Internal Revenue Code Section 274: Meals, Gifts, and Substantiation

Internal Revenue Code Section 274 sets the disallowance rules that override ordinary business deductions for entertainment, meals, travel, gifts, and certain other expenses. Even when a cost is “ordinary and necessary” under Section 162, Section 274 can cut the deduction in half, cap it at a fixed dollar amount, or eliminate it entirely.¹ Knowing where each of your common expenses lands on that spectrum, and what records you need to prove it, is the difference between a deduction that survives an audit and one that doesn’t.

Entertainment Expenses Get No Deduction

Section 274 flatly prohibits deductions for entertainment, amusement, or recreation. Before 2018, a “directly related to business” exception let you write off entertainment tied to active business discussions. The Tax Cuts and Jobs Act removed that exception, so the ban is now nearly absolute.²

“Entertainment” is anything a reasonable person would view as fun or recreational. Sporting event tickets, a round of golf with a client, theater seats, concert boxes, and hunting or fishing trips all fall inside it. So does any facility used for those purposes, such as a skybox or clubhouse. How much business you discuss during the activity doesn’t matter.

Club Dues

The statute also blocks any deduction for membership dues at clubs organized for business, pleasure, recreation, or social purposes.³ Country clubs, golf clubs, athletic clubs, airline lounges, and hotel clubs are all covered. Even if you use the membership exclusively to meet clients, the dues themselves aren’t deductible. A specific meal at the club is analyzed separately under the meal rules below, but the underlying membership produces nothing.

The Narrow Exceptions to the Entertainment Ban

A handful of situations escape the entertainment prohibition. Each is tighter than it might sound.

Food and beverages furnished on your business premises primarily for employees are treated as meals rather than entertainment, so they move to the 50% deduction rules below instead of being disallowed outright.⁴
Amounts you report as wages on an employee’s W-2 with proper withholding escape the ban. For “specified individuals” under the securities laws, the exception only reaches the actual cost of the entertainment, not any inflated compensation figure.⁵
Recreational and social activities primarily benefiting rank-and-file employees are fully deductible. The company holiday party is the classic case. The exception does not apply if the event mainly benefits highly compensated employees.⁶
If you incur entertainment costs while performing services for someone else under a reimbursement arrangement and properly account for them, the disallowance shifts to the party reimbursing you.⁷

Business Meals Are Capped at 50%

Meals are the main category where Section 274 limits rather than eliminates the deduction. You can deduct 50% of the cost of a business meal if two conditions are met: the expense is not lavish or extravagant under the circumstances, and you or one of your employees is present when the food is served. The 50% cap applies to the full bill, including tax and tip.⁸

“Lavish or extravagant” is judged in context rather than by a fixed dollar cutoff. A $200 dinner with a client in Manhattan isn’t automatically lavish if the setting and purpose justify it. What kills more deductions than the extravagance test is the presence requirement: sending a client to dinner alone on your dime doesn’t qualify.

Food served during an entertainment activity can still make the 50% cut, but only if the food is purchased separately from the entertainment or is separately stated on the invoice.⁹ The baseball tickets stay non-deductible; the separately billed hot dogs and drinks can be a 50% write-off.

Employer-Provided Meals On-Site

Meals furnished to employees on your premises, such as a subsidized cafeteria, benefit from the food-and-beverage exception to the entertainment ban but remain subject to the 50% cap.⁸ The only route to a 100% deduction on on-site meals is treating them as taxable W-2 compensation, which shifts the tax burden to the employee.

Meals During Travel

When an employee travels away from home overnight, meals during the trip are deductible at 50%. If you use a per diem allowance instead of actual receipts, the meal portion of the per diem is still capped at 50%. Under the IRS high-low method for October 1, 2025 through September 30, 2026, the meals-and-incidentals allowance is $86 per day in high-cost localities and $74 per day elsewhere, with a $5 incidentals-only rate on days no meal costs are incurred.¹⁰

Travel Away From Home

Business travel costs like airfare, lodging, and ground transportation are deductible when you travel away from your tax home overnight. “Away from home” means you need to sleep or rest to meet the demands of your work. Day trips, however long the drive, don’t qualify as travel expenses.

Domestic Trips

For travel inside the United States, the primary-purpose test governs transportation costs. If the main reason for the trip is business, the full cost of getting to and from the destination is deductible even if you add a few personal days on the tail end. If the main purpose is personal, none of the transportation is deductible. Either way, costs directly tied to specific business days at the destination remain deductible, while purely personal-day costs do not.

Foreign Trips

Trips outside the United States face stricter rules. If the trip runs longer than one week and more than 25% of the total time is spent on non-business activities, you must prorate transportation costs by the ratio of business days to total days.¹¹ A trip of seven days or fewer, or one where at least 75% of the time is spent on business, is treated like domestic travel and avoids the proration.¹²

Luxury Water Transportation

Cruise ships and ocean liners have a hard cap. The most you can deduct for water transportation is twice the highest federal per diem rate for domestic travel, multiplied by the number of days on the water.¹³

Spouses, Dependents, and Other Companions

Bringing a spouse, dependent, or anyone else on a business trip generally produces no deduction for their portion. Their costs qualify only if all three conditions are met: the companion is an employee of the business, their travel serves a genuine business purpose, and their expenses would independently qualify as deductible business travel.¹⁴ Attending dinner is not a business purpose. As a workaround, treating spousal travel as taxable W-2 compensation lets the employer deduct it while shifting the income to the employee.

Vehicle Use

For driving, you choose between the IRS standard mileage rate and actual vehicle expenses. For 2026, the standard rate is 72.5 cents per business mile, which folds gas, insurance, depreciation, and maintenance into one figure.¹⁵ Using actual expenses requires records of total, business, and personal miles for the year, because only the business-use percentage is deductible.

Conventions Held Outside North America

Attending a convention, seminar, or similar meeting outside North America adds another hurdle. You can deduct the related expenses only if it was as reasonable to hold the meeting outside North America as inside it. The IRS weighs the meeting’s purpose, the sponsoring group’s membership, past meeting locations, and other relevant factors.¹⁶

For this test, “North America” covers the United States, Canada, Mexico, U.S. possessions, and Caribbean countries with tax information exchange agreements with the United States, including Bermuda. A medical conference in London gets scrutinized. The same conference in Toronto does not.

Business Gifts Are Capped at $25 per Recipient

Business gift deductions max out at $25 per recipient per year. The cap has never been indexed for inflation. It applies to direct and indirect gifts, so routing a gift through someone else doesn’t reset the limit.¹⁷ Give a $200 gift and only $25 is deductible; you don’t lose the whole thing, but the rest is nondeductible.

A few items sit outside the gift definition entirely and don’t count toward the $25 ceiling:

Branded promotional items costing $4 or less with your business name permanently imprinted, distributed generally rather than aimed at one person.¹⁸
Signs, display racks, and similar promotional materials for use on the recipient’s business premises.
Employee achievement awards of tangible personal property for length of service or safety, deductible up to $400 per employee per year, or $1,600 under a qualified plan.¹⁹

Substantiation Is Where Deductions Die

Section 274(d) requires specific records for every deductible travel expense, meal, gift, and use of listed property. Without them, the deduction is gone. The rule specifically overrides the Cohan doctrine, an old court principle that let taxpayers estimate deductions when exact records were missing. Under Section 274, estimation isn’t available.²⁰

For each expense, four elements have to be documented:²¹

The amount. Daily travel meals and incidentals can be grouped into reasonable categories rather than itemized meal by meal.
The time and place. Date and location of the expense; for travel, departure and return dates plus destination; for gifts, the date and a description.
The business purpose. The specific reason for the expense or the benefit you expected.
The business relationship. The name and business connection of each person entertained, hosted, or given a gift.

What Counts as Adequate Records

The IRS expects a contemporaneous log, meaning the entries are made at or near the time of the expense. A spreadsheet reconstructed months later doesn’t qualify. On top of the log, you need receipts or paid bills for any expense of $75 or more and for all lodging costs regardless of amount. Transportation charges are exempt from the receipt requirement when receipts aren’t readily available.²²

Listed property draws extra scrutiny. It covers vehicles and other assets that lend themselves to personal use. If you use a vehicle for business, you need total miles, business miles, and personal miles for the whole year to establish the deductible percentage. Computers and peripheral equipment came off the listed property list starting in 2018, so they no longer require that detailed usage log.

Penalties for Weak Records

The first cost of poor substantiation is the lost deduction. The second is often worse. If an audit shows you claimed deductions without proper records, the IRS can add an accuracy-related penalty of 20% of the resulting tax underpayment, and the statute specifically lists failure to keep adequate records as a form of negligence that triggers the penalty.²³ Sloppy records don’t just erase the deduction; they add 20% to the tax you should have paid in the first place.

1
Office of the Law Revision Counsel. 26 USC 274 Disallowance of Certain Entertainment, Etc., Expenses
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Office of the Law Revision Counsel. 26 USC 274 Disallowance of Certain Entertainment, Etc., Expenses – Section (a)(1)
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Office of the Law Revision Counsel. 26 USC 274 Disallowance of Certain Entertainment, Etc., Expenses – Section (a)(3)
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Office of the Law Revision Counsel. 26 US Code 274 – Disallowance of Certain Entertainment, Etc., Expenses – Section (e)(1)
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Office of the Law Revision Counsel. 26 US Code 274 – Disallowance of Certain Entertainment, Etc., Expenses – Section (e)(2)
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Office of the Law Revision Counsel. 26 US Code 274 – Disallowance of Certain Entertainment, Etc., Expenses – Section (e)(4)
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Office of the Law Revision Counsel. 26 US Code 274 – Disallowance of Certain Entertainment, Etc., Expenses – Section (e)(3)
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Office of the Law Revision Counsel. 26 USC 274 Disallowance of Certain Entertainment, Etc., Expenses – Section (n)(1)
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Internal Revenue Service. IRS Notice 2018-76 Expenses for Business Meals Under Section 274
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Internal Revenue Service. IRS Notice 2025-54 Special Per Diem Rates
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Office of the Law Revision Counsel. 26 USC 274 Disallowance of Certain Entertainment, Etc., Expenses – Section (c)
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eCFR. 26 CFR 1.274-4 – Disallowance of Certain Foreign Travel Expenses
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Office of the Law Revision Counsel. 26 USC 274 Disallowance of Certain Entertainment, Etc., Expenses – Section (m)(1)
14
Internal Revenue Service. Spousal Travel
15
Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents
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Office of the Law Revision Counsel. 26 USC 274 Disallowance of Certain Entertainment, Etc., Expenses – Section (h)
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Office of the Law Revision Counsel. 26 USC 274 Disallowance of Certain Entertainment, Etc., Expenses – Section (b)(1)
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eCFR. 26 CFR 1.274-3 – Disallowance of Deduction for Gifts
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Office of the Law Revision Counsel. 26 US Code 274 – Disallowance of Certain Entertainment, Etc., Expenses – Section (j)(2)
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eCFR. 26 CFR 1.274-5T – Substantiation Requirements (Temporary)
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eCFR. 26 CFR 1.274-5A – Substantiation Requirements
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eCFR. 26 CFR 1.274-5 – Substantiation Requirements
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Office of the Law Revision Counsel. 26 USC 6662 Imposition of Accuracy-Related Penalty on Underpayments