Last week, the IRS issued Notice 2021-25 clarifying a provision in the Consolidated Appropriations Act that allows a 100% tax deduction of business-related food and beverage expenses provided by a restaurant in 2021 and 2022. Before this change, deductions for business meals were limited to 50% of the cost.
Notice 2021-25 defines the term “restaurant” as “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’ premises.” Hence, the definition applies to dining inside a restaurant as well as to take-out and delivery services.
Food and beverages are defined as all food and beverage items from restaurants, regardless of whether they are characterized as meals or snacks.
Further, the temporary 100% business meal deduction includes any related sales tax, delivery fees, and tips.
Businesses that primarily sell prepackaged food and beverages not intended for immediate consumption are not considered a restaurant and therefore do not qualify for the 100% meals deduction. This includes the following establishments:
Additionally, the IRS has specified the 100% meals deduction does not apply to meals provided to employees from on-site, third-party, or employer-operated eating facilities.
A 50% deduction continues to apply to any expense paid or incurred for food or beverages acquired from these types of businesses.
Other rules originally included in Section 274 amended by the 2017 Tax Cuts and Jobs Act still apply. For example, no deduction is allowed for business meals unless:
1) The expense is not lavish or extravagant under the circumstances;
2) The taxpayer or an employee of the taxpayer is present at the furnishing of the food and beverages; and
3) The food and beverages are provided to the taxpayer or a business associate.
A business associate is defined as a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”
While Section 274 generally limits or disallows deductions for entertainment, amusement, or recreation expenses, food and beverages consumed in conjunction with entertainment are eligible for deduction if (1) the food or beverages are separately purchased from the entertainment activity or (2) the cost of the food or beverages is separately stated from the cost of the entertainment in an invoice, bill, or receipt.
It is important to acquire detailed receipts from entertainment venues as business taxpayers must separate deductible meal expenses from nondeductible entertainment expenses.
Business owners need to ensure their recordkeeping systems and accounting processes capture the information needed to apply the 100% deduction for business meal expenses.
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