Local Lodging Expenses
Lodging expenses that an employee incurs when not traveling away from home are generally considered taxable income to the employee. Recently released Final Regulation 1.162-32 explains when the expense may be deducted as an ordinary and necessary business expense by the employee, and also when the value of the lodging provided may be excluded from taxable wages reported by the employer.
The regulations outline two methods to determine whether these expenses are deductible or excludable from wages:
- A safe harbor test; or
- A facts and circumstances determination.
If a local lodging expense meets either of these tests, the value of the lodging is a working condition fringe benefit. This means that, if the employee paid the expense, he or she could take an itemized deduction for the expense; and if the employer paid the expense, the value of the benefit is not included in the wages of the employee.
Safe Harbor Test
A local lodging expense meets the safe harbor test if:
- 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;
- Lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter;
- The employer requires the employee to remain at the activity or function overnight; and
- The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation or benefit.
Facts and Circumstances Test
A local lodging expense that does not meet the safe harbor test may still be deductible under Section 162(a) if it is an ordinary and necessary expense paid or incurred in connection with carrying on a taxpayer’s trade or business. Some of the factors to consider under this facts and circumstances determination are:
- The local lodging expense must be incurred because of a bona fide condition or requirement of employment imposed by the employer;
- A local lodging expense must be for a business purpose and not primarily to provide a social or personal benefit to the employee;
- Local lodging must not be considered lavish or extravagant under the circumstances and should not provide a significant element of personal pleasure, recreation or benefit;
- Employer is not paying or reimbursing the expenses primarily to provide a social or personal benefit to the employee.
This regulation applies to expenses paid or incurred after September 30, 2014. Please see Internal Revenue Bulletin 2014-43 for more information, including several examples on determining the deductibility of local lodging expenses that do not meet the safe harbor.