Final Meal and Entertainment Regulations: A Victory for the Restaurant Industry!
On September 30, 2020, the IRS issued final regulations relating to the limitation on tax deductions for meals and entertainment expenses. The regulations confirm that entertainment expenses are not deductible, but leave the door open for partial or full deductibility of meal expenses, depending on the category of food and beverage expense involved.
Employee Shift Meals Confirmed to be 100% Deductible
In welcome news for the restaurant industry, the final regulations confirm that restaurants may deduct 100% of the food and beverage costs associated with employee shift meals. However, for such expenses to be fully deductible, the shift meals provided to employees must be consumed at the restaurant, and the food and beverage items must have been purchased for the purpose of preparing and providing meals to paying customers.
The final regulations contain the following helpful example:
Employer T operates a restaurant. T provides food and beverages to its food service employees before, during, and after their shifts for no consideration. Under section 274(e)(8) and this paragraph (c)(2)(v), the expenses associated with the food and beverages provided to the employees are not subject to the 50 percent deduction limitation in paragraph (a) of this section because the restaurant sells food and beverages to customers in a bona fide transaction for an adequate and full consideration in money or money's worth. Thus, T may deduct 100 percent of the food and beverage expenses (emphasis added).
Confirmation that shift meals are fully deductible is a significant victory for the restaurant industry. When the Tax Cuts and Jobs Act was enacted in late 2017, it was unclear whether shift meals would remain 100% deductible or whether they would be subject to a 50% “haircut.” Subjecting shift meals to a 50% disallowance would have created additional accounting burdens on restaurants…and we can all agree that additional burdens are the last thing that restaurant owners and operators need!
The final regulations also address other common expenses, including the following:
- Meals provided in conjunction with business entertainment: As noted above, the final regulations confirm that entertainment expenses are not deductible. However, 50% of the cost of food and beverages consumed during an entertainment activity may be deducted provided the food and beverage costs can be segregated from the overall cost of the entertainment. For example, if you take two business associates to a baseball game and buy them peanuts and crackerjacks at a snack stand, there is no tax deduction for the tickets, but 50% of the cost of the snacks may be deducted.
- Meals provided during recreational and social activities for the benefit of employees: Food and beverage expenses incurred for a recreational, social or similar activity for the benefit of employees are generally 100% deductible. This category of meals includes holiday parties, picnics and summer outings, provided they do not discriminate in favor of highly compensated employees.
- Break room snacks: Many employers provide free coffee, soda, bottled water, donuts and other snacks to all employees in a break room setting. The final regulations confirm that a break room is not a recreational, social or similar activity primarily for the benefit of employees, even if some socializing occurs at the time employees partake in the snacks. As such, employers may deduct only 50% of the expenses incurred to purchase break room drinks and snacks.
- Business meals, including meals consumed when traveling for business: The final regulations confirm that 50% of business meals are tax deductible. Included in this category are business lunches or dinners, meals provided at off-site business meetings, and meals consumed when traveling away from home for business. However, the following requirements must be met for the expenses to be deductible:
- The expenses cannot be lavish or extravagant under the circumstances;
- The taxpayer (or an employee of the taxpayer) must be present at the time the meals or beverages are consumed; and
- The food or beverages must be provided to the taxpayer and a business associate of the taxpayer.
Restaurants haven’t had many victories over the past six months. Let’s hope that the shift meal victory is just the first of many to come.
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