Serve up on-site, tax-free, deductible meals for employees — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily

Serve up on-site, tax-free, deductible meals for employees

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Do you provide a company cafeteria or other on-site meals for employees? This can be a valuable tax-free fringe benefit to employees and help attract and retain workers.

Alert: A crackdown could be coming. The IRS has implied it might take steps to modify the rules, especially as they pertain to technology-based companies.

Tech companies are in the cross hairs in the wake of recent media reports about employers offering them elaborate dining options.

Here’s the whole story: Under Sec­­tion 119 of the tax code, meals provided to employees are tax-free if they are furnished for the convenience of the employer and served on the premises. Meals are furnished for the employer’s convenience only if there’s a substantial noncompensatory business purpose. The arrangement can’t be disguised compensation.

A “substantial noncompensatory business purpose” exists when:

  • Meals are for employees who must be on call for emergencies.
  • The time period for meals is short (e.g., 30-45 minutes) because of the nature of the business.
  • Employees reasonably can’t other-wise obtain meals off-premises (e.g., the worksite is in a remote area).

Keep it legal: If more than half of the employees are furnished meals for the employer’s convenience, all employees are treated as being furnished meals for the employer’s convenience.

Generally, only 50% of the cost of meals and entertainment are deductible by an employer, but your business may deduct 100% of the cost of meals that qualify as a de minimis fringe benefit, such as a cafeteria on the business premises.

This exclusion is available for highly compensated employees only if all workers have access to the facility. You won’t qualify if you use a private dining room for higher-ups.

Bottom line: If your business provides meals at a cafeteria or other facility on the business premises, and the meals are provided to more than half of the employees for your convenience, the meals are tax-free to all employees. Plus, the cost is 100% deductible by your business.

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