The Internal Revenue Service is reviewing whether the free gourmet lunches enjoyed by many employees of technology companies in Silicon Valley should be considered taxable benefits. In an article last week, the Wall Street Journal noted that the agency has added the issue to its top tax priorities in the next fiscal year.
Employers often provide perks such as gourmet coffee, tea, sodas and snacks. The IRS treats these along with the occasional free lunch to reward a successful project as "de minimis" or minimal fringe benefits that are not taxable.
If the daily meals are taxable, then the cost of the lunches would become employee income. This would affect employer payroll tax withholdings. As a practical matter, the IRS would likely go after employers for failing to withhold the tax.
The move to scrutinize the free lunch programs will probably not put an end to the practice. Even if the daily benefit is not viewed as de minimis, meals provided free on-site to employees for the employer's "convenience" are not taxable.
A company that has strict security or is far from restaurants could argue that the time it takes employees to eat offsite justifies offering free meals on location for the employer's convenience. Firms that provide meals are also able to deduct the costs as business expenses.
Any change to the guidance on the definition of employer "convenience" will take some time. Then it is possible that a large company hit with a tax audit and penalty might decide to litigate the issue in tax court.
This free meals review is just one of the hundreds of the agency priorities, but could be toward the top as the agency seeks to close the estimated $400 billion yearly tax gap.
Source: CNN, "IRS eyes tax on Silicon Valley's free lunches," Jeanne Sahadi, September 4, 2014.