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Business meals and the Employee Retention Credit revisions

Shelley E. Huguley swfp-shelley-huguley-19-kayla-parkey-food.jpg
For employers reimbursing employees for meals using a per diem, the meal portion of the per diem qualifies for the 100% restaurant meal deduction based on an IRS notice on Nov. 16, 2021. 
Beneficial changes may require more recordkeeping requirements.

outlook-logo-22.jpg*This is the final article in our 2022 Southwest Economic Outlook series. Hear from Oklahoma State University and Texas A&M AgriLife Extension economists about the 2022 outlook. 

Employers have been able to deduct 50% of business meal expenses for many years. Congress modified the limitation on expenses paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023, for food and beverages provided by a restaurant to be a 100% deduction with some exceptions.  

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. It does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption—for example, a grocery store; a specialty food store; drug store; a convenience store; a newsstand; or a vending machine or kiosk. The 50% limitation continues to apply to those businesses.  

If an employer provides meals excluded from an employee’s gross income or has an employer-operated eating facility, the meals provided are not considered as being from a restaurant. 

This change, while beneficial, will increase the recordkeeping requirements to differentiate between the two sources of meals. For employers reimbursing employees for meals using a per diem, the meal portion of the per diem qualifies for the 100% restaurant meal deduction based on an IRS notice on Nov. 16, 2021. 

swfp-shelley-huguley-19-kayla-parkey-daddy.jpgHarvest love notes to go: Congress modified the limitation on expenses paid or incurred for food and beverages provided by a restaurant to be a 100% deduction. (Photo by Shelley E. Huguley)

Another important change resulted from the passage of the Infrastructure Bill which amended the Employee Retention Credit (ERC) for 2021. Now, the ERC will only apply to the first three quarters of 2021. It also increased the maximum credit amount for each employee to 70% of a maximum of $10,000 for each of the first three quarters of 2021 or $21,000 ($10,000 x 3 x .7) per qualified employee. 

Self-employed farmers and ranchers are not eligible for the credit, but the credit can be claimed for wages paid to their eligible employees. Individuals related to the employer (children, grandchildren, siblings, nieces, nephews, etc.) are not eligible employees. However, the spouse of the farm employer is a qualified employee for the credit. 

Gross receipts are used to determine the employer’s eligibility for the ERC. Gross receipts for a cash basis farmer or rancher include income received during the applicable calendar quarter. Items included in business gross receipts are sales of production, crop insurance and disaster proceeds, patronage dividends, government payments, and custom hire or services income. Non-business receipts include investment income, interest, dividends, rents, royalties, and annuities which are also included in the gross receipts calculation.  

To be eligible for the ERC an employer must qualify under the significant decline in gross receipts test which has been relaxed for 2021 as well. An employer may qualify for the ERC if gross receipts for a calendar quarter are less than 80% of the gross receipts for the same quarter for 2019. The employer may elect to use an alternative quarter which allows the use of 2019 or 2020 gross receipts as a comparison to 2021 on a quarterly basis. The ERC can result in significant tax savings for qualified employers. 

Be sure to consult with your tax advisor concerning these and other tax provisions. In addition, the Farmer’s Tax Guide, IRS Publication 225 for completing 2021 returns, contains useful income tax information for farmers and ranchers.  

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