It is no secret that the restaurant industry is a tough business. Whether they are fast-casual eateries or the purveyors of upscale gourmet fare, restaurants have a frighteningly high failure rate, and the combination of labor woes, low margins, and fickle tastes have combined to create a particularly difficult playing field.
In the midst of all that stress and anxiety are concerns about tax laws and staying on the good side of the IRS. Whether you are new to the restaurant industry or an experienced chef and entrepreneur, it is important to understand how newly enacted tax legislation and changes to existing law could impact your eatery, your profitability and your ability to operate.
One of the most significant changes to tax law and how it impacts the restaurant industry goes by the unsexy and unhelpful name: Temporary 100-Percent Deduction for Business Meal Expenses. Notice 2021-25, and there is a lot to unpack in this new tax law change. In the wake of the coronavirus pandemic and its heavy impact on restaurant owners, the IRS has seen fit to make some significant, albeit temporary, tax changes.
In the end, these tax changes could have a significant impact on restaurant owners, helping them preserve their profitability, hire back their laid off staff and buy themselves time until the flood of diners returns.
Given the significance of this new IRS rule change on the restaurant industry and the owners of popular eateries, it is surprising that the rule itself applies not to the men and women who own restaurants but to the diners who eat in them. More specifically, rule 2021-25 allows for the temporary 100% expensing of certain restaurant meals, allowing businessmen and women to write off significantly more than they had previously been able to.
Since the previous cap on the expensing of business meals and entertainment was 50% of the cost, this change is a significant one. Essentially the implementation of rule 2021-25 means business executives, entrepreneurs and others can enjoy double the benefit when they dine out, giving them a strong incentive to entertain clients at the restaurant down the street instead of taking advantage of other options.
It is important to understand that this new rule is only a temporary measure, and that means business owners may not want to get used to the sudden flood of business diners they are almost guaranteed to experience. It is still important for the owners of restaurants to lower their overhead expenses, take care with hiring decisions and expand their menus to capture the widest universe of diners possible.
Even so, this temporary lifeline could prove pivotal for struggling restaurant owners, especially given the enormous disruptions the COVID-19 pandemic has created for the industry. Now that the worst appears to be over, diners are heading out to their favorite restaurants once again, and that is certainly good news for the restaurant industry.
In the meantime, restaurant owners can do what they can to capture a share of what is sure to be a marked increase in business meals and entertainment. Now that busy executives and the companies they work for can write off 100% of their dining expenses, the restaurants they choose will be the indirect beneficiaries of this governmental largesse.