The Internal Revenue Service has proposed regulations relating to the deductibility of lodging expenses when not traveling away from home.
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In REG-137589-07, the IRS noted that Section 1.262-1 of the Income Tax Regulations generally disallows a deduction for local lodging expenses. The proposed regulations would allow taxpayers to deduct local lodging expenses as ordinary and necessary business expenses in appropriate circumstances.
Section 162(a) of the Tax Code allows a deduction for all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. “Whether an expense is ordinary and necessary is a question of fact,” said the IRS. “In general, a trade or business expense is ordinary if it is normal, usual, or customary in the taxpayer’s type of business. An expense is necessary if it is appropriate and helpful for the development of the taxpayer’s business. … An expense that serves primarily to furnish the taxpayer with a social or personal benefit, and is only secondarily related to business, is not a necessary business expense under Section 162(a).”
In one case dating back to 1946, Commissioner v. Flowers, a taxpayer’s expenses for lodging near his principal work location, to avoid a long commute to and from his primary residence, were nondeductible personal expenses incurred solely because of the taxpayer’s decision to maintain his primary residence far from his work location.
Section 262(a) provides that, except as otherwise provided in Chapter 1 of the Tax Code, no deduction is allowed for personal, living, or family expenses. Section 1.262-1(b)(5) provides, as examples of personal, living, and family expenses, that the costs of a taxpayer’s meals incurred when not traveling away from home are generally nondeductible personal expenses.
The cost of local lodging that a taxpayer pays or incurs primarily for the taxpayer’s convenience or personal benefit is not an ordinary and necessary expense of a business or income-producing activity. Similarly, the cost of local lodging provided to an employee by an employer for the employee’s convenience or personal benefit would not be deductible by the employee if the employee paid the cost directly. Therefore, the value of the lodging under those circumstances is not excludible from the gross income of an employee as a working condition fringe, and reimbursement for the cost of the lodging under those circumstances is not a payment under an accountable plan.
The cost of local lodging is for the convenience or personal benefit of an employee (or other recipient) if, for example, the lodging is provided to the employee (1) as additional compensation, such as to provide a weekend at a luxury hotel or resort; (2) to enable the employee to avoid a long-distance commute; (3) because the employee is required to work overtime; (4) as housing for a recently relocated employee while the employee searches for permanent housing; or (5) for the employee’s indefinite personal use.
An employer may deduct the costs the employer incurs in providing the lodging in each of these cases under Section 162(a) as compensation for services. However, because the primary purpose of the lodging is to provide the employee with a personal benefit, if the employee pays the cost of the lodging directly, the employee may not deduct the expense as an ordinary and necessary business expense under Section 162(a). Therefore, a cash reimbursement of the cost is not excludible from the employee’s gross income under Section 62(c) and the value of the lodging is not excludible from the employee’s gross income under Section 132(d) as a working condition fringe.
Expenditures for local lodging may qualify as deductible ordinary and necessary expenses under appropriate circumstances if all other requirements of Section 162 are met. For example, an employer may require its employees to stay at a local hotel for the bona fide purpose of facilitating training or team building directly connected with the employer’s trade or business.
Similarly, a professional sports team may require its employees (players and coaches) to stay at a local hotel the night before a home game to ensure physical preparedness and allow for last minute training.
Under these circumstances, the cost of the lodging is primarily for the business purposes of the employer and not to provide a personal benefit to the employees. The cost of the lodging would be deductible by an employee under Section 162 if the employee paid the cost directly, and thus the value of the lodging may be excluded from the employee’s gross income as a working condition fringe if other requirements are satisfied. Similarly, a payment from the employer reimbursing the employee for the cost of the lodging may be excluded from the employee’s gross income as a payment under an accountable plan if all the requirements of an accountable plan are met.
Comments or a request for a public hearing on the proposed regulations must be received by the IRS by July 24, 2012.