Local Lodging Expense Regulations Finalized by IRS

Author: Rena Pirsos, XpertHR Legal Editor

November 20, 2014

The IRS has adopted as final regulations that clarify proposed regulations issued in 2012 allowing employers to reimburse employees who are not away from home overnight for their local lodging expenses as a tax-free working condition fringe benefit (rather than a taxable personal expense) under the Internal Revenue Code (IRC). This is an exception to the general rule under the IRC permitting employer reimbursement of employee lodging expenses on a tax-free basis only if the employee is temporarily (up to one year) away from home (away overnight from his or her regular or principal place of business) on the employer's business.

Facts and Circumstances Test

Under the final regulations, local lodging expenses (an employee's lodging expenses not incurred in traveling away from home) can be reimbursed by an employer as a tax free, working condition fringe benefit only if they qualify as ordinary and necessary business expenses, as defined by the IRC. This is determined based on all the facts and circumstances, which the final regulations clarify.

One factor is whether the employee incurs an expense because of a bona fide condition or requirement of employment imposed by an employer. In other words, local lodging expenses qualify for this tax-free status under the final regulations if the employer requires employees to stay at a local hotel for a bona fide business purpose directly connected to the employer's business, such as facilitating training or team building.

Safe Harbor for Business Meetings and Conferences

The final regulations also adopt the proposed regulations' safe harbor for business meetings and conferences. Specifically, an employee's local lodging expenses will be treated as ordinary and necessary business expenses and, therefore, may be reimbursed by an employer to an employee on a tax-free basis, if all of the following conditions are satisfied:

  • The lodging is necessary for the employee to participate fully in, or be available for, a bona fide business meeting, conference, training activity or other business function;
  • The lodging does not exceed five calendar days and does not occur more than once per calendar quarter;
  • The 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 to the employee.

Other local lodging expenses also may be deductible as business expenses depending on the particular facts and circumstances. The final regulations include several examples illustrating the application of the facts and circumstances test.

Effective Date

The final regulations apply to expenses paid or incurred on or after October 1, 2014, but they may be applied to local lodging expenses paid or incurred in tax years for which the limitation period on a credit or refund has not expired.