Tax News Update    Email this document    Print this document  

November 17, 2021

IRS clarifies that temporary 100% deduction for restaurant meals applies to meal portion of per diem payments

In Notice 2021-63, the IRS clarified that the temporary 100% deduction for 2021 and 2022 for food or beverages provided by a restaurant applies to the meal portion of per diem payments.


A taxpayer travelling away from home on business may deduct travel expenses subject to the limitations imposed by IRC Section 274, which generally include heightened substantiation requirements and a 50% limitation on deductions for meals. Likewise, employees travelling away from home in furtherance of their employer's business may be reimbursed for their travel expenses and exclude these reimbursements from income if the IRC Section 62 accountable plan rules are satisfied. Like other taxpayers, the employer's deduction for these reimbursements is subject to the limitations of IRC Section 274. Per diems, which are an alternative to the normal substantiation rules of IRC Sections 62 and 274, simplify compliance by deeming prescribed amounts to be substantiated without the need for receipts or other documentation of actual expenses.

Accountable plans

IRC Section 62 excludes certain reimbursed business expenses of employees from adjusted gross income if the payment to the employee is: (1) for expenses that have a business connection to the employer, (2) substantiated in the manner required, and (3) returned, to the extent of any excess reimbursement.

IRC Section 274 imposes limits on otherwise available business deductions. As relevant here, IRC Section 274(d) requires heightened substantiation for travel expense deductions and IRC Section 274(n) generally limits deductions for food or beverages to 50% of the amount of the expense. IRC Section 62 generally requires these heightened substantiation rules to be met to the extent they would apply to that type of expense.

Per diems

The IRC Section 274 regulations authorize the Commissioner to prescribe rules for the treatment of per diems. Under this authority, the per diem rules deem an employee's travel expenses to be substantiated up to the permitted per diem rates if the employee has substantiated the business purpose, date and place of a trip. These rules are in Revenue Procedure 2019-48.

The regular federal per diem rate has two components, which vary by geographic location and from month to month: meal and incidental expenses (M&IE) and lodging expense. The rates are published by the General Services Administration (for the continental US), the Defense Department (for non-foreign localities outside the continental US, such as Alaska, Hawaii and Puerto Rico), and the State Department (for foreign localities). In general, a per diem may cover lodging in addition to M&IE or it may cover only M&IE — a per diem that covers only lodging expenses is not permitted. A per diem that covers only incidental expenses is permitted but uncommon.

In addition to the general per diem rate, an annual notice provides three special rates. First, a taxpayer may use the high-low method, which further simplifies per diems by using one "high rate" for any city in the continental US treated as a high-cost location, and another "low rate" for all other locations. Currently, the high rate is $296 ($74 of which is M&IE) and the low rate is $202 ($64 of which is M&IE). The second special rate is an incidental expense-only per diem amount, which is currently $5. The third special rate is the special transportation industry M&IE rate, which is currently $69 for travel in the continental US.

IRC Section 274(n)

Subject to exceptions, IRC Section 274(n) limits otherwise available business deductions for "food or beverages" to 50% of the amount of the expense. For this purpose, the per diem rules prescribe what portion of a per diem must be treated as an expense for food or beverages as follows:

  1. If the per diem does not cover meals (that is, an incidentals-only per diem), no portion is treated as an expense for food or beverages.
  2. For M&IE-only per diems, the full amount of the per diem is treated as an expense for food or beverages.
  3. For per diems that include a lodging component:
    1. The portion of the allowance that equals the federal M&IE rate is treated as an expense for food or beverages if the per diem allowance equals or exceeds the federal per diem rate for the locality.
    2. If the per diem allowance is less than the federal per diem rate for the locality, the taxpayer must either:
      1. Treat the portion of the allowance that equals the federal M&IE rate as an expense for food or beverages or
      2. Treat 40% of the allowance as an expense for food or beverages

Exceptions to IRC Section 274(n)

Ordinarily, the statutory exceptions to IRC Section 274(n) allow full deduction of (1) amounts included as compensation, (2) certain reimbursed expenses, (3) recreational expenses for employees, (4) items made available to the general public, and (5) items sold for adequate and full consideration.

The Consolidated Appropriations Act, 2021 (CAA) added IRC Section 274(n)(2)(D), a temporary exception that allows full deduction of otherwise deductible expenses for "food or beverages provided by a restaurant" if paid or incurred after December 31, 2020, and before January 1, 2023, without regard to the taxpayer's tax year (see Tax Alert 2020-2938).

Notice 2021-25, issued in April 2021, clarified that, for the IRC Section 274(n)(2)(D) exception, 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." The exception does not apply to food or beverages from (1) a business that primarily sells pre-packaged food or beverages not for immediate consumption; (2) an eating facility on an employer's business premises that furnishes meals excluded from an employee's gross income under IRC Section 119; or (3) an employer-operated eating facility treated as an IRC Section 132(e)(2) fringe even if operated by a third party (see Tax Alert 2021-0739).

Notice 2021-63

Notice 2021-25 did not address how the temporary exception for 2021 and 2022 applied in the context of per diems, a portion of which is deemed to be paid for meals.

Notice 2021-63 resolved this issue by stating that a taxpayer that properly follows the per diem rules can attribute the full meal portion of a per diem rate or allowance paid or incurred after December 31, 2020, and before January 1, 2023, to food or beverages provided by a restaurant.


Notice 2021-63 provides welcome guidance that taxpayers may avail themselves of the "provided by a restaurant" exception for the cost of providing the meals portion of a per diem without having to demonstrate that the meals were in fact purchased from a restaurant. That is, for 2021 and 2022, the expense of providing a per diem is fully deductible, a meaningful difference for industries that rely heavily on per diems for business travel. This result is consistent with the policy supporting the per diem alternative to the normal substantiation rules, allowing per diems to continue to be a simplified approach to business travel expenses without losing out on the two-year exception allowing for full deductibility of restaurant meals.


Contact Information
For additional information concerning this Alert, please contact:
Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (
Workforce Tax Services - Employment Tax Advisory Services
   • Kristie Lowery (
   • Kenneth Hausser (
   • Debera Salam (
National Tax – Accounting Periods, Methods, and Credits
   • Alexa Claybon (