IRS--Potential Tax on Employer On-Site Meals

The idea that there’s no such thing as a free lunch could eventually ring true for employees who get complimentary meals at work, as the Internal Revenue Service and Department of the Treasury have taken a step closer to potentially taxing such meals.

Last year, the IRS suggested in its Priority Guidance Plan that it was exploring modifying sections of the Tax Code concerning employer-provided meals that it believed were problematic. Two weeks ago, the agency suggested in its new annual Priority Guidance Plan that it has moved beyond exploring the possibility of making changes to actually starting a project that could change regulations on these meals. The move does not necessarily mean that the IRS will start taxing meals.

However, the guidance plan issued July 31 means the issue remains on the agency’s radar screen and it is devoting more time and resources to settling the question, which could indeed result in eventually taxing meals.  Silicon Valley companies like Google Inc., Yahoo Inc. and Facebook Inc., in addition to many non-tech companies, provide their employees with free meals and loads of snacks for convenience, and to keep them happy and at work. Google told the Silicon Valley Business Journal that in Mountain View alone, it serves 30,000 meals per day at its 30-plus campus cafés.  Others like Cisco Systems Inc., Brocade Communications Systems and Symantec Corp. offer employees food on their campuses, but for subsidized prices.

Currently, free meals for employees, spouses and their dependents are excludable from income under section 119 of the Tax Code, if the meals are for “employee convenience” and are provided on the employer's premises. The IRS is also looking to clarify section 132, which says an employee entitled under section 119 to exclude the value of a meal provided on the premises is treated as having paid an amount for such meal equal to the direct cost of the meal.

While the issue remains under review by the IRS, no changes are likely to be made soon. It can take years for IRS regulations to be written.   Guidance — what the IRS issued last year on the meals issue — simply means that agency is stating there's a problem surrounding the particular law that it's looking into.