On April 25, 2012 the Internal Revenue Service published proposed amendments to regulations under Sections 162 and 262 of the Internal Revenue Code of 1986, as amended (the “Code”) that would allow some business-related local lodging expenses to be deductible as ordinary and necessary business expenses. The term local lodging expenses is defined generally as any lodging expenses that are not incurred while traveling away from home.
Section 162(a) of the Code allows a deduction for all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. As the Code currently stands, however, local lodging expenses are generally not considered ordinary and necessary expenses and thus are not deductible. The proposed safe harbor regulations under section 162 provides that local lodging at a business meeting, conference, or other activity or function will be deductible as an ordinary and necessary business expense if:
- The lodging is necessary for an individual to participate fully in or be available for a bona fide business meeting 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 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.
The proposed regulations under Code Section 262 further provide that expenses incurred for local lodging are personal expenses unless the expenses are deductible under Code Section 162. Therefore, transportation expenses such as commuting to the place of business and meals are deductible if they satisfy the four factors above to qualify as ordinary and necessary expenses in carrying on a trade or business.
Other local lodging expenses may be deductible as business expenses depending on the particular facts and circumstances. The proposed regulation contains six examples to help employers understand when local lodging expenses are deductible. One example includes an employee who normally travels two hours each way between her home and office. While working on a project that requires her to work late hours, the employer provides her with a hotel near the office. This lodging expense would not be deductible because it is primarily to provide a personal benefit to the employee by relieving her of her daily commute. Yet, if the employee must remain “on duty” throughout the night to respond quickly to emergencies and the employer has no sleeping facilities on the business premises, the employer can deduct the cost of this lodging. The complete regulation containing all six examples can be found here.
The regulations would apply to expenses paid or incurred on or after the date the regulations are published as final in the Federal Register. Until that time, taxpayers may apply the proposed regulations to expenses paid or incurred in taxable years for which the statute of limitations has not expired. Comments or a request for a public hearing regarding the proposed amendments must be received by July 24, 2012.
Fraser Stryker is a leader in employee benefits and tax law. Attorneys in the Firm’s Employee Benefits and Taxation Practice Groups advise businesses, governments, and nonprofit organizations on a wide variety of tax and employee benefit matters, transactions, and litigation. Fraser Stryker helps employers implement and maintain innovative and cost-effective employee benefit plans that attract and retain top talent. For more information on the tax treatment of local lodging expenses, please contact Nicole R. Konen.