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Expenses 201:

Some Local Lodging Expenses Are Now Deductible

 

In the article Expenses 101: Are Expense Reimbursements Taxable Income?, it was implied that the only lodging expense reimbursements that are reimbursable on a non-taxable basis are ones that occur away from the employee's tax home. However, the IRS just issued regulations, effective October 1, 2014, that define certain local lodging expenses as deductible. (Internal Revenue Bulletin 2014-43) And if an expense is deductible for the business, then it can be reimbursed to the employee on a non-taxable basis.

 

The new regulations establish a safe harbor for local lodging expenses that are incurred at business meetings and conferences near or in the business's tax home. These expenses will be treated as ordinary and necessary if they meet all four of the following criteria:

 

  • “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;
     

  • “The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter;
     

  • “If the individual is an employee, the employee’s 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 clarify the application of these criteria, the IRS has provided in the regulations examples of both when local lodging expenses are deductible and when they are not.

 

The bottom line is this: If the business can deduct an expense as being both ordinary and necessary, and if the employee pays for a deductible expense out of his own pocket, the business may reimburse the employee for the expense on a non-taxable basis.

 

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