Providing Meals and Lodging to Employees

Editor: Albert B. Ellentuck, Esq.

Under Sec. 119(a), meals provided by an employer—including a C corporation employer—can be excluded from an employee’s gross income if they are furnished on the business premises and for the employer’s convenience. The employer can deduct the full cost of these meals (the normal 50% limit does not apply in this context); see Sec. 274(n)(2)(A) and (e)(4). Meals are furnished for the employer’s convenience if furnished for a substantial noncompensatory business reason. However, under Sec. 119(b)(4), all meals furnished to employees on the employer’s business premises are treated as furnished for the employer’s convenience if more than half of the employees receiving meals are furnished them for the employer’s convenience.

What Is “Employer Convenience”?

Determining whether a substantial noncompensatory business reason exists depends on the facts and circumstances. A mere declaration that the meals are furnished for a substantial noncompensatory business reason is not sufficient.

Generally, meals provided before or after the employee’s workshift are not deemed furnished for the employer’s convenience; however, exceptions exist for food-service workers, or if the meal would have been provided during normal working hours for substantial noncompensatory business reasons but, because of work duties, was not eaten during work hours. In any event, meals provided on nonwork days do not qualify for the exclusion.

The following examples show when meals can be deemed provided for a substantial noncompensatory business reason, according to Regs. Sec. 1.119-1(a)(2)(ii).

1. Meals furnished during working hours so employees are available for emergency calls during the meal period (e.g., a hospital requires its employees to remain on call during their lunch hour) are furnished for a substantial noncompensatory business reason. However, the employer must show that emergencies have occurred or are reasonably expected to occur.
2. Meals furnished during working hours to employees because the nature of the employer’s business restricts employees to short meal periods (e.g., the peak workload is during the normal lunch hour) are furnished for a substantial noncompensatory business reason if the employees cannot be expected to eat elsewhere in such a short time. However, meals do not qualify if the reason for the short meal period is to allow employees to leave earlier in the day.
3. Meals are furnished for a substantial noncompensatory business reason if the employees could not otherwise secure food within a reasonable period of time (e.g., there are insufficient eating facilities near the employer’s premises).
4. Meals furnished to food-service workers for each meal period they work are regarded as furnished for a substantial noncompensatory business reason whether furnished during, immediately before or immediately after the employee’s working hours.

The deduction for other business meal reimbursements is generally limited to 50% of the amount otherwise allowable as a deduction, under Sec. 274(n)(2)(A). However, the limit is 75% in 2007 for food and beverages consumed while away from home by individuals subject to the Department of Transportation’s hours-of-service limits, such as employees under Federal Aviation Administration regulations, interstate truck operators, bus drivers, railroad employees and merchant mariners; see Sec. 274(n)(3).

Sampling: The IRS allows the use of statistical sampling to establish the amount of substantiated meal and entertainment expenses that are excepted from the Sec. 274(n)(1) 50%-deduction-disallowance rule. Rev. Proc. 2004-29 provides the technical specifications for the sampling methodology in its appendices. However, it does not (1) authorize the use of sampling to substantiate expenses (as required by Sec. 274(d)); (2) authorize the use of sampling to determine liability for employment taxes or exclusions from income; (3) establish the correctness of an employer’s interpretation of Sec. 274(n) or characterization of expenses as ones that are excepted from Sec. 274(n)(1); or (4) preclude the Service from raising or pursuing any income, employment or other tax issue identified in the review of a statistical sample.

Lodging: Employer-provided lodging may be excluded from an employee’s income if it is furnished on the employer’s business premises for its convenience and the employee is required to accept these lodgings as a condition of employment. Lodging and meals may also be furnished to the employee’s spouse and dependents; see Sec. 119(a) and Regs. Sec. 1.119-1. Meals furnished on nonworking days do not qualify for the exclusion.

This case study has been adapted from PPC’s Tax Planning Guide—Closely Held Corporations, 19th Edition, by Albert L. Grasso, Joan Wilson Gray, R. Barry Johnson, Lewis A. Siegel, Richard L. Burris, James A. Keller, Kellie J. Bushwar and Leslie D. Singleton, published by Practitioners Publishing Company, Ft. Worth, TX, 2006 ((800) 323-8724; ppc.thomson.com).