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Serve up tax-free, deductible meals

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in Small Business Tax,Small Business Tax Deduction Strategies

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 a way to attract and retain good 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. (Department of the Treasury 2014 2015 Priority Guidance Plan, 8/26/14)

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 to employees for the convenience of the employer and served on the business 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.

Typically, a “substantial noncompensatory business purpose” exists when:

  • Meals are provided to employees who have to 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 otherwise obtain meals off-premises (e.g., the worksite is located in a remote area).

Safe-harbor rule: 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, whether or not the remaining employees meet this test.

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 (HCEs) 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.

Tip: Although the crackdown is more speculative than fact at this point, we will keep a close watch on developments in this area.

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