The IRS issued proposed regulations that permit employees to treat
certain expenses paid or incurred for local lodging as deductible
business expenses (REG-137589-07).
Living expenses paid or incurred when not traveling away from home generally are considered nondeductible personal expenses under Sec. 262. The proposed regulations state that under certain circumstances, a taxpayer may be able to deduct under Sec. 162 the costs of local lodging as expenses in connection with the taxpayer’s trade or business, including the trade or business of being an employee. Whether local lodging expenses paid or incurred in carrying on a taxpayer’s trade or business as an employee are deductible depends on the facts and circumstances, one of which is whether the expense is incurred to satisfy a bona fide requirement imposed by the employer. Prop. Regs. Sec. 1.162-31(b) contains a safe harbor (and numerous examples illustrating the safe harbor) allowing a deduction for expenses for local lodging to attend business meetings and conferences if:
- 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 each calendar quarter;
- The employer requires the employee to remain at the activity or function overnight; and
- The lodging is not extravagant or lavish and does not provide a significant element of personal pleasure.
The proposed regulations also make a corresponding change in Prop. Regs. Sec. 1.262-1(b)(5), which specifies that an employee’s costs for local lodging are personal expenses unless the expenses are deductible under Sec. 162 as ordinary and necessary business expenses.
Taxpayers do not have to wait for the proposed regulations to be
finalized to rely on them. Taxpayers may apply the new rules to
eligible local lodging expenses paid or incurred in tax years for
which the statute of limitation on credit or refund has not expired
(Prop. Regs. Secs. 1.162-31(d) and 1.262-1(b)(5)). This means that
taxpayers can file amended returns to seek refunds for tax paid on
these expenses for years that are still open (three years from filing
date/two years from payment of tax). A simplified version of these
rules was already in effect under Notice
2007-47 (which is obsoleted by these regulations).