The IRS issued proposed regulations that permit employees to treat certain expenses paid or incurred for local lodging as deductible business expenses (REG-137589-07).
Under Sec. 262(a), living expenses paid or incurred when not traveling away from home are considered nondeductible personal expenses. However, in certain circumstances, the proposed regulations will allow local lodging expenses paid or incurred in carrying on a taxpayer’s trade or business to be deducted, depending on the facts and circumstances, one of which is whether the expense is incurred to satisfy a bona fide requirement imposed by the employer. Expenses that are lavish or extravagant under the circumstances will not qualify (Prop. Regs. Sec. 1.162-31(a)).
Prop. Regs. Sec. 1.162-31(b) contains a safe harbor (and numerous examples illustrating the safe harbor) allowing a deduction for expenses for local lodging to attend business meetings and conferences if:
- The lodging is necessary for the employee to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function;
- The lodging does not exceed five calendar days and does not occur more than once each calendar quarter;
- The employer requires the employee to remain at the activity or function overnight; and
- The lodging is not extravagant or lavish and does not provide a significant element of personal pleasure.
The proposed regulations specify that an employee’s costs for local lodging are personal expenses unless the expenses are deductible under Sec. 162 as ordinary and necessary business expenses (Prop. Regs. Sec. 1.262-1(b)(5)). The preamble to the regulations explains that being an employee in itself can qualify as a trade or business.
Taxpayers do not have to wait for the proposed regulations to be finalized to rely on them. Taxpayers may apply the new rules to eligible local lodging expenses paid or incurred in tax years for which the statute of limitation on credit or refund has not expired (Prop. Regs. Secs. 1.162-31(d) and 1.262-1(b)(5)). This means that taxpayers can file amended returns to seek refunds for tax paid on these expenses for years that are still open (three years from filing date/two years from payment of tax). A simplified version of these rules was already in effect under Notice 2007-47 (which is obsoleted by these regulations).