The Internal Revenue Service (IRS) has issued proposed regulations relating to the deductibility of lodging expenses incurred when not traveling away from home (i.e., local lodging expenses). Existing regulations from the U.S. Department of the Treasury generally provide that local lodging expenses constitute nondeductible personal expenses. With the proposed regulations, the IRS has retreated somewhat from this position.
Whether local lodging expenses may be deducted as a business expense is determined based on all the facts and circumstances. One factor is whether an employee incurs the expense because of a condition of employment imposed by the employer. By now a familiar concept in determining the deductibility of business expenses, expenses paid for lavish lodging or lodging that primarily provides a personal benefit are not deductible. Local lodging expenses deductible as a business expense, of course, would also qualify as a working condition fringe, thereby allowing an employee to exclude from income any amounts paid or reimbursed by the employer for such expenses.
The proposed regulation includes a safe harbor for deducting local lodging expenses. To qualify:
- The lodging must be necessary for the individual to participate fully or be available for a bona fide business meeting, conference, training activity, or other business function.
- The lodging must be for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter.
- In the case of an employee, the employer must require the employee to remain at the activity or function overnight.
- The lodging must not be lavish under the circumstances and must not provide any significant element of personal pleasure, recreation, or benefit.
Six examples are included in the proposed regulation. These examples demonstrate that local lodging expenses are likely to be deductible when the employee is required to stay overnight. On the other hand, where local lodging expenses are incurred primarily for an employee’s convenience, those expenses are not deductible, even when the expense arguably advances a business purpose.
None of the examples relate to taxpayers considered to be self-employed—remember, partners are considered employees for purposes of working condition fringe benefits. Even so, when an employer pays or reimburses local lodging expenses, the touchstone is whether a noncompensatory business purpose for the expense exists.
Note that the proposed rules apply to lodging only, not meals. Also, although the rules apply to expenses incurred on or after the date the proposed regulations become finalized, the proposed regulations provide that taxpayers may apply the rules to local lodging expenses incurred in taxable years for which the period of limitation on credit or refund has not expired. Finally, the proposed rules do not alter the requirement that any reimbursements must be made under an accountable plan in order to be excluded by the employee.