What is a "Restaurant" for Purposes of the 2021-2022 100% Food/Beverage Deduction?

IRS Notice 2021-25 sets out what is, and what is not, a restaurant, for purposes of the rule that allows a 100% deduction for certain business expenses for food and beverages provided by a restaurant in 2021 and 2022.

Code Sec. 274 generally limits or disallows deductions for certain meal and entertainment expenses that otherwise would be allowable. Code Sec. 274(a)(1) generally disallows deductions for expenses for entertainment, amusement, or recreation. Reg § 1.274-11 provides that the disallowance under Code Sec. 274(a)(1) does not apply to food or beverages provided at an entertainment activity if the food or beverages are separately purchased from the entertainment activity or the cost of the food or beverages is separately stated from the cost of the entertainment in an invoice, bill, or receipt. (Reg § 1.274-11(b)(1)(ii))

Code Sec. 274(k) generally provides that no deduction is allowed for the expense of any food or beverage unless:

1. Such expense is not lavish or extravagant under the circumstances; and
2. The taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages.

What is a restaurant for purposes of the 2021-2022 deduction? For purposes of the 2021-2022 deduction, the term “restaurant” means 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.

However, a restaurant does not include 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. The 50% limitation of Code Sec. 274(n)(1) continues to apply to the amount of any deduction otherwise allowable to the taxpayer for any expense paid or incurred for food or beverages acquired from such a business (unless another exception in Code Sec. 274(n)(2) applies to such expense).

In addition, an employer may not treat as a restaurant for purposes of Code Sec. 274(n)(2)(D):

1. Any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income under Code Sec. 119, or
2. Any employer-operated eating facility treated as a de minimis fringe under Code Sec. 132(e)(2), even if such eating facility is operated by a third party under contract with the employer as described in Reg § 1.132-7(a)(3).