Are you eating lunch at your desk? Perhaps your employer provides meals for a business reason, such as when the meals are necessary for you to do your job properly. These “convenience of employer” meals are not taxable to you when they meet specific requirements. In addition, your employer can generally claim a deduction on the business’s federal income tax return.
Here’s the background, followed by a trick question.
In a legal advice memorandum issued by associate chief counsel in November 2018 (number AM 2018-004), the IRS took a look at how to determine whether an employer’s reasons for furnishing meals to employees meet the “convenience of employer” requirements.
Specifically, auditors with the Tax Exempt and Government Entities Division wanted to know whether a “test” created by the US supreme court in a 1977 case (Kowalski) was still a valid method for assessing the “convenience of employer” criteria when deciding whether meals were nontaxable to an employee.
The question arose because employers who were being audited were arguing that the 1977 supreme court case was superseded by an internal revenue code section added in 1978.
— The supreme court case stated that for the convenience of employer rules to apply, an employee must accept the employer-provided meals.
— Internal revenue code section 119(b)(2), enacted after the supreme court case, says that, in determining whether meals are furnished for the convenience of the employer, the fact that a charge is made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account.
The conclusion in associate counsel memo 2018-004: IRS determined that internal revenue code section 119(b)(2) did not invalidate the Kowalski test.
The auditors also wanted to know if they could question whether the reasons an employer claimed for furnishing the meals were actually substantial noncompensatory business reasons, and if the auditors could ask to see substantiation for those claims.
The problem: Employers who were being audited cited a 1999 court decision (Boyd Gaming) that says the IRS cannot substitute its judgment for the business decisions of a taxpayer as to the taxpayer’s business needs and goals and what specific business policies or practices are best suited to addressing those business needs and goals.
The IRS agreed with the court’s conclusion in Boyd Gaming.
The conclusion in associate counsel memo 2018-004: The IRS determined that the Boyd Gaming decision does not mean the IRS has to accept an employer’s claims at face value. In addition, no provision in internal revenue code section 119, related regulations, or case law requires that the IRS accept the claims without question.
Instead, taxpayers bear the burden of proving that they are entitled to any exclusion claimed. The IRS can verify that an employer actually follows and enforces its stated business policies and practices. The IRS can then decide whether the policies and practices, and the needs and goals they address, require employees to receive employer provided meals on business premises and qualify as a substantial noncompensatory business reason for furnishing the meals.
Editorial note: The memo also provided examples of acceptable substantiation that IRS auditors can accept.
THE TRICK QUESTION
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For employees, the rules did not change. Meals provided “for the convenience of the employer” that meet the requirements can still be excluded from an employee’s income.
The rules did change for employers. Prior to the enactment of the new law, meals provided to employees for the “convenience of the employer” were 100% deductible. Beginning in January 2018, these meals are subject to a 50% deduction limit. After December 31, 2025, the meals are not deductible at all.
Editorial note: Employers can choose to include the value of the meals in employee income. That would make the meals 100% deductible for the employer and taxable to the employee.