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REGIONAL REPORT : Tax Bite on Business Meals : Restaurant Owners Fear Effect If Expense Deductions Lowered


Expense-account lunches are back on the chopping block in Washington, and Southern California restaurateurs are already yelping in pain.

Restaurant owners warn of a noticeable falloff in business if the Senate joins the House in approving President Clinton's budget package, which would make business meals only 50% tax deductible, instead of the 80% rule in effect since 1987.

"The frequency will (decline), and I think people will be more conscious of what they spend at lunch," said Phillip Larimore, general manager of Water Grill, a downtown Los Angeles seafood restaurant where business people make up 90% of the lunch crowd.

But will the smaller tax-deduction for meals force executives to start skipping power breakfasts or stop doing lunch? Not likely, says Bob Greenfield, who advises companies on travel, entertainment and meal expenses for American Express.

Greenfield says it will be tough for many businesses to dramatically change their employees' eating and spending habits, and as a result, "I don't think it will have a tremendous effect on the restaurant business.

"Companies in sales and service do a lot of client entertaining," he explains. "You just can't cut down on business meals."

Business diners in Southern California also seem to be taking the proposal in stride. Between mouthfuls of fettuccine during a business lunch, Mark Welker and Dale W. Herring shrugged off further restrictions on business meal and entertainment deductions.

Welker, a self-employed Newport Beach businessman, joked that he'd simply "eat twice as much to get the same amount of deduction." He added more seriously: "I'll just have to look for other ways to cut costs. . . . You can't change the way you do business."

David Colden, a Hollywood entertainment lawyer, agrees with restaurateurs--who are among his clients--that reducing the business-meal deduction would be a mistake. But you won't see him or his Hollywood clients reduce their meal bills.

"Meals are such an integral part of the business," he said. "It's as much a part of my business day as the time spent in my office."

The only difference might be that it costs more. A host of tax changes--including a higher corporate income tax--mean that businesses will see their meal tab rise 13% if their spending remains unchanged, says Greenfield.

A $100 business meal costs $72.80 after deductions are taken, he said. Under the proposed changes, the after-tax cost rises to $82.50.

That kind of increase will get noticed and force companies to scrutinize their meal and entertainment expenses and reduce waste, Greenfield says. His advice to clients: require receipts for meals above $10, accept only "hard receipts" such as credit card bills--instead of restaurant check stubs--to reduce fraudulent expenses and require employees to ask before exceeding predetermined spending limits.

Not surprisingly, the National Restaurant Assn. paints a gloomy picture of the tax change. The association has predicted that California restaurant sales would tumble by $517.5 million annually, costing 22,711 jobs. Nationwide, the group says, restaurant sales would fall by an estimated $3.8 billion annually, eliminating 165,000 jobs.

"This industry is getting hit from all sides right now, with taxes, minimum wage and smoking," says Jim Walker, owner of Pasta Mesa restaurant in Costa Mesa. "But the average restaurant in California makes less than a 4% profit. So there's not a lot of room for extra costs."

If history is any guide, fancy restaurants will suffer especially. Sales fell at higher-end eateries in 1987, the last time Congress tinkered with business meals, owners say, and in those days Southern California's economy was booming.

"Then, it wasn't a big deal," says Orange County restaurateur Larry Cano, whose Cano's on West Coast Highway in Newport Beach caters largely to the business crowd. "But now, every dollar counts."

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