Uncle Sam’s Taking Bigger Bite, but Restaurants Are Faring Well
At Los Angeles’ Seventh Street Bistro, where downtown executives frequently make deals over candlelight and white tableclothes, owner Laurent Quenioux feared that tax reform might make customers lose their appetite for his pricey cuisine.
After all, under the new tax law that went into effect Jan. 1, diners talking business amid the art deco walls of the downtown eatery no longer can deduct 100% of the cost of the restaurant’s $30 lobster mousse or other entrees. At tax time, they or their employers now can deduct only 80%.
Yet, this year the average total lunch bill per diner, Quenioux said, is running about $32, up from $28 last year.
“I was worried about how tax reform would affect my business,” said Quenioux, “but so far, Metro rail (construction) is having more impact than the tax.”
Eight weeks into tax reform, stricter rules limiting the deductibility of business meals are apparently having little effect on the dining habits of executives across the country.
Businessmen and women continue to flock to pricey gastronomic haunts--dispelling at least for now the restaurant industry’s worries of financial woe. But one expert cautions that it may be too early for restaurateurs to celebrate.
“Tax reform is less than 60 days old,” said Dan Lawrence, a partner in the Dallas office of Wyatt Co., a benefits consulting firm. “I don’t think the real impact is going to hit companies until the first time they do their taxes” under the rules of the new tax law.
The restrictions on business meals--limiting deductions to 80% of the bill, requiring that business be discussed and stipulating that the meal not be “lavish”--as well as limits on tax-deductible business entertainment are expected to raise an additional $11.4 billion in tax revenues in the next five years, according to an estimate by the House Ways and Means Committee.
The new limits on entertainment expenses would phase out deductions for expenses such as banquets and private stadium seating at entertainment and sporting events. While the luxury boxes would not be deductible, ordinary tickets to sports events would still qualify as a tax-deductible business expense under the 80% limitation.
For years, business meals, travel and entertainment--characterized euphemistically and unfairly, some say, as the “three Martini lunch”--came to represent a lightening rod of sorts for critics of the federal tax system. Such critics have long complained that it is unfair to allow wealthy executives to deduct an activity that most ordinary wage earners cannot.
As long as 26 years ago, President John F. Kennedy declared that: “The slogan ‘It’s deductible’ should pass from our scene.” And virtually every Administration since then has tried to do away with the deductible business meal. But that deduction has come in especially handy for big spenders.
Bob Gibson, chairman of the Group, a public relations firm which represents musicians Chaka Khan and Black Sabbath among others, for example, said that last year he and four other people ran up a dinner tab of $1,200 at a pricey New York restaurant. As the food piled up and the wine flowed, they jubilantly celebrated a video and record deal, Gibson recalled, only to discover after dinner that the deal had fallen through.
If he hadn’t been able to deduct the meal, Gibson said, “It would have hurt a lot more.”
Business Lunch Survives
That was the forecast of restaurateurs, who predicted that their $131-billion-a-year industry would lose $28.5 billion in the next three years and have to eliminate 342,000 jobs in 1987 alone because of the new deduction rules.
But for all the worries, the business meal--from the lavish to the pedestrian--appears to have survived.
“What can you do, start taking people to Burger King?” protested Paul Alvarez, chairman of New York-based Ketchum Public Relations firm, which, he says, does a lot of wining and dining to attract and keep blue chip clients such as Aetna Life Insurance, Dow Chemical and H. J. Heinz Co.
Adds Keith Anderson, a spokesman for Pepsico: “There’s been no change in our policy on business lunches. We assume our employees are using business lunches for their appropriate purpose--if it moves the business along, it should be done. That doesn’t change with tax reform.”
Although most experts agree with that assessment, they caution that it is too early to draw any long-term conclusions.
Some professional sports teams are already reporting a softening in demand for season tickets and private seating because of the elimination of deductions for luxury box seating.
“It has affected us in a big way,” said Dick Beam, director of operations for the Los Angeles Rams, who, despite getting into the NFL playoffs, have been unable to generate much renewal interest in their $30,000-a-year luxury box seating booths or season tickets.
“The people that did not renew with us said it was because of tax reform,” Beam explained.
Some experts say that attitude may soon spill over to business meals at expensive restaurants.
At Rex Il Ristorante in downtown Los Angeles, for example, owner Mauro Vincenti blames tax reform for dampening business enthusiasm for dining at Rex, where the average meal for two (not including liquor) can total $80 or more.
“It’s a bit early to tell what the effect (of tax reform) is, but we’ve been seeing some effect,” said Vincenti. “Instead of buying a $100 bottle of wine, people are drinking less-expensive brands.”
Some, however, are already taking steps to adjust to the new change. At several companies, including Pepsico and Burson-Marsteller, the nation’s largest public relations firm, expense reporting forms have been modified to provide more detail about business meals, such as where they took place and what was discussed, officials of the two companies say.
Reporting Forms Changed
And some restaurant companies are requiring that their executives have business meals at their restaurants or at places that will directly or indirectly benefit the parent company, according to Janet Lowder, a restaurant group analyst at Laventhol & Horwath, a national accounting firm.
Others, however, express little concern about the tax law changes.
“I hate business lunches,” said James H. Dowling, president of Burson-Marsteller, as he cradled a phone in one hand and wrestled with a ham and cheese sandwich with the other.
“I’m having a sandwich at my desk like I usually do. But I wouldn’t penalize my own people and make them do the same thing. You go to lunch to generate more business. As long as we do that, I don’t complain about lunch bills.”
