64026 Federal Register / Vol. 85, No. 197 / Friday, October 9, 2020 / Rules and Regulations DEPARTMENT OF THE TREASURY (TCJA) to revise the rules for deducting conduct of the taxpayer’s trade or expenditures for meals and business (directly related exception); or Internal Revenue Service entertainment, effective for amounts (2) in the case of an item directly paid or incurred after December 31, preceding or following a substantial and 26 CFR Part 1 2017. bona fide business discussion On February 26, 2020, the Department [TD 9925] (including business meetings at a of the Treasury (Treasury Department) convention or otherwise), the item was RIN 1545–BP23 and the IRS published a notice of associated with the active conduct of proposed rulemaking (REG–100814–19) the taxpayer’s trade or business Meals and Entertainment Expenses in the Federal Register (85 FR 11020) (business discussion exception). Section Under Section 274 containing proposed regulations under 274(e)(1) through (9) also provide AGENCY: Internal Revenue Service (IRS), section 274 to implement certain of the exceptions to the rule in section 274(a) Treasury. TCJA’s amendments to section 274 that disallows a deduction for (proposed regulations). The proposed entertainment expenditures. The TCJA ACTION: Final rule. regulations would update existing did not change the application of the SUMMARY: This document contains final regulations in § 1.274–2 by adding a section 274(e) exceptions to regulations that provide guidance under new section at § 1.274–11 for entertainment expenditures. section 274 of the Internal Revenue entertainment expenditures. The Section 274(a)(1)(B) disallows a Code (Code) regarding certain recent proposed regulations would also add a deduction for any item with respect to amendments made to that section. new section at § 1.274–12 to address the a facility used in connection with an Specifically, the final regulations limitations on food or beverage activity referred to in section address the elimination of the deduction expenses under section 274(k) and (n), 274(a)(1)(A). Section 274(a)(2) provides under section 274 for expenditures including the application of the that, for purposes of applying section related to entertainment, amusement, or exceptions in section 274(e)(2), (3), (4), 274(a)(1), dues or fees to any social, recreation activities, and provide (7), (8), and (9). Pending the issuance of athletic, or sporting club or organization guidance to determine whether an these final regulations, taxpayers were shall be treated as items with respect to activity is of a type generally considered permitted to rely upon the proposed facilities. Section 274(a)(3) disallows a to be entertainment. The final regulations for entertainment and food deduction for amounts paid or incurred regulations also address the limitation or beverage expenses, as applicable, for membership in any club organized on the deduction of food and beverage paid or incurred after December 31, for business, pleasure, recreation, or expenses under section 274(k) and (n), 2017. other social purpose. including the applicability of the The Treasury Department and the IRS Prior to amendment by the TCJA, exceptions under section 274(e)(2), (3), did not receive any requests to speak at section 274(n)(1) generally limited the a public hearing on the proposed deduction of food or beverage expenses (4), (7), (8), and (9). The final regulations regulations. Therefore, the scheduled and entertainment expenditures to 50 affect taxpayers who pay or incur public hearing was cancelled. The percent of the amount that otherwise expenses for meals or entertainment. Treasury Department and the IRS would have been allowable. Thus, DATES: received 14 written and electronic under prior law, taxpayers could deduct Effective Date: These regulations are comments in response to the proposed 50 percent of meal expenses, and 50 effective on October 9, 2020. regulations. All comments were percent of entertainment expenditures Applicability Date: These regulations considered and are available at https:// that met the directly related or business apply for taxable years that begin on or www.regulations.gov or upon request. discussion exception. Distinguishing after October 9, 2020. The comments addressing the proposed between meal expenses and FOR FURTHER INFORMATION CONTACT: regulations are summarized in the entertainment expenditures was Patrick Clinton of the Office of the Summary of Comments and Explanation unnecessary for purposes of the 50 Associate Chief Counsel (Income Tax of Revisions section. However, percent limitation. and Accounting), (202) 317–7005 (not a comments recommending statutory Section 13304(a)(1) of the TCJA toll-free number). revisions or addressing issues outside repealed the directly related and SUPPLEMENTARY INFORMATION: the scope of these final regulations are business discussion exceptions to the not discussed in this preamble. After general prohibition on deducting Background full consideration of the comments, this entertainment expenditures in section This document contains final Treasury decision adopts the proposed 274(a)(1)(A). Also, section regulations under section 274 of the regulations with modifications in 13304(a)(2)(D) of the TCJA amended the Code that amend the Income Tax response to certain comments, as 50 percent limitation in section Regulations (26 CFR part 1). In general, described in the Summary of Comments 274(n)(1) to remove the reference to section 274 limits or disallows and Explanation of Revisions section. entertainment expenditures. Thus, deductions for certain meal and entertainment expenditures are no entertainment expenditures that 1. Business Meals and Entertainment longer deductible unless one of the nine otherwise would be allowable under Section 274(a)(1)(A) generally exceptions to section 274(a) in section chapter 1 of the Code (chapter 1), disallows a deduction for any item with 274(e) applies. primarily under section 162(a), which respect to an activity of a type While the TCJA eliminated the allows a deduction for ordinary and considered to constitute entertainment, deduction for entertainment expenses, necessary expenses paid or incurred amusement, or recreation Congress did not amend the provisions during the taxable year in carrying on (entertainment expenditures). However, relating to the deductibility of business any trade or business. prior to the amendment by the TCJA, meals. Thus, taxpayers generally may On December 22, 2017, section 274 section 274(a)(1)(A) provided continue to deduct 50 percent of the was amended by section 13304 of Public exceptions to that disallowance if the food and beverage expenses associated Law 115–97 (131 Stat. 2054), commonly taxpayer established that: (1) The item with operating their trade or business, referred to as the Tax Cuts and Jobs Act, was directly related to the active including meals consumed by VerDate Sep<11>2014 20:32 Oct 08, 2020 Jkt 253001 PO 00000 Frm 00034 Fmt 4700 Sfmt 4700 E:\FR\FM\09OCR1.SGM 09OCR1 Federal Register / Vol. 85, No. 197 / Friday, October 9, 2020 / Rules and Regulations 64027 employees on work travel. See H.R. Rep. circumvented through inflating the to make accounting for it unreasonable No. 115–466, at 407 (2017) (Conf. Rep.). amount charged for food and beverages. or administratively impracticable. However, as before the TCJA, no Section 132(e)(2) provides that the 2. Travel Meals deduction is allowed for the expense of operation by an employer of any eating any food or beverages unless (a) the Section 274(n)(1) generally limits the facility for employees is treated as a de expense is not lavish or extravagant deduction of food or beverage expenses, minimis fringe if (1) the facility is under the circumstances, and (b) the including expenses for food or located on or near the business premises taxpayer (or an employee of the beverages consumed while away from of the employer, and (2) revenue taxpayer) is present at the furnishing of home, to 50 percent of the amount that derived from the facility normally the food or beverages. See section otherwise would have been allowable, equals or exceeds the direct operating 274(k). unless one of the six exceptions to costs of the facility. Thus, under prior Prior to amendment by the TCJA, section 274(n) in section 274(e) applies. law, employers generally were allowed section 274(d) provided substantiation However, no deduction is allowed for to fully deduct an expense for food or requirements for deductions under the expense of any food or beverages beverages provided to their employees if section 162 or 212 for any traveling unless: (1) The expense is not lavish or the amount was excludable from the expense (including meals and lodging extravagant under the circumstances; gross income of the employee as a de while away from home), and for any and (2) the taxpayer (or an employee of minimis fringe. However, the TCJA item with respect to an activity of a type the taxpayer) is present at the furnishing repealed section 274(n)(2)(B), meaning considered to constitute entertainment, of the food or beverages. See section that expenses for food or beverages that amusement, or recreation or with 274(k). Section 274(d) provides are de minimis fringes under section respect to a facility used in connection substantiation requirements for 132(e) are no longer excepted from with such activity. Section traveling expenses, including food and section 274(n)(1). As a result, these 13304(a)(2)(A) of the TCJA repealed the beverage expenses incurred while on expenses, like other food or beverage substantiation requirements for business travel away from home. expenses generally, are subject to the 50 entertainment expenditures. Traveling Section 274(m) provides additional percent limitation unless one of the six expenses (including meals and lodging limitations on travel expenses, exceptions to section 274(n) in section while away from home), however, including expenses for meals consumed 274(e) applies. remain subject to the section 274(d) while away from home.