Emily Solley
On December 27, 2020, President Donald J. Trump signed a $900 billion pandemic relief bill into law.[1] The bill resulted from eight months of tense negotiations, earlier failures at passage, and, most recently, an intense debate over the bill’s proposed $600 direct payment to Americans.[2] President Trump called the payments a “disgrace” and publicly called on lawmakers to increase the payments to $2,000.[3] Although President Trump ultimately did not succeed in convincing Congress to increase the direct payments to $2,000, the pandemic relief bill included one of President Trump’s priorities: increasing the income tax deduction for business meals.[4]
The income tax deduction for business meals is one of many deductions available to a taxpayer carrying on a business or trade for profit.[5] In many cases, a business may deduct “ordinary and necessary” business expenses.[6] The Internal Revenue Service (IRS) defines “ordinary” as an expense that is “common and accepted” in the particular trade or business and “necessary” as an expense that is “helpful and appropriate” in the particular trade or business.[7] Therefore, deductions available to a business differ depending on common practice within the industry.[8]
This is not the first time Congress has altered business expense deductions during the Trump administration. In 2017, Congress reduced available business expense deductions under the Tax Cuts and Jobs Act (TCJA).[9] The TCJA entirely eliminated the deduction for business entertainment and limited employer deduction for the cost of providing meals to employees on-site.[10] However, the TCJA did not change the business meal deduction that had been in place since 1983, leaving the business meal deduction at 50 percent.[11]
Following the TCJA, some legal scholars questioned whether business meals furnished during business entertainment activities were deductible despite the entertainment itself no longer being deductible, such as buying hot dogs at a baseball game.[12] The IRS later clarified that business meals were deductible so long as the taxpayer, or a taxpayer’s employee, was present and the business meal was furnished to a business client, customer, or contact.[13] Food and beverages purchased during or as part of business entertainment are deductible so long as the cost of such food and beverages is a separate line item from the cost of entertainment on the bill, invoice, or receipt.[14] As long as a business can show that the expense of a meal was not simply an attempt to write-off business entertainment, the meal is deductible.[15] In other words, the cost of a hot dog bought at a baseball game is deductible so long as the cost of the ticket and the cost of the hotdog are separated on the taxpayer’s records.[16]
In late 2020, the pandemic relief bill increased the deduction for certain business meals to 100 percent, allowing businesses to deduct the full cost of qualifying meals.[17] This change doubled the possible deduction for any business meal that meets the statutory requirement.[18] Under the pandemic relief bill, a business can deduct the entire amount of a business meal expense “for food or beverages provided by a restaurant.”[19] This requirement emphasizes Congress’s intent to help struggling restaurants through increasing the tax deduction for business meal expenses incurred in restaurants.[20] For instance, businesses cannot deduct expenses related to purchasing ingredients from a grocery store to cook a meal for clients.[21] Additionally, the provision will phase out on January 1, 2023.[22] Businesses can take advantage of the business meal deduction for the entirety of 2021 and 2022. The length of the increased deduction arguably offers both taxpaying businesses and restaurants a measure of certainty, since the deduction can be utilized for two full calendar years.[23]
Notably, the bill left other requirements for business meals untouched. Unless an exception applies, the expense must be related to providing a meal to a business contact, the taxpayer or taxpayer’s employee must be present, and the meal must not be “lavish or extravagant under the circumstances.”[24] These requirements reflect the statutory requirement that deductible business expenses must be “ordinary and necessary.”[25] As discussed above, “ordinary and necessary” differs depending on the particular business’s industry, so a meal at a steakhouse may be “lavish or extravagant” for businesses that do not typically treat clients to meals at expensive restaurants. On the other hand, a business that deals with high-income clients may ordinarily invite clients to expensive restaurants to seal high-dollar deals.
Supporters of the increased deduction for business meals argue that the increased deduction will cause businesses to spend more in restaurants.[26] Such spending would, in theory, bring much-needed income to the struggling restaurant industry and benefit both restaurant owners and employees. Supporters can cite endorsement by trade groups such as the American Hotel and Lodging Association[27] and the National Restaurant Association[28] as proof that increasing businesses’ tax deduction will benefit the restaurant and hospitality industry.
Opponents of restoring the full deduction for business meals argue that the increased deduction will not help more casual “neighborhood eateries.”[29] In fact, opponents contend that any increased restaurant spending generated by the business meal deduction will instead benefit “high-end” restaurants.[30] Another criticism levelled at the bill is that it decreases tax revenue. The Joint Committee on Taxation estimates that the deduction will result in a loss of $6.296 billion during its lifespan.[31]
Beyond the ramifications for the budget and potential uneven benefits, increasing the business meal deduction sends a potentially contradictory message to Americans. The increased business meal deduction will achieve its goal of driving income to restaurants if businesses invite clients for meals at restaurants.[32] As of January 2021, many state and local governments maintain restrictions on indoor dining, limiting the convenience of doing business over meals even if businesses and their clients are comfortable with meeting face-to-face to discuss business during a pandemic.[33] The increased deduction will last until 2023, so Congress may hope that the pandemic will abate during the life of the increased deduction.[34]
As of January 2021, the daily deaths from COVID-19 continues to climb to unprecedented numbers.[35] Any benefits or harms caused by the increased business meal deduction will likely be seen once Americans return to dining face-to-f
[1] Katie Lobosco & Tami Luhby, Here’s What’s in the Second Stimulus Package, CNN (Dec. 28, 2020), https://www.cnn.com/2020/12/20/politics/second-covid-stimulus-package-details/index.html.
[2] Brian Naylor, Here’s What’s In the COVID-19 Relief Bill, NPR (Dec. 28, 2020), https://www.npr.org/2020/12/21/948744901/here-is-whats-in-congress-covid-19-relief-package.
[3] Jack Kelly, President Trump Calls for $2,000 Stimulus Checks and Says the $600 is a ‘Disgrace’, Forbes (Dec. 23, 2020), https://www.forbes.com/sites/jackkelly/2020/12/23/president-trump-calls-for-2000-stimulus-checks-and-says-the-600-is-a-disgrace/?sh=6aa3ce2c245a.
[4] Jeff Stein, White House Secures ‘Three Martini Lunch’ Tax Deduction in Draft of Coronavirus Relief Package, Wash. Post (Dec. 20, 2020), https://www.washingtonpost.com/us-policy/2020/12/20/meal-tax-deduction/.
[5] See 26 U.S.C. § 162(a) (“There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business . . .”).
[6] Id.
[7] 26 C.F.R. § 1.162-1 (2020).
[8] See id.
[9] 26 U.S.C. § 274(n).
[10] Julie Roin, The Case For (and Against) Surrogate Taxation, 39 Va. Tax Rev. 239, 257 (2019).
[11] I.R.S. Notice 2018-76.
[12] Sally P. Schreiber, Meals Continue to be Deductible Under New IRS Guidance, J. Acct. (Oct. 3, 2018), https://www.journalofaccountancy.com/news/2018/oct/tax-deduction-meal-entertainment-expenses-201819848.html.
[13] I.R.S. Notice 2018-76.
[14] Id.
[15] See id.
[16] See id.
[17] Taxpayer Certainty and Disaster Relief Act of 2020, Pub. L. No. 116-260, § 210 (2020) (to be codified at 26 U.S.C. § 274(n)(2)).
[18] Stein, supra note 4.
[19] Taxpayer Certainty and Disaster Relief Act of 2020, Pub. L. No. 116-260, § 210 (2020) (to be codified at 26 U.S.C. § 274(n)(2)).
[20] Stein, supra note 4.
[21] See Taxpayer Certainty and Disaster Relief Act of 2020, Pub. L. No. 116-260, § 210 (2020) (to be codified at 26 U.S.C. § 274(n)(2)) (requiring that business meals are purchased at a restaurant in order to be deductible).
[22] Taxpayer Certainty and Disaster Relief Act of 2020, Pub. L. No. 116-260, § 210 (2020) (to be codified at 26 U.S.C. § 274(n)(2)).
[23] See id.
[24] 26 U.S.C. § 274(k)(1)(A).
[25] 26 U.S.C. § 162.
[26] Press Release, Senator Tim Scott, More than a Dozen Scott Provisions Included in COVID Relief, Year End Funding, and Tax Bills (Dec. 21, 2020), https://www.scott.senate.gov/media-center/press-releases/more-than-a-dozen-scott-provisions-included-in-covid-relief-year-end-funding-and-tax-bills.
[27] Press Release, American Hotel and Lodging Association, AHLA Statement on Bipartisan COVID Relief Package (Dec. 21, 2020), https://www.ahla.com/press-release/ahla-statemnet-bipartisan-covid-relief-package.
[28] Press Release, National Restaurant Association, National Restaurant Association Statement on the Pandemic Relief Bill (Dec. 21, 2020), https://www.restaurant.org/news/pressroom/press-releases/association-statement-on-pandemic-relief-bill.
[29] Marcy Gordon, Writing Off More of That 3-Martini Lunch is Causing a Stir, Associated Press (Dec. 22, 2020), https://apnews.com/article/donald-trump-economy-coronavirus-pandemic-restaurants-4e4d09ee51a82f45a5fbdacd94fc9d92.
[30] Howard Gleckmen, Restoring the Three Martini Lunch Tax Deduction Won’t Feed the COVID-19 Economy, Tax Pol’y Ctr. (May 7, 2020), https://www.taxpolicycenter.org/taxvox/restoring-three-martini-lunch-tax-deduction-wont-feed-covid-19-economy.
[31] Joint Comm. on Tax’n, JCX-24-20, Estimated Budget Effects of the Revenue Provisions Contained in Rules Committee Print 116-68, The “Consolidated Appropriations Act, 2021” (2020).
[32] Senator Tim Scott, supra note 26.
[33] See Gleckmen, supra note 30.
[34] Taxpayer Certainty and Disaster Relief Act of 2020, Pub. L. No. 116-260, § 210 (2020) (to be codified at 26 U.S.C. § 274(n)(2)).
[35] Clark K. Johnson & Lisa Marie Pane, US Registering Highest Deaths yet from the Coronavirus, Associated Press (Jan. 7, 2021), https://apnews.com/article/us-news-pandemics-california-coronavirus-pandemic-5d120f6273dc8ec89e3f60df98b9f5f7.
