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October 08, 2014 in Benefits, Tax Info, Compliance

Tax Benefits Feeding Frenzy Over Employer-Provided Meals

Whether in California’s Silicon Valley, North Carolina’s Research Triangle or some other part of the country where high-tech industries are booming, employers are trying to entice and retain workers with tax-favored benefits.

New York Employer Provided Meals

 

De Minimis Benefits

For payroll purposes, a de minimis benefit is any property or service a company provides to an employee that has so little value that accounting for it would be unreasonable or administratively impracticable.

The value takes into account how frequently employees receive similar benefits.

In addition to employer-provided meals, the IRS offers the following examples of de minimus perks:

  • Personal use of an employer-provided cell phone;
  • Personal use of a copying machine if the machine is used at least 85 percent of the time for business purposes;
  • Holiday gifts, other than cash, with a low fair market value;
  • Group-term life insurance payable on the death of an employee’s spouse or dependent if the face amount is not more than $2,000;
  • Occasional parties or picnics for employees and their guests;
  • Occasional tickets for the theater or sporting events, and
  • Transportation fares (subject to certain special rules).

Prime example: Your business may provide free lunches or dinners to employees on a tax-free basis if employees remain on the premises for the meals, the duration is short and they go right back to work. It’ is a win-win situation.

Tech companies such as Google have ramped up their fringe benefits in this area to project a favorable image and entice the best minds to work for them. The benefit also encourages workers to put in longer hours and cut down on meal breaks.

Various media sources have reported on elaborate dining options and meals being available at all times during the day. Reportedly, one company even lured away a chef from a competitor.

The IRS is taking notice of this trend. The agency briefly alluded to this practice in its 2014-2015 Priority Guidance Plan and implied that a crackdown could be coming. Although the IRS did not release any definitive details, your payroll department should be aware that the agency could carve out special rules for tech firms or otherwise modify current requirements.

Background

Under Section 119 of the Internal Revenue Code, meals provided to employees are tax-free if they are

  1. Furnished for the convenience of the employer and
  2. Served on the premises.

Meals are furnished for the employer’s convenience only if there is a substantial non-compensatory purpose. In other words, the perk cannot represent disguised compensation.

Determining a substantial non-compensatory purpose depends on the circumstances of the specific situation, but generally the tax exclusion may be allowed when:

  • Meals are provided to employees who must be on call for emergencies and these occur or can reasonably be expected to occur;
  • The time for the meal is short, typically 30 to 45 minutes, due to the nature of the business, and
  • Employees reasonably cannot obtain meals off-premises, such as when the job location is remote.

Key point: If more than half the meals provided at the on-premises facility are for your company’s convenience, the balance of the meals are treated the same way.

Generally, your company can deduct only half of the cost of meals and entertainment it pays, although there are notable exceptions. For instance, it may deduct the full cost of meals that qualify as de minimis fringe benefits under Section 132 of the Code (see right-hand box).

An employer-operated eating facility is a de minimis fringe benefit if it is located on or near the premises and its revenue normally equals or exceeds its direct operating costs (the revenue test). Highly compensated employees are eligible for the exclusion only if access to the facility is non-discriminatory.

For purposes of determining if an eating facility meets the revenue test, the regulations state that “if an employer can reasonably determine the number of meals that are excludable from income by the recipient employees,” then it can “disregard all costs and revenues attributable to such meals provided to such employees.”

For purposes of the test for determining whether an employer-operated eating facility is a de minimis fringe benefit, an employee who can exclude the value of a meal under Code Section 119 is treated as having paid an amount for the meal equal to the direct operating costs of the facility attributable to the meal.

Bottom line: Your enterprise can deduct the full cost of providing meals if it provides the food to more than half the employees at a cafeteria or other facility on the premises. The meals are tax-free to all employees, including those who are highly compensated.

Litigation History

There has been little litigation concerning this issue, but one case provides a litmus test.

Boyd Gaming Corp. operated several casinos in Nevada and provided meals to employees who were required to stay on the premises during their shifts for security reasons. This case established the requirements for the tax exclusion based on the amount equal to the direct operating costs attributable to the meal. This case also resulted in the rule for an employer’s convenience based on more than half of the employees. The IRS subsequently agreed to the full deduction (Boyd Gaming Corporation v. Commissioner).

On a related front, the IRS recently said that deductions for meals provided to flight attendants on planes are limited to half the cost because aircraft aren’t eating facilities (Chief Counsel Advice 201151020). This ruling emphasized that simply qualifying as a de minimis fringe benefit doesn’t guarantee a full business deduction for meals.

What the Future Holds

Although an IRS crackdown is speculative, the agency could adopt an approach that the meals are being furnished for compensatory reasons if they are used to boost morale. However, it is likely that providing meals to encourage employees to work longer hours would be considered a non-compensatory business purpose.

Without a substantial non-compensatory business purpose, your business cannot deduct 100 percent of providing meals to employees because it would no longer qualify as tax-free de minimis fringe benefit. Although the IRS could craft a special exception for technology-based industries, you would expect such an approach would ruffle the feathers of companies in other industries that would like to be able to offer the benefit.