IRS Finalizes Rules for Local Lodging Expenses

• DOI: http://doi.org/10.1002/jcaf.22035
• Date: 01 March 2015
• Published date: 01 March 2015
• Author: Shirley Dennis‐Escoffier

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Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22035

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Shirley Dennis-Escoffier

IRS Finalizes Rules for Local Lodging

Expenses

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.

GENERAL RULES

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

requirements:

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

working.

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.