On September 30, 2014, the IRS issued final regulations in T.D. 9696, allowing employees to deduct expenses paid or incurred for local lodging as business expenses.
The general rule is that local lodging expenses for an individual are nondeductible personal expenses. The new regulations provide that local lodging expenses that meet certain criteria are deductible as ordinary and necessary business expenses under IRC 162.
The regulations state that local lodging expenses that meet either a facts and circumstances test or satisfy safe harbor requirements are deductible by an individual if incurred directly.
Alternatively, if the expenses are incurred by an employer on behalf of an employee, the value of the local lodging may be excludible from the income of the employee as a working condition fringe and deductible by the employer as ordinary and necessary business expenses, if the arrangement is covered under an accountable plan.
Whether local lodging expenses are paid or incurred in carrying on a taxpayer’s trade or business is determined under all the facts and circumstances. One factor is whether the taxpayer incurs an expense because of a bona fide condition or requirement of employment imposed by the taxpayer’s employer, provided not lavish or extravagant. An example is where an employee must stay at a local hotel while working long hours at the office.
The regulations offer a safe harbor for local lodging at business meetings and conferences. An individual’s local lodging expenses will be treated as ordinary and necessary business expenses if:
(1) 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.
(2) The lodging is for a period that does not exceed five calendar days and does not recur 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, and
(3) The lodging is not lavish or extravagant and does not provide any significant element of personal pleasure, recreation, or benefit.
The regulations also state that if expenses are not deductible under the safe harbor, such expenses may still be deductible under the facts-and circumstances test.
The new rules may be applied for any tax year that is still open.