IRS Notice 2021-25: Temporary 100% Deduction for Business Meal Expenses
- Apr 13, 2021
The IRS has issued Notice 2021-25 which provides guidance on the 100% deductibility for food or beverages provided by a “restaurant.” The 100% deduction is temporary in that it only applies to expenses that are paid or incurred after December 31, 2020 and before January 1, 2023.
The Consolidated Appropriations Act of 2021 (the “Act”) provides a temporary exception to the limitation on the deduction for meals which under IRC Sec. 274(n)(1) would normally be subject to a 50% reduction. The temporary exception under the Act is intended to provide relief for the restaurant industry which has been hit hard during the pandemic. The Notice provides guidance as to what a restaurant is for purposes of the 100% deduction. The meals provided by a restaurant must still meet the requirement that they not be lavish or extravagant and that the taxpayer or an employee of the taxpayer be present at the time the meals are being furnished.
According to Notice 2021-25, a restaurant is defined as a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless as to whether they are actually consumed on the business premises. Take-out meals from a restaurant are qualified restaurant meals. However, a restaurant does not include a business that sells pre-packaged food or beverage, not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; vending machine or kiosk.
In addition, the Notice provides that an employer-provided eating facility located on the employer’s business premises for use in furnishing meals which are excluded from an employee’s gross income as a convenience to the employer (IRC Sec. 119) is not considered a restaurant. Similarly disqualified as a restaurant is an employer-operated eating facility which is treated as a de minimis fringe benefit (under IRC Sec. 132(e)(2)) even if the eating facility is operated by a third party under a contract with the employer. In order for an employer-operated eating facility to be considered a de minimis fringe benefit, the facility must be on or near the business premise of the employer and the revenue derived from the eating facility must normally equal or exceed the direct operating costs of the facility.
To maximize deductions, businesses should consider setting up a new general ledger code and expense reimbursement code for qualified restaurant meals.
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Carolyn Dolci, CPA is a Tax Partner providing tax planning, compliance and advisory services with experience in corporate income tax, consolidated filings, partnerships, multi-state and local taxes and trusts.
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