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What meals qualify for temporary 100% expense deduction? IRS Explains.

On a Thursday morning in April 2021, The IRS released it’s guidance explaining exactly when the temporary 100% deduction for meals in restaurants is available. Also noted is when the 50% limitation on the deduction for food and beverages continues to apply.

Under this guidance, a deduction for any expense for food or beverages is generally limited to 50% of the amount. But, the Consolidated Appropriations Act enacted a “short-term” exception to the limitation for amounts paid or incurred after Dec. 31, 2020 & before Jan. 1, 2023. This is for all food or beverages provided by a restaurant. It was initially designed to help the restaurant owners, many of which have been hard-hit by the COVID-19 pandemic.

To provide certainty to taxpayers, the IRS guidance explains when the temporary 100% deduction applies and when the 50% limitation continues to apply.

Under the notice, 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’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 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 those types of businesses.

The notice explained that an employer may not treat as a restaurant for Sec. 274(n)(2)(D) purposes:

  • 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
  • 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).

This notice is determined effective for the amounts that are required to be paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023.

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