IRS Issues Guidance Clarifying Temporary 100 Percent Expense Deduction for Meals

April 9, 2021

The IRS recently released Notice 2021-25 clarifying when the temporary 100 percent deduction for restaurant meals is available and when the 50 percent limitation on the deduction for food and beverages applies.

Under Sec. 274(n)(1), a deduction for any expense for food or beverages is generally limited to 50 percent of the amount that would otherwise be deductible. The Consolidated Appropriations Act, 2021, P.L. 116-260, enacted a temporary exception to the limitation for amounts paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023, for food or beverages provided by a restaurant (Sec. 274(n)(2)(D)) to help restaurants that have been affected by the COVID-19 pandemic.

The notice clarifies that the term “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 business’ premises. The notice states that a business that primarily sells prepackaged food or beverages not for immediate consumption is not considered a restaurant. This includes grocery stores; specialty food stores; beer, wine or liquor stores; drug stores; convenience stores; newsstands; vending machines; or kiosks. The 50 percent limitation continues to apply to the amount of any deduction otherwise allowable to the taxpayer for any expense paid or incurred for food or beverages acquired from these types of businesses unless another exception in Sec. 274(n)(2) applies.

The notice also clarifies that an employer may not treat as a restaurant for Sec. 274(n)(2)(D) purposes any eating facility that is located on the employer’s business premises and used in providing meals excluded from an employee’s gross income under Sec. 119 or 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).