Article Highlights:
- New Business Tax Break
- Restaurant Purchased Meals
- Qualifying Restaurants
- Take-out Meals
- Lavish Limitations
- Taxpayer Presence
- Substantiation
Congress has provided businesses with a temporary tax break as a means of helping the restaurant industry, which has been devastated by the COVID pandemic.
Although the Tax Cuts and Jobs Act eliminated the business deduction for entertainment, it continued to allow a deduction for 50% of the cost of qualified business meals.
As part of its COVID relief efforts Congress is allowing businesses to deduct 100% of business meals during 2021 and 2022, provided the meals are provided by a restaurant.
Recent guidance from the IRS (Notice 2021-25) defines the term restaurant to mean 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. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk.
In addition, an employer may not treat as a restaurant any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income under IRC Sec 119, or any employer-operated eating facility treated as a de minimis fringe benefit even if such eating facility is operated by a third party under contract with the employer.
Business meals are deductible up to an amount not considered “lavish” (reasonable under the circumstances). Also, the taxpayer (or a representative of the taxpayer) must be present. The representative could be, for example, the taxpayer’s employee, an attorney or an independent contractor who performs significant services for the taxpayer.
A final hoop to qualify for the deduction is meeting the substantiation requirements. You must be able to establish the amount spent, the time and place, the business purpose and the business relationship and names of the individuals involved. Taxpayers should keep a diary, account book or similar records with this information and record the details within a short time of incurring the expenses – a timely kept record carries more weight in an IRS audit than one created months or years after the event occurred, when memory can be hazy. For expenses of $75 or more, documentary proof (receipts, etc.) is also required.
Lastly, individuals who are employees cannot claim a deduction for business meals, even if all of the requirements noted above have been met. This is because the Tax Cuts and Jobs Act suspended the deduction of employee business expenses as an itemized deduction for years 2018 through 2025.
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