IRS Proposes Regulation on Local Lodging Expenses
|Date Posted: April 26, 2012|
Some business-related lodging expenses incurred in the vicinity of home will be deductible if the IRS adopts a proposed regulation, that would amend the rules under Code Section 162. The proposed regulation was published on April 25.
In general, the tax Code does not allow a deduction for expenses paid or incurred for lodging when not traveling away from home. Under the proposed rule, there would be exceptions to that general prohibition within a safe harbor provision on which the IRS is seeking public comment. The public has until July 24 to file comments.
Safe Harbor for Local Business Conferences
The proposed rule would provide a safe harbor for “certain local lodging at a business meeting, conference or other activity or function.” Other local lodging expenses would be treated according to the facts and circumstances.
Under the proposed rule, local lodging expenses could qualify for a deduction or income exclusion if it met all of the following conditions:
- the lodging is necessary for the employee to participate in or be available for a bona fide business meeting or function of the employer;
- the lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter;
- the lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation or benefit; and
- the individual is an employee, or the employee’s employer requires the employee to remain at the activity or function overnight.
The IRS provides six examples that meet or do not meet the four conditions above in the notice of rulemaking, which is published in the Federal Register at 77 Fed. Reg. 24657.
Professional Sports Teams
In addition to a local conference facilitating training or team building among employees of a company, the IRS envisioned another example in the proposed rule preamble. It stated, “a professional sports team may require its employees (players and coaches) to stay at a local hotel the night before a home game to ensure physical preparedness and allow for last minute training.”
Notice 2007-47 Superseded
The rulemaking has been expected for years; the IRS had it on its list of priorities as far back as 2008. In June 2007, the IRS issued temporary guidance on the subject, which became obsolete with the issuance of the proposed regulation, on April 25. Until a final regulation is published, employers may apply the proposed regulation (see “Effective/Applicability Date” below).
That was IRS Notice 2007-47, which provided that if certain conditions were satisfied, expenses incurred for local lodging could be deductible by an employee under Section 162.
The change meant that if the expense were to be paid by the employer, the amount could be excluded from the employee’s income as a working condition fringe benefit.
Under Notice 2007-47, there were three conditions that must be satisfied in order for local lodging expenses to qualify for a deduction or income exclusion:
- the lodging is on a temporary basis;
- the lodging is necessary for the employee to participate in or be available for a bona fide business meeting or function of the employer; and
- the expenses must otherwise be deductible by the employee under Section 162(a).
The regulations are proposed to apply to expenses paid or incurred on or after the date these regulations are published as final regulations in the Federal Register. The proposed rule preamble states that until then, “taxpayers may apply the proposed regulations to expenses paid or incurred in taxable years for which the period of limitation on credit or refund under section 6511 has not expired.” For further information about the proposed regulation, taxpayers may contact R. Matthew Kelley at the IRS, at (202) 622-7900. For information about how to submit comments, contact Funmi Taylor at (202) 622-7180.
More information about fringe benefits is available in Thompson Publishing Group’s Employer’s Guide to Fringe Benefit Rules.