Many changes have occurred with regard to meal and entertainment deductibility since the Tax Cuts and Jobs Act of 2017 (TCJA) and continuing with the Consolidated Appropriations Act of 2021 (CAA) signed into law on December 27, 2020.
In an effort to help the struggling restaurant industry during the COVID-19 pandemic, changes were made to allow a 100% deduction for business meal expenses incurred after December 31, 2020 through December 31, 2022. If meals are not provided by a restaurant, the deduction is still limited to 50%. On April 8, 2021, the IRS issued Notice 2021-25 to provide further guidance that a restaurant does not include businesses that primarily sell pre-packaged food or beverages not for immediate consumption.
On November 16, 2021, the IRS issued Notice 2021-63 to indicate that a taxpayer that properly applies the rules of Rev. Proc. 2019-48 may treat the meal portion of a per diem rate or allowance as being attributable to food or beverages provided by a restaurant.
What is Per Diem and how do we apply Rev. Proc. 2019-48?
A per diem allowance is an amount a business pays for lodging, meals, and incidental expenses incurred when traveling. The allowance is in lieu of paying employees for actual travel expenses.
The amount of expenses considered substantiated for each calendar day equals the lesser of the per diem allowance for that day or the amount computed at the federal per diem rate for the relevant location set by the U.S. General Services Administration.
No receipts are required to substantiate the deduction as long the employee provides the time, place, and business purpose of the travel for that day.
If the per diem allowance is only for meals and incidental expenses (i.e., there are no lodging costs) the amount considered substantiated is the same as above using the per diem allowance for meals and incidental expenses (M&IE).
A per diem allowance is treated as paid for M&IE only if:
- The business pays the employee for actual expenses for lodging based on receipts submitted to the payor,
- The business provides the lodging,
- The business pays the actual expenses for lodging directly to the lodging provider,
- The business does not have a reasonable belief that the employee will or did incur lodging expenses,
- The allowance is computed on a basis similar to that used to compute an employee’s compensation (such as the number of hours worked, or miles traveled).
Businesses that pay employees on a per diem basis should review their procedures for compliance with Rev. Proc. 2019-48 so they can deduct their per diem payments to employees without limitation including 100% for meal costs.
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