No Such Thing as a Free Lunch?

The IRS is making headlines on the west coast as it reviews and challenges the practice of employers providing free meals to employees. Employers consider the free meals a non-taxable fringe benefit. The IRS believes this fringe benefit is employee wages.

Cafeteria lunchBackground

Many fringe benefits offered as part of your employment are not considered taxable to you as an employee. The IRS publishes a fringe benefit guide for employers to help them navigate what benefits are income to the employee and what benefits are not. Common examples of non-taxable fringe benefits include; health insurance, certain life insurance, disability insurance and minor fringe benefits like employee outings and small branded items.

Current Situation

A number of large firms have been offering fairly elaborate free meals as part of their employment package. Firms like Google and Facebook use this fringe benefit to build employee morale and encourage their employees to spend more time on the job.

The IRS is now reviewing the interpretation of this “free” benefit and is challenging the taxability of the meals. If deemed taxable, each employee would need to include the fair market value of the meals as income on their W-2s.

What you need to know

checkmark Know the standards. If a meal is considered to be “for the convenience of the employer” it is not deemed to be wages. This typically means meals during work hours for a work related purpose that benefits the employer.
checkmark Minimal value and frequency. Occasional meals or meals of minimal value are also not taxed as wages. This includes things like employee picnics.
checkmark Meals before and after hours. Meals provided before or after work could be wages. Common exceptions to this rule are employees of restaurants and employees at cafeterias. Another exception could be work environments that prohibit getting a meal during the workday.
checkmark It is in the IRS spotlight. Each year the IRS publishes a list of initiatives, called their Priority Guidance Plan. Reviewing the taxability of employee-provided meal benefits is on their agenda for 2014-15.

If your employer provides free or reduced meals as part of your benefit package you can probably expect to see changes in the next year. Perhaps there is no such thing as a free lunch.

As always, should you have any questions or concerns regarding your situation please feel free to call.

Business Use of your Home

A tax deduction under your nose?

The advent of cloud computing, extensive communication channels, and other new technologies make it easier to work out of your home. If you qualify, many home business expenses are deductible. Think you might qualify? You must first pass these tests.

Home officeTrade or business use test. To qualify for business use of your home you must use part of your home for a qualified trade or business. This profit seeking activity must not be a hobby in the eyes of the IRS.

Exclusive use test. You must use part of your home exclusively for your business activity. Blending personal use within the same space as your business activity can disallow the business use of home deductions. There does not need to be a permanent barrier between this space and the rest of the house.

Regular use test. In addition to having a qualified business activity in an exclusive area of your home, you must also use it “regularly” for your business activity. The IRS applies judgement in this area to determine the facts and circumstances around what it deems to be regular use.

Principal place of business test. To deduct your home office expenses, the home location must also be your principal place of business. That does not mean there cannot be other business locations, just that your home office must be your primary location. You might also have multiple business activities. In this case, you could meet the test for one of your businesses to qualify to take the deductions. With multiple locations, the considering factors are:

  • The relative importance of the activities performed at each location,
  • the amount of time spent at each location,
  • the primary place used exclusively and regularly for administrative or management activities and,
  • whether there are other fixed locations for business use.

Here is a diagram presented by the IRS to help you determine whether your business qualifies.

Home business use diagramNote: Do not use this chart if you use your home for the storage of inventory or product samples, or to operate a daycare facility.

Source: IRS Publication 587

Why bother?

Sound confusing? Perhaps. But with the recent introduction of a simplified home office deduction calculation more small businesses will have the opportunity to reduce their tax bill. Please call should you need help in navigating this part of the tax code.

Preview of Some Key 2015 Tax Figures

While official numbers for 2015 are not yet released by the Internal Revenue Service (IRS), many figures are formulas set within the Internal Revenue Code (IRC) or are based on the Consumer Price Index (CPI) published by the Department of Labor. Using the release of recent CPI figures, a number of references are projecting key figures for 2015. They are noted here for your planning purposes:

Tax Brackets: While the actual income brackets for tax rates are not set for 2015, the rate of inflation that impacts the income levels for each tax rate is anticipated to raise the income brackets by approximately 1.55-1.60%.

Personal Exemption: $4,000 in 2015 ($3,950 in 2014)

Standard Deductions:

Deduction Tax Year 2015 Tax Year 2014
Single
$6,300
$6,200
Head of Household
9,250
9,100
Married Filing Joint
12,600
12,400
Married Filing Separately
6,300
6,200
Dependents (kiddie tax)
1,050
1,000
65 or Blind: Married
Add $1,250
Add $1,200
Single
Add $1,550
Add $1,550

Other Key figures:

Estate & Gift Tax Exclusion
$5.43 million
$5.34 million
Annual Gift Tax Exclusion
$14,000
$14,000
Roth and Traditional IRA Contribution Limit
$5,500
$5,500

Caution: Remember, these are early figures using the recently announced Consumer Price Index. Official numbers are released by the IRS later in the year.