Special analysis: Business meals deduction
Tech companies provide free on-site gourmet meals to their employees because they want to keep them “engaged.” Engaged employees, the argument goes, are more productive. Well, maybe. But that caught the attention of the IRS several years ago, and it promised to act on these so-called convenience meals.
The Tax Cuts and Jobs Act’s extension of the 50% corporate deduction limit to convenience meals shines a new light on these meals and has allowed the IRS to refine its previous guidance. (AM 2018-004, 10-23-18)
Under tax code Section 119, you may provide meals tax free to employees if you have a substantial non-compensatory reason for doing so (i.e., the meals are provided for your convenience) and the meals are provided on your premises. Short meal periods that are necessitated by the business or meals provided to employees so they’ll be available for emergencies are two standard examples of convenience meals.
What’s on the menu?
IRS auditors report employers are using the following reasons to justify providing meals tax free to employees:
- Innovation and collaboration are aspects of a company’s business model and culture and the meals are provided to facilitate employee innovation, collaboration and productivity.
- Meals are provided to enable employees to work long days and overtime.
- Meals are provided to promote a healthier workforce.
- Meals are provided to discourage employees from jeopardizing trade secrets by encouraging them to remain on site for meals.
Reality check, please.
The IRS didn’t dismiss these as general business goals, but it didn’t say they were good enough, either. IRS: General business goals are fine, but you need more before meals qualify as tax-free convenience meals. You must have an enforceable policy that furthers those goals and you must substantiate how your meals enable employees to perform their duties.
Policies can be substantiated if they’re included in an employee handbook or disciplinary records show an employee violated the policy. The trickier part is substantiating that employees’ duties necessitate them eating in. IRS: It’s appropriate to determine whether specific policies related to an employer’s stated business needs and goals (including general business goals, such as promoting collaboration and healthier employees) have been adopted and if so, whether those specific policies connect the employer’s stated needs and goals to the business necessity of furnishing meals to employees.
Snack time. Snacks—coffee and donuts set out on a conference table for employees who are in meetings—have always been considered de minimis fringes. As such, their value is excluded from employees’ income and 100% deductible on your corporate return. The TCJA didn’t change that.
Even so, a trade association that stocks pantries or break rooms with snacks and beverages wants clarification that these items remain de minimis fringes. You might want that clarification, too, considering the difference between 100% deductibility and 50% deductibility. The IRS has yet to respond to this request.
RULE OF THUMB: The underlying issue is the tension between goals—which can be gauzy—and specific policies, which can’t. The IRS narrowly interprets exclusions from income, such as convenience meals. You need to do that, too. For example, it’s laudable to provide employees with healthy food choices for lunch. But the hit to your group health premiums probably wouldn’t be enough to allow you to exclude the value of those healthy meals from employees’ income.