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This past Thursday, the IRS released Notice 2021-25 that provides guidance on the temporary 100% deduction for expenses that are paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant.

Temporary 100% Meal Deduction

The Consolidated Appropriations Act, 2021, P.L. 116-260, provided a temporary 100% deduction which was intended to help restaurants that have been hurt by the COVID-19 pandemic. But under Sec. 274(n)(1), a deduction for any expense for food or beverages is generally limited to 50% of the amount that would otherwise be deductible. As a result, the IRS released this notice to provide more clarity to taxpayers to explain when the temporary 100% deduction applies and when the 50% limitation continues to apply.

Clarifications under Notice 2021-25:

  • The new notice defines the term “restaurant” as 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.
  • A restaurant does not include a business that primarily sells prepackaged food or beverages not for immediate consumption, including a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk.
  • The 50% limitation of § 274(n)(1) continues to apply to the amount of any deduction otherwise allowable to the taxpayer under chapter 1 for any expense paid or incurred for food or beverages acquired from such a business (unless another exception in § 274(n)(2) applies to such expense).

An employer may not treat a “restaurant” for Sec. 274(n)(2)(D) purposes as:

  1. Any eating facility located on the employer’s business premises and used in furnishing meals excluded from an employee’s gross income under Sec. 119; or
  2. Any employer-operated eating facility treated as a de minimis fringe under Sec. 132(e)(2), even if that eating facility is operated by a third party under Regs. Sec. 1.132-7(a)(3).
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