Expenses for Business Meals Under § 274 of the Internal Revenue Code

Notice 2018-76

PURPOSE

Act does not specifically address the deductibility of expenses for business meals.

This notice also announces that the Department of the Treasury (Treasury

Department) and the Internal Revenue Service (IRS) intend to publish proposed

regulations under § 274, which will include guidance on the deductibility of expenses for

certain business meals. Until the proposed regulations are effective, taxpayers may rely

on the guidance in this notice for the treatment under § 274 of expenses for certain

business meals.

BACKGROUND

Section 162(a) allows a deduction for ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or business. However,

Section 274(k) generally provides that no deduction is allowed for the expense of

any food or beverages unless (A) such 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 such food or beverages. Section 274(n)(1) generally provides that the

amount allowable as a deduction for any expense for food or beverages shall not

with respect to an activity of a type considered to constitute entertainment, amusement,

or recreation (“entertainment expenses”). However, § 274(a)(1)(A) provided exceptions

to that prohibition if the taxpayer established that: (1) the item was directly related to

the active conduct of the taxpayer’s trade or business (the “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), that

the item was associated with the active conduct of the taxpayer’s trade or business (the

“business discussion” exception).

Prior to amendment by the Act, § 274(n)(1) generally limited the deduction of

food and beverage (meal) expenses and entertainment expenses to 50 percent of the

percent limitation in § 274(n)(1) to remove the reference to entertainment expenses.

Otherwise allowable meal expenses remain deductible, subject to the 50 percent

limitation in § 274(n)(1).

Section 1.274-2(b)(1)(i) of the Income Tax Regulations provides that the term

“entertainment” means any activity which is of a type generally considered to constitute

hunting, fishing, vacation, and similar trips, including such activity relating solely to the

taxpayer or the taxpayer’s family. The term “entertainment” may include an activity, the

cost of which is claimed as a business expense by the taxpayer, which satisfies the

personal, living, or family needs of any individual, such as providing food and

beverages, 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 (a) supper money provided by an employer to an employee

working overtime, (b) a hotel room maintained by an employer for lodging of employees

while in business travel status, or (c) an automobile used in the active conduct of trade

entertainment. Thus, if an activity is generally considered to be entertainment, it will

constitute entertainment for purposes of § 274(a) and § 1.274-2 regardless of whether

the expenditure for the activity can also be described otherwise, and even though the

expenditure relates to the taxpayer alone. This objective test precludes arguments such

as that “entertainment” means only entertainment of others or that an expenditure for

considered. Thus, although attending a theatrical performance would generally be

considered entertainment, it would not be considered entertainment for 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 to constitute entertainment. In contrast, if an

appliance distributor conducts a fashion show for its retailers, the fashion show

generally would be considered to constitute entertainment.

Section 274(e) enumerates nine specific exceptions to § 274(a). Expenses that

are within one of the exceptions in § 274(e), which may include certain meal expenses,

are not disallowed under § 274(a). However, those expenses may be subject to the 50

The Act did not change the definition of entertainment under § 274(a)(1);

therefore, the regulations under § 274(a)(1) that define entertainment continue to apply.

The Act did not address the circumstances in which the provision of food and beverages

might constitute entertainment. However, the legislative history of the Act clarifies that

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

The Treasury Department and the IRS intend to publish proposed regulations

under § 274 clarifying when business meal expenses are nondeductible entertainment

expenses and when they are 50 percent deductible expenses. Until the proposed

regulations are effective, taxpayers may rely on the guidance in this notice for the

treatment under § 274 of expenses for certain business meals.

Under this notice, taxpayers may deduct 50 percent of an otherwise allowable

business meal expense if:

1. The expense is an ordinary and necessary expense under § 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;

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

entertainment disallowance rule may not be circumvented through inflating

the amount charged for food and beverages.

EXAMPLES

carrying on a trade or business and are not lavish or extravagant under the

circumstances. Also assume that the taxpayer and the business contact are not

engaged in a trade or business that has any relation to the entertainment activity.

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

purchases tickets for A and B to attend the game. While at the game, A buys hot dogs

and drinks for A and B.

(ii) The baseball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus,

the cost of the game tickets is an entertainment expense and is not deductible by A.

The cost of the hot dogs and drinks, which are purchased separately from the game

tickets, is not an entertainment expense and is not subject to the § 274(a)(1)

(ii) The basketball game is entertainment as defined in § 1.274-2(b)(1)(i) and,

thus, the cost of the game tickets is an entertainment expense 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 also is an entertainment expense that is subject to the § 274(a)(1)

Example 3. (i) Assume the same facts as in Example 2, except that the invoice

for the basketball game tickets separately states the cost of the food and beverages.

2(b)(1)(i) and, thus, the cost of the game tickets, other than the cost of the food and

beverages, is an entertainment expense 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, is not an entertainment expense and is not subject to the § 274(a)(1)

disallowance. Therefore, C may deduct 50 percent of the expenses associated with the

food and beverages provided at the game.

REQUEST FOR COMMENTS

so, whether and how it should be revised; (3) whether the objective test in § 1.274-

2(b)(1)(ii) should be retained and, if so, whether and how it should be revised; and

(4) whether and what additional examples should be addressed in guidance.

Comments must be submitted by December 2, 2018. Comments, identified by

• By Mail:

Internal Revenue Service

Room 5203

P.O. Box 7604

Ben Franklin Station

Washington, DC 20044

1111 Constitution Avenue, NW

Washington, DC 20224

• Electronically: Submissions may be made electronically to

Notice.Comments@irscounsel.treas.gov, with “Notice 2018-76” in the subject

All submissions will be available for public inspection and copying in room 1621,

1111 Constitution Avenue, NW, Washington, DC, from 9 a.m. to 4 p.m.

DRAFTING INFORMATION

The principal author of this notice is Patrick M. Clinton of the Office of Associate

Chief Counsel (Income Tax & Accounting). For further information regarding this notice,

contact Patrick M. Clinton at (202) 317-7005 (not a toll-free call).