Wine & dine with tax in mind
Restaurant owners are eagerly optimistic Congress will restore the full meal deduction in order to boost the economy, create jobs
Meeting clients face-to-face is more important than ever in a bad economy — and if that encounter happens over a meal in a restaurant, the check is a business expense that’s 50 percent tax deductible.
The restaurant industry, reeling from the consumer-spending slump, is lobbying Congress to restore the full meal and entertainment tax deduction, which was cut during the 1986 tax law overhaul from 100 percent to 50 percent.
A bill in Congress would raise the deduction to 80 percent as a first step; the National Restaurant Association said this could boost restaurant revenue by $6 billion a year, pumping $18 billion into the economy.
The Stage Left restaurant, in New Brunswick, closes for lunch Monday to Thursday. Francis Schott, co-owner, says if Congress restores the meal deduction to 100 percent, Stage Left would serve lunch all week, and also hire more employees.
Francis Schott, co-owner of the Stage Left restaurant in New Brunswick, said restoring the 100 percent meal deduction is a matter of simple justice, since nearly every other business expense — travel, hotels, gifts for clients — is fully deductible.
Restaurants are labor intensive, meaning they create jobs when revenue rises, he said. Stage Left closes for lunch Monday to Thursday, but if the full tax deduction is restored, “the next day, I will open for lunch all week, and I would have to hire people in order to do it,” Schott said.
Deborah Dowdell, president of the New Jersey Restaurant Association, said her industry has waged a losing battle to restore the deduction ever since it was slashed more than two decades ago.
So why should this year be any different?
“The reason we are optimistic is related to current tax policy and attitudes in Washington,” Dowdell said. “Congress is looking for a way to stimulate the economy, and this is a targeted policy that would create jobs.”
Attitudes have shifted, she said. In the 1980s, the meal deduction was painted as a “three-martini lunch” abuse of the tax system; today, the country is in the grip of massive layoffs and widespread business failures from the recession. And as restaurant meals have declined during the downturn, thousands of low-wage workers have been laid off.
Whether or not Congress sides with the restaurant industry, the 50 percent deduction is the law right now. And taxpayers who take advantage of it must keep good records to show the IRS in the event they are audited, said Alex Serrano, a partner at the Springfield accounting firm Citrin Cooperman.
“You need to maintain a contemporaneous record in a diary, along with your receipts,” he said. “In your diary, you need a sentence or two as to what business was discussed.” And don’t wait until the end of the year and try to reconstruct your diary, he said.
Businesses are slashing expenses to survive the recession, but they are still doing deals over meals, Serrano said, as “it’s always a good idea to stay in touch with customers and develop business.”
Martin Stein, president of the New Jersey Society of Enrolled Agents, said the Internal Revenue Service watches for high levels of meal and entertainment deductions. “If you have a high percentage of deductions in relation to your gross revenue, of course they will look at it. They have their own stats on what is the norm for your industry.” Enrolled agents are licensed by the U.S. Treasury Department to represent taxpayers before the IRS.
Betsy Alger opened The Frog and the Peach restaurant in New Brunswick in 1983, and saw an immediate drop in lunch business when the tax deduction was slashed three years later.
Restoring the full tax break “is long overdue,” she said. “Other industries have gotten huge bailouts, and small businesses have gotten nothing. Restaurants employ a tremendous number of people, and if they are working, they are not collecting unemployment.”
Barbara Kauffman, executive vice president of the Newark Regional Business Partnership, said even with businesses cutting back, “people still need to get together in person and make connections.” She often goes to the Theatre Square Grill, in Newark, “because I know I’ll bump into people I need to have a conversation with.”
Robert Zelnick, chief executive of the Alternative Board, an organization that brings businesses together in groups, said it’s essential to maintain personal relationships during a recession.
“The meals can be less expensive and fancy, but nothing is better than face time with people,” he said. “Your competitors are out there discounting to get business. Unless your customers have a relationship with you, why wouldn’t they be inclined to buy cheap?”
Original article: http://www.njbiz.com/weekly_article.asp?aID=79604