Employers in certain businesses and industries that provide employees with meals during the workday can deduct the costs of those meals if they are ordinary and necessary business expenses. As a rule, the IRS limits the business meals deduction to 50% of cost, although it may allow a full deduction if the costs qualify as a de minimis fringe benefit. Such a benefit means employees receive the meals in a nondiscriminatory eating facility located on or near the employers business premises and the facilitys revenue must equal or exceed its direct operating costs.
The Taxpayer Relief Act of 1997 changed the rules somewhat. Now employers can receive a full deduction for the cost of employee meals even if the facilitys revenues do not exceed its costs if those meals are provided primarily to employees for a substantially noncompensatory business reason of the employer.
Substantially Noncompensatory Business
The IRS considers the following factors when determining whether a substantially noncompensatory business reason is present:
Timing of the meal. The employer must provide meals to
employees on a workday during the work shift. For food-service
employees (or if extenuating circumstances prevent a meal during
shifts), the meal must be provided immediately before or after a
shift. In addition, this means no more than one meal per normal
eight-hour shift and does not apply to meals on days off or at other
Availability during emergencies. Under this factor, an
employer requires that employees be available during meal periods to
respond to emergencies. The central issue here is the definition of
emergency : While emergencies generally are thought of as
events of a nature or type that have happened in the past or are
reasonably expected to happen in the future, some courts have
defined them much more narrowly, as unexpected serious occurrences
requiring prompt actions. Another issue is whether this factor
applies to business needs that may not be considered true
emergencies; an example is employees who eat at their desks so they
can respond to urgent business situations.
- Short lunch period due to nature of employers business. This usually refers to businesses that have peak workloads during the employees lunch time. The short meal period must be due to the distinct nature of the employers business. critical to this factor is the employers business demands that the employees meal period be short and that the employee cannot be expected to eat elsewhere in the short time period allotted for a meal.
Inadequate eating facilities elsewhere. This usually refers
to employees in remote or isolated locations in which there are
insufficient eating facilities in the vicinity of the employers
- Food-service employees. While this factors application seems straightforward, some courts have held that bartenders and cocktail waitresses do not fit in this category even if they work on the same premises as other food-service employees; according to these courts, providing alcohol does not constitute the serving of food.
Need For Documentation and Enforcement
To avoid many of the problems in this area, employers should implement strict recordkeeping in the substantiation of their employees meal expenses. Such substantiation should show the relative charges and costs associated with these meals, and the quantity and times meals are taken by each employee. At the same time, a companys management should implement strict policies to ensure employees are not taking more meals than authorized; records of infractions and disciplinary actions should show that the employer truly regulates the process.
These precautions are very important; meals determined not to be deductible as de minimis fringe benefits may be subject to a host of unexpected (negative) consequences. If the meals must be considered wages, the employer may be liable for withholding taxes and could be subject to penalties for failure to withhold. In addition, the values of such meals would have to be included in the employees gross incomes, and it is uncertain what amounts would be required to be included in determining those valuesthe meals actual costs or their fair market value (probably a much higher figure).
For a discussion of this and other developments, see the Tax Clinic, edited by Edward Sair, in the March 1998 issue of The Tax Adviser .
Nicholas Fiore, editor
The Tax Adviser