The Consolidated Appropriations Act of 2021 (“CAA”) created a temporary 100% (vs. 50%) deduction for certain food or beverages provided by “restaurants.” The 100% deduction applies to amounts paid or incurred after December 31, 2020 and before January 1, 2023. The IRS recently released Notice 2021-25 with the following definition:
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. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk. The 50-percent limitation of § 274(n)(1) continues to apply to the amount of any deduction otherwise allowable to the taxpayer under chapter 1 for any expense paid or incurred for food or beverages acquired from such a business (unless another exception in § 274(n)(2) applies to such expense).
Some practical aspects of the law change follow:
- Consumption at the restaurant is not required so the 100% deduction applies to take-out orders.
- Because your business could incur 100% and 50% meals, it may be prudent to segregate the two on your P&L for ease in tax reporting.
- Fiscal year taxpayers with years overlapping January 1, 2021 and December 31, 2022 will require additional tracking.
- Entertainment costs continue to be 0% deductible and certain meals (e.g. those served at a summer picnic or holiday party) continue to be 100% deductible, as they were prior to the CAA.
- The notice excludes from the definition of a restaurant any eating facility located on the employer’s business premises or any employer-operated eating facility.
Restaurants have been hard-hit by the COVID-19 pandemic. The provision above encourages further solicitation of such businesses.