Temporary 100% Deduction for Meal Costs Explained
Beginning January 1, 2021, through December 31, 2022, businesses may claim an income tax deduction for 100% of the food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided, and the expense is not lavish or extravagant under the circumstances. In addition, the portion of per diem rates paid to employees that cover meal expenses may be deducted as restaurant meals.
In order to assist the hospitality and restaurant industry recovering from the COVID-19 pandemic, the Taxpayer Certainty and Disaster Relief Act of 2020 (“Act”) temporarily increased the amount of income tax deduction allowed for food and beverage expense. The Act provides a temporary exception to the general rule limiting deductions to 50% of qualified meal and beverage costs. The Act increased the deduction to 100% for restaurant meals. The increase in allowed deduction applies to meals expense incurred in 2021 and 2022. The IRS issued two Notices to help businesses claim their deductions.
Notice 2021-25 provides guidance to businesses to determine which meals qualify as “restaurant meals.” The term “restaurant” for this purpose 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.
The term 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.
Notice 2021-63 provides guidance for employers on how the temporary 100% business deduction for food or beverages from restaurants applies to taxpayers using per diem rates to reimburse employees for travel expenses. The notice sets forth a special rule to allow the taxpayer to treat the full meal portion of a per diem rate or allowance as being attributable to food or beverages from a restaurant beginning January 1, 2021, through December 31, 2022.
Rev. Proc. 2019-48 provides rules for taxpayers that choose to use a per diem rate to substantiate, under Sec. 274(d) and Sec. 1.274-5, the amount of ordinary and necessary business expenses paid or incurred while traveling away from home for: a) lodging, meal, and incidental expenses; b) meals and incidental expenses only; or c) incidental expenses only. Section 6.05 of Revenue Procedure 2019-48 can be used to determine the meal portion of a per diem rate or allowance paid or incurred. This meal portion can be deducted in full as restaurant meals expense under Notice 2021-63.
Food and beverage expenses that do not satisfy the 100% deduction limit for restaurant meals may still qualify for the 50% deduction limit. Meal expenses that cannot be separated from entertainment expenses are considered entertainment and no deduction is allowed for these costs under Section 274.
For questions about qualifying restaurant meals and per diem expenses, please contact Deborah Walker or your Cherry Bekaert tax advisor.