Randy J. Elder, CPA, P.C.

Don’t miss out on business related lodging deductions

If you are a business owner in the Phoenix area, you may hold sales or training meetings with your employees in our great city. With our sunny weather and abundance of business friendly hotels, Phoenix can be a great place for productive and pleasant meetings. And, local employees may be be able to take expenses as lodging deductions.

Phoenix Business Hotel

A business deduction is allowed for lodging when a taxpayer travels away from his or her ‘tax home’. Tax home is, in general, defined as the location (i.e. city or metropolitan area) in which the taxpayer conducts business. This may or may not be the location where the taxpayer resides.

But what if the taxpayer’s ‘tax home’ and meeting location are the same? For example, the taxpayer works in Phoenix and is required to attend a 2 day extended-hour sales meeting in Phoenix that precludes traveling back home between the days of the event?

To address the scenario described above the IRS has proposed regulations upon which taxpayers can rely. The proposed regulations permit certain non-away-from-home (local) lodging expenses to be treated as deductible business expenses by employers and tax-free working condition fringe benefits or accountable-plan reimbursements to employees. Of course, to qualify certain conditions must be met. In order for local lodging expenses to be treated as an ordinary and necessary business expense, they must meet the following conditions;
(1) The local 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 local lodging is for five or fewer calendar days and must only recur 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.

How it works
Here is an example of how these regulations work. You own and operate a business with your main office in downtown Phoenix. You hold a sales meeting at a nearby hotel and require that all employees including local employees stay overnight at the hotel in order to participate fully in the sales meeting activities. If you, business owner, pay the hotel directly then 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 your business may deduct the cost as an ordinary and necessary business expense. If the employees pay for the lodging costs and are reimbursed by your business, the reimbursement is of the accountable plan variety and is tax-free to the employees and deductible by your company as an ordinary and necessary business expense.

Substantiation requirements
Good recording keeping is always important when it comes to tax deductions and lodging expenses are no exception. In general, lodging expenses are deductible only if they are substantiated in full. This means you should have a record of the following;
* Record of time, place and amount
* Business purpose
* Details of paid bills or receipts

The expenses can’t be substantiated using the lodging component of the federal per-diem rate.

If you have any questions about the tax deductions of business related local lodging expenses, please give me a call.