Hospitality Clients: Beware Audit Pitfalls Over Industry Classification

The COVID-19 Pandemic has been extraordinarily impactful on hospitality businesses, particularly sit-down dining establishments. To help stimulate this important sector of our economy, one overwhelmingly dominated by small and closely held businesses, Congress authorized a temporary, two-year, 100% business expense deduction for certain business meals at “restaurants.” As with all (tax) law changes, the devil is in the details.

The IRS published on its website Notice 2021-25 which defines a “restaurant” for the purposes of this law change as a “business that prepares and sells food or beverages to retail customers for immediate consumption.”  The IRS explicitly excludes businesses that “primarily sell pre-packaged food or beverages not for immediate consumption.”  The IRS notes that neither a “specialty foods store” nor a “convenience store” is a restaurant.

In recent audits of non-hospitality clients, we have seen the IRS and state Departments of Revenue scrutinize meal and entertainment deductions, going so far as to investigate the underlying restaurants that issued the receipts. In those cases, the IRS has looked to the NAICS and SIC codes that the restaurants listed on their entity documents. An incorrect NAICS or SIC code by an unwary restaurant owner can lead to the disallowance of business expense deductions for legitimate business meals expensed by the restaurant’s patrons.

In order to prevent this derivative audit risk, we urge our hospitality clients to reach out for a complimentary Industry Classification Review. Our attorneys will review your formation documents and recent tax filings to help determine whether your business is incorrectly classified. We consider this a small effort to help closely held and small businesses get back to normal after the incredibly challenging year we all faced.

We remind our clients that the best time to clean up any paperwork and business formality loose-ends is yesterday. The next best time is today.

The information provided herein should not be relied upon as legal advice. Your receipt of this information does not create an attorney-client relationship between you and Shmuel Law Group, LLC. Any advice provided herein should be discussed between you and your legal and tax advisers and applied to your individual circumstances prior to your acting on it. In certain jurisdictions, this publication may constitute attorney advertising.

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