Room Service
Some tax practitioners started getting concerned about the treatment of meal expenses in February, when Congress’s nonpartisan scorekeeper, the Joint Committee on Taxation, gave the clearest indication yet that the deduction had been eliminated for business meals.
In its 38-page overview of the new federal tax system, the JCT said in a footnote that the new law “changed the rules governing the deductibility of meal and entertainment expenses to generally prohibit deductions for entertainment expenses, including meals and other items, activities, and facilities that constitute entertainment.”
In a separate analysis, the JCT estimated that ending the deduction for meals and entertainment would save the federal government $23.5 billion over a decade.
The old law permitted the deduction for entertainment or meals if companies had a necessary business purpose, like current contracts or prospective deals, and they weren’t “lavish or extravagant.” Companies can still deduct 50 percent of the cost of food in limited circumstances, like when employees are traveling and order room service or eat solo.
High-End Steakhouses
Del Frisco’s Restaurant Group Inc., which operates steakhouses across the U.S., says the majority of its weekday business comes from expense-account customers. “Our business therefore may be affected by reduced expense account or other business-related dining by our business clientele” as a result of U.S. budgetary and fiscal policy uncertainties, including recent tax legislation, the company said in its latest annual report in March.
The business-meal spending by companies is a “meaningful amount” for the restaurant industry, and if the IRS makes changes, it’s very likely to have a negative effect for high-end steakhouses like Morton’s or Ruth’s Chris, said Darren Tristano, chief executive officer of the researcher CHD-Expert for the Americas.
Cicely Simpson, the executive vice president of public affairs at the National Restaurant Association, said the group was optimistic that the IRS would eventually provide guidance preserving the 50 percent deduction for client meals.
Earlier iterations of the tax bill seemed to keep the 50 percent meal deduction intact for qualified expenses. Gary Botwinick, head of the taxation, trusts and estates group at Einhorn, Harris, Ascher, Barbarito & Frost PC in Denville, N.J., said he blames the current confusion on the speed with which Congress enacted the tax law.
Still, some firms may just choose to, well, eat the cost.
“Human connection is a core part of doing business,” said Kelly Porter, a partner and managing director at Woodside Capital Partners, a boutique investment bank in East Palo Alto, California. “Connecting over a meal or other entertainment helps create a different, deeper bond than meeting in an office.”