When Can Businesses Claim 100% Deduction for Employee Meals?

According to reports in the Boston Globe and other media sources, the Boston Bruins hockey team has filed a petition in Tax Court to allow a deduction for 100% of the cost of their pre-game meals at road games. Normally, the deduction is limited to 50% of the cost.

At the crux of the matter is the Bruins’ contention that these activities fall within the realm of the tax law exception for employer-provided eating facilities. Because the hotels where they stay for games away from the TD Garden is the effective base of operations for the club, the Bruins say that they should be able to write off the entire cost.

It’s an interesting theory and professional sports franchises and entertainers will be closely watching developments in this new case. However, the tax rules for most of your clients are already frozen in time.

Generally, meals provided by a business are tax-free to employees if the food and beverages are furnished for the convenience of the employer and they are served on the business premises. Meals are furnished for the employer’s “convenience” only if there’s a substantial noncompensatory business purpose such as feeding workers quickly if they are on call for emergencies. In other words, the arrangement can’t represent disguised compensation.

If more than half of the employees are furnished meals for the employer’s convenience, the meals for all employees are treated as being furnished for the employer’s convenience, even if the rest of the employees don’t meet this test. This rule could be critical for certain employers.

In the usual situation, an employer may deduct only 50% of the cost of qualified meals and entertainment provided to employees, but there are a few key exceptions. Notably, an employer may deduct 100% of the cost of meals that qualify as a de minimis fringe benefit under the tax code. For instance, if an employer operates a cafeteria or comparable eating facility on its business premises and the revenue regularly equals or exceeds direct operating costs, the meals qualify as a de minimis fringe benefit. This is the provision that the Bruins are relying on in the new case.

Note that the tax exclusion is available to highly compensated employees (HCEs) only if the entire rank-and-file have access to the facility. It’s not allowed for certain private dining rooms.

In other words, if client’s firm provides a cafeteria or other eating facility at its main headquarters and it’s open to all emlloyees, the benefits are generally tax-free to all employees, including HCEs, and the firm can write off the entire cost.

What about meal deductions for sole proprietors and other self-employed individuals? Usually, these business people may deduct 50% of the cost of qualified business meals incurred before or after they hold a substantial business meeting with a client or customer. But the IRS isn’t likely to let you skate away with deductions for 100% of the cost.