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IRS Defines Restaurants for Temporary 100% Business Meal Deduction

Food for Thought: IRS Defines Restaurants for Temporary 100% Business Meal Deduction

On April 8, 2021, the IRS released Notice 2021-25 to provide additional guidance regarding when the temporary 100% deduction applies to business meal expenses.

The temporary 100% deduction was previously discussed in our February 2021 tax blog article Appetite for Deductions: CAA and Meals & Entertainment. That article explained the temporary change to deduction for business meals and suggested more guidance was needed to define the term “restaurant” for purposes of the new rule.

Notice 2021-25 clarifies these rules - and defines a restaurant as a business that prepares and sells food or beverages for immediate consumption, either on or off business premises.

This definition excludes businesses that primarily sell pre-packaged food and beverages not for immediate consumption. Notice 2021-25 specifies that the following businesses are not considered restaurants for this deduction:

  • Grocery stores
  • Specialty food stores
  • Beer, wine or liquor stores
  • Drug stores
  • Convenience stores
  • Newsstands
  • Vending machine or kiosks

The 50% limitation will continue to be applied to food or beverages purchased from these businesses.

Notice 2021-25 also excludes the 100% deduction food and beverages from (1) an eating facility on an employer’s business premises that furnishes meals excluded from employee’s gross income or (2) an employer-operated eating facility treated as a fringe benefit, even if operated by a third party.

Considerations for those claiming meals deductions AND restaurants reminding patrons of the new rule

To maximize deductions, taxpayers should consider setting up new general ledger accounts for meals eligible for this temporary change to the amount of the deduction. In addition, restaurant owners should consider reminding patrons or potential customers of this 100% deduction.

Consult your tax advisor to discuss how this guidance may impact your meal and entertainment deductions.

For additional information contact us at info@herbein.com

Article prepared by Annika McKinney.