3.13 Employer-Furnished Meals or Lodging
The value of employer-furnished meals is not taxable if furnished on your employer’s business premises for the employer’s convenience. The value of lodging is not taxable if, as a condition of your employment, you must accept the lodging on the employer’s business premises for the employer’s convenience.
Court Decision
Business premises test.
The IRS generally defines business premises as the place of employment, such as a company cafeteria in a factory for a cook or an employer’s home for a household employee. The Tax Court has a more liberal view, extending the area of business premises beyond the actual place of business in such cases as these:
- A house provided a hotel manager, although located across the street from the hotel. The IRS has agreed to the decision.
- A house provided a motel manager, two blocks from the motel. However, a court of appeals reversed the decision and held in the IRS’s favor.
- A rented hotel suite that is used daily by executives for a luncheon conference.
Remote camp in foreign country. Lodging in certain foreign “camps” is considered to be furnished on the business premises of the employer. To qualify, lodging must be provided to employees working in remote foreign areas where satisfactory housing is not available on the open market, it must be located as near as practicable to where they work, and it must be in a common area or enclave that is not available to the public and which normally accommodates at least 10 employees.
Convenience of employer test.
The employer convenience test requires proof that an employer provides the free meals or lodging for a business purpose other than providing extra pay. In the case of meals, the employer convenience test is deemed to be satisfied for all meals provided on employer premises if a qualifying business purpose is shown for more than 50% of the meals. If meals and lodging are described in a contract or state statute as extra pay, this does not bar tax-free treatment provided they are also furnished for other substantial, noncompensatory business reasons; for example, you are required to be on call 24 hours a day, or there are inadequate eating facilities near the business premises.
Meal charges.
Your company may charge for meals on company premises and give you an option to accept or decline the meals. However, by law, the IRS must disregard the charge and option factors in determining whether meals that you buy are furnished for noncompensatory business reasons. If such business reasons exist, the convenience-of-employer test is satisfied. If such reasons do not exist, the value of the meals may be tax free as a de minimis benefit (3.10); otherwise, the value of the meal subsidy provided by the employer is taxable.
Where your employer provides meals on business premises at a fixed charge that is subtracted from your pay whether you accept the meals or not, the amount of the charge is excluded from your taxable pay. If the meal is provided for the employer’s convenience, as in the previous Examples, the value of the meals received is also tax free. If it is not provided for the employer’s convenience, the value is taxable whether it exceeds or is less than the amount charged.
Planning Reminder
Lodging must be condition of employment.
This test requires evidence that the lodging is necessary for you to perform your job properly, as where you are required to be available for duty at all times. The IRS may question the claim that you are required to be on 24-hour duty. For example, at one college, rent-free lodgings were provided to teaching and administrative staff members, maintenance workers, dormitory parents who supervised and resided with students, and an evening nurse. The IRS ruled that only the lodgings provided to the dorm parents and the nurse met the tax-free lodging tests because, for the convenience of the college, they had to be available after regular school hours to respond to emergencies.
If you are given the choice of free lodging at your place of employment or a cash allowance, the lodging is not considered to be a condition of employment, and its value is taxable.
If the lodging qualifies as tax free, so does the value of employer-paid utilities such as heat, electricity, gas, water, sewerage, and other utilities. Where these services are furnished by the employer and their value is deducted from your salary, the amount deducted is excluded from taxable wages on Form W-2. But if you pay for the utilities yourself, you may not exclude their cost from your income.
Caution
Groceries.
An employer may furnish unprepared food, such as groceries, rather than prepared meals. Courts are divided on whether the value of the groceries is excludable from income. One court allowed an exclusion for the value of nonfood items, such as napkins and soap—as well as for groceries—furnished to a doctor who ate at his home on the hospital grounds so that he would be available for emergencies.
Cash allowances.
A cash allowance for meals and lodging is taxable.
Faculty lodging.
Teachers and other employees (and their spouses and dependents) of an educational institution, including a state university system or academic health center, do not have to pay tax on the value of school-provided lodging if they pay a minimal rent. The lodging must be on or near the campus. The minimal required rent is the smaller of: (1) 5% of the appraised value of the lodging; or (2) the average rental paid for comparable school housing by persons who are neither employees nor students. Appraised value must be determined by an independent appraiser and the appraisal must be reviewed annually.
For purposes of the 5% minimum rent rule, academic health centers include medical teaching hospitals and medical research organizations with regular faculties and curricula in basic and clinical medical science and research.
Peace Corps and VISTA volunteers.
Peace Corps volunteers working overseas may exclude subsistence allowances from income under a specific code provision. The law does not provide a similar exclusion for the small living expense allowances received by VISTA volunteers.
Caution
Table 3-3 Are Your Board and Lodging Tax Free?
| Yes— | No— |
| Hotel executives, managers, housekeepers, and auditors who are required to live at the hotel. Domestics, farm laborers, fishermen, canners, seamen, servicemen, building superintendents, and hospital and sanitarium employees who are required to have meals and lodging on employer premises. Restaurant and other food service employees who have meals furnished during or immediately before or after working hours. Employees who must be available during meal periods for emergencies. Employees who, because of the nature of the business, must be given short meal periods. Workers who must use company-supplied facilities in remote areas. Park employees who voluntarily live in rent-free apartments provided by a park department in order to protect the park from vandalism. |
Your employer gives you a cash allowance for your meals or lodgings. You have a choice of accepting cash or getting the meals or lodging. For example, under a union contract you get meals, but you may refuse to take them and get an automatic pay increase. A state hospital employee is given a choice. He or she may live at the institution rent free or live elsewhere and get extra pay each month. Whether he or she stays at the institution or lives outside, the extra pay is included in his or her income. A waitress, on her days off, is allowed to eat free meals at the restaurant where she works. |