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On-Premises Meals: Is There Such a Thing as a Free Lunch?

Meeting the tax code provisions that allow employers to provide onsite meals on a tax-free basis

Part One:

It is no secret that many Silicon Valley employers serve free gourmet meals to their employees—the Wall Street Journal, Bon Appétit magazine, Time, Forbes, and other media sources have reported on this benefit. In addition, the number and variety of cafés and foods provided by these employers, the healthfulness of the meals served, the positive culinary reviews, famous executive chefs involved, cleanliness of the facilities, and the favorable benefit cost-estimates have been the subject of news stories for years.

News sources have recently reported that the Internal Revenue Service (IRS) has begun to examine the tax treatment of employer-provided free meals, though the agency has yet to officially comment on its findings. Depending on the value of the meals, the number provided per day, and the number of employees receiving the benefit, this could be a fairly big-ticket item in an employer’s tax audit if the IRS determines (1) that the value of the benefit should have been included in employee income, resulting in employer liability for the income and employment taxes, interest, and penalties and (2) that the value of the meals was not fully deductible.

It is also no secret that the U.S. Department of Treasury and IRS intend to provide additional guidance on the taxation of employer-provided meals under Internal Revenue Code sections 119 and 132. On August 26, 2014, the Treasury Department and the IRS released the “2014-2015 Priority Guidance Plan,” the federal government’s annual prioritization of tax issues and projects to be “addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance.” Among the plan’s priorities is an entry entitled “Guidance under §§119 and 132 regarding employer-provided meals,” which appeared as the third item in the “Executive Compensation, Health Care and Other Benefits, and Employment Taxes” section. Odds are that this new guidance is related to the IRS’s audit experiences and to the free gourmet meals regularly provided by Silicon Valley companies to their employees.

The question remains: Is there such a thing as a free lunch? The answer is yes. The Code contains two provisions that allow employers to provide meals to their employees on a tax-free basis:

  • Section 119, which applies to meals provided on the employer’s premises, if the meals are provided “for the convenience of the employer”; and

  • Section 132(e)(2), which applies to meals provided at an employer-operated eating facility, such as a company cafeteria or café.

The requirements for the section 119 and section 132(e)(2) exclusions are generally described below and in part two of this series. If the requirements for either of the sections’ exclusions are not satisfied, then the meals technically are not free. Rather, the value of the meals is includible in employees’ wages and subject to income and employment taxes. Taxing employees poses obvious administrative difficulties. For example, an employer would have to keep track of the value of what each employee ate on a particular day. Of course, administrative difficulties aside, an employer could pay the taxes on the employees’ behalf and provide a tax gross-up for any additional taxes owed as a result, which is another, albeit more expensive, way to provide tax-free lunches to employees.

In addition, other Code provisions allow employers to provide or pay for employee meals on a tax-free basis. Two of these exceptions are the “accountable plan” rules (which apply to business travel and entertainment) and the “de minimis” rule. The de minimis rule covers employer-provided company picnics, occasional meals, coffee, donuts, and meal money necessitated by overtime work.

Code Section 119—“Convenience of the Employer” Test

To qualify for tax-exempt treatment under section 119, an employer-provided meal must be furnished:

  • To an employee, or employee’s spouse or tax dependent;
  • By or on behalf of the employer;
  • On the business premises of the employer;
  • For the convenience of the employer.

“On the business premises of the employer” generally means the employee’s place of employment. The regulations give two examples of this term of art: meals furnished in an employer’s home to a domestic worker and meals furnished to cowhands while herding their employer’s cattle on leased land.

“For the convenience of the employer” generally means that free meals will be considered to have been furnished for the convenience of the employer, if the meals were furnished for a substantial noncompensatory business reason (though that reason need not have been the only reason for the provision of the meal). Whether an employer has a substantial noncompensatory business reason is determined based upon an examination of all the facts and circumstances. The regulations provide the following circumstances in which meals may be regarded as having been furnished for a substantial noncompensatory business reason of an employer:

Emergencies. Meals provided during working hours to maintain the employee’s availability for emergency calls during his or her meal period may be considered to have been provided for a substantial noncompensatory business reason. It must be shown that emergencies have occurred or can be reasonably expected to occur and that as a result of such emergenices, the employer called on the employee during the employee’s meal period.

Short meal periods. If an employer’s business requires a short meal period (such as 30 or 45 minutes) and the employee cannot be expected to eat elsewhere within such a short time, a meal furnished by the employer may be considered to have been provided for a substantial noncompensatory business reason. The meal period, however, cannot be kept short so that the employee may go home early.

No alternatives. Meals provided when insufficient eating facilities exist in the vicinity of the employer’s premises such that an employee cannot otherwise secure proper meals within a reasonable meal period may be considered to have been provided for a substantial noncompensatory business reason.

Restaurant work. Meals furnished to a restaurant or other food service employee for work he or she performs during a meal period will be regarded as furnished for a substantial noncompensatory business reason of the employer.

If more than half of the employees receive an on-premise meal that is, in fact, for the convenience of the employer, then pursuant to section 119(b)(4), all meals furnished on the business premises of that employer may be treated as furnished “for the convenience of the employer.”

Whether the employer charges for a meal or whether the employee can decline such a meal does not affect the analysis. However, the meal must be in-kind and cannot be a cash allowance or additional compensation in lieu of the meal. According to the regulations, meals furnished to employees solely to promote goodwill or employee morale or to attract prospective employees do not meet the convenience of the employer test.

Part Two:

Below is a discussion of a pivotal case on free lunches, and a look at the income exclusion for certain employee meals provided at a company cafeteria.

The Boyd Gaming Case

The seminal case involving the “convenience for the employer” test is Boyd Gaming Corp. v. Commissioner of Internal Revenue, (9th Cir. 1999). In Boyd Gaming, a casino furnished free meals on its business premises to all of its employees, most of whom were required to stay on the premises during their working hours because of the casino’s security concerns. The Ninth Circuit Court of Appeals held that it was inappropriate to second-guess an employer’s business reasons or to substitute a different business judgment for the employer’s. The court found that the employer’s security and business concerns provided sufficient justification for its policy of requiring employees to stay on the premises to satisfy the “convenience of the employer” test.

In light of Boyd, the IRS stated in Announcement 99-77 (August 1999) that in applying Section 119 it would no longer “attempt to substitute its judgment for the business decisions of an employer as to what specific business policies and practices are best suited to addressing the employer’s business concerns.” However, the IRS will consider whether an employer’s policies are reasonably related to its business needs and whether the policies were in fact followed.

Code Section 132—De Minimis Exclusion for Subsidized Company Cafeterias

Employee meals at a company cafeteria are excludable from income as “de minimis” fringes if the facility does not operate at a loss (that is, the revenue from employees must at least equal the facility’s direct operating costs).

To qualify as a de minimis fringe benefit the employer-provided meal must meet the following requirements.

Ownership: The eating facility must be owned or leased by the employer.

Operation: The eating facility must be operated by the employer (that is, operated by employees or by a food services business under contract to the employer).

Location: The eating facility must be located on or near the employer’s business premises.

Revenue: The eating facility must generate revenues that on an annual basis equal or exceed the facility’s “direct operating costs.” For purposes of this requirement, direct operating costs are the cost of food, beverages, and the cost of labor of personnel whose services relate to the facility and are performed primarily on the premises (such as cooks, waiters, and waitresses). The direct operating costs test can be applied separately to each eating facility or to all eating facilities in the aggregate.

When: The eating facility must provide meals either during, or immediately before or after, the employees’ workday.

Nondiscrimination: Meals provided to highly compensated employees (HCE) at an employer-operated eating facility for employees must be taxed to those HCEs unless certain nondiscrimination rules are satisfied.

If the above requirements are not met, the discounts on meals provided at the facility must be valued and included in employees’ wages. Under the general valuation rule, any income imputation must be based on the fair market value of the meals, minus any amounts paid for the meals or excluded under other code sections (such as section 119). Note that an alternative valuation method exists as well.


Employers may prefer to rely on the de minimis exclusion for subsidized company cafeterias described above rather than the exclusion under section 119 because the rules are more straightforward and mechanical, assuming that the facility generates some revenue. In contrast, the exclusion under section 119 depends on whether the employer can satisfy the subjective “convenience of the employer” test.

Employers also prefer the de minimis exclusion because all meals provided to employees that are tax-free de minimis fringe benefits are fully deductible (and are not subject to the 50 percent deduction limit under section 274(n)(1)). However, it is possible, given the interaction of the section 119 rules with the revenue test for determining whether an employer-operated eating facility is a de minimis fringe, that if more than half of the employees to whom the meals are furnished on the employer’s premises are furnished for the employer’s convenience, an employer may fully deduct the cost of all meals provided at its eating facility.

It appears that employers that are providing free meals to employees and not including the value of those meals in wages are doing so for their own convenience under section 119; the employers may be deducting the entire cost of providing the meals as a tax-free de minimis benefit due to the interaction of the section 119 rules with the de minimis rules. But if the IRS determines that there is no substantial compensatory business purpose and that the value of the meals should have been included in employee wages, the employer would not be able to deduct the entire cost of providing the meals and the employer could be liable for the income and employment taxes, interest and penalties.

It will be interesting to see how the case law and IRS guidance in this area develop.

Vicki M. Nielsen is of counsel in the Washington, D.C. office of Ogletree Deakins and a member of the firm’s employee benefits practice group. © 2014 Ogletree Deakins. All rights reserved. Republished with permission.​


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