The Internal Revenue Service and National Treasury Department have announced an increase in food and beverages deductions that businesses can claim up until 2023. The agencies have outlined which expenses would qualify for temporary 100% food and beverages deductions ‘provided by a restaurant.’
Which period is this temporary food and beverage deductions available for?
Up until last December, small businesses could only deduct 50% of their costs incurred for certain meals and beverages purchased from a restaurant. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Disaster Relief Act) offers a temporary full deduction for small businesses. There are, however, certain circumstances where this may not apply. This tax relief program is applicable to deductions for expenses paid or incurred between January 1, 2021, and December 31, 2021, for food or beverages provided by a restaurant.
How do I know if I am eligible?
For the purpose of this Act, the IRS defines a restaurant as any business that prepares and sells food or beverages to retail customers for immediate on-premises and/or off-premises consumption. Businesses that primarily sell pre-packaged goods, not for immediate consumption, do not qualify. This would include grocery stores, specialty food stores, beer, wine, or liquor stores, drug stores; newsstands, ending machines, kiosks, and convenience stores. Additionally, an employer may not treat certain employer-operated eating facilities like restaurants, even if these facilities are operated by a third party under contract with the employer.
The food and beverages deductions do not apply if the costs for food and other expenses are paid for under one bill. This means you’re eligible to apply for this food and beverages tax deduction if the food provided at your staff event was purchased separately from other expenses. Food must not be purchased alongside entertainment. The best option is ensuring that they are paid for and provided on separate receipts, bills, or invoices, even if your restaurant provider will be providing other services for the same event. There is, however, a condition that prohibits exorbitant or lavish costs incurred under the circumstances.
In order for an application for this deduction to be valid, someone from the business (employee or employer) must be present when food and beverages are provided by the restaurant.
What are the temporary exceptions for the 50% limitation?
There is a temporary exception to the 50% deduction limitation. Where the 100% food and beverages deductions do not apply to certain eating facilities, the 50% deductions continue to apply to certain arrangements. These instances include when an eating facility, which provides meals excluded from employee’s gross income (under IRC Section 119), is located on the employer’s business premises. And, when an eating facility is operated by the employer (under IRC Section 132(e)(2), even if operated by a third party.
Based on the stipulations, restaurant delivery and take-out food and beverages may qualify for the temporary exception. TIt remains unclear whether per diem, generally paid to freelance workers, will be considered deductible under these provisions. We will be on the lookout for further updates on this tax relief. All taxpaying businesses should ensure that their administrative processes and record-keeping systems will capture the information needed if they wish to claim these temporary food and beverages deductions.
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