Meal Portion of Per Diems Eligible for Temporary 100% Business Expense Deduction

The IRS has issued guidance clarifying how the temporary 100% business expense deduction for food or beverages from restaurants applies to the meal portion of per diem rates and allowances. As background, Code § 274(n) generally limits otherwise allowable deductions for food or beverage expenses to 50% of the expenses. The disaster tax relief provisions of the Consolidated Appropriations Act, 2021 amended the Code to add a temporary exception that waives the 50% limit (thus allowing a 100% deduction) for “food or beverages provided by a restaurant,” so long as the expense is paid or incurred in 2021 or 2022 (see our Checkpoint article).

The new guidance adds a special rule that allows employers to treat the entire meal portion of a per diem paid or incurred in 2021 or 2022 as being attributable to “food or beverages provided by a restaurant.” (The guidance also applies to self-employed individuals and the limited group of employees that may take an above-the-line deduction for business travel expenses.) Employers should refer to Revenue Procedure 2019-48 (see our Checkpoint article) for guidance on how to determine the meal portion of a per diem rate. (In general, travel expenses, including meals, must be substantiated, but the per diem rules allow the amount of certain types of travel expenses to be deemed substantiated up to a specified limit.) The notice makes the special rule available only to taxpayers that properly apply the rules of that revenue procedure.

EBIA Comment: Traveling employees who receive per diems may not always spend the entire amount or use the entire meal portion at restaurants. (Employees are not required to return the unused portion of a properly paid per diem if it exceeds their actual expenses.) Thus, the amount actually spent at restaurants will vary from the meal portion of the per diem. Employers will be relieved to know that variance has no effect on their ability to benefit from the temporary 100% deduction for meals. The accompanying news release suggests that the IRS’s expansive interpretation of the temporary waiver of the 50% deduction limit as applied to per diems is part of the IRS’s overall COVID-19 tax relief efforts. Employers seeking more information on that relief are directed to a dedicated website. For more information, see EBIA’s Fringe Benefits manual at Sections XXI.B (“Deductible Business Travel Expenses”) and XXI.G (“Travel Expense Reimbursements: Substantiation”).

Contributing Editors: EBIA Staff.