The Three-Martini Lunch
The so-called “Three-Martini Lunch” tax deduction refers to the practice in a prior era of deducting meals and entertainment expenses. This practice allowed leisurely lunches, including alcoholic beverages, to be deducted as business expenses. It was a common practice in many professional service fields prior to the 1980s. In the past, the three-martini lunch concept extended to writing off a variety of costs that could be construed as business-entertainment expenses, including rounds of golf, vacations disguised as business trips, and tickets to sporting events or concerts. It allowed increased deductions for the entertainment of clients or even paying for personal expenses.
The Tax Cuts and Jobs Act
Deductions for entertainment and meals have seen drastic reductions since 1987. The Tax Cuts and Jobs Act (TCJA) placed further restrictions on meals and significantly limited the tax benefits available to companies by eliminating the deduction for entertainment expenses and reducing the deductible amount for certain types of meals.
The Consolidated Appropriations Act of 2020
The latest emergency Coronavirus relief package, the Consolidated Appropriations Act of 2020 (CAA) passed on December 21, 2020, reverses some of the TCJA meals and entertainment changes and provides a temporary full deduction of certain business meals. For example, meal expenses incurred after December 31, 2020, and before January 1, 2023 could be 100% deductible.
This new tax law represents an emergency Coronavirus relief package and effectively brings back the fully deductible so-called “three-martini lunch” in a sweeping fashion with the expressed intent to stimulate the restaurant and beverage businesses across the country.
The CAA amends the Tax Reform Act of 1986 by inserting an exception to the 50% meal deduction that includes "food or beverages provided by a restaurant, and paid or incurred before January 1, 2023," and provides for a full deduction for business meals.
For an overview of the main changes to be aware of, please download our infographic below.