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IRS Targets Silicon Valley Cafeterias

October 8, 2014


Silicon Valley employees at technology companies like Google Inc., Facebook Inc. and Twitter Inc. have enjoyed free cafeterias as well as pizza joints and kitchens stocked with organic produce, on behalf of their employers. The benefit has become ingrained into much of the valley’s culture and is believed to encourage collaboration and longer work hours.

However, the IRS has made cafeteria crackdown a priority in recent months during routine audits of certain companies. Tax attorneys suggest the IRS has ramped up efforts to see the return of taxes that amount to 30% of the meals’ fair-market value should the employers have failed to withhold taxes related to the freebies.

Recently, the IRS and the U.S. Treasury Department included taxation of “employer-provided meals” in their annual list of top tax priorities for the fiscal year ending next June as well as saying they would provide new “guidance” on the matter.

“I suspect this is going to be guidance on these free cafeterias, that the benefit has got to be included in income,” said Anne G. Batter, an employment tax attorney at Baker & McKenzie in Washington.

Tax lawyers suspect the IRS will have a battle on their hands, which may very well need to be resolved in court.

Those in favor of the IRS’ initiative suggest failing to tax company cafeterias distorts the economy and provides certain employers with unfair advantages.

Tax experts agreed that employer-provided meals, with the exception of those served at the occasional business meeting, are a taxable fringe benefit. The law is complex, however, and the meals are able to remain untaxed if they are served for “noncompensatory” reasons or for the “convenience of the employer.”

Until the final ruling on tax-free meals is made official, Silicon Valley’s no-cost cafeterias are likely here to stay. It isn’t uncommon for companies in the valley to “gross up” its employees, paying them extra in order to cover the additional taxes as a result of the perk.

Source: Maremont, Mark, “Silicon Valley Cafeterias Whet Appetite of IRS,” The Wall Street Journal, September 1st, 2014