IRS allows 100% deduction for certain food, beverages

Companies are getting a small break! IRS is temporarily letting businesses take a 100% deduction on food and beverages from restaurants.

As you know, your company can typically take a 50% deduction on meal and beverage costs, as long as:

• it’s reasonable (not lavish), and
• the company or employee is present when food or drinks are furnished.

But the Taxpayer Certainty and Disaster Relief Act of 2020, aimed to help businesses in light of the COVID-19 pandemic, includes a temporary exception to the normal 50% limit.

From Jan. 1, 2021, through Dec. 31, 2022, your company can take a 100% deduction for food or beverages paid to restaurants. Of course, the normal conditions (mentioned above) still apply.

What qualifies

Your employees may expense food and beverages at a variety of places, from sit-down restaurants to fast food drive-thrus. So, what specifically qualifies for the 100% deduction?

IRS says “restaurants” include “businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption.”

Restaurants don’t include businesses that primarily sell prepackaged goods not for immediate consumption (e.g., grocery stores, convenience stores). The definition also excludes employer-operated eating facilities, even if a third party under contract with your company operates the facilities.

Finally, IRS says your company should still use the 50% deduction if:

• the eating facility is located on-site and provides meals excluded from an employee’s gross income, or
• an employer-operated eating facility’s treated as a de minimis fringe benefit.

You’ll find all the details of this temporary 100% deduction for food and beverages in IRS Notice 2021-25. Be sure to share it with your staff, so they can flag food and beverage expenses that come across and fit that bill.