Final Regulations Under Sec. 162 Provide New Safe Harbor Rules For Certain Local Lodging Expense

The cost of local lodging is generally for the convenience of the employee and does not qualify as a business expense unless the employee reports the cost as additional compensation income.

Generally, an employee or self-employed person is not away from home (for purposes of qualifying the expense as a deduction) unless he is away overnight.

Under new Reg. l.162-32(b), the IRS has established a safe harbor rule for when local lodging expenses may qualify as ordinary and necessary (Section 162) expenses.  It’s a four part test.  All four parts must be in place.

1. 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.

2. The lodging is for a period which does not exceed five calendar days and does not recur more frequently than once per calendar quarter.

3. If the individual is an employee, his employer requires him to remain at the activity or function overnight.

4. The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation or benefit.

There are many situation specific examples in the new regulations.  One in particular
[Reg. 1.162-32(c) Example 5] has to do with someone who normally commutes two hours each way from home to work and return.  The employer wished to have the employee available for extra hours because of a special project, so the employee was provided with hotel accommodations for a period of time.  The IRS concluded that this provided a personal benefit to the employee (she was relieved of her long, daily commute) and was taxable to her as additional compensation.

See T.D. 9696, 9/30/2014; Reg. 1.162-32, Reg. 1.262-1