IRS provides guidance on deductions for food or beverages
TAX ALERT |
Authored by RSM US LLP
As our Alert previously discussed, Congress provided a temporary exception to the 50% the business deduction for certain business meals under the Taxpayer Certainty and Disaster Relief Act of 2020 (the Act). The temporary exception under the Act allows a 100% deduction for business meals if the food or beverages are provided by restaurants after Dec. 31, 2020 and before Jan. 1, 2023
On April 8, 2021, the IRS issued guidance in Notice 2021-25 to further explain how to apply the temporary exception.
Under the general rules provided in section 274 and subsequent IRS guidance, taxpayers may deduct 50% of a business meal if:
- The expense is an ordinary and necessary expense under section 162(a) paid or incurred during the taxable year in carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact; and
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
The temporary change in the law allows business meal amounts to be tax deductible so long as the business owner (or an employee of the business) is present when the food or beverages are provided and the expense is not lavish or extravagant under the circumstance. However, it was not clear how the temporary change in the law defined the term ‘restaurant.’
Under the Notice, the term ‘restaurant’ is defined as 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. The Notice clarifies that grocery stores, specialty food stores, stores that sell alcohol, drug stores, convenience stores and vending machines may provide meals that can be eaten immediately, but they do not qualify as ‘restaurants’ because they primarily sell food that is pre-packaged and not for immediate consumption. The 50% deduction limitation under section 274 will continue to apply when a taxpayer purchases food or beverages from these locations.
Additionally, the Notice addresses the treatment of on-premises cafeterias. Some employers provide on-premises cafeterias for their employees. These cafeterias may provide meals that are tax-free to employees (under section 119) or may provide meals at direct cost (under section 132(e)(2)). Many such cafeterias are operated by contractors. There were open questions about whether these cafeterias could be treated as ‘restaurants’ for purposes of the temporary change in the deduction rules. The Notice provides that on-premises cafeterias operating under section 119 or section 132(e\)(2) may not be treated as restaurants, even if operated by contractors.
One item that seems to remain open is what ‘present’ means in the context of a taxpayer having to be present when the food or beverages are provided. It appears this will remain a facts and circumstances issue, especially as some companies continue to operate virtually.
You can email us at email@example.com, call us at (631) 845-5252 (Long Island) or (212) 684-2414 (NY) or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Karen Field, Katie Beaver and originally appeared on 2021-04-09.
2020 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Nussbaum, Berg, Klein & Wolpow, CPAs LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Nussbaum, Berg, Klein & Wolpow, CPAs LLP can assist you, please call (631) 845-5252 (Long Island) or (212) 684-2414 (NY).