When I was contemplating where I might want to practice after law school, I was struck by the description of one particular firm in Philadelphia with a thriving tax practice. A former partner warned me off, explaining that they brought lunch to your desk. After years of scratching together my own lunch, I thought that sounded pretty great so I asked what was so terrible about having your lunch brought to you.
“They do it,” she said simply, “Because they don’t want you to leave.”
She wasn’t kidding.
It turns out that providing lunch and other perks at your desk (even suit shopping) was the norm – and for exactly the reason the partner explained.
But that kind of behavior isn’t limited to law firms. Companies all over the country often provide meals and other services to keep employees on the premises and happy. Earlier this year, Forbes counted down the 10 Most Popular Employee Perks of 2014 and found benefits that ran the gamut from game rooms to company gyms. Not surprisingly, the list also included free food including a “never-ending cereal bar” at Moz.com and a “24-7 on-tap keg” at apartmentrental.com.
Perks like these can be win-win for employers and employees. Employers, of course, win employee loyalty and keep employees at work. Employers can generally deduct the costs of providing perks to employees as business expenses while employees may be able to exclude the cost of those perks from income. Specifically, when it comes to meals, they may be excludable from income under section 119 of the Tax Code. The Regulations clarify at section 1-119 that:
The value of meals furnished to an employee by his employer shall be excluded from the employee’s gross income if two tests are met: (i) The meals are furnished on the business premises of the employer, and (ii) the meals are furnished for the convenience of the employer.
That’s driven some companies like Google to provide meals considered “insanely awesome” by the rest of us who may settle for an occasional pizza and beer. It’s also prompted veritable foodie wars driving Facebook to hire away Google’s top chef in 2009 to offer “free food, and copious amounts of it…” as part of a “strategy to encourage employees to work long hours.” That strategy is contagious with other companies like Twitter and Yahoo signing on to offer free food to attractive quality candidates who are willing to work long hours.
And mostly, it’s all been free for employees.
Except maybe it shouldn’t have been. The Wall Street Journal raised the issue in 2013 when it suggested that regular meals provided for employees were not intended to be tax free under the Tax Code. Those tax free meals were meant for convenience, the article suggested, and not as a substitute for compensation. Allowing employees unfettered access to gourmet food for free did not seem to fall under any reasonable exception.
Despite the spike in press that followed, the Internal Revenue Service remained relatively quiet on the issue. That is, until last week.
On August 26, 2014, the Department of Treasury released the 2014-2015 Priority Guidance Plan (downloads as a pdf) which raised the issue of employer-provided meals as one of 317 projects that are priorities for the upcoming year. The plan “represents projects we intend to work on actively during the plan year.”
In other words: the IRS is rethinking looking the other way when it comes to free meals. While the plan did not focus on how IRS specifically plans to evaluate the issue – nor did it establish any timeline – it’s likely that the agency will shift resources to consider how and whether to force companies to include “free” meals as compensation for employees.
It’s a tricky issue, both on the merits and in the public eye.
In court, proving that it’s a perk and not solely for the convenience of the employer could be difficult for companies.
But in the court of public opinion, it could be worse for IRS. With the IRS’ popularity already quite low, aggressive enforcement to tax what has to date been considered a “free lunch” could prove to be a black eye for the agency. However, there is a chance that with a tax crunch facing more and more taxpayers across the country, some may cheer the taxation of what some consider an unfair advantage – especially middle class workers who aren’t offered the same perks.
With no real direction from IRS to date, employers (and their tax lawyers) will likely keep a close eye out for official guidance on the matter – as well as monitoring whether IRS fires any warning shots in the form of high profile audits. Chances are, employers will be those in the crosshairs: it’s unlikely that IRS would make employees a mass target as a policy matter.
As for the rest of us? We can breathe easy. No matter how IRS comes down on the gourmet offerings at Google, occasional snacks and other drinks offered to employees at their workplace remain de minimis and therefore not includable for tax purposes. The reasoning behind exempting those items is that they are “so small as to make accounting for it unreasonable or impractical.” In fact, the Latin phrase de minimis translates roughly to “of little importance” – which means the IRS clearly doesn’t know how many of us feel about coffee.
Check out this guide for more on business taxes.