§ 274. Disallowance of certain entertainment, etc., expenses
(a)
Entertainment, amusement, or recreation
(1)
In general
No deduction otherwise allowable under this chapter shall be allowed for any item—
(A)
Activity
With respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, unless the taxpayer establishes that the item was directly related to, or, 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), that such item was associated with, the active conduct of the taxpayer’s trade or business, or
(B)
Facility
With respect to a facility used in connection with an activity referred to in subparagraph (A).
In the case of an item described in subparagraph (A), the deduction shall in no event exceed the portion of such item which meets the requirements of subparagraph (A).
(b)
Gifts
(1)
Limitation
No deduction shall be allowed under section
162 or section
212 for any expense for gifts made directly or indirectly to any individual to the extent that such expense, when added to prior expenses of the taxpayer for gifts made to such individual during the same taxable year, exceeds $25. For purposes of this section, the term “gift” means any item excludable from gross income of the recipient under section
102 which is not excludable from his gross income under any other provision of this chapter, but such term does not include—
(c)
Certain foreign travel
(1)
In general
In the case of any individual who travels outside the United States away from home in pursuit of a trade or business or in pursuit of an activity described in section
212, no deduction shall be allowed under section
162, or section
212 for that portion of the expenses of such travel otherwise allowable under such section which, under regulations prescribed by the Secretary, is not allocable to such trade or business or to such activity.
(2)
Exception
Paragraph (1) shall not apply to the expenses of any travel outside the United States away from home if—
(B)
the portion of the time of travel outside the United States away from home which is not attributable to the pursuit of the taxpayer’s trade or business or an activity described in section
212 is less than 25 percent of the total time on such travel.
(d)
Substantiation required
No deduction or credit shall be allowed—
(1)
under section
162 or
212 for any traveling expense (including meals and lodging while away from home),
(2)
for any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity,
unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement
(B)
the time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift,
(D)
the business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift. The Secretary may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations. This subsection shall not apply to any qualified nonpersonal use vehicle (as defined in subsection (i)).
(e)
Specific exceptions to application of subsection (a)
Subsection (a) shall not apply to—
(1)
Food and beverages for employees
Expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for his employees.
(2)
Expenses treated as compensation
(A)
In general
Except as provided in subparagraph (B), expenses for goods, services, and facilities, to the extent that the expenses are treated by the taxpayer, with respect to the recipient of the entertainment, amusement, or recreation, as compensation to an employee on the taxpayer’s return of tax under this chapter and as wages to such employee for purposes of chapter 24 (relating to withholding of income tax at source on wages).
(B)
Specified individuals
(i)
In general
In the case of a recipient who is a specified individual, subparagraph (A) and paragraph (9) shall each be applied by substituting “to the extent that the expenses do not exceed the amount of the expenses which” for “to the extent that the expenses”.
(ii)
Specified individual
For purposes of clause (i), the term “specified individual” means any individual who—
(I)
is subject to the requirements of section 16(a) of the Securities Exchange Act of 1934 with respect to the taxpayer or a related party to the taxpayer, or
(II)
would be subject to such requirements if the taxpayer (or such related party) were an issuer of equity securities referred to in such section.
For purposes of this clause, a person is a related party with respect to another person if such person bears a relationship to such other person described in section
267
(b) or
707
(b).
(3)
Reimbursed expenses
Expenses paid or incurred by the taxpayer, in connection with the performance by him of services for another person (whether or not such other person is his employer), under a reimbursement or other expense allowance arrangement with such other person, but this paragraph shall apply—
(4)
Recreational, etc., expenses for employees
Expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees (within the meaning of section
414
(q))). For purposes of this paragraph, an individual owning less than a 10-percent interest in the taxpayer’s trade or business shall not be considered a shareholder or other owner, and for such purposes an individual shall be treated as owning any interest owned by a member of his family (within the meaning of section
267
(c)(4)). This paragraph shall not apply for purposes of subsection (a)(3).
(5)
Employees, stockholder, etc., business meetings
Expenses incurred by a taxpayer which are directly related to business meetings of his employees, stockholders, agents, or directors.
(7)
Items available to public
Expenses for goods, services, and facilities made available by the taxpayer to the general public.
(8)
Entertainment sold to customers
Expenses for goods or services (including the use of facilities) which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money’s worth.
(9)
Expenses includible in income of persons who are not employees
Expenses paid or incurred by the taxpayer for goods, services, and facilities to the extent that the expenses are includible in the gross income of a recipient of the entertainment, amusement, or recreation who is not an employee of the taxpayer as compensation for services rendered or as a prize or award under section
74. The preceding sentence shall not apply to any amount paid or incurred by the taxpayer if such 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 and is not so included.
For purposes of this subsection, any item referred to in subsection (a) shall be treated as an expense.
(f)
Interest, taxes, casualty losses, etc.
This section shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity). In the case of a taxpayer which is not an individual, the preceding sentence shall be applied as if it were an individual.
(g)
Treatment of entertainment, etc., type facility
For purposes of this chapter, if deductions are disallowed under subsection (a) with respect to any portion of a facility, such portion shall be treated as an asset which is used for personal, living, and family purposes (and not as an asset used in the trade or business).
(h)
Attendance at conventions, etc.
(1)
In general
In the case of any individual who attends a convention, seminar, or similar meeting which is held outside the North American area, no deduction shall be allowed under section
162 for expenses allocable to such meeting unless the taxpayer establishes that the meeting is directly related to the active conduct of his trade or business and that, after taking into account in the manner provided by regulations prescribed by the Secretary—
(C)
the residences of the active members of the sponsoring organization and the places at which other meetings of the sponsoring organization or groups have been held or will be held, and
it is as reasonable for the meeting to be held outside the North American area as within the North American area.
(2)
Conventions on cruise ships
In the case of any individual who attends a convention, seminar, or other meeting which is held on any cruise ship, no deduction shall be allowed under section
162 for expenses allocable to such meeting, unless the taxpayer meets the requirements of paragraph (5) and establishes that the meeting is directly related to the active conduct of his trade or business and that—
(B)
all ports of call of such cruise ship are located in the United States or in possessions of the United States.
With respect to cruises beginning in any calendar year, not more than $2,000 of the expenses attributable to an individual attending one or more meetings may be taken into account under section
162 by reason of the preceding sentence.
(3)
Definitions
For purposes of this subsection—
(4)
Subsection to apply to employer as well as to traveler
(A)
Except as provided in subparagraph (B), this subsection shall apply to deductions otherwise allowable under section
162 to any person, whether or not such person is the individual attending the convention, seminar, or similar meeting.
(B)
This subsection shall not deny a deduction to any person other than the individual attending the convention, seminar, or similar meeting with respect to any amount paid by such person to or on behalf of such individual if includible in the gross income of such individual. The preceding sentence shall not apply if the amount is required to be included in any information return filed by such person under part III of subchapter A of chapter 61 and is not so included.
(5)
Reporting requirements
No deduction shall be allowed under section
162 for expenses allocable to attendance at a convention, seminar, or similar meeting on any cruise ship unless the taxpayer claiming the deduction attaches to the return of tax on which the deduction is claimed—
(A)
a written statement signed by the individual attending the meeting which includes—
(6)
Treatment of conventions in certain Caribbean countries
(A)
In general
For purposes of this subsection, the term “North American area” includes, with respect to any convention, seminar, or similar meeting, any beneficiary country if (as of the time such meeting begins)—
(B)
Beneficiary country
For purposes of this paragraph, the term “beneficiary country” has the meaning given to such term by section 212(a)(1)(A) of the Caribbean Basin Economic Recovery Act; except that such term shall include Bermuda.
(C)
Authority to conclude exchange of information agreements
(i)
In general
The Secretary is authorized to negotiate and conclude an agreement for the exchange of information with any beneficiary country. Except as provided in clause (ii), an exchange of information agreement shall provide for the exchange of such information (not limited to information concerning nationals or residents of the United States or the beneficiary country) as may be necessary or appropriate to carry out and enforce the tax laws of the United States and the beneficiary country (whether criminal or civil proceedings), including information which may otherwise be subject to nondisclosure provisions of the local law of the beneficiary country such as provisions respecting bank secrecy and bearer shares. The exchange of information agreement shall be terminable by either country on reasonable notice and shall provide that information received by either country will be disclosed only to persons or authorities (including courts and administrative bodies) involved in the administration or oversight of, or in the determination of appeals in respect of, taxes of the United States or the beneficiary country and will be used by such persons or authorities only for such purposes.
(ii)
Nondisclosure of qualified confidential information sought for civil tax purposes
An exchange of information agreement need not provide for the exchange of qualified confidential information which is sought only for civil tax purposes if—
(I)
the Secretary of the Treasury, after making all reasonable efforts to negotiate an agreement which includes the exchange of such information, determines that such an agreement cannot be negotiated but that the agreement which was negotiated will significantly assist in the administration and enforcement of the tax laws of the United States, and
(D)
Coordination with other provisions
Any exchange of information agreement negotiated under subparagraph (C) shall be treated as an income tax convention for purposes of section
6103
(k)(4). The Secretary may exercise his authority under subchapter A of chapter 78 to carry out any obligation of the United States under an agreement referred to in subparagraph (C).
(E)
Determinations published in the Federal Register
The following shall be published in the Federal Register—
(i)
any determination by the President under subparagraph (C)(ii) (including the reasons for such determination),
(7)
Seminars, etc. for section
212 purposes
No deduction shall be allowed under section
212 for expenses allocable to a convention, seminar, or similar meeting.
(i)
Qualified nonpersonal use vehicle
For purposes of subsection (d), the term “qualified nonpersonal use vehicle” means any vehicle which, by reason of its nature, is not likely to be used more than a de minimis amount for personal purposes.
(j)
Employee achievement awards
(2)
Deduction limitations
The deduction for the cost of an employee achievement award made by an employer to an employee—
(3)
Definitions
For purposes of this subsection—
(A)
Employee achievement award
The term “employee achievement award” means an item of tangible personal property which is—
(B)
Qualified plan award
(i)
In general
The term “qualified plan award” means an employee achievement award awarded as part of an established written plan or program of the taxpayer which does not discriminate in favor of highly compensated employees (within the meaning of section
414
(q)) as to eligibility or benefits.
(ii)
Limitation
An employee achievement award shall not be treated as a qualified plan award for any taxable year if the average cost of all employee achievement awards which are provided by the employer during the year, and which would be qualified plan awards but for this subparagraph, exceeds $400. For purposes of the preceding sentence, average cost shall be determined by including the entire cost of qualified plan awards, without taking into account employee achievement awards of nominal value.
(4)
Special rules
For purposes of this subsection—
(A)
Partnerships
In the case of an employee achievement award made by a partnership, the deduction limitations contained in paragraph (2) shall apply to the partnership as well as to each member thereof.
(B)
Length of service awards
An item shall not be treated as having been provided for length of service achievement if the item is received during the recipient’s 1st 5 years of employment or if the recipient received a length of service achievement award (other than an award excludable under section
132
(e)(1)) during that year or any of the prior 4 years.
(C)
Safety achievement awards
An item provided by an employer to an employee shall not be treated as having been provided for safety achievement if—
(k)
Business meals
(l)
Additional limitations on entertainment tickets
(1)
Entertainment tickets
(A)
In general
In determining the amount allowable as a deduction under this chapter for any ticket for any activity or facility described in subsection (d)(2), the amount taken into account shall not exceed the face value of such ticket.
(2)
Skyboxes, etc.
In the case of a skybox or other private luxury box leased for more than 1 event, the amount allowable as a deduction under this chapter with respect to such events shall not exceed the sum of the face value of non-luxury box seat tickets for the seats in such box covered by the lease. For purposes of the preceding sentence, 2 or more related leases shall be treated as 1 lease.
(m)
Additional limitations on travel expenses
(1)
Luxury water transportation
(A)
In general
No deduction shall be allowed under this chapter for expenses incurred for transportation by water to the extent such expenses exceed twice the aggregate per diem amounts for days of such transportation. For purposes of the preceding sentence, the term “per diem amounts” means the highest amount generally allowable with respect to a day to employees of the executive branch of the Federal Government for per diem while away from home but serving in the United States.
(2)
Travel as form of education
No deduction shall be allowed under this chapter for expenses for travel as a form of education.
(3)
Travel expenses of spouse, dependent, or others
No deduction shall be allowed under this chapter (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—
(n)
Only 50 percent of meal and entertainment expenses allowed as deduction
(1)
In general
The amount allowable as a deduction under this chapter for—
(B)
any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such activity,
shall not exceed 50 percent of the amount of such expense or item which would (but for this paragraph) be allowable as a deduction under this chapter.
(2)
Exceptions
Paragraph (1) shall not apply to any expense if—
(B)
in the case of an expense for food or beverages, such expense is excludable from the gross income of the recipient under section
132 by reason of subsection (e) thereof (relating to de minimis fringes),
(D)
in the case of an employer who pays or reimburses moving expenses of an employee, such expenses are includible in the income of the employee under section
82, or
(E)
such expense is for food or beverages—
(ii)
provided to crew members of a commercial vessel—
(iii)
provided on an oil or gas platform or drilling rig if the platform or rig is located offshore, or
(iv)
provided on an oil or gas platform or drilling rig, or at a support camp which is in proximity and integral to such platform or rig, if the platform or rig is located in the United States north of 54 degrees north latitude.
Clauses (i) and (ii) of subparagraph (E) shall not apply to vessels primarily engaged in providing luxury water transportation (determined under the principles of subsection (m)). In the case of the employee, the exception of subparagraph (A) shall not apply to expenses described in subparagraph (D).
(3)
Special rule for individuals subject to Federal hours of service
(A)
In general
In the case of any expenses for food or beverages consumed while away from home (within the meaning of section
162
(a)(2)) by an individual during, or incident to, the period of duty subject to the hours of service limitations of the Department of Transportation, paragraph (1) shall be applied by substituting “the applicable percentage” for “50 percent”.
(B)
Applicable percentage
For purposes of this paragraph, the term “applicable percentage” means the percentage determined under the following table:
For taxable years beginning
The applicable
in calendar year—
percentage is—
1998 or 1999
55
2000 or 2001
60
2002 or 2003
65
2004 or 2005
70
2006 or 2007
75
2008 or thereafter
80.
(o)
Regulatory authority
The Secretary shall prescribe such regulations as he may deem necessary to carry out the purposes of this section, including regulations prescribing whether subsection (a) or subsection (b) applies in cases where both such subsections would otherwise apply.