By Steven J. Mopsick and Allison Ornelaz*
A hot topic buzzing around Silicon Valley’s tech companies lately is the uncertainty over whether the IRS will tighten the rules regarding free meals some hi-tech companies offer their employees without requiring the value of the meals to be included as part of the employees’ taxable income.
: Under current guidelines, Treas. Regs. §1.119-1 permit the exclusion of meals provided by the employer if the meals are provided on the business premises and are for the convenience of the employer. Whether the free meals are for “the convenience of the employer” is to be
determined on a case-by-case basis. Curiously, the current version of the Regulations say that meals provided by the employer “to promote the morale or goodwill of the employee or to attract prospective employees” are to be treated as compensatory—meaning they are taxable.
The current IRS guidance has been around for a while (1964 and 1985). The current rules provide examples of meals the Service considers to be excludable or includable from an employee’s gross pay but they are obviously outdated and were written long before the rise of campus-like work communities where the worker bees are encouraged to pause from their labor and break bread with their fellow workers.
1. Treas. Regs. 1.119-1(a)(2)(f) provides, in Example 1:
“A waitress who works from 7 a.m. to 4 p.m. is furnished without charge two meals a work
day. The employer encourages the waitress to have her breakfast on his business premises before starting work, but does not require her to have breakfast there. She is required, however, to have her lunch on such premises. Since the waitress is a food service employee and works during
the normal breakfast and lunch periods, the waitress is permitted to exclude from her gross income both the value of the breakfast and the value of the
2. Example 3 says:
“A bank teller who works from 9 a.m. to 5 p.m. is furnished his lunch without charge in a
cafeteria which the bank maintains on its premises. The bank furnishes the teller such meals in order to limit his lunch period to 30 minutes since the bank’s peak work load occurs during the normal lunch period. If the teller had to obtain his lunch elsewhere, it would take him considerably longer than 30 minutes for lunch, and the bank strictly enforces the 30-minute time
limit. The bank teller may exclude from his gross income the value of such meals obtained in the bank cafeteria.”
Examples of waitresses and bank tellers with half hour lunch breaks are inapposite to modern corporate cultures and workplaces.
Here is how Google describes what it is like to work at the Googleplex on its website:
“We’re fond of doing things differently, so you’ll find unique places scattered around
the Googleplex. Creative environments like our flexible workspace—we call it the Garage—allow Googlers to get out from the behind their desks, experiment and find inspiration for their projects. Local childcare options help working moms and dads put family first, while our gFit physical fitness programs and onsite gyms allow Googlers to improve their work-life balance (as well as their actual balance) and make up for all the great food available in our gourmet cafes. As we’ve grown as a company, we’ve expanded our local offices, offering a variety of Bay Area jobs across many skills and product areas.”
Is this where the IRS should be looking for additional revenue Obviously, this issue goes way beyond wondering if the IRS is going to require Googlers to walk fifteen minutes to the employee parking lot, drive to a McDonald’s a few miles away, wolf down a Quarter Pounder, and rush back to their work station at the Googleplex within an hour. But on-site gyms? Childcare? Gourmet cafes? The IRS is duty bound to look into this area as their mandate is not only to assess and collect revenue but to interpret the law and offer guidance to the public. Under the existing statutes and court cases, the IRS would be well-within its mandate to administer the tax law by defining these benefits as part of the Googlers’ “compensation.” The issue perhaps is, should they?
This issue recently flared up when the 2014 IRS Priority Guidance Plan on employer-provided meals was upgraded to a Regulations project when the 2015 Plan was released this past July. Guidance Plans are the IRS’ way of announcing the areas it sees as priority projects for the upcoming year. A deadline for publication is not given.
What actually happens now is an IRS attorney in the IRS National Office will have a new assignment working for up to a year or two on nothing else but crafting a Proposed Regulation on employer-provided meals which will be published in the Federal Register for comment by the public.
Once the comment period is announced, Google, Apple, Microsoft, Amazon, and every other major corporation which hopes to thrive in the Twenty First Century will lawyer-up and submit their best arguments to the IRS. They have a good chance of convincing the tax man that in today’s modern corporate culture, keeping its people fit, secure and satisfied in the workplace may promote goodwill and good morale as an added bonus, but nothing could be more “convenient” to the employer than to structure the work environment around the idea that the employees should have no reason at all to leave the premises.
As for the IRS regulations process, believe it or not, it is still the case that we live in a country where the strength and power of our words can sometimes convince the government to use good judgment and do the right thing.
Many fear that the “guidance” which results from this process will affect companies negatively, as they no longer would be able to provide free employee meals and other benefits. If
the Service were to implement this change, employers would have to include the value of the meals in their employees’ wages and incur additional payroll taxes related to those additional wages. The question for the employers then becomes – what is the value of these meals and how do they maintain proper records of this additional value as a wage to the employee?
As this issue is of great interest to tech companies in Silicon Valley, The Silicon Valley Business Journal reached out to me for my opinion on this stuff. You can find the article here which was published on August 14, 2015. Following that, KCBS Radio in San Francisco also interviewed me on the topic. You can find the interview here, under the title “Steven Mopsick Interviewed by KCBS Radio San Francisco on IRS Announcement Regarding Possible New Regulations on the Proposed Taxation of Employer-Provided Meals.” That afternoon, yet again, I was interviewed by Gil Grosson Talk 910 AM San Francisco on a segment titled “Taxing the Free Lunch.” That interview can be found on the station’s web site archives.
It is uncertain when the IRS will announce any new guidance on these employer-provided meals and other benefits. In the meantime, employees receiving free meals should appreciate
them while they last, as the rules could change in the near future.
* Assistant to Steven J. Mopsick
**Treas. Regs. 1.119-1(a)(2)(f)(iii)