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United States - Dishing Out Tax Reform: Impact on Employer-Provided Meals in Food Service Sector

United States - Dishing Out Tax Reform: Impact on

This GMS Flash Alert focuses on an explanation of the changes and their effect on the restaurant and food service sector.


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H.R. 1, originally known as the Tax Cuts and Jobs Act,1 makes several changes to the U.S. tax treatment of fringe benefits; limiting and eliminating many employer deductions.  In particular, U.S. Internal Revenue Code section 274 was amended -- through the addition of new section 274(o) -- to limit and eventually disallow deductions for employer-provided eating facilities.

The provisions have a significant impact on business deductions for employer-provided meals that are commonplace to the restaurant and food service industry because such meals allow employees to be available during working hours when long breaks are not practical.  

This GMS Flash Alert focuses on an explanation of the changes and their effect on the restaurant and food service sector.  


Employers in the restaurant and food service industry have historically been able to deduct 100% of expenses associated with meals provided to employees immediately before, during, and/or immediately after their working hours.  The new law limits section 274 deductions for certain employer-provided meals to 50% through 2025 and then completely disallows them from 2026 forward.

Because the change is immediately applicable and there is no guidance on how to interpret the provisions, many employers in the restaurant industry are struggling to capture potential disallowed expenses. While awaiting guidance, employers in the restaurant industry need to consider how they may track employee meals and appropriately capture the amount of lost deductions.

Pre-2018 Rules

Code section 162 allows companies to deduct all ordinary and necessary expenses paid or incurred during the tax year in carrying on a trade or business. Although ordinary and necessary business expenses are generally deductible, costs incurred for personal reasons are not. Meals contain an element of personal benefit that can sometimes blur the line between the business and personal distinction.  

The section 274 meals limitation (first 80%, then 50%) was enacted in the Tax Reform Act of 1986 in what appears to have been an effort to control the impact of business expense accounts on federal revenue. Under sections 274(a), 274(d) and 274(k), to be tax deductible, the meal expenses a company incurs on behalf of clients, customers or employees must be directly related to the active conduct of the taxpayer’s trade or business, ordinary and necessary (that is, not lavish or extravagant), and properly substantiated. In addition, section 274(n)(1) limits the tax deductible amount of any food, beverage, or entertainment outlay—including the costs of a facility used for such activity—to 50% of the amount section 162 otherwise allows as an ordinary and necessary business expense. 

Applying the section 274 limitation to employer-provided meals can get complicated when it intersects with sections 119 and 132 (older provisions of the Code that were based on prior case law), which govern the tax treatment of employees.

Employee Income Exclusions

The 1954 Code introduced section 119, which was constructed from earlier case law to exclude from an employee’s income meals furnished (1) for the convenience of the employer, and (2) on the employer’s business premises. Under Treas. Reg. section 1.119-1(a)(2)(i), a meal is furnished for the employer’s convenience only if the company provided it for a substantial noncompensatory business reason. Treas. Reg. section 1.119-1(a)(2) provides that whether meals are provided for the convenience of the employer is determined by the Internal Revenue Service (IRS) based on  all the facts and circumstances.

Under the regulations, restaurant or other food service employees may have meals excluded from income if provided during, immediately before, or immediately after a meal period during which the employee worked.2  For example, a waitress who works from 7:00 a.m. to 4:00 p.m. may exclude the value of a breakfast she receives before she begins work, because she works during the normal breakfast period.3  On the other hand, if the waitress obtains a meal on her employer’s premises without charge on her day off, the value of this meal is not excludible under section 119 because the employer’s convenience is not served on that day by providing the free meal.4

This provision of the regulations for food service employees creates an industry-wide exception to the general rule that meals furnished before or after an employee's working hours are not regarded as furnished for the convenience of the employer.5  If an employee’s duties prevented one from obtaining a meal while working a shift, a meal served before or after the work period qualifies for the exclusion from income under section 119.6  

For this purpose, the term “restaurant and food service employees” is generally understood to include employees who perform services related to the provision of food to customers, but it is not clear that this extends to administrative employees. Nonetheless, under section 119(b)(4), all meals an employer furnishes to employees on its business premises are treated as furnished for the convenience of the employer if more than half the employees to whom the meals are furnished receive them for the employer’s convenience.  In most instances, food service employees are more than half of the employees receiving the meals.

Enacted in 1984, Code section 132 establishes income tax exclusions for several fringe benefits, including de minimis fringes. Section 132(e) describes the section 132(a)(4) exclusion for de minimis fringes, for which accounting would be impractical. Section 132(e)(2) specifically provides that subsidized cafeterias for employees are a de minimis fringe.7  Basically, a section 132(e)(2) cafeteria must be located on or near the business premises, must not favor executives, and must generate revenue that normally equals or exceeds its direct operating costs. As long as the costs are covered overall, then the meal is considered de minimis and excluded from employee income.

Neither section 119 nor section 132(e) addresses an employer’s deduction related to the cost of providing meals to its employees.  Section 274 addresses limits to business-related meals and section 274(n)(2) lists the exceptions to the business meal deduction limit. Under section 274(n)(2)(A) and (e)(2), meals that are treated as compensation are not subject to the deduction limit. In addition, under section 274(n)(2)(B), meals that are excluded from employee income by virtue of section 132(e)(2) – de minimis fringes -- are not subject to the limit. However, the section 274(n)(2) exemption does not specifically address section 119. 

As noted above, the section 132(e) exclusion from employee income for de minimis fringe meals applies when the employer’s revenue from the meals is at least equal to the expense of providing those meals. For section 119 meals (for employer convenience), the employee is treated as having paid an amount equal to the expense of the meal.8 Accordingly, if meals excluded from employee income under section 119 are being provided by the employer in an on-premises eating facility that qualifies under section 132(e), then the result, consistent with Boyd Gaming Corp. v. Comm’r, 117 F.3d 1096 (9th Cir. 1999), is that the employer can take a full deduction for the cost of the meals rather than being limited to 50% by section 274(n)(1).9  

Implications and Unknowns

There are various ways industry employers provide meals. Some provide meals without charge while others charge employer cost or give a discount (50% or so) from menu prices that typically covers the employer cost.  Finally, some have a hybrid approach of providing certain meals for no cost and other meals at a discount. 

When the meals are provided without charge and section 119 applies, employers need guidance on how the non-deductible amount is calculated.  Because the employers in these situations already have facilities and staff for their normal business operations, it would appear that the only practical additional cost is the cost of goods (ingredients, etc.).

When the employer charges employees for meals to cover its cost and sections 119 and/or 132 apply, it would appear that there would not be a net cost to the employer on which the deduction limitation would apply.  However, additional guidance is necessary to clarify how the deduction limitation may or may not apply when an employer’s additional cost is paid by employees.

1  For the text of H.R. 1 (Public Law No.115-97), click here.

See Treas. Reg. sec. 1.119-1(a)(2)(ii)(d).

See Treas. Reg. section 1.119-1(f), Ex. (1).

See Treas. Reg. section 1.119-1(f) Ex. (2).

See Treas. Reg. section 1.119-1(a)(2)(i).

See Treas. Reg. section 1.119-1(a)(2)(ii)(f). [already stated above in text with fn 4]

7  The subsidy rather than the meal is the de minimis fringe. See Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, JCS-41-84, p. 859.

See Section 132(e)(2)(B).

9  In 1999 the IRS announced its acquiescence to the Ninth Circuit’s Boyd Gaming decision (Announcement 99-77, 1999-32 I.R.B. 243).  See also Jacobs v. Comm’r, 148 T.C. No. 24 (2017).

The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.

The information contained in this newsletter was submitted by the KPMG International member firm in United States.

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