Have you ever thought of local lodging as a business expense? A business deduction is allowed for lodging when a taxpayer travels away from his or her “tax home.” A taxpayer’s tax home is generally the location, such as a city or metropolitan area, of a taxpayer’s main place of business. It is not always defined as the place where he or she lives.
The traveling away from his or her tax home condition creates problems for individuals attending conferences and training sessions within their tax home area. These may include extended-hour events that prevent traveling back home between the days of the events.
What Does the IRS Say?
To alleviate this problem, taxpayers may rely on IRS proposed regulations. These regulations permit certain non-away-from-home lodging expenses. These expenses include local lodging, to be treated as deductible business expenses by employers. This also includes tax-free working condition fringe benefits or accountable-plan reimbursements to employees. Under the proposed regulations, local lodging expenses are treated as ordinary and necessary business expenses. If all of these conditions are met:
- The lodging is necessary. The individual who participates is fully in or mus be available for a bona fide business meeting, conference, training activity, or other business function.
- The lodging is for a period that does not exceed five calendar days.
- The lodging does not recur more frequently than once per calendar quarter.
- The event requires overnight attendance by the employer. If the individual is an employee, the employer requires the person to remain at the activity or function overnight.
- The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.
Local Lodging Deduction Example
A business conducts business-related sales training sessions at a hotel and conference center near its main office. This is local lodging. The employer requires both its field and in-house sales force to attend the training. The employer requires the team stay at the hotel overnight for the bona fide purpose of facilitating the training.
If the company pays the local lodging costs directly to the hotel, the stay is a working condition fringe benefit to all attendees. This is true even to employees who live in the area who are not on travel status. The company may deduct the cost as an ordinary and necessary business expense.
If the employees pay for the lodging costs and are reimbursed by the company, the reimbursement is of the accountable plan variety. The local lodging is tax-free to the employees and deductible by the company as an ordinary and necessary business expense.
Example: If Warren, a locally based, self-employed consultant, is required by a client to attend the sessions and stay at the hotel. The hotel is local lodging for him. Warren is permitted to:
- Deduct the expense, if he paid for it himself, or
- Exclude the expense, if he were reimbursed by the company after accounting for it in full for his costs.
Generally lodging expenses are deductible only if they are substantiated in full. This means record of time, place, amount, and business purpose, plus paid bills or receipts. The expenses cannot be substantiated using the lodging component of the federal per-diem rate.
Questions about Local Lodging?
If you have questions about the deduction and substantiation of business-related lodging expenses, please give Alex a call at 781-849-7200. He can go over the criteria with you and help you to know you are in compliance.