One thing about human resources - they need to eat. Just about every employer
encounters situations in which it needs to provide meals to its employees. No matter
how often you do so, be sure you're aware of the tax rules for deducting these costs.
Claim half or all
Generally, a business may deduct only 50% of the cost of business meals for federal
tax purposes. But food provided to employees may be fully deductible in circumstances
such as when meals:
- Are provided as additional compensation (and thus included in employees' taxable
- Qualify as tax-free de minimis fringe benefits.
You may also write off food, and exclude it from employees' income, if it's furnished
for your convenience and on your premises.
Furnish with a purpose
Under IRS regulations, the "convenience of the employer test" is met only if meals are
furnished for a "substantial noncompensatory business purpose." Although whether
meals pass this test depends on the facts and circumstances of each case, the IRS has
given examples of a number of acceptable circumstances.
For instance, food provided to keep employees available for emergency calls during the
meal period generally qualifies for the full deduction. But such calls must actually
occur or be reasonably expected to occur.
Another example is when the nature of the employer's business tends to shorten a meal
to, say, 30 to 45 minutes. The furnishing of meals, however, isn't considered to be
for a substantial noncompensatory business purpose if a meal period is shortened in
order to allow employees to leave early.
A third instance is when employees cannot otherwise secure proper meals within a
reasonable period. The regulations state that meals are fully deductible under this
test if there aren't enough eateries near the workplace.
Important note: Under the current tax rules, if more than 50% of the
employees fed on premises are furnished meals for the employer's convenience, then
all meals furnished on premises are treated as furnished for the employer's
convenience. Therefore, these meals are excludable from employees' income, regardless
of whether every employee meets the convenience test.
Enjoy your meals
From a tax perspective, providing meals to employees can be deceptively simple. On
their face, the rules seem straightforward, but many exceptions and caveats apply.
Stay apprised of the latest IRS guidance and double-check your company's meal
deductions every year.
Sidebar: Considering a cafeteria?
Years ago, only the largest companies had on-site cafeterias. But some midsize
businesses are now establishing them, too. There are a number of potential advantages
to doing so. Keeping employees on your premises can cut down on excessively long
lunch breaks and foster collaboration among team members. A good cafeteria could also
attract better job candidates.
From a tax perspective, an employer-operated eating facility is usually considered a
de minimis fringe benefit. So the costs of providing meals there are generally 100%
deductible as long as the cafeteria is located on or near your premises.
But there are a number of complex rules involved. For instance, the eating facility's
revenue must normally equal or exceed its direct operating costs. We would be glad to
work with you to ensure that the facility qualifies for tax-advantaged treatment when
established and on an annual basis.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2016