The exclusion for meals and lodging.

• Author: Campbell, Alan D.

PREVIEW

* Under Sec. 119(a), employees in many instances may exclude from gross income the value of employer-provided meals and lodging if they are provided for the convenience of the employer.

* Other exclusions that may apply to employer-provided meals and lodging include the exclusions for qualified employee discounts, de minimis fringe benefits, and qualified campus lodging provided by an educational institution.

* Practitioners should be aware of the case law surrounding the exclusion from a partner's income of meals or lodging provided by a partnership where the partner provides services similar to those of an employee for the partnership.

Gross income generally includes the fair market value (FMV) of meals and lodging received from one's employer. (1) However, Sec. 119 allows an employee to exclude from gross income the value of meals and lodging received from an employer under certain circumstances. In addition, some or all of the value of meals or lodging may be excluded from income under other exclusion provisions. This article explains the general exclusion under Sec. 119(a) and the other limited exclusions for meals and lodging received from an employer and addresses whether a partnership may treat a partner as an employee for purposes of the Sec. 119(a) exclusion.

Conditions for Exclusion of Meals by an Employee

For an employee to exclude the value of meals received from an employer from gross income under the general exclusion in Sec. 119(a), the employer must furnish the meals on the employer's business premises. (2) The "employer's business premises" generally means the employee's place of employment. For example, for a household employee, the business premises are the employer's home. (3) The business premises include the place where the employee performs significant duties or where the employer conducts a significant portion of its business. (4) Places near the employer's premises will not qualify, even though such places might be convenient. (5) The business premises of the employer include any place on the grounds of the employer and not just the main structure. (6) The meals must also be for the convenience of the employer, not the convenience of the employee. (7)

Noncompensatory Business Reason Requirement

An employee may exclude from gross income the value of the meals provided free by an employer only if the employer does so for a substantial noncompensatory business reason. An employee may exclude the value of the meals in this case even if the employer also has an additional, compensatory reason for providing the free meals. The employer's statement alone is not sufficient evidence for the conclusion the employer provided the meals for a substantial noncompensatory reason. All the facts and circumstances are relevant to such a determination. (8)

Where an employer requires an employee to accept lodging on the employer's business premises as a condition of employment, the law deems any meal the employer provides free to the employee at the business premises to be for a substantial noncompensatory reason. (9)

An employee may exclude from gross income the value of small food items and soft drinks as a de minimis fringe benefit. In addition, an employee may exclude from gross income occasional meals provided in kind or occasional cash received to buy dinner to allow the employee to work overtime. (10) The same treatment may be extended to food and drinks provided by the employer to employees and their guests at picnics and parties.

Meals Before and After Work

With some exceptions, the law treats meals provided immediately before and/ or after work as not provided for a substantial noncompensatory reason. Thus, the employee must include the value of such meals in gross income. (11) Meals provided to restaurant employees are a common exception. A restaurant employee may exclude from gross income the value of free or discounted meals consumed immediately before work, during work, or immediately after work, as Example 1 illustrates. (12)

Example 1: A is a restaurant server who works from 8 a.m. to 5 p.m. each workday. His employer allows him one hour for a meal during his shift. The restaurant manager allows A to eat breakfast free at the restaurant before he starts work The restaurant does not require A to eat breakfast at the restaurant; however, he must eat lunch at the restaurant. Because A is a food service employee, he may exclude from gross income the value of these breakfasts and lunches the restaurant provides.

However, if a restaurant employee eats a meal free at the restaurant on a nonworking day, the employer must include the value of the meal in the employee's wages and report it on Form W-2, Wage and Tax Statement, (13) The employer must keep adequate records of the value of any meals included in the employee's wages. (14) The employer may treat the value of taxable noncash fringe benefits as paid on a per-pay-period, quarterly, semiannual, annual, or other basis. (15) The employee would have to include the value of the meal in gross income, as Example 2 shows. (16)

Example 2: A came in to the restaurant on his day off to see what his shift schedule would be for the next week While he was there, he ate lunch. The FMV of the lunch was $12. The restaurant provided the lunch to A without charge. As employer should include the $12 value of the free meal in A's wages reported on Form W-2.

If A's employer fails to do so, A could request an amended Form W-2 from his employer. If his employer will not provide him with an amended Form W-2, A should add 112 to the amount reported as wages on line 7 of Form 1040, U.S. Individual Income Tax Return, and attach an explanation.

However, a restaurant employee might be able to exclude from income the discount on discounted meals consumed on nonworking days as a qualified employee discount. (17) To provide a qualified employee discount, the restaurant must not sell the meal below its cost of goods sold. (18) Example 3 illustrates the exclusion of discounted meals as a qualified employee discount.

Example 3: G works as a bartender at a steakhouse. She may eat meals without charge immediately before her shift, while on break during her shift, and immediately after her shift. She excludes the value of these free meals under Sec. 119. On her nonworking days, G may eat meals at the restaurant for a 50% discount. Assume that the gross profit percentage at the steakhouse is 60%. Because the discount does not exceed the gross profit percentage, G may exclude all the discounts she receives as a qualified employee discount under Sec. 132.

What if the employer would have provided a meal to an employee during working hours for a substantial non-compensatory business reason, but work duties prevented the employee from eating? In that case, the employee may exclude from gross income the value of a meal provided by the employer immediately after working hours. (19)

Meals During Working Hours

An employee may exclude from gross income the value of meals furnished by an employer during working hours if the reason is to have the employee available for emergency calls during the meal period. (20) Likewise, an employee may exclude the value of meals furnished by an employer during working hours if the reason is that the employer allows only a short meal period, such as 30 to 45 minutes, and the employee could not be expected to eat elsewhere in that time. (21) Such a circumstance may arise when the employee's peak workload occurs during normal meal hours, as Example 4 shows.

Example 4: A credit card company employs D, a customer service agent, from 8:30 a.m. to 5 p.m. D has a 30-minute lunch period, which management strictly enforces. The lunch period coincides with the peak workload for the employee. Management allows D to eat in the company's cafeteria free. If he left the premises for lunch, he could not return to work within the 30-minute lunch period allowed. D may exclude the value of the free lunch from gross income. (22)

However, meals provided by the employer do not qualify for the exclusion if they are not provided for the employer's convenience (e.g., if the purpose of the short meal period is to allow employees to leave earlier in the day). (23)

What if the employer charged D a flat fee for each lunch served in the company cafeteria, regardless of whether he ate lunch in the cafeteria? D would exclude the value of the flat fee from compensation. He would also exclude from gross income the value of the meals eaten, even if the value of the meals he ate exceeded the flat fee. (24)

An employee may exclude from gross income the value of...