IRS Provides Guidance on Temporary 100-Percent Deduction for Business Meal Expenses

(Parker Tax Publishing April 2021)

The IRS issued a notice providing guidance on the temporary 100-percent deduction for expenses that are paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant. The IRS explains when the temporary 100-percent deduction applies and when the usual 50-percent limitation applies for purposes of Code Sec. 274, as amended by Section 210 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which was enacted on December 27, 2020, as part of the Consolidated Appropriations Act, 2021. Notice 2021-25.

Background

Code Sec. 274 generally limits or disallows deductions for certain meal and entertainment expenses. Code Sec. 274(a)(1) generally disallows deductions for expenses for entertainment, amusement, or recreation. Reg. Sec. 1.274-11 provides that the disallowance under Code Sec. 274(a)(1) does not apply to food or beverages provided at an entertainment activity if the food or beverages are separately purchased from the entertainment activity or the cost of the food or beverages is separately stated from the cost of the entertainment in an invoice, bill, or receipt.

Code Sec. 274(k) generally provides that no deduction is allowed for the expense of any food or beverage unless: (1) such expense is not lavish or extravagant under the circumstances; and (2) the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages. Code Sec. 274 provides additional rules that may apply to the deduction of food or beverage expenses, depending on the circumstances.

Code Sec. 274(n)(1) provides that a deduction for any expense for food or beverages generally is limited to 50 percent of the otherwise deductible amount. Code Sec. 274(n)(2) provides exceptions to the 50-percent limitation of deductions for food or beverage expenses. Section 210(a) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which was enacted on December 27, 2020, as part of the Consolidated Appropriations Act, 2021, added Code Sec. 274(n)(2)(D), which provides a temporary exception to the 50-percent limitation for expenses for food or beverages provided by a restaurant. Code Sec. 274(n)(2)(D) applies to amounts paid or incurred after December 31, 2020, and before January 1, 2023.

Notice 2021-25

To provide certainty to taxpayers in determining whether Code Sec. 274(n)(2)(D) applies, the IRS issued Notice 2021-25, which explains when the temporary 100-percent deduction applies and when the 50-percent limitation continues to apply.

Under Code Sec. 274(n)(2)(D), the 50-percent limitation of Code Sec. 274(n)(1) does not apply to the amount of any deduction otherwise allowable to a taxpayer for any expense paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant. In Notice 2021-25, the IRS stated that for this purpose, 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. According to the IRS, the 50-percent limitation of Code Sec. 274(n)(1) continues to apply to the amount of any deduction otherwise allowable to the taxpayer for any expense paid or incurred for food or beverages acquired from such a business (unless another exception in Code Sec. 274(n)(2) applies to such expense).

In addition, the IRS stated that an employer may not treat as a restaurant for purposes of Code Sec. 274(n)(2)(D), (1) any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee's gross income under Code Sec. 119, or (2) any employer-operated eating facility treated as a de minimis fringe under Code Sec. 132(e)(2), even if such eating facility is operated by a third party under contract with the employer as described in Reg. Sec. 1.132-7(a)(3).

For a discussion of the temporary 100-percent deduction for food or beverages provided by a restaurant, see Parker Tax ¶91,115.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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