Regulations issued on Tuesday finalize rules the IRS put into effect in 2012 allowing employees to deduct certain expenses paid or incurred for local lodging as business expenses (T.D. 9696).
Normally, lodging expenses a taxpayer incurs while not traveling away from home are considered personal expenses under Sec. 262(a) and are not deductible. However, under the new rules, local lodging expenses that meet certain criteria will be considered ordinary and necessary business expenses and therefore deductible under Sec. 162.
To be deductible, local lodging expenses must meet a facts-and-circumstances test under Regs. Sec. 1.162-32(a) or qualify for a safe harbor under Regs. Sec. 1.162-32(b). Local lodging expenses paid by an employer on behalf of an employee may be deductible under Sec. 132 as a working condition fringe benefit if they meet the new tests. If an employee is reimbursed by the employer for local lodging expenses, the reimbursement amount may be excludable from the employee’s income if the expense allowance arrangement qualifies as an accountable plan under Sec. 62(c).
One factor considered under the facts-and-circumstances test is whether the expense is a “bona fide condition or requirement of employment imposed by the taxpayer’s employer.” Examples given in the regulations to illustrate the facts-and-circumstances test include employees who are required to stay at a local hotel during a work-related training session; professional athletes who are required to stay at a local hotel before a home game; an employee who is relocating for work and looking for a new home; an employee who has to stay at a hotel near the office while working long hours; and employees who occasionally are on call for a night duty shift and stay at a local hotel.
Under the safe harbor, local lodging expenses will be treated as an ordinary and necessary business expense 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.
In response to a comment, the final regulations clarify that expenses that do not qualify for the Regs. Sec. 1.162-32(b) safe harbor may nevertheless be deductible under the facts-and-circumstances test.
Taxpayers may apply the new rules to any tax year that is still open.