When a taxpayer pays lodging expenses for local travel, the expenses are generally not deductible because they are considered personal expenses.
Fortunately, the IRS recently finalized guidance that allows local lodging expenses to be deductible under certain circumstances. Local lodging expenses may be deductible as ordinary and necessary expenses incurred in connection with carrying on a trade or business, including a trade or business as an employee. Whether the expenses are incurred in a trade or business is determined under all the facts and circumstances.
The Safe Harbor Rule
The IRS has provided a safe harbor rule, and local lodging expenses will be treated as ordinary and necessary business expenses if all of the following requirements are met:
- 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
- the lodging is for a period that does not exceed five calendar days and does not occur more frequently than once per calendar quarter
- if the individual is an employee, the employee’s employer requires the employee to remain at the activity or function overnight
- the lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit
The above requirements are a safe harbor, local lodging expenses may still be deductible if the facts and circumstances indicate the expenses were incurred for a trade or business.
Example: Employer conducts a four-day training session for its employees at a local hotel. Employer requires all employees to stay at the hotel to facilitate the training. Employer pays the costs of lodging directly to the hotel and does not treat the value of the hotel stay as compensation to the employees.
The local lodging expenses meet the safe harbor requirements so the employer can deduct the lodging expenses and the employees do not have to report the value as income.
Example: Same facts as above, except that the training lasts seven days. Now the safe harbor is not meet because the period lasted longer than five days. However, the local lodging expenses will still meet the facts and circumstances test because the training is a bona fide requirement of employment and the employer has a noncompensatory business purpose for the lodging expenses. Employer is not paying the expenses primarily to provide a personal benefit to the employees, and the lodging Employer provides is not lavish or extravagant.
Example: Employer requires an employee to be “on duty” each night to respond quickly to emergencies that may occur outside of normal working hours. Employees who work daytime hours each serve a “duty shift” once per month to respond to emergencies (which occur regularly). Employer has no sleeping facilities, so employer pays for a nearby hotel room where the duty shift employee sleeps.
While this fact scenario does not meet the safe harbor requirements (each employee’s local lodging expenses occur more frequently than quarterly), the local lodging expenses will meet the facts and circumstances test.
The duty shift is a bona fide condition or requirement of employment and Employer has a noncompensatory purpose for paying the lodging expenses. Employer is not providing the lodging for the employee’s personal benefit, and the lodging is not extravagant.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.