Keep in mind that if the employee is not in travel status, which we will discuss in a few minutes, actual expenses following the accountable plan procedures must be used. The “deemed” substantiation by using a per diem amount is not applicable when the person is not in travel status and thus the reimbursement would be taxable.
IRS Meal Reimbursement Exceptions
Treasury Regulation §1.274-2(d)(3) provides that reimbursements for meal expenses directly related to and necessary for attending business meetings or conventions of certain exempt organizations are excludable from wages if the expenses of your attendance are related to your trade or business. These organizations include chambers of commerce, business leagues and trade or professional associations.
IRS Meal Reimbursement Requirements
Treasury Regulations also provide for a di minimus exception for meals or a meal money allowance or reimbursement provided to an employee as a fringe benefit if :
- The benefit is for a reasonable value.
- It can be used on an occasional basis because overtime work necessitates an extension of the employee’s workday,
- And the meals or meal allowance enables the employee to work overtime.
In no event will meal money that is calculated on the basis of the number of hours worked be considered de minimis.
So, for instance, if an employee is given two dollars per hour for each hour of overtime after working eight hours, that is not considered de minimis and would be taxable. On the other hand, if meals are furnished immediately after working hours because the employee’s duties prevented the employee from obtaining a meal during working hours treasury regulations would allow a tax free reimbursement of the meal.
What about when an employee is travelling for business purposes?
These meals generally fall under the rules for overnight travel expenses, as mentioned earlier, the employee is in travel status. The taxability of these reimbursements or allowances depend on whether the meals are connected to the business travel and whether the expenses are substantiated under the accountable plan rules.
Reimbursements or allowances must meet the accountable plan rules in order to be excludable. In addition, employees must be traveling away from their tax home on business. As with other travel-related expenses, the general area of work, not the employees’ residence, determines the tax home.
What does the IRS consider travel?
So what does traveling “away from home” mean? First, the employee destination must be a substantial distance from the workplace. Revenue Rulings 73-529 and 93-86 indicate that, the tax home includes the entire metropolitan area; therefore, the taxpayer is not away from home unless he or she leaves the metropolitan area.
Second, the employee needs to obtain substantial sleep or rest to meet the demands of the work while away from home.
What are IRS “Day Meals”?
In many cases, day meals are paid because a state or local charter allows for them based on distances employees must travel from their normal tax home. . For example if the employee travels outside the county then their meal is reimbursed during their day trip.
In some cases, meals were negotiated as part of a union contracts, or it is “just because that is the way the government has done it”.
An example might be a sheriffs department has an officer that travels to another part of the state in order to pick up an inmate at the state prison. Many sheriff departments have agreements that require the department to pay or reimburse an amount for a day meal during that trip.
Although there may be a valid “business” reason for reimbursing that meal and the officer may have travelled outside of the employee’s normal tax home, the trip does not require substantial sleep or rest to meet the demands of the work.
In this example, the reimbursement or meal allowance is taxable and should be reportable on the employee’s form W2.
A question we received from the audience asked “If city employees or elected officials are out of town for a day meeting, with no over night stay, and a lunch meal is charged to their city credit card, is this a taxable benefit or is it considered de minimus?”
Since this is not an over night trip the meal would be a taxable fringe benefit to the employee unless the employee reimburses the employer the cost of their meal. If they don’t reimburse the employer then the cost of the meal should be included in the employee’s wages as a taxable fringe benefit.
It should be noted that it doesn’t make any difference how the meal was purchased; the taxability to the employee remains the same.
What is Tax Home of Employee?
The general rule is that lodging may be excludable from wages if the lodging is provided:
- On the employer’s business premises, AND
- furnished for the employer’s convenience, AND
- The employee is required to accept the lodging as a condition of employment.
This means the employee must accept the lodging to perform his duties. For example, lodging is furnished to enable the employee to be available for duty at all times, and the employee could not perform the services required of him unless he is furnished such lodging.
Section 119 of the Internal Revenue Code provides exclusions but only for meals or lodging furnished in kind, in other words, when the employer actually provides the lodging. Cash allowances or reimbursements are not eligible for this exclusion.
Remember that, just as in the case of the day meals, Federal law takes precedence over a state statute, employment, or union contracts, in determining the Federal tax liability for furnished lodging. The actual facts and circumstances and the requirements are outlined in Internal Revenue Code 119 which determine the liability for Federal income tax, social security and Medicare taxes.