To assist the hospitality industry in its recovery from pandemic-related shutdowns, the December Consolidated Appropriations Act authorized a temporary 100% tax deduction for business meal expenses provided generally by restaurants that would have otherwise been limited to 50%. The IRS has now provided guidance on the newly enacted 100% deduction, in Notice 2021-25, issued April 8.
The 2017 Tax Cuts and Jobs Act (TCJA) changed Internal Revenue Code (IRC) Section 274 to disallow any deduction for entertainment-related expenses that are otherwise fully deductible expenses incurred in the ordinary course of business. (Such expenses were previously generally allowed a 50% deduction.) Later regulations clarified how the rules apply to business-related food and beverage expenses: The entertainment disallowance applies only to food or beverages provided during or at a defined “entertainment activity,” unless they are purchased separately from the entertainment activity, or their costs are stated separately from the cost of the entertainment in an invoice, bill, or receipt. Non-entertainment business meals could still be deducted at 50%, provided other conditions were met.
With Notice 2021-25, businesses can now claim a 100% business meal deduction on “food or beverages provided by a restaurant” through the end of 2022. This enhanced deduction, meant to bolster the hospitality industry’s recovery, is for the period beginning Jan. 1, 2021, and ending Dec. 31, 2022.
Note that the 100% deduction applies only to food and beverage purchases from take-out and dine-in restaurants; purchases of pre-packaged food, groceries, or beverages “not for immediate consumption” will not qualify. This would include purchases from grocery stores, specialty food stores, liquor stores, drug stores, convenience stores, newsstands, vending machines, or kiosks.
The Notice also excludes from the definition of “restaurant” any eating facility located on the employer’s business premises and used in furnishing meals excluded from an employee’s gross income under IRC Section 119, and any employer-operated eating facilities, even if operated by a third party under contract with the employer.
What does CohnReznick think?The enhanced deduction for business meals is a meaningful incentive for businesses to spend more on an industry severely impacted by the COVID-19 pandemic. Given the 100% deduction for qualified restaurant expenses, taxpayers must continue distinguishing between business meals and entertainment. The regulations still disallow deductions for entertainment expenses, including amounts paid for clubs and organizations. The regulations are also clear that entertainment does not include expenses for food and beverage if these expenses are separately purchased and separately stated on invoices or receipts.
Subject matter expertise
CPA, CGMA, Partner
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