This document will be submitted to the Office of the Federal Register (OFR) for publication

and will be pending placement on public display at the OFR and publication in the Federal

Register. The version of the final regulations released today may vary slightly from the

published document if minor editorial changes are made during the OFR review process. The

document published in the Federal Register will be the official document.

[4830-01-p]

DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

section 274 of the Internal Revenue Code (Code) regarding certain recent amendments

made to that section. Specifically, the final regulations address the elimination of the

deduction under section 274 for expenditures related to entertainment, amusement, or

recreation activities, and provide guidance to determine whether an activity is of a type

generally considered to be entertainment. The final regulations also address the

limitation on the deduction of food and beverage expenses under section 274(k) and

(n), including the applicability of the exceptions under section 274(e)(2), (3), (4), (7), (8),

and (9). The final regulations affect taxpayers who pay or incur expenses for meals or

entertainment.

FOR FURTHER INFORMATION CONTACT: Patrick Clinton of the Office of the

Associate Chief Counsel (Income Tax and Accounting), (202) 317-7005 (not a toll-free

number).

SUPPLEMENTARY INFORMATION:

Background

This document contains final regulations under section 274 of the Code that

amend the Income Tax Regulations (26 CFR part 1). In general, section 274 limits or

disallows deductions for certain meal and entertainment expenditures that otherwise

would be allowable under chapter 1 of the Code (chapter 1), primarily under section

162(a), which allows a deduction for ordinary and necessary expenses paid or incurred

and the IRS published a notice of proposed rulemaking (REG-100814-19) in the

Federal Register (85 FR 11020) containing proposed regulations under section 274 to

implement certain of the TCJA’s amendments to section 274 (proposed regulations).

exceptions in section 274(e)(2), (3), (4), (7), (8), and (9). Pending the issuance of these

final regulations, taxpayers were permitted to rely upon the proposed regulations for

entertainment and food or beverage expenses, as applicable, paid or incurred after

December 31, 2017.

The Treasury Department and the IRS did not receive any requests to speak at a

public hearing on the proposed regulations. Therefore, the scheduled public hearing

was cancelled. The Treasury Department and the IRS received 14 written and

electronic comments in response to the proposed regulations. All comments were

considered and are available at https://www.regulations.gov or upon request. The

comments addressing the proposed regulations are summarized in the Summary of

1. Business Meals and Entertainment

Section 274(a)(1)(A) generally disallows a deduction for any item with respect to

an activity of a type considered to constitute entertainment, amusement, or recreation

substantial and bona fide business discussion (including business meetings at a

convention or otherwise), the item was associated with the active conduct of the

taxpayer's trade or business (business discussion exception). Section 274(e)(1)

through (9) also provide exceptions to the rule in section 274(a) that disallows a

deduction for entertainment expenditures. The TCJA did not change the application of

the section 274(e) exceptions to entertainment expenditures.

Section 274(a)(1)(B) disallows a deduction for any item with respect to a facility

used in connection with an activity referred to in section 274(a)(1)(A). Section 274(a)(2)

provides that, for purposes of applying section 274(a)(1), dues or fees to any social,

athletic, or sporting club or organization shall be treated as items with respect to

taxpayers could deduct 50 percent of meal expenses, and 50 percent of entertainment

expenditures that met the directly related or business discussion exception.

expenditures in section 274(a)(1)(A). Also, section 13304(a)(2)(D) of the TCJA

amended the 50 percent limitation in section 274(n)(1) to remove the reference to

entertainment expenditures. Thus, entertainment expenditures are no longer deductible

unless one of the nine exceptions to section 274(a) in section 274(e) applies.

While the TCJA eliminated the deduction for entertainment expenses, Congress

did not amend the provisions relating to the deductibility of business meals. Thus,

taxpayers generally may continue to deduct 50 percent of the food and beverage

expenses associated with operating their trade or business, including meals consumed

by employees on work travel. See H.R. Rep. No. 115-466, at 407 (2017) (Conf. Rep.).

However, as before the TCJA, no deduction is allowed for the expense of any food or

an activity of a type considered to constitute entertainment, amusement, or recreation or

with respect to a facility used in connection with such activity. Section 13304(a)(2)(A) of

the TCJA repealed the substantiation requirements for entertainment expenditures.

On October 15, 2018, the Treasury Department and the IRS published Notice

2018-76, 2018-42 I.R.B. 599, providing transitional guidance on the deductibility of

expenses for certain business meals and requesting comments for future guidance to

further clarify the treatment of business meal expenses and entertainment expenditures

under section 274. Under the notice, taxpayers may deduct 50 percent of an otherwise

allowable business meal expense if: (1) the expense is an ordinary and necessary

expense under section 162(a) paid or incurred during the taxable year in carrying on

any trade or business; (2) the expense is not lavish or extravagant under the

circumstances; (3) the taxpayer, or an employee of the taxpayer, is present at the

furnishing of the food or beverages; (4) the food and beverages are provided to a

charged for food and beverages.

2. Travel Meals

allowed for the expense of any food or beverages unless: (1) the expense is not lavish

or extravagant under the circumstances; and (2) the taxpayer (or an employee of the

taxpayer) is present at the furnishing of the food or beverages. See section 274(k).

Section 274(d) provides substantiation requirements for traveling expenses, including

food and beverage expenses incurred while on business travel away from home.

Section 274(m) provides additional limitations on travel expenses, including

expenses for meals consumed while away from home. Section 274(m)(1) generally

limits the deduction for luxury water transportation expenses to twice the highest federal

per diem rate allowable at the time of travel, and section 274(m)(2) generally disallows a

deduction for expenses for travel as a form of education. Section 274(m)(3) provides

dependent, or other individual.

3. Employer-Provided Meals

recipient under section 132 by reason of section 132(e), relating to de minimis fringes.

Section 132(e)(1) defines “de minimis fringe” as any property or service the value of

which is, after taking into account the frequency with which similar fringes are provided

by the employer to its employees, so small as to make accounting for it unreasonable or

administratively impracticable. Section 132(e)(2) provides that the operation by an

employer of any eating facility for employees is treated as a de minimis fringe if (1) the

facility is located on or near the business premises of the employer, and (2) revenue

derived from the facility normally equals or exceeds the direct operating costs of the

facility. Thus, under prior law, employers generally were allowed to fully deduct an

expense for food or beverages provided to their employees if the amount was

The TCJA also added section 274(o) that, effective for amounts paid or incurred

after December 31, 2025, disallows a deduction for (1) any expense for the operation of

an employer-operated facility described in section 132(e)(2), and any expense for food

operation of certain eating facilities for employees, will be fully nondeductible.

4. Section 274(e) Exceptions to Section 274(k) and (n)

Section 274(k)(2)(A) and (n)(2)(A) provide that the limitations on the deduction of

food or beverage expenses in section 274(k)(1) and (n)(1), respectively, do not apply if

the expense is described in paragraph (2), (3), (4), (7), (8), or (9) of section 274(e).

Expenses described in paragraph (1), (5), and (6) of section 274(e) are not exceptions

to the limitations on the deduction of food or beverage expenses in section 274(k)(1)

and (n)(1). However, they are exceptions to the disallowance of the deduction of

entertainment expenses in section 274(a).

Section 274(e)(2) applies to expenses for goods, services, and facilities to the

Section 274(e)(8) applies to expenses for goods or services that are sold by the

taxpayer in a bona fide transaction for an adequate and full consideration in money or

money’s worth. Section 274(e)(9) applies to expenses for goods, services, and facilities

provide new guidance under section 162(a), specifically as to the definition of “ordinary

and necessary expense.” The proposed regulations provide guidance only under

section 274 and are not intended to provide guidance under section 162. In response to

the comment, the final regulations modify Examples 1 and 2 in proposed §1.274-

12(a)(3) by removing any mention of a discussion that takes place during lunch because

the facts already explain that in each example, the food or beverage expenses are

assumed to be ordinary and necessary expenses under section 162(a). In addition, the

final regulations clarify, as necessary, in the introductory language to the examples in

§1.274-11 and §1.274-12 that the examples assume that the underlying expenses are

deductible under section 162.

claim a 50 percent deduction for food or beverages provided to the taxpayer (or an

employee of the taxpayer), as well as food or beverages provided to a business

associate. The commenter noted that proposed §1.274-12(a)(1) refers to “food or

applies to food and beverages provided to the taxpayer (or an employee of the

taxpayer), as well as a business associate or another person. In response to the

comment, the final regulations revise §1.274-12(a)(1) to remove the reference to food or

beverages being provided “to another person or persons.” In addition, as discussed in

part 2.A. of this Summary of Comments and Explanation of Revisions, the final

regulations include employees in the definition of “business associate” (as defined in

§1.274-12(b)(3)). Finally, to make clear that the rules in §1.274-12(a)(1) also apply to

food or beverages provided to a taxpayer such as a sole proprietor or other business

owner, the final regulations revise §1.274-12(a)(1)(iii) to refer to food or beverages

provided “to the taxpayer or a business associate.”

imposed by section 274 are in addition to the requirements for deductibility imposed by

other provisions of the Code. If a taxpayer intends to claim a deduction for an

expenditure for meals or entertainment, the taxpayer must first establish that the

expenses are ordinary and necessary expenses under section 162(a) that are paid or

incurred during the taxable year in carrying on a trade or business, the sole proprietor

may deduct 50 percent of the food or beverage expenses under section 274(k) and (n)

and §1.274-12(a) of the final regulations if: (1) the expenses are not lavish or

extravagant; (2) the sole proprietor, or an employee of the sole proprietor, is present at

the furnishing of the food or beverages; and (3) the food or beverages are provided to

the sole proprietor or a business associate (as defined in §1.274-12(b)(3)).

B. Travel Meal Expenses

Although the TCJA did not specifically amend the rules for travel expenses, the

final regulations are intended to provide comprehensive rules for food and beverage

of the taxpayer) on business travel. These limitations do not apply to deductions for

moving expenses under section 217. However, the TCJA amended section 217 to

suspend the deduction for moving expenses for taxable years beginning after

paid a per diem rate for travel expenses and are subject to the hours of service

limitations of the Department of Transportation. The proposed regulations describe and

clarify the statutory requirements of section 274(a), 274(k), and 274(n) for entertainment

and food or beverage expenses, as well as the applicability of certain exceptions under

section 274(e) to food or beverage expenses. The TCJA did not change the rules for

using a per diem rate to substantiate, under section 274(d), the amount of ordinary and

necessary business expenses paid or incurred while traveling away from home. Thus,

neither the proposed regulations nor the final regulations address the substantiation

rules.

C. Other Food or Beverage Expenses

the 50 percent deduction limitation under section 274(n)(1) and could be fully deducted.

The TCJA repealed section 274(n)(2)(B) so that expenses for food or beverages

the taxpayer or an employee of the taxpayer must be present at the furnishing of the

food or beverages. However, as discussed in the Background section of this preamble,

section 274(e) provides six exceptions to the limitations on the deduction of food or

beverages in section 274(k)(1) and (n)(1). The final regulations explain how those

exceptions apply. The Background section of this preamble also explains that the

exceptions in section 274(e)(1), (e)(5), and (e)(6) do not apply to food or beverages

expenses. Section 1.274-12(a)(3) of the final regulations adds an example illustrating

that the exception in section 274(e)(5) does not apply to food or beverage expenses

that are directly related to business meetings of a taxpayer’s employees.

In response to comments that the Treasury Department and the IRS received

beverages provided by a seasonal camp to camp counselors; (5) food or beverages

provided to employees at a company cafeteria; and (6) food or beverages provided at

company holiday parties and picnics.

applies, the deduction limitations apply regardless of whether the food or beverages are

treated as de minimis fringe benefits under section 132(e).

The final regulations define food or beverage expenses to mean the cost of food

or beverages, including any delivery fees, tips, and sales tax. In the case of employer-

provided meals at an eating facility, food or beverage expenses do not include

expenses for the operation of the eating facility such as salaries of employees preparing

and serving meals and other overhead costs.

A commenter requested clarification that the cost of transportation to a meal is

not included in food or beverage expenses. The Treasury Department and the IRS

considered this comment and note that food or beverage expenses under §1.274-

section 274(e)(2), (3), (4), (7), (8), and (9). Section 1.274-12(c) of the final regulations,

therefore, provides that the deduction limitations are not applicable to expenditures for

section 274(k)(1) and (n)(1) do not apply to expenditures for food or beverages provided

to an employee of the taxpayer to the extent the taxpayer treats the expenses as

and as wages to the employee for purposes of withholding under chapter 24 of the

Code, relating to collection of income tax at source on wages.

Pursuant to section 274(e)(9), the final regulations provide that the limitations in

section 274(k)(1) and (n)(1) do not apply to expenses for food or beverages provided to

a person who is not an employee of the taxpayer to the extent the expenses are

includible in the gross income of the recipient of the food or beverages as compensation

for services rendered or as a prize or award under section 74.

F.3d 495 (8th Cir. 2001), acq., AOD 2002-02 (February 11, 2002). In 2004, Congress

reversed the result in the Sutherland Lumber-Southwest case by enacting section

274(e)(2)(B) with regard to specified individuals. Thus, with regard to employees or

this preamble as the “dollar-for-dollar” methodology.

The Treasury Department and the IRS are aware that some taxpayers may

attempt to claim a full deduction under section 274(e)(2) or (e)(9) by including a value

that is less than the amount required to be included under §1.61-21, which provides the

rules for valuation of fringe benefits, or by purportedly including a value of zero, as

compensation and wages to the employee, or as includible in gross income by a person

who is not an employee of the taxpayer. As a result, the proposed regulations provide

that expenses for food or beverages for which the taxpayer calculates a value that is

less than the amount required to be included in gross income under §1.61-21, or for

which the amount required to be included in gross income is zero, will not be considered

difficulty in determining the value of food or beverages under §1.61-21 and the

possibility of good faith errors. In addition, a commenter noted that neither the “to the

response to these comments, the Treasury Department and the IRS revised the rules in

proposed §1.274-12(c)(2)(i) to allow a taxpayer to apply section 274(e)(2) and (e)(9), as

applicable, in cases where the taxpayer includes an improper amount in compensation

and wages, or gross income, of the recipient. However, if a taxpayer includes less than

the proper amount in compensation and wages or gross income, the final regulations

provide that the taxpayer must apply the dollar-for-dollar methodology that applies in the

case of a specified individual. Under that dollar-for-dollar methodology, the taxpayer

may deduct meal expenses to the extent that the expenses do not exceed the amount

of the expenses that are treated as compensation and wages, or gross income, as

applicable.

which a taxpayer demonstrates that it has “properly” included in compensation and

wages the value of an employee vacation flight in accordance with §1.61-21(g). See

AOD-2002-02. The rules are also consistent with §1.274-10(a)(2)(ii)(A), which applies

included on the employee’s Form W-2 or other recipient’s Form 1099-MISC instead of

amounts reported as compensation on the service provider’s return. The language in

employee or service provider. However, to further clarify the rule, §1.274-12(c)(2)(i)(A)

of the final regulations no longer references the treatment of the amount on the

taxpayer’s income tax return, but instead refers to the treatment of the expense as

compensation and wages, consistent with the language in §1.274-10(a)(2)(ii)(A).

A commenter suggested the final regulations address the effect of

reimbursements by employees, specified individuals, or other recipients of the food or

may be accorded more favorable treatment than expenses provided to non-specified

individuals. The Treasury Department and the IRS agree that in cases in which

expenditures for food and beverages are reimbursed to the taxpayer, similar treatment

employees of the taxpayer are customers when they purchase food or beverages from

the taxpayer in a bona fide transaction for arm’s length, fair market value prices.

Statement of Availability of IRS Documents

Notices cited in this preamble are published in the Internal Revenue Bulletin (or

Cumulative Bulletin) and are available from the Superintendent of Documents,

U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS web

site at http://www.irs.gov.

Applicability Date

These regulations apply to taxable years that begin on or after [INSERT DATE

OF PUBLICATION IN THE Federal Register].

certified that this final rule will not have a significant economic impact on a substantial

number of small entities. Although the rule may affect a substantial number of small

entities, the economic impact of the regulations is not likely to be significant. Data are

incorporate prior guidance and otherwise clarify the application of the TCJA changes to

section 274 related to meals and entertainment. These final regulations will assist

taxpayers in understanding the changes to section 274 and make it easier for taxpayers

to comply with those changes. Accordingly, the Secretary of the Treasury’s delegate

certifies that the rule will not have a significant economic impact on a substantial

number of small entities. Notwithstanding this certification, the Treasury Department

and the IRS welcome comments on the impact of these regulations on small entities.

Pursuant to section 7805(f), these final regulations have been submitted to the

Chief Counsel for the Office of Advocacy of the Small Business Administration for

comment on their impact on small business. No comments on the proposed regulations

Drafting Information

Income Taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR Part 1 is amended as follows:

Part 1--INCOME TAX

Paragraph 1. The authority citation for part 1 is amended by adding entries in

numerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *

Section 1.274-11 also issued under 26 U.S.C. 274.

Section 1.274-12 also issued under 26 U.S.C. 274.

Par. 2. Section 1.274-11 is added to read as follows:

activity. For this purpose, dues or fees to any social, athletic, or sporting club or

organization are treated as items with respect to facilities and, thus, are not deductible.

In addition, no deduction otherwise allowable under chapter 1 of the Code is allowed for

constitute entertainment, amusement, or recreation, such as entertaining at bars,

theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing,

vacation and similar trips, including such activity relating solely to the taxpayer or the

taxpayer’s family. These activities are treated as entertainment under this section,

subject to the objective test, regardless of whether the expenditure for the activity is

term entertainment may include an activity, the cost of which otherwise is a business

expense of the taxpayer, which satisfies the personal, living, or family needs of any

individual, such as providing a hotel suite or an automobile to a business customer or

the customer’s family. The term entertainment does not include activities which,

on vacation would constitute entertainment of the employee.

(ii) Food or beverages. Under this section, the term entertainment does not

include food or beverages unless the food or beverages are provided at or during an

separately from the entertainment, or the cost of the food or beverages is stated

separately from the cost of the entertainment on one or more bills, invoices, or receipts.

The amount charged for food or beverages on a bill, invoice, or receipt must reflect the

the entertainment or must approximate the reasonable value of those items. If the food

or beverages are not purchased separately from the entertainment, or the cost of the

food or beverages is not stated separately from the cost of the entertainment on one or

more bills, invoices, or receipts, no allocation between entertainment and food or

beverage expenses may be made and, except as further provided in this section and

section 274(e), the entire amount is a nondeductible entertainment expenditure under

objective test precludes arguments that entertainment means only entertainment of

others or that an expenditure for entertainment should be characterized as an

expenditure for advertising or public relations. However, in applying this test the

its products to a group of store buyers, the show generally would not be considered

entertainment. However, if an appliance distributor conducts a fashion show, the

fashion show generally would be considered to be entertainment.

(2) Expenditure. The term expenditure as used in this section includes amounts

paid or incurred for goods, services, facilities, and other items, including items such as

losses and depreciation.

(3) Expenditures for production of income. For purposes of this section, any

reference to trade or business includes an activity described in section 212.

(c) Exceptions. Paragraph (a) of this section does not apply to any expenditure

described in section 274(e)(1), (2), (3), (4), (5), (6), (7), (8), or (9).

(1) Example 1. Taxpayer A invites, B, a business associate, to a baseball game

game. The baseball game is entertainment as defined in §1.274-11(b)(1) and thus, the

hot dogs and drinks for A and B from a concession stand. The cost of the hot dogs and

expenditure and is not subject to the disallowance under §1.274-11(a) and section

dogs and drinks purchased at the game if the expenses meet the requirements of

(3) Example 3. Taxpayer C invites D, a business associate, to a basketball

game. C purchases tickets for C and D to attend the game in a suite, where they have

access to food and beverages. The cost of the basketball game tickets, as stated on

the invoice, includes the food or beverages. The basketball game is entertainment as

defined in §1.274-11(b)(1), and, thus, the cost of the game tickets is an entertainment

expenditure and is not deductible by C. The cost of the food and beverages, which are

not purchased separately from the game tickets, is not stated separately on the invoice.

Thus, the cost of the food and beverages is an entertainment expenditure that is subject

to disallowance under section 274(a)(1) and paragraph (a) of this section, and C may

not deduct the cost of the tickets or the food and beverages associated with the

basketball game.

(4) Example 4. The facts are the same as in Example 3, except that the invoice

reflects the venue’s usual selling price if purchased separately. As in Example 3, the

the game tickets, other than the cost of the food and beverages, is an entertainment

which is stated separately on the invoice for the game tickets and reflects the venue’s

(e) Applicability date. This section applies for taxable years that begin on or after

[INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER].

Par. 3. Section 1.274-12 is added to read as follows:

§1.274-12 Limitation on deductions for certain food or beverage expenses paid or

(ii) The taxpayer, or an employee of the taxpayer, is present at the furnishing of

such food or beverages; and

(iii) The food or beverages are provided to the taxpayer or a business associate.

(2) Only 50 percent of food or beverage expenses allowed as deduction. Except

as provided in this section, the amount allowable as a deduction for any food or

beverage expense described in paragraph (a)(1) of this section may not exceed 50

percent of the amount of the expense that otherwise would be allowable.

(3) Examples. The following examples illustrate the application of paragraph

(a)(1) and (2) of this section. In each example, assume that the food or beverage

expenses are ordinary and necessary expenses under section 162(a) that are paid or

(n) and paragraph (a) of this section, A may deduct 50 percent of the food or beverage

and (n) and paragraph (a) of this section, C may deduct 50 percent of the food or

beverage expenses.

(iii) Example 3. Taxpayer E holds a business meeting at a hotel during which

other than the cost of food and beverages, are not subject to the deduction limitations in

section 274 and are deductible if they meet the requirements for deduction under

deduct 50 percent of the food and beverage expenses.

(iv) Example 4. The facts are the same as in Example 3, except that all the

other than the cost of food and beverages, are not subject to the deduction limitations in

section 162. Under section 274(k) and (n) and paragraph (a) of this section, E may

deduct 50 percent of the food and beverage expenses. The exception in section

274(e)(5) does not apply to food and beverage expenses under section 274(k) and (n).

(4) Special rules for travel meals. (i) In general. Food or beverage expenses

paid or incurred while traveling away from home in pursuit of a trade or business

generally are subject to the deduction limitations in section 274(k) and (n) and

paragraph (a)(1) and (2) of this section, as well as the substantiation requirements in

section 274(d). In addition, travel expenses generally are subject to the limitations in

allowed under chapter 1 of the Internal Revenue Code (Code), except under section

217 for certain members of the Armed Forces of the United States, for the expense of

any food or beverages paid or incurred with respect to a spouse, dependent, or other

individual accompanying the taxpayer, or an officer or employee of the taxpayer, on

taxpayer;

(D) Example. The following example illustrates the application of paragraph

(a)(4)(iii) of this section:

Example. Taxpayer F, a sole proprietor, and Taxpayer F’s spouse travel from

New York to Boston to attend a series of business meetings related to F’s trade or

business. F’s spouse is not an employee of F, does not travel to Boston for a bona fide

business purpose of F, and the expenses would not otherwise be deductible. While in

Boston, F and F’s spouse go out to dinner. Under section 274(m)(3) and paragraph

(a)(4)(iii) of this section, the expenses associated with the food and beverages

consumed by F’s spouse are not deductible. Therefore, the cost of F’s spouse’s dinner

is not deductible. F may deduct 50 percent of the expense associated with the food and

beverages F consumed while on business travel if F meets the requirements in sections

162 and 274, including section 274(k) and (d).

(b) Definitions. Except as otherwise provided in this section, the following

definitions apply for purposes of section 274(k) and (n), §1.274-11(b)(1)(ii) and (d), and

this section:

employer-provided meals furnished at an eating facility on the employer’s business

premises, food or beverage expenses do not include expenses for the operation of the

treated as a reimbursement arrangement under that paragraph.

(C) Reimbursement arrangements involving persons that are not employees. In

the case of expenses for food or beverages paid or incurred by an independent

contractor in connection with the performance of services for a client or customer under

a reimbursement or other expense allowance arrangement with the independent

contractor, the limitations on deductions in paragraph (a) of this section apply to the

party expressly identified in an agreement between the parties as subject to the

limitations. If an agreement between the parties does not expressly identify the party

subject to the limitations, then the deduction limitations in paragraph (a) of this section

apply--

allowance arrangement involves persons who are not employees and the agreement

between the parties does not expressly identify the party subject to the limitations on

deductions in paragraph (a) of this section, the limitations on deductions in paragraph

(c)(2)(ii) of this section.

(1) Example 1. (i) Employee I performs services under an arrangement in which

J, an employee leasing company, pays I a per diem allowance of $10x for each day that

I performs services for J's client, K, while traveling away from home. The per diem

allowance is a reimbursement of travel expenses for food or beverages that I pays in

performing services as an employee. J enters into a written agreement with K under

which K agrees to reimburse J for any substantiated reimbursements for travel

expenses, including meal expenses, that J pays to I. The agreement does not

expressly identify the party that is subject to the limitations on deductions in paragraph

(a) of this section. I performs services for K while traveling away from home for 10 days

and provides J with substantiation that satisfies the requirements of section 274(d) of

$100x of meal expenses incurred by I while traveling away from home. J pays I $100x

substantiation to K. K pays J $300x, which includes $200x compensation for services

nor K treats the $100x paid to I as compensation or wages.

(ii) Under paragraph (b)(7)(i) of this section, I and J have established a

can meet the requirements of section 274(e)(3)(B) and paragraph (c)(2)(ii)(C) of this

reimburse J for substantiated reimbursements for travel expenses that J pays to I, under

other expense allowance arrangement for purposes of paragraph (c)(2)(ii)(C) of this

section. J accounts to K for K's reimbursement in the manner required by section

under section 274(e)(3)(B) and paragraph (c)(2)(ii)(C)(2) of this section, K and not J is

arrangements between I and J and between J and K, I provides the substantiation of the

reimbursement or other expense allowance arrangement for purposes of paragraph

payment was not treated as compensation and wages paid to I, under section

274(e)(3)(A) and paragraph (c)(2)(ii)(C)(1) of this section, I is not subject to the

limitations on deductions in paragraph (a) of this section. Under paragraph

(c)(2)(ii)(C)(2) of this section, K, the payor, is subject to the limitations on deductions in

paragraph (a) of this section.

(3) Example 3. (i) The facts are the same as in Example 1, except that the

written agreement between J and K expressly provides that the limitations of this

section will apply to K.

(ii) Under paragraph (b)(7)(ii)(B) of this section, J and K have established a

reimbursement or other expense allowance arrangement for purposes of paragraph

(c)(2)(ii)(C) of this section. Because the agreement provides that the 274 deduction

limitations apply to K, under section 274(e)(3)(B) and paragraph (c)(2)(ii)(C) of this

section.

(4) Example 4. (i) The facts are the same as in Example 1, except that the

expenses.

(iii) Recreational expenses for employees--(A) In general. In accordance with

section 274(e)(4), any food or beverage expense paid or incurred by a taxpayer for a

recreational, social, or similar activity, primarily for the benefit of a taxpayer’s employees

(other than employees who are highly compensated employees (within the meaning of

primarily for the benefit of employees generally. An expense for food or beverages is

not to be considered outside of the exception of this paragraph (c)(2)(iii) merely

because, due to the large number of employees involved, the provision of food or

beverages is intended to benefit only a limited number of employees at one time,

provided the provision of food or beverages does not discriminate in favor of highly

compensated employees. This exception applies to expenses paid or incurred for

events such as holiday parties, annual picnics, or summer outings. This exception does

under section 119 because the meals are provided for the convenience of the employer

and are therefore not primarily for the benefit of the taxpayer’s employees.

ballroom that includes a buffet dinner and an open bar. Under section 274(e)(4), this

beverage expenses, is not subject to the deduction limitations in paragraph (a) of this

section because the holiday party is a recreational, social, or similar activity primarily for

the cost of the party.

(2) Example 2. The facts are the same as in Example 1, except that Employer L

invites only highly-compensated employees to the holiday party, and the invoice

ballroom or the food and beverage expenses because L invited only highly-

food and beverage expenses are not treated as entertainment. Therefore, L is not

under section 274(a)(1) and §1.274-11(a). Unless another exception in section

274(n)(2) and paragraph (c)(2) of this section applies, L may deduct only 50 percent of

the food and beverage costs under paragraph (a)(2) of this section. In addition, the

limitations in section 274(k)(1) and paragraph (a)(1) of this section apply because none

of the exceptions in section 274(k)(2) and paragraph (c)(2) of this section apply.

(3) Example 3. Employer M provides free coffee, soda, bottled water, chips,

donuts, and other snacks in a break room available to all employees. A break room is

not a recreational, social, or similar activity primarily for the benefit of the employees,

even if some socializing related to the food and beverages provided occurs. Thus, the

exception in section 274(e)(4) and this paragraph (c)(2)(iii) does not apply and unless

another exception in section 274(n)(2) and paragraph (c)(2) of this section applies, M

may deduct only 50 percent of the expenses for food and beverages provided in the

break room under paragraph (a)(2) of this section. In addition, the limitations in section

section 274(k)(2) and paragraph (c)(2) of this section apply.

(4) Example 4. Employer N has a written policy that employees in a certain

nature of the position that requires frequent emergency responses. Because these

(c)(2)(iii) does not apply, even if some socializing related to the food and beverages

this section does not apply. Thus, unless another exception in section 274(n)(2) and

for food and beverages provided to employees in the cafeteria under paragraph (a)(2) of

section apply because none of the exceptions in section 274(k)(2) and paragraph (c)(2)

of this section apply.

(5) Example 5. Employer O invites an employee and a client to dinner at a

celebration. Because the meal is a business meal, and therefore not primarily for the

benefit of the employee, the exception in section 274(e)(4) and this paragraph (c)(2)(iii)

celebration occurred during the meal. Thus, unless another exception in section

the meal expense. In addition, the limitations in section 274(k)(1) and paragraph (a)(1)

(c)(2) of this section apply.

(iv) Items available to the public--(A) In general. In accordance with section

274(e)(7), any expense paid or incurred by a taxpayer for food or beverages to the

extent the food or beverages are made available to the general public is not subject to

the deduction limitations in paragraph (a) of this section. If a taxpayer provides food or

beverages to employees, this exception applies to the entire amount of expenses for

those food or beverages if the same type of food or beverages is provided to, and are

primarily consumed by, the general public.

with the refreshments are not subject to the deduction limitations in paragraph (a) of this

reasonably estimated to be consumed by potential buyers and other real estate agents.

estimated to be consumed by the general public, only the costs attributable to the food

this paragraph (c)(2)(iv). In addition, the limitations in section 274(k)(1) and paragraph

(a)(1) of this section apply to the expenses associated with the refreshments that are

and customers, and Q reasonably estimates that more than 50 percent of the

(c)(2)(iv), the expenses associated with the refreshments are not subject to the

beverages are primarily consumed by customers. Thus, Q may deduct 100 percent of

for children and provides breakfast and lunch, as part of the fee to attend camp, both to

camp counselors, who are employees, and to camp attendees, who are customers.

There are 20 camp counselors and 100 camp attendees. The same type of meal is

available to each counselor and attendee, and attendees consume more than 50

percent of the food and beverages. Under section 274(e)(7) and this paragraph

(c)(2)(iv), the expenses associated with the food and beverages are not subject to the

deduction limitations in paragraph (a) of this section, because over 50 percent of the

food and beverages are consumed by camp attendees and the food and beverages are

therefore primarily consumed by the general public. Thus, R may deduct 100 percent of

the food and beverage expenses.

(4) Example 4. Employer S provides food and beverages to its employees

without charge at a company cafeteria on its premises. Occasionally, customers or

other visitors also eat without charge in the cafeteria. The occasional consumption of

percent of the total amount of food and beverages consumed at the cafeteria.

and only the costs attributable to the food and beverages provided to the general public

limitations in section 274(k)(1) and paragraph (a)(1) of this section apply to the

payment through services provided. Under this paragraph (c)(2)(v), a restaurant or

catering business may deduct 100 percent of its costs for food or beverage items,

purchased in connection with preparing and providing meals to its paying customers,

money or money's worth.

(B) Example. The following example illustrates the application of this paragraph

(c)(2)(v):

Example. Employer T operates a restaurant. T provides food and beverages to

its food service employees before, during, and after their shifts for no consideration.

Under section 274(e)(8) and this paragraph (c)(2)(v), the expenses associated with the

food and beverages provided to the employees are not subject to the 50 percent

deduction limitation in paragraph (a) of this section because the restaurant sells food

and beverages to customers in a bona fide transaction for an adequate and full

consideration in money or money's worth. Thus, T may deduct 100 percent of the food

and beverage expenses.

Approved: September 25, 2020.

David J. Kautter,