While job-related expenses for travel away from home may be deductible as trade or business expenses, the income tax regulations historically have disallowed the employee’s deduction for local lodging (described as lodging that is not incurred in traveling away from home). However, in 2007, the IRS announced it would amend the regulations to change this rule. In the meantime, it would not challenge an employee’s deduction for temporary local lodging that was necessary for the employee to participate in a business function. The new reliance regulations go even further, with more specifics that liberalize the rules.
Requirements
The new regulations provide that whether local lodging expenses are incurred in carrying on a taxpayer’s trade or business is determined under all the facts and circumstances. The regulations provide numerous examples of costs that would be deductible under these rules covering such situations as team training, late night projects, and rotating on-duty shifts.
The new regulations also provide the following safe harbor for an employee to deduct local lodging expenses:
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The lodging is necessary for the individual to participate fully or to be available for a bona fide business meeting, conference, training activity, or other
function; - The period of lodging does not exceed five calendar days and does not recur more than once per calendar quarter;
- The employer requires the employee to remain at the activity or function overnight; and
- The lodging is not lavish or extravagant and does not provide a significant element of personal pleasure, recreation or benefit.
If the employer reimburses the employee for expenses that would be deductible, the reimbursement will be nontaxable either as a fringe benefit, or as paid under an accountable T&E plan (assuming the appropriate requirements are met).
These new rules are good news for employees, as well as for employers that want their employees relieved of any tax burden when they are needed for special assignments. If you would like to discuss whether you have any expenses that qualify for this new deduction, please contact our office.