26 U.S.C. § 274 — Disallowance of certain entertainment, etc., expenses

(a) Entertainment, amusement, recreation, or qualified transportation fringes: No deduction is allowed for an activity of the type generally considered entertainment, amusement, or recreation, or for a facility used for such an activity. Dues to a social, athletic, or sporting club count as a "facility" expense. No deduction is allowed for club membership dues at all, for any club organized for business, pleasure, recreation, or social purposes. No deduction is allowed for the cost of a "qualified transportation fringe" (defined in section 132(f)) given to an employee. (b) Gifts: No deduction is allowed for a business gift to an individual beyond $25 total per person per year. A "gift" here means anything excludable from the recipient's income under section 102, with two exceptions that don't count toward the $25 cap: an item costing $4.00 or less with the taxpayer's name permanently imprinted on it, given out as one of many identical items; and signs, display racks, or other promotional material used on the recipient's business premises. A gift from a partnership counts against the $25 limit both for the partnership and for each partner. A husband and wife are treated as one taxpayer for this limit. (c) Certain foreign travel: If someone travels outside the United States for business, no deduction is allowed for the part of the trip's expenses that regulations say isn't allocable to the business. This limit does not apply if the trip is one week or less, or if less than 25 percent of the travel time outside the U.S. was not for business. Travel between two points inside the United States is not "foreign travel" for this rule. (d) Substantiation required: No deduction is allowed for travel expenses (including meals and lodging), gift expenses, or listed-property expenses (defined in section 280F(d)(4)) unless the taxpayer proves, with adequate records or other sufficient evidence, the amount of the expense, its time and place (or the gift's date and description), its business purpose, and the business relationship of the person who benefited. The Secretary may exempt small expenses below a set amount from these requirements. This subsection does not apply to a "qualified nonpersonal use vehicle" as defined in subsection (i). (e) Specific exceptions to application of subsection (a): Subsection (a)'s entertainment ban does not apply to: (1) food and beverages for employees provided mainly for them on the taxpayer's business premises; (2) expenses treated as compensation to the employee and reported as wages — though for a "specified individual" (roughly, a corporate insider under section 16(a) of the Securities Exchange Act, or someone who would be if the company issued stock), the deduction is capped at the amount actually treated as compensation; (3) expenses reimbursed under a reimbursement arrangement, if the employer hasn't already used exception (2), or if the worker properly accounts for the expenses to whoever isn't their employer; (4) recreational or social expenses mainly for the benefit of employees who are not highly compensated (an owner of less than 10 percent of the business, including family attribution, isn't treated as an "owner" here — but this exception doesn't apply to the club-dues ban in (a)(3)); (5) expenses directly related to business meetings of employees, stockholders, agents, or directors; (6) expenses directly related to attending a business meeting of a tax-exempt business league, chamber of commerce, real estate board, or board of trade; (7) expenses for goods, services, or facilities made available to the general public; (8) expenses for goods or services actually sold to customers for full value; (9) expenses includible in the gross income of a non-employee recipient as pay or a prize — unless the amount was required to be reported on an information return and wasn't (a small-amount exception applies below $600). (f) Interest, taxes, casualty losses, etc.: This section does not apply to a deduction that would be allowed anyway, without regard to any connection to a trade or business. This rule applies to non-individual taxpayers as if they were individuals. (g) Treatment of entertainment-type facility: If part of a facility's deductions are disallowed under (a), that part is treated as a personal-use asset, not a business asset. (h) Attendance at conventions, etc.: (1) No deduction is allowed for a convention, seminar, or similar meeting held outside North America, unless the taxpayer shows the meeting is directly related to their business and that, considering the meeting's purpose and activities, the sponsoring group's purpose and activities, where the group's active members live, where other meetings have been or will be held, and other relevant facts, holding it outside North America was as reasonable as holding it inside. (2) No deduction is allowed for a convention on a cruise ship unless the taxpayer meets the reporting rules in paragraph (5), shows the meeting is directly related to business, and the ship is U.S.-registered with all ports of call in the U.S. or its possessions; even then, no more than $2,000 per person per year can be deducted for cruise-ship conventions. (3) "North American area" means the U.S., its possessions, the Trust Territory of the Pacific Islands, Canada, and Mexico; "cruise ship" means any vessel, whether or not it sails in U.S. waters. (4) This subsection applies to whoever pays for the trip — the attendee or their employer — except an employer isn't denied a deduction for amounts paid to the attendee if those amounts are included in the attendee's income (unless a required information return should have reported it and didn't). (5) For cruise-ship conventions, the taxpayer must attach to their tax return a signed statement from the attendee (giving trip length, hours spent on business each day, and a program of business activities) and a signed statement from an officer of the sponsoring organization (giving a daily schedule of business activities and hours attended). (6) "North American area" also includes certain Caribbean "beneficiary countries" that have an information-exchange agreement with the U.S. and are not found by the Secretary to discriminate against U.S.-held conventions; Bermuda is included by definition. The Secretary may negotiate these information-exchange agreements, which generally must cover a broad range of tax information (even bank-secrecy or bearer-share information) but need not cover certain confidential information sought only for civil tax purposes if the Secretary of the Treasury and the President make specific findings; agreements are treated like income tax treaties for section 6103(k)(4) purposes; certain presidential and Secretary determinations under this paragraph must be published in the Federal Register. (7) No deduction is allowed under section 212 (income-producing-activity expenses) for a convention, seminar, or similar meeting at all. (i) Qualified nonpersonal use vehicle: For subsection (d), this means a vehicle that, by its nature, is unlikely to be used more than minimally for personal purposes. (j) Employee achievement awards: (1) No deduction is allowed for an employee achievement award beyond the limits in paragraph (2). (2) The deduction per employee per year is capped at $400 for awards that are not "qualified plan awards," and $1,600 total (including non-qualified-plan awards) if the award is a qualified plan award. (3) An "employee achievement award" is tangible personal property given to an employee for length-of-service or safety achievement, as part of a meaningful presentation, under conditions unlikely to be disguised pay; it excludes cash, cash equivalents, gift cards, and gift certificates (unless they only let the employee pick from a limited pre-approved list of tangible items), and it excludes vacations, meals, lodging, event tickets, and securities. A "qualified plan award" is one given under a written plan that doesn't favor highly compensated employees; but if the average cost of all such plan awards during the year exceeds $400 (not counting nominal-value awards), none of them count as qualified plan awards that year. (4) A partnership's awards are capped the same way, both for the partnership and each partner. An award isn't for "length of service" if given in the employee's first 5 years, or if the employee already got a length-of-service award (other than one excluded under section 132(e)(1)) in that year or the prior 4 years. An award isn't for "safety achievement" if the employer already gave safety awards to more than 10 percent of eligible employees that year, or if it's given to a manager, administrator, clerical, or other professional employee. (k) Business meals: No deduction is allowed for food or beverages unless the expense isn't lavish or extravagant for the circumstances, and the taxpayer (or their employee) is present when the food or drinks are served. This rule doesn't apply to the exceptions listed in (e)(2), (3), (4), (7), (8), or (9), or to other expenses regulations may exempt. (l) Transportation and commuting benefits: No deduction is allowed for transportation, or payment or reimbursement, given to an employee for travel between home and work — except when necessary for the employee's safety. (m) Additional limitations on travel expenses: (1) No deduction is allowed for water transportation expenses beyond twice the highest federal per-diem rate for each day of travel — except for cruise-ship conventions meeting the rules above, or expenses listed in (e)(2), (3), (4), (7), (8), or (9). (2) No deduction is allowed for travel used as a form of education. (3) No deduction is allowed (outside section 217) for the travel expenses of a spouse, dependent, or other companion on a business trip, unless that person is the taxpayer's employee, travels for a genuine business purpose, and the expenses would be deductible for that person anyway. (n) Only 50 percent of meal expenses allowed: (1) Only 50 percent of a food or beverage expense that would otherwise be deductible can actually be deducted. (2) This 50 percent cut does not apply to: expenses listed in (e)(2), (3), (4), (7), (8), or (9); moving-expense reimbursements included in the employee's income under section 82; food required by federal law for commercial vessel crews, or provided to crew on certain U.S. inland-waterway vessels, offshore oil or gas platforms, platforms north of 54 degrees latitude, or fishing vessels and processing facilities north of 50 degrees latitude outside a metropolitan area; or food from a restaurant paid for before January 1, 2023. The vessel-crew exceptions don't apply to luxury water transportation. For an employee receiving the meal, the food-for-employees exception in (e)(1) doesn't apply to the categories excluded in (e)(2)(B). (3) For someone subject to Department of Transportation hours-of-service limits, the deductible share is 80 percent instead of 50 percent for meals eaten away from home during that duty period. (o) Meals provided at convenience of employer: Except for the on-premises-facility exception in (e)(8) or the restaurant exception in (n)(2)(C), no deduction is allowed for the cost of operating an eating facility described in section 132(e)(2) (or food and drink connected to it), or for meals described in section 119(a) (meals provided to employees for the employer's convenience). (p) Regulatory authority: The Secretary may write regulations to carry out this section, including rules for which of subsection (a) or (b) applies when both could otherwise apply to the same expense.