Providing meals and lodging to employees.

• Author: Ellentuck, Albert B.

Under Sec. 119(a), meals provided by an employer--including a C corporation employer--can be excluded from an employee's gross income if they are furnished on the business premises and for the employer's convenience. The employer can deduct the full cost of these meals (the normal 50% limit does not apply in this context); see Sec. 274(n)(2)(A) and (e)(4). Meals are furnished for the employer's convenience if furnished for a substantial noncompensatory business reason. However, under Sec. 119(b) (4), all meals furnished to employees on the employer's business premises are treated as furnished for the employer's convenience if more than half of the employees receiving meals are furnished them for the employer's convenience.

What Is "Employer Convenience"?

Determining whether a substantial noncompensatory business reason exists depends on the facts and circumstances. A mere declaration that the meals are furnished for a substantial noncompensatory business reason is not sufficient.

Generally, meals provided before or after the employee's workshift are not deemed furnished for the employer's convenience; however, exceptions exist for food-service workers, or if the meal would have been provided during normal working hours for substantial noncompensatory business reasons but, because of work duties, was not eaten during work hours. In any event, meals provided on nonwork days do not qualify for the exclusion.

The following examples show when meals can be deemed provided for a substantial noncompensatory business reason, according to Kegs. Sec. 1.119-1(a)(2)(ii).

1. Meals furnished during working hours so employees are available for emergency calls during the meal period (e.g., a hospital requires its employees to remain on call during their lunch hour) are furnished for a substantial noncompensatory business reason. However, the employer must show that emergencies have occurred or are reasonably expected to occur.

2. Meals furnished during working hours to employees because the nature of the employer's business restricts employees to short meal periods (e.g., the peak workload is during the normal lunch hour) are furnished for a substantial noncompensatory business reason if the employees cannot be expected to eat elsewhere in such a short time. However, meals do not qualify if the reason for the short meal period is to allow employees to leave earlier in the day.

3. Meals are furnished for a substantial noncompensatory business reason if the...