Employee Business Expenses

The IRS has finalized regulations, which are effective October 1, 2014, relating to the deductibility of expenses for lodging when an individual is not traveling away from home (i.e., local lodging). T.D. 9696 (10/1/14).

Under the safe-harbor provision of the regulations, an individual’s local lodging expenses are deductible as ordinary and necessary business expenses if: (1) the lodging is necessary for the individual to participate fully in or be available for business functions; (2) the lodging is for a maximum of five days and occurs no more than once per calendar quarter; (3) the individual’s employer requires him or her to stay at the lodging overnight; and (4) the lodging is not lavish or extravagant and does not provide significant personal pleasure, recreation, or benefit.

Example: ABC Company conducts a seven-day training session for its employees at a nearby hotel. The training is directly connected with ABC’s trade or business. Some employees are traveling away from home and some employees are not traveling away from home. ABC requires all employees attending the training to remain at the hotel overnight for the bona fide purpose of facilitating the training. ABC pays the hotel costs directly to the hotel and does not treat those costs as employee compensation. Because the training is longer than five calendar days, the lodging safe-harbor rules do not apply. However, the value of the lodging is excludable from the employees’ income if the facts and circumstances test is satisfied. In this example, the training is a bona fide condition or requirement of employment, and ABC has a non-compensatory business purpose for paying the lodging expenses. If the employees who are not traveling away from home had paid for their own lodging, the expenses would have been deductible as ordinary and necessary business expenses. Therefore, the value of the lodging is excluded from the employees’ income as a working condition fringe, and ABC can deduct the lodging expenses, including lodging for employees who are not traveling away from home, as ordinary and necessary business expenses

Example: XYZ Company, a professional sports team, requires its team to stay at a local hotel the night before a home game to conduct last-minute training and ensure the physical preparedness of the players. XYA pays the lodging expenses directly to the hotel and does not treat the value as compensation to the employees. Because the overnight stays occur more than once per calendar quarter, the lodging safe-harbor rules do not apply. However, the value of the lodging may be excluded from income if the facts and circumstances test is satisfied. In this case, the overnight stays are a bona fide condition or requirement of employment, and XYZ has a non-compensatory business purpose for paying the lodging expenses. XYZ is not paying the lodging expenses primarily to provide a social or personal benefit to the team, and the lodging is not lavish or extravagant. If the team members had paid for their own lodging, the expenses would have been deductible as ordinary and necessary business expenses. Therefore, the value of the lodging is excluded from the team members’ income as a working condition fringe, and XYZ can deduct the lodging expenses as ordinary and necessary business expenses.

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