The IRS continues to aggressively audit how free meals and snacks offered to employees in many workplaces are treated for federal tax purposes. Recent IRS guidance in this respect is Technical Advice Memorandum 201903017 (the TAM) published this spring. The TAM, which includes both employer-favorable and IRS-favorable provisions, is essentially the first guidance on employer-provided meals and snacks that the IRS has published in nearly two decades. (We previously discussed changes made to the on-site meal and snack deduction rules in the 2017 Tax Cuts and Jobs Act for federal income tax purposes.)
Providing on-site meals and snacks often requires a significant investment, which employers deem worthwhile for a variety of business reasons. Reasons that satisfy the “convenience of the employer” standard (which regulations interpret as a “substantial noncompensatory business reason”) result in the value of related meals and snacks being excludable from employee wages under Code Section 119. Recognized business reasons for providing on-premises meals that are spelled out in the regulations include circumstances in which there is a lack of nearby eating facilities (so that providing on-premises meals results in time savings), a need for employees to be available to respond to emergencies, or to respond to peak customer demand during a meal period. The examples in the regulations are not exhaustive; other business reasons such as employee security, protection of confidential information, or any other legitimate business reason that an employer can substantiate may qualify covered meals for exclusion.
Employers with free or subsidized food and snack programs should consider implementing various design, operational, and recordkeeping policies and practices that align with current IRS views, as set out in the TAM, such as the following:
- Review organizational charts and job duties to identify specific employees/employee groups that fall within particular Section 119 business reasons, as the TAM by-and-large reflects an IRS aversion for workforce-wide Section 119 business reasons
- Develop and implement formal written policies that link a particular business objective—e.g., encouraging collaboration—with the provision of meals to affected employee groups
- Educate employees as to the noncompensatory reasons why the business provides free or subsidized meals, for example, so that IT and systems/infrastructure support personnel can be available to quickly respond to technical exigencies as they arise
- Track meals provided to visitors, contractors, and employees visiting from other offices
- Organize cafeterias to maximize efficiencies, e.g., provide easy access to prepackaged grab-n-go meals, and minimize bottlenecking as employees move through food lines
- Provide snacks in breakrooms that are healthy, inexpensive, and not considered a meal substitute
- Work with third-party food service vendors to track “direct operating costs” (as laid out in Treas. Reg. § 1.132-7(b)) for fringe benefit valuation purposes (if audited)
Conforming company policies to the TAM demonstrates an employer’s reasonable efforts to understand and apply IRS guidance in this evolving area of the law. As this list suggests, aligning policies and practices with the TAM will require coordination across human resources, tax, the food team, and other internal stakeholders.
Please contact the blog authors or your Morgan Lewis contacts if you would like to discuss the TAM, any of these recommendations, or the tax treatment of your meals program more generally.