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April 03, 2019

IRS Concludes Free Employee Meals are Not Excludable under IRC Section 119

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As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists businesses with representation in tax examinations, audits, appeals, and civil litigation with the Internal Revenue Service (the “IRS”) and the Ohio Department of Taxation. As part of that representation, our tax attorneys keep individuals and businesses informed about new information and guidance provided by the IRS. This article will discuss the recently published Technical Advice Memorandum (“TAM”) which analyzes whether free meals provided by an employer to its employees is excludable under IRC 119.

IRC Section 119 and the Convenience of the Employer Test

On January 18, 2019, the IRS released a TAM informing business owners that free meals to employees under IRC Section 119 are not excludable under the “convenience of the employer” test if the employer cannot show a substantial non-compensatory business reason for the free meal. TAM 2019030171. Generally, an employee’s gross income includes certain fringe benefits such as gym memberships and prizes. But, under IRC Section 119(a), meals and lodging furnished to an employee by or on behalf of their employer for the convenience of the employer is excluded from the employees income if (i) the meals are furnished on the business premises, or (ii) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment. Whether meals are furnished for the convenience of the employer is a question of fact to be determined based on the facts and circumstances of each case. Further, free meals provided by an employer to its employees are considered furnished for the convenience of the employer if such meals are furnished for a “substantial non-compensatory business reason.” The regulations have identified the following substantial non-compensatory business reasons: (i) the employer’s business requires that the employee be restricted to a short meal period during which the employee could not be expected to eat elsewhere; (ii) the employee must be available for emergency calls during the meal period; or (iii) the employee could not otherwise secure proper meals within a reasonable meal period. Additionally, free snacks provided to employers are excludable as de minimis fringes.

Analyzing the Facts

In the case presented before the IRS, the employer provided meals, without charge, to all employees, contractors, and visitors. In one area, meals were eaten at seating in or near the snack areas, or at the employee’s desks. The employer also had a cafeteria where meals were consumed. In addition to meals, the employer provided unlimited snacks and drinks. The reasons the employer had for providing these free meals were: (i) to foster collaboration and innovation; (ii) to protect the employer’s confidential and proprietary information; (iii) to protect the employees due to unsafe conditions surrounding the business premises; (iv) to provide healthy eating options for employees to improve employee health; (v) because the employees cannot secure a meal within a reasonable meal period; (vi) because demands of the employees job functions allow them to only take a short break; and (vii) to provide meal so that employees are available to handle emergencies that regularly occur.

In analyzing the facts of the case, the TAM stated that it did not doubt the legitimacy of the of the employer’s reasons listed above, but the fact that these reasons are legitimate does not quality them as substantial non-compensatory business reasons. In particular, several items were for the benefit of the employee and not the employer. Further, the TAM noted that these goals did not have specific policies to implement them. According to the TAM, policies are necessary to connect a business goal to the business necessity for furnishing meals to employees in order to achieve that goal. But, it is not enough for a policy to exist, the employer must actually enforce the policy and demonstrate how the policy relates to the furnishing of meals to employees. Finally, the TAM concluded that the value of snacks provided by employers to it employees is excludable from gross income as a de minimis fringe benefit, because the value of the portions consumed by each employee are hard to quantify and given the low value of each snack portion it would be administratively impracticable.

The TAM, however, does not address situations where the employer provides occasional meals to employees, such as food provided at company parties, or pizza lunches. Fortunately, the IRS has covered these situations in IRS Publication 15-B (the “Publication”). According to the Publication, you can generally exclude from the employee’s wages, the value of de minimis meals employers provide to employees. Further, per the Publication, meals furnished to employees for recreational or social activities, are 100% deductible, provided they are primarily for the entire company and not weighted towards top owners or highly compensated employees.

Contact Nardone Limited

If your business provides free meals to employees, you should consider how the TAM may affect you and your employees. Ensuring that you have policies that address the reason for the free meals and that you are prepared to demonstrate how the policy relates to the free meals are things your business should be considering. If you or your business need help navigating the tax laws regarding employee benefits or need help creating employment policies, it is important that you seek guidance from a legal professional experienced in tax matters.

Nardone Limited represents employers with federal tax issues and provides guidance regarding changes and shifts to tax laws. If you are unsure how the TAM will affect you or your business, you should contact an experienced tax attorney. Nardone Limited’s tax attorneys and professionals are experienced in representing businesses regarding federal tax issues.

 


1You can find the full TAM here.

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April 03, 2019

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