Deducting Your Three-Martini Lunch
Before we discuss how the law recently changed, let’s set the table by discussing when a taxpayer can properly deduct a meal expense. There can easily be confusion because the Tax Cuts and Jobs Act made substantial changes to §274, which governs deductions for entertainment expenses and food and beverage expenses.
For a taxpayer to deduct a meal expense, the expense must be a §162 ordinary and necessary business expense and not be subject to disallowance under §274.
Treasury Regulation §1.274-12(a) provides four general limitations on deducting food and beverage expenses:
Only 50% of the expense is deductible,
The expense cannot be lavish or extravagant under the circumstances,
The taxpayer, or an employee of the taxpayer, must be present at the furnishing of the food or beverages, and
The food or beverages must be provided to the taxpayer or a business associate.
Treasury Regulation §1.274-12(b)(3) states a business associate is
a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.
Here’s where the new provision comes to play: in order to help the restaurant industry post-COVID-19, Congress temporarily authorized a 100% deduction for food and beverage expenses if a restaurant provides the food and beverages. This exception only applies to expenses paid or incurred during calendar years 2021 and 2022.
The food and beverages provided by the restaurant must still be a §162 ordinary and necessary business expense and meet the other §274 limitations listed above.
Recently released Notice 2021-25 states that a restaurant is
…a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.
A restaurant is not “a business that primarily sells pre-packaged food or beverages not for immediate consumption.” Businesses that do not qualify as restaurants include
Specialty food stores,
Beer, wine, or liquor stores,
Vending machines or kiosks.
Small shifts in a taxpayer’s choice of meal location can create larger meal deductions.
Example. John drives five hours by car on Sunday for a three day business trip. En route, he stops for lunch, and it is a deductible travel meal expense:
If John stops at a convenience store, the expense is only 50% deductible, even if he buys food for immediate consumption.
If John goes to a fast food restaurant, the expense is 100% deductible.
In addition, a business may want to pay for actual meal expenses instead of using a per diem in order to get larger deductions from the amounts paid.
Example. During 2021, Susan is on a business trip in San Francisco. She spends $15 for breakfast, $20 for lunch, and $50 for dinner, all at locations considered restaurants under Notice 2021-25:
If the business pays Susan a per diem, then the business can only deduct $38, which is 50% of the $76 per diem rate.
If the business reimburses Susan’s actual expenses, then the business can deduct the full $85 she spent.
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