New Tax Menu for Employer-Provided Meals?

by | May 6, 2023 | Uncategorized

In most cases, fringe benefits are tax-free for employees who receive them and tax-deductible by employers that provide them — so long as certain conditions are met. For example, an employer may offer discounted lunches in a company cafeteria. Not only can employees benefit from the perk, but it also keeps workers in the office, which is to most employers’ advantage. However, tax legislation in recent years, as well as improved food delivery services, may change how you offer meals to employees.

Making Meals Tax-Free

According to Section 119 of the tax code, meals provided to employees are tax-free if they’re:

1. Made in kind. This means that employees can’t have the option of choosing a free meal or additional money. Similarly, employers can’t reimburse employees for meals employees buy themselves.

2. Served on business premises. Meals must be consumed in the workplace. A workplace is a space the employer owns or leases for business purposes. It can’t be an employee’s home, even if the employee primarily works from home.

3. Offered at the employer’s convenience. This requirement often trips up employers. In general, meals are furnished for the employer’s convenience only if there’s a substantial noncompensatory business purpose. In other words, the arrangement can’t represent disguised compensation.

How “substantial noncompensatory business purpose” is defined depends on all of the applicable facts and circumstances. But employers usually can claim an exclusion if:

  • Meals are provided to employees who have to be on call for emergencies and these calls can reasonably be expected to occur or actually do occur,
  • The time available for the meal is short (for example, 30 or 45 minutes) due to the nature of the employer’s business, and
  • Employees can’t otherwise obtain meals off-premises because, for instance, the workplace is located in a remote area.

Note that if you provide meals for more than half of your employees for a business convenience reason, all employees are treated as being provided with meals for the employer’s convenience — even if some employees don’t meet the convenience test.

Exceptions to the Rules

Generally, only 50% of the cost of meals and entertainment paid by an employer on behalf of employees is deductible. But there are several notable exceptions to the general rule. Employers may deduct 100% of the cost of meals that qualify as de minimis fringe benefits, as governed by the tax code’s Section 132. If an employer operates a cafeteria or similar eating facility on the business premises and its revenue regularly equals or exceeds the direct operating costs, the meals are treated as a de minimis fringe benefit.

But be careful about providing highly compensated employees (HCE) with these benefits. The de minimis exclusion is available for HCEs only if rank-and-file workers have access to the same facility. Therefore, the exclusion doesn’t apply to an executive dining room that’s off-limits to non-executives.

Meal Delivery Services Expand

Sec. 119 regulations were adopted long before specialized meal delivery services such as Grubhub, DoorDash and Uber Eats became widespread. In 2019, the IRS issued Technical Advice Memorandum 201903017, which complicated matters somewhat. It states that the availability of meal delivery should be a consideration in whether an employer qualifies for an exclusion because its employees might not be able to “secure proper meals within a reasonable meal period.” However, the guidance also says that “the availability of meal delivery is not determinative in every analysis … especially in situations where delivery options are limited.”

Nevertheless, your business might still have good reasons for providing meals to workers — even if meals can be delivered quickly. For example, you might not want meal delivery people wandering around your office unsupervised.

TCJA’s Crackdown

The biggest change that may affect employers that furnish meals to employees is a crackdown included in 2018’s Tax Cuts and Jobs Act (TCJA). Under the TCJA, employer-provided meals remain tax-deductible expenses through 2025. However, unless Congress acts to change the law, employers may no longer claim a tax deduction for these meals starting in 2026. On the other hand, qualified meals will still be tax-free to employees.

Since 2018, the employer’s deduction forsuch meals has been limited to 50% of the cost of qualified food and beverage expenses. (The 50% rule already applied to employee meals when workers traveled away from home.)

In 2021 and 2022, under a COVID-19 relief law, the usual meals deduction amount was temporarily increased to 100% for fare provided by restaurants. But the tax break didn’t apply to employer-provided meals at an on-premises eating facility, so it’s essentially a moot issue here. The 100% deduction expired after 2022 and hasn’t been renewed.

Where Things Stand Now

Your business now may face a decision: Continue to provide meals after 2025 to employees — or not? Be sure to consider all tax and nontax repercussions, keeping in mind that the law could change again before 2025.