Business Meals: New Temporary Tax Guidance Helps Restaurants and Companies via 100% Deduction
The restaurant industry continues its struggle to recover from the impacts of COVID-19, and a new act provides temporary relief related to business meal deductions. The new measure intends to incentivize companies to conduct more business at restaurants while avoiding unfavorable related tax treatment.
As businesses continue to emerge from a long period of economic uncertainty, many companies can benefit from temporary tax benefits by taking advantage of the Consolidated Appropriations Act, 2021 (the act), which temporarily (during 2021 and 2022) increased the deduction from 50% to 100% for business meal expenses provided by a restaurant. The act was signed on Dec. 27, 2020, and the Internal Revenue Service (IRS) recently issued guidance on April 8, 2021, regarding the treatment of the temporary increase.
Here are the key tax considerations that companies should be aware of in order to fully maximize the benefit.
Examples of businesses that the IRS does not consider to be a restaurant include grocery stores, specialty food stores, liquor stores, drug stores, convenience stores, newsstands, vending machines, or kiosks.
Background: qualifying meal expenses versus entertainment
Prior to the act, business meal expenses were generally allowed to be deducted at 50% if:
- the expense is not lavish or extravagant; and
- the taxpayer or employee are present when the food or beverages are furnished.
IRC $274 provides additional rules that might apply to the deduction of food or beverage expenses, depending on the circumstances.
It is important to note that entertainment expenses paid or incurred after 2017 remain fully non-deductible for tax purposes. Entertainment consists of any activity generally considered to provide entertainment, amusement, or recreation. Some examples include entertaining guests at nightclubs, theaters, sporting events, or on yachts, or on trips for hunting, fishing, or vacation purposes.
Current guidance and definition of a restaurant
The temporary deduction was passed in December of 2020, but the IRS has recently issued guidance on how it plans to interpret the temporary 100% deduction for business meals provided by a restaurant.
The same rules listed above for a business meal expense to be deductible still apply, but the main takeaway is how the IRS defines a restaurant. According to the guidance, a restaurant is a business that prepares and sells food or beverages to retail customers for immediate consumption. Note, for the 100% deduction to apply, food and beverages do not need to be consumed on the premises.
Examples of businesses that the IRS does not consider to be a restaurant include grocery stores, specialty food stores, liquor stores, drug stores, convenience stores, newsstands, vending machines, or kiosks.
During 2021 and 2022, the act is beneficial for qualified expenses of business meals consumed at locations deemed to be restaurants. The act provides a mutual incentive that should bolster the restaurant industry and provide tax advantages related to companies’ business meal expenses.
