The IRS has issued final rules under Code Secs. 162 and 262 for when employees may deduct their expenses for local lodging that are required in their trade or business. The final regulations also provide favorable tax treatment for certain local lodging expenses paid or reimbursed by the employer.
The final regulations apply to expenses paid or incurred on or after October 1, 2014. Generally, the final rules track the earlier proposed reliance regulations issued in 2012, with some enhancements.
In general, local lodging expenses are treated as nondeductible personal, living or family expenses. However, in some situations, local lodging expenses that are incurred in connection with a trade or business are deductible. The IRS has provided a safe harbor in the final rules. If a taxpayer meets the requirements of this safe harbor, the local lodging expenses will be treated as deductible ordinary and necessary business expenses. If the taxpayer does not meet all the requirements of the safe harbor, the IRS has clarified in the final regulations that the local lodging expenses may still be deductible, depending on the facts and circumstances.
The final rules set forth the requirements of the safe harbor:
- The lodging is necessary for the individual to participate fully in or be available for a bona fide business function;
- The lodging period does not exceed five calendar days and does not recur more than once per calendar quarter;
- The individual is an employee, the employee’s employer requires the employee to remain at the activity or function overnight; and
- The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.
The final regulations include six examples illustrating when taxpayers may deduct local lodging expenses. One example describes circumstances in which a professional sports team provides local lodging to players and coaches for a noncompensatory purpose. The IRS revised the example to clarify that the example is illustrative and can apply to other employees of a sports team.
In another example, the employer conducted a seven-day training session at a hotel near the employer’s main office. The employer required all employees to stay at the hotel overnight. Although the facts do not satisfy the safe harbor (because the training is longer than five calendar days), the IRS concluded that the training satisfied the facts and circumstances test. The value of the lodging, which the employer paid directly to the hotel, satisfies the facts and circumstances test and is excluded from the employees’ income as a working condition fringe under Code Sec. 132. Another example allows a deduction for housing an employee who is on call outside of normal working hours.
Other examples in the final regulations concluded that the employer’s provision of local lodging provided a personal benefit to the employee and was includible in the employee’s gross income. This result applied: where an employee who lived 500 miles from the employer was provided temporary local lodging while looking for a residence; and where an employee who commutes two hours each way was provided temporary lodging while she worked on a project that required late hours.