Article Highlights:

  • Away-from-home lodging
  • Non-away-from-home lodging
  • Requirements to be deductible
  • Substantiation requirements

A business deduction is allowed for lodging when a taxpayer travels away from his or her “tax home.” A taxpayer’s tax home is generally the location (such as a city or metropolitan area) of a taxpayer’s main place of business (not necessarily the place where he/she lives).

The traveling away from his or her tax home condition creates problems for individuals attending conferences and training sessions within their tax homes that include extended-hour events that preclude traveling back home between the days of the events.

To alleviate this problem, IRS proposed regulations, upon which taxpayers may rely, permit certain non-away-from-home lodging expenses to be treated as deductible business expenses by employers and tax-free working condition fringe benefits or accountable-plan reimbursements to employees. Under the proposed regulations, local lodging expenses are treated as ordinary and necessary business expenses if all of these 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 that does not exceed five calendar days and does not recur more frequently than once per calendar quarter.

(3) If the individual is an employee, his or her employer requires him or her 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: A business conducts business-related sales training sessions at a hotel and conference center near its main office. The employer requires both its field and in-house sales force to attend the training and stay at the hotel overnight for the bona fide purpose of facilitating the training. If the company pays the lodging costs directly to the hotel, the stay is a working condition fringe benefit to all attendees (even to employees who live in the area who are not on travel status) and the company may deduct the cost as an ordinary and necessary business expense. If the employees pay for the lodging costs and are reimbursed by the company, the reimbursement is of the accountable plan variety and is tax-free to the employees and deductible by the company as an ordinary and necessary business expense.

Example: If Warren, a locally based, self-employed consultant, were required by a company to attend the sessions and stay at the hotel, he could deduct the expense if he paid for it himself or exclude the expense if he were reimbursed by the company after accounting for it in full for his costs.

Substantiation requirements – Generally lodging expenses are deductible only if they are substantiated in full (record of time, place, amount, and business purpose, plus paid bills or receipts). The expenses can’t be substantiated using the lodging component of the federal per-diem rate.

If you have questions about the deduction and substantiation of business-related lodging expenses, please give this office a call.

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