Understanding the Food/Beverage Tax Deduction

The IRS set out the guidelines of what is and what is not considered a restaurant, for the purposes of the 100% food and beverages deduction for certain businesses that ordered through a restaurant in 2021 and 2022.

Normally, this deduction is not allowed; however, a new regulation states that this disallowance under Code Sec. 274(a)(1) does not apply to food or beverages provided at an entertainment activity if the food or beverages are separately purchased from the entertainment activity or the cost is separately stated from the cost of the entertainment in an invoice, bill or receipt.

Code Sec. 274(k) generally provides that no deduction is allowed for the expense of any food or beverage unless:

  • such expense is not lavish or extravagant under the circumstances
  • the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages

Code Sec. 274(n)(1) provides that a deduction for any expense for food or beverages generally is limited to 50% of the amount that is otherwise deductible. Code Sec. 274(n)(2) provides exceptions to the 50% limitation.

Section 210 of the Taxpayer Certainty and Disaster Act of 2020 provides a temporary exception to the 50% limitation for expenses for food and beverages provided by a restaurant. This section also applies to amounts paid or incurred after December 31, 2020, and before January 1, 2023.

Additional rules:

  • The operation of certain eating facilities by an employer does not provide gross income to employees who use those facilities
  • Excluding, from an employee’s gross income, meals furnished to him/her for the convenience of his/her employer

What is a restaurant for 2021-2022 deduction purposes?

The term “restaurant” means 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.

However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk. The 50% limitation of Code Sec. 274(n)(1) continues to apply to the amount of any deduction otherwise allowable to the taxpayer for any expense paid or incurred for food or beverages acquired from such a business (unless another exception in Code Sec. 274(n)(2) applies to such expense).

To get a better understanding of this tax deduction and how it may apply to your business, contact your CTBK service team for guidance.

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