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Restoring the Three Martini Lunch Tax Deduction Won’t Fuel the COVID-19 Economy

One of President Trump’s demands for the next COVID-19 relief bill is the reinstatement of the tax deduction for business meals and entertainment expenses. Given that the president has a long history in the hospitality industry, his affinity for this tax subsidy is not surprising. But as a tool to boost the current troubled economy, this tax break is, as the President himself might say, a total loser.

What good is subsidizing business meals and entertainment when hardly anyone is traveling or meeting in person? Or that hotels, restaurants, golf courses and the like remain largely closed? And when those who reopen are functioning well below their capacity? Until the pandemic is brought under control, who will be doing business over lunch?

Lunch at three martinis

The tax break, affectionately known as the three martinis for lunch deduction, has been a long-standing mess for decades. Business executives and small business owners used it regularly to deduct personal expenses from the costs of doing business. Want to take your spouse to a fancy birthday dinner? Charge it to the business and make a deduction. Want to take a ride to the country club? Take a customer and claim a deduction. The tax scam has been around for so long that martinis have had time to be fashionable, catch on and trend back.

Congress has slowly reduced the deduction over the years, most recently in the 2017 Jobs and Tax Cuts Act (TCJA). The TCJA has generally repealed the deduction for business entertainment, such as, for example, green fees on golf courses or tickets to sporting events. But business meals have remained on the menu for tax breaks, albeit less so.

There was some initial confusion about the deduction for meals. But in 2018, the IRS issued interim guidance that taxpayers can generally still deduct 50% of customer-related business meals if food and beverages are purchased separately, or at least reported separately on an invoice or bill. invoice. This guidance, updated last February, does not exactly impose onerous requirements on businesses.

Mostly useless

For example, a golf club concerned with maximizing deductible expenses for its members could likely reduce non-deductible green fees, but increase the prices of dinner and deductible drinks at the 19e hole as long as it is billed separately.

Not only has the deduction for business meals been a privileged tool for tax evasion and therefore dubious tax policy, but its restoration now seems particularly unnecessary.

There is no doubt that hotels, resorts and restaurants have been hit hard by COVID-19. Even before governments shut down these businesses to prevent the spread of the disease, customers largely stopped going out. Business conferences have been canceled. Hotel reservations collapsed and restaurants were only able to do take out.

These industries may all need help. But will tax incentives help much?

It seems unlikely. Try this thought experiment: Would you be more likely to have a business dinner tonight if you could deduct the full cost rather than half? Would anyone attend? It seems unlikely.

Joe’s Bar and Grill

While some restaurants are slowly reopening, most will need to keep diners six feet apart for the foreseeable future, dramatically reducing occupancy and revenue. There is real doubt about how many people can survive on this low volume of business.

There is little evidence that business diners will soon be flocking to expense accounts restaurants. And the meal deduction will not help small neighborhood establishments. Mom’s Dinette and Joe’s Bar and Grill didn’t do a lot of expense accounts before COVID-19 and won’t do much afterwards. This deduction mainly benefits the joints of high-end white tablecloths. And probably not a lot.

There isn’t much academic research on the economic effects of tax breaks on the demand for meals and entertainment. But we have the results of a natural experiment. When the TCJA reduced the meal deduction to 50 percent, there was little evidence that overall demand for restaurant meals had slowed. If anything, the industry was pretty robust in 2018 and 2019.

For real help, control the pandemic

According to the National Restaurant Association, US restaurant receipts grew from $ 799 billion in 2017 (before the TCJA) to $ 833 billion in 2018 and $ 862 billion in 2019. Full-service restaurant receipts grew. from $ 263 billion in 2017 to $ 274 billion in 2018 and $ 285. billion in 2019.

The most important step the government can take to revive the hospitality industry is to bring the COVID-19 pandemic under control. Other than that, it’s hard to see what will help keep many of these businesses viable. But one thing is clear: Reinstating tax relief, as President Trump demands, will not do more than increase the rewards for business executives who play with the system.

Margarita W. Wilson

The author Margarita W. Wilson