Recently issued final regulations (T.D. 9696) provide an exception to the general rule that local lodging expenses incurred by or on behalf of an individual are personal expenses that are not deductible, while lodging expenses incurred while traveling away from the individual's tax home are deductible.

Under the regulations, if certain requirements are met, local lodging expenses are deductible by an individual if incurred directly by that individual. Alternatively, if the expenses are incurred by an employer on behalf of an employee, or the employer reimburses the employee for the expenses, the value of the local lodging expenses may be excludible from the employee's compensation as a working-condition fringe benefit. The expense is also deductible by the employer as an ordinary and necessary business expense.

The regulations provide a safe harbor, and if the safe harbor conditions are met, the local lodging expenses will be treated as business expenses that are deductible under Section 261. The safe harbor conditions are as follows:

  • 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 of five days or less and does not recur more frequently than once a calendar quarter.
  • If the individual is an employee, the employer requires the employee to remain at the activity or function overnight.
  • The lodging is not lavish under the circumstances and does not provide any significant element of personal pleasure, recreation or benefit.

If the safe harbor requirements are not met, a facts-and-circumstances test may be applied. The regulations state that one factor to consider is whether the expense is incurred because of a bona fide condition or requirement of employment imposed by the employer.

These regulations apply to expenses paid or incurred on or after Oct. 1, 2014, but taxpayers may apply these regulations to expenses paid or incurred in taxable years beginning before Oct. 1, 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.