There have been Internet headlines that the IRS has made deducting local lodging expenses tax deductible. We believe that while these headlines are factually correct, they are somewhat misleading with respect to the small business owner who may think that the cost of lodging for an overnight stay is now always tax deductible. Accordingly, we need to look at the scope of these new regulations.
By way of background, expenses for lodging of an individual who is not traveling away from home are generally personal expenses that are non-deductible. However effective Oct. 1, 2014, local lodging expenses may be tax deductible as ordinary and necessary expenses paid in connection with carrying on a taxpayer’s trade or business. Let’s look at the tax planning when such expenses are tax deductible if paid directly by the employee, or if paid by the employer on behalf of the employee, to be excludible from W-2 income as a working condition fringe under Code Sec. 132(a) and (d). The IRS safe harbor rules are:
- 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;
- 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
- The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.
If all of the above requirements were met and the employer paid the hotel bill directly to the lodging facility for a 5-day training seminar for its employees, the employer would not be required to include the cost of lodging in the employees’ W-2s. But what if the conference lasted seven days rather than five?
IRS regulation §1.162-32 states that if a taxpayer does not satisfy the safe harbor rules, the taxpayer may still be able to deduct local lodging expenses under other facts and circumstances that satisfy the ordinary and necessary expense rules.
Factors that the IRS would consider include:
- Training is a bona fide condition or requirement of employment;
- The employer has a non-compensatory business purpose for paying the lodging;
- The employer is not paying the expenses primarily to provide a social or personal benefit to the employee; and
- The lodging provided is not lavish or extravagant.
Thus using the facts and circumstances tests, the 7-day training conference would receive the same tax treatment as the 5-day training conference. If the employer cannot satisfy the safe harbor tests and the facts and circumstances test, then the employer is required to include the value of the lodging in the employee’s W-2 as taxable compensation.
To learn more about your tax preparation and tax planning responsibilities, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your personal situation with an experienced tax professional. You can also schedule a consultation at Click Here.
