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.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Alerts and Webinars
InsightQ&A: How restaurants can navigate pandemic-related challengesNavigating the effects of the pandemic on restaurants is challenging. This Q&A offers some advice. Learn more.
InsightFinal tip credit rules: What hospitality businesses should know about credits for tipped vs. non-tipped servicesWhen can an employer take a tip credit for employees whose services are both directly tip-producing and supporting that work? Read our overview and examples.
InsightAccounting for non-public franchisors’ pre-opening services: An overviewCindy McLoughlin, Monica PebordeASU 2021-02 is intended to simplify certain aspects of identifying performance obligation in revenue recognition, but other aspects of Topic 606 still apply.
InsightPrepare to apply quickly for New York’s Restaurant Return-to-Work Tax Credit programYelena Belaks, Stan SolomonRead which businesses are eligible, how and when to apply, and other key information for New York businesses impacted by COVID-19.