20.6 Local Lodging Costs

Lodging costs are generally deductible only on trips “away from home” (20.7). However, the IRS allows an exception for certain local lodging costs that enable you to participate in a business meeting or training. An IRS safe harbor allows the deduction if: (1) the lodging is necessary for you to participate in or be available for a business meeting, conference or training, (2) if you are an employee, your employer requires you to stay overnight, (3) the lodging does not extend for more than 5 days and does not recur again within the same calendar quarter, and (4) the lodging is not lavish or extravagant under the circumstances. For employees, the deduction must be claimed as a miscellaneous itemized deduction subject to the 2%-of- adjusted gross income floor (20.30).

Even if the safe harbor does not apply, the IRS allows a deduction for local lodging costs that have a bona fide business purchase under all the facts and circumstances.

If your employer pays for lodging that satisfies the safe harbor or the facts-and-circumstances test, the value of the lodging is considered a “working condition” fringe benefit that is excludable from your pay (3.9). Similarly, if you pay for qualifying local lodging and are reimbursed by your employer, the reimbursement is excluded from your pay provided the reimbursement is made under an “accountable” plan (20.32).

According to the IRS, local lodging that an employer temporarily provides to a new employee who is searching for a residence near the employer’s premises does not qualify under the “facts and circumstances” test. The employer’s payment is considered to be primarily for the employee’s personal benefit (rather than for a noncompensatory business reason) and the value of the lodging must be included in the employee’s taxable pay. The employer may deduct it as an ordinary and necessary business expense (compensation). Similarly, if an employer pays for an employee’s overnight hotel stay at a nearby hotel because the employee is working late on a special project and has a long commute, the expense is considered to be primarily for the employee’s personal benefit and the value of the lodging must be reported as additional pay to the employee.

On the other hand, if an employer pays for a hotel room near the employer’s office so an employee on “night duty”can be available for emergencies, this is considered to be a non-compensatory business reason, and the value of the lodging is not taxable. It is excluded from the employee’s income as a working condition fringe.

Law Alert

Tax Home Defined

For travel expense purposes, your home is your place of business, employment, or post of duty, regardless of where you maintain your family residence. This tax home includes the entire city or general area of your business premises or place of employment. The area of your residence may be your tax home if your job requires you to work at widely scattered locations, you have no fixed place of work, and your residence is in a location economically suited to your work.

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