The IRS released guidance explaining when the temporary 100% deduction for restaurant meals is available and when the 50% limitation on the deduction for food and beverages continues to apply for Section 274 purposes.
Under Section 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. However, the Consolidated Appropriations Act, 2021, P.L. 116-260, enacted a temporary exception to the limitation for amounts paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant. This temporary 100% deduction was designed to help restaurants, many of which have been hard-hit by the COVID-19 pandemic.
Under the notice, "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 Section 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 Section 119; or
- Any employer-operated eating facility treated as a de minimis fringe under Section 132(e)(2), even if that eating facility is operated by a third party under Regulations Section 1.132-7(a)(3).
The notice is effective for amounts paid or incurred after December 31, 2020, and before January 1, 2023.
Your Tax Pro on Demand,
Monica Marie Stuart
