While necessary, the drastic public health response to the coronavirus has shuttered small businesses, and restaurants have been hit particularly hard. As the New York Times reported, between two-thirds and 75% of the independent restaurants that have had to close may not survive.
That’s why during his Sunday coronavirus press conference, President Trump proposed bringing back the corporate income tax deduction for meal spending, hoping to save these restaurants. This is undoubtedly a well-intentioned move, but it is nonetheless a completely wrongheaded policy approach. Instead, we should focus on helping these restaurants directly.
Right now, under the tax reform Trump signed in 2017, companies can only deduct 50% of their spending on meals that are “directly related or associated with the active conduct of the taxpayer’s business or income-producing activity” and can no longer deduct entertainment spending. But the president suggests that bringing back this deduction in full would incentivize companies to spend on restaurant meals.
He’s wrong. Fully reinstating the deduction would not help struggling restaurants.
How are companies going to spend more on meals and entertainment for their employees when so many restaurants are closed and so many offices have shifted to remote work? Incentivizing people to leave their homes and go to restaurants also certainly seems like a public health risk.
Even in normal times, this deduction is bad policy. Ideally, companies would be able to deduct their expenses as soon as possible, as the corporate income tax is a tax on profits (in other words, revenues minus expenses). Companies can deduct the cost of building a new factory or office, and they can deduct the wages they pay their workers. Meals provided to employees are a form of compensation, so it might sound like they should be deductible for companies, just like wages.
But the difference between a corporate deduction for wage payments and a deduction for sponsored meals is that employees pay income taxes on their wages, but not on the benefits they’ve received from a sponsored meal. Instead of making individual taxpayers keep track of these meals and report them on their taxes, which could result in a lot of annoying tax compliance costs, the next-best solution is simply to not allow corporations to deduct that spending.
There are better ways to give the restaurant industry a hand for the next few months and an easier path to recovery.
The economic relief package signed into law last week included several provisions for businesses, such as the $350 billion Paycheck Protection Program, which provides loans to small businesses — loans that will be forgiven if spent on payroll and other expenses. The law also includes a 50% payroll tax credit, delays for payroll tax payment, and several corporate income tax changes designed to increase cash flow and market activity.
So, too, the bill fixed a tax glitch governing how businesses can deduct the cost of certain investments called qualified improvement property, a provision that has been particularly troublesome for the restaurant industry. This provision unnecessarily increases the cost of investing in improvements to fixtures inside some types of commercial property, including restaurants.
However, commentators as disparate as right-leaning economist Steven Hamilton to liberal Slate economics columnist Jordan Weissmann fear that these provisions won’t be enough to backstop small businesses. They’re right.
Restaurants (and other small businesses) need the ability to pay their bills now, which could be accomplished with additional loans and grants on top of the ones provided in the relief bill last week. Addressing a problem with the tax treatment of investment is good policy, but it doesn’t do much to help a restaurant pay its rent this month.
The solution here is not to try and create a roundabout, ineffective way to incentivize people to go to restaurants in the middle of a pandemic, as Trump has proposed, but to help restaurants directly. Fully reinstating this corporate tax break would be a bad policy movie in regular times. In current circumstances, it wouldn’t help at-risk restaurants at all.
Alex Muresianu is a contributor for Young Voices, and his work has been featured in National Review Online, the Detroit News, and the Kansas City Star. Find him on Twitter @ahardtospell.
