Meals and entertainment deductibility is governed by IRC §274, not by the general "ordinary and necessary" rule of §162. §274 is the gatekeeper - it imposes additional limits on top of the §162 deduction even when the underlying expense is clearly business-related. The rules have shifted multiple times: TCJA (2017) eliminated the entertainment deduction; the COVID-era §274(n)(2)(D) restaurant 100% (2021-2022) expired; OBBBA retained the long-pending §274(o) sunset that disallows convenience-of-employer meals starting 1/1/2026. This guide covers the rules in effect for 2026 and the planning consequences.
0% - Entertainment, amusement, recreation (TCJA, permanent disallowance under §274(a))
50% - Standard business meal (§274(n)(1))
100% - Six narrow exceptions under §274(e), §274(n)(2)(C), and bona-fide-customer transactions
The COVID-era 100% restaurant rule (§274(n)(2)(D)) expired on December 31, 2022. Lobbying to revive it has not succeeded. Restaurant meals revert to the 50% rule for 2023 and beyond.
Treasury Regulation §1.274-2 defines entertainment as activities of a type generally considered to be entertainment, amusement, or recreation - including theater, sporting events, hunting, fishing, vacation, golf, country clubs, social clubs. After TCJA, expenses for entertainment activities are 0% deductible. There is no business-purpose test that revives the deduction.
The bright line: food and beverages are not entertainment as long as they are purchased separately from any entertainment activity (or stated separately on the invoice). Notice 2018-76 (formalized in Treas. Reg. §1.274-11) confirmed this. So:
Under §274(n)(1), most ordinary business meal expenses are limited to 50% deductibility. To qualify even for the 50%, the meal must:
Travel meals (away-from-home meals during business travel) are 50% deductible under the same standard.
Six categories of food/beverage expenses are exempt from the §274(n)(1) 50% limit and remain fully deductible at 100%. These are codified in §274(e):
| Code Section | Description | Rate |
|---|---|---|
| §274(e)(1) | De minimis food/beverages provided to employees (e.g., office coffee, breakroom snacks, occasional doughnuts) - subject to §274(o) starting 2026, see below | 100%* |
| §274(e)(2) | Expenses treated as compensation to recipient and reported on Form W-2 | 100% |
| §274(e)(3) | Expenses reimbursed by a non-employer (independent contractor reimbursement under accountable plan) | 100% |
| §274(e)(4) | Recreational, social, or similar activities primarily for the benefit of employees (e.g., holiday party, summer picnic, employee appreciation events) - not just for highly-compensated | 100% |
| §274(e)(7) | Expenses available to general public (e.g., free samples at a trade show) | 100% |
| §274(e)(8) | Goods/services sold to customers in a bona fide transaction for adequate consideration (e.g., a restaurant's cost of goods sold for meals served to paying customers) | 100% |
| §274(n)(2)(C) | Meals on certain commercial vessels, fishing vessels, and oil/gas platforms in remote locations | 100% |
* §274(e)(1) de minimis and §274(e)(4) employee social meals were historically 100% deductible, but coordination with the new §274(o) is required for de minimis food provided as a convenience-of-employer meal starting 1/1/2026. See next section.
This is the change practitioners need to flag for every employer client. Effective for amounts paid or incurred after December 31, 2025, IRC §274(o) (added by the TCJA but with a delayed sunset that OBBBA retained in full) disallows 100% of:
Pre-2026, these meals were 50% deductible to the employer. Post-2025, they are 0% deductible. This is a significant change for tech companies, hospital systems, manufacturing facilities with on-site cafeterias, and any employer that historically provided "convenience" meals to keep employees on premises.
OBBBA added two narrow carve-outs to the §274(o) disallowance:
For everyone else - tech, finance, manufacturing, healthcare, professional services - the §274(o) disallowance applies starting 1/1/2026.
For amounts paid or incurred after December 31, 2020, and before January 1, 2023, §274(n)(2)(D) (added by the Consolidated Appropriations Act, 2021) provided a temporary 100% deduction for food or beverages provided by a restaurant. IRS guidance is in Notice 2021-25.
"Restaurant" was defined as a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food was consumed on the premises. Excluded: grocery stores, specialty food stores, beer/wine/liquor stores, drug stores, convenience stores, newsstands, vending machines, and kiosks - those remained at the 50% rate.
The provision expired on schedule. Despite ongoing lobbying from the restaurant industry, neither subsequent legislation nor OBBBA revived it. Business meals from restaurants are back to the 50% standard for 2023 and forward.
Even fully deductible meals require substantiation. §274(d) requires the taxpayer to substantiate by adequate records or sufficient evidence:
Practical implementation: keep the receipt; record on the receipt (or in a contemporaneous log) the names of attendees, business relationship, and topic discussed. Credit card statements alone are insufficient. The standard tightens for amounts of $75 or more (Rev. Proc. 2003-15), where a documentary record is required.
A single "Meals & Entertainment" line item in the chart of accounts is no longer adequate. Different categories carry different deductibility rates. The recommended structure for 2026:
| Account | Examples | Rate |
|---|---|---|
| Business Meals - 50% | Client lunches, business travel meals, prospect dinners | 50% |
| Employee Social - 100% | Holiday party, summer picnic, employee appreciation events | 100% |
| De Minimis Food - 100% (subject to §274(o)) | Office coffee, breakroom snacks, occasional doughnuts | 100%/0% |
| Convenience-of-Employer Meals - 0% (2026) | Free lunches, on-site cafeteria, late-night work meals to keep employees | 0% |
| Sold to Customers - 100% | Goods sold in bona-fide transactions, restaurant COGS | 100% |
| Entertainment - 0% | Sporting event tickets, concerts, golf, hunting/fishing | 0% |
| Travel Meals - 50% | Per diem and actual cost for away-from-home meals | 50% |
Audit your "free lunch" policy now. If the business has been providing on-site meals or operating an in-house cafeteria, the post-2025 disallowance may be material. Quantify the lost deduction at the corporate effective rate to assess whether the practice should continue, be priced (charged to employees), or be added to W-2 wages.
Bundled invoices are a deduction risk. Sporting event suites, conference packages with included meals, hospitality events - require separately stated invoices for the food component. A single bundled invoice typically defaults to entertainment treatment (0%).
Holiday parties and employee social events remain 100% deductible. §274(e)(4) applies as long as the event is primarily for the benefit of employees (not just executives). This is one of the few unambiguously favorable carve-outs that OBBBA did not touch.
Per diem rates simplify substantiation but not deductibility. Use of GSA per diem rates for travel meals satisfies §274(d) recordkeeping but does not change the 50% deductibility of those meals.
Don't forget Form 1099 reporting. If the business reimburses a non-employee (e.g., a board member or consultant) for meals and treats the reimbursement as compensation, that's §274(e)(2) territory - 100% deductible to the payer but reportable on Form 1099-NEC.