The landscape of business expenses has undergone significant shifts with the recent changes to IRC Section 274, particularly concerning meals and entertainment deductions. These modifications are crucial for businesses aiming to optimize their tax liabilities while remaining compliant with federal regulations.
Understanding these changes is essential as they directly affect how companies account for various expenditures.
Key Changes in IRC Section 274
The Tax Cuts and Jobs Act (TCJA) of 2017 brought about substantial revisions to IRC Section 274, fundamentally altering the landscape for business deductions related to meals and entertainment. One of the most notable changes is the elimination of the deduction for entertainment expenses. Previously, businesses could deduct 50% of entertainment costs if they were directly related to the active conduct of a trade or business. This is no longer the case, and companies must now absorb these costs without any tax relief. 1Legal Information Institute. 26 CFR § 1.274-11 Disallowance of Deductions for Entertainment
Another significant adjustment pertains to meal expenses. While the 50% deduction for business meals remains intact, taxpayers must meet the regulatory conditions for meals (for example, not lavish or extravagant, taxpayer present, and provided to the taxpayer or a business associate). In addition, when food and beverages are provided at or during an entertainment activity, the food must be purchased separately or stated separately from the entertainment to remain deductible. 2Legal Information Institute. 26 CFR § 1.274-12 Limitation on Deductions for Food or Beverage Expenses
Additionally, the TCJA has clarified the treatment of meals provided for the convenience of the employer. These meals are subject to the 50% limitation for amounts paid or incurred through December 31, 2025, and they become nondeductible for amounts paid or incurred after December 31, 2025. This change impacts companies that provide meals to employees on-site and necessitates a reevaluation of how these expenses are managed and documented. 3Legal Information Institute. 26 U.S.C. § 274(o) Meals Provided at Convenience of Employer
Impact of TCJA on Deductions
The Tax Cuts and Jobs Act (TCJA) has had a profound influence on how businesses approach their tax planning strategies, particularly concerning deductions for meals and entertainment. The elimination of the entertainment expense deduction has forced companies to reassess their spending on client entertainment and employee events.
One area where the TCJA has introduced complexity is in the documentation of meal deductions that occur alongside entertainment. To preserve a deduction for the meal portion, businesses must ensure the food and beverages are purchased separately from the entertainment or clearly stated separately on the invoice. 4Internal Revenue Service. Notice 2018-76: Expenses for Business Meals Under § 274
The TCJA’s impact extends beyond just the elimination of certain deductions; it has also influenced corporate culture and spending habits. Companies are now more judicious in their spending, often opting for more cost-effective ways to achieve their business objectives.
Deductible vs. Non-Deductible Expenses
Navigating the maze of deductible and non-deductible expenses can be a daunting task for businesses, especially in light of the recent changes brought about by the TCJA. Understanding the nuances between what can and cannot be deducted is essential for accurate financial planning and compliance. One of the primary distinctions lies in the nature of the expense itself. For instance, while business meals remain partially deductible, lavish or extravagant meals do not qualify.
Employee benefits also present a complex landscape. While certain fringe benefits, such as health insurance and retirement contributions, are fully deductible, others like gym memberships or personal use of company vehicles may not be.
Travel expenses offer another area where the line between deductible and non-deductible can blur. Business travel, including airfare, lodging, and meals, is generally deductible, but personal travel expenses are not.
Common Misconceptions and Clarifications
One prevalent misconception is that all client entertainment expenses are entirely non-deductible under the TCJA. While it’s true that the deduction for entertainment expenses has been eliminated, meals provided during an entertainment event can still be 50% deductible if they are purchased separately from the entertainment or stated separately on the invoice. 5Internal Revenue Service. Notice 2018-76: Expenses for Business Meals Under § 274
Another area of confusion involves the treatment of employee meals. Many companies mistakenly believe that meals provided for the convenience of the employer are fully deductible. However, under current rules, these meals are subject to the 50% limitation through December 31, 2025, and become nondeductible for amounts paid or incurred after December 31, 2025. Misunderstanding this rule can result in inaccurate tax filings and potential penalties. 6Legal Information Institute. 26 U.S.C. § 274(o) Meals Provided at Convenience of Employer
The classification of travel expenses also generates frequent misunderstandings. Some businesses assume that all travel-related costs are deductible, but only expenses directly related to business activities qualify.
Recent IRS Guidance and Interpretations
The IRS has provided additional guidance to help businesses navigate the complexities introduced by the TCJA. One of the most significant clarifications pertains to expenses for recreational or social events primarily for the benefit of employees other than highly compensated individuals (for example, company picnics or holiday parties). Food and beverage costs for these events are fully deductible when the requirements are met. 7Legal Information Institute. 26 CFR § 1.274-12(c)(2)(iii) Employee Recreational or Social Activities
Another area where the IRS has offered clarity is in the treatment of per diem allowances. Businesses may use the IRS per diem substantiation methods instead of detailed receipts, subject to the annual rates and rules the IRS publishes; for 2025–2026, the high-low and transportation industry rates were updated effective October 1, 2025. 8Internal Revenue Service. Notice 2025-54: 2025–2026 Special Per Diem Rates
In addition, the procedural rules governing the use of per diem methods (including when receipts are not required if per diem is used properly) are set out in Rev. Proc. 2019-48. 9Internal Revenue Service. Rev. Proc. 2019-48: Per Diem Substantiation Rules