Employee benefits, like a daily lunch program, are non-cash benefits provided by an employer to an employee as a way to attract and retain top talent. Additionally, because employee benefits like a daily lunch bring employees together over food, furnishing lunch as a benefit fosters greater collaboration.
After some investigation, you may find that many employee benefits offer tax advantages to both your organization and your employees. Providing employee benefits is an excellent way for your organization to reduce taxes. And, in most cases, the excluded benefits are not subject to federal tax withholding, social security tax, or federal unemployment tax. Consequently, qualifying employee benefits aren’t reported on the employee’s Form W-2.
Now that you are planning to offer free daily lunches to your employees, you may be wondering if those lunches are tax deductible. Let’s take a look.
Tax Exempt Benefits
Here are some of the benefits that are exempt from income tax under 26 U.S. Code Section 274:
- Achievement awards
- Athletic facilities
- De minimis benefits
- Dependent care assistance
- Educational assistance
- Employee discounts
- Employee stock options
- Group-term life insurance coverage
- Health benefits
- Health savings accounts (HSA)
- Lodging on business premises
- Moving expense reimbursements
- Commuting benefits
- Tuition reduction
Notice that meals are included among the tax-exempt benefits listed above. However, all of the listed exemptions are subject to conditions. For instance, moving expenses are not exempt unless the employee paid for them. And, educational assistance in the form of payments for tuition, fees and similar expenses, books, supplies, and equipment are tax exempt up to $5,250 each year.
Three Types of Meals are Tax Deductible
According to IRS rules and regulations, there are three types of tax-deductible meals.
- Meals discussing business – Meal expenses are deductible when there is a business connection such as lunch with a customer, potential client, or employee. To deduct the meal, there must be some substantial business discussion before, during, or directly after the meal. All dining and entertainment deductions are limited to 50% of the total expense.
- Meals while traveling for business – Meals eaten when traveling for a legitimate business activity are also deductible. While you can deduct 100 percent of your lodging and mileage expenses, you can only deduct 50 percent of the expenses relating to the meals you purchase. You may include the entire cost of the bill when you calculate the expense, including food, beverages, sales tax, and gratuity.
- Food Provided in the workplace – This is the tax deduction relating to providing lunch as a benefit. It covers meals that you provide to your employees for your convenience. If those meals qualify, they are 100 percent deductible.
Meeting the IRS Requirements for Lunch as a Benefit
In general, meals are 100 percent exempt if furnished at the employee’s place of work and for the employer’s convenience. The place of work requirement is easily met. That just involves feeding your employees on your business’s premises.
The second requirement is not so easily met. According to the IRS, whether you are furnishing meals for your convenience as an employer depends on all of the facts and circumstances. For instance, meals can be deductible if there are insufficient eating facilities near your business and your employees could not be expected to eat elsewhere in the period of time allotted for lunch.
Lunch as a Benefit Works for You and Your Employees
Employee lunches as a tax-deductible benefit is a good thing for both employers and employees. Employers are providing a culture-affirming benefit that drives significant returns on their investment that includes enhanced talent acquisition and retention efforts as well as increased collaboration between employees. And, employees get free access to convenient and healthy food options that makes their workday easier to navigate.
Consult Your Tax Advisor
Language in the final tax bill focused on “free food” that many companies provide their employees. It prevents companies from fully deducting the cost of food and beverages they provide to employees. Instead, the food is taxable like restaurant meals for employees, which are only 50% deductible. That limit applies until 2025. After that tax year, the costs won’t be deductible at all.
The Tax Cuts and Job Act is now the law of the land. However, it is important to understand that the corporate tax forms you file in 2018 are based on the old tax law. That’s because they cover 2017 income and expenses. The tax-deductible nature of the meals you provide in 2018, and the corporate taxes you file in 2019, will be based on the new law.
This article is not intended to give tax advice. Everyone’s tax situation is different. And, because the Tax Cuts and Jobs Act makes sweeping changes to the tax code, including a number of deductions to broaden the tax base, it’s important that you and your tax advisor review the law to determine the taxability of your lunch program in 2018 and beyond.