The Internal Revenue Service has issued final regulations on the deductibility of expenses for lodging when an individual is not traveling away from home, permitting them in some cases for taxpayers who pay or incur local lodging expenses.
In TD 9696, the IRS noted that generally local lodging expenses for an individual are personal, living or family expenses and are considered to be nondeductible by the individual under Section 262(a) of the Tax Code. However, depending on the facts and circumstances, local lodging expenses may be deductible under Section 162 as ordinary and necessary business expenses.
Proposed regulations released in 2012 provided a safe harbor, under which local lodging expenses that meet certain criteria could be treated as ordinary and necessary business expenses. If the expenses are incurred by an employer on behalf of an employee, the value of the local lodging may be excludible from the income of the employee as a working condition fringe. To the extent an employer reimburses an employee for local lodging expenses, the reimbursement may be excludible from the employee’s gross income if the expense allowance arrangement satisfies the requirements of an accountable plan and the applicable regulations. The expenses are also deductible by the employer as ordinary and necessary business expenses.
Under certain circumstances, however, local lodging expenses may be deductible under Section 162(a) as ordinary and necessary expenses paid or incurred in connection with carrying on a taxpayer’s trade or business, including a trade or business as an employee. “Whether local lodging expenses are paid or incurred in carrying on a taxpayer’s trade or business is determined under all the facts and circumstances,” said the IRS. “One factor is whether the taxpayer incurs an expense because of a bona fide condition or requirement of employment imposed by the taxpayer’s employer. Expenses paid or incurred for local lodging that is lavish or extravagant under the circumstances or that primarily provides an individual with a social or personal benefit are not incurred in carrying on a taxpayer’s trade or business.”
There is also a safe harbor for local lodging at business meetings and conferences. An individual’s local lodging expenses will be treated as ordinary and necessary business expenses if (1) the lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity or other business function; (2) the lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter; (3) if the individual is an employee, and the employee’s employer requires the employee to remain at the activity or function overnight; and (4) the lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation or benefit.
The final regulations include several examples, such as when an employer conducts a seven-day training session at a hotel near the main office, and when the employer is a professional sports team that requires players and coaches to stay at a local hotel the night before a home game to conduct last-minute training and ensure the physical preparedness of the players.
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