United States: Substance, Not Form, Determines Whether Employee Meals Have Noncompensatory Business Reason, IRS Warns

In a technical advice memorandum (TAM 201903017) released on January 18, 2019, the Internal Revenue Service (IRS) provided guidance on whether employer-provided meals and snacks are includable in employee income and subject to employment tax. The memorandum, which cites a number of IRS rulings on this topic, serves as a forewarning to employers of the limitations of providing free meals to employees.

Employers should be aware that the value of employer-provided meals will not be excludable from employee income unless the employer can (1) demonstrate that the meals were provided for a substantial noncompensatory business reason and (2) substantiate that the employer enforces the policies and practices underlying this substantial noncompensatory business reason.


While an employer is generally required to include compensation for all services and all fringe benefits in an employee's gross compensation, there are exceptions set forth in the Internal Revenue Code.

One such exception is found in Code Section 119(a)(1), which allows an employer to exclude from an employee's income the value of meals provided for the convenience of the employer if the meal is furnished on the employer's business premises and provided for a substantial noncompensatory business reason.

Whether meals are furnished for a substantial noncompensatory business reason requires an analysis of the relevant facts and circumstances. Regulations from the U.S. Department of the Treasury provide several examples, indicating that meals will be regarded as furnished for a substantial noncompensatory business reason when the meals are furnished to the employee during working hours for these purposes:

  • To have the employee available for emergency calls
  • To restrict the employee to a short meal period
  • To enable the employee to secure a meal within a reasonable meal period because the employee could not otherwise do so

Further, Code Section 119(b)(4) provides that all meals furnished to employees on the employer's business premises will be treated as being for the convenience of the employer as long as more than half of the employees on the employer's business premises are furnished meals for the convenience of the employer.

Additionally, Code Section 132(e)(2) provides that the value of meals furnished to employees at an employer-operated eating facility is excludable from income as a de minimis fringe benefit, as long as the revenue from the facility equals or exceeds the direct operating costs of the facility. Although the term "eating facility" has never been expressly defined, the IRS has indicated that an eating facility means an identifiable location that is designated and set aside for the preparation and/or serving and consumption of meals.

Finally, Code Section 132(e)(1) also provides for the exclusion from an employee's wages of any property or service whose value is so small as to make accounting for it unreasonable or administratively impracticable. Determining whether the item received is sufficiently small is a matter of facts and circumstances, including how often the employer provides this benefit to its employees.

The Memorandum

The taxpayer in the memorandum is an unnamed employer that provided free meals to all employees as well as unlimited snacks and drinks. The taxpayer gave the following noncompensatory business reasons for furnishing the meals:

  • Protecting confidential information by providing a secure environment for business discussions on the business premises
  • Fostering collaboration and innovation by encouraging employees to remain on the business premises
  • Protecting employees due to unsafe conditions surrounding the business premises
  • Providing healthy eating options for employees to improve employee health
  • Because employees cannot quickly purchase a meal elsewhere within a reasonable meal period given the location of the business premises
  • Because, due to the demands of the employees' job functions, employees may only take short meal breaks
  • Ensuring that employees are available to handle emergency outages that regularly occur

Boyd Gaming Corp. v. Commissioner

To begin its analysis, the IRS pointed to Boyd Gaming Corp. v. Commissioner, which precludes the IRS from substituting its judgment for the business decisions of a taxpayer. However, the IRS noted that Boyd does not restrict its authority to determine whether those policies qualify as substantial noncompensatory business reasons and whether the taxpayer actually adheres to and enforces its own policies.

The IRS noted that a taxpayer bears the burden of proving that it is entitled to exclusions from income and wages for meals furnished for the convenience of the employer. Upon request, the taxpayer must provide substantiation concerning the business reasons being cited to support its claim of furnishing meals for the convenience of the employer. Additionally, if an employer provides specific written policies to demonstrate a substantial noncompensatory business reason for furnishing meals to employees, the employer also must demonstrate that it actually enforces these policies.

Prevalence of Meal Delivery Services

Interestingly, in the memorandum the IRS discussed the prevalence of meal delivery services, aside from traditional restaurant delivery. In recent years, food delivery services have become more prevalent, and employees can easily order meals online or on their cell phones from a variety of on-demand delivery services.

The IRS expressly noted that the availability of meal delivery services should be considered when evaluating the business reasons proffered by employers as support for providing meals for the convenience of the employer. For example, the inability of an employee to secure a meal within a reasonable meal period may be challenged if the IRS finds that meal delivery services are readily available. However, the ability of an employee to bring food from home should not be considered.

Substance Over Form: Review of Substantial Noncompensatory Business Reasons

The IRS concluded that the business reasons provided by the taxpayer were not sufficient to justify the employer's need to furnish meals. Specifically, the IRS explained that:

  • the taxpayer did not demonstrate that it had policies related to protecting confidential information, fostering collaboration, employee health, or shortened length of meal periods that would require employer-provided meals in order for employees to properly perform their duties;
  • the taxpayer did not provide sufficient support related to its claim that its employees could not safely obtain meals off the business premises such that employer-provided meals were necessary for the employees to perform their duties; and
  • the employees had access to nearby eating facilities, such that employer-provided meals were not necessary for the employees to perform their duties.

Significantly, the IRS noted that the taxpayer sufficiently demonstrated that it had policies in place requiring certain employees to respond to emergencies that regularly occurred. However, the taxpayer did not demonstrate that all employees were expected to be available to respond to emergencies during meal periods as part of their job duties. As a result, the IRS concluded that this exclusion was only available to those employees reasonably expected to respond to emergencies during their meal periods.

The IRS also noted that the taxpayer did not demonstrate that at least half of all employees were furnished meals for the convenience of the employer and, therefore, had not shown that the requirements of Code Section 119(b)(4) were met.

In addition to the above, the IRS ruled that the snack areas and employees' desks at which meals were provided and consumed did not qualify as "eating facilities" under Section 132 of the Code. Additionally, the memorandum noted that because the meals were provided free of charge, the revenue derived from the "facility" did not exceed the operating costs. Thus, along with failing to meet the requirements of Code Section 119, the IRS concluded that the meals the taxpayer furnished to its employees were not excludable as a de minimis fringe benefit for an employer-operated eating facility under Code Section 132(e)(2).


While the IRS concluded that the employer-provided meals were not excludable from employee income, the memorandum said that snacks remain tax-free as a de minimis fringe benefit under Code Section 132(e)(1), provided they are not of unusually high value or offered in unusually large portions. The IRS noted that snacks come in small portions that are difficult to quantify and have a low value even if they are provided by the employer on a continual basis. Thus, employers can continue to provide free snacks to employees and expect to exclude the value of these snacks from employee income.

Calculation of Employment Taxes Owed

In the event meals furnished by an employer to an employee do not qualify for exclusion under Code Sections 119 or 132(e)(2), employers must impute into employee income the fair market value of the meal less any amount paid by the employee. Alternatively, a special valuation rule provides that the value of meals provided at an employer-operated eating facility is equal to 150 percent of the direct operating costs.

If employees are charged for meals, the individual meal subsidy may be treated as the value of the meal. However, as was the case in the memorandum, where employees are not charged for meals, the employer may allocate the total meal subsidy among employees in any reasonable manner under the circumstances.

Looking Ahead

While employers may continue to provide free snacks to employees, they should consider taking precautions with regard to furnishing free meals. While the IRS cannot substitute its judgment for an employer's judgment, the IRS can determine whether the policies qualify as a substantial noncompensatory business reason for furnishing meals and whether the policies are followed in practice.

Employers should consider whether they have written policies that describe the specific legitimate business reasons for providing meals and are prepared to bear the burden of proof in demonstrating that they consistently and uniformly enforce the policies in practice. In addition, employers will likely want to be ready to provide evidence as to why access to meal delivery services does not impact the employer's specified business reasons for offering free meals.

The memorandum shows that the IRS is scrutinizing employer-provided meal programs and will consider general business goals and objectives without substance an insufficient showing of a substantial noncompensatory business reason.

A version of this article was published in the July 2019 issue of BLR's newsletter, The Employer's Guide to Fringe Benefit Rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions