Taxation of employees’ use of corporate apartments

Editor: Mary Van Leuven, J.D., LL.M.

Employers may provide their employees use of an apartment (a “corporate apartment”) instead of a hotel room or suite for business purposes, with such advantages as cost savings; flexibility; reliable connectivity (internet, data, etc.); privacy and security; safety and sanitation; additional facilities (laundry, etc.); a convenient location; or a combination of these reasons. Sometimes, an employer provides a corporate apartment for a specific employee or for a limited time as part of a project involving extensive travel. In other cases, an employer has sufficient business at a location to warrant year-round access to a corporate apartment for traveling employees to use as needed.

When a corporate apartment is otherwise unoccupied, an employee (or employer) may be tempted to use the space for nonbusiness purposes, including use by the employee’s family members or friends. However, personal use or even availability for personal use may result in unintended taxable compensation to the employee. Accordingly, employers should consider adopting workplace policies to mitigate or eliminate employees’ taxable compensation related to personal use of a corporate apartment.

Taxable compensation from use of an employer-provided corporate apartment

Absent an applicable exclusion, the fair market value (FMV) of any fringe benefit, less any amount the employee paid for the benefit, is included in the employee’s taxable compensation (see Regs. Sec. 1.61-21(b)(1)). For use of a corporate apartment, the potential amount of taxable compensation generally is based on the market rent or lease payments and may be includible in an employee’s income either at the specific rental rate for the number of personal-use nights or on a pro rata basis if the apartment is rented at a weekly or monthly rate. However, several exceptions permit exclusion from gross income for the value of fringe benefits; the use of a corporate apartment as part of business travel generally could be excluded as a working condition fringe benefit, provided substantiation and other requirements are met.

Exclusion as a working condition fringe benefit

Sec. 132(d) and Regs. Sec. 1.132-5 define a working condition fringe benefit and exclude its FMV from employee gross compensation and wages. Working condition fringe benefits generally are any property or services provided by an employer to an employee that, if paid by the employee, would be deductible as a trade or business expense or depreciation deduction under Sec. 162 or 167. Specifically, a working condition fringe benefit must meet the following conditions:

• The benefit relates to the employer’s business;
• The employee would have been entitled to an income tax deduction if the employee had paid the expense personally;
• The business use is substantiated with records; and
• The expense is ordinary and necessary (and so not lavish).

Although the law known as the Tax Cuts and Jobs Act, P.L. 115-97, added Sec. 67(g) to disallow miscellaneous itemized deductions for individuals during tax years 2018 through 2025, employer reimbursements of expenses, as well as expenses paid directly by the employer or provided in-kind, that meet the Sec. 162(a) (2) requirements continue to be excludable from taxable compensation for U.S. income tax purposes as working condition fringe benefits under Sec. 132(a)(3) (see also IRS Publication 15-B (2023), Employer’s Tax Guide to Fringe Benefits). The exclusion is available for employees, partners, directors, and independent contractors to the extent those individuals provide services to the employer (see Regs. Sec. 1.132-1(b)(2)). However, the ability to reimburse partners for these expenses may depend upon whether the partnership or operating agreement or other firm policy specifically provides for partner reimbursement (see McLauchlan, T.C. Memo. 2011-289).

Housing is a working condition fringe benefit under Secs. 132 and 162(a)(2) for business travel, which is generally defined as travel:

• Away from the individual’s “tax home”;
• Incurred in the pursuit of a trade or business;
• Overnight (any trip long enough to require sleep or rest to enable the individual to continue working); and
• Temporary in duration (assignment to a single location that is realistically expected to last (and does in fact last) for one year or less).

In certain cases, business travel may extend beyond the workweek, particularly when cost savings can be achieved. Although taxpayers other than the taxpayer to whom it is issued may not rely on a private letter ruling, the IRS acknowledged in Letter Ruling 9237014 that a deduction was available to an employer and income was excludable by its employees for meals and lodging for an additional day after the completion of business to allow employees to take advantage of reduced weekend airfare. The IRS reasoned that since the total travel costs were reduced, the extended stay had a business purpose. Consistent with this reasoning, stays involving overseas travel or meetings on both a Friday and a Monday where weekend transportation would cost more than the cost of the extended stay, for example, may support a business purpose (see also Rev. Rul. 54-497).

For local lodging expenses, Regs. Sec. 1.162-32 provides a deduction for business purposes, including a safe harbor to attend a local business meeting, conference, or similar function if certain requirements are met.

Use by an employee’s spouse or other companion

A spouse or other companion might accompany the employee during business travel, especially considering the additional space and amenities that many corporate apartments afford. Normally, if an employer pays the travel expenses of an employee’s spouse or other companion, the benefit is taxable compensation to the employee unless the spouse or other companion is accompanying the employee for a bona fide business purpose and the expense is substantiated (see Regs. Sec. 1.61-21(a)(4)). The additional expense covered by the employer will be apparent, for example, with an additional airline ticket. But the expense of a corporate apartment might not increase solely due to the additional individual staying there. If the apartment would have been leased for the employee’s business travel regardless of the presence of the spouse or other companion, then, arguably, no additional benefit is provided to the employee and there is no tax consequence. On the other hand, if a more expensive apartment is leased to provide space for a spouse or other companion, then that additional expense would seem to be taxable even if the housing benefit otherwise qualified as an excludable working condition fringe benefit.

Personal use by an employee

Business travel usually involves stays at hotels, in which case an employer typically pays for the room or suite or reimburses the employee for only the nights needed to accomplish the related business, without having to worry about the room or suite’s availability for personal use. In contrast, a corporate apartment often is leased for an entire week or month (or months). As a result, a corporate apartment may be available for use beyond the core business days or days of specific business activity requiring travel. An employee (and employer) may assume that these additional days are available for use by the employee or the employee’s family and friends. For example, the employee may spend a few extra days at the corporate apartment to explore a new city without any additional out-of-pocket costs to the employer. Even if not staying in the apartment, an employee may wish to store personal items there for when he or she returns. This personal use (or even the potential for personal use) may result in taxable compensation.

One might posit that access alone should not result in compensation, because the benefit is not actually or constructively received by the employee unless the employee uses the apartment. The position may be stronger if the employer retains discretion as to whether to make the apartment available and there is some bona fide approval process or, in the case of a corporate apartment, it may be unavailable due to use by another employee. But if the employee is provided exclusive and unfettered access to the corporate apartment during some or all of the lease term, it will be difficult to maintain that the employee has not been provided a taxable benefit.

Best practices for avoiding unanticipated taxable compensation by restricting personal use

If the employer wishes to mitigate or eliminate unanticipated taxable compensation to the employee based on the availability of a corporate apartment, the employee’s use should be limited to bona fide business travel or, if potentially available for limited personal use, subject to a bona fide approval process. The following are some best practices intended to allow the employer to demonstrate that an employee’s access to the apartment is either (1) limited to bona fide business travel so that no taxable compensation arises related to the use of the apartment (provided that the other requirements are satisfied for it to qualify as a working condition fringe benefit); or (2) limited to bona fide business travel and limited personal use subject to a bona fide approval process, so that any taxable compensation is limited to actual personal use and not the apartment’s availability:

• Leasing or owning the apartment in the employer’s name (not the employee’s name with employee reimbursement of the cost);
• Establishing and following a written policy for use of corporate apartments, with explicit prohibitions or limitations on personal use;
• Maintaining a bona fide documented approval process for personal use;
• Using the apartment for multiple employees when one of those employees is on business travel (rather than holding the apartment empty except for the exclusive use of a single employee), particularly if employees must make advance reservations;
• Maintaining a log of apartment use, including the purpose of the travel for which it is used;
• Using a card swipe or other access control so that the employee’s use may be restricted (and so, for example, the employee does not retain a key allowing access at any time); and
• Prohibiting or limiting the use of the apartment for storage of personal items by employees not on business travel (for example, limiting use to one locked drawer or small storage area).

Avoiding tax surprises

While it is natural to think that a corporate apartment that would otherwise remain empty should be available for personal use, employers should be aware that its personal use — or even its availability for personal use — may lead to tax ramifications for employees with access to it. Putting together a process upfront to limit access and provide approval procedures for personal use may easily avoid tax surprises for unsuspecting employees (and employers).

Editor notes

Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C. Contributors are members of or associated with KPMG LLP. For additional information about these items, contact Van Leuven at 202-533-4750 or mvanleuven@kpmg.com.

The information in these articles is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained in these articles is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. The articles represent the views of the authors only, and do not necessarily represent the views or professional advice of KPMG LLP.