Members of the tax community have been calling on the IRS for more clarity related to taxes on food and beverages since the new rules were enacted late last year as part of the Consolidated Appropriations Act (CAA).
In a new Notice, the IRS has finally weighed in on the new 100 percent tax deduction for food or beverages bought by businesses from a restaurant (Notice 2021-25, 4/8/21). In an effort to increase revenue for restaurants struggling during the COVID-19 pandemic, the Consolidated Appropriations Act officially authorized a 100 percent deduction for food or beverages provided by a restaurant. This tax break lasts for just two years—2021 and 2022.
Traditionally, a business can deduct 50 percent of the cost of its qualified business meals, provided the expenses are properly substantiated. To qualify for the new 100 percent deduction under the CAA provision, the food and beverages must be provided by a restaurant to retail customers. Note: The expenses can’t be lavish or extravagant under the circumstances.
But the law didn’t spell out what constitutes a “restaurant” for this purpose and it wasn’t entirely clear if this tax break applied to food or beverages purchased for off-site consumption as well as in-restaurant dining.
The New IRS Notice Sets the Record Straight
The Notice states that the restaurant must prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption. Thus, it applies to both dining inside a restaurant and take-out fare.
Furthermore, the IRS says restaurants do not include businesses that primarily sell pre-packaged goods that are not for immediate consumption.
This includes the following:
- Grocery stores and convenience stores
- Specialty food stores
- Beer, wine or liquor stores
- Drug stores
- Newsstands
- Vending machines or kiosks
This prohibition also applies to an eating facility located on the employer’s business premises and used in furnishing meals excluded from an employee’s gross income under IRC Section 119. In addition, an employer can’t treat certain employer-operated eating facilities as a restaurant, even if a third party under contract operates the facility with the employer.
Advise your business clients about this significant tax law change. It represents an opportunity to double deductions over the next two years.