IRS Explains New Rules for When Businesses Can Deduct 100% of Food and Beverage Expenses

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On April 8, 2021, the Internal Revenue Service issued Notice 2021-25 to provide guidance on the rule changes made under the Consolidated Appropriations Act, 2021 (CAA), which passed in December 2020. The CAA added a temporary exception to the 50% limit on the amount that businesses may generally deduct for food or beverages.

This temporary exception allows a 100% deduction for amounts paid or incurred for food or beverages provided by a restaurant. This deduction not only saves money for business owners, but was also intended to help generate income for restaurants, an industry that has been negatively impacted by the restrictions caused by the COVID-19 pandemic.

Beginning January 1, 2021, through December 31, 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided, and the expense is not lavish or extravagant under the circumstances.

Eligible expenses include purchases from businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption. Purchases from businesses that primarily sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores, do not qualify. The 50% limitation continues to apply to these expenses.

Additionally, an employer may not treat certain employer-operated eating facilities as restaurants, even if these facilities are operated by a third party under contract with the employer.

If you need assistance interpreting these rules or any of the other COVID-related relief provisions, please contact a GYF Tax Executive at 412-338-9300.

Marne Babich

Marne Babich

Marne has more than 20 years of experience in public accounting. She focuses on providing tax planning, compliance and research services for closely held businesses, as well as their owners and executives.

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