The IRS’s April 26, 2021 bulletin draws a practical line for U.S. businesses claiming the temporary 100% deduction for restaurant meals: takeout can qualify, but buying food does not by itself qualify a purchase. Notice 2021-25 defines the restaurant exception for otherwise deductible food and beverage expenses paid or incurred in 2021 and 2022. It removes the usual 50% limit for eligible purchases, without removing the underlying business-expense requirements. [S1]

The notice defines a restaurant as a business that prepares and sells food or beverages to retail customers for immediate consumption. Customers do not have to eat on the premises. But a business that primarily sells prepackaged food or drinks not for immediate consumption is outside that definition. The IRS lists grocery, convenience and liquor stores among its examples. Purchases from those businesses remain subject to the general 50% limit unless another exception applies. [S1]

A restaurant receipt is not enough on its own. The IRS’s October 2020 final regulations explain that an expense must first qualify for a deduction under the tax code—for example, as an ordinary and necessary business expense. The meal rules generally also require that the cost not be lavish or extravagant, that the taxpayer or an employee be present, and that the food be provided to the taxpayer or a business associate. That last category includes established or prospective customers, suppliers, employees and professional advisers. The restaurant exception does not turn every lunch eaten during a working day into a business expense. [S1][S2]

Delivery charges belong with the meal for this purpose. The 2020 regulations define food and beverage expenses to include delivery fees, tips and sales tax; the cost of transportation to a meal is not included. For a bookkeeper applying the restaurant exception, that means keeping the restaurant bill and recording the journey to the meal separately. [S1][S2]

Entertainment creates a separate problem. Under the regulations, food served at an entertainment activity escapes treatment as entertainment only when it is purchased separately or its cost is separately stated on a bill, invoice or receipt. The stated food charge must reflect the venue’s usual separate selling cost or approximate its reasonable value. Without that separation, the taxpayer cannot allocate part of a bundled entertainment bill to meals afterward; the entire amount is generally nondeductible, subject to the statutory exceptions. Even with separate billing, the food must meet the restaurant definition and the other deduction requirements to use the temporary 100% treatment. [S1][S2]

Hiring a food-service contractor does not make every workplace eating facility a restaurant. Notice 2021-25 excludes on-premises employer facilities used to furnish meals excluded from employees’ income under section 119, and employer-operated facilities treated as a de minimis fringe under section 132(e)(2). The latter exclusion still applies when a third party operates the facility under contract. [S1]

Source documents

  1. Internal Revenue Bulletin 2021-17: Notice 2021-25, Temporary 100-Percent Deduction for Business Meal Expenseshttps://www.irs.gov/irb/2021-17_IRB
  2. Meals and Entertainment Expenses Under Section 274 — TD 9925https://www.govinfo.gov/content/pkg/FR-2020-10-09/html/2020-21990.htm