Small Business Finance News

IRS Clarifies Restaurant Expense Deduction Change

Written by Ken Gaebler
Published: 4/9/2021

Pandemic tax relief temporarily increases the allowable deduction for restaurant food and beverages from 50 percent to 100 percent.

This week, the Treasury Department and the Internal Revenue Service (IRS) issued additional guidance concerning the temporary 100% tax deduction for restaurant expenses.

Restaurant Meal Tax Deduction Changes

The increased deduction is part of the Taxpayer Certainty and Disaster Relief Act of 2020 and is applicable from Jan. 1, 2021, through Dec. 31, 2022.

This is a welcome change for the small business economy. It helps restaurants that are suffering during the pandemic by making it more likely that businesses will purchase from restaurants, given the expanded tax deduction for business meals.

As you consider the impact of deducting the full amount for your meal expenses, here are some important considerations:

  • In order to claim 100% of food or beverage expenses paid to restaurants, at least one employee of the business must be present when the food or beverages are provided.
  • The expense cannot be lavish or extravagant under the circumstances.
  • Takeout food appears to be deductible, as the IRS guidelines explicitly include food or beverages purchased for off-premises consumption.
  • The deduction only applies to purchases from traditionally-defined restaurants. Purchases from places that sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores, don't qualify.
  • Employer-operated eating facilities cannot be treated as restaurants, even if these facilities are operated by a third party under contract with the employer.

In the past, it has always been a pain to separate meals out from other expenses in order to ensure tax preparers didn't inadvertently deduct the full amount for restaurant expenses.

Now that you can deduct the entire amount for many business meals, it's tempting to just commingle all your expenses. However, we still recommend that you categorize and isolate your meal expenses separately.

If nothing else, you'll be able to determine how much you gained from this tax relief provision.

You'll also be in good shape for 2023, when this tax deduction will likely return to its 50 percent threshold, assuming Congress doesn't extend it.

Before we wrap up, it's worth noting that the tax regulations regarding deductions for meals and entertainment expenses are, surprise surprise, not straightforward.

Before you jump to any conclusions on what you can and cannot deduct, you should consult with your tax or legal advisors.

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