A business expense is generally deductible for federal income tax purposes if it’s ordinary, necessary, and reasonable in amount. Yet there are some sections in the Internal Revenue Code (IRC) that limit the deductibility of a business expense or make it not deductible. For example, IRC §274(n)(1) generally limits the deduction for certain business meals expenses incurred by a taxpayer to 50% of the expense unless an exception is listed in IRC §274(n)(2) allowing it to be fully deductible.

And the Taxpayer Certainty and Disaster Tax Relief Act of 2020 expanded those exceptions to the 50% limitation by adding IRC §274(n)(2)(D). Under this new section, a special two-year provision allows a business owner to deduct 100% of food or beverages expenses incurred or paid to a restaurant before January 1, 2023—thus, during calendar years 2021 and 2022. The provision is limited to two years and applies to the calendar year and not to the taxable year, if different.

In addition, Internal Revenue Service (IRS) News Release, IR 2021-79, provides that the business owner or an employee of the business must be present at the meal for it to qualify under the 100% deduction. The question that immediately surfaces from this temporary legislation is: What qualifies as a restaurant?


Notice 2021-25 was issued on April 8, 2021, to provide clarification to this question. The term “restaurant” for purposes of this exception 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.

Moreover, Notice 2021-25 clarifies that takeout meals also qualify under this special two-year exemption since the food or beverages don’t need to be consumed at the restaurant. As one might suspect, the notice doesn’t definitively answer the question. For example, some commentators have questioned whether a bar that serves meals would qualify as a restaurant. But this is a good starting point.

The IRS further states the term “restaurant” doesn’t include businesses that primarily sell prepackaged food or beverages not for immediate consumption, such as grocery stores; specialty food stores; beer, wine, or liquor stores; drug stores; convenience stores; newsstands; or vending machines or kiosks. Although the 100% deductibility doesn’t apply to these businesses, the 50% limitation of IRC §274(n)(1) would continue to apply to the amount of any expense paid or incurred by the taxpayer for food or beverages acquired from such a business.

Furthermore, Notice 2021-25 reminds taxpayers that there are other expenses for which the taxpayer can deduct 100% of the meal expense. These exceptions are found in IRC §274(n)(2)(A), (B), and (C) and include:

  • Expenses treated as compensation to the employee and therefore included in their gross income;
  • Certain reimbursed expenses;
  • Recreational, social, or similar activities expenses incurred primarily for the benefit of the employees (other than highly compensated employees);
  • Expenses for goods, services, and facilities made available by the taxpayer to the public;
  • Expenses for goods or services (including the use of facilities) that are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money (an arm’s length transaction); and
  • Expenses for goods, services, and facility expenses includable in the income of persons who aren’t employees.


There are situations where an employer may not treat an eating facility as a restaurant for purposes of IRC §274(n)(2)(D). One example given in Notice 2021-25 is any eating facility that’s located on the business premises of the employer and used to furnish meals excluded from an employee’s gross income under IRC §119. Under IRC §119, the value of meals furnished to employees by their employer is excluded from the employees’ gross income if two tests are satisfied: (1) The meals are furnished on the business premises of the employer, and (2) the meals are furnished for the convenience of the employer, which is determined by analysis of all the facts and circumstances in each case.

Another example given in Notice 2021-25 of a facility an employer may not treat as a restaurant is any employer-operated eating facility that is treated as a de minimis fringe benefit (property or service provided to an employee that has so little value as to make accounting for it unreasonable or impractical) under IRC §132(e)(2). To qualify under the de minimis fringe rules, the eating facility must be located on or near the business premises of the employer. In addition, the revenue derived from the facility normally must equal or exceed the direct operating costs of the facility.

If the facility is also available to highly compensated employees, the meals will still qualify provided the facility doesn’t discriminate in favor of the highly compensated employees. This exception applies even if the facility is operated by a third party under contract with the employer as described in Reg. §1.132-7(a)(3).


Final regulations (TD 9925) were issued on October 9, 2020, to address the changes made to IRC §274 by the Tax Cuts and Jobs Act (TCJA) of 2017 for the disallowance of certain meals and entertainment expenses. Those regulations note that the TCJA repealed IRC §274(n)(2)(B), meaning that expenses for food or beverages that are de minimis fringes under IRC §132(e) are no longer excepted from IRC §274(n)(1).

As a result, these expenses, like other food or beverage expenses generally, are subject to the 50% limitation unless one of the six exceptions or the special 100% restaurant expense applies. In addition, the final regulations state that the expense must not be lavish or extravagant under the circumstances, and the business owner or employee must be present at the meal.

A business owner can deduct 100% of the food or beverages expenses incurred or paid at a qualified restaurant under IRC §274(n)(2)(D) after December 31, 2020, and before January 1, 2023. But it’s important to remember that documentation of the expense, the business purpose, and a list of the attendees are the overarching requirement.

© 2021 A.P. Curatola

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