Companies that provide meals and snacks on their “business premises,” as well as manufacturers of snack or breakroom products, will be particularly interested in a possible expansion of what many have assumed would be a 50% disallowance of deductions for all coffee, doughnuts, fruit, soft drinks, candy, and similar items, effective after 2017. A gap in the regulations points to the possibility that breakroom snacks that are considered de minimis fringe benefits provided on business premises might remain 100% deductible.
The 2017 Tax Cuts and Jobs Act (TCJA) made changes to Section 274 concerning the deductibility of food and beverages. Those changes have been widely interpreted as subjecting food and beverages in all on-premises cafeterias, together with all other “de minimis” food and beverages, to a 50% deduction disallowance. Additionally, Section 274(o) provides for a 100% disallowance, effective in 2026, for eating facility operating expenses under Section 132(e)(2) “and any expense for food or beverages, including under section 132(e)(1), associated with such facility” or for meals or lodging furnished for the convenience of the employer under Section 119. Notably, this provision, effective after 2025, excludes food and beverages that are not associated with a Section 132(e)(2) eating facility. Together, these Section 274 changes led to a presumption that after 2025, snacks made available in break rooms would continue to be subject to the 50% disallowance. It also seemed clear that if the company charged for the food and beverages, those charges would offset the “net costs” subject to deduction disallowance. However, particularly for “de minimis” items like coffee, sodas, and snacks, employers had worried that the burden of tracking amounts paid for break room or vending machine food and beverages and offsetting those amounts against the costs of the food and beverages would be considerable.
Notice 2018-76, 2018-42 IRB 1, released on October 3, 2018, confirmed that food and beverages provided during an entertainment activity may qualify for a 50% deduction, even though the “entertainment expenses” (apart from food and beverages) are 100% disallowed, under the TCJA’s 100% disallowance for entertainment expenses (effective after 2017). However, the notice did not discuss on-premises food and beverages, nor did it address Section 132(e) de minimis fringe benefits. Instead, it indicated that “the Treasury Department and the IRS intend to issue separate guidance addressing the treatment under § 274(e)(1) and 274(n) of expenses for food and beverages furnished primarily to employees on the employer’s business premises.”
Pre-guidance lobbying underway recognizes the gap in existing IRS guidance concerning the exclusion from income of de minimis food and beverages under Section 132(e)(1). For example, an October 12 comment submitted to the IRS by the National Automatic Merchandising Association (NAMA) contends that snack foods remain 100% deductible after the TCJA changes, and it seeks confirmation that the IRS will continue to treat as 100% deductible snacks that are of low value, irregularly consumed, and impractical to track. Notably, NAMA pointed out that employers typically make such snacks available to increase productivity or maintain employee morale, indirectly referencing the Section 119 “convenience of the employer” exclusion from employee income for which these snacks also might qualify. (However, a recently released Chief Counsel Memorandum AM 2018-004 (November 23, 2018) insisting on established policies specific to particular job positions that show a business need for providing on-premises meals (despite a lack of support in the statute, regulations, or case law) may make these arguments more difficult to sustain.
Most significantly, this recommended position may encompass not just snacks purchased in vending machines, but also low-cost or free food and beverages supplied by employers on “business premises”. In light of the expanded interpretation of “business premises” to include rented hotel space where an employer does business (see Jacobs v. Commissioner, 148 T.C. No. 24 (June 26, 2017), if the IRS were to respond favorably to this request for relief from the 50% disallowance, snacks would not need to be provided at employer offices to qualify: suites at sports stadiums should be covered (see example 3 of Notice 2018-76), as well as purchases from hotel mini-bars or snacks provided at off-site meetings. Moreover, since Section 274(e)(1) and the related regulations waive the strict substantiation rules for food and beverages furnished on business premises primarily for employees, employers would be exempt from onerous recordkeeping requirements.
We encourage businesses to consider submitting pre-regulation comments seeking confirmation on this issue, possibly as a comment submitted by one or more trade associations representing member employers.