The IRS has proposed regulations on the deductibility of employee business expenses for lodging when the employee is not traveling away from home (“local lodging"). Prior IRS regulations generally did not allow employees to deduct expenses for local lodging, even if they incurred the expense while performing their duties for the employer and were not reimbursed by the employer for the expense.
The proposed regulations, which taxpayers can rely on until new final regulations are issued, are good news for employees who have to pay such expenses outr of their own pockets. Under the nbew rules, if certain conditions are met, the employee can deduct the expense of local business lodging on his or her federal income tax return if certain requirements are met.
Specifically, IRS IRS will not challenge a taxpayer’s deduction of local lodging costs if the lodging is provided on a temporary basis (e.g., a hotel or motel room) and the lodging is necessary for the employee to participate in a bona fide business meeting or function of the employer.
Naturally, employees who are reimbursed for such expenses by their employer may not deduct the cost of local business lodging.
The new rules also provide a “safe harbor," under which unreimbursed business expenses will be deductible. Under the safe harbor, such an unreimbursed expense is deductible if (i) the lodging allows the employee to participate fully in a bona fide business meeting, conference, training activity, or other function, (ii) the period for which the lodging is provided does not exceed five days and does not occur more than once per calendar quarter, (iii) the employer requires the employee to remain at the activity or function overnight and (iv) the lodging is not lavish or extravagant and does not provide a significant element of personal pleasure, recreation or benefit.
The IRS states that the following reasons for using local lodging are considered personal and therefore are not deductible: (i) a weekend at a luxury hotel provided by the employer, (ii) lodging provided to help an employee avoid a long-distance commute, (iii) lodging provided because the employee is required to work overtime, (iv) temporary housing for a relocated employee and (v) lodging for an employee’s indefinite personal use. These expenses, where they are not reimbursed by the employer, are not deductible by the employee. If the employer does reimburse the employee for these types of expenses, the employee generally will have to pay federal income tax on the amount reimbursed.
The new rules also provide examples of when local business lodging will be considered to be for business purposes. These include local lodging provided to (i) allow the employee to attend employer-mandated training at a local hotel, (ii) house athletes for last-minute training and ensure the players’ preparedness for an upcoming sports event and (iii) house an employee who is on call to respond to business emergencies outside of normal working hours. Such expenses, if paid by an employee and not reimbursed by the employer, would be deductible on the employee’s personal income tax return.