Authored by Ryan Rhodes | Tax Services
Since March of 2020, we have seen various taxpayer-friendly legislation that has relaxed preexisting IRS rules and/or allowed for more robust deductions for tax purposes.
One notable benefit for businesses, specifically restaurants, was the temporary change to the deductibility of certain meals (as per the Taxpayer Certainty and Disaster Relief Act of 2020, and further explained in IRS Notice 2021-25). Effective December 31, 2020, and applicable through January 1, 2023, businesses are now permitted to deduct 100% of their meals (up from 50%) that meet certain criteria set out by the IRS in section 274.
The temporary legislation is intended to support the restaurant industry; and as businesses return to a “new normal” in terms of in-person meetings, in-office work, etc., this new rule will become even more valuable.
SC&H’s Key Takeaways
SC&H’s Key Takeaways
Meal Deductible Criteria Specifics
The new criteria for the temporary 100% deduction require that meals must be purchased from a qualifying restaurant, broadly defined under the Notice 2021-25 as, “any business that prepares and serves food or beverages that are meant for immediate consumption at the time of purchase.” This requirement stands regardless of whether the food or drink is meant to be consumed on the restaurant’s premises. The stipulation would include meals such as takeout and delivery, provided the restaurant meets the requirements. For instance, taking an employee out to the local food truck to grab lunch would be considered 100% deductible since this food is made and prepared at the truck and is ready to consume immediately after purchase.
A qualified restaurant does not include any business that primarily sells food and beverages not made for immediate consumption such as pre-packaged food or beverages. This would include businesses under the following categories:
- Grocery stores, drug stores, or convenience stores
- Beer, wine, or liquor stores
- Vending machines, kiosks, or newsstands
For instance, an employee purchase of chips and soda from the airport kiosk while waiting for their flight would be excluded from the new criteria for the fully deductible rules. Since the kiosk primarily sells pre-packaged food, this would only qualify for the 50% meals deductibility. However, if the employee purchased food from an airport restaurant that prepared their food/beverages for immediate consumption, this would qualify as a 100% deductible expense.
The 50% deductibility rule still applies to all food/beverages purchased from businesses listed above unless the expenses meet the exemption requirements under section 274(n)(2).
The temporary 100% deductibility does not apply to any eating facility located on the employer premises if these facilities meet either of the two restrictions:
- The facility is used to provide meals for employees excluded from gross income
- The employer-operated eating facility is treated as a de minimis fringe benefit to employees
These employer restaurants are still excluded from the 100% deductibility even if the employer hires a third-party contractor to operate the facility.
Recommendations For Effective Documentation
To maximize these tax deductions and ease bookkeeping, we recommend creating separate general ledger accounts to track 50% and 100% deductible meal expenses independently. This will allow a business to keep contemporaneous records and avoid extra effort in the future. A prudent business should also consider adjusting their expense reporting and communicate these changes to employees to maximize this temporary deduction.