Deducting Local Lodging Expenses

Generally, personal, living, or family expenses, such as the costs of lodging, are not deductible unless the taxpayer is traveling away from home on business. However, thanks to recently finalized IRS regulations, local lodging expenses may be a deductible business expense if certain conditions are met.

An individual's local lodging expenses can be deducted as business expenses if the applicable facts and circumstances dictate that such treatment is appropriate and the lodging is not lavish or extravagant, or primarily to provide the individual with a social or personal benefit. If paid by an employer, the expense can be treated as a tax-free working condition fringe benefit (WCFB) for the employee. The employer can deduct the cost of WCFBs.

Safe harbor rule. IRS regulations provide a safe-harbor rule where local lodging expenses are automatically treated as ordinary and necessary business expenses if all of the following conditions are met:

  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 no longer than five calendar days and does not occur more frequently than once per calendar quarter.
  3. In the case of an employee, the employer requires the employee 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.

Example: Tax-favored treatment allowed for employees

Alpha Corporation puts on periodic employee training sessions at a hotel near its main office. Alpha requires all attending employees, including employees from the local area, to remain at the hotel overnight for the bona fide business purpose of maximizing the effectiveness of the training sessions.

If Alpha directly pays the lodging costs for attending employees and the lodging is not lavish, the costs qualify as tax-free WCFBs for the attending employees, including those who live in the local area, and Alpha can deduct the costs as business expenses.

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