We noted in our post on deductible travel expenses that hotel bills and costs of lodging incurred by an employee are generally only excludible from the employee’s income if the stay is away from the tax home of the employee. The employee’s tax home is the entire city or general area where you’re the employee’s main place of work is located.
If an employer paid a hotel bill (or reimbursed the employee) for a stay within the employee’s tax home, that amount would be deductible as compensation by the employer, but includible in the employee’s W-2 wages. I.e. the employee would have to pay tax on the benefit.
The IRS has released final regulations (Reg §1.162-32) which allows lodging costs within the tax home to be excluded from the employee’s W-2 income as a working condition fringe benefit under certain circumstances in which the lodging is for the benefit of the employer.
Facts and circumstances test
Whether an employee’s local lodging expenses are paid or incurred in carrying on a taxpayer’s trade or business (and so are excludible from the employee’s income) is determined under all the facts and circumstances. One important factor noted in the regulation is that the lodging is a bona fide condition of employment imposed by the employer. Local lodging that is lavish or extravagant, or that primarily provide the employee with social or personal benefit are not excludible from the employee’s wages.
Safe harbor for local lodging at business meetings
The new regulations provide a safe harbor for lodging related to business meetings and conferences. An individual’s local lodging is treated as ordinary and necessary business expense (is excludible from the employee’s income) if all of the following conditions are met:
- 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 that does not exceed five calendar days and does not recur more frequently than once per calendar quarter;
- If the individual is an employee, the employee’s employer requires the employee to remain at the activity or function overnight; and
- The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.
Example 1
Facts: Employer conducts a semi-annual three-day training session for its employees at a hotel near Employer’s main office. Some employees attending the training are traveling away from home and some employees are not traveling away from home. Because training sessions start early and end late, and Employer sees bona fide value in informal employee discussions outside of formal training, Employer requires all employees attending the training to remain at the hotel. Employer pays the costs of the lodging at the hotel directly to the hotel. The lodging is not extravagant.
Conclusion: The facts meet the conditions of the safe harbor. Employer can deduct the cost of the lodging, but does not include the cost in the W-2 wages of any employees.
Note that the results are the same if the employees pay for the hotel rooms, and the employer reimburses them under an accountable plan.
Example 2
Facts: Employer conducts a semi-annual three-day training session for its employees at a hotel near Employer’s main office. Some employees attending the training are traveling away from home and some employees are not traveling away from home. Employer does not require local participants to stay overnight, but does pay for lodging for local employees who choose to stay overnight. Employer pays the costs of the lodging at the hotel directly to the hotel. The lodging is not extravagant.
Conclusion: The cost of lodging for out-of-town participants is deductible by the employer and excludible from employee’s income under the general rules. Because the employer does not require local participants to stay overnight, the safe harbor does not apply. The cost for local participants is for the convenience of the employees, not the employer. These costs should be included in the W-2 wages of the local employees.
Tip: Consider letting the local employees know that they’ll be taxed on the cost of the lodging. They might prefer to commute rather than pay the tax.
Example 3
Facts: Employer is a professional sports team. Employer requires its employees (for example, players and coaches) to stay at a local hotel the night before a home game to conduct last minute training and ensure the physical preparedness of the players. Employer pays the lodging expenses directly to the hotel and does not treat the value as compensation to the employees.
Conclusion: Because the lodging occurs more frequently than quarterly, the safe harbor doesn’t apply.
However, under the facts and circumstances test, the overnight stays are a bona fide condition or requirement of employment and Employer has a noncompensatory business purpose for paying the lodging expenses. Employer is not paying the lodging expenses primarily to provide a social or personal benefit to the employees and the lodging Employer provides is not lavish or extravagant. Therefore, the value of the lodging is excluded from the employees’ income as a working condition fringe.
Example 4
Facts: Employer hires Employee, who currently resides 500 miles from Employer’s business premises. Employer pays for temporary lodging for Employee near Employer’s business premises while Employee searches for a residence.
Conclusion: Employer is paying the temporary lodging expense primarily to provide a personal benefit to employee by providing housing while employee searches for a residence. If the employee paid for the lodging, it would be a nondeductible personal expense. Employer can deduct the costs as compensation expense, but must include the costs in the employee’s W-2 income.
Example 5
Facts: Employer requires one employee to be “on duty” each night to respond quickly to emergencies that may occur outside of normal working hours. Employees who work daytime hours each serve a “duty shift” once each month in addition to their normal work schedule. Emergencies that require the duty shift employee to respond occur regularly. Employer has no sleeping facilities on its business premises and pays for a hotel room nearby where the duty shift employee stays until called to respond to an emergency.
Conclusion: Because the duty shifts occur monthly, the safe harbor doesn’t apply. Looking at all the facts and circumstances, we see that the duty shift is a bona fide requirement of employment and Employer has a noncompensatory business purpose for paying the lodging expenses. Employer is not providing the lodging to duty shift employees primarily to provide a social or personal benefit to the employees and the lodging Employer provides is not lavish or extravagant. Therefore, the value of the lodging is excluded from the employees’ income as a working condition fringe.
Example 6
Facts: Employee normally travels two hours each way between her home and her office. Employee is working on a project that requires employee to work late hours. Employer provides employee with lodging at a hotel near the office.
Conclusion: As in Example 4, Employer is paying the lodging costs primarily as a personal benefit to the employee. Employer can deduct the costs as compensation expense, but must include the costs in the employee’s W-2 income.
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