The IRS released guidance on Thursday explaining when the temporary 100% deduction for restaurant meals is available and when the 50% limitation on the deduction for food and beverages continues to apply for Sec. 274 purposes (Notice 2021-25).
Under Sec. 274(n)(1), a deduction for any expense for food or beverages is generally limited to 50% of the amount that would otherwise be deductible. However, the Consolidated Appropriations Act, 2021, P.L. 116-260, enacted a temporary exception to the limitation for amounts paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023, for food or beverages provided by a restaurant (Sec. 274(n)(2)(D)). This temporary 100% deduction was designed to help restaurants, many of which have been hard-hit by the COVID-19 pandemic.
To provide certainty to taxpayers, the IRS guidance explains when the temporary 100% deduction applies and when the 50% limitation continues to apply.
Under the notice, 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. A restaurant does not include a business that primarily sells prepackaged food or beverages not for immediate consumption, including a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk. The 50% limitation 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 those types of businesses (unless another exception in Sec. 274(n)(2) applies).
The notice explained that an employer may not treat as a restaurant for Sec. 274(n)(2)(D) purposes:
Any eating facility located on the employer’s business premises and used in furnishing meals excluded from an employee’s gross income under Sec. 119; or
Any employer-operated eating facility treated as a de minimis fringe under Sec. 132(e)(2), even if that eating facility is operated by a third party under Regs. Sec. 1.132-7(a)(3).
The notice is effective for amounts paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023.