In September, the Wall Street Journal reported that the Internal Revenue Service (IRS) is looking to tax the free food offered by many Silicon Valley companies to entice prospective employees.
The IRS and U.S. Treasury Department have stated that measuring and beginning taxation of ’employer-provided meals’ is a top tax priority for the fiscal year ending next June. The agencies said they intend to issue new ‘guidance’ on the matter, but have not revealed when this new initiative would officially begin.
Generally, there are two ways that the tax code looks at meals provided to employees. The code tries to distinguish between whether the meals are compensation — a regular payment in exchange for labor, or for the convenience of the employer —an expense necessary for an employee to do their job, such as a meal for a worker on an oil rig in the middle of the ocean.
If it is the former, the meal is taxable. If it is the latter, the meal is not taxable. In the case of Silicon Valley companies, the meals seem to appear more like taxable compensation than employer convenience to the IRS.
One straightforward way to view the IRS’s argument is to compare it to the current employer-provided health insurance exclusion, another hole in the income tax code that most people want to patch.
Currently, the fringe benefit of employer-provided health insurance is not taxable. The business purchases insurance coverage for its employees, deducts that cost from its taxable income, but employees do not have to pay tax on it.
This exclusion in the income tax code amounts to a $143 billion loss in tax revenue, according to an August 2014 study by Congress’s Joint Committee on Taxation.
This is a large subsidy for employer-sponsored health insurance, due to its special tax treatment compared to cash income. If one’s current marginal tax rate is 25 percent, the after-tax value of an additional of cash income is $0.75, while $1 of extra health insurance retains its full value.
This subsidy encourages companies to provide health insurance, rather than a higher salary, in order to attract individuals with high compensation packages. Some experts believe that health insurance should be treated taxable income — as some Silicon Valley perks may now be treated — instead of receiving special treatment and special credits under the tax code.
Kyle Pomerleau ([email protected]) is an economist for the Tax Foundation’s Center for Federal Tax Policy. Used with permission of the Tax Foundation, http://taxfoundation.org/
“Estimates of Federal Tax Expenditures for Fiscal Years 2014-2018,” United States Congress, Joint Committee on Taxation: http://heartland.org/policy-documents/estimates-federal-tax-expenditures-fiscal-years-2014-2018