[Federal Register Volume 79, Number 190 (Wednesday, October 1, 2014)]
[Rules and Regulations]
[Pages 59112-59115]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-23306]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9696]
RIN 1545-BH60


Local Lodging Expenses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to the 
deductibility of expenses for lodging when an individual is not 
traveling away from home (local lodging). The regulations affect 
taxpayers who pay or incur local lodging expenses.

DATES: Effective Date: These regulations are effective on October 1, 
2014.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.162-32(d) and 1.262-1(b)(5).

FOR FURTHER INFORMATION CONTACT: Peter Ford, (202) 317-7011 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains final regulations that amend the Income Tax 
Regulations (26 CFR part 1) under sections 162 and 262 of the Internal 
Revenue Code (Code) relating to the deduction of local lodging 
expenses. On April 25, 2012, a notice of proposed rulemaking (REG-
137589-07) was published in the Federal Register (77 FR 24657). One 
written comment responding to the notice of proposed rulemaking was 
received. No public hearing was requested or held. After consideration 
of the comment, the regulations are adopted as amended by this Treasury 
decision.

Summary of Comment and Explanation of Provisions

    The provisions of the proposed regulations under section 162 of the 
Code were designated as Sec.  1.162-31, however, after the proposed 
regulations were published, unrelated regulations were finalized as 
Sec.  1.162-31. Accordingly, the final regulations in this document 
under section 162 are designated as Sec.  1.162-32.
    Under the general rule in Sec.  1.162-31(a) of the proposed 
regulations, local lodging expenses for an individual are personal, 
living, or family expenses that are nondeductible by the individual 
under section 262(a). Depending on the facts and circumstances, 
however, local lodging expenses may be deductible under section 162 as 
ordinary and necessary business expenses. Section 1.162-31(b) of the 
proposed regulations provides a safe harbor, pursuant to which local 
lodging expenses that meet certain criteria are treated as ordinary and 
necessary business expenses of an individual. Local lodging expenses 
that meet either the facts and circumstances test of paragraph (a) or 
the safe harbor requirements of paragraph (b) are deductible by an 
individual if incurred directly. Alternatively, if the expenses

[[Page 59113]]

are incurred by an employer on behalf of an employee, the value of the 
local lodging may be excludible from the income of the employee as a 
working condition fringe under section 132(a) and (d). To the extent an 
employer reimburses an employee for local lodging expenses, the 
reimbursement may be excludible from the employee's gross income if the 
expense allowance arrangement satisfies the requirements of an 
accountable plan under section 62(c) and the applicable regulations. 
The expenses are also deductible by the employer as ordinary and 
necessary business expenses.
    The commenter requested that the final regulations be revised to 
make it clear that a taxpayer's local lodging expenses that do not 
satisfy the safe harbor under Sec.  1.162-31(b) of the proposed 
regulations may nonetheless be deductible under Sec.  1.162-31(a) of 
the proposed regulations depending on the taxpayer's facts and 
circumstances. In response to this comment, the final regulations 
clarify that the examples illustrate the facts and circumstances test. 
Specifically, the examples illustrate situations in which certain 
conditions of the safe harbor are not satisfied and, therefore, the 
facts and circumstances test determines the appropriate treatment.
    An example in the proposed regulations describes circumstances in 
which a professional sports team provides local lodging to players and 
coaches for a noncompensatory business purpose. The commenter suggested 
that the final regulations clarify that local lodging provided to other 
employees of a sports team also may be ordinary and necessary 
noncompensatory business expenses. In response to this comment, the 
final regulations revise the example to clarify that the reference to 
players and coaches is illustrative and not exclusive.
    The commenter requested that the final regulations clarify the 
circumstances in which meal expenses paid or incurred in connection 
with lodging expenses are deductible. The final regulations do not 
adopt this comment, as the proposed regulations did not provide rules 
relating to meal expenses and those issues are beyond the scope of 
these regulations.

Effective/Applicability Date

    These regulations apply to expenses paid or incurred on or after 
October 1, 2014. Taxpayers may apply these regulations to expenses paid 
or incurred in taxable years ending before October 1, 2014, for which 
the period of limitation on credit or refund under section 6511 has not 
expired.

Special Analyses

    This Treasury decision is not a significant regulatory action as 
defined in Executive Order 12866, as supplemented by Executive Order 
13563. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations and, because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking that preceded these final regulations was submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business. No comments were received.

Drafting Information

    The principal author of these regulations is R. Matthew Kelley of 
the Office of Associate Chief Counsel (Income Tax and Accounting). 
However, other personnel from the IRS and the Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *


0
Par. 2. Section 1.162-32 is added to read as follows:


Sec.  1.162-32  Expenses paid or incurred for lodging when not 
traveling away from home.

    (a) In general. Expenses paid or incurred for lodging of an 
individual who is not traveling away from home (local lodging) 
generally are personal, living, or family expenses that are 
nondeductible by the individual under section 262(a). Under certain 
circumstances, however, local lodging expenses may be deductible under 
section 162(a) as ordinary and necessary expenses paid or incurred in 
connection with carrying on a taxpayer's trade or business, including a 
trade or business as an employee. Whether local lodging expenses are 
paid or incurred in carrying on a taxpayer's trade or business is 
determined under all the facts and circumstances. One factor is whether 
the taxpayer incurs an expense because of a bona fide condition or 
requirement of employment imposed by the taxpayer's employer. Expenses 
paid or incurred for local lodging that is lavish or extravagant under 
the circumstances or that primarily provides an individual with a 
social or personal benefit are not incurred in carrying on a taxpayer's 
trade or business.
    (b) Safe harbor for local lodging at business meetings and 
conferences. An individual's local lodging expenses will be treated as 
ordinary and necessary business expenses if--
    (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, the employee's employer 
requires the employee to remain at the activity or function overnight; 
and
    (4) The lodging is not lavish or extravagant under the 
circumstances and does not provide any significant element of personal 
pleasure, recreation, or benefit.
    (c) Examples. The provisions of the facts and circumstances test of 
paragraph (a) of this section are illustrated by the following 
examples. In each example the employer and the employees meet all other 
requirements (such as substantiation) for deductibility of the expense 
and for exclusion from income of the value of the lodging as a working 
condition fringe or of reimbursements under an accountable plan.

    Example 1.  (i) Employer conducts a seven-day training session 
for its employees at a hotel near Employer's main office. The 
training is directly connected with Employer's trade or business. 
Some employees attending the training are traveling away from home 
and some employees are not traveling away from home. Employer 
requires all employees attending the training to remain at the hotel 
overnight for the bona fide purpose of facilitating the training. 
Employer pays the costs of the lodging at the hotel directly to the 
hotel and does not treat the value as compensation to the employees.
    (ii) Because the training is longer than five calendar days, the 
safe harbor in paragraph (b) of this section does not apply. 
However, the value of the lodging may be excluded from income if the 
facts and circumstances test in paragraph (a) of this section is 
satisfied.

[[Page 59114]]

    (iii) The training is a bona fide condition or requirement of 
employment and Employer has a noncompensatory business purpose for 
paying the lodging expenses. Employer is not paying the expenses 
primarily to provide a social or personal benefit to the employees, 
and the lodging Employer provides is not lavish or extravagant. If 
the employees who are not traveling away from home had paid for 
their own lodging, the expenses would have been deductible by the 
employees under section 162(a) as ordinary and necessary business 
expenses. Therefore, the value of the lodging is excluded from the 
employees' income as a working condition fringe under section 132(a) 
and (d).
    (iv) Employer may deduct the lodging expenses, including lodging 
for employees who are not traveling away from home, as ordinary and 
necessary business expenses under section a162(a).
    Example 2.  (i) The facts are the same as in Example 1, except 
that the employees pay the cost of their lodging at the hotel 
directly to the hotel, Employer reimburses the employees for the 
cost of the lodging, and Employer does not treat the reimbursement 
as compensation to the employees.
    (ii) Because the training is longer than five calendar days, the 
safe harbor in paragraph (b) of this section does not apply. 
However, the reimbursement of the expenses for the lodging may be 
excluded from income if the facts and circumstances test in 
paragraph (a) of this section is satisfied.
    (iii) The training is a bona fide condition or requirement of 
employment and Employer is reimbursing the lodging expenses for a 
noncompensatory business purpose and not primarily to provide a 
social or personal benefit to the employees and the lodging Employer 
provides is not lavish or extravagant. The employees incur the 
expenses in performing services for the employer. If Employer had 
not reimbursed the employees who are not traveling away from home 
for the cost of the lodging, the expenses would have been deductible 
by the employees under section 162(a) as ordinary and necessary 
business expenses. Therefore, the reimbursements to the employees 
are made under an accountable plan and are excluded from the 
employees' gross income.
    (iv) Employer may deduct the lodging expense reimbursements, 
including reimbursements for employees who are not traveling away 
from home, as ordinary and necessary business expenses under section 
162(a).
    Example 3.  (i) Employer is a professional sports team. Employer 
requires its employees (for example, players and coaches) to stay at 
a local hotel the night before a home game to conduct last minute 
training and ensure the physical preparedness of the players. 
Employer pays the lodging expenses directly to the hotel and does 
not treat the value as compensation to the employees.
    (ii) Because the overnight stays occur more than once per 
calendar quarter, the safe harbor in paragraph (b) of this section 
does not apply. However, the value of the lodging may be excluded 
from income if the facts and circumstances test in paragraph (a) of 
this section is satisfied.
    (iii) The overnight stays are a bona fide condition or 
requirement of employment and Employer has a noncompensatory 
business purpose for paying the lodging expenses. Employer is not 
paying the lodging expenses primarily to provide a social or 
personal benefit to the employees and the lodging Employer provides 
is not lavish or extravagant. If the employees had paid for their 
own lodging, the expenses would have been deductible by the 
employees under section 162(a) as ordinary and necessary business 
expenses. Therefore, the value of the lodging is excluded from the 
employees' income as a working condition fringe.
    (iv) Employer may deduct the expenses for lodging the employees 
at the hotel as ordinary and necessary business expenses under 
section 162(a).
    Example 4. (i) Employer hires Employee, who currently resides 
500 miles from Employer's business premises. Employer pays for 
temporary lodging for Employee near Employer's business premises 
while Employee searches for a residence.
    (ii) Employer is paying the temporary lodging expense primarily 
to provide a personal benefit to Employee by providing housing while 
Employee searches for a residence. Employer incurs the expense only 
as additional compensation and not for a noncompensatory business 
purpose. If Employee paid the temporary lodging expense, the expense 
would not be an ordinary and necessary employee business expense 
under section 162(a) because the lodging primarily provides a 
personal benefit to Employee. Therefore, the value of the lodging is 
includible in Employee's gross income as additional compensation.
    (iii) Employer may deduct the lodging expenses as ordinary and 
necessary business expenses under section 162(a) and Sec.  1.162-
25T.
    Example 5.  (i) Employee normally travels two hours each way 
between her home and her office. Employee is working on a project 
that requires Employee to work late hours. Employer provides 
Employee with lodging at a hotel near the office.
    (ii) Employer is paying the temporary lodging expense primarily 
to provide a personal benefit to Employee by relieving her of the 
daily commute to her residence. Employer incurs the expense only as 
additional compensation and not for a noncompensatory business 
purpose. If Employee paid the temporary lodging expense, the expense 
would not be an ordinary and necessary business expense under 
section 162(a) because the lodging primarily provides a personal 
benefit to Employee. Therefore, the value of the lodging is 
includible in Employee's gross income as additional compensation.
    (iii) Employer may deduct the lodging expenses as ordinary and 
necessary business expenses under section 162(a) and Sec.  1.162-
25T.
    Example 6.  (i) Employer requires an employee to be ``on duty'' 
each night to respond quickly to emergencies that may occur outside 
of normal working hours. Employees who work daytime hours each serve 
a ``duty shift'' once each month in addition to their normal work 
schedule. Emergencies that require the duty shift employee to 
respond occur regularly. Employer has no sleeping facilities on its 
business premises and pays for a hotel room nearby where the duty 
shift employee stays until called to respond to an emergency.
    (ii) Because an employee's expenses for lodging while on the 
duty shift occur more frequently than once per calendar quarter, the 
safe harbor in paragraph (b) of this section does not apply. 
However, the value of the lodging may be excluded from income if the 
facts and circumstances test in paragraph (a) of this section is 
satisfied.
    (iii) The duty shift is a bona fide condition or requirement of 
employment and Employer has a noncompensatory business purpose for 
paying the lodging expenses. Employer is not providing the lodging 
to duty shift employees primarily to provide a social or personal 
benefit to the employees and the lodging Employer provides is not 
lavish or extravagant. If the employees had paid for their lodging, 
the expenses would have been deductible by the employees under 
section 162(a) as ordinary and necessary business expenses. 
Therefore, the value of the lodging is excluded from the employees' 
income as a working condition fringe.
    (iv) Employer may deduct the lodging expenses as ordinary and 
necessary business expenses under section 162(a).

    (d) Effective/applicability date. This section applies to expenses 
paid or incurred on or after October 1, 2014. However, taxpayers may 
apply these regulations to local lodging expenses that are paid or 
incurred in taxable years for which the period of limitation on credit 
or refund under section 6511 has not expired.


0
Par. 3. In Sec.  1.262-1, paragraph (b)(5) is revised to read as 
follows:


Sec.  1.262-1  Personal, living, and family expenses.

* * * * *
    (b) * * *
    (5) Expenses incurred in traveling away from home (which include 
transportation expenses, meals, and lodging) and any other 
transportation expenses are not deductible unless they qualify as 
expenses deductible under section 162 (relating to trade or business 
expenses), section 170 (relating to charitable contributions), section 
212 (relating to expenses for production of income), section 213 
(relating to medical expenses), or section 217 (relating to moving 
expenses), and the regulations under those sections. The taxpayer's 
costs of commuting to his place of business or employment are personal 
expenses and do not qualify as deductible expenses. For expenses paid 
or incurred before October 1, 2014, a taxpayer's expenses for lodging 
when not traveling away from home (local lodging) are nondeductible 
personal expenses. However, taxpayers may deduct local lodging expenses 
that qualify under section 162 and are paid

[[Page 59115]]

or incurred in taxable years for which the period of limitation on 
credit or refund under section 6511 has not expired. For expenses paid 
or incurred on or after October 1, 2014, a taxpayer's local lodging 
expenses are personal expenses and are not deductible unless they 
qualify as deductible expenses under section 162. Except as permitted 
under section 162 or 212, the costs of a taxpayer's meals not incurred 
in traveling away from home are nondeductible personal expenses.
* * * * *


Heather C. Maloy,
Acting Deputy Commissioner for Services and Enforcement.
    Approved: August 22, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-23306 Filed 9-30-14; 8:45 am]
BILLING CODE 4830-01-P