Covid-19 has changed our lifestyle, how we do our business, how we spend our free time, how we spend our money, and even how we eat. The pandemic has rocked nearly every company and industry, especially food services. Many restaurants across the U.S. have permanently closed. According to food and beverage industry analytics and insights company Datassentials, of the 778,807 total U.S. restaurants in business since the onset of Covid-19, 79,438 restaurants have closed.
Congress passed the Consolidated Appropriations Act (CAA) in December of 2020 to provide fast and direct economic assistance for American workers, families, small businesses, and industries. The CAA allows taxpayers to deduct 100% of the cost of business-related food and beverage expenses incurred at restaurants in 2021 and 2022. In previous years, deductions for business meals at restaurants were limited to only 50% of the cost.
IRS guidance in Notice 2021-25 defines “restaurants” for the purpose of this tax break to include businesses that prepare and sell food or beverages to retail customers for immediate on-premises or off-premises consumption. However, the restaurants’ definition does not include businesses that primarily sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores. Additionally, an employer may not treat certain employer-operated eating facilities as restaurants, even if these facilities are operated by a third party under contract with the employer.
In October 2020, the IRS issued final regulations which clarified that taxpayers could still deduct 50% of business-related meal expenses under the Tax Cuts and Jobs Act (TCJA). These regulations were written before the CAA change that allows 100% deductions for business-related restaurant meals provided in 2021 and 2022, but they still offer some helpful guidance on the following issues:
- Food or beverages means all food and beverage items, regardless of whether they are characterized as meals, snacks, or other types of food and beverages. Food or beverage costs mean the full cost of food or beverages, including any delivery fees, tips, and sales tax.
- For purposes of the general disallowance rule for entertainment expenses, the term “entertainment” includes food or beverages only if the food or beverages are provided at or during an entertainment activity (such as a sporting event), and the costs of the food or beverages aren’t separately stated.
Specifically, to be deductible, amounts paid for food and beverages provided at or during an entertainment activity must be:
- Purchased separately from the entertainment, or
- Stated separately on a bill, invoice, or receipt that reflects the venue’s usual selling price for such items if they were purchased separately from the entertainment or the approximate reasonable value of the items.
Otherwise, the entire cost is treated as a nondeductible entertainment expense; the taxpayer cannot attempt to allocate costs between the entertainment and the food or beverages.
Under the final regulations, a deduction is allowed for business-related food or beverages only if:
- The expense isn’t lavish or extravagant under the circumstances,
- The taxpayer or an employee of the taxpayer is present at the furnishing of the food or beverages, and
- The food or beverages are provided to the taxpayer or a business associate.
A business associate means a person with whom the taxpayer could reasonably expect to engage or deal with in the active conduct of the taxpayer’s business, such as a customer, client, supplier, employee, agent, partner, or professional advisor — whether established or prospective.
Under the final regulations, the long-standing rules for substantiating meal expenses still applies.
The regulations also reiterate the long-standing rule that no deductions are allowed for meal expenses incurred for spouses, dependents, or other individuals accompanying the taxpayer on business travel (or accompanying an officer or employee of the taxpayer on business travel), unless the expenses would otherwise be deductible by the spouse, dependent, or other individual. For example, meal expenses for the taxpayer’s spouse would be deductible if the spouse works in the taxpayer’s unincorporated business and accompanies the taxpayer for business reasons.
Under the new law, for 2021 and 2022, meals provided by restaurants while traveling on business are 100% deductible, subject to the preceding considerations.
There are additional circumstances under which your business can deduct 100% of the cost of meals, other food, and beverages. Taking advantage of this deduction is a benefit to your business and employees. More so, frequenting local restaurants helps keep their hard-working employees employed and boosts local economies. Contact your tax advisor if you have questions or want more information.
Loren Hofer is a tax manager with Dalby Wendland’s Grand Junction office. She works with clients in various industries and particularly enjoys advising businesses geared to overall business growth. Loren graduated from Colorado Mesa University with a B.S. in accounting and computer information systems. She is a member of the American Institute of CPAs, Colorado Society of CPAs, and serves as the treasurer for the Western Slope Chapter of the Colorado Society of CPAs.