Rules Governing Lodging Away from Home Will Be Liberalized

The IRS and Treasury intend to amend regulations under Sec. 262, relating to the deductibility of lodging expenses.

Background

Sec. 162(a) allows as a deduction all the ordinary and necessary business expenses paid or incurred during the tax year in carrying on any trade or business. Sec. 162(a)(2) provides that expenses deductible under Sec. 162(a) include traveling expenses (including lodging expenses not lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business.

Sec. 262(a) provides generally that no deduction is allowed for personal, living or family expenses. Regs. Sec. 1.262-1(b)(5) provides that the costs of a taxpayer’s lodging not incurred in traveling away from home are personal expenses and not deductible, unless they qualify as deductible moving expenses under Sec. 217.

Under Regs. Sec. 1.132-5(a), the value of a working-condition fringe benefit is not included in an employee’s gross income. A working-condition fringe benefit is any property or service provided to an employee to the extent that, if the employee paid for the property or service, the amount would be allowable as a deduction under Sec. 162 or 167. 

Interim Guidance

The Service and Treasury expect to amend Regs. Sec. 1.262-1(b)(5) to provide that the costs of a taxpayer’s lodging not incurred in traveling away from home are personal expenses and not deductible unless they qualify as deductible expenses under Sec. 162 or 217. Pending the issuance of additional published guidance, the IRS will not apply Regs. Sec 1.262-1(b) (5) to expenses for employee lodging not incurred while the employee is traveling away from home that an employer provides to the employee, or requires the employee to obtain, under the following conditions:

• The lodging is on a temporary basis;
• The lodging is necessary for the employee to participate in or be available for a bona-fide business meeting or function of the employer; and
• The expenses are otherwise deductible by the employee, or would be deductible if paid by the employee, under Sec. 162(a).

This issue will not be raised in any tax year ending on or before publication of the guidance; if already raised as an issue in examination or before the Office of Appeals or the Tax Court in a tax year ending before May 24, 2007, the Service will not pursue the issue.

Notice 2007-47, 2007-24 IRB 1393