No Free Lunch for Companies as IRS Weighs Tax-Exempt Meals
(Bloomberg) Be careful when you grab that office bagel. The Internal Revenue Service may be watching.
The U.S. tax agency is taking a closer look at a popular tax-exempt perk offered by companies such as Google Inc.: free meals.
“There’s really potentially a lot of tax revenue involved,” said Lawrence Zelenak, a tax law professor at Duke University in Durham, North Carolina. “It sounds like you’re being inherently trivial, but I think this is not.”
The rules may address the unusual legal question of whether employees at the Googleplex in Mountain View, California, are more like New York office workers who can duck out for lunch or akin to lumberjacks in a remote logging camp who need to have food trucked in.
Technology companies that use their well-stocked cafeterias as a lure for prospective employees and a way to keep them on campus for longer hours have been challenged by the IRS in recent years, said Marianna Dyson, a tax lawyer at Miller & Chevalier in Washington. She represents some of the companies whose meal policies are being reviewed.
“The IRS has been particularly active on the West Coast with respect to any perks,” she said. “They’re trying to tamp this down. I think they see there’s been a lot of freewheeling delivery of this benefit in these fast-moving workplaces.”
Under U.S. tax law, workers don’t have to pay income or payroll taxes on meals they are provided “for the convenience of the employer.”
The IRS publication on the issue says companies can qualify if employees can’t “otherwise eat proper meals within a reasonable period of time.” It cites the example of a bank teller who has a short lunch break to accommodate the peak traffic period.
Another provision of the U.S. tax code lets companies set up cafeterias to serve those employees and then deduct the full cost of the meals, not just the 50 percent limit that typically applies to business meals.
The IRS has been conducting intensive employment-tax audits over the past several years as it looks for ways to combat tax avoidance.
Dyson said the cafeterias serve the companies’ interests by keeping people at work.
“They don’t want their people leaving, particularly if they have to get in cars and go find a place,” she said. “They’re gone longer. They lose time. They lose the opportunity to be in a setting where they’re talking together.”
The Treasury Department included the issue in its list of administrative priorities for the year that started July 1. It included no deadline for completion and no detail on the content of the rules.
The project is in its preliminary stages, Erin Donar, a spokeswoman for the Treasury Department, said in an e-mailed statement.
“The application of tax rules to employer-provided meals in various contexts is an area in which additional guidance may provide useful clarity for employers,” she said.
Mark Hanson, an IRS spokesman, declined to comment. The Wall Street Journal first reported the increased IRS interest in the issue.
Free meals are common as a perk at technology companies with campuses in California. Jim Prosser, a spokesman for Twitter Inc., had no comment. Tim Drinan, a spokesman for Google, declined to comment. Vanessa Chan, a spokeswoman for Facebook Inc., said the company has no comment.
Bloomberg LP, the parent of Bloomberg News, operates pantries at its offices that often feature fresh fruit, breakfast cereal and bagels. Ty Trippet, a spokesman for Bloomberg LP, declined to comment on how the company treats the food for tax purposes.
One IRS definition of meals includes a specific sugary, caffeinated exemption for “coffee, doughnuts or soft drinks.”
Beyond that, the lawyers may have to fight it out all the way to court, one baked good at a time.
For example, Dyson said she’s had the IRS tell her that a bagel is more like a meal than a snack.
“The IRS’s view of meal’ may not be the classic example of the food chart that you and I are thinking of,” she said. “They’re going to interpret a meal liberally.”
If the IRS declares meals as taxable, companies have a few options, including selling the meals at cost to employees and giving them taxable raises to make them whole, said Sam Brunson, a tax law professor at Loyola University in Chicago. Zelenak said the meals most at risk of a changed tax treatment are breakfasts and dinners at either end of the workday. The midday meal at a secluded tech campus is on more solid legal ground, he said, though it could be vulnerable.
“The other thing I’d like to see them address is the bag lunch question,” he said. “Why can’t people just bring a bag lunch?”
—With assistance from Sarah Frier and Brian Womack in San Francisco.