COVID-19 wreaked havoc on the economy. The hardest-hit sector has been leisure and hospitality. Employment in this sector has fallen 23% since the pandemic began. One method that lawmakers seek to use to come to the restaurant industry’s aid is via a provision in the Consolidated Appropriations Act (CAA), signed into law on December 27, 2020. By tweaking an existing business deduction, they hope to boost the restaurant industry’s bottom line and put thousands back to work. The following is what lawmakers have put into law.
Tax relief for the hungry
Historically, businesses have generally been allowed to deduct 50% of their business-related meals so long as the taxpayer or their employee is present during the transaction and the meals aren’t “lavish or extravagant.” Also, the meals can’t be related to non-deductible entertainment expenses; a nightclub, for example. They are deductible if they can be separately charged. The most common types of write-offs would be the meal consumed on the way to a client appointment, or a meal eaten with a client present, or even meals provided to employees so they can keep working on-site. Naturally, this is overly generalized; there are many exceptions to this rule, and even some allowances that provide a 100% write-off of the entire meal in certain circumstances.
Under the CAA, meals that have historically been subject to the 50% restriction will now neatly be placed temporarily in the 100% deductible category, so long as those meals are “provided by a restaurant.” The temporary caveat: those meals “provided by a restaurant” can be deducted at 100% face value only during calendar years 2021 and 2022. Before and after those two years, the meals remain subject to the 50% deductible restriction.
“…meals provided by a restaurant…”, the CAA says. The savvy business owner then asks, “What do you, Commissioner, consider to be a ‘restaurant’?” For the IRS’ response, we’ll need to wait. Currently, there is no federal regulation issued on this topic just yet. While there is still some time until taxpayers will be filing taxes for their 2021 business activities, fiscal year taxpayers will be the first to test this new rule.
Food for thought
Keep in mind that almost all businesses take advantage of the meal expense deduction. Therefore, this CAA change is quite relevant because it will affect nearly all active businesses regardless of their tax-entity form, passthrough or taxed at the entity level. Businesses who cater to higher net income clientele will benefit the most because these meal expenses are typically generated at high-end restaurants, resulting in expensive bills and tips.
For businesses that expense meals obtained mostly from grocery stores or wholesale sources, they face the age-old tradeoff of increased tax savings vs. increased tax compliance costs. If restaurant usage is modest, then perhaps continue using broad brushstrokes of the 50% meals deduction during those two years instead of trying to separate out one type of meal from the other.
This meal deduction tax law change is just one method that lawmakers hope will revive this ailing industry. Another more immediate method is via the Paycheck Protection Program Second Draw Loan (PPP2). This second iteration of the PPP allows qualified restaurants to obtain the lesser of 3.5 times their average monthly payroll expenses or $2 million, whereas other industries are capped at 2.5 times. For more information on the updated PPP loan provisions, see Need another PPP loan for your small business? Here are the new rules from January 6, 2021. The tax law is ever-changing, and the new presidential administration will certainly advance a new fiscal agenda in the years to come. Contact us for the latest developments on this issue and to help with tax compliance.