Meals and Entertainment Expenses Under Section 274, 11020-11031 [2020-03723]

Agencies

• Internal Revenue Service
• Department of Treasury

[Federal Register Volume 85, Number 38 (Wednesday, February 26, 2020)]
[Proposed Rules]
[Pages 11020-11031]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03723]


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DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-100814-19]
RIN 1545-BP23


Meals and Entertainment Expenses Under Section 274

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance under section 274 of the Internal Revenue Code (Code) 
regarding certain statutory amendments made to section 274 by 2017 
legislation. Specifically, the proposed 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 proposed 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). These proposed 
regulations affect taxpayers who pay or incur expenses for meals or 
entertainment in taxable years beginning after December 31, 2017. This 
document also provides notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by April 13, 
2020. Outlines of topics to be discussed at the public hearing 
scheduled for April 7, 2020, at 10 a.m. must be received by April 13, 
2020. If no outlines are received by April 13, 2020, the public hearing 
will be cancelled.

ADDRESSES: Submit electronic submissions via the Federal Rulemaking 
Portal at www.regulations.gov (indicate IRS and REG-100814-19) by 
following the online instructions for submitting comments. Once 
submitted to the Federal Rulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the Internal Revenue Service (IRS) will publish for public availability 
any comment received to their public docket, whether submitted 
electronically or in hard copy. Send hard copy submissions to: 
CC:PA:LPD:PR (REG-100814-19), Room 5203, Internal Revenue Service, P.O. 
Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
call Patrick Clinton of the Office of Associate Chief Counsel (Income 
Tax and Accounting), (202) 317-7005; concerning the submission of 
comments, the hearing, or to be placed on the building access list to 
attend the hearing, call Regina Johnson, (202) 317-6901 (not toll-free 
numbers), or email [email protected].

SUPPLEMENTARY INFORMATION: 

Background

1. Statutory Framework

    This document contains proposed regulations under section 274 of 
the Code that amend the Income Tax Regulations (26 CFR part 1). Section 
274 was added to the Code by section 4 of the Revenue Act of 1962, 
Public Law 87-834 (76 Stat. 960) and has been amended numerous times 
over the years. 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, 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.

2. 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

[[Page 11021]]

(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 
provides 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 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 during or 
at 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.
    The Treasury Department and the IRS received approximately 25 
comments in response to Notice 2018-76. All comments were considered 
and are available at www.regulations.gov or upon request. Several of 
the comments addressing the notice are summarized in the Explanation of 
Provisions. However, comments recommending statutory revisions or 
addressing provisions outside the scope of these proposed regulations 
are not discussed in this preamble. The Treasury Department and the IRS 
continue to study comments on issues related to section 274 that are 
beyond the scope of these proposed regulations and may discuss those 
comments that are beyond the scope of these regulations in the final 
regulations or future guidance.

3. 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 (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). 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. 
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 
of the Code (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: (A) The spouse, dependent, or other 
individual is an employee of the taxpayer, (B) the travel

[[Page 11022]]

of the spouse, dependent, or other individual is for a bona fide 
business purpose, and (C) such expenses would otherwise be deductible 
by the spouse, dependent, or other individual.

4. 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.

5. Section 274(e) Exceptions to Section 274(k) and (n)

    Section 274(k)(2) and (n)(2)(A) provide that the limitations on the 
deduction of food or beverage expenses in sections 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 on 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 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 
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.

Explanation of Provisions

    The proposed regulations describe and clarify the statutory 
requirements of section 274(a), 274(k), and 274(n), as well as the 
applicability of certain exceptions under section 274(e) to food or 
beverage expenses. To implement the TCJA's disallowance of 
entertainment expenditures under section 274(a), the proposed 
regulations add a new section at Sec.  1.274-11 (proposed Sec.  1.274-
11) for entertainment expenditures paid or incurred after December 31, 
2017. The proposed regulations also add a new section at Sec.  1.274-12 
(proposed Sec.  1.274-12) to address food or beverage expenses under 
section 274(k) and 274(n) paid or incurred after December 31, 2017, 
including the application of the exceptions in section 274(e)(2), (3), 
(4), (7), (8), and (9). Specifically, proposed Sec.  1.274-12 addresses 
expenses for business meals as described in Notice 2018-76, as well as 
expenses for other meals including travel meals and employer-provided 
meals.

1. Entertainment Expenditures

A. In General
    Proposed Sec.  1.274-11 restates the statutory rules under section 
274(a), including the application of the entertainment deduction 
disallowance rule to dues or fees to any social, athletic, or sporting 
club or organization. The proposed regulations substantially 
incorporate the existing definition of entertainment in Sec.  1.274-
2(b)(1), with minor modifications to remove outdated language. The 
proposed regulations also confirm that the nine exceptions in section 
274(e) continue to apply to entertainment expenditures under section 
274(a). Finally, as described further in part I.B. of this Explanation 
of Provisions, the proposed 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.
    Taxpayers may continue to rely upon the existing rules in Sec.  
1.274-2, to the extent applicable and not superseded by the TCJA, for 
entertainment expenditures paid or incurred after December 31, 2017.
B. Separately Stated Food or Beverages Not Entertainment
    The proposed 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 proposed 
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. However, in response 
to a comment on the notice, the proposed regulations further 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 during or at 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. Taxpayers may continue to rely on the guidance in Notice 
2018-76 until these proposed regulations are finalized.
    One commenter asked for clarification of the requirement in the 
notice that the entertainment disallowance rule may not be circumvented 
by inflating the amount charged for food and beverages on one or more 
bills, invoices, or receipts. In response, the proposed regulations 
provide 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

[[Page 11023]]

must approximate the reasonable value of those items. Further, the 
proposed regulations provide that unless food or beverages provided at 
or during an entertainment activity 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, 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 proposed 
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. 
The Treasury Department and the IRS request comments on these rules.

2. Food or Beverage Expenses

A. Business Meal Expenses
    As noted earlier in this Explanation of Provisions, the proposed 
regulations substantially incorporate the guidance in Notice 2018-76 
addressing business meals provided during or at an entertainment 
activity. The proposed regulations also incorporate other statutory 
requirements taxpayers must meet to deduct 50 percent of an otherwise 
allowable business meal 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 proposed 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). Thus, the proposed 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.'' In addition to clarifying this definition 
for purposes of determining whether a business meal expense is 
deductible, the proposed regulations apply this standard to the 
deduction of food or beverage expenses generally. In particular, the 
proposed regulations include employees as a type of business associate, 
making the standard applicable to employer-provided meals as well as to 
situations in which a taxpayer provides meals to both employees and 
non-employee business associates at the same event. The Treasury 
Department and the IRS request comments on this standard.
B. Travel Meal Expenses
    Although the TCJA did not specifically amend the rules for travel 
expenses, the proposed 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, as revised in 
these proposed regulations, to travel meals. In addition, the proposed 
regulations incorporate the substantiation requirements in section 
274(d), unchanged by the TCJA, to travel meals. Finally, the proposed 
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 proposed regulations 
revise the reference to section 217 to reflect that amendment.
C. Other Food or Beverage Expenses
    The proposed regulations apply the business meal guidance in Notice 
2018-76, as revised in these 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 part E of this Explanation of Provisions, section 274(e) 
provides six exceptions to the limitations on the deduction of food or 
beverages in section 274(k)(1) and 274(n)(1) and the proposed 
regulations explain how those exceptions apply.
    In response to comments that the Treasury Department and the IRS 
received after enactment of the TCJA, the proposed regulations address 
several scenarios involving the deductibility of food or beverage 
expenses. For example, commenters requested guidance on the 
deductibility of expenses for: (i) Food or beverages provided to food 
service workers who consume the food or beverages while working in a 
restaurant or catering business; (ii) snacks available to employees in 
a pantry, break room, or copy room; (iii) refreshments provided by a 
real estate agent at an open house; (iv) food or beverages provided by 
a seasonal camp to camp counselors; (v) food or beverages provided to 
employees at a company cafeteria; and (vi) food or beverages provided 
at company holiday parties and picnics. The Treasury Department and the 
IRS considered all comments received and provide examples in proposed 
Sec.  1.274-12(c) to address many of the factual scenarios raised by 
commenters.
D. Definitions
    The proposed 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 the six exceptions under section 274(n)(2)(A) 
applies, the deduction limitations apply regardless of whether the food 
or beverages are treated as de minimis fringe benefits under section 
132(e).

[[Page 11024]]

    The proposed 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.
E. Section 274(e) Exceptions to Section 274(k) and (n)
    Section 274(k)(2) 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). The proposed regulations, therefore, provide that the deduction 
limitations are not applicable to expenditures for 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 proposed regulations provide 
that the limitations in section 274(k)(1) and (n)(1) do not apply to 
expenditures for food or beverages of an employee of the taxpayer 
(including food or beverages of a spouse, dependent or other individual 
accompanying the employee on travel described in section 274(m)(3)), 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 proposed regulations provide 
that the limitations in section 274(k)(1) and (n)(1) do not apply to 
expenses for food or beverages of 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 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 as wages to the employee, or as includible in gross 
income by a person who is not an employee of the taxpayer. The proposed 
regulations therefore provide that expenses for food or beverages with 
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).
ii. Reimbursed Food or Beverage Expenses
    Pursuant to section 274(e)(3), the proposed 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 
proposed 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 the 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 proposed 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.
    The Treasury Department and the IRS have received several questions 
and comments on the deductibility of food or beverage expenses for 
recreational, social and similar activities for employees. Many 
commenters 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. Commenters 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 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 the section 274(e)(4) 
exception does not apply to free food or beverages provided in a break 
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.
    In addition, the proposed regulations provide that the exception in 
section 274(e)(4) does not apply to food or beverage expenses that are 
excludable 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 food or beverages.
iv. Items Available to the Public
    Pursuant to section 274(e)(7), the proposed regulations provide 
that any food or beverage expense of a taxpayer is not subject to the 
deduction limitations in section 274(k)(1) and (n)(1) to the extent the 
food or beverages are made available to the general public. In 
addition, the proposed regulations provide that this exception applies 
to the entire amount of the expense 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,

[[Page 11025]]

customers, clients, and visitors. The proposed regulations also provide 
that the general public does not include employees, partners, 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).
    Commenters have 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.
v. Goods or Services Sold to Customers
    Pursuant to section 274(e)(8), the proposed 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 proposed 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 proposed regulations incorporate this interpretation of the 
exception in section 274(e)(8).
    Finally, the proposed 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.

Request for Comments

    The Treasury Department and the IRS request comments on all aspects 
of these proposed regulations. Regarding entertainment expenditures 
under proposed Sec.  1.274-11, comments are specifically requested 
about the definition of entertainment, including how to distinguish 
entertainment from advertising and travel; the use of the objective 
test in defining entertainment activities; the application of the 
exceptions in section 274(e) to entertainment expenditures; and whether 
additional issues or examples should be addressed in the regulations. 
Regarding food or beverage expenses under proposed Sec.  1.274-12, 
comments are specifically requested about the changes from Notice 2018-
76 to the rules for business meals; the application of the exceptions 
in section 274(e) to food or beverage expenses; and whether additional 
issues or examples should be addressed in the regulations.

Proposed Applicability Date

    Section 7805(b)(1)(A) and (B) of the Code generally provide that no 
temporary, proposed, or final regulation relating to the internal 
revenue laws may apply to any taxable period ending before the earliest 
of (A) the date on which the regulation is filed with the Federal 
Register, or (B) in the case of a final regulation, the date on which a 
proposed or temporary regulation to which the final regulation relates 
was filed with the Federal Register.
    Consistent with authority provided by section 7805(b)(1)(A), these 
regulations are proposed to apply for taxable years that begin on or 
after the date of publication of a Treasury decision adopting these 
rules as final regulations in the Federal Register. Pending the 
issuance of the final regulations, a taxpayer may rely on these 
proposed regulations for entertainment expenditures and food or 
beverage expenses, as applicable, paid or incurred after December 31, 
2017. In addition, a taxpayer may rely on the guidance in Notice 2018-
76 until these proposed regulations are finalized.

Special Analyses

    These proposed 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.
    In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 
6), it is hereby certified that this proposed 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 proposed regulations 
substantially incorporate prior guidance and otherwise clarify the 
application of the TCJA changes to section 274 related to meals and 
entertainment. The proposed regulations will assist taxpayers in 
understanding the changes to section 274 and make it easier for 
taxpayers to comply with those changes. 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 proposed regulations have been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
state, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). This rule 
does not include any Federal mandate that may result in expenditures by 
state, local, or tribal governments, or by the private sector in excess 
of that threshold.

Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from

[[Page 11026]]

publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This proposed rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive order.

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 https://www.irs.gov.

Comments

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic and written comments that 
are submitted timely to the IRS as prescribed in this preamble under 
the ADDRESSES heading. The Treasury Department and the IRS request 
comments on all aspects of the proposed rules. All comments will be 
available at https://www.regulations.gov or upon request.

Drafting Information

    The principal author of this proposed regulation 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.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAX

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order for Sec. Sec.  1.274-11 and 1.274-12 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:


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 
purposes of this paragraph (a), 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 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 hotel 
room maintained by an employer for lodging of employees while in 
business travel status or an automobile used in the active conduct of 
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 during or at an entertainment activity. Food or beverages 
provided during or at an entertainment activity generally are treated 
as part of the entertainment activity. However, in the case of food or 
beverages provided during or at 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. Unless 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, no allocation can be made and the entire 
amount is a nondeductible entertainment expenditure.
    (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 sponsors 
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,

[[Page 11027]]

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, neither the 
taxpayer nor the business associate is engaged in a trade or business 
that relates to the entertainment activity.

    (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 paragraph (b)(1) of this section and 
thus, the cost of the game tickets is an entertainment expenditure 
and is not deductible by A.
    (2) Example 2. Assume the same facts 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 section 
274(a)(1) disallowance. Therefore, A may deduct 50 percent of the 
expenses associated with the hot dogs and drinks purchased at the 
game if they 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 paragraph (b)(1) of this section 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 the section 274(a)(1) 
disallowance. Therefore, C may not deduct the cost of the tickets or 
the food and beverages associated with the basketball game.
    (4) Example 4. Assume the same facts 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) (Example 3), the basketball game 
is entertainment as defined in paragraph (b)(1) of this section 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, is not an 
entertainment expenditure and is not subject to the section 
274(a)(1) disallowance. Therefore, C may deduct 50 percent of the 
expenses associated with the food and beverages provided at the game 
if they 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 [DATE OF PUBLICATION OF FINAL REGULATIONS IN THE 
FEDERAL REGISTER].
    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) to 
another person or persons 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 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 expense for food or beverages provided by the 
taxpayer, or an employee of the taxpayer, to a business associate 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, 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.

    (i) Example 1. Taxpayer A takes client B out to lunch. While 
eating lunch, A and B discuss A's trade or business activities. 
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. While 
eating lunch, C and D discuss D's annual performance review. Under 
section 274(k) and (n) and paragraph (a) of this section, C may 
deduct 50 percent of the food and beverage expenses.

    (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) The following example illustrates the application of paragraph 
(a)(4)(iii) of this section. Taxpayer E and Taxpayer E's spouse travel 
from New York to Boston to attend a series of business meetings. E's 
spouse is not an employee of E, does not travel to Boston for a bona 
fide business purpose of E, and the expenses would not otherwise be 
deductible. While in Boston, E and E'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 E's spouse 
are not deductible. Therefore, the cost of E's spouse's dinner is not 
deductible. E may deduct 50 percent of the expense associated with the 
food and beverages E consumed while on business travel if E meets the 
requirements in sections 162 and 274, including section 274(k) and (d).
    (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

[[Page 11028]]

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 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 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 (the employer, its agent, or a third party) 
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 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 or independent contractors of the taxpayer. Also, an exclusive 
list of guests is 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.
    (2) Exceptions--(i) Expenses treated as compensation--(A) In 
general. Any expense paid or incurred by a taxpayer for food or 
beverages, including food or beverages provided during travel described 
in section 274(m)(3), if an employee 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 expense is treated by the 
taxpayer--
    (1) On the taxpayer's income tax return as originally filed, as 
compensation paid to the employee; and
    (2) 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.
    (B) Expenses includible in income of persons who are not employees. 
An expense paid or incurred by a taxpayer for food or beverages, 
including food or beverages provided during travel described in section 
274(m)(3), is not subject to the deduction limitations in paragraph (a) 
of this section to the extent the expenditure is includible in gross 
income as compensation for services rendered, or as a prize or award 
under section 74 by a recipient of the expense who is not an employee 
of the taxpayer. 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) Expenses for which value is improperly included or for which 
amount required to be included is zero. The exception in section 
274(e)(2) and (e)(9) and paragraph (c)(2)(i) of this section does not 
apply to expenses paid or incurred for food or beverages for which the 
value that is included in gross income is less than the amount required 
to be included in gross income under Sec.  1.61-21. Furthermore, if the 
amount required to be included in gross income under Sec.  1.61-21 is 
zero, the exception in section 274(e)(2) and (e)(9) and paragraph 
(c)(2)(i) of this section does not apply.
    (D) Examples. The following examples illustrate the application of 
paragraph (c)(2)(i) of this section. In each example, 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 that are not lavish or extravagant under the 
circumstances.

    (1) Example 1. Employer F provides food and beverages to its 
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 section 132(e). F treats the food and beverage expenses as 
compensation and wages, and determines the amount of the inclusion 
under Sec.  1.61-21. Under section 274(e)(2) and paragraph (c)(2)(i) 
of this section, the expenses associated with the food and beverages 
provided to the employees are not subject to the 50 percent 
deduction limitations in paragraph (a) of this section. Thus, F may 
deduct 100 percent of the food and beverage expenses.
    (2) Example 2. Employer G 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

[[Page 11029]]

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 G may only deduct 50 percent of the expenses for the food 
and beverages provided to employees.

    (ii) Reimbursed food or beverage expenses--(A) In general. 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 paragraph (c)(2)(ii)(A) 
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 employer, its agent, or 
a third party) 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 paragraph (c)(2)(ii)(C).
    (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 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 paragraph 
(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

[[Page 11030]]

limitations on deductions in paragraph (a) of this section.

    (iii) Recreational expenses for employees--(A) In general. Any food 
or beverage expense paid or incurred by a taxpayer for a recreational, 
social, or similar activity, primarily for the benefit of taxpayer's 
employees (other than employees who are highly compensated employees 
(within the meaning of paragraph (c)(2)(iii)(B) of this section)) is 
not subject to the deduction limitations in paragraph (a) of this 
section. This paragraph (c)(2)(iii)(A) applies to expenses paid or 
incurred for events such as holiday parties, annual picnics, or summer 
outings. This paragraph (c)(2)(iii)(A) 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.
    (B) Highly compensated employees. The exception in this paragraph 
(c)(2)(iii) applies only to expenses for food or beverages made 
primarily for the benefit of employees of the taxpayer other than 
employees who are officers, shareholders or other owners who own a 10-
percent or greater interest in the business, or other highly 
compensated employees. For purposes of the preceding sentence, 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 employees who are officers, shareholders or 
other owners, or 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 
officers, shareholders, other owners, or highly compensated employees.
    (C) Examples. The following examples illustrate the application of 
this paragraph (c)(2)(iii). In each example, 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 that are not lavish or extravagant under the 
circumstances.

    (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)(C)(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 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. L may deduct 50 
percent of the food and beverage costs that are separately stated on 
the invoice under paragraph (a)(2) of this section.
    (3) Example 3. Employer M provides free coffee, soda, bottled 
water, chips, donuts, and other snacks in a break room available to 
all employees. The expenses associated with the food and beverages 
are subject to the deduction limitations in paragraph (a) of this 
section because the break room is not a recreational, social, or 
similar activity primarily for the benefit of the employees. Thus, 
the exception in section 274(e)(4) and this paragraph (c)(2)(iii) 
does not apply and M may only deduct 50 percent of the expenses for 
food and beverages provided in the break room.
    (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 response. 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. 
Thus, N may only deduct 50 percent of the expenses for food and 
beverages provided to employees in the cafeteria.
    (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, O may only deduct 50 percent of the meal expenses.

    (iv) Items available to the public--(A) In general. 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 paragraph 
(c)(2)(iv)(A) applies to the entire amount of expenses for those food 
or beverages if the same types of food or beverages are 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, 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 and that are not lavish or extravagant under the 
circumstances.

    (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 over 50 percent of the food and 
beverages are primarily consumed by potential buyers and other real 
estate agents. If the food and beverages are not primarily 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).
    (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. 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 if over 50 percent of the food 
and beverages are primarily consumed by customers. If the food and 
beverages are not primarily 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).
    (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

[[Page 11031]]

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 primarily consumed by camp attendees. 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, 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).
    (v) Goods or services sold to customers--(A) In general. 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 consideration in money or money's worth.
    (B) Example. The following example illustrates the application of 
this paragraph (c)(2)(v). 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 [DATE OF PUBLICATION OF FINAL REGULATIONS IN THE 
FEDERAL REGISTER].

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-03723 Filed 2-21-20; 4:15 pm]
BILLING CODE 4830-01-P