The Consolidated Appropriations Act, 2021, increased the business-meal deduction for the cost of food and beverages provided by a restaurant from 50 percent to 100 percent in 2021 and 2022, if certain conditions are met. The IRS on April 8 issued Notice 2021-25 to provide guidance on the higher limit for deducting business meals.
The notice explains when the temporary 100 percent deduction applies and when the standard 50 percent limit continues to apply for purposes of Section 274 of the Internal Revenue Code. The notice “provides important details that should be applied when determining whether an expense qualifies for the larger deduction amount,” wrote Alexis Nash, a partner at accounting and tax advisory firm Wilson Lewis in Atlanta.
“As a refresher, starting on Jan. 1, 2021, through Dec. 31, 2022, a business may claim 100 percent of food or beverage expenses paid to restaurants, assuming the business owner (or employee) is present when provided and the expense is not lavish or extravagant under the circumstances,” Nash explained. “For all other entertainment and business-meal expenses, the 50 percent meal deduction would still apply.”
Restaurant Meals Only
“The notice clarifies that the 100 percent deduction is available for food or beverages provided by a restaurant,” wrote Kathleen King, managing director at professional services firm Alvarez & Marsal in Washington, D.C. “A restaurant does not include businesses that primarily sell pre-packaged food or beverages not for immediate consumption. The notice specifically calls out grocery stores, specialty food stores, liquor stores, convenience stores, vending machines and kiosks as examples of businesses likely to primarily sell pre-packaged items.”
The 50 percent deductibility limit under Section 274(n)(1) “will continue to apply to the amount of any expense paid or incurred for food or beverages acquired from such a business, unless other exceptions apply,” King explained.
Onsite Eating Facilities
According to Nash, “the guidance also clarifies any eating facility located on the business premises for the purpose of furnishing employee meals (excluded from employee gross income), or an employer-operated eating facility, even if operated by a third party under contract with the employer, is not a qualifying restaurant for purposes of the expanded meal deduction.
King pointed out, “This includes not only employer- or contract-operated facilities (such as cafeterias), but other food that may be prepared on the premises.”
The IRS failed to address several issues perplexing employers, King wrote in her evaluation of the guidance. For example, “how will a consumer determine if a business ‘primarily’ serves pre-packaged food? In addition to not knowing what the standard is for ‘primarily’ nor what constitutes pre-packaged food (e.g., does it include food provided in a grab-and-go model?), consumers will need to know the level of activity of a business for which they frequent.”
Further, because the term “restaurant” appears to be limited to businesses that sell items to a retail customer, “questions may arise whether a caterer or similar food preparers are selling to a retail customer,” King said. “Because these changes are temporary, many businesses hoping to claim the greater deduction may need to develop short-term solutions to enable this analysis.”