What You Can (and Can’t) Deduct in 2026

Charitable Contributions, Meals, Entertainment, Advertising, and Sponsorships: Understanding the 2026 Tax Deduction Rules

Business owners frequently incur expenses that support their communities, promote their businesses, or strengthen relationships with customers and employees. While these expenditures may appear similar from a practical standpoint, the Internal Revenue Code treats charitable contributions, advertising, sponsorships, meals, and entertainment very differently. Choosing the wrong tax treatment can result in lost deductions or increased scrutiny on examination.

Beginning with tax years starting in 2026, Congress made significant changes to the deductibility of charitable contributions through the One Big Beautiful Bill Act (OBBBA). The new law introduced minimum deduction thresholds for both corporations and individuals, making it more important than ever for taxpayers to distinguish between deductible advertising expenses and charitable contributions subject to the limitations of Internal Revenue Code (IRC) Section 170.

Charitable Contributions: What’s New for 2026?

A charitable contribution is generally a voluntary transfer of money or property to a qualified charitable organization without receiving substantial value in return. These contributions are deductible under IRC Section 170 rather than as ordinary and necessary business expenses under IRC Section 162. Because they are governed by a separate section of the tax law, charitable contributions are subject to specific limitations that do not apply to ordinary business expenses.

Prior to 2026, C corporations generally could deduct charitable contributions of up to 10 percent of taxable income, with excess contributions carried forward for up to five years. There was no minimum contribution required before a deduction became available.

Beginning in 2026, however, C corporations must satisfy both a minimum threshold and a maximum limitation. Under the new rules, charitable contributions are deductible only to the extent they exceed 1 percent of taxable income and do not exceed 10 percent of taxable income. In effect, Congress created both a floor and a ceiling for corporate charitable deductions.

For example, assume a corporation has taxable income of $1,000,000 and makes charitable contributions totaling $8,000. Because one percent of taxable income is $10,000, none of the contribution is currently deductible. If the corporation instead contributes $50,000, only the amount exceeding the $10,000 floor is deductible. Accordingly, the corporation may deduct $40,000, which remains below the 10 percent maximum limitation. If charitable contributions exceed the 10 percent limitation, the excess generally remains subject to the existing carryforward rules.

The addition of the 1 percent floor represents a meaningful change from prior law and may influence how corporations structure their charitable giving. Rather than making relatively small annual donations that fail to exceed the threshold, some corporations may consider bunching several years of contributions into a single tax year to maximize the available deduction.

Individuals who itemize deductions also face new limitations beginning in 2026. Prior law generally allowed itemized charitable deductions subject only to the applicable adjusted gross income (AGI) percentage limitations. Under the new rules, itemizing taxpayers receive a charitable deduction only to the extent their total qualifying contributions exceed 0.5 percent of AGI.

For example, an individual with adjusted gross income of $300,000 must first exceed a threshold of $1,500 before receiving any charitable deduction. If the taxpayer contributes $8,000 during the year, only $6,500 is deductible. The first $1,500 effectively produces no tax benefit. Existing percentage limitations, such as the 60 percent AGI limitation applicable to many cash contributions to public charities, continue to apply after the new floor has been met.

The legislation also restores a limited above-the-line deduction for certain cash contributions by taxpayers who do not itemize, although the deduction is subject to statutory dollar limitations. In addition, taxpayers in the highest income tax bracket generally receive a maximum tax benefit equal to a 35 percent deduction rate for charitable contributions, even though the top marginal income tax rate remains higher.

Advertising Expenses Remain Fully Deductible

Unlike charitable contributions, advertising expenses continue to be governed by IRC Section 162 as ordinary and necessary business expenses. When advertising is intended to promote a business, attract customers, increase revenue, or maintain the company’s market presence, the expense is generally fully deductible in the year it is incurred.

Traditional forms of advertising, such as newspaper advertisements, radio commercials, online marketing, social media campaigns, billboards, and promotional materials, continue to qualify for a full deduction. These expenses are not subject to the charitable contribution limitations, the new 1 percent corporate floor, or the individual AGI threshold.

The distinction is particularly important because two payments of identical dollar amounts made to the same nonprofit organization may receive completely different tax treatment depending upon the benefits received by the business.

Sponsorships: When Are They Advertising Rather Than Charitable Contributions?

One of the most frequently misunderstood areas of tax law involves sponsorship payments made to nonprofit organizations. Businesses often sponsor charitable events, youth athletic leagues, school fundraisers, festivals, and community organizations. Whether those payments are fully deductible depends on the substance of the arrangement rather than the label assigned to the payment.

If the business receives substantial promotional or advertising benefits in exchange for its payment, the sponsorship is generally deductible as an advertising expense under IRC Section 162. Common examples include displaying the company’s logo on event signage, advertising in event programs, recognition on the organization’s website with a hyperlink to the business, booth space at the event, promotional announcements, naming rights, or other marketing opportunities intended to generate business.

The IRS has long recognized that expenditures made with a reasonable expectation of financial return through increased publicity, customer goodwill, or enhanced brand recognition may qualify as ordinary and necessary business expenses rather than charitable contributions. The key consideration is whether the primary purpose of the payment is to promote the taxpayer’s business.

Conversely, if the organization merely acknowledges the donor without providing meaningful advertising or promotional benefits, the payment is generally treated as a charitable contribution. Simply listing a company’s name among donors, without promotional language or advertising value, typically does not transform the contribution into a deductible advertising expense.

In some cases, a sponsorship agreement provides both advertising benefits and charitable elements. When this occurs, the payment may need to be allocated between the fair market value of the advertising received and the charitable contribution portion. Careful documentation becomes essential to support the allocation.

Businesses should maintain written sponsorship agreements, invoices, event programs, photographs of signage, website screenshots, and other evidence demonstrating the advertising benefits received. Documentation showing that the sponsorship was undertaken as part of the company’s marketing strategy can further support treatment as a fully deductible business expense.

Meals Continue to Receive Limited Deductibility

The rules governing business meals remain largely unchanged for 2026. Meals that are ordinary and necessary business expenses are generally deductible at 50 percent, provided the taxpayer or an employee is present and the meal has a legitimate business purpose. Common examples include meals with clients, prospective customers, or business associates, as well as meals incurred while traveling for business.

Taxpayers should continue to maintain adequate records documenting the amount of the expense, the date and location of the meal, the individuals in attendance, and the business purpose discussed.

Entertainment Expenses Remain Nondeductible

The treatment of entertainment expenses also remains unchanged. Expenses incurred for entertainment activities such as sporting events, concerts, theater performances, golf outings, or similar recreational activities generally are not deductible, even if business is discussed during the event.

An important exception continues to apply when food and beverages are purchased separately from entertainment and separately stated on the invoice. In those circumstances, the meal portion may qualify for the applicable meal deduction rules even though the entertainment itself remains nondeductible.

Conclusion

The charitable deduction changes effective in 2026 represent one of the most significant modifications to charitable giving in recent years. By introducing a 1 percent taxable income floor for C corporations and a 0.5 percent AGI floor for individuals who itemize deductions, Congress has narrowed the circumstances under which charitable gifts generate immediate tax benefits.

These changes make it increasingly important for businesses to distinguish charitable contributions from advertising expenditures. Properly structured sponsorship arrangements that provide genuine promotional benefits may qualify as fully deductible advertising expenses, while donations made without a substantial return benefit remain subject to the charitable contribution limitations under IRC Section 170.

As businesses review their marketing budgets and charitable giving programs, careful planning and thorough documentation will be essential. Evaluating sponsorship agreements before they are executed, documenting the advertising value received, and understanding the new deduction limitations can help taxpayers maximize available deductions while remaining compliant with federal tax law.