New IRS Guidance on Meals Qualifying for Temporary 100% Expense Deduction

The Internal Revenue Service has released guidance on the new 100% tax deduction for food or beverages bought by businesses from a restaurant (Notice 2021-25; 4/8/21). In an effort to help restaurants struggling to stay afloat in the Covid-19 pandemic, the Consolidated Appropriations Act (CAA) officially authorizes a 100% deduction for food or beverages provided by a restaurant.

Normally, a business can deduct 50% of the cost of its qualified business meals, provided the expenses are properly substantiated. The CAA provision has increased the limit to 100%, allowing for full deductions of food or beverages provided by a restaurant for the next two years, between January 1, 2021 – December 31, 2022.

What Qualifies as a Restaurant? Does it Apply to Dine-In and Take-out?

The notice defines a restaurant as a business that prepares and sells food or beverages to retail customers for immediate consumption, whether or not for on-premise or off-premise consumption.

It is important to note, however, that the IRS says restaurants do not include businesses that primarily sell pre-packaged goods that are not for immediate consumption. This includes the following:

  1. Grocery stores and convenience stores
  2. Specialty food stores
  3. Beer, wine or liquor stores
  4. Drug stores
  5. Newsstands
  6. Vending machines or kiosks
Also prohibited is an 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. Additionally, an employer can’t treat certain employer-operated eating facilities as a restaurant, even if a third party under contract operates the facility with the employer.

As always, our team of tax specialists are available to provide additional information and assistance as you consider how this change may impact your business. We look forward to the continued opportunity to work together in the fluid world of tax regulation.

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