Pricier Power Lunches: How the New Tax Law May Impact Entertainment Expenses
Deductions for business dining, Soho House memberships, Lakers games and more are (probably) going away.
An agent and a director meet for a meal at a Canon Drive hotspot to discuss a budding star's potential role in an upcoming blockbuster. Such power lunches are business as usual in Hollywood — but now, thanks to the new federal tax law, whoever picks up the tab may pay much more than he or she used to.
Before Jan. 1, companies and individuals could deduct 50 percent of the eligible entertainment expenses that they racked up wining and dining current or potential business partners. But that deduction was eliminated in the plan signed by President Trump. (The Joint Committee on Taxation estimates the change will bring in $23.5 billion in tax revenue over the next decade.)
The IRS defines entertainment as "any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client."
The new law also ends the deduction for dues to social, athletic or sporting clubs — even if the membership is used primarily in furtherance of the taxpayer's business. That means no deductions for Staples Center boxes or Soho House memberships. But industry experts say it's unclear what the showbiz impact will be.
"It raises more questions than it answers," says business manager Matthew Burke of the change, explaining that it likely was a result of the IRS having difficulty drawing a line between personal and business entertainment.
Awards-season soirees could be affected, too, depending on whether lawyers and accountants can finesse the expenses into other categories. Premiere parties seem like a logical fit to qualify as a "promotional" expense, but some events would be a harder sell to the IRS. "People are going to be really careful if they're budgeting an Emmys party or a wrap party," says Burke. "They're not going to get the same deduction they used to get."
The goodwill or business gained from a star-studded party could well outweigh the tax hit, and studios might not see their bottom lines affected since the corporate tax rate is dropping from 35 percent to 21 percent.
"It may be that the lower tax rate will offset the loss of this deduction," says business manager Rick Shephard, noting that the change, like much of the new law, is more likely to negatively affect individuals and small businesses in the entertainment industry.
Shephard says it's not unusual for a Hollywood professional (especially talent reps like agents and managers) to rack up $10,000 to $20,000 in entertainment expenses in a year, with a dozen-person production or development company spending closer to $60,000.
Complicating matters, there's currently no official draft of the tax code that incorporates the recent changes — leaving the experts flipping back and forth between the old rules and the new law.
Local restaurateurs don't seem worried about the business effect. "I haven't heard any concerns from our clients," says Jannis Swerman, a publicist who represents such hotspots as Tavern, Toscana and A.O.C.
Adds hotelier Jeff Klein, whose West Hollywood hotel is home to the Tower Bar, "I assume most people who come here don't write off their meals anyway."
This story first appeared in the Jan. 10 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.