Good news for restaurants and business owners – temporary 100% deduction of restaurant meals! The IRS recently released guidance addressing when the temporary 100% deduction for restaurant meals is available and when the 50% limitation on the deduction for food and beverages continues to apply for IRC 274 purposes (Notice 2021-25).
IRC 274 provides a 50% limitation of deductions for food or beverage expenses. The Consolidated Appropriations Act, 2021, enacted a temporary 100% deduction for amounts paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant. A business may claim this deduction of food or beverage expense if this is offered by a restaurant and the business owner or employee of the business is present when the food or beverage is offered and the expense is not extravagant. The purpose of this temporary 100% deduction is to help restaurants since many have been devastated by the COVID-19 pandemic.
Under this recent 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’s premises. A restaurant does not include a business that primarily sells prepackaged food or beverages, not for immediate consumption. This applies to grocery stores; specialty food stores; beer, wine, or liquor stores; drug stores; convenience stores; newsstands; or vending machines or kiosks. The 50% limitation continues to apply to the amount of any deduction otherwise allowable to the taxpayer for any expense paid or incurred for food or beverages purchased from those types of businesses (unless another exception in IRC 274 applies).
The notice clarified that an employer may not treat as a restaurant for IRC 274 purposes:
- Any eating facility located on the employer’s business premises and used in catering meals excluded from an employee’s gross income under IRC 119; or
- Any employer-operated eating facility treated as a de minimis fringe under IRC 132, even if that eating facility is operated by a third party.
The notice is effective for amounts paid or incurred after December 31, 2020, and before January 1, 2023. Be certain to retain all of these restaurant receipts.
For more information about COVID-19 tax and business implications, visit this special section of our website.