Meals and Entertainment: What Qualifies for the Temporary 100% Deduction?

The restaurant industry continues to be hit hard due to the pandemic.  With slim profit margins under normal circumstances, many are still struggling to keep the doors open due to restrictions or shutdowns.  In an effort to address this, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 allows a temporary 100% deduction for certain business meal expenses.

The temporary full deduction is in play for amounts paid or incurred after December 31, 2020, and before January 1, 2023, for food and beverages provided by a restaurant.  The same rules apply for the expense to qualify as they did under the 50% deduction rule.  IRC 274(k) provides that the food and beverages cannot be lavish or extravagant under the circumstances, either the taxpayer or their employee must be present at the time, and of course, there must be a business-related reason for the activity.  I recommend that you document the business activity if you are not already doing so.

Recently the IRS offered clarification on the rules in Notice 2021-25.  While I’m certain that reading IRS notices is at the top of your to-do list, I’ve summarized it for you below in case you’d rather not.

• The term “restaurant” refers to a business that prepares and sells food and beverages for immediate consumption, though purchases can be to-go or delivered for off-site consumption. Qualifying meals are 100% deductible for the given period.
• Pre-packaged foods from a grocery store, specialty store, convenience store, vending machine, etc. do not qualify as those businesses operate under the assumption that their products are for later, rather than immediate, consumption. The 50% limitation still applies to these qualifying expenses.
• Any eating facility located on the employer’s premises, or employer-operated, and used to furnish meals that are excludable from an employee’s gross income do not qualify.

At this time the expansion of the rules appears to apply only to meals.  Entertainment expenses continue to be non-deductible.  Personally, I miss the more relaxed connections that take place in a lunch or dinner meeting.  Take advantage of the expanded deductions (or order in if you prefer) and support our restaurant owners!