The IRS recently issued updated guidance for rules put into effect into 2012 allowing employees to deduct certain local lodging business expenses. In the past, any expenses incurred for hotel and related services while not away from home were not eligible to be deducted. As a result, if an employee was reimbursed for the expense, it would be included as part of their annual gross income. However, under new regulations, lodging and related expenses for qualifying business activities are now eligible to be deducted as an ordinary and necessary business expense. In order to determine what expenses qualify, the IRS has provided two qualification methods including the Facts & Circumstances Test and Safe Harbor Program. Below we have provided a brief summary of each method.
Facts & Circumstances Test
This test essentially requires a company to determine if the expense is a result of a necessary condition or requirement of employment. Examples from the regulations include employees staying overnight at a local hotel to facilitate a training session, professional athletes staying at a hotel prior to a home game for last minute game planning or preparation, temporary lodging for an employee working more than 500 miles from home and employees required to be on duty to quickly respond to emergencies that occur outside of normal business hours.
Safe Harbor Method
Under the safe harbor method, lodging expenses can be deducted if they meet the following criteria:
- The lodging is necessary for an employee to participate fully in or be available for a legitimate business meeting, conference or training activity.
- The local lodging activities do not exceed five calendar days and occurs no more than once per quarter.
- Situations where an employer requires the employee to remain at a function overnight to fulfill a business obligation or responsibility.
- Accommodations are not classified as lavish and do not provide a significant element of personal pleasure, recreation or benefit to the individual beyond reasonable and customary accommodations.
It is important to note that expenses not qualifying under the safe harbor rules may still be deducted under the Facts & Circumstances Test assuming the proper criteria has been satisfied. These new rules may be applied to expenses incurred in any tax year that is still open.
Have questions about the new lodging expense reimbursement regulations? There are several items to consider when identifying whether an expense qualified. For additional information on determining qualifying local lodging expenses, please contact JLK Rosenberger at 949-860-9902, or click here to contact us.