No Such Thing as Free Lunch? Meal Deductions Say Otherwise

The notice released by the IRS clarifies that the 100% deduction would only be available for food or beverages provided by restaurants. A restaurant by definition does not include businesses that primarily sell pre-packaged food or beverages, not for immediate consumption.

This is more specifically called out in the notice by referencing grocery stores, specialty food stores, liquor stores, convenience stores, vending machines, and kiosks as examples of businesses likely to sell pre-packaged items. The good news for these types of stores though is that the 50% deductibility limit still applies to any expense paid or incurred for food or beverage acquired from such a business.

For employees looking to get dinners out of this deduction, it’s time to put in the extra hours! An employer may be entitled to a deductions on meal allowance or reimbursement provided to an employee. These deductions will hold up as a de minimis fringe benefit so long as:

1.      The type of payment is provided on an occasional basis

2.      It is for overtime work, and

3.      It enables the employee to work overtime

If the requirements to receive this deduction are met, the reimbursement is to be excluded from the employee’s income, and not reported as wages on a W-2, which also means that it is exempt from FITW, FICA, and FUTA.

While the 100% deduction will be a massive boost for business owners at the federal level, some may be in for a surprise when it comes to their state tax returns. New York for example, is decoupling from the IRS’s guidance and continuing to only allow for 50% of meals to be deducted. This is not the first time New York has gone against the IRS’ guidance, but it is a bit shocking as restaurants were among one of New York’s hardest-hit industries from the COVID-19 pandemic.

On top of New York decoupling from the 100% deduction, food or beverage purchased during entertainment activity also will have a 50% cap. This further decreases the spectrum of the 100% deduction for food or beverages, and adds a lot more rules when trying to deduct expenses. Let’s take a look:

While food and beverage are expenses associated with operating a trade or business are deductible, entertainment expenses are generally not deductible! This means that if you are purchasing food or beverages at an entertainment activity will not be a deductible expense unless:

If these rules are not followed, no allocation between entertainment expenses and food or beverage expenses may be made, meaning you will miss out!