Treasury recently released TD 9696, which contains final regulations relating to the deductibility of local lodging expenses.
The final regulations are issued under Treas. Reg. 1.162-32. The regulations define local lodging expenses as expenses not deductible under IRC § 262(a), which disallows deductions for personal, living and family expenses. The regulations allow for the deduction of lodging expenses as trade or business expenses if the expenses meet either a facts and circumstance or safe harbor test and an individual incurs the expenses directly. A lodging expense is deductible under the safe harbor test if several criteria are met: the lodging must be necessary for the individual to participate in a bona fide business function; the lodging must not exceed 5 calendar days and must not recur more than once per calendar quarter; if the individual is an employee, the individual’s employer must require the individual to remain at the activity overnight; and the lodging must not be lavish or extravagant and must not “provide any significant element of personal pleasure, recreation, or benefit.” The regulations include examples that illustrate when the safe harbor test is not satisfied and instead the facts and circumstances test determines the appropriate treatment. The examples in the regulations evaluate several factors in determining whether a lodging expense satisfies the facts and circumstances test, including whether the lodging is a bona fide condition of employment, whether the employer has a non-compensatory business purpose for providing the lodging, whether the employer is providing the lodging “to provide a social or personal benefit” and whether the lodging is lavish or extravagant.
If an individual does not incur a lodging expense directly but instead an employer incurs the expense on behalf of the employee, the employee may exclude the value of the expense from gross income if the expense is a working condition fringe under section 132(a) and (d). A working condition fringe is “any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowed as a deduction” as either a trade or business expense or depreciation.
If the employer reimburses the employee for local lodging expenses, the employee may exclude the reimbursement from gross income if the reimbursement arrangement constitutes an accountable plan under IRC § 62(c). An accountable plan must meet several criteria: the plan must only reimburse business expenses incurred by the employee in connection with his employment; the plan must require the employee to substantiate each expense; and the plan must not allow the employee to retain any reimbursements in excess of expenses incurred.
The final regulations are effective on October 1, 2014.