On Thursday, April 8, the IRS served up Notice 2021-251 (the Notice) providing guidance for taxpayers seeking to take advantage of the temporary 100-percent deduction for the cost of business meals, which was enacted by Congress to provide relief in light of the devastating economic consequences associated with the COVID-19 pandemic. While 75% of US restaurants are open for business again, approximately 10% of the nearly 800,000 restaurants that existed before the pandemic have permanently closed.2 To assist the industry, the Consolidated Appropriations Act, 2021 (CAA) allows businesses to claim 100-percent of qualifying food and beverage expenses paid to restaurants from January 1, 2021 through December 31, 2022.3 Questions arose regarding the breadth and scope of the temporary expansion, and with Notice 2021-25, the Service has clarified certain ambiguities.
Background
Prior to the Tax Cuts and Jobs Act (the TCJA),4 Section 274(a) of the Internal Revenue Code (the “Code”) allowed a deduction for business entertainment if it directly related to or was associated with the active conduct of business (a business expense deduction). The TCJA modified Section 274(a) to disallow any otherwise allowed income tax deductions for activities or facilities that qualify as entertainment, amusement, or recreation. The TCJA’s modifications effectively eliminate business expense deductions for entertainment. Subsequent to the TCJA, the IRS issued final regulations under Section 274,5 which provide that the disallowance for business expense deductions under Section 274(a)(1) does not apply to qualifying food or beverages provided at an entertainment activity if the food or beverages are separately purchased from the entertainment activity or the cost of the food or beverages is separately stated from the cost of the entertainment in an invoice, bill, or receipt.6
Furthermore, with respect specifically to food and beverages, Section 274(k) disallows a business expense for food or beverages unless qualifying that: (1) the expense is not lavish or extravagant under the circumstances, and (2) the taxpayer (or employee of the taxpayer) is present at the furnishing of the food or beverages. Section 274(n)(1) further limits any business expense deduction for food or beverage costs to no more than 50% of the expense that would otherwise be allowed.
The CAA added Section 274(n)(2)(D) to the Code, temporarily allowing a 100% business expense deduction for the expenses of qualifying food or beverages provided by a restaurant if paid or incurred after December 31, 2020, and before January 1, 2023.
Notice 2021-25
The Service issued Notice 2021-25 to provide certainty to taxpayers in determining when Section 274(n)(2)(D) applies, specifically, when the temporary 100% business expense deduction applies and when the 50% limitation continues to apply. Pursuant to Section 274(n)(2)(D), the Notice provides that the 50% limitation of Section 274(n)(1) does not apply to the amount of any income tax deduction otherwise allowable to a taxpayer for any business expense paid or incurred after December 31, 2020, and before January 1, 2023, for food and beverages provided by a restaurant.
For purposes of this temporary 100% deduction, the Notice indicates the term “restaurant” means a business that prepares and sells food or beverages to retail customers for immediate consumption, whether or not the food or beverages are consumed on the business’s premises. The Notice excludes from the definition of restaurant, a business that primarily sells pre-packaged food or beverages not for immediate consumption, including: grocery stores; beer, wine, or liquor stores; drug stores; convenience stores; newsstands; or, vending machines or kiosks. For 2021 and 2022, the 50% deduction limitation would remain in place for such businesses falling outside of the definition of a restaurant. The Notice also excludes from the restaurant exception under Section 274(n)(2)(D), any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income under Section 119, or any employer-operated eating facility treated as a de minimis fringe benefit under Section 132(e)(2), even if such eating facility is operated by a third party under contract with the employer.
| Eversheds Sutherland Observation: Taxpayers will appreciate that the IRS issued this clarifying guidance in short order. Although the Notice provides a menu of examples of entities that satisfy the definition of a restaurant, a number of establishments are excluded from the definition of Section 274(n)(2)(D) for purposes of the temporary 100% business expense deduction, including even on-site and employer-operated facilities. Nonetheless, taxpayers will be pleased that the enhanced deduction may be available when food is ordered for delivery and take out as these services have flourished during the pandemic. Unfortunately, the Notice fails to address how the temporary business expense deduction interacts with the treatment of per diems (especially when only a portion of which is paid for meals), and it will be interesting to see whether the Service issues additional guidance to further assist taxpayers in ordering up the temporary 100% business expense deduction. |
2 Haddon, Heather, Restaurants Prepare For Diners to Return, Wall Street Journal (Apr. 12, 2021).
3 P.L. 116-260 (Dec. 21, 2020). For additional details regarding relief provided in the CAA, please see
Eversheds Sutherland’s December 24, 2020, article “On the 5000th page of the stimulus my Congress
gave to me....meal deductions and benefit plan relief,” available at https://us.eversheds-
sutherland.com/NewsCommentary/Legal-Alerts/238159/On-the-5000th-page-of-the-stimulus-my-
Congress-gave-to-memeal-deductions-and-benefit-plan-relief.
6 Treas. Reg. § 1.274-11(b)(1)(ii).
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