JD, LLM, Managing Director - National Tax Services
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IRS Chief Counsel Memorandum Provides Guidance On Compensation Exclusion for Employee Meals Provided for Convenience of the Employer
Recently, the IRS issued Chief Counsel Advice Memorandum, AM 2018-004. The memorandum, (also known as a CCA) while technically not establishing any formal precedent, includes helpful taxpayer guidance to employers that provide, or are contemplating providing, in-house meals to their employees on a non-taxable basis. This CCA is especially noteworthy because it was prepared in response to questions raised by IRS auditors who, as part of employment tax audits, noted a pattern of cases in which employers furnish meals to their employees and do not treat the meals as compensation for tax purposes, relying on the exclusion available for meals provided to employees on the employer’s business premises “for the convenience of the employer.”
Internal Revenue Code Section 119 permits an employer to exclude from taxable income the value of meals provided at its expense to its employees on the employer’s premises for the convenience of the employer. The analysis is fact-driven and focuses on the requirement that the meals must be furnished for a substantial non-compensatory business reason of the employer. Treasury regulations under Section 119 provide that, on a facts and circumstances basis, the following meals provided on the employer’s premises can constitute meals provided for a substantial non-compensatory business reason:
• The meals are furnished to an employee during the employee’s working hours so that the employee will be available for emergencies while eating (e.g., certain hospital workers).
• The employer’s business requires the employee’s meal period to be short (e.g., 30 minutes) and the employee cannot be expected to eat elsewhere during the short time period (e.g., where the peak work hours of the employer’s business in which the employee is engaged occur during meal times).
• The meals are furnished to the employee because the employee could not otherwise have a proper meal within a reasonable meal period (e.g., where there are insufficient eating facilities in the vicinity of the employer’s business premises where the employee works).
• The meals are furnished to an employee during the employee’s working hours so that the employee will be available for emergencies while eating (e.g., certain hospital workers).
• The employer’s business requires the employee’s meal period to be short (e.g., 30 minutes) and the employee cannot be expected to eat elsewhere during the short time period (e.g., where the peak work hours of the employer’s business in which the employee is engaged occur during meal times).
• The meals are furnished to the employee because the employee could not otherwise have a proper meal within a reasonable meal period (e.g., where there are insufficient eating facilities in the vicinity of the employer’s business premises where the employee works).
In general, the Memorandum provides the following guidance:
• If the employer’s particular business policies require the employer to provide certain employees with on-premises meals in order for the employees to properly perform their jobs, then meals provided to employees with those duties in that job position are provided for the employer’s convenience, even if certain individual employees in that position decline the meals.
• Per applicable case law, the IRS cannot substitute its judgment for the business decision of the employer as to its business needs and concerns and as to which policies or practices are best suited to address them; however, in regard to meals for the employer’s convenience, the IRS is not prevented from requiring substantiation that a specific employee meal policy exists, as well as an explanation and substantiation that the provision of employer-provided employee on-site meals is necessitated by the policy in order for the employer to meet its business needs and goals (e.g., the employer could not run a hospital without certain staffers being available for emergencies while eating. However, an employer using the ‘on-call for emergencies’ approach could be required to demonstrate to the IRS that emergencies have actually occurred or can be reasonably be expected to occur).
• An employer utilizing the Section 119 exclusion bears the burden of proving that they are entitled to the exclusion, and should be prepared to provide substantiation, if requested by the IRS, as to the business reasons supporting its position that the meals are for the employer’s convenience.
• If the employer’s particular business policies require the employer to provide certain employees with on-premises meals in order for the employees to properly perform their jobs, then meals provided to employees with those duties in that job position are provided for the employer’s convenience, even if certain individual employees in that position decline the meals.
• Per applicable case law, the IRS cannot substitute its judgment for the business decision of the employer as to its business needs and concerns and as to which policies or practices are best suited to address them; however, in regard to meals for the employer’s convenience, the IRS is not prevented from requiring substantiation that a specific employee meal policy exists, as well as an explanation and substantiation that the provision of employer-provided employee on-site meals is necessitated by the policy in order for the employer to meet its business needs and goals (e.g., the employer could not run a hospital without certain staffers being available for emergencies while eating. However, an employer using the ‘on-call for emergencies’ approach could be required to demonstrate to the IRS that emergencies have actually occurred or can be reasonably be expected to occur).
• An employer utilizing the Section 119 exclusion bears the burden of proving that they are entitled to the exclusion, and should be prepared to provide substantiation, if requested by the IRS, as to the business reasons supporting its position that the meals are for the employer’s convenience.
It is noteworthy that the CCA was prepared to assist IRS employment tax auditors. The issuance of the CCA can therefore be expected to result in such audits requiring substantial employer documentation and substantiation where the Section 119 exclusion is utilized. Consequently, employers utilizing or considering the use of the Section 119 “meals for the employer’s convenience” exemption should work closely with their tax advisor to best document and substantiate the existence of an on-premises employer-provided employee meals policy, and show why that policy is needed for the employer to conduct its business.
For more information, please contact Dana Fried, Managing Director National Tax Services, at Dana.Fried@CohnReznick.com or 516-417-5064.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.