Let’s Talk About Tax

Wait, wait – don’t walk away. Let me explain. Roger Moore made his first movie as James Bond in 1973. At that time, businesses could deduct 100 percent of all meal and entertainment expenses. President Jimmy Carter began the movement to curb these business deductions for what he called “three martini lunches” during his presidential campaign in 1976. By 1985, when Roger Moore’s last Bond movie hit theaters, President Ronald Reagan was in the process of finalizing the Internal Revenue Code of 1986, which would limit meals and entertainment deductions at 50 percent.

Coincidence? All I can say is, that theory should survive to die another day.

Under the Tax Cuts and Jobs Act of 2017, Section 274(a) was again amended, this time to completely eliminate the deductions for business entertainment expenses.

And then, in response to the global pandemic which began in early 2020, President Donald Trump urged Congress to make business meals fully deductible, in an effort to bolster the reeling restaurant and hospitality industries. Congress responded in the Consolidated Appropriations Act of 2021 by enacting IRC Section 274(n)(2)(D), which allows, for tax years 2021 and 2022 only, a 100 percent deduction for all business “food and beverages provided by a restaurant.”

Among the nuances in this temporary provision, the food does not need to be consumed on premises; takeout food qualifies. However, prepackaged food for offsite consumption (for instance, pre-prepared sandwiches from a grocery store) does not qualify, nor does liquor purchased from a liquor store.

In addition, the prior “strict substantiation” requirements for the meal’s deduction have also been relaxed. A business now needs only document the business purpose and dollar amount of each meal expense deducted (although retaining copies of receipts and records of who was wined and dined remains a best practice).

So, does this mark the return of the “three martini lunch”? Maybe, at least through 2022.

But there still are limits, such as the usual precondition for business deductions to be “reasonable” and related to the business.

Finally, remember that the Tax Cuts and Jobs Act’s general prohibition on deductions for business entertainment expenses remains in force. For example, if a business fetes a customer in its luxury suite at a football game, the cost of the tickets is not deductible, and the food and beverage expenses must be separately invoiced from a qualifying “restaurant.”