The IRS released guidance on April 8, 2021, explaining tax deductions for business meals. Specifically, when the temporary 100% meal deduction is available and when the 50% tax deduction limitation applies for Sec. 274 purposes (Notice 2021-25 ).
Under Sec. 274(n)(1), tax deduction for food or beverages is generally limited to 50% of the expense. COVID-19 temporarily changed all of that.
Under the Consolidated Appropriations Act 2021, there was a temporary exception to the limitation, allowing a 100% meal deduction for food or beverages provided by a restaurant. This exception was designed to help restaurants, which have been hard-hit by the pandemic. This applies for expenses paid or incurred between 12/31/2020 and 1/1/2023.
According to the IRS, “restaurant” 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 restaurant’s premises, or at the business’ location.
Not eligible for the 100% meal deduction are businesses that sell prepackaged food, not intended for immediate consumption. These include grocery stores, convenience stores, drug stores, liquor stores, etc. The 50% limitation continues to apply for these types of businesses.
For example, if an employer brings in lunch from a restaurant, it is 100% deductible. If they bring in cold cuts and bread from the grocery store to have available for employees in the company’s own lunchroom, café, etc., it’s only 50% deductible.
Please reach out to your HW advisor with any questions regarding this latest IRS guidance.