In a just released Technical Advice Memorandum (TAM 201903017), the IRS concluded that the value of employer provided meals will not be excludable from employee income under the protection of “being provided for the convenience of the employer” under Internal Revenue Code (“IRC”) 119(a) unless the employer follows its own policies and procedures regarding the provision of said meals and that there is a “substantial and noncompensatory business reason” as is required under IRS regulations. This guidance follows similar communication from the IRS from November 2018 and an oft-cited case Boyd Gaming.
In general, employee gross income includes all cash compensation paid by their employer, including some, but not all fringe benefits. There have been several cases recently where the IRS has been weighing in on the issue of employee income inclusion, as well as the deductibility by the employer of employer provided meals.
Section 119(a) allows employees to exclude from income the value of meals provided “for the convenience of the employer” on the employer’s premises. Regulations under IRC 119 required that the meals be provided for a noncompensatory business reason – employees need to be available for emergencies during meal periods, employee meal breaks are restricted in location or duration, there was a lack of viable eating facilities near the employer’s premises, and/or the meals were provided during or immediately before or after the employee’s working hours. Common meal spend in this realm are overtime meals and coffee/snacks furnished by employers.
In the TAM the IRS vetted a number of business reasons that employers have utilized to provide for the employee exclusion for meals. The TAM rejected the following oft-cited reasons for employer provided meals meeting the substantial noncompensatory business reason:
• Protection of confidential information
• Fostering collaboration
• Unsafe conditions
• Healthier eating options
• Inability to obtain food within a reasonable time frame
• Short meal breaks
• Employees needed for potential emergencies
While the employee’s ability to bring a meal from home was deemed to be not relevant, the availability of meal delivery services was a factor that diminished the importance of a short meal break, healthy options, and inability to obtain food easily.
Snacks fared a little better in the TAM. The IRS first determined that snacks are not meals. So, while IRC 119 does not afford employees income exclusion for snacks given that determination, the IRS indicated that the value of snacks was excludable under IRC 132 as a de minimis fringe benefit.
So, what to do here?
Employers who provide meals to employees for overtime, being on call, and other valid business reasons need to have policies in place and adhere to those policies which outline the noncompensatory reasoning for provided meals and snacks to employees.
While the TAM was focused on the income exclusion for employees, it did not address the employer deduction for these same meals. Currently employers may deduct 50% of meals provided to employees for the convenience of the employer and for meals provided at an employer-operated dining facility. If employees are required to be taxed upon the fair market value of employer provided meals, then said employer may deduct 100% of the cost.
If you have any questions about how to approach this TAM please contact our tax team.