Free lunch in new business and start up

Technical topics regarding tax preparation.
#1
Keyad22  
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These are new companies in California Bay Area. Some are IT startups, some are doing online trading. When I go through their financial statements, I saw about 200K "business meal and entertainment ". I ask them what kind of "business meal and entertainment " it is.

The client told me, "our company provide free lunch for all employees".
Okay, "the value of meals provided to an employee and his family by an employer is not income to the employee if the meals are provided on the employer's business premises for the employer's convenience".

"Meals, meal money, or local transportation fare provided to an employee is an excludable de minimis fringe if the benefit is reasonable and is provided in a manner that satisfies all of the following conditions:
(1) it's provided on an occasional basis,
(2) it allows an extension of the normal workday, and
(3) with respect to meals and meal money, it enables the employee to work overtime."

However, the employees at this company work at regular hours-- 8 hours a day, 5 days a week, no overtime. Free lunch every day.

Some startup company we are doing bookkeeping start to provide free lunch too. How should we record the expense? Most of the employees were from the high tech companies in the bay area with delicious free lunch. Have you ever heard any of the IT company get trouble with "free lunch" issue?

How should I hand the 200K lunch expense? Do you have any suggestions?

Thank you,





If you told them it is fringe benefits and should be reported on
 

#2
JAD  
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You might want to check out the interaction between 274, 132, and meals being available to everyone, not just the highly compensated. If I remember correctly, if you work through those sections, you will find that not only are the meals not taxable to the employees, the cost is fully deductible to the employer. I believe that under the new law, the deduction is reduced to 50%, and I believe that the deduction goes away in a few years.

Sorry I am not more specific - I am more than fully employed right now with the 10/15 deadline. Hopefully this at least gives you some ideas as to where to start on the issue.
 

#3
zeesung  
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I remember meals provided to employees for the convenience of the employer used to be 100% deductible, but 2018 TCJA reduced the deduction rate to 50%.
Also, I doubt your client's free lunch belongs to the category of "the convenience of the employer".
If not, they should either be a permanent M-1 item or included in employee's W2 to be deductible by the business.
 

#4
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This situation (providing free lunch or meals to the employees) is running rampage among the high tech firms. I have heard some bigger companies have cafeteria that their employees can just walk in to eat for free anytime they want. And we are not just talking about hamburgers, hotdogs or french fries here. They might serve sushi, ribs, sashimi...etc... those kinds of highend foods that not everyone can afford to order in a restaurant. Have anyone ever heard of or ever seen one incident that they put the cost of the meals on the W-2 of the employees? Such 'free lunches' are ridiculous and they should be considred compensation and fully taxable to the employees.
Last edited by AccTaxMan on 25-Sep-2018 1:11pm, edited 1 time in total.
 

#5
lucyko  
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IRC Section 119 has no mention of extravagant and lavish meals provided by employer (ribs ,sashimi .etc ) so based on PO facts and circumstances it's 100 % deductible by employer .

Also on original post I can't find any support that the meals provided on an occasional basis is a factor on the deductibility
 

#6
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I was strictly talking about the 'unfairness'.

On the one hand, there are highly compensated employees who have lavish meals which are provided to them free of charge by their employers and they do not even have to pay tax on it.

On the other hand, there are fast foods chains workers who would have to use their after-tax money to pay a restaurant for sashimi which they might not even be able to afford.
 

#7
rkrcpa  
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AccTaxMan wrote: Have anyone ever heard of or ever seen one incident that they put the cost of the meals on the W-2 of the employees?


Actually, yes. My brother's Company many years ago started including the FMV of ER provided meals on the W-2's. In fact, they even grossed it up to cover the taxes on the imputed income. This was done at the "Suggestion" of IRS during an audit.
 

#8
lucyko  
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I understand your point about unfairness . Perhaps congress will also and modify provisions in IRC Section 119 and put language concerning lavish and extravagant meals . In the meantime it is what it is .

Maybe we are heading in the write direction of "unfairness " by eliminating the entertainment deduction although others may disagree .
 

#9
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I got this far in the OP:
Meals, meal money, or local transportation fare provided to an employee is an excludable de minimis fringe if the benefit is reasonable and is provided in a manner that satisfies all of the following conditions:
(1) it's provided on an occasional basis...
and I stopped reading. It's not clear what the source for the cited [quoted?] rule is, but...
If it's not occasional, it's not an excludible de minimis fringe benefit according to the OP.
 

#10
Keyad22  
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The notes are cited from RIA Checkpoint.

I used to have more source on this issue. But hands are full now.

For small business, non-tech business, yes, we put the cost into their w-2 since we did payroll, bookkeeping, tax filing for them. But for high-Tech and company with lots of employee, the employer and employee don't want to put it on W-2.
 

#11
Keyad22  
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¶H-1808. “Occasional basis” for receiving meals, etc.

Meals, meal money, or local transportation fare qualify as a de minimis fringe only if provided to employees on an occasional basis, see ¶ H-1807. Whether the benefit is provided on an occasional basis depends on the regularity with which the employer provides the benefit. Thus, provision of any or all of these benefits on a regular or routine basis would not qualify as occasional. 37

Where meal money was paid when overtime work was in response to emergencies, and overtime work and emergencies were a routine part of the employer's business, the meal money was not provided on an occasional basis. The common occurrence of overtime and emergency work was reflected in the fact that the payment of meal allowances was contractually mandated by the employer's collective bargaining agreement. 38 For the possibility of overtime being reasonably foreseeable without being routine, see ¶ H-1809.

The aggregate basis for the determination of the frequency with which an individual receives a benefit (under Reg § 1.132-6(b)(2), see ¶ H-1803) doesn't apply for purposes of determining whether meals, meal money, or local transportation fare is provided on an occasional basis. 39 The smallness of the average benefit per employee, calculated by an employer, didn't demonstrate that meal allowances and reimbursements it paid were provided only occasionally. 40


37Reg § 1.132-6(d)(2)(i)(A).

38IRS Letter Ruling 9148001.

39Reg § 1.132-6(b)(2).

40IRS Letter Ruling 9148001.

From Checkpoint.
 

#12
Keyad22  
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¶H-1807. Meals, meal money, and transportation fare as de minimis fringes.

Meals, meal money, or local transportation fare provided to an employee is an excludable de minimis fringe if the benefit is reasonable and is provided in a manner that satisfies all of the following conditions: 30
(1) it's provided on an occasional basis, see ¶ H-1808;
(2) it allows an extension of the normal workday, see ¶ H-1809; and
(3) with respect to meals and meal money, it enables the employee to work overtime, see ¶ H-1810.



Meal money and local transportation fare that meet the requirements of Reg § 1.132-6(d)(2) are exceptions to the unavailability of the de minimis exclusion for benefits provided in cash (see ¶ H-1804). 31 Thus, cash reimbursements for meal expenses incurred by employees in connection with their employment, but that didn't satisfy the above requirements (because they didn't involve overtime work) didn't qualify as de minimis fringe benefits, even though the reimbursement amounts were modest—no more than $6.25 for dinner, $5 for lunch and $4 for breakfast. 31.1

Meal money or local transportation fare calculated on the basis of hours worked isn't treated as a de minimis fringe. 32


Illustration: Employee worked four hours in excess of the normal eight-hour day and received $4 in meal money ($1 for each overtime hour worked). The $4 is not excludable as a de minimis fringe. 33

If a benefit exceeds either a value or frequency limit described in ¶ H-1807 through¶ H-1810, the entire amount of the benefit is includible. 34


Checkmark RIA illustration: Employer provides employees with meal money every day, without regard to whether they work overtime. All meal money payments would be includible in income, even those paid under circumstances that would qualify the payment under the rules at ¶ H-1807 through¶ H-1810.



The rules for meals, meal money, and transportation (in this paragraph and in ¶ H-1808 et seq.) may not be used to establish a general rule permitting exclusion of a benefit as a de minimis fringe. For example, the fact that the commuting use of an employer-provided vehicle more than one day a month is an example of a benefit not excludable as a de minimis fringe (see ¶ H-1802) doesn't mean that the commuting use of a vehicle no more than 12 times a year is an excludable de minimis fringe. 35 For the rule for “unsafe conditions,” see ¶ H-1811.

For the exclusion of meals at employer-operated eating facilities, see ¶ H-1821 et seq.

For the exclusion of employer-provided meals on the employer's premises for the convenience of the employer under Code Sec. 119, see ¶ H-1750 et seq. Note that the definition of “employee” is different under Code Sec. 119 than for the de minimis rules (see ¶ H-1801). 36



30Reg § 1.132-6(d)(2).

31Reg § 1.132-6(c).

31.1IRS Letter Ruling 9720005.

32Reg § 1.132-6(d)(2)(i).

33Reg § 1.132-6(d)(2)(i).

34Reg § 1.132-6(d)(4).

35Reg § 1.132-6(d)(3).

36Reg § 1.132-6(d)(2)(ii).
 

#13
lucyko  
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Note the very last paragraph where the topic excluding employer provided meals on the employer premises is discussed .Next go to the RIA Checkpoint reference H-1750 and see if they have the language regarding "provided on an occasional basis .
 

#14
makbo  
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zeesung wrote:I remember meals provided to employees for the convenience of the employer used to be 100% deductible, but 2018 TCJA reduced the deduction rate to 50%.

Partly correct. The change affects de minimis exclusion, not meals provided for convenience of employer. "Section 13304 of P.L. 115-97 changes the rules for the deduction of food or beverage expenses that are excludable from employee income as a de minimis fringe benefit. For amounts incurred or paid after December 31, 2017, the 50% limit on deductions for food or beverage expenses also applies to food or beverage expenses excludable from employee income as a de minimis fringe benefit. " [Pub 15-B]

Pub 15-B has over two pages explaining all this. For example, regarding the topic of De Minimis Meals, "the exclusion doesn't apply to [...] meals or meal money provided on a regular or routine basis."

Also, "Employer-operated eating facility for employees.The de minimis meals exclusion also applies to meals you provide at an employer-operated eating facility for employees if the annual revenue from the facility equals or exceeds the direct operating costs of the facility."

Moving on to Meals on Your Business Premises, which is a different topic from de minimis meals,

"Whether you furnish meals for your convenience as an employer depends on all the facts and circumstances. You furnish the meals to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. This is true even if a law or an employment contract provides that the meals are furnished as pay. However, a written statement that the meals are furnished for your convenience isn't sufficient."
 

#15
makbo  
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AccTaxMan wrote:This situation (providing free lunch or meals to the employees) is running rampage among the high tech firms.

Some Silicon Valley cities and towns are pushing laws that would prohibit free or heavily subsidized meals, to get the workers to spend more time and money out in the local community.

I wonder how the meals for contractors figure into this. I understand that at Google, if you have to wear a contractor badge, you are often singled out for treatment different from employees.
 

#16
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I am a little confused. I have a client that provides all meals to its employees on site. The employees take a 15 minute break . I was told that I can take 100 percent of meals because it is a ordinary and necessary business expense under section 162. Meals are not lavish. I was told the law did not change under TJCA. Am I correct?
 

#17
Anderly  
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From CCH:

Employer-provided meals. In certain situations, an employer may deduct expenses for meals it provides to employees, and the employees may exclude the value of the meals from gross income. For instance, if an employer provides meals to employees and their spouses and dependents for the employer’s convenience and on the employer’s business premises, the value of the meals is excludable from the employee’s income (Code Sec. 119(a)). The employer can claim a business expense deduction, but it is subject to the general rule that limits deductions for food and beverages to 50 percent of the expense (Code Sec. 274(n); IRS Chief Counsel Advice 201151020).
 

#18
Anderly  
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Also:

In contrast, employer-provided meals are fully deductible if they are de minimis fringe benefits. De minimis fringes are benefits that are so small as to make accounting for them unreasonable or impractical. An employer’s operation of an eating facility for employees is a de minimis fringe benefit if (a) the facility is located at or near the employer’s business premises, and (b) revenue derived from the facility normally equals or exceeds its direct operating costs. De minimis fringe benefits are excludable from the employee’s income (Code Sec. 132(e)). The employer may deduct the full cost of de minimis fringe meals because they are exempt from the 50-percent limit that applies to most meal expenses (Code Sec. 274(n)(2)(B)).
 

#19
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Thank you for your detailed response. I believe I can take the 100 percent deduction, because the accounting would be a nightmare if I had to allocate . If I understand the law correctly if the meals fall under the de mininis fringe benefit umbrella they are exempt from the 50 percent limit ?
 

#20
WEISSEA  
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From Spidell, see also Notice 2018-76:
1. Meals provided for the convenience of the employer, such as; tax season meals in office,employee meals at seminars, and office coffee, water and snacks are 50% deductible(100% prior to TCJA) if they qualify as a de minimis fringe benefit. 0% deductible if not a de minimis fringe benefit(50% prior to TCJA)
2. Holiday parties,company picnics and other occasional employee appreciation events 100% deductible. No TCJA change to IRC 274(e)(4).
CA does not conform to these TCJA changes.
Also, from QF: 100% deduction for meals where the value is included in the employees wages IRC 274(n)(2).
 

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