Tax Tips Logo ImageISSUE:

Although it will not affect most not-for-profit institutions – unless you have UBIT deductions – the Taxpayer Certainty and Disaster Tax Relief Act of 2020 added a temporary exception to the 50% limit on the amount that businesses may deduct for food or beverages.

 

SITUATION:

Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

We were on a Zoom meeting with SCC’s CFO when she asked about the 50% limitation on meals and entertainment (entertainment expenses were suspended by the 2017 TCJA).

“For our consulting business, which we report as unrelated business income and apply both direct and allocated deductions, ‘food and beverage’ expenses have historically been a significant amount.  Last year, during the COVID-19 ‘pause’ they were not.  Now, as we schedule more and more in-person meetings, those expenditures are coming back.  We heard that for 2021 we are not required to apply the 50% limitation.  Is that true?”

“This is true.  The ‘Taxpayer Certainty and Disaster Tax Relief Act” (2020) includes I.R.C. section 274(n)(2)(D).  This provision in the law allows for a 100% deduction “for food or beverages provided by a

Restaurant.”  The rules go on to define what is and is NOT a ‘restaurant.’  And, you may not treat any eating facility located on your business premises nor and employer-operated eating facility treated as a de minimis fringe as a restaurant – even is these are operated by a third party vendor.”

“Are there other limitations?” she asked.

“Well, there is the section 274(k) rules that ensure 1) the food and beverage expense is not lavish nor extravagant and that an employee of your institution is present.  Also, remember the substantiation rules for meals in I.R.C. section 274(d).  You can find out more by reviewing IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.”

 

RULES:                                                                        .

From IRS Notice 2021-25:

APPLICATION OF § 274(n)(2)(D)

Pursuant to § 274(n)(2)(D), the 50-percent limitation of § 274(n)(1) does not apply to the amount of any deduction otherwise allowable to a taxpayer under chapter 1 for any expense paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant. For this purpose, 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-percent limitation of § 274(n)(1) continues to apply to the amount of any deduction otherwise allowable to the taxpayer under chapter 1 for any expense paid or incurred for food or beverages acquired from such a business (unless another exception in § 274(n)(2) applies to such expense).

 

BOTTOM LINE:

  • Internal Revenue Code section 274(n)(1) contains a 50% limitation on deductions for “meal and entertainment expenses.”  This has been around since 1986.
  • The 2017 “Tax Cuts and Jobs Act” suspended deductions for “entertainment expenses.”
  • For 2021 and 2022, 100% of food and beverage expenditures provided by a restaurant may be deducted – but there are nuances.
  • Also, I.R.C. section 274(k) requires the expenditure to not be lavish or extravagant.

 

Specific questions? Email Dave Moja – dave@mojacpa.com

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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