Section 162 of the tax code provides a deduction for all ordinary and necessary expenses paid or incurred by a taxpayer in carrying on any trade or business. Business expenses generally include but are not limited to salaries, traveling expenses, and rental payments. In addition, the expenses need to be reasonable and not violate public policy.

In the case of traveling expenses, lodging expenses for a business owner are generally deductible business expenses if incurred in connection with the individual carrying on a trade or business. For an employee, lodging expenses are generally deductible only if the travels are away from home and overnight rest is necessary.

Local lodging expenses, therefore, generally would be considered a personal expense and thus not deductible. In September 2014, however, the U.S. Treasury issued Reg. §1.162-32, which provides relief in this area if certain conditions are satisfied. Specifically, an individual incurring local lodging expenses may deduct the expense if he or she satisfies either the facts and circumstances test or the safe harbor rules.

Reg. §1.162-32 begins with a description of the facts and circumstances (F&C) test and then lists the safe harbor rules before giving examples that may support only the F&C test. Perhaps the best approach in practice would be to first see if the safe harbor rules apply before looking into the F&C test.


Under the safe harbor rules, an individual must satisfy four conditions in order to qualify local lodging expenses as deductible business expenses:

  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 doesn’t exceed five calendar days and doesn’t recur more frequently than once per calendar quarter;
  1. The employee is required by his or her employer to remain at the activity or function overnight; and

  2. The lodging isn’t lavish or extravagant under the circumstances and doesn’t provide any significant element of personal pleasure, recreation, or benefit.


If an individual is unable to satisfy the safe harbor rules, the alternative is the F&C test. Reg. §1.162-32(a) provides general guidelines and a series of examples for satisfying this test. Not surprisingly, the first factor is whether the expense is incurred by the taxpayer as a bona fide condition or requirement of employment that is imposed by the employer. If this factor is satisfied, the expense still ­doesn’t qualify if the lodging is lavish or extravagant. In addition, an expense primarily providing a taxpayer with a social or personal benefit wouldn’t be qualified. The final regulations provide several examples to illustrate the interpretation of the F&C test. Here are a few.

Example 1. An employer conducts a seven-day training session for its employees at a hotel near the employer’s main office. The training is directly connected with the employer’s business. Some employees attending the training are traveling away from home while others are local. All employees attending the training are required by the employer to remain at the hotel overnight for the bona fide purpose of facilitating the training. The employer pays the costs of the lodging and doesn’t treat the value as compensation to the employees. In this example, the IRS concludes that the value of the lodging would satisfy the F&C test. It’s a bona fide business purpose, requirement of the employer, and not primarily for social benefit. Therefore, the expense would be excluded from the income of all the participating employees.

Example 2. The facts are the same as in Example 1, except the employees pay the lodging costs and seek reimbursement from the employer. The reimbursements are made under an accountable plan and, as such, are excluded from the gross income of all the employees. The employer also would deduct the lodging expense reimbursements for the employees who are and are not traveling away from home as ordinary and necessary business expenses.

Example 3. The employer is a professional sports team and requires the 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. The overnight stays satisfy the bona fide business purpose and condition or requirement of employment. Thus, the lodging expenses would be excluded from the employees’ income.

Example 4. An employer hires an employee who currently lives 500 miles from the employer’s offices. The employer pays temporary lodging so that the new employee can search for a residence locally. In this example, the temporary lodging expense is primarily for personal benefit to the employee and therefore doesn’t satisfy a bona fide business purpose. The expense would be includible in the employee’s income because it isn’t a qualified business expense.

The examples in the final regulations provide far less discussion of the safe harbor rules. A review of the first three examples shows that condition 2 of the safe harbor rules (limit of five days per quarter) isn’t satisfied. Examples 1 and 2 require the employees to be available for training that lasts seven days. Example 3 isn’t as clear because it pertains to a sports team requiring lodging before each home game. Depending on the number of home games and how the season is spread out, one would suspect the team wouldn’t be able to satisfy this ­condition.


Treasury Decision (T.D.) 9696 was issued in September 2014 and became applicable to expenses paid or incurred on or after October 1, 2014. Taxpayers are permitted to apply these regulations for tax years prior to October 1, 2014, as long as the period of limitation on credit or refund hasn’t expired. The period for filing a claim for a credit or refund is within three years after the date the taxpayer filed his or her original tax return or within two years after the date the taxpayer paid the tax, whichever is later. Thus, an individual can file an amended tax return to claim a refund in this area.

© 2015 A.P. Curatola

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