Comments on the Three Martini Lunch Deduction
(Full Deductibility of Certain Meals in the Recent Tax Act)
One of the more controversial provisions of the recently-enacted 5,593-page Consolidated Appropriations Act of 2021 (the Act) is also one of the shortest. Looking to boost the restaurant industry, President Trump insisted on reinstating, for the first time in decades, the full deductibility of restaurant food and beverages. The mechanism for doing so is the addition of the following language to Code Section 274(n), which lists the categories of food and beverage expenses that are 100% deductible:
“(D) such expense is—
(i) for food or beverages provided by a restaurant, and
(ii) paid or incurred before January 1, 2023.”
The only other provision of the Act that addresses this rule states that it applies to “amounts paid or incurred after December 31, 2020.” Thus, this provision is addressed by fewer than ten lines in this gargantuan piece of legislation.
Whether this provision represents sound policy is debatable. In any event, as is almost always the case for tax legislation, especially if it was enacted in haste, there are a number of unanswered questions that will need to be answered by IRS guidance. Examples of uncertainty include the following:
- What is a “restaurant” for purposes of this rule? Does it depend on being licensed as a restaurant by a state or local government? Is sit-down service required, or do catering services qualify as restaurants?
- What does “provided by” mean? Are take-out food and beverages covered by this provision? The language seems to indicate that the answer is yes, and this is the general consensus of commenters.
- One of the significant provisions of the Tax Cuts and Jobs Act, discussed here, is that as of January 1, 2018, food and beverages provided to employees as de minimis fringe benefits became only 50% deductible (previously, they had been 100% deductible). This category includes meals provided on an occasional basis to enable employees to work overtime, as well as coffee and snacks provided in a break room. Can the employer regain 100% deductibility of these expenditures by purchasing the items from a restaurant?
Unless extended, this provision will expire, or “go down to the Sunset Grill,” at the end of 2022. Between now and then, there is yet one more category of expenses that businesses will need to track separately, hopefully with the help of yet-to-be-issued guidance from the IRS.
For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.