Final Regs Provide Safe Harbor for Local Lodging Expenses.
(Parker Tax Publishing October 17, 2014)

The IRS has finalized regulations, which are effective October 1, 2014, relating to the deductibility of expenses for lodging when an individual is not traveling away from home (i.e., local lodging). T.D. 9696 (10/1/14).

Generally, local lodging expenses for an individual are personal, living, or family expenses that are nondeductible by the individual under Code Sec. 262(a). Depending on the facts and circumstances, however, local lodging expenses may be deductible under Code Sec. 162 as ordinary and necessary business expenses.

The IRS has issued final regulations that provide a safe harbor under which local lodging expenses meeting certain criteria are treated as ordinary and necessary business expenses of an individual. Local lodging expenses that meet either the facts-and-circumstances test or the safe-harbor requirements are deductible by an individual if incurred directly.

Alternatively, 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 benefit under Code Secs. 132(a) and (d). If 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 under Code Sec. 62(c) and the applicable regulations. In either case, the employer can deduct the expenses as ordinary and necessary business expenses.

Under the safe-harbor provision of the regulations, an individual's local lodging expenses are deductible as ordinary and necessary business expenses if: (1) the lodging is necessary for the individual to participate fully in or be available for business functions; (2) the lodging is for a maximum of five days and occurs no more than once per calendar quarter; (3) the individual's employer requires him or her to stay at the lodging overnight; and (4) the lodging is not lavish or extravagant and does not provide significant personal pleasure, recreation, or benefit.

Even if the lodging expenses fall out of the safe-harbor provision, they may still be deductible as ordinary and necessary business, depending on all the facts and circumstances surrounding the lodging expenses.

Example: ABC Company conducts a seven-day training session for its employees at a nearby hotel. The training is directly connected with ABC's trade or business. Some employees are traveling away from home and some employees are not traveling away from home. ABC requires all employees attending the training to remain at the hotel overnight for the bona fide purpose of facilitating the training. ABC pays the hotel costs directly to the hotel and does not treat those costs as employee compensation. Because the training is longer than five calendar days, the lodging safe-harbor rules do not apply. However, the value of the lodging is excludable from the employees' income if the facts and circumstances test is satisfied. In this example, the training is a bona fide condition or requirement of employment, and ABC has a noncompensatory business purpose for paying the lodging expenses. If the employees who are not traveling away from home had paid for their own lodging, the expenses would have been deductible as ordinary and necessary business expenses. Therefore, the value of the lodging is excluded from the employees' income as a working condition fringe, and ABC can deduct the lodging expenses, including lodging for employees who are not traveling away from home, as ordinary and necessary business expenses.

Example: XYZ Company, a professional sports team, requires its team 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. XYZ pays the lodging expenses directly to the hotel and does not treat the value as compensation to the employees. Because the overnight stays occur more than once per calendar quarter, the lodging safe-harbor rules do not apply. However, the value of the lodging may be excluded from income if the facts and circumstances test is satisfied. In this case, the overnight stays are a bona fide condition or requirement of employment, and XYZ has a noncompensatory business purpose for paying the lodging expenses. XYZ is not paying the lodging expenses primarily to provide a social or personal benefit to the team, and the lodging is not lavish or extravagant. If the team members had paid for their own lodging, the expenses would have been deductible as ordinary and necessary business expenses. Therefore, the value of the lodging is excluded from the team members' income as a working condition fringe, and XYZ can deduct the lodging expenses as ordinary and necessary business expenses.

For a discussion of the tax treatment of lodging expenses, see Parker Tax ¶123,510. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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