Deducting Business Meals: IRS Guidance on What is a ‘Restaurant’

Overview of the Business Meal Deduction

Under current law, businesses may deduct 50% of the cost of business-related meals. The Consolidated Appropriations Act, 2021, (CAA, 2021) included a provision regarding deductibility of business meal expenses to assist taxpayers impacted by COVID-19. The legislation adds an exception to the 50% limit for expenses for food or beverages provided by a ‘restaurant’. Under the CAA, 2021, food and beverage expenses are 100% deductible and apply to expenses paid or incurred after December 31, 2020, and before January 1, 2023.

The IRS recently released Notice 2021-25 which provides guidance on what is or isn’t considered a ‘restaurant’ for purposes of the deduction.

Definition of a Restaurant for 2021-2022 Deduction

Under Notice 2021-25, 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% 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 such a business (unless another exception in Code Sec. 274(n)(2) applies to such expense).

In addition, an employer may not treat the following as a restaurant:

  • Any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income, or
  • Any employer-operated eating facility treated as a de minimis fringe, even if such eating facility is operated by a third party under contract with the employer

Note: Under Section 119 or Section 132(e)(1), the cost of food or beverages an employer purchases off the employer’s business premises from a source that qualifies as a restaurant may be 100% deductible even though the value is excluded from the income of employees.

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