As the restaurant industry continues to struggle amid the COVID-19 pandemic, any relief that can help restaurants boost their cash flow is welcome. Recently, the IRS issued final regulations regarding limits on the deductibility of meal and entertainment expenses. The regulations confirm that most entertainment expenses are nondeductible, but they clarify that some meal expenses remain 100% deductible, including certain food and beverage costs associated with employee shift meals.
This is good news for restaurants — previously, it was uncertain whether these costs were fully deductible or whether they were subject to the 50% deduction limit for certain meal expenses.
Related Read: The Impact of Tax Reform on Restaurants
What is Off the Menu?
The Tax Cuts and Jobs Act of 2017 (TCJA) removed many popular items from the menu of tax deductions. The Act eliminated most deductions for entertainment expenses (with some exceptions) and limited deductions for many business-related meal expenses to 50% of their cost. Some expenses continue to be fully deductible, including meals and entertainment that are treated as employee compensation (and included in employees’ taxable income) and expenses related to recreational or social activities that primarily benefit rank-and-file employees (such as holiday parties or picnics).
It was unclear, however, whether the TCJA would permit restaurants to fully deduct shift meals provided to employees free or at a discount, or whether those meals were subject to the 50% limitation. Under prior law, shift meals generally were 100% deductible. In late 2018, the congressional Joint Committee on Taxation clarified in its legislative “blue book” that shift meals fall within an exception to the 50% deduction limit. Still, there was some uncertainty about whether IRS regulations would confirm this treatment.
Related Read: The Business Meal Expense Deduction Lives on Post-TCJA
The final regulations expressly address the provision of employee shift meals by restaurants. The regulations make clear that restaurants and catering businesses may continue to deduct 100% of their food and beverage costs associated with employee shift meals, provided the food and beverages are:
- Purchased in connection with preparing and providing meals to paying customers; and
- Consumed by employees at the worksite.
The final regulations include a restaurant-specific example that illustrates the treatment of shift meals:
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 the Internal Revenue Code, 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% 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% of the food and beverage expenses.
This is a welcome development for restaurants. Had the IRS applied the 50% limit to employee shift meals, not only would it have potentially reduced restaurants’ deductions and increased their tax bills, but it also would have complicated the process of accounting for these costs.
For more information about the final regulations on the deduction of meal and entertainment expenses, please contact Tom Pierce at [email protected] or call him at 312.670.7444. Visit ORBA.com to learn more about our Restaurant Group.