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

Internal Revenue Code Section 274 is the provision that blocks or limits deductions for business expenses that carry a personal benefit: entertainment, meals, gifts, club dues, companion travel, and transportation fringes. The IRC Section 274 deduction rules matter especially for the 2026 tax year because a major change took effect on January 1, 2026: employer-provided meals that used to be 50% deductible are now fully disallowed. Everything else in Section 274 — the entertainment ban, the 50% cap on business meals, the $25 gift limit, and the strict substantiation requirements — carries forward unchanged.

Entertainment Is Fully Disallowed

The Tax Cuts and Jobs Act eliminated the deduction for entertainment, and the ban still applies in 2026. You cannot deduct any cost for an activity considered entertainment, amusement, or recreation, no matter how closely it ties to your business.¹ Sporting event tickets, concerts, theater, golf outings, hunting trips — all out. There is no percentage deduction and no “directly related to business” escape hatch.

The disallowance reaches facilities too. Country club dues, athletic club memberships, and fees for any social or recreational club are fully non-deductible, even if you use the club almost entirely for business networking.²

Food served at an entertainment event is where people slip up. Take a client to a baseball game and buy hot dogs at the stadium, and the food is deductible only if you purchase it separately from the tickets or the invoice breaks out the food on its own line. Bundle it into one ticket price and the whole thing is non-deductible. Inflating the food charge to shift entertainment costs into the meal column does not work either.³

Business Meals Are 50% Deductible

Business meals survived the TCJA, but only at 50% of the cost including tax and tip.⁴ The temporary 100% deduction for restaurant meals that ran in 2021 and 2022 expired on January 1, 2023 and has not been renewed.⁵

IRS Notice 2018-76 sets five conditions that all have to be met:³

The expense is ordinary and necessary to carrying on your trade or business.
The meal is not lavish or extravagant for the circumstances. There is no fixed dollar cap, but the IRS can push back on anything unreasonable.
You or an employee is present when the food is served.
The food goes to a current or prospective customer, client, consultant, or similar business contact.
If the meal happens during an entertainment activity, the food is purchased or invoiced separately.

Meals while traveling away from home follow the same 50% rule. If you prefer not to track actual costs, you can use the IRS per diem. For the period beginning October 1, 2025, the high-low method allows $86 per day for meals in high-cost localities and $74 per day everywhere else within the continental United States.⁶ The 50% limitation still applies to the per diem amount.

Employer-Provided Meals Lost Their Deduction in 2026

This is the biggest shift for the 2026 return. Section 274(o) now fully disallows two categories of employer-provided meals that used to be 50% deductible:²

Meals provided for the convenience of the employer, such as food served on-site during long shifts or at remote locations.
Operating costs of an employer-run eating facility and the food served in it. The one exception: if employees pay full price for the meals, the limitation does not apply.

The change also catches small daily food benefits. Breakroom coffee, snacks, and occasional overtime meals that used to qualify as excludable de minimis fringe benefits under Section 132(e) are no longer deductible for the employer. Employees are generally still not taxed on these items, so the loss falls on the employer only. If you have been deducting cafeteria costs or free employee meals, expect your 2026 tax bill to reflect the difference.

Business Gifts Capped at $25 Per Recipient

You can deduct no more than $25 per year in gifts to any single individual.⁷ The cap is per recipient, not per gift: five separate $40 gifts to one client still yield a $25 deduction.

You and your spouse are treated as one taxpayer and share a single $25 limit per recipient.⁷ Indirect gifts count too. A gift to a client’s spouse is charged against the client’s $25 cap when the client is the real intended beneficiary.

Two things escape the limit. Incidental costs like engraving, gift wrapping, and shipping do not count toward the $25 as long as they do not add substantial value. Small promotional items costing $4 or less with your business name permanently imprinted and distributed on a regular basis fall outside the gift rules entirely and are deductible as advertising.⁸

Employee Achievement Awards

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

Non-qualified plan awards: the deduction for all awards to a single employee during the year cannot exceed $400.
Qualified plan awards made under a written plan that does not favor highly compensated employees: a combined annual limit of $1,600 per employee.

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

Spouse and Dependent Travel

When your spouse, a dependent, or any other companion travels with you on a business trip, their travel costs are fully non-deductible unless three conditions all hold:¹⁰

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

Meeting one or two is not enough. Having your spouse host a dinner or take meeting notes does not establish a bona fide business purpose. Your own travel stays deductible under the usual rules, but the companion’s share of airfare, hotel, and meals is disallowed unless they are genuinely working.

Qualified Transportation Fringes

Section 274(l) disallows employer deductions for qualified transportation fringe benefits — transit passes, commuter highway vehicle costs, and qualified parking provided to employees. The only exception is for transportation necessary to ensure employee safety. Employees can still receive these benefits tax-free up to the annual exclusion limits; the deduction simply disappears from the employer’s side.

Exceptions That Allow a Full Deduction

Section 274(e) carves out categories that escape both the entertainment ban and the 50% meal cap, giving a 100% deduction:¹¹

Expenses you treat as compensation by including the cost on the employee’s W-2 as wages and withholding on it.
Employee recreation such as holiday parties and annual picnics open to all employees, not just highly compensated ones.
Items made available to the general public, including product samples, promotional events, and trade show activities.
Food and entertainment at meetings of employees, directors, stockholders, or agents.
Amounts reimbursed to an employee under an accountable plan that requires substantiation and return of excess.

Substantiation Is Where Deductions Get Lost

Even when an expense qualifies, you lose the deduction entirely if you cannot substantiate it. Section 274(d) demands more documentation than ordinary business expenses, and the IRS enforces this strictly.¹² The requirement applies to travel expenses (including meals and lodging away from home), gifts, and listed property such as vehicles.

Document four elements for each covered expense:

Amount. Documentary evidence such as a receipt or paid bill is required for any expenditure of $75 or more, and for all lodging while traveling.¹³
Time and place of the meal, travel, or gift.
Business purpose of the expense.
Business relationship — the name, title, or occupation of each recipient and their connection to your business.

The IRS expects these details recorded at or near the time the expense occurs. A log or app entry made the same day is far more credible than a reconstruction at tax time. The burden of proof sits on you, and the IRS specifically calls out travel, entertainment, gifts, and vehicle expenses as categories needing additional evidence beyond what ordinary deductions require.¹⁴ The IRS does not need to prove your expense was illegitimate; it only needs to show you failed to keep adequate records, and the deduction is gone.

Penalties for Claiming Disallowed Expenses

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

You can avoid the penalty by showing reasonable cause and good faith. In practice that means having a system for categorizing expenses and a defensible reason for your tax position, even if the IRS disagrees in the end. Guessing that an entertainment expense might be deductible and hoping for the best does not meet that standard.

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