Download Meals for Employees

Meals for
Employees:
What Are the Costs?
Meals for Employees: What Are the Costs?
Many of the expenses incurred by employees, and perks provided for employees,
involve food.
Employees eat while traveling, while working, while taking breaks, and while entertaining. When
employers provide or pay for these food costs, what are the real costs for both the employer and the
employee?
The IRS basically refers to all food as meals, so there are actually two issues involved in answering this
question:
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Is the cost of providing or paying for employee meals a tax deductible expense?
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Must the cost of a meal be added to the employee’s income?
What is a tax deductible expense?
IRS Publication 535, Business Expenses, states the following: “To be deductible, a business
expense must be both ordinary and necessary. An ordinary expense is one that is common and
accepted in your industry. A necessary expense is one that is helpful and appropriate for your
trade or business. An expense does not have to be indispensable to be considered necessary.”
It should be noted, however, that although an expense may qualify as a business expense, the
deductible portion of the expense may be limited, which is often the case with meals.
The primary financial goal of a business is to make a profit. A profit is possible only if income exceeds
tax deductible expenses. But making a profit is only part of the picture. The business must also have
operating capital.
So what happens when a business incurs an expense that is not deductible? Three things:
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The business’s working capital is reduced.
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The business’s profit is increased in spite of the fact that it has incurred an expense.
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The amount of income tax due on the profits will increase.
If a business continues to incur nondeductible expenses, then it may have a cascading effect. The
business may have to borrow working capital to cover its expenses, and the interest on the borrowed
funds will increase its expenses.
All meals must be treated either as a business expense or an employee fringe benefit. If it treated as a
fringe benefit, then according to IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits, the value
of the fringe benefit must be treated as employee compensation except for:
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Any amount that the law excludes from compensation; and
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Any amount that the recipient pays for the benefit.
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Suppose the employer pays for an employee’s lunch using a company credit card, and the total bill with
tip was $30. If the cost of the meal cannot be excluded from wages, then the $30 would be added
to the employee’s wages, and approximately $4.30 in additional taxes would be withheld as a cost to
the employee. If the employer’s share of the taxes on the $30 is $3.60, then the employer can deduct
a total of $33.60 as a business expense. On the other hand, if the $30 meal can be excluded from
compensation, then the cost to the employee is zero, and the deductible cost to the employer is $30.
Therefore, it is to the employer’s cost benefit if meals provided to employees can be excluded from
employee compensation. Then, only the cost of providing the benefit will be incurred and the additional
payroll taxes will be avoided.
Employers do have one other option. They can choose to provide meals to employees without treating
them as a deductible expense. If they don’t deduct the expense in any form, then it does not have to
be added to an employee’s compensation. In that case, the primary issue becomes one of cash flow and
operating capital reserves.
So what meals are deductible business expenses, and what meals can be excluded
from employee compensation?
Meals Associated with Business Travel
When an employee travels on business, the cost of meals can usually be treated
as a business expense.
If the employee incurs the expense, and the business has an accountable expense reimbursement plan,
then the cost of the meal can be reimbursed to the employee, and the employee does not have to pay
any income taxes on the reimbursement. However, there are certain criteria that must be met in order for
the cost to be treated in this way.
In order for the cost of a meal to be a valid business expense, it must have a
business purpose.
To prove that a meal is a business expense the employee must provide his employer with evidence of the
amount, time, place, and business purpose of the meal.
Meals that are associated with business travel are tax deductible only if they occur when the employee is
traveling away from his “tax home.” IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses,
states: “Generally, your tax home is your regular place of business or post of duty, regardless of where
you maintain your family home. It includes the entire city or general area in which your business or work
is located.” Publication 463 further states that the cost of meals can be deducted if “it is necessary for
you to stop for substantial sleep or rest to properly perform your duties while traveling away from home
on business.”
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So if the meal occurs while the employee is traveling away from his tax home on business, then the
meal by definition is said to have a business purpose. The employee only has to provide evidence of the
amount, time and place of the meal.
There are, however, restrictions on how much of the cost is a tax deductible business expense. Generally,
the business may only deduct 50% of the cost of a meal. Included in the cost of the meal are any taxes
and tips as well as the food. On the other hand, if the employee paid for the meal and is reimbursed, the
entire cost of the meal may be reimbursed and none of the reimbursement is taxable to the employee.
Meal expenses can be figured using either of the following methods:
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Actual cost.
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The standard meal allowance.
The standard meal allowance for most small localities in the United States for
2015 is $46 per day.
Other localities may have higher rates. (For more information on how to use per diem rates, see the
article Expenses 101: What Are Safe Harbor Employee Business Expense Allowances?) Regardless of
which method is used, the employer can still only deduct 50% of the cost.
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Meals for Transportation Workers
IRS Publication 463 also contains a provision for employees who work in the transportation industry. A
transportation worker is defined as one who is:
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Directly involved in “moving people or goods by airplane, barge, bus, ship, train, or truck,” and is
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Regularly required to travel away from home and, during any single trip, usually travels to areas
eligible for different standard meal allowance rates.
The standard meal allowance for transportation workers is $59 per day in the
continental United States.
There is one primary restriction on using this allowance. If an employee uses this method of
substantiating his meal costs for one trip, then he must use it for all trips for the entire calendar year.
Local Business Meals
Local business meals are business meals that occur in the location of the
employee’s tax home.
Such meals can be treated as business expenses only if they have a clear business purpose. In addition
to providing evidence of the amount, time, place, and business purpose of the meal, the employee must
also provide the names of those sharing in the meal and a description of the business that was conducted
during the meal.
This area of business meals is probably the most difficult to substantiate, and it is the most likely to be
questioned by the IRS in an audit. For instance, a meal that is used to extend a business discussion with a
potential client would be a deductible business expense, but a meal that occurs after a business meeting
has concluded may not be. If the meal qualifies as a business meal, the 50% limit on deductibility still
applies.
Meals as a Form of Entertainment
Often meals may be provided as a form of entertainment, or they may be provided in association with
an event, and this may take place in the employee’s tax home. In order to treat entertainment-related
meals as a business expense, they must be either directly related to business or associated with some
activity related to the conduct of business. Details of the entertainment expense requirements are found
in Publication 463.
Like business meals, entertainment-related meals are only 50% deductible.
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De Minimus Meals
Employers often provide food to employees on a regular basis in an effort to
promote goodwill in the office. In many cases, these may be provided under the
de minimus fringe benefit rules.
IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits, defines a de minimus meal as any
occasional meal provided to an employee that has so little value that “accounting for it would be
unreasonable or administratively impracticable.” For instance, it lists the following:
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Coffee, doughnuts, or soft drinks.
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Occasional meals or meal money provided to enable an employee to work overtime. However, the
exclusion does not apply to meal money figured on the basis of hours worked.
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Occasional parties or picnics for employees and their guests.
One major advantage of providing meals to employees in this way is the fact that the 50% limit on the
deduction of meal costs does not apply. Employers may deduct 100% of the cost as a business expense.
However, if such meals are provided to a highly compensated employee (who is either a 5% owner of the
business or receives more than $115,000 in annual compensation), and the meals are not available to all
employees, then the value of the meals must be included in the employee’s compensation.
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Employer-Operated Eating Facilities
An employer-operated eating facility is actually a method of providing de minimus meals to employees.
Such a facility must meet all of the following conditions:
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It must be owned or leased by the employer.
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The employer must either operate the facility or have a contract with another to operate it.
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The facility must be on or near the employer’s business premises.
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The employer must provide meals (food, drinks, and related services) at the facility during, or
immediately before or after, the employee’s workday.
As a de minimus fringe benefit, the cost is 100% deductible to the employer and
can be excluded from the employee’s wages.
Meals Provided on the Employer’s Business Premises
Meals provided on the employer’s business premises that are furnished to
employees for the convenience of the employer can be excluded from the
employee’s wages and are 100% deductible as a business expense.
Defining the phrase “for the employer’s convenience,” however, is a sticking point with the IRS. All of
the facts and circumstances have to be evaluated in order to determine if this criterion applies. IRS
Publication 15-B states that this criterion applies only if the employer does this “for a substantial business
reason other than to provide the employee with additional pay.”
The following circumstances may establish that the meals are provided for the employer’s convenience:
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Meals are provided for more than half of the employer’s employees.
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Meals provided to food service employees during, or immediately before or after, the employee’s
working hours.
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Meals provided during working hours so that an employee will be available for emergency calls.
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Meal periods are so restricted that the employee cannot be expected to eat elsewhere in such a short
time.
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Proper meals cannot be obtained elsewhere within a reasonable period of time.
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In Conclusion
Providing meals to employees and reimbursing employees for business meals is
a common practice in business today, but it is an issue that can be problematic if
not handled properly.
For years it has been common knowledge among tax practitioners that what appear to be excess
deductions for meals on a business tax return is one of the major factors for triggering an audit.
An area that is of particular concern at this time is the issue of meals provided for the employer’s
convenience. On August 26, 2014, the U.S. Department of the Treasury released its 2014-2015 Priority
Guidance Plan. In this document it noted that the issue of employer-provided meals is one of the projects
that it intends to “work actively on during the plan year.” The September 4, 2014, issue of the Wall Street
Journal noted that IRS auditors have already started “flagging the issue and demanding back taxes from
companies amounting to 30% of the meals’ fair market value.”
Therefore, it is important that employers carefully examine any arrangements they have for reimbursing
employees for meals or providing meals as a benefit. Doing so will enable them to evaluate the actual
costs of providing such benefits, as well as protect them from incurring unwanted costs, such as
additional taxes or penalties, for failure to handle the issue properly.
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