The IRS has issued final regulations regarding the deductibility of local lodging expenses. In the past, employees were able to deduct expenses for job travel away from home, but could not deduct lodging expenses for the cost of staying in the locality where they work (local lodging). However, in 2007 the IRS announced that the regulations would be amended to change the treatment of local lodging. The Service also stipulated that until the amendment took place, an employee’s deduction for local lodging would be allowed if the lodging was temporary and necessary for participation in a business function of the employer.
The final regulations, adopt with some modifications, the proposed regulations issued in April 2012. The final regulations allow a deduction for expenses paid or incurred for local lodging as ordinary and necessary expenses of a taxpayer’s trade or business, including business expenses incurred as a condition of employment. Whether local lodging expenses are paid or incurred in carrying on a taxpayer’s trade or business is determined under all the facts and circumstances.
One factor is whether the taxpayer incurs an expense because of a bona fide condition or requirement of employment imposed by the taxpayer’s employer. For example, an employee deduction is allowed (or an employer payment is non-taxable) when local lodging expenses are incurred:
to attend employer-mandated training at a local hotel;
to house athletes for last-minute training and to ensure the players’ preparedness; and
to house an employee who is on call outside of normal working hours to respond to business emergencies.
Expenses paid or incurred for local lodging that is lavish or extravagant under the circumstances or that primarily provides an individual with a social or personal benefit are not incurred in carrying on a taxpayer’s trade or business.
The proposed regulations also provide a safe harbor for deducting local lodging expenses for business meetings and conferences. Under the safe harbor rules, an individual’s local lodging is deductible if the following four conditions are met:
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 business function;
The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter;
If 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.
Conversely, if a local lodging expense is primarily for th e employee’s personal benefit or convenience, it is not deductible. The following examples illustrate local lodging that is considered personal (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;
housing for a recently relocated employee; and
lodging for the employee’s indefinite personal use.
Because you have incurred lodging expenses, these rules may affect the amount of your allowable business deductions and substantiation procedures. We are happy to answer any questions and discuss your options in greater detail. Please call our office at your earliest convenience to arrange an appointment.
IRS Circular 230 Disclosure
Pursuant to U.S. Treasury Department Regulations, information contained in this article is not intended by TOPC Potentia P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.