The intention of this temporary broadening of the deduction is very clearly aimed to assist the restaurant industry, which has been significantly interrupted by COVID-19.
You may, in the conduct of your trade or business, incur business meal expenses. With restaurants and other hospitality industry venues beginning to reopen as we emerge from the pandemic, the recent IRS notice regarding deductibility of business meal expenses may be of particular interest to you. On April 8, the IRS released Notice 2021-25, which contains guidance for taxpayers in determining which meals may be fully deductible under the new rules and which are still subject to the 50 percent limitation.
Under long-standing IRS rules, the deduction for food or beverage expenses is generally limited to 50 percent of the amount that would otherwise be allowable, provided the meals do not meet certain exceptions. For example, in order to be deductible as a business meal, the food must not be lavish or extravagant under the circumstances or the taxpayer (or an employee of the taxpayer) must be present at the furnishing of such food or beverages.
The Tax Cuts and Jobs Act of 2017 amended these rules, but the 50 percent limitation rules for business meals remained largely intact. With the passing of the Consolidated Appropriations Act of 2021 (which we wrote about in a prior Alert) in December 2020, Congress saw fit to expand the deduction of business meals to 100 percent, granted certain conditions are met. The primary condition is that the food or beverages for the meal be provided by a restaurant. In addition, the expanded deduction is only allowable for amounts paid or incurred during the calendar years 2021 and 2022 (the provision lapses on January 1, 2023).
The intention of this temporary broadening of the deduction is very clearly aimed to assist the restaurant industry, which has been significantly interrupted by COVID-19. However, in the wake of the act’s passing, some taxpayers and tax practitioners began to question what the IRS’s definition of a “restaurant” is, as it had not previously been defined in the IRS Code. Thus, the IRS issued Notice 2021-25 to provide clarification as to when the temporary 100 percent deduction may be applied.
Per the notice, the term “restaurant” is defined as “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’ premises” (emphasis added). Conversely, stores that sell prepackaged food that is not intended for immediate consumption are still subject to the 50 percent limitation. A few examples of businesses that do not meet the definition of a restaurant:
- Grocery store
- Specialty food store
- Liquor store
- Convenience store
- Vending machine
The notice also clarified whether certain employer-provided meals would qualify as restaurants under the regulations, indicating that the following will not be treated as restaurants, and for which the temporary 100 percent deduction will not be available:
- “Any eating facility located on the employer’s business premises and used in furnishing meals excluded from an employee’s gross income under Sec. 119”; or
- “Any employer-operated eating facility treated as a de minimis fringe under Sec. 132(e)(2), even if that eating facility is operated by a third party under Regs. Sec. 1.132-7(a)(3).”
Taxpayers participating in business meals should review these rules so as to maximize available deductions. Operating in the current economic and pandemic environment continues to be challenging. As a result, continued hesitancy to consume meals in restaurants due to ongoing concerns with COVID-19 is not surprising. However, remember that as long as the establishment meets the definition of a restaurant, the meal need not be consumed on-premises in order to take advantage of the temporary 100 percent meals deduction.
For More Information
If you would like more information about this topic or your own unique situation, please contact Sean R. Schoppy, Steven M. Packer or any of the practitioners in the Tax Accounting Group. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.