[Federal Register Volume 85, Number 197 (Friday, October 9, 2020)]
[Rules and Regulations]
[Pages 64026-64040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21990]



[[Page 64026]]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9925]
RIN 1545-BP23


Meals and Entertainment Expenses Under Section 274

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations that provide guidance 
under 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.

DATES: 
    Effective Date: These regulations are effective on October 9, 2020.
    Applicability Date: These regulations apply for taxable years that 
begin on or after October 9, 2020.

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 during the taxable year in carrying on any trade or business.
    On December 22, 2017, section 274 was amended by section 13304 of 
Public Law 115-97 (131 Stat. 2054), commonly referred to as the Tax 
Cuts and Jobs Act, (TCJA) to revise the rules for deducting 
expenditures for meals and entertainment, effective for amounts paid or 
incurred after December 31, 2017.
    On February 26, 2020, the Department of the Treasury (Treasury 
Department) 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). The proposed 
regulations would update existing regulations in Sec.  1.274-2 by 
adding a new section at Sec.  1.274-11 for entertainment expenditures. 
The proposed regulations would also add a new section at Sec.  1.274-12 
to address the limitations on food or beverage expenses under section 
274(k) and (n), including the application of the 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 Comments and 
Explanation of Revisions section. However, comments recommending 
statutory revisions or addressing issues outside the scope of these 
final regulations are not discussed in this preamble. After full 
consideration of the comments, this Treasury decision adopts the 
proposed regulations with modifications in response to certain 
comments, as described in the Summary of Comments and Explanation of 
Revisions section.

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 (entertainment expenditures). 
However, prior to the amendment by the TCJA, section 274(a)(1)(A) 
provided exceptions to that disallowance if the taxpayer established 
that: (1) The item was directly related to the active conduct of the 
taxpayer's trade or business (directly related exception); or (2) in 
the case of an item directly preceding or following a 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 
facilities. Section 274(a)(3) disallows a deduction for amounts paid or 
incurred for membership in any club organized for business, pleasure, 
recreation, or other social purpose.
    Prior to amendment by the TCJA, section 274(n)(1) generally limited 
the deduction of food or beverage expenses and entertainment 
expenditures to 50 percent of the amount that otherwise would have been 
allowable. Thus, under prior law, taxpayers could deduct 50 percent of 
meal expenses, and 50 percent of entertainment expenditures that met 
the directly related or business discussion exception. Distinguishing 
between meal expenses and entertainment expenditures was unnecessary 
for purposes of the 50 percent limitation.
    Section 13304(a)(1) of the TCJA repealed the directly related and 
business discussion exceptions to the general prohibition on deducting 
entertainment 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

[[Page 64027]]

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 beverages unless (a) the expense is not 
lavish or extravagant under the circumstances, and (b) the taxpayer (or 
an employee of the taxpayer) is present at the furnishing of the food 
or beverages. See section 274(k).
    Prior to amendment by the TCJA, section 274(d) provided 
substantiation requirements for deductions under section 162 or 212 for 
any traveling expense (including meals and lodging while away from 
home), and for any item with respect to 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. Traveling expenses 
(including meals and lodging while away from home), however, remain 
subject to the section 274(d) substantiation requirements. Food and 
beverage expenses are subject to the substantiation requirements under 
section 162 and the requirement to maintain books and records under 
section 6001.
    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 current or 
potential business customer, client, consultant, or similar business 
contact; and (5) in the case of food and beverages provided at or 
during an entertainment activity, the food and beverages are purchased 
separately from the entertainment, or the cost of the food and 
beverages is stated separately from the cost of the entertainment on 
one or more bills, invoices, or receipts. The notice provides that the 
entertainment disallowance rule may not be circumvented through 
inflating the amount charged for food and beverages.

2. Travel Meals

    Section 274(n)(1) generally limits the deduction of food or 
beverage expenses, including expenses for food or beverages consumed 
while away from home, to 50 percent of the amount that otherwise would 
have been allowable, unless one of the six exceptions to section 274(n) 
in section 274(e) applies. However, no deduction is 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 that no deduction is allowed under chapter 1 
(other than section 217) for travel expenses paid or incurred with 
respect to a spouse, dependent, or other individual accompanying the 
taxpayer (or an officer or employee of the taxpayer) on business 
travel, unless: (1) The spouse, dependent, or other individual is an 
employee of the taxpayer; (2) the travel of the spouse, dependent, or 
other individual is for a bona fide business purpose; and (3) such 
expenses would otherwise be deductible by the spouse, dependent, or 
other individual.

3. Employer-Provided Meals

    Prior to amendment by the TCJA, section 274(n)(1) generally limited 
the deduction for food or beverage expenses to 50 percent of the amount 
that otherwise would have been allowable, subject to an exception in 
section 274(n)(2)(B) in the case of an expense for food or beverages 
that is excludable from the gross income of the 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 excludable from the gross income of 
the employee as a de minimis fringe. However, the TCJA repealed section 
274(n)(2)(B), meaning that expenses for food or beverages that are de 
minimis fringes under section 132(e) are no longer excepted from 
section 274(n)(1). As a result, these expenses, like other food or 
beverage expenses generally, are subject to the 50 percent limitation 
unless one of the six exceptions to section 274(n) in section 274(e) 
applies.
    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 or beverages, including 
under section 132(e)(1), associated with such facility, or (2) any 
expense for meals provided to an employee for the convenience of the 
employer, as described in section 119(a). Thus, beginning with amounts 
paid or incurred in 2026, expenses for food or beverages provided to 
employees, as well as expenses for the 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 extent that the expenses are treated as compensation 
to the recipient. Section 274(e)(3) applies to expenses incurred

[[Page 64028]]

by a taxpayer in connection with the performance of services for an 
employer or other person under a reimbursement or other expense 
allowance arrangement. Section 274(e)(4) applies to expenses for 
recreational, social, or similar activities for employees. Section 
274(e)(7) applies to expenses for goods, services, and facilities made 
available to the general public. 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 to the extent that the expenses are treated as income to a 
person other than an employee.

Summary of Comments and Explanation of Revisions

1. Entertainment Expenditures

    The final regulations restate the statutory rules under section 
274(a), at Sec.  1.274-11(a), including the application of the 
entertainment deduction disallowance rule to dues or fees to any 
social, athletic, or sporting club or organization. The existing 
definition of entertainment in Sec.  1.274-2(b)(1), with minor 
modifications to remove outdated language, is incorporated into the 
final regulations, at Sec.  1.274-11(b)(1). The final regulations 
provide that for purposes of section 274(a), the term ``entertainment'' 
does not include food or beverages unless the food or beverages are 
provided at or during an entertainment activity and the costs of the 
food or beverages are not separately stated from the entertainment 
costs. The final regulations do not affect the application of the 
special rules in Sec.  1.274-10 to expenses related to aircraft used 
for entertainment.
A. Section 274(e) Exceptions to Section 274(a)
    The final regulations, at Sec.  1.274-11(c), confirm the continued 
application of the nine exceptions in section 274(e) to entertainment 
expenditures otherwise disallowed by section 274(a). The application of 
section 274(e) to food or beverage expenses is discussed in part 2.E. 
of this Summary of Comments and Explanation of Revisions section, which 
discusses the exceptions under section 274(e) to section 274(k) and 
(n).
    A commenter on the proposed regulations requested that the Treasury 
Department and the IRS clarify that for purposes of the section 
274(e)(8) exception to the entertainment deduction limitations in 
section 274(a) for goods or services sold by the taxpayer, the goods or 
services may be sold to an employee of the taxpayer in a bona fide 
transaction for an adequate and full consideration in money or money's 
worth. The Treasury Department and the IRS decline to adopt this 
suggestion because the section 274(e)(8) exception to the entertainment 
disallowance is outside the scope of these regulations. The proposed 
regulations and these final regulations were initiated in response to 
the changes made to section 274 by the TCJA and generally are limited 
to addressing those changes. In particular, with regard to 
entertainment expenditures, the final regulations under Sec.  1.274-11 
primarily distinguish between meals and entertainment, as that 
distinction is now relevant, for purposes of determining whether the 
deduction of a particular expense is disallowed entirely or is limited 
to 50 percent. However, the TCJA did not change the application of the 
section 274(e) exceptions to entertainment expenditures. Thus, other 
than confirming that the section 274(e) exceptions continue to apply to 
entertainment expenditures, the final regulations do not provide rules 
addressing how the section 274(e) exceptions apply to entertainment 
expenditures. Taxpayers may, however, continue to rely upon the 
existing rules and examples in Sec.  1.274-2 to the extent they are not 
superseded by the TCJA or other legislation and are not inconsistent 
with the final regulations.
B. Separately Stated Food or Beverages not Entertainment
    The final regulations substantially incorporate the guidance in 
Notice 2018-76 to distinguish between entertainment expenditures and 
food or beverage expenses in the context of business meals provided at 
or during an entertainment activity. In addition, the final regulations 
generally apply the guidance in Notice 2018-76 to all food or 
beverages, including travel meals and employer-provided meals, provided 
at or during an entertainment activity. The final regulations also 
clarify the rules applicable to food or beverages provided at or during 
an entertainment activity.
    Notice 2018-76 explains that in the case of food and beverages 
provided at or during an entertainment activity, the taxpayer may 
deduct 50 percent of an otherwise allowable business expense if the 
food and beverages are purchased separately from the entertainment, or 
if the cost of the food and beverages is stated separately from the 
cost of the entertainment on one or more bills, invoices, or receipts. 
The notice provides that the entertainment disallowance rule may not be 
circumvented through inflating the amount charged for food and 
beverages. The final regulations clarify this requirement by providing 
that the amount charged for food or beverages on a bill, invoice, or 
receipt must reflect the venue's usual selling cost for those items if 
they were to be purchased separately from the entertainment, or must 
approximate the reasonable value of those items.
    The final regulations provide that in cases where the food or 
beverages provided at or during an entertainment activity are not 
purchased separately from the entertainment, and where 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 can be made and the entire amount is a nondeductible 
entertainment expenditure. Finally, in accordance with the TCJA's 
amendments to section 274(a)(1) specifically repealing the ``directly 
related'' and ``business discussion'' exceptions to the general 
disallowance rule for entertainment expenditures, the final regulations 
clarify that the entertainment disallowance rule applies whether or not 
the expenditure for the activity is related to or associated with the 
active conduct of the taxpayer's trade or business.
    A commenter suggested that the final regulations provide that the 
consumption of food and beverages is not entertainment in the case of 
both business and nonbusiness activities and include an example of a 
specified individual consuming food and beverages while traveling on an 
employer-provided aircraft to visit family members for nonbusiness 
purposes. The specific question presented in this comment relates to 
whether air travel is an entertainment activity and is addressed in the 
existing rules in Sec.  1.274-10. Therefore, this question is not 
addressed in the final regulations. In addition, Sec.  1.274-
11(b)(1)(ii) provides that the term entertainment does not include food 
or beverages unless the food or beverages are provided at or during an 
entertainment activity and are not purchased separately from the 
entertainment.

2. Food or Beverage Expenses

A. Business Meal Expenses
    The final regulations substantially incorporate the guidance in 
Notice 2018-76 addressing business meals provided at or during an 
entertainment activity. The final regulations also incorporate other 
statutory requirements

[[Page 64029]]

taxpayers must meet to deduct 50 percent of an otherwise allowable food 
or beverage expense. Specifically, the expense must not be lavish or 
extravagant under the circumstances, and the taxpayer, or an employee 
of the taxpayer, must be present at the furnishing of the food or 
beverages.
    The final regulations also address the general requirement in 
Notice 2018-76 that the food and beverages be provided to a business 
contact, which was described in the notice as a ``current or potential 
business customer, client, consultant, or similar business contact.'' 
This requirement is to ensure that the meal expenses are directly 
connected with or pertaining to the taxpayer's trade or business, as 
required under section 162. One commenter on Notice 2018-76 requested a 
definition of ``potential business contact,'' suggesting that the term 
could be interpreted broadly to include almost anyone. In response to 
the comment, and to conform the rule more closely to the trade or 
business requirement in section 162, the proposed regulations follow 
the definition of ``business associate'' as currently provided in Sec.  
1.274-2(b)(2)(iii). The final regulations adopt this definition of 
``business associate'' in Sec.  1.274-12(b)(3). Thus, the final 
regulations provide that the food or beverages must be provided to a 
``person with whom the taxpayer could reasonably expect to engage or 
deal in the active conduct of the taxpayer's trade or business such as 
the taxpayer's customer, client, supplier, employee, agent, partner, or 
professional adviser, whether established or prospective.'' 
Accordingly, the final regulations apply this definition to employer-
provided food or beverage expenses by considering employees as a type 
of business associate as well as to the deduction for expenses for 
meals provided by a taxpayer to both employees and non-employee 
business associates at the same event.
    A commenter on the proposed regulations asked whether the Treasury 
Department and the IRS have legal authority to allow taxpayers to claim 
deductions for business meal expenses that have been considered part of 
entertainment since the enactment of section 274. The commenter 
acknowledged that the legislative history of the TCJA provides that 
taxpayers may still generally deduct 50 percent of the food and 
beverage expenses associated with operating their trade or business 
(e.g., meals consumed by employees on work travel). H.R. Rep No. 115-
466 at 407. However, the commenter argued that the legislative history 
merely recognizes that travel meals remain 50 percent deductible. The 
commenter further argued that the term ``entertainment'' clearly 
encompasses many business meals and that the proposed regulations 
unsettle the longstanding position that expenditures for the personal 
enjoyment of an individual fall within the ordinary meaning of 
``entertainment.''
    The Treasury Department and the IRS believe that Congress, in 
amending section 274 in the TCJA, intended that expenses for business 
meals be considered food or beverage expenses associated with operating 
a taxpayer's trade or business, and therefore generally remain 50 
percent deductible. The Treasury Department and the IRS acknowledge 
that, prior to the TCJA, some meals were considered to be 
entertainment. However, prior to the TCJA, neither section 274 nor the 
regulations under section 274 attempted to define meal expenses or to 
distinguish meal expenses from entertainment expenses. In considering 
the comment, the Treasury Department and the IRS believe that the 
proposed regulations are consistent with the plain reading of section 
274 after the TCJA, which clearly contemplates different treatment for 
meal expenses and entertainment expenses. In addition, the existing 
regulatory definition of entertainment relies upon an objective test to 
determine whether an activity is of a type generally considered to 
constitute entertainment. Providing that business meals are not of a 
type generally considered to constitute entertainment results in an 
administrable rule that does not depend on subjective factors such as 
whether the taxpayer enjoys the business meal. Thus, the final 
regulations adopt the proposed rule providing that business meals 
generally remain 50 percent deductible. The Treasury Department and the 
IRS believe that the final regulations provide a rule that is legally 
supportable and that draws a clear line between meals and entertainment 
that taxpayers can understand and the IRS can administer.
    One commenter also asked whether the proposed regulations were 
intended to 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 
Sec.  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 Sec.  1.274-11 and Sec.  1.274-12 that the examples assume 
that the underlying expenses are deductible under section 162.
    Two commenters requested that the final regulations add an example 
addressing the treatment of expenses for food and beverages provided to 
attendees at a business meeting, such as a conference for clients or a 
training seminar for employees. In response to these comments, the 
final regulations add two new examples to Sec.  1.274-12(a)(3) to 
address these scenarios.
    A commenter also asked whether under proposed Sec.  1.274-12(a), a 
taxpayer may 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 Sec.  1.274-12(a)(1) refers to ``food or beverages 
provided to a business associate,'' raising a question about whether 
the rule applies to food or beverages provided to the taxpayer or the 
taxpayer's employees. In addition, Sec.  1.274-12(a)(1) of the proposed 
regulations refers to food or beverages provided ``to another person or 
persons.'' It was intended that the 50 percent deduction 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 Sec.  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 Sec.  1.274-12(b)(3)). Finally, to make 
clear that the rules in Sec.  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 Sec.  1.274-12(a)(1)(iii) 
to refer to food or beverages provided ``to the taxpayer or a business 
associate.''
    One commenter asked whether a sole proprietor can deduct the cost 
of meals when working throughout the day. As explained in the 
Background section of this preamble, section 274 limits or disallows 
deductions for certain meal and entertainment expenditures that 
otherwise would be allowable under chapter 1, primarily under section 
162(a), which allows a deduction for ordinary and necessary expenses 
paid or

[[Page 64030]]

incurred during the taxable year in carrying on any trade or business. 
The requirements 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 
expenditure is otherwise allowable as a deduction under chapter 1 
before the provisions of section 274 become applicable. Therefore, the 
sole proprietor must first establish that the food or beverage expense 
is deductible under chapter 1 before section 274 would apply. For 
example, if the sole proprietor can establish that the food or beverage 
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 Sec.  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 Sec.  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 expenses and thus, apply the general rules 
for meal expenses from Notice 2018-76 and the proposed regulations, to 
travel meals. In addition, the final regulations incorporate the 
substantiation requirements in section 274(d), unchanged by the TCJA, 
to travel meals. Finally, the final regulations apply the limitations 
in section 274(m)(3) to expenses for food or beverages paid or incurred 
while on travel for spouses, dependents or other individuals 
accompanying the taxpayer (or an officer or employee 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 December 31, 2017, and before January 1, 2026, except 
with respect to certain members of the Armed Forces. Thus, the final 
regulations revise the reference to section 217 to reflect that 
amendment.
    One commenter asked how the proposed regulations affect employees 
that are 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 final regulations apply the business meal guidance in Notice 
2018-76, as revised in the proposed regulations, to food or beverage 
expenses generally. Under section 274(n)(1), the deduction for food or 
beverage expenses generally is limited to 50 percent of the amount that 
would otherwise be allowable. Prior to the TCJA, under section 
274(n)(2)(B), expenses for food or beverages that were excludable from 
employee income as de minimis fringe benefits under section 132(e) were 
not subject to 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 excludable from 
employee income under section 132(e) are subject to the section 
274(n)(1) deduction limitation unless another exception under section 
274(n)(2) applies.
    Under section 274(k)(1), in order for food or beverage expenses to 
be deductible the food or beverages must not be lavish or extravagant 
under the circumstances and 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 after enactment of the TCJA, the final regulations address 
several scenarios involving the deductibility of food or beverage 
expenses. For example, commenters requested guidance on the 
deductibility of expenses for: (1) Food or beverages provided to food 
service workers who consume the food or beverages while working in a 
restaurant or catering business; (2) snacks available to employees in a 
pantry, break room, or copy room; (3) refreshments provided by a real 
estate agent at an open house; (4) food or 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.
D. Definitions
    The final regulations provide that the deduction limitation rules 
generally apply to all food and beverages, whether characterized as 
meals, snacks, or other types of food or beverage items. In addition, 
unless one of six exceptions under section 274(e) 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 Sec.  1.274-12(b)(2) of the final regulations 
means the full cost of food or beverages, including any delivery fees, 
tips, and sales tax. Indirect expenses, including the cost of 
transportation to a meal, are not included in the definition.
E. Section 274(e) Exceptions to Section 274(k) and (n)
    Section 274(k)(2)(A) and (n)(2)(A) provide that the limitations on 
deductions in section 274(k)(1) and (n)(1), respectively, do not apply 
to any expense described in 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

[[Page 64031]]

business meals, travel meals, or other food or beverages that fall 
within one of these exceptions.
i. Expenses Treated as Compensation Under Section 274(e)(2) or (e)(9)
    Pursuant to section 274(e)(2), the final regulations provide that 
the limitations in 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 compensation 
to the employee on the taxpayer's income tax return as originally 
filed, 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.
    The exceptions in section 274(e)(2) related to employees and in 
section 274(e)(9) related to non-employees have been interpreted as 
allowing a taxpayer to deduct the full amount of an expense if the 
expense has properly been included in the compensation and wages of the 
employee, or gross income of the recipient, even if the amount of the 
expense exceeds the amount included in compensation or income. See 
Sutherland Lumber-Southwest Inc. v. Commissioner, 114 T.C. 197 (2000), 
affd., 255 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 non-employees 
who are specified individuals, section 274(e)(2)(B) provides an 
exception to the section 274(n) limitation only ``to the extent that 
the expenses do not exceed the amount of the expenses which'' are 
treated as compensation and wages to the employee or as income to a 
non-employee. This methodology is also referred to in 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 Sec.  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 Sec.  1.61-21, or for 
which the amount required to be included in gross income is zero, will 
not be considered as having been treated as compensation and as wages 
to the employee, or as includible in gross income by a recipient of the 
food or beverages who is not an employee of the taxpayer, for purposes 
of section 274(e)(2) and (e)(9).
    Commenters argued that the proposed rule disallowing the 
application of section 274(e)(2) and (e)(9) to expenses for which an 
improper amount is included in compensation and wages or in gross 
income, as applicable, is unduly harsh given the difficulty in 
determining the value of food or beverages under Sec.  1.61-21 and the 
possibility of good faith errors. In addition, a commenter noted that 
neither the ``to the extent that'' language in section 274(e)(2)(A) nor 
the holding in Sutherland Lumber-Southwest support applying an ``all or 
nothing'' rule against the taxpayer.
    The Treasury Department and the IRS agree that the ``all or 
nothing'' rule included in the proposed regulations may lead to unduly 
harsh results. Therefore, in response to these comments, the Treasury 
Department and the IRS revised the rules in proposed Sec.  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.
    The Treasury Department and the IRS believe the rules provided in 
the final regulations avoid the unduly harsh result that could arise by 
prohibiting application of section 274(e)(2) or (e)(9) in cases where 
the taxpayer includes some, but not all, of the value of a food or 
beverage expense in the recipient's income. In addition, the rules 
maintain consistency with the IRS's acquiescence in Sutherland Lumber, 
which provides that the IRS will no longer litigate application of 
section 274(e)(2) in cases in which a taxpayer demonstrates that it has 
``properly'' included in compensation and wages the value of an 
employee vacation flight in accordance with Sec.  1.61-21(g). See AOD-
2002-02. The rules are also consistent with Sec.  1.274-
10(a)(2)(ii)(A), which applies the section 274(e)(2) exception to 
entertainment air travel and provides that a taxpayer must ``properly'' 
treat expenses as compensation and wages to an employee and treat the 
proper amount as compensation under Sec.  1.61-21.
    For administrability, a commenter suggested that the rule apply to 
the amounts 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 the proposed regulations 
refers to the treatment of the amount on the ``taxpayer's income tax 
return as originally filed,'' meaning the tax return of the employer, 
not the employee or service provider. However, to further clarify the 
rule, Sec.  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 Sec.  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 beverages on the amount excepted from the limitations 
under section 274(k)(1) and (n)(1) by section 274(e)(2) and (e)(9). The 
commenter explained that Sec.  1.274-10(a)(2)(ii)(C)(2) treats 
reimbursements in the same manner as compensation and wages for 
specified individuals, and a similar rule should be provided for 
reimbursements from non-specified individuals. The commenter pointed 
out that without a similar rule, expenses for food or beverages 
provided to specified individuals 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 should be provided under section 274, regardless of 
whether the food or beverages are provided to a specified or non-
specified individual.
    With regard to non-specified individuals, the final regulations

[[Page 64032]]

provide that a taxpayer may deduct its food or beverage expenses under 
the exception in section 274(e)(2)(A) or section 274(e)(9) if the 
taxpayer includes the proper amount in compensation and wages, or gross 
income, as applicable. Section 1.61-21(b)(1) provides rules for the 
valuation of fringe benefits and requires that an employee must include 
in gross income the amount by which the fair market value of the fringe 
benefit exceeds the sum of the amount paid for the benefit by or on 
behalf of the recipient and the amount, if any, specifically excluded 
from gross income under the Code. Thus, in the case of reimbursements 
by a recipient, the amount of the reimbursement is taken into account 
in determining the amount properly includible in the recipient's income 
and does not affect the taxpayer's ability to use the exception in 
section 274(e)(2)(A) or section 274(e)(9).
    With regard to improper inclusions in compensation and wages or 
gross income, the final regulations provide that the taxpayer must 
apply the dollar-for-dollar methodology as described in Sec.  1.274-
12(c)(2)(i)(D). Under that rule, food and beverage expenses are 
deductible to the extent that the expenses do not exceed the sum of the 
amount of the expenses that are treated as compensation and wages or 
gross income, and any amount the recipient reimburses the taxpayer. 
This dollar-for-dollar rule is the same methodology that applies under 
section 274(e)(2)(B) for food or beverages provided to specified 
individuals.
    The final regulations also include a provision for specified 
individuals providing that the exceptions of section 274(e)(2) and 
(e)(9) generally apply only to the extent that the food or beverage 
expenses do not exceed the amount of the food or beverage expenses 
treated as compensation (under section 274(e)(2)) or as income (under 
section 274(e)(9)) to the specified individual. The final regulations 
provide, however, that amounts reimbursed to the taxpayer by the 
specified individual, will reduce the amount subject to the limitations 
under section 274(k)(1) and (n)(1). This rule conforms to the statutory 
language in section 274(e)(2)(B) and the regulatory language in Sec.  
1.274-10. Thus, the final regulations address the comment asking for 
clarification of the effect of reimbursements by employees, specified 
individuals, and other recipients of the food or beverages on the 
amount excepted from the limitations under section 274(k)(1) and (n)(1) 
by section 274(e)(2) and (e)(9).
    The Treasury Department and the IRS continue to believe that if the 
amount to be included in compensation and wages or gross income is 
zero, whether zero is a proper or improper amount, the exceptions in 
section 274(e)(2) and section 274(e)(9) do not apply because no amount 
has been included in compensation and wages or gross income. For 
example, if the amount to be included is zero because the value of the 
food or beverages is excluded as a fringe benefit under section 132, 
the exceptions in section 274(e)(2) and (e)(9) do not apply. Similarly, 
the exceptions in section 274(e)(2) and (e)(9) do not apply if the 
amount to be included is zero solely because the recipient has fully 
reimbursed the taxpayer for the food or beverages. In that case, 
however, the exception in section 274(e)(8) may apply if the food or 
beverages are sold to the recipient in a bona fide transaction for an 
adequate and full consideration in money or money's worth.
ii. Food or Beverage Expenses Provided Under Reimbursement Arrangements
    Pursuant to section 274(e)(3), the final regulations provide that 
in the case of expenses for food or beverages paid or incurred by one 
person in connection with the performance of services for another 
person (whether or not the other person is an employer) under a 
reimbursement or other expense allowance arrangement, the limitations 
on deductions in section 274(k)(1) and (n)(1) apply either to the 
person who makes the expenditure or to the person who actually bears 
the expense, but not to both. Section 274(e)(3)(B) provides that if the 
services are performed for a person other than an employer, such as by 
an independent contractor, the exception in section 274(e)(3) applies 
only if the taxpayer, in this case, the independent contractor, 
accounts, to the extent provided by section 274(d), to such person. The 
final regulations therefore provide that the deduction limitations in 
section 274(k)(1) and (n)(1) apply to an independent contractor unless, 
under a reimbursement or other expense allowance arrangement, the 
contractor accounts to its client or customer with substantiation that 
satisfies the requirements of section 274(d).
iii. Recreational Expenses for Employees
    Pursuant to section 274(e)(4), the final regulations provide that 
any food or beverage expense paid or incurred by a taxpayer for a 
recreational, social, or similar activity, primarily for the benefit of 
the taxpayer's employees, is not subject to the deduction limitations 
in section 274(k)(1) and (n)(1). However, activities that discriminate 
in favor of highly compensated employees, officers, shareholders or 
others who own a 10-percent or greater interest in the business are not 
considered paid or incurred primarily for the benefit of employees.
    Many of the comments received after enactment of the TCJA requested 
confirmation that food or beverage expenses for company holiday parties 
and picnics that do not discriminate in favor of highly compensated 
employees are not subject to the deduction limitations in section 
274(k)(1) and (n)(1) because the exception in section 274(e)(4) 
applies. These comments also suggested that expenses for snacks and 
beverages available to all employees in a pantry, break room, or copy 
room are not subject to the deduction limitations in section 274(k)(1) 
and (n)(1) because the exception in section 274(e)(4) applies.
    In response to the questions and comments received, the proposed 
regulations confirm the rules in the existing regulations at Sec.  
1.274-2(f)(2)(v) that the exception in section 274(e)(4) applies to 
food or beverage expenses for company holiday parties, annual picnics, 
or summer outings that do not discriminate in favor of highly 
compensated employees. However, an example in the proposed regulations 
demonstrates that the section 274(e)(4) exception does not apply to 
free food or beverages available to all employees in a pantry, break 
room, or copy room because the mere provision or availability of food 
or beverages is not a recreational, social, or similar activity, 
despite the fact that employees may incidentally socialize while they 
are in the break room. The final regulations adopt the proposed 
regulations with respect to the application of section 274(e)(4) in 
this context.
    In addition, the final regulations provide that the exception in 
section 274(e)(4) does not apply to food or beverage expenses that are 
excludable from employees' income under section 119 as meals provided 
for the convenience of the employer. Because these food or beverages 
are, by definition, furnished for the employer's convenience, they 
cannot also be primarily for the benefit of the employees, even if some 
social activity occurs during the provision of the food or beverages.
iv. Items Available to the Public
    Pursuant to section 274(e)(7), the final regulations provide that 
food or beverage expenses of a taxpayer are not subject to the 
deduction limitations in section 274(k)(1) and (n)(1) to the extent the 
food or beverages are made available

[[Page 64033]]

to the general public. In addition, the final regulations provide that 
this exception applies to expenses for food or beverages provided to 
employees if similar food or beverages are provided by the employer to, 
and are primarily consumed by, the general public. For this purpose, 
``primarily consumed'' means greater than 50 percent of actual or 
reasonably estimated consumption, and ``general public'' includes, but 
is not limited to, customers, clients, and visitors. The final 
regulations also provide that the general public does not include 
employees, partners, 2-percent shareholders of S corporations (as 
defined in section 1372(b)), or independent contractors of the 
taxpayer. Further, an exclusive list of guests also is not considered 
the general public. See Churchill Downs, Inc. v. Commissioner, 307 F.3d 
423 (6th Cir. 2002).
    Comments received in response to Notice 2018-76 requested guidance 
as to whether the exception in section 274(e)(7) for food or beverages 
made available by the taxpayer to the general public applies in various 
situations. The Treasury Department and the IRS considered these 
comments and included examples in the proposed regulations to 
illustrate that the exception in section 274(e)(7) generally applies to 
the entire food or beverage expense if the food or beverages are 
primarily consumed by the general public. The final regulations retain 
these examples.
v. Goods or Services Sold to Customers
    Pursuant to section 274(e)(8), the final regulations provide that 
any expense for food or beverages that are sold to customers in a bona 
fide transaction for an adequate and full consideration in money or 
money's worth is not subject to the deduction limitations in section 
274(k)(1) and (n)(1). The final regulations clarify that money or 
money's worth does not include payment through services provided.
    The Treasury Department and the IRS are aware of concerns raised by 
commenters that it is a common business practice for employers of 
restaurant and food service workers to provide food or beverages at no 
cost or at a discount to their employees. The Joint Committee on 
Taxation's Bluebook on the TCJA explains that amendments made by the 
TCJA to limit the deduction for expenses of the employer associated 
with providing food or beverages to employees through an employer-
operated eating facility that meets the requirements of section 
132(e)(2) do not affect other exceptions to the 50-percent limitation 
on deductions for food or beverage expenses. For example, a restaurant 
or catering business may continue to deduct 100 percent of its costs 
for food or beverage items, purchased in connection with preparing and 
providing meals to its paying customers, which are also consumed at the 
worksite by employees who work in the employer's restaurant or catering 
business. Joint Committee on Taxation, General Explanation of Public 
Law 115-97 (JCS-1-18), at 186 n.940 and at 188 n.956, December 2018. 
The final regulations adopt this interpretation of the exception in 
section 274(e)(8).
    Finally, the final regulations provide that for purposes of the 
section 274(e)(8) exception to the deduction limitations in section 
274(k)(1) and (n)(1), the term ``customer'' includes anyone who is sold 
food or beverages in a bona fide transaction for an adequate and full 
consideration in money or money's worth. For example, 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 website at http://www.irs.gov.

Applicability Date

    These regulations apply to taxable years that begin on or after 
October 9, 2020.

Special Analyses

    These final regulations are not subject to review under section 
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Treasury Department and the Office of 
Management and Budget regarding review of tax regulations.
    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby 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 not 
readily available about the number of taxpayers affected, but the 
number is likely to be substantial for both large and small entities 
because the rule may affect entities that incur meal and entertainment 
expenses. The economic impact of these regulations is not likely to be 
significant, however, because these final regulations substantially 
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 were received from the Chief 
Counsel for the Office of Advocacy of the Small Business 
Administration.

Effect on Other Documents

    The following publications are obsolete as of October 9, 2020.
    Notice 2018-76 (2018-42 I.R.B. 599).

Drafting Information

    The principal author of these final regulations is Patrick Clinton, 
Office of the Associate Chief Counsel (Income Tax & Accounting). Other 
personnel from the Treasury Department and the IRS participated in 
their development.

List of Subjects in 26 CFR Part 1

    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

0
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.

0
Par. 2. Section 1.274-11 is added to read as follows:

[[Page 64034]]

Sec.  1.274-11  Disallowance of deductions for certain entertainment, 
amusement, or recreation expenditures paid or incurred after December 
31, 2017.

    (a) In general. Except as provided in this section, no deduction 
otherwise allowable under chapter 1 of the Internal Revenue Code (Code) 
is allowed for any expenditure with respect to an activity that is of a 
type generally considered to be entertainment, or with respect to a 
facility used in connection with an entertainment 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 amounts paid or incurred for 
membership in any club organized for business, pleasure, recreation, or 
other social purpose.
    (b) Definitions--(1) Entertainment--(i) In general. For section 274 
purposes, the term entertainment means any activity which is of a type 
generally considered to 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 related to or 
associated with the active conduct of the taxpayer's trade or business. 
The 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, 
although satisfying personal, living, or family needs of an individual, 
are clearly not regarded as constituting entertainment, such as the 
providing of a hotel room maintained by an employer for lodging of 
employees while in business travel status or an automobile used in the 
active conduct of a trade or business even though used for routine 
personal purposes such as commuting to and from work. On the other 
hand, the providing of a hotel room or an automobile by an employer to 
an employee who is 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 entertainment activity. Food or beverages 
provided at or during an entertainment activity generally are treated 
as part of the entertainment activity. However, in the case of food or 
beverages provided at or during an entertainment activity, the food or 
beverages are not considered entertainment if the food or beverages are 
purchased 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 venue's 
usual selling cost for those items if they were to be purchased 
separately from 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 this section and section 
274(a).
    (iii) Objective test. An objective test is used to determine 
whether an activity is of a type generally considered to be 
entertainment. Thus, if an activity is generally considered to be 
entertainment, it will be treated as entertainment for purposes of this 
section and section 274(a) regardless of whether the expenditure can 
also be described otherwise, and even though the expenditure relates to 
the taxpayer alone. This 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 
taxpayer's trade or business is considered. Thus, although attending a 
theatrical performance generally would be considered entertainment, it 
would not be so considered in the case of a professional theater critic 
attending in a professional capacity. Similarly, if a manufacturer of 
dresses conducts a fashion show to introduce 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).
    (d) Examples. The following examples illustrate the application of 
paragraphs (a) and (b) of this section. In each example, assume that 
the taxpayer is engaged in a trade or business for purposes of section 
162 and that neither the taxpayer nor any business associate is engaged 
in a trade or business that relates to the entertainment activity. Also 
assume that none of the exceptions under section 274(e) and paragraph 
(c) of this section apply.
    (1) Example 1. Taxpayer A invites, B, a business associate, to a 
baseball game to discuss a proposed business deal. A purchases tickets 
for A and B to attend the game. The baseball game is entertainment as 
defined in Sec.  1.274-11(b)(1) and thus, the cost of the game tickets 
is an entertainment expenditure and is not deductible by A.
    (2) Example 2. The facts are the same as in paragraph (d)(1) of 
this section (Example 1), except that A also buys hot dogs and drinks 
for A and B from a concession stand. The cost of the hot dogs and 
drinks, which are purchased separately from the game tickets, is not an 
entertainment expenditure and is not subject to the disallowance under 
Sec.  1.274-11(a) and section 274(a)(1). Therefore, A may deduct 50 
percent of the expenses associated with the hot dogs and drinks 
purchased at the game if the expenses meet the requirements of section 
162 and Sec.  1.274-12.
    (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 Sec.  
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

[[Page 64035]]

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 paragraph (d)(3) of 
this section (Example 3), except that the invoice for the basketball 
game tickets separately states the cost of the food and beverages and 
reflects the venue's usual selling price if purchased separately. As in 
paragraph (d)(3) of this section (Example 3), the basketball game is 
entertainment as defined in Sec.  1.274-11(b)(1), and, thus, the cost 
of the game tickets, other than the cost of the food and beverages, is 
an entertainment expenditure and is not deductible by C. However, the 
cost of the food and beverages, which is stated separately on the 
invoice for the game tickets and reflects the venue's usual selling 
price of the food and beverages if purchased separately, is not an 
entertainment expenditure and is not subject to the disallowance under 
section 274(a)(1) and paragraph (a) of this section. Therefore, C may 
deduct 50 percent of the expenses associated with the food and 
beverages provided at the game if the expenses meet the requirements of 
section 162 and Sec.  1.274-12.
    (e) Applicability date. This section applies for taxable years that 
begin on or after October 9, 2020.

0
Par. 3.
    Section 1.274-12 is added to read as follows:


Sec.  1.274-12   Limitation on deductions for certain food or beverage 
expenses paid or incurred after December 31, 2017.

    (a) Food or beverage expenses--(1) In general. Except as provided 
in this section, no deduction is allowed for the expense of any food or 
beverages provided by the taxpayer (or an employee of the taxpayer) 
unless--
    (i) The expense is not lavish or extravagant under the 
circumstances;
    (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 incurred during the taxable year in 
carrying on a trade or business and are not lavish or extravagant under 
the circumstances. Also assume that none of the exceptions in paragraph 
(c) of this section apply.
    (i) Example 1. Taxpayer A takes client B out to lunch. Under 
section 274(k) and (n) and paragraph (a) of this section, A may deduct 
50 percent of the food or beverage expenses.
    (ii) Example 2. Taxpayer C takes employee D out to lunch. Under 
section 274(k) 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 food and beverages are provided to attendees. Expenses for 
the business meeting, 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 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.
    (iv) Example 4. The facts are the same as in paragraph (a)(3)(iii) 
of this section (Example 3), except that all the attendees of the 
meeting are employees of E. Expenses for the business meeting, 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 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 section 274(m)(1), (2), and (3).
    (ii) Substantiation. Except as provided in this section, no 
deduction is allowed for the expense of any food or beverages paid or 
incurred while traveling away from home in pursuit of a trade or 
business unless the taxpayer meets the substantiation requirements in 
section 274(d).
    (iii) Travel meal expenses of spouse, dependent or others. No 
deduction is 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 business travel, unless--
    (A) The spouse, dependent, or other individual is an employee of 
the taxpayer;
    (B) The travel of the spouse, dependent, or other individual is for 
a bona fide business purpose of the taxpayer; and
    (C) The expenses would otherwise be deductible by the spouse, 
dependent or other individual.
    (D) Example. The following example illustrates the application of 
paragraph (a)(4)(iii) of this section:
    (1) 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).
    (2) [Reserved]
    (b) Definitions. Except as otherwise provided in this section, the 
following definitions apply for purposes of section 274(k) and (n), 
Sec.  1.274-11(b)(1)(ii) and (d), and this section:
    (1) Food or beverages. Food or beverages means all food and 
beverage items, regardless of whether characterized as meals, snacks, 
or other types of food and beverages, and regardless of whether the 
food and beverages are treated as de minimis fringes under section 
132(e).
    (2) Food or beverage expenses. Food or beverage expenses mean the 
full cost of food or beverages, including any delivery fees, tips, and 
sales tax. In the case of employer-provided meals furnished at an 
eating facility on the employer's business premises, food or beverage 
expenses do not include

[[Page 64036]]

expenses for the operation of the eating facility such as salaries of 
employees preparing and serving meals and other overhead costs.
    (3) Business associate. Business associate means a person with whom 
the taxpayer could reasonably expect to engage or deal in the active 
conduct of the taxpayer's trade or business such as the taxpayer's 
customer, client, supplier, employee, agent, partner, or professional 
adviser, whether established or prospective.
    (4) Independent contractor. For purposes of the reimbursement or 
other expense allowance arrangements described in paragraph (c)(2)(ii) 
of this section, independent contractor means a person who is not an 
employee of the payor.
    (5) Client or customer. For purposes of the reimbursement or other 
expense allowance arrangements described in paragraph (c)(2)(ii) of 
this section, client or customer of an independent contractor means a 
person who receives services from an independent contractor and enters 
into a reimbursement or other expense allowance arrangement with the 
independent contractor.
    (6) Payor. For purposes of the reimbursement or other expense 
allowance arrangements described in paragraph (c)(2)(ii) of this 
section, payor means a person that enters into a reimbursement or other 
expense allowance arrangement with an employee and may include an 
employer, its agent, or a third party.
    (7) Reimbursement or other expense allowance arrangement. For 
purposes of the reimbursement or other expense allowance arrangements 
described in paragraph (c)(2)(ii) of this section, reimbursement or 
other expense allowance arrangement means--
    (i) For purposes of paragraph (c)(2)(ii)(B) of this section, an 
arrangement under which an employee receives an advance, allowance, or 
reimbursement from a payor for expenses the employee pays or incurs; 
and
    (ii) For purposes of paragraph (c)(2)(ii)(C) of this section, an 
arrangement under which an independent contractor receives an advance, 
allowance, or reimbursement from a client or customer for expenses the 
independent contractor pays or incurs if either--
    (A) A written agreement between the parties expressly states that 
the client or customer will reimburse the independent contractor for 
expenses that are subject to the limitations on deductions described in 
paragraph (a) of this section; or
    (B) A written agreement between the parties expressly identifies 
the party subject to the limitations.
    (8) Primarily consumed. For purposes of paragraph (c)(2)(iv) of 
this section, primarily consumed means greater than 50 percent of 
actual or reasonably estimated consumption.
    (9) General public. For purposes of paragraph (c)(2)(iv) of this 
section, the general public includes, but is not limited to, customers, 
clients, and visitors. The general public does not include employees, 
partners, 2-percent shareholders of S corporations (as defined in 
section 1372(b)), or independent contractors of the taxpayer. Also, the 
guests on an exclusive list of guests are not the general public.
    (c) Exceptions--(1) In general. The limitations on the deduction of 
food or beverage expenses in paragraph (a) of this section do not apply 
to any expense described in paragraph (c)(2) of this section. These 
expenses are deductible to the extent allowable under chapter 1 of the 
Code (chapter 1).
    (2) Exceptions--(i) Expenses treated as compensation--(A) Expenses 
includible in income of persons who are employees and are not specified 
individuals. In accordance with section 274(e)(2)(A), and except as 
provided in paragraph (c)(2)(i)(D) of this section, an expense paid or 
incurred by a taxpayer for food or beverages, if an employee who is not 
a specified individual is the recipient of the food or beverages, is 
not subject to the deduction limitations in paragraph (a) of this 
section to the extent that the taxpayer--
    (1) Properly treats the expense relating to the recipient of food 
or beverages as compensation to an employee under chapter 1 and as 
wages to the employee for purposes of chapter 24 of the Code (chapter 
24).; and
    (2) Treats the proper amount as compensation to the employee under 
Sec.  1.61-21.
    (B) Expenses includible in income of persons who are not employees 
and are not specified individuals. In accordance with section 
274(e)(9), and except as provided in paragraph (c)(2)(i)(D) of this 
section, an expense paid or incurred by a taxpayer for food or 
beverages is not subject to the deduction limitations in paragraph (a) 
of this section to the extent that the expenses are properly included 
in income as compensation for services rendered by, or as a prize or 
award under section 74 to, a recipient of the expense who is not an 
employee of the taxpayer and is not a specified individual. The 
preceding sentence does not apply to any amount paid or incurred by the 
taxpayer if the amount is required to be included, or would be so 
required except that the amount is less than $600, in any information 
return filed by such taxpayer under part III of subchapter A of chapter 
61 of the Code and is not so included.
    (C) Specified Individuals. In accordance with section 274(e)(2)(B), 
in the case of a specified individual (as defined in section 
274(e)(2)(B)(ii)), the deduction limitations in paragraph (a) of this 
section do not apply to an expense for food or beverages of the 
specified individual to the extent that the amount of the expense does 
not exceed the sum of--
    (1) The amount treated as compensation to the specified individual 
under chapter 1 and as wages to the specified individual for purposes 
of chapter 24 (if the specified individual is an employee) or as 
compensation for services rendered by, or as a prize or award under 
section 74 to, a recipient of the expense (if the specified individual 
is not an employee); and
    (2) Any amount the specified individual reimburses the taxpayer.
    (D) Expenses for which an amount is excluded from income or is less 
than the proper amount. Notwithstanding paragraphs (c)(2)(i)(A) and (B) 
of this section, in the case of an expense paid or incurred by a 
taxpayer for food or beverages for which an amount is wholly or 
partially excluded from a recipients' income under any section of 
subtitle A of the Code (other than because the amount is reimbursed by 
the recipient), or for which an amount included in compensation and 
wages to an employee (or as income to a nonemployee) is less than the 
amount required to be included under Sec.  1.61-21, the deduction 
limitations in paragraph (a) of this section do not apply to the extent 
that the amount of the expense does not exceed the sum of--
    (1) The amount treated as compensation to the employee under 
chapter 1 (or as income to a nonemployee) and as wages to the employee 
for purposes of chapter 24; and
    (2) Any amount the recipient reimburses the taxpayer.
    (E) Examples. The following examples illustrate the application of 
paragraph (c)(2)(i) 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 incurred during the taxable year in 
carrying on a trade or business.
    (1) Example 1. Employer G provides food and beverages to its non-
specified individual employees without charge at a company cafeteria on 
its premises. The food and beverages do not meet the definition of a de 
minimis fringe under

[[Page 64037]]

section 132(e). Thus, G treats the full fair market value of the food 
and beverage expenses as compensation and wages, and properly 
determines this amount under Sec.  1.61-21. Under section 274(e)(2) and 
paragraph (c)(2)(i)(A) of this section, 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. Thus, 
G may deduct 100 percent of the food and beverage expenses.
    (2) Example 2. The facts are the same as in paragraph 
(c)(2)(i)(E)(1) of this section (Example 1), except that each employee 
pays $8 per day for the food and beverages. The fair market value of 
the food and beverages is $10 per day, per employee. G incurs $9 per 
day, per employee for the food and beverages. G treats the food and 
beverage expenses as compensation and wages, and properly determines 
the amount of the inclusion under Sec.  1.61-21 to be $2 per day, per 
employee ($10 fair market value-$8 reimbursed by the employee = $2). 
Therefore, under paragraph (c)(2)(i)(A) of this section, G may deduct 
100 percent of the food and beverage expenses, or $9 per day, per 
employee.
    (3) Example 3. Employer H provides meals to its employees without 
charge. The meals are properly excluded from the employees' income 
under section 119 as meals provided for the convenience of the 
employer. Under Sec.  1.61-21(b)(1), an employee must include in gross 
income the amount by which the fair market value of a fringe benefit 
exceeds the sum of the amount, if any, paid for the benefit by or on 
behalf of the recipient, and the amount, if any, specifically excluded 
from gross income by some other section of subtitle A of the Code. 
Because the entire value of the employees' meals is excluded from the 
employees' income under section 119, the fair market value of the 
fringe benefit does not exceed the amount excluded from gross income 
under subtitle A of the Code, so there is nothing to be included in the 
employees' income under Sec.  1.61-21. Thus, the exception in section 
274(e)(2) and paragraph (c)(2)(i) of this section does not apply and, 
assuming no other exceptions provided under section 274(n)(2) and 
paragraph (c)(2) of this section apply, H may deduct only 50 percent of 
the expenses for the food and beverages provided to employees. 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.
    (ii) Reimbursed food or beverage expenses--(A) In general. In 
accordance with section 274(e)(3), in the case of expenses for food or 
beverages paid or incurred by one person in connection with the 
performance of services for another person, whether or not the other 
person is an employer, under a reimbursement or other expense allowance 
arrangement, the deduction limitations in paragraph (a) of this section 
apply either to the person who makes the expenditure or to the person 
who actually bears the expense, but not to both. If an expense of a 
type described in paragraph (c)(2)(ii) of this section properly 
constitutes a dividend paid to a shareholder, unreasonable compensation 
paid to an employee, a personal expense, or other nondeductible 
expense, nothing in this exception prevents disallowance of the 
deduction to the taxpayer under other provisions of the Code.
    (B) Reimbursement arrangements involving employees. In the case of 
expenses paid or incurred by an employee for food or beverages in 
performing services as an employee under a reimbursement or other 
expense allowance arrangement with a payor, the limitations on 
deductions in paragraph (a) of this section apply--
    (1) To the employee to the extent the employer treats the 
reimbursement or other payment of the expense on the employer's income 
tax return as originally filed as compensation paid to the employee and 
as wages to the employee for purposes of withholding under chapter 24 
relating to collection of income tax at source on wages; or
    (2) To the payor to the extent the reimbursement or other payment 
of the expense is not treated as compensation and wages paid to the 
employee in the manner provided in paragraph (c)(2)(ii)(B)(1) of this 
section. However, see paragraph (c)(2)(ii)(C) of this section if the 
payor receives a payment from a third party that may be 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--
    (1) To the independent contractor (which may be a payor) to the 
extent the independent contractor does not account to the client or 
customer within the meaning of section 274(d); or
    (2) To the client or customer if the independent contractor 
accounts to the client or customer within the meaning of section 
274(d).
    (D) Section 274(d) substantiation. If the reimbursement or other 
expense 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 (a) of this section 
apply to the independent contractor unless the independent contractor 
accounts to the client or customer with substantiation that satisfies 
the requirements of section 274(d).
    (E) Examples. The following examples illustrate the application of 
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 to reimburse those 
expenses pursuant to their arrangement. J delivers a copy of I's 
substantiation to K. K pays J $300x, which includes $200x compensation 
for services and $100x as reimbursement of J's payment of I's travel 
expenses for meals. Neither J 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 reimbursement or other expense allowance arrangement for 
purposes of paragraph (c)(2)(ii)(B) of this section. Because the 
reimbursement payment is

[[Page 64038]]

not treated as compensation and wages paid to I, under section 
274(e)(3)(A) and paragraph (c)(2)(ii)(B)(1) of this section, I is not 
subject to the limitations on deductions in paragraph (a) of this 
section. Instead, under paragraph (c)(2)(ii)(B)(2) of this section, J, 
the payor, is subject to limitations on deductions in paragraph (a) of 
this section unless J can meet the requirements of section 274(e)(3)(B) 
and paragraph (c)(2)(ii)(C) of this section.
    (iii) Because the agreement between J and K expressly states that K 
will reimburse J for substantiated reimbursements for travel expenses 
that J pays to I, under paragraph (b)(7)(ii)(A) 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. J 
accounts to K for K's reimbursement in the manner required by section 
274(d) by delivering to K a copy of the substantiation J received from 
I. Therefore, under section 274(e)(3)(B) and paragraph (c)(2)(ii)(C)(2) 
of this section, K and not J is subject to the deduction limitations in 
paragraph (a) of this section.
    (2) Example 2. (i) The facts are the same as in paragraph 
(c)(2)(ii)(E)(1) of this section (Example 1) except that, under the 
arrangements between I and J and between J and K, I provides the 
substantiation of the expenses directly to K, and K pays the per diem 
directly to I.
    (ii) Under paragraph (b)(7)(i) of this section, I and K have 
established a reimbursement or other expense allowance arrangement for 
purposes of paragraph (c)(2)(ii)(C) of this section. Because I 
substantiates directly to K and the reimbursement 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 paragraph 
(c)(2)(ii)(E)(1) of this section (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, K and 
not J is subject to the limitations on deductions in paragraph (a) of 
this section.
    (4) Example 4. (i) The facts are the same as in (c)(2)(ii)(E)(1) of 
this section (Example 1), except that the agreement between J and K 
does not provide that K will reimburse J for travel expenses.
    (ii) The arrangement between J and K is not a reimbursement or 
other expense allowance arrangement within the meaning of section 
274(e)(3)(B) and paragraph (b)(7)(ii) of this section. Therefore, even 
though J accounts to K for the expenses, J is subject to the 
limitations on deductions in paragraph (a) of this section.
    (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 
section 414(q))) is not subject to the deduction limitations in 
paragraph (a) of this section. For purposes of this paragraph 
(c)(2)(iii), an employee owning less than a 10-percent interest in the 
taxpayer's trade or business is not considered a shareholder or other 
owner, and for such purposes an employee is treated as owning any 
interest owned by a member of the employee's family (within the meaning 
of section 267(c)(4)). Any expense for food or beverages that is made 
under circumstances which discriminate in favor of highly compensated 
employees is not considered to be made 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 not apply to expenses for meals the value of which is 
excluded from employees' income 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.
    (B) Examples. The following examples illustrate the application of 
this paragraph (c)(2)(iii). In each example, assume that the food or 
beverage 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.
    (1) Example 1. Employer L invites all employees to a holiday party 
in a hotel ballroom that includes a buffet dinner and an open bar. 
Under section 274(e)(4), this paragraph (c)(2)(iii), and Sec.  1.274-
11(c), the cost of the party, including food and 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 benefit of non-highly compensated employees. 
Thus, L may deduct 100 percent of the cost of the party.
    (2) Example 2. The facts are the same as in paragraph 
(c)(2)(iii)(B)(1) of this section (Example 1), except that Employer L 
invites only highly-compensated employees to the holiday party, and the 
invoice provided by the hotel lists the costs for food and beverages 
separately from the cost of the rental of the ballroom. The costs 
reflect the venue's usual selling price for food or beverages. The 
exception in this paragraph (c)(2)(iii) does not apply to the rental of 
the ballroom or the food and beverage expenses because L invited only 
highly-compensated employees to the holiday party. However, under Sec.  
1.274-11(b)(1)(ii), the food and beverage expenses are not treated as 
entertainment. Therefore, L is not subject to the full disallowance for 
its separately stated food and beverage expense under section 274(a)(1) 
and Sec.  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

[[Page 64039]]

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.
    (4) Example 4. Employer N has a written policy that employees in a 
certain medical services-related position must be available for 
emergency calls due to the nature of the position that requires 
frequent emergency responses. Because these emergencies can and do 
occur during meal periods, N furnishes food and beverages to employees 
in this position without charge in a cafeteria on N's premises. N 
excludes food and beverage expenses from the employees' income as meals 
provided for the convenience of the employer excludable under section 
119. Because these food and beverages are furnished for the employer's 
convenience, and therefore are not primarily for the benefit of the 
employees, the exception in section 274(e)(4) and this paragraph 
(c)(2)(iii) does not apply, even if some socializing related to the 
food and beverages provided occurs. Further, the exception in section 
274(e)(2) and paragraph (c)(2)(i) of this section does not apply. Thus, 
unless another exception in section 274(n)(2) and paragraph (c)(2) of 
this section applies, N may deduct only 50 percent of the expenses for 
food and beverages provided to employees in the cafeteria 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.
    (5) Example 5. Employer O invites an employee and a client to 
dinner at a restaurant. Because it is the birthday of the employee, O 
orders a special dessert in 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) does not 
apply, even though an employee social activity in the form of a 
birthday celebration occurred during the meal. Thus, unless another 
exception in section 274(n)(2) and paragraph (c)(2) of this section 
applies, O may deduct only 50 percent of the meal expense. 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.
    (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.
    (B) Examples. The following examples illustrate the application of 
this paragraph (c)(2)(iv). In each example, assume that the food and 
beverage 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.
    (1) Example 1. Employer P is a real estate agent and provides 
refreshments at an open house for a home available for sale to the 
public. The refreshments are consumed by P's employees, potential 
buyers of the property, and other real estate agents. Under section 
274(e)(7) and this paragraph (c)(2)(iv), the expenses associated with 
the refreshments are not subject to the deduction limitations in 
paragraph (a) of this section if P determines that over 50 percent of 
the food and beverages are actually or reasonably estimated to be 
consumed by potential buyers and other real estate agents. If more than 
50 percent of the food and beverages are not actually or reasonably 
estimated to be consumed by the general public, only the costs 
attributable to the food and beverages provided to the general public 
are excepted under section 274(e)(7) and 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 not excepted under section 274(e)(7) and this paragraph 
(c)(2)(iv).
    (2) Example 2. Employer Q is an automobile service center and 
provides refreshments in its waiting area. The refreshments are 
consumed by Q's employees and customers, and Q reasonably estimates 
that more than 50 percent of the refreshments are consumed by 
customers. Under section 274(e)(7) and this paragraph (c)(2)(iv), the 
expenses associated with the refreshments are not subject to the 
deduction limitations provided for in paragraph (a) of this section 
because the food and beverages are primarily consumed by customers. 
Thus, Q may deduct 100 percent of the food and beverage expenses.
    (3) Example 3. Employer R operates a summer camp open to the 
general public 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 food and beverages at the 
company cafeteria by customers and visitors is less than 50 percent of 
the total amount of food and beverages consumed at the cafeteria. 
Therefore, the food and beverages are not primarily consumed by the 
general public, and only the costs attributable to the food and 
beverages provided to the general public are excepted under section 
274(e)(7) and 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 food and beverages that are not excepted 
under section 274(e)(7) and this paragraph (c)(2)(iv).
    (v) Goods or services sold to customers--(A) In general. In 
accordance with section 274(e)(8), an expense paid or incurred for food 
or beverages, to the extent the food or beverages are sold to customers 
in a bona fide transaction for an adequate and full consideration in 
money or money's worth, is not subject to the deduction limitations in 
paragraph (a) of this section. However, money or money's worth does not 
include 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, which are also 
consumed at the worksite by employees who work in the employer's 
restaurant or catering business. In addition, for purposes of this 
paragraph (c)(2)(v), the term customer includes anyone, including an 
employee of the taxpayer, who is sold food or beverages in a bona fide 
transaction for an adequate and full

[[Page 64040]]

consideration in 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.
    (d) Applicability date. This section applies for taxable years that 
begin on or after October 9, 2020.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: September 25, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-21990 Filed 10-2-20; 4:15 pm]
BILLING CODE 4830-01-P