What exactly is the “Three Martini Lunch”? The Three Martini Lunch is a holdover from the Mad Men era of American business that, at least from a drinking standpoint, has mostly gone the way of the dodo. Effectively, prior to 1986, the American tax code stated that you could write off 100% of food-and-beverage related business expenses, hence giving an extra incentive towards this practice of long, indulgent business meals, where one would, you know, drink three martinis and go (or not go, as the case might be) back to the office with a strong buzz.
Under the Regan tax reform movement, this was curtailed and the deduction was lowered to 80% by the Tax Reform act of 1986. This deduction also stipulated that business must be discussed at the meal, where previously the purpose the meal could be for purely social engagement. Furthermore, in a typically gray government proclamation, “lavish and extravagant” portions of the bill could not be declared on taxes at all. So, no more 1945 First Growth Bordeaux billed back to taxpayers…
These stipulations remained unchanged until 2017 when the policy became even more austere. Deductions were lowered to 50% under the Tax Cuts and Jobs act. Furthermore, deductions had to be, "directly related to the active conduct of a trade or business or incurred immediately before or after a substantial and bona fide business discussion."
The prohibitionist’s and tax hawk’s victory was short-lived. The lobby for the return to pre-1986 legislation received traction during the later part of the Trump presidency; we’re sure this was owing no part to the fact that the president had lots of businessman friends, and that the family business owns multiple hospitality venues.
Whatever the motivations, the Consolidated Appropriations Act of 2021 has reinstated the 100%, pre-1986 deductions. When the world gets closer to normal, the timing could not be better, as most restaurants, hotels, bars, and other venues are hurting right now. Hopefully, this will lead to a strong return of business for these venues in the later part of 2021! We can definitely cheers to that.