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April 9, 2021

IRS clarifies which expenses qualify for temporary 100% deduction for food or beverages 'provided by a restaurant'

In Notice 2021-25, the IRS clarified the provision in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Disaster Relief Act) that allows a full deduction for 2021 and 2022 for food or beverages provided by a restaurant.


IRC Section 274(a), as modified by the Tax Cuts and Jobs Act (TCJA), disallows any otherwise allowed income tax deduction for an activity or facility that qualifies as entertainment, amusement or recreation. The TCJA repealed the exception from IRC Section 274(a) that preserved a deduction for business entertainment if directly related to or associated with the active conduct of business. This repeal effectively eliminated business entertainment deductions. The Treasury Department and IRS issued final regulations clarifying disallowances for business expense deductions under IRC Section 274 for entertainment and food or beverage expenses after the TCJA (see Tax Alert 2020-2412).

IRC Section 274(k) disallows a deduction for any food or beverages unless: (1) the expense is not lavish or extravagant under the circumstances and (2) the taxpayer (or employee of the taxpayer) is present at the furnishing of the food or beverages. IRC Section 274(n)(1) limits the deduction for any expense for food or beverages to no more than 50% of the expense that otherwise would be allowed.

Section 210 of the Disaster Relief Act added IRC Section 274(n)(2)(D), which temporarily allows a 100% deduction for the expense of food or beverages "provided by a restaurant" if paid or incurred after December 31, 2020 and before January 1, 2023 (see Tax Alert 2020-2938).

Notice 2021-25

IRS issued Notice 2021-25 to clarify when the temporary exception to the 50% deduction limitation applies.

The IRC Section 274(n)(2)(D) exception applies for expenses paid for food or beverages provided by a restaurant in 2021 and 2022. For this purpose, a "restaurant" 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."

For 2021 and 2022, the 50% deduction limitation still applies to food or beverages from a business "that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk," because these businesses are not restaurants for the purpose of IRC Section 274(n)(2)(D).

The IRS denies the restaurant exception for (1) an eating facility on an employer's business premises that furnishes meals excluded from employee's gross income under IRC Section 119 or (2) an employer-operated eating facility treated as an IRC Section 132(e)(2) fringe even if operated by a third party. As a result, the 50% deduction limitation continues to apply to these arrangements.


Many taxpayers have been anxiously awaiting guidance on the meaning of "restaurant" for purposes of the temporary exception for 2021 and 2022. They will be disappointed that Notice 2021-25 interprets "restaurant" rather narrowly and excludes most meals provided to employees from on-site or employer-operated eating facilities. It is comforting, however, to see that restaurant delivery and take-out meals may qualify for the temporary exception. Taxpayers should consider whether their administrative processes and recordkeeping systems will capture the information needed to determine whether the temporary exception applies.

Notice 2021-25 does not address how the temporary exception for 2021 and 2022 applies in the context of per diems, a portion of which is deemed to be paid for meals. It is unclear whether further guidance will be issued. In the meantime, taxpayers should consider whether they can substantiate that the meals portion of their per-diem payments relates to food or beverages provided by a restaurant.


Contact Information
For additional information concerning this Alert, please contact:
Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (
National Tax – Accounting Periods, Methods, and Credits
   • Scott Mackay (
   • Alexa Claybon (