IRS Tax Tip Explains Key Aspects of Enhanced Business Meal Deduction for 2021 and 2022

The IRS has issued a tax tip explaining key aspects of the enhanced business meal deduction in effect for 2021 and 2022. As background, Code § 274(n) generally limits a business’s otherwise allowable deductions for food or beverage expenses to 50% of the expenses, subject to various exceptions. The exceptions include amounts that are treated as compensation to an employee, expenses incurred under a reimbursement arrangement, and expenses for certain recreational or social activities for employees. The Consolidated Appropriations Act, 2021 amended the Code to add another exception that temporarily permits a 100% deduction for “food or beverages provided by a restaurant” for expenses paid or incurred in 2021 or 2022 (see our Checkpoint article).

The tax tip identifies the following conditions that a business must satisfy to qualify for the “enhanced” deduction: the business owner or an employee of the business must be present when food or beverages are provided; meals must be from restaurants, which include businesses that prepare and sell food or beverages to retail customers for immediate on-premises or off-premises consumption; payment or billing for the food and beverages must occur after December 31, 2020, and before January 1, 2023; and the expense cannot be lavish or extravagant. The cost of the meal can include taxes and tips, but not the cost of transportation to and from the meal. Consistent with prior guidance elaborating on the definition of a “restaurant” for purposes of the higher deduction limit (see our Checkpoint article), the tax tip indicates that grocery stores, convenience stores, and other businesses that mostly sell pre-packaged goods not for immediate consumption do not qualify as restaurants. Also, employers may not treat certain employer-operated eating facilities as restaurants, even if they operate under contract with a third party. The tax tip notes the rules for meals and beverages provided during entertainment events and urges businesses to review special recordkeeping rules for business meals.

EBIA Comment: Legislation enacted over the past several years has significantly altered the deductibility rules for business meals, and it can be challenging to keep track of the changing requirements. This tax tip provides a helpful overview with links to other IRS resources. Employers should keep in mind that deductibility of business meals must be analyzed separately from the income and employment tax implications of employer-provided meals to employees. For more information, see EBIA’s Fringe Benefits manual at Section XVI (“Employer-Provided Meals”).

Contributing Editors: EBIA Staff.