Proposed regulations now permit an employee or self employed person to treat some local lodging as a deductible expense.
Generally in order to claim a lodging expense the employee must be away from his tax home for a period of time that requires a reasonable rest period. Back in 2007 IRS announced (Notice 2007-47) that it would not challenge an employee’s deduction for local lodging if the lodging was temporary and was “necessary” for the employee to participate in a business function of the employer
Now IRS has expanded on the regulations and provides the following safe harbor which permits a deduction if:
- The lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other function,
- The period of lodging does not exceed five calendar days and does not recur more frequently than once per calendar quarter,
- If the individual is an employee, the employer requires the employee to remain at the activity or function overnight, and
- The lodging is not lavish or extravagant and does not provide significant personal pleasure, recreation or benefit.
The preamble to the regulation states IRS does not permit this deduction for local lodging if the lodging is:
- Not business related,
- A weekend at a luxury hotel provided by the employer,
- Lodging to avoid a long-distance commute,
- Lodging because the employee must work overtime, or
- Lodging for the employee’s indefinite personal use.
This proposed regulation is not effective until it becomes a final regulation, but taxpayers may apply the proposed regulations to local lodging expenses that are paid or incurred in taxable years for which the statute of limitations on credit or refund has not expired.
Example #1 from regulation – Employer conducts training for its employees at a hotel near Employer's main office. The training is directly connected with Employer's trade or business. Some employees attending the training are traveling away from home and some employees are not traveling away from home. Employer requires all employees attending the training to remain at the hotel overnight for the bona fide purpose of facilitating the training. Employer pays the costs of the lodging at the hotel directly to the hotel and does not treat the value as compensation to the employees.
Ruling – Employer has a noncompensatory business purpose for paying the lodging expenses. Employer is not paying the expenses primarily to provide a social or personal benefit to the employees. If the employees who are not traveling away from home had paid for their own lodging, the expenses would have been deductible as ordinary and necessary business expenses of the employees. Therefore, the value of the lodging is excluded from the employee’s income as a working condition fringe benefit. (Example #2 in the regulation is the same except the employee is paying the lodging costs themselves and being reimbursed by the employer.)
Example #5 from the regulation - Employee normally travels two hours each way between her home and her office. Employee is working on a project that requires Employee to work late hours. In order to maximize Employee's availability to work on the project, Employer provides Employee with lodging at a hotel near the office.
Employer is paying the temporary lodging expense primarily to provide a personal benefit to Employee by relieving her of the daily commute to her residence. Employer incurs the expense only as additional compensation and not for a noncompensatory business purpose. If Employee paid the temporary lodging expense, the expense would not be an ordinary and necessary business expense because the lodging primarily provides a personal benefit to Employee. Therefore, the value of the lodging is includible in Employee's gross income as additional compensation.
Proposed Regulation §1.162-31
