The IRS has finalized rules enacted in 2012 to allow employees to deduct certain expenses paid for local lodging as business expenses. Prior to the recent change, local lodging expenses incurred by employees were classified as personal expenses. However, expenses for local lodging that meet certain criteria will be considered ordinary and necessary business expenses and, therefore, are deductible under the updated regulations. The new rule may prove to be very beneficial for employees who will be deducting local lodging expenses when they prepare their tax returns.
Facts-and-Circumstances Test
To qualify as a deductible business expense, a local lodging expense must either a) meet a facts-and-circumstances test set forth in Regs. Sec. 1.162-32(a) or b) meet safe harbor criteria under Regs. Sec. 1.12(b). An example of a factor the facts-and-circumstances test considers whether the expense is a “bona fide requirement or condition of employment” that is imposed by the employer. Furthermore, if an employer pays local lodging expenses on behalf of an employee, the expenses may qualify for deduction under Sec. 132 as a working fringe condition benefit if the requirements under the new tests are satisfied. If an employer reimburses an employee for local lodging expenses, the employee may be able to exclude the reimbursement from his or her income if the allowance arrangement qualifies as an accountable plan according to Sec. 62(c).
Safe Harbor
Local lodging expenses that do not meet the facts-and-circumstances test may potentially be considered a business expense if the safe harbor criteria are met. In order to qualify for a safe harbor, expenses must meet the following requirements:
- Lodging must be necessary for the employee to fully participate in or be available for a bona fide business function such as a meeting, conference, or training activity.
- The lodging must to extend beyond five calendar days or occur more frequently than once per calendar quarter.
- The employer must require the employee to stay overnight at the function or activity, and
- The lodging must not be extravagant or provide a significant element of personal pleasure.
Employees who are uncertain whether their local lodging expenses are deductible should consult an experienced CPA. Gary M. Kaplan is qualified to advise and deliver effective tax planning solutions to taxpayers from diverse financial backgrounds. To learn more about deducting local lodging expenses, call 1 (866) 643-3560.
