The IRS has issued proposed regulations regarding local lodging expenses.

Although the new regulations are in proposed form, the IRS has stated that they can be relied upon until they are finalized.

Generally, the cost of local lodging - defined as lodging while not traveling away from home - is considered a personal expense, not a deductible business expense. However, local lodging provided to employees may qualify as a business expense if the lodging is primarily for the business purposes of the employer rather than for a personal benefit to employees.

Under the new regulations, lodging is tax-free if it is provided by an employer so that employees can carry on their business of being employees. This determination is made based on the facts and circumstances of the particular situation.

One factor is whether use of the lodging by the employee is a bona fide condition or requirement of employment imposed by the employer. Lodging that is lavish or extravagant or gives an employee a social or personal benefit will not be treated as provided for the purpose of carrying on an employee's business as an employee.

Under the regulations, local lodging will automatically be treated as provided for business purposes if certain requirements are met. If the requirements are not met, the lodging may still be tax-free under the general facts and circumstances test.

The following requirements must be met for automatic tax-free treatment:

  • 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 of the employer.
  • The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter.
  • The employer requires the employee to remain at the activity or function overnight.
  • The lodging is not lavish or extravagant and does not provide any significant element of personal pleasure, recreation or benefit.

The regulations also contain several examples to guide in the determination of whether local lodging will be considered tax-free.

Read more in the Federal Register.

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