New IRS Guidance Invites Businesses to Eat, Drink and be Merry...at Restaurants (kind of)
In an effort to benefit one of the industries hardest hit by the COVID-19 economic downturn—restaurants, as previously reported here— Congress passed an amendment to Section 274 of the Tax Code as part of the Consolidated Appropriations Act, 2021 (“CAA 2021”). Section 274 was previously amended by the Tax Cuts and Jobs Act of 2017 (“TCJA”) which repealed deductions for entertainment, amusement, and recreation even when these costs were directly related to the taxpayer’s business. The TCJA also limited the deduction for some food and beverage expenses to 50%. While you still can’t deduct golf outings, the CAA 2021 amendments to Section 274 lifts the 50% deduction limitation for food and beverage expenses incurred by businesses at restaurants for the tax years of 2021 and 2022.
IRS Notice 2021-25 makes it clear that certain limitations under Section 274(k) still apply to the deduction of meals. First, the expense for food and beverages cannot be lavish or extravagant under the circumstances. Second, the taxpayer (or an employee of the taxpayer) must be present at the furnishing of the food and beverages being deducted as business expenses.
Additionally, as noted above, the expense must be incurred at a restaurant. Deena Devereux of the Office of Associate Chief Counsel (Income Tax & Accounting) notes that “the term ‘restaurant’ means 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.”
“However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk.” Temporary 100-Percent Deduction for Business Meal Expenses, IRS Notice 2021-25 (https://www.irs.gov/pub/irs-drop/n-21-25.pdf). An employer also cannot deduct meals for employees from a facility located on its premises and used for the furnishing of meals that is excluded from the employees’ gross income, even if this facility is operated by a third party.
To be clear:
Entertainment expenses are still not deductible.
Company-wide holiday parties, food and drinks to the public, and food included as taxable compensation to employees are still 100% deductible.
The following business-related food and beverage expenses incurred at restaurants after December 31, 2020 and before January 1, 2023 are now 100% deductible:
Meals with clients that are not lavish;
Cost of meals for employees at a conference (beyond ticket price);
Employee meals while traveling;
Treating at least one-half of the employees to a meal;
Food for a board meeting; and
Dinners purchased for employees working late into the night.
We strive to keep our clients and the business community apprised of developments that might affect them but our taxation attorneys are not CPAs and we do not endeavor to give tax or tax filing advice. Contact your tax preparation professional for any guidance you may need regarding applicable deductions.