Tech Talk

04.09.13

There's No Such Thing as a Free Lunch in Taxland

Should Google and Facebook employees pay taxes on all that free food?

Yesterday, the Wall Street Journal reported that the IRS is eyeing one of the many fabulous perks of working for a high-tech company: free food. If the Journal is right, Googlers and Facebookers could soon be paying taxes on their consumption of all those luscious free meals.  

Should the IRS really treat those meals as compensation? My colleague Daniel Gross doesn't think so. On the one hand, those meals really are pretty great; I've eaten in the Google cafeteria in D.C., and it rivals the offerings of the more expensive local eateries. On the other hand, the companies argue that this is essentially a part of creating their unique corporate culture. Keeping the staff in for lunch boosts productivity (no time wasted walking or driving to a restaurant), and perhaps more importantly, it keeps your employees eating together, bouncing ideas off each other and fostering creativity.  

The one argument that they can't make is that the free food helps them attract and retain top-notch workers. The IRS has a term for tools that help you attract and retain workers: they call them "compensation." And they want someone—either you, or your employer—to pay taxes on any such attractive amenities.

The core problem is that the IRS cannot look into the hearts of companies and see which of them really needs to provide free lunch to their employees in order to have a healthy, vibrant company, and which of them is doing this in order to provide a tax-free boon to their workers. There is a reason that the tax code was amended to make it harder for employers to expense employee meals: prior to the 1986 tax code reform, when all meals were deductible to the employer, but not taxable to the employee, corporate dining rooms and expense accounts were in fact frequently used as a form of supplementary tax-free compensation. Since the IRS can't tell which companies are mostly interested in the productivity benefits, and which are mostly interested in giving their employees a little something extra on the side, they have to rely on some very crude rules, like "Is it physically feasible for you to leave the premises in order to eat?"

The exceptions under which Google and Facebook are deducting their meal expenses were, as I understand it, designed for situations where it was actually difficult for employees to provide their own food: oil platforms, cruise ships, night watchmen, and so forth. They were not designed so that companies could provide free meals to workers who are perfectly capable of strolling down to the corner for a sandwich, or brown-bagging it from home.  Not even if the company thinks it makes their workers marginally more productive. So if I were the IRS, I'd probably disallow it. Which is what the Journal suggests may happen.

And it's hard to feel too much sympathy. After all, if the tax break goes away, these companies can still buy the free lunch; they just can't deduct it from their taxes. It's not like Google's net profits are going to be entirely drained if they have to pay taxes on the money that they spend on their in-house restaurant.

Which is why I find it a bit surprising that we haven't had politicians complaining about this "corporate free lunch." Lavish, tax-deductible Silicon Valley lunches for employees who are often already pretty wealthy from their stock options seem like the perfect issue for an enterprising politician who wants to hammer "corporate loopholes" and "giveaways to the rich." But for some reason, neither Republicans or Democrats have picked up on this one.