If there's food at a meeting, you'll get higher turnout. OK, I just made that up, but I think a government grant is in order for me to study that very principle, and I suspect that when the results come back indicating that my thesis is correct, everyone will say, "Duh."

People love free food. And free food has long been a perk of the startup world. But the IRS has started to take note that food that is free to the employee actually costs money. And furthermore, employees need to eat anyway, so if employees are eating at the office, they are saving money by not having to procure their own food, therefore they should be (drum roll, please) taxed on it.

I really wish I were joking. I also hope that The Washington Post is making up this part: "For example, Dyson [a tax attorney working on these food cases] said she's had the IRS tell her that a bagel is more like a meal than a snack."

As someone on a perpetual diet, I can see the IRS's point. A chocolate chip bagel with honey walnut cream cheese from Bruegger's Bagels comes in at 480 calories. As someone with a clue, I think the IRS is nuts. Just try handing out bagels to your staff members and then forbidding them to eat lunch "because they've already eaten!" It will not go over well. (Of course, at least it would be better than what our kids get in public school.)

There are actual laws around this. Companies are allowed to give food to employees if it is "for the convenience of the employer." Not if it's for the employees' happiness, unfortunately. So, if your startup is in the middle of the Yukon Territory and it takes six days on dog sleds to get there, it's for the employer's convenience since the employees would take all their time just foraging for food. (Also, you should incorporate in Canada if you are located in the Yukon, since that way you avoid the IRS altogether.) It's going to be difficult to make that same argument if you're located in downtown San Francisco, with 14 restaurants on the same block.

Is it a huge deal if the IRS considers your company's free meals as part of your employees' incomes? Well, yes, because they become taxable, which makes the accounting difficult for everyone.

Your solution? You need to check with your tax attorney on what the consequences could be for your company if you continue to offer free food. Then you'll need to evaluate if that's worth it to you and to your employees. Your employees will probably not be thrilled about a cut in their take-home pay, so you'll probably need to consider "grossing up" their salaries to account for the "free" food that the IRS considers income.

You may, though, have to wait for clear IRS guidelines. The agency is working on them right now but hasn't given any idea of when they will be finished. When they are done, though, I guarantee they'll be at least as clear as the Affordable Care Act. Good luck.

Published on: Sep 9, 2014
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