What Is Revenue Code 274? Meals, Entertainment, and Gifts

Internal Revenue Code Section 274 is the provision that blocks or limits business deductions for expenses with a personal-benefit flavor: entertainment, meals, gifts, club dues, employer-provided food, spouse travel, commuter benefits, and employee awards. Some categories are fully disallowed, others are capped at 50% or a dollar figure, and even the deductions that survive can be wiped out by inadequate recordkeeping. For 2026, the rule that matters most is new: employer-provided meals that used to be 50% deductible are now fully non-deductible as of January 1, 2026.

Entertainment Is Fully Disallowed

Since the Tax Cuts and Jobs Act, no deduction is allowed for any activity considered entertainment, amusement, or recreation, no matter how business-connected it looks.¹ Tickets to sporting events, concerts, theater, golf outings, and hunting trips all fall on the wrong side of the line. There is no percentage deduction and no directly-related-to-business exception to fall back on.

The prohibition also covers facilities. Country club dues, athletic club memberships, and fees for any social or recreational club produce zero deduction, even when the club is used mainly for business networking.²

Food consumed at an entertainment event needs special handling. If you take a client to a game and buy hot dogs at the stadium, the food is deductible only when purchased separately from the tickets or invoiced on its own line. Bundle the food into a single ticket price and the whole amount is non-deductible. Inflating food charges to shift entertainment costs into a deductible bucket is not allowed either.³

Business Meals Are 50% Deductible

Meals with a business purpose remain deductible, but only at 50% of the cost, tax and tip included.⁴ The temporary 100% restaurant meal deduction from 2021 and 2022 has not been renewed.⁵

IRS Notice 2018-76 sets out five conditions, all of which must be met for the 50% deduction:³

The expense is ordinary and necessary to your trade or business.
The meal is not lavish or extravagant for the circumstances.
You or one of your employees is present when the food is served.
The food goes to a current or potential customer, client, consultant, or similar business contact.
If the meal happens during an entertainment activity, the food cost is purchased or invoiced separately from the entertainment.

One point worth clearing up: the old requirement for a substantial and bona fide business discussion before, during, or after the meal was repealed by the TCJA. You still need a business purpose and a business contact at the table, but no formal discussion has to be documented.³

Meals while traveling for business follow the same 50% rule. Instead of tracking actual costs, you can use IRS per diem rates; for the period beginning October 1, 2025, the high-low method allows $86 per day for meals in high-cost localities and $74 elsewhere in the continental United States, still subject to the 50% cut.⁶

Employer-Provided Meals Lost Their Deduction in 2026

This is the change most likely to reset your 2026 tax bill. Section 274(o) now fully disallows deductions for two categories that were previously 50% deductible:²

Meals provided for the convenience of the employer, such as food served on-site during long shifts or at remote work locations.
Operating costs of an employer eating facility and the food served in it. The one exception is when employees pay full price for the meals.

The change reaches everyday items too. Breakroom coffee, snacks, and occasional overtime meals that qualified as excludable de minimis fringes under Section 132(e) no longer produce a deduction for the employer. Employees are generally still not taxed on these benefits; the cost lands on the employer’s side of the ledger.

Business Gifts Cap at $25 Per Recipient

You can deduct no more than $25 in gifts per year to any single individual.⁷ The cap has stood at $25 since 1962 and has not been inflation-adjusted. It applies per recipient, so five separate $40 gifts to the same client still yield a $25 deduction.

You and your spouse are treated as one taxpayer sharing a single $25 limit per recipient. Indirect gifts count as well: a gift to a client’s spouse is charged against the client’s cap if the client is the real beneficiary.⁷

Some items sit outside the cap. Incidental costs like engraving, wrapping, and shipping do not count toward the $25 limit as long as they do not add substantial value. Small promotional items costing $4 or less, permanently imprinted with your business name and distributed on a regular basis, are treated as advertising rather than gifts.⁸

Employee Achievement Awards

Section 274(j) limits deductions for tangible personal property given to employees as length-of-service or safety awards:⁹

Non-qualified plan awards: deduction for all awards to one employee in a year cannot exceed $400.
Qualified plan awards (made under a written plan that does not favor highly compensated employees): combined limit rises to $1,600 per employee per year.

The award has to be tangible personal property. Cash, gift cards, vacations, meals, event tickets, and securities do not qualify. A watch for 20 years of service works; a $500 gift card does not, whatever the occasion. If the average cost of all qualified plan awards across the company exceeds $400 in a year, none of them get the higher $1,600 cap.

Spouse and Companion Travel

When your spouse, a dependent, or another companion travels with you on business, their expenses are non-deductible unless all three of these conditions are met:¹⁰

The person is an employee of your business.
Their travel serves a bona fide business purpose.
Their expenses would otherwise be deductible on their own.

Meeting one or two is not enough. Attending a client dinner as a social host or typing up notes does not establish a bona fide business purpose. Your own travel remains deductible under the ordinary rules; the companion’s share of airfare, hotel, and meals gets disallowed unless they are genuinely working.

Qualified Transportation Fringes

Section 274(l), also added by the TCJA, disallows employer deductions for qualified transportation fringes: transit passes, commuter highway vehicle costs, and qualified parking provided to employees. The one exception is transportation necessary for employee safety. Employees can still receive these benefits tax-free up to the annual exclusion limits, so the deduction disappears only on the employer’s side. This catches employers off guard precisely because the benefit itself looks unchanged from the employee’s perspective.

Substantiation: Where Deductions Are Won or Lost

Even a qualifying expense produces no deduction if you cannot substantiate it. Section 274(d) demands more documentation than ordinary business expenses do, and the IRS enforces it strictly.¹¹ The rule applies to travel expenses (including meals and lodging away from home), gifts, and listed property like vehicles.

For each covered expense you need to document four elements:

Amount. Documentary evidence such as receipts or paid bills is required for any expense of $75 or more, and for all lodging while traveling.¹²
Time and place of the meal, travel, or gift.
Business purpose of the expenditure.
Business relationship: the name, title, or occupation of each person who received the benefit, and their connection to your business.

Records made at or near the time of the expense carry more weight than reconstructions at tax time. The burden of proof sits with you as the taxpayer, and travel, meals, gifts, and vehicle expenses are singled out by the IRS as needing evidence beyond what ordinary deductions require.¹³ The IRS does not have to prove the expense was illegitimate; showing that your records fall short is enough to strip the deduction.

When You Can Still Deduct 100 Percent

Section 274(e) carves out categories that escape both the entertainment disallowance and the 50% meal limitation:¹⁴

Expenses treated as compensation. If you include the value of an entertainment or meal benefit on an employee’s W-2 as wages and withhold on it, you can deduct the full amount.
Employee recreation. Company holiday parties, annual picnics, and similar events open to all employees rather than just highly compensated ones are fully deductible.
Items available to the public. Product samples, promotional events, and trade show activities open to the general public are fully deductible.
Employee business meetings. Food and entertainment at meetings of employees, directors, stockholders, or agents are excepted from the entertainment disallowance.
Reimbursement arrangements. When you reimburse an employee’s meal or travel expense under an accountable plan requiring substantiation and return of excess amounts, the disallowance rules do not apply to you as the employer.

The 50% meal limitation also does not apply to meals federal law requires for crew members on commercial vessels, food provided on offshore oil and gas platforms, and food at remote fishing or processing facilities in Alaska and similar northern locations.⁴

Penalties for Claiming Disallowed Expenses

Deducting expenses that Section 274 disallows creates an underpayment, which can trigger the accuracy-related penalty under Section 6662. That penalty runs 20% of the underpayment attributable to negligence or a substantial understatement of income.¹⁵ Negligence specifically covers failure to keep adequate books and records or to substantiate items properly, which is exactly what Section 274(d) is built to catch.

You can avoid the penalty by showing reasonable cause and good faith. In practice, that means having a categorization system and a defensible reason for the position you took, even if the IRS ultimately disagrees. Guessing that an entertainment expense might slip through does not meet the standard.

1
Internal Revenue Service. Tax Cuts and Jobs Act – A Comparison for Businesses
2
Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses
3
Internal Revenue Service. Notice 2018-76 – Expenses for Business Meals Under Section 274
4
Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses – Section: Only 50 Percent of Meal Expenses Allowed as Deduction
5
Internal Revenue Service. Here’s What Businesses Need to Know About the Enhanced Business Meal Deduction
6
Internal Revenue Service. Notice 2025-54 – 2025-2026 Special Per Diem Rates
7
Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses – Section: Gifts
8
Internal Revenue Service. Are Business Gifts Deductible?
9
Office of the Law Revision Counsel. 26 US Code 274 – Disallowance of Certain Entertainment, Etc., Expenses – Section: Employee Achievement Awards
10
Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses – Section: Travel Expenses of Spouse, Dependent, or Others
11
Office of the Law Revision Counsel. 26 US Code 274 – Disallowance of Certain Entertainment, Etc., Expenses – Section: Substantiation Required
12
eCFR. 26 CFR 1.274-5 – Substantiation Requirements
13
Internal Revenue Service. Burden of Proof
14
Office of the Law Revision Counsel. 26 US Code 274 – Disallowance of Certain Entertainment, Etc., Expenses – Section: Specific Exceptions
15
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments