A rule written in 2017 took effect on January 1, 2026. For amounts paid or incurred after December 31, 2025, Section 274(o) of the Internal Revenue Code eliminates the deduction for many meals employers provide on their own premises. For offices that stock a kitchen or cater staff lunches, the change can turn a 50% deduction into zero. Restaurants and caterers are in a different position, because the law keeps an exception for businesses that sell food to customers.
What Changed on January 1, 2026
Under Section 274(o), no deduction is allowed for:
- The cost of operating an employer eating facility described in Section 132(e)(2), and the food and beverages associated with that facility, and
- Meals furnished for the convenience of the employer under Section 119(a), such as meals provided on premises because employees must stay available during a shift.
The effective date language in the statutory notes applies this disallowance to amounts paid or incurred after December 31, 2025. In 2025, these costs were generally 50% deductible.
The Exceptions That Survive
Section 274(o) does not apply to expenses described in Section 274(e)(8) or 274(n)(2)(C).
- Food sold to customers. Section 274(e)(8) covers goods or services the business sells in a bona fide transaction for full value. As Baker Tilly's 2026 guidance summarizes, a restaurant or catering business that provides meals to employees and sells food and beverages to customers in bona fide transactions falls within this exception.
- Specific industries. Section 274(n)(2)(C) covers meals required by federal law on commercial vessels, certain offshore and northern oil and gas platforms, and, beginning in 2026, fishing vessels and certain fish processing facilities.
For California restaurant owners, the practical point is to keep the records that show staff meals come from the same food you sell: kitchen records, a written staff meal policy, and the cost of the meals tracked separately from other expenses.
A 100/50/0 Chart for 2026
The chart below is drawn from Section 274 and the Baker Tilly checklist cited above. Each line assumes the expense is otherwise an ordinary and necessary business expense with proper records.
| Expense | 2026 federal deduction |
|---|---|
| Holiday party or picnic primarily for employees who are not highly compensated (Sec. 274(e)(4)) | 100% |
| Meals treated as taxable compensation and reported as wages (Sec. 274(e)(2)) | 100% |
| Food offered free to the general public, such as at a promotional event (Sec. 274(e)(7)) | 100% |
| Meals sold to employees or customers at full value (Sec. 274(e)(8)) | 100% |
| Meals while traveling away from home on business | 50% |
| Meal with a client or customer when business is discussed, you or an employee attend, and the meal is not lavish | 50% |
| Meals at an employer-operated cafeteria or eating facility (Sec. 274(o)) | 0% |
| Meals furnished for the employer's convenience on premises (Sec. 274(o)) | 0% |
| Staff meeting lunch or overtime dinner treated as a de minimis benefit (Baker Tilly classification) | 0% |
| Lavish or extravagant meals, or meals with no business discussion | 0% |
| Entertainment, such as sporting event tickets or club dues | 0% |
Two lines deserve care. Whether an office lunch is a business meeting meal at 50% or a de minimis meal at 0% depends on the facts, and advisors do not all classify these the same way. And the 100% treatment for employee parties does not apply to events held mainly for owners or highly compensated employees.
What California Businesses Should Review
Recode the books. If your chart of accounts has a single "meals" account, 2026 is the year to split it. A simple structure is: client and travel meals (50%), employee parties and events (100%), meals sold or reported as wages (100%), and on-premises staff meals and snacks (0% unless an exception applies).
Consider wage treatment. Meals included in an employee's taxable wages remain deductible in full. That shifts tax to the employee, so it is a decision to make deliberately, not by default.
Check the California return separately. California's conformity to Section 274 has historically differed from federal law, and its current conformity date is January 1, 2025, without the One Big Beautiful Bill Act, according to the FTB. Your California meal deduction may not match your federal deduction, so the adjustment should be reviewed on each return.
For the rest of the year-end list, see our 2026 year-end tax planning checklist.
Key Takeaways
- Starting with amounts paid after December 31, 2025, employer eating facilities and convenience-of-employer meals are not deductible federally.
- Businesses that sell food to customers, such as restaurants and caterers, keep a deduction for staff meals under the Section 274(e)(8) exception.
- Client and travel meals stay at 50%, and employee parties and meals reported as wages stay at 100%.
- Split your meals accounts now and review the California treatment separately.
If you want your meals accounts reorganized for 2026 or your restaurant's staff meal policy reviewed, schedule a consultation with SMB CPA Group, or contact us with your questions.
Disclaimer: The information presented on this website or any SMB CPA Group, PC online platform is for general information and illustrative purposes only. It should not be considered tax, legal, financial, or other professional advice, and it is not a substitute for advice from a licensed professional who knows your circumstances.
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SMB CPA Group