Expense Accounts : $8.9-Billion Loss Seen--but Restaurateurs Are Hopeful
One year ago, Zack Bruell opened “Z”--far and away the flashiest and most expensive restaurant in Cleveland.
His biggest problem, until now, has been getting Cleveland’s corporate restaurant crowd accustomed to dinner tabs nearing the $100 range for two. But with the expected new rules under tax revision legislation--making corporate entertainment expenses only 80% deductible compared to the current 100%--Bruell has a new worry.
With smaller write-offs, will corporate America cut back on entertaining its clients?
Ballgames, theater tickets and fancy restaurants may be somewhat threatened by the legislation. But few restaurant or leisure industry executives believe it spells doom. After all, one restaurateur explained, the new law basically allows executives to write off the entire meal--except for dessert.
‘Have to Entertain’
Like Bruell, many restaurateurs are worried but hardly unnerved. “People on top have to entertain like they’re on top,” Bruell said. But restaurant executives see the moderate change as a threatening trend that eventually could lead to elimination of all tax breaks for business entertainment.
“It’s only a matter of time before they come back and ask for more,” said Chuck Frank, president of Spectrum Foods, the San Francisco chain of 12 restaurants that includes Prego and MacArthur Park, which both have Los Angeles-area units. “I’m petrified by this legislation.”
So, too, is the National Restaurant Assn., the Washington-based trade association that represents 100,000 restaurants. While many individual restaurateurs see little effect, a study done for the association by Chase Econometrics forecasts that the 80% deductibility provision will cause the nation’s restaurants and bars to lose an estimated $8.9 billion in sales in 1987, and lay off as many as 342,000 employees.
Small Businessmen Hurt
“It particularly discriminates against the small businessman who can’t afford television advertising and instead relies on the business marketing meal,” said an association spokesman.
Randall Howatt, president of Rusty Pelican, the Irvine-based seafood restaurant chain, expects some “short-term, knee-jerk” reaction to the law. He said that traffic may drop off a bit--particularly at lunch hour, when about half the business is corporate clientele. “But people will always need to conduct business over lunch,” he said.
The final tax bill is not nearly as restrictive as the President’s tax overhaul proposal, which drew howls of protest from sports teams and restaurateurs. Under the President’s proposal, deductions for business meals would have been limited to $25 per person plus half the rest of the restaurant bill. Deductions for most entertainment expenses other than meals would have been eliminated.
No one knows exactly how corporate America will react to the final tax bill. “You’d have to be God to know what will happen,” said Peter Berlinsky, editor of Restaurant Business, a New York-based industry trade journal. “But when General Motors puts out a memo to its sales staff to cut back entertainment spending by 20%, then we’ll know.”
Thus far, General Motors has released no such memo. A GM spokesman said the company is still looking at the issue. And Ford Motor Corp. also is avoiding a hasty judgment. “Maybe a year from now we’ll know the effects. It’s just too early to tell right now,” said Thomas Foote, a spokesman for the auto maker.
Firms Withhold Comment
Most companies are withholding comment until the legislation passes. Union Oil Co., Honeywell Inc., and Fluor Corp. all said they had no comment on the pending legislation.
In some cases, however, tax experts say corporate entertainment policies could face major changes.
Besides shrinking the amount that can be deducted, for example, the new law also tightens the restrictions about what qualifies as a business meal, said Philip Kavesh, tax manager at Laventhol & Horwath’s Los Angeles office.
“If two attorneys go out to lunch and discuss business in general, that would no longer qualify,” said Kavesh. “But if they discuss, say, two specific pending cases, that would qualify.”
And if those same two attorneys attend a baseball or a football game while discussing the cases, they will only be able to write off 80% of the face value of the tickets. In the past, they could write off 100% of the ticket prices--even if they paid more for them than the face value.
Despite a reliance on corporate business--particularly in season ticket sales--few professional sports teams are openly expressing concern.
Nearly half of the Los Angeles Rams’ 45,000 season tickets are purchased by companies, said Peter Donovan, the team’s director of public relations. “We’d like to think that fans have tickets because they’re rooting for the Rams--not because the tickets are tax write-offs,” Donovan said.
Team Sees No Effect
Similarly, the Los Angeles Dodgers say that more than two-thirds of their season tickets--which sell for $405 for reserved and $486 for box seats--are purchased by corporations. “We don’t see this having an adverse effect,” said Steve Brener, director of publicity for the team. “After all, on a season ticket basis, the tickets only cost $6 each (per game).”
Those facing the biggest threat appear to be ticket brokers. With the new law limiting the tax breaks to part of a ticket’s face value, corporations no longer will be able to buy $30 tickets to the Super Bowl for $200--and then write off the full $200 price. Instead, they will only be able to claim 80% of the $30 face value.
“That stinks,” said a Canoga Park ticket broker. “Nearly half of my business is corporate, but we’ll survive.”
