On 8 April 2021, the IRS released Notice 2021-25, providing taxpayers guidance regarding the temporary 100% deduction for restaurant meal expenses paid or incurred between 31 December 2020 and 1 January 2023.
As a refresher, the Tax Cuts and Jobs Act (TCJA) expanded the types of entertainment expenses that are 100% nondeductible and reduced the number of exceptions to the section 274(n) 50% deduction disallowance for meal expenses. Specifically, the exception to the 50% deduction disallowance for de minimis food and beverages (such as coffee and snacks) provided by an employer was done away with so that those types of expenses are only 50% deductible starting in 2018. The final regulations (at Treas. Reg. §§ 1.274-11 and -12) interpreting the TCJA provisions indicate that entertainment expenses subject to 100% deduction disallowance are distinct from and generally do not include food or beverage expenses (which are subject, instead, to a 50% deduction disallowance) unless those food or beverages are provided at or during an entertainment activity. However, even food or beverage provided at an entertainment event can be deductible, subject to the 50% limitation, if the expenses are separately stated on the invoice for the entertainment or purchased separately from the entertainment. In other words, food and beverages expenses generally are not treated as 100% non-deductible entertainment, but rather generally are 50% deductible.
The regulations also explain that food or beverages are 50% deductible only when: 1) the expense is not lavish or extravagant; 2) the food or beverages are provided under circumstances in which the taxpayer or an employee of the taxpayer is present; and 3) the food or beverages are provided to the taxpayer or a business associate.
After the TCJA, only a few exceptions to the 50% deduction disallowance remained in place. For example, an exception for meals treated as compensation to an employee or contractor remained, so that the costs of such meals would be fully deductible as compensation. An exception to deduction disallowance for meals also was retained for employee-wide recreational events, such as a company picnic or holiday party, and for meals sold to the public. The 50% deduction disallowance and the exceptions to that deduction disallowance, applied regardless of whether the meals and beverages were provided by a restaurant or some other means. As part of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, in an apparent attempt to assist the restaurants adversely impacted by the COVID-19 pandemic by encouraging the purchase of tax deductible restaurant meals, Congress allowed a temporary 100% deduction for the costs of food or beverages provided by a restaurant. This was accomplished with the addition of section 274(n)(2)(D), which provides a temporary exception to the 50% limitation for expenses for food or beverages provided by a restaurant. Businesses can take a tax deduction for 100% of their costs for food or beverages provided by a restaurant that are paid or incurred beginning 1 January 2021, through December 31 December 2022. Notice 2021-25 clarifies when the temporary 100% deduction applies and when the 50% limitation in section 274(n) applies.
First, as with all other meal expenses, the 100% deductible restaurant food and beverage expense cannot be lavish or extravagant and the taxpayer, or an employee of the taxpayer, must be present when the meal or beverage is furnished. The big issue under new section 274(n)(2)(D) is what qualifies as a restaurant. The notice describes restaurants as “a business that prepares and sells foods or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” This means that restaurant food delivered to an employer’s or employee’s location should qualify for the full deduction. By contrast, businesses ─ such as grocery stores, drug stores, and convenience stores ─ that primarily sell pre-packaged food and beverages that is not for immediate consumption do not qualify for the 100% deduction. According to Notice 2021-25, employer eating facilities that qualify under section 119 or section 132 may not be treated as restaurants for purposes of section 274(n)(2)(D). The notice leaves open whether meals provided by a caterer qualify as restaurant meals and, under the notice, this would appear to depend on the extent to which the caterer also sells food to customers for immediate consumption on the premises.