The Consolidated Appropriations Act 2021 (“CAA”) increased the deduction for the cost of food and beverages provided by a restaurant from 50% to 100%. The IRS recently issued Notice 2021-25 to provide guidance on when the 100% deduction applies. The allowance of 100% deductions for restaurant meals only applies for amounts paid or incurred after December 31, 2020 and before January 1, 2023.

The notice clarifies that the 100% deduction is available for food or beverages provided by a restaurant. The term “restaurant” means a business that prepares and sells food or beverages to retail customers for immediate consumption either on- or off-premises. A restaurant does not include businesses that primarily sell pre-packaged food or beverages, not for immediate consumption. The notice specifically calls out grocery stores, specialty food stores, liquor stores, convenience stores, vending machines and kiosks as examples of businesses likely to primarily sell pre-packaged items. The 50% limitation of section §274(n)(1) will continue to apply to the amount of any expense paid or incurred for food or beverages acquired from such a business, unless other exceptions apply.

In addition, the notice provides that an employer may not treat as a restaurant for purposes of the 100% deduction any eating facility located on the business premises of the employer. This includes not only employer- or contract-operated facilities (such as cafeterias), but other food that may be prepared on the premises. 

The notice is problematic because the consumer purchasing the food has the onus of determining eligibility, as opposed to the establishment providing such meals, but the consumer will not necessarily be in a position to make such a determination. For example, how will a consumer determine if a business “primarily” serves pre-packaged food? In addition to not knowing what the standard is for “primarily” nor what constitutes pre-packaged food (e.g., does it include food provided in a grab-and-go model?), consumers will need to know the level of activity of a business for which they frequent. Further, because the term restaurant appears to be limited to businesses that sell items to a “retail” customer, questions may arise whether a caterer or similar food preparers are selling to a retail customer. Because these changes are temporary, many businesses hoping to claim the greater deduction may need to develop short-term solutions to enable this analysis. An A&M Taxand client alert is forthcoming that will discuss these and other issues in more detail.

If you would like to discuss how this guidance may impact your meal and entertainment deductions, please contact Kathleen King in our Washington, D.C. office.