Wall Street Era of Deducting $65 Dry-Aged Steaks Could Be Over

(Bloomberg) -- For Wall Street banks, treating clients to the 45-day dry-aged bone-in rib eye at Delmonico’s in Manhattan may now cost the full $65, thanks to President Donald Trump’s tax law.

The overhaul delivered a windfall to corporate America by slashing the tax rate to 21 percent. But one of the law’s provisions could curb wining and dining of clients, a mainstay of the finance, investment, law and lobbying industries.

Under the old tax regime, companies could deduct 50 percent of business-related expenses when entertaining clients and discussing work -- so high-end meals, golf outings and concert tickets were all generally covered. Tax experts initially thought the law, which was signed in December, eliminated the deduction for so-called entertainment expenses, while preserving the 50 percent write-off for business meals.

Now, tax lawyers and accountants are saying a closer read shows that deductions for client meal expenses may no longer be allowed either -- and warning their clients to proceed with caution.

It all boils down to whether a meal is considered entertainment. The new law says no “entertainment, amusement or recreation” of any kind is deductible -- even if it’s related to the active conduct of business. But it doesn’t explicitly say that business meals are no longer deductible.

For Ruth Wimer, an executive compensation lawyer and accountant at Winston & Strawn LLP in Washington, the answer is clear. “If I’m a hedge fund manager and I take a current or prospective investor to a Hell’s Kitchen steakhouse, it is completely non-deductible,” Wimer said.

Meals Task Force

The American Institute of CPAs urged the Treasury Department and Internal Revenue Service earlier this month to provide immediate guidance to clear up taxpayer confusion about the deductibility of business meals. The institute, which formed a meal and entertainment task force, asked for clarification on client business meals separate from entertainment events as well as those before, during or after entertainment events.

For now, major accounting firms are trying to make their clients aware of the potential change. PricewaterhouseCoopers said in a March note that it’s unclear whether the IRS may seek to deny deductions for meals that are associated with non-deductible entertainment. Since many expenses include elements of both entertainment and business, it will be difficult for companies to distinguish between and account for those costs, according to PwC.

“I’m telling people I think this is a big deal,” said Mark Kohler, an accountant and lawyer in Cedar City, Utah. “A lot of people close major deals while breaking bread.”

Kohler said many of his clients were scaling back their expense accounts for sales representatives, and small businesses in particular were re-evaluating their expenses.

Room Service

Some tax practitioners started getting concerned about the treatment of meal expenses in February, when Congress’s nonpartisan scorekeeper, the Joint Committee on Taxation, gave the clearest indication yet that the deduction had been eliminated for business meals.

In its 38-page overview of the new federal tax system, the JCT said in a footnote that the new law “changed the rules governing the deductibility of meal and entertainment expenses to generally prohibit deductions for entertainment expenses, including meals and other items, activities, and facilities that constitute entertainment.”

In a separate analysis, the JCT estimated that ending the deduction for meals and entertainment would save the federal government $23.5 billion over a decade.

The old law permitted the deduction for entertainment or meals if companies had a necessary business purpose, like current contracts or prospective deals, and they weren’t “lavish or extravagant.” Companies can still deduct 50 percent of the cost of food in limited circumstances, like when employees are traveling and order room service or eat solo.

High-End Steakhouses

Del Frisco’s Restaurant Group Inc., which operates steakhouses across the U.S., says the majority of its weekday business comes from expense-account customers. “Our business therefore may be affected by reduced expense account or other business-related dining by our business clientele” as a result of U.S. budgetary and fiscal policy uncertainties, including recent tax legislation, the company said in its latest annual report in March.

The business-meal spending by companies is a “meaningful amount” for the restaurant industry, and if the IRS makes changes, it’s very likely to have a negative effect for high-end steakhouses like Morton’s or Ruth’s Chris, said Darren Tristano, chief executive officer of the researcher CHD-Expert for the Americas.

Cicely Simpson, the executive vice president of public affairs at the National Restaurant Association, said the group was optimistic that the IRS would eventually provide guidance preserving the 50 percent deduction for client meals.

Earlier iterations of the tax bill seemed to keep the 50 percent meal deduction intact for qualified expenses. Gary Botwinick, head of the taxation, trusts and estates group at Einhorn, Harris, Ascher, Barbarito & Frost PC in Denville, N.J., said he blames the current confusion on the speed with which Congress enacted the tax law.

Still, some firms may just choose to, well, eat the cost.

“Human connection is a core part of doing business,” said Kelly Porter, a partner and managing director at Woodside Capital Partners, a boutique investment bank in East Palo Alto, California. “Connecting over a meal or other entertainment helps create a different, deeper bond than meeting in an office.”

--With assistance from Ben Steverman and Leslie Patton

To contact the reporter on this story: Lynnley Browning in New York at lbrowning4@bloomberg.net.

To contact the editors responsible for this story: Alexis Leondis at aleondis@bloomberg.net, John Harney

©2018 Bloomberg L.P.