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One of the keys to this determination is comparing the cost of providing the meals to the revenue the operation brings in. There are “direct” and “indirect” costs, the latter of which do not go toward the calculation of the cost-to-revenue ratio that determines whether you are providing a de minimis benefit (and therefore one that does not have to be included in employees’ taxable wages).
Treas. Reg. §1.132-7(b) provides that the “cost of labor for personnel whose services relating to the facility are performed primarily on the premises of the eating facility,” constitute a direct operating cost of the eating facility. Therefore, the salary for an on-site cook must be considered a direct cost and therefore must be accounted for in determining the revenue/direct operating cost ratio to determine whether the meal qualifies for the exclusion. The regulation provides:
Direct operating costs do not include the labor cost attributable to personnel whose services relating to the facility are not performed primarily on the premises of the eating facility. Thus, for example, the labor costs attributable to cooks, waiters and waitresses are included in direct operating costs, but the labor cost attributable to a manager of an eating facility whose services relating to the facility are not primarily performed on the premises of the eating facility is not included in the direct operating costs. If an employee performs services relating to the facility both on and off the premises of the eating facility, only the portion of the total labor cost of the employee relating to the facility that bears the same proportion to such total labor cost as time spent on the premises bears to total time spent performing services relating to the facility is included in direct operating costs.
For example, assume that 60 percent of the services of a cook in the above example are not related to the eating facility. Only 40 percent of the total labor cost of the cook is includible in direct operating costs. For purposes of this section, labor costs include all compensation required to be reported on a Form W-2 for income tax purposes and related employment taxes paid by the employer. In determining the direct operating costs of an eating facility, the employer may include as part of the facility, vending machines that are provided by the employer and located on the same premises as the other eating facilities operated by the employer.
Treas. Reg. §1.61-21(j) provides a valuation rule for valuing meals provided at an employer-operated eating facility for employees.
CAUTION! Employers should be mindful that the IRS will apply a second prong of the test of whether a meal is being served at an “employer-operated eating facility” under Code Section 132. In a recent IRS Chief Counsel Memorandum, the IRS found that meals provided to airline crewmembers while on duty aboard an aircraft were not excluded from the employees’ gross income as a de minimis fringe benefit because they were not provided at “employer-provided eating facilities.” The meals were prepared by an independent third-party vendor at a facility on the ground. (Chief Counsel Memorandum 201151020, released Dec. 23, 2011)
In the memorandum, the IRS noted,
the regulations contemplate that an eating facility is a location at which individuals are employed to prepare and/or serve food, stating to this end that components of the direct operating costs of an eating facility include “personnel whose services relating to the facility are performed on the premises of the eating facility (Treas. Reg. §1.132-7(b)(ii)) and ‘labor costs attributable to cooks, waiters and waitresses.” No guidance raises the inference that the exclusion of Section 132(e) extends to all meals provided on the employer’s business premises, irrespective of whether or not they are provided at an “eating facility.”
De Minimis Standard of Code Section 132
Code Section 132(e) provides that “the term ‘de minimis fringe’ includes the operation by an employer of any eating facility for employees if (1) such a facility is located on or near the employer’s business premises, and (2) revenue derived from such a facility normally equals or exceeds its direct operating costs.”