The Consolidated Appropriations Act of 2021 increased the business-meal deduction for the cost of food and beverages provided by a restaurant from 50 percent to 100 percent in 2021 and 2022, if certain conditions are met. The IRS released Notice 2021-25 on April 8th to provide guidance on the increased deductibility limit for business meals. The notice specifies when the temporary 100% deduction applies and when the usual 50% restriction continues.
According to the notification, a 100% deduction is available when food and beverage are supplied by a restaurant. However, businesses that mainly sell pre-packaged products that are not meant for immediate consumption do not qualify as a restaurant.
Grocery stores, convenience stores, liquor stores, specialty food stores, kiosks, and vending machines are among the establishments that are most likely to sell pre-packaged foods. Unless any exceptions apply, the 50% deductibility limit outlined in Section 274(n)(1) will continue to apply to any expense paid for food or beverages obtained from such a business.
Onsite Eating Facilities
The issue also clarifies that onsite eating facilities that prepare or provide employee meals are not considered a restaurant. Similarly, any company-operated eating facility does not qualify as a restaurant. It includes facilities operated by third parties under contract with the employer and all employer-operated facilities, such as cafeterias, in addition to any meals prepared on-site.
Ambiguities & Unanswered Questions
The IRS neglected to address key concerns that have perplexed employers. For example, one of the biggest concerns is how will a consumer know whether a business ‘mainly’ serves pre-packaged food and beverages?
In addition to understanding what constitutes ‘mainly pre-packaged,’ consumers must also understand the level of activity of the business they visit. Furthermore, questions may emerge regarding the services of caterers and similar food preparers because the term “restaurant” appears to be limited to businesses that sell food and beverages to retail customers only.
The Bottom Line: Windes Can Help Navigate through Business Meal Deduction Regulations
It must be noted that these changes are only temporary. Therefore, businesses that want to take advantage of the higher business meal deduction may need to devise short-term solutions to do this analysis. Windes provides tax consulting services to address these issues in order to minimize tax exposure. Connect with our team today to learn more or schedule a consultation.