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The wide-ranging tax reform introduced by the Tax Cuts and Jobs Act has left business owners across the United States wondering which expenses they can deduct from taxes.
IRS Code 274, a section of the Internal Revenue Code that defines deductible entertainment, recreation, amusement, and meal expenses, was largely affected by the TCJA.
The IRS subsequently released Notice 2018-76, REG-100814-19, and T.D. 9925 to clarify further the deduction of meal expenses in relation to entertainment activities.
Although up to 50% of certain entertainment expenses were deductible before 2018, these deductions are unavailable after the TCJA. Businesses can still deduct the costs of meals from federal taxes but only under certain conditions.
Let’s take an in-depth look at IRS Code 274 and see which meal expenses you can claim on your tax return.
Table of Contents
IRC Section 274 After TCJA
Claiming deductions for entertainment expenses was a hot topic long before TCJA came into effect. Under IRC Section 274, claiming these expenses was disallowed before the changes were introduced in 2018.
However, the tax code offered an exception for entertainment expenses directly related to or associated with actively conducting business, allowing taxpayers to deduct up to 50% of their entertainment costs.
The 50% limit was also applicable to business meal expenses. The regulations in Section 274 changed after TCJA went into effect, disallowing the deduction of all entertainment expenses and severely limiting the deduction of meal expenses.
Section 274 vaguely defined the rules for writing off meal expenses during entertainment, amusement, and recreational activities. The IRS released additional regulations in February and October 2020 addressing the changes the TCJA introduced.
Despite this, the rules employers and employees must follow when deducting meal expenses remain difficult to understand.
A Glance at T.D. 9925
According to Section 274, meal expenses are deductible if the following two conditions are satisfied:
- The meal isn’t lavish under the circumstances and
- The taxpayer (or taxpayer’s employee) is present while the food and drinks are furnished.
- Per Section 162(a), the meal must be an ordinary and necessary expense related to a trade or business.
Under these circumstances, businesses can deduct 50% of the meal’s cost. The T.D 9925 Meals and Entertainment Expenses Under Section 274 document published in October 2020 offers additional guidelines for furnishing meals in different contexts.
1. Business Meals
The IRS conducts an objective test and considers the nature of a taxpayer’s business when evaluating if a particular activity can be regarded as entertainment. Consequently, the deduction of all expenditures related to an entertainment activity is disallowed.
Businesses cannot deduct the costs of a sports club and social club membership fees or similar expenses from their taxes.
The T.D 9925 document indicates that costs of business meals don’t qualify as entertainment unless they’re furnished during an entertainment activity, in which case their deduction is disallowed.
Food and drinks served at an entertainment activity aren’t considered an entertainment expenditure if their cost is stated on a separate receipt, bill, or invoice. However, they must be furnished for a business associate.
For instance, if you purchase tickets for a Lakers game for you and a business associate, their cost isn’t deductible. Moreover, if you put the food and drinks you’ll consume during the game on the same bill, that expense is also nondeductible.
However, if you buy the tickets, beverages, and food separately, you can deduct 50% of the food and drink cost. Similarly, you can take a business associate to dinner before the game and deduct the amount you spend as a business meal.
Also, the expenses of a meeting held outside of a company’s office are not subject to deduction limits. Still, a company cannot deduct over 50% of the cost of food and beverages served during the meeting.
2. Travel Meals
The rules for the deduction of travel meals weren’t affected by TCJA. However, employers and employees must still follow the general meal deductions guidelines. Moreover, the rules for paying per diems to employees for business-related travel expenses remain the same.
An employer is allowed a travel meal deduction if their employee was present when food and beverages were furnished, provided that a meal wasn’t lavish.
Meals for spouses, dependents, and other individuals traveling with a taxpayer’s employee are nondeductible unless they’re employed by the same company or their presence on the trip is necessary for business purposes.
3. Meals at Recreational or Social Activities
Taxpayers who supply food and beverages during social or recreational events aren’t subject to the 50% deduction limitation. The regulation doesn’t apply to highly compensated employees or employees with over 10% interest in their employer’s company.
Consequently, businesses can deduct their entire meal and beverage expenditures for the following activities:
- Meals and drinks at the company cafeteria
- Catering at an open house staged by a real estate agent
- Food and beverages served at seasonal camps for camp counselors
- The cost of the food and drinks furnished by a restaurant or a catering service to its employees.
As of January 1, 2023, businesses can only write off 50% of a meal’s cost purchased from a restaurant, even though this expense was fully deductible in 2021 and 2022.
Moreover, the 50% deduction limit applies to snacks employers furnish in the pantry or other office parts that don’t qualify as spaces where social or recreational activities can occur.
4. De Minimis Fringe Benefits
Section 132(e)(1) offers the following definition of the ‘de minimis fringe’:
‘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.’
These benefits include the food and beverages excludable from an employee’s wages. Section 274 regulations say de minimis fringe benefits are subject to a 50% deduction limit.
Section 274(o) stipulates that starting from December 31, 2025, employers will be disallowed from deducting expenses incurred while operating a facility described in Section 132(e)(1) or costs of providing food and drinks in such facilities.
Consequently, the food and drinks companies provide for their employees at the company’s cafeteria or similar facilities will become entirely nondeductible from 2026.
5. Additional Exemptions
Several exceptions enable companies to deduct the full cost of meals and beverages and circumvent the 50% deduction limit. Food and beverage expenditure is fully deductible under the following conditions:
- Costs of food and drinks are reimbursed
- Meal expense is a compensation
- 50% of food and beverage is for the general public, such as clients or visitors
- The cost of food served at picnics and similar events
The rules for deducting the costs of food and beverages furnished at charitable events remain the same after TCJA. Nonprofit organizations usually break down their expenditures for these events into meals, entertainment, and charitable contributions.
The entertainment costs aren’t deductible, and a 50% deduction limit applies to the meal expenses, while donations are 100% deductible.
It’s also worth adding that according to the most recent Section 274 regulations, meal expenditure deductions can include the cost of food or drinks, delivery fees, tips, and sales tax.
Frequently Asked Questions
Individual taxpayers cannot claim an itemized deduction for their meal expenditures unless they’re freelancers or receive distributions from an S corporation, LLC, or similar pass-through entity.
The IRS doesn’t limit the overall deduction amount for meal expenses. But in most cases, you cannot write off more than 50% of your total meal expenditure in a tax year.
Before 2023, you could only deduct 50% of meal and entertainment expenses included in compensation, but from 2023 onward; these expenses are fully deductible.
Keeping a record of correspondence with a business associate and receipts that substantiate that you used the amount you’re claiming on the return to pay for a meal are some of the methods you can use to prove that the meal expense was business related.
Making Sense of Meal and Entertainment Deductions
The perpetual amendments to IRS Code 274 have made keeping up with the meal and entertainment expenditure deduction regulations difficult.
Moreover, T.D 9925 lays out the final regulations for deductions of meal expenses on 56 pages, so you must crawl through the text to find information about the meal expenses you can and cannot claim.
According to the new regulations, entertainment expenses are nondeductible. Section 274 indicates that taxpayers can deduct 50% of their meal expenses only under certain conditions.
Although the government doesn’t plan to amend Section 274 further, you should still check which meal expenses are deductible before each filing season.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
