In early April, the IRS released guidance explaining when the temporary 100 percent deduction for restaurant meals is available, and when the 50 percent limitation on the deduction for food and beverages continues to apply.
Under section 274(n) (1) of the tax code, a deduction for any expense of food or beverages is generally limited to 50 percent of the amount that would otherwise be deductible. However, the Consolidated Appropriations Act enacted a temporary exception to the limitation for amounts paid or incurred after December 31, 2020 and before January 1, 2023 for food or beverages provided by a restaurant. This temporary 100 percent deduction was designed to help restaurants, many of which have been adversely affected by the COVID-19 pandemic.
What counts as a “restaurant?”
Under the new guidance, the term “restaurant” refers to 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’ premises.
What a “restaurant” isn’t
A restaurant does not include a business that primarily sells prepackaged food or beverages not for immediate consumption, including:
- grocery stores
- specialty food stores
- beer/wine/liquor stores
- drug stores
- convenience stores
- vending machine kiosks
Additionally, an employer may not treat the following as a “restaurant:’
- Any eating facility located on the employer’s business premises that is used in furnishing meals excluded from an employee’s gross income
- Any employer-operated eating facility that offers minimal “fringe benefit” food/meals, even if that facility is operated by a third party.
The 50 percent limitation continues to apply to any deduction otherwise incurred by the taxpayer for any expenses paid for food and beverages bought from those types of businesses.
Again, this notice is effective for amounts paid or incurred after December 31, 2020 and before January 1, 2023.