IRS Finalizes Rules for Local Lodging Expenses

Date01 March 2015
Published date01 March 2015
© 2015 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22035
Shirley Dennis-Escoffier
IRS Finalizes Rules for Local Lodging
The Internal Revenue Service
(IRS) recently issued final
regulations allowing certain
local lodging expenses to be
treated as deductible business
expenses. Although lodg-
ing expenses incurred while
traveling away from home on
business qualify as deductible
business expenses, the cost of
local lodging when not away
from home is usually treated as
a personal expense. When an
employer pays for an employ-
ee’s personal expense, it results
in taxable compensation to the
employee and will be subject
to payroll taxes. Under these
new regulations, payments for
local lodging for employees
attending a conference or train-
ing event can now be treated
as business expenses rather
than taxable compensation.
Although these regulations are
welcome news for employers
and employees, they do limit
the circumstances in which this
exception will apply.
When an employer pays for
an employee’s lodging expense,
that expense payment may be
excluded from the employee’s
income if it qualifies under
Regulation Section 1.132–5(a) as
a working condition fringe bene-
fit. To qualify as a working con-
dition fringe benefit, the expense
would have to be deductible by
the employee if the employee
had paid for it himself or her-
self. Internal Revenue Code
(IRC) Section 162(a) allows a
deduction for all ordinary and
necessary expenses incurred in
carrying on a trade or business
such as travel expenses that are
incurred while away from home
on business. Although all lodg-
ing expenses incurred while
attending a business-related
function may appear to meet the
ordinary and necessary business
test, they do not qualify under
the general rules of IRC Sec-
tion 162 unless they are incurred
while the taxpayer is traveling
away from home.
The cost of lodging qualifies
as a deductible travel expense
if it meets the following four
1. The primary purpose of
the trip is for ordinary and
necessary business reasons.
2. The trip is temporary (for
less than one year).
3. The taxpayer travels away
from his or her tax home
(tax home is usually the
general area of the regular
place of business).
4. The trip involves over-
night travel or requires the
taxpayer to be away from
home for a period of time
long enough to require
sleep or rest to enable
the taxpayer to continue
The cost of local lodging
is generally considered for the
convenience of the employee
rather than a valid business
expense. If the employer pays
for an expense that does not
qualify as a deductible busi-
ness expense, then that pay-
ment will be treated as taxable
compensation to the employee.
The employer could still get a
compensation deduction, but
the amount would be subject to
payroll taxes.
In 2007, the IRS announced
its intention to modify the tax
treatment of local lodging and
issued a moratorium on auditing
these expenses until it issued new
regulations. In 2012, the IRS
issued proposed regulations on
an exception that would allow
local lodging to qualify as a
valid business expense in limited
circumstances and invited com-
ments on these proposals. The
IRS incorporated some of the
suggestions it received in its new
final regulations.

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