The term “Three-Martini Lunch” was coined in the U.S. during the 1960’s and 1970’s when NYC executives would gather and claim that these libations made them more creative. The expense of these luncheons was deducted fully despite efforts by former Presidents Kennedy and Carter to reduce the overall deduction. President Carter’s 1976 opponent, Gerald Ford, fully supported the tax break saying “The three-martini lunch is the epitome of American efficiency. Where else can you get an earful, a bellyful and a snootful at the same time?”
Over the years, the meals and entertainment deduction were reduced to 80% in 1987 and further reduced to 50% in 1994 as business meals were an easy target for regulators due to the perceived abuse of the three-martini lunch. In 2020, Congress included the full deductibility of business meals for 2021 and 2022 for meals provided by restaurants as a means of supporting restaurants during the pandemic. Critics have stated that this move is bad tax policy. However, it should be noted that the Internal Revenue Code has substantiation rules for these expenses that are stricter than most other deductions. The full deductibility of meals is fair tax policy as small businesses depend on these meals to grow their businesses. Unable to rely on Super Bowl advertising or stadium sponsorships, they build relationships one by one.
When Congress picks and chooses which legitimate expenses to allow, the system goes out of balance. The limitation of the deduction for business meals has always hit small businesses disproportionately. Full deductibility, even on a temporary basis, is a first step towards reinstating fairness between small and big business. The policy should be praised, not bludgeoned. In a post-Covid-19 environment, business meals will play an important role in the revitalization of small business.