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Benefits

When Can an Employer Provide Nontaxable Local Lodging?

EBIA  

EBIA  

QUESTION: Our company would like to assemble its senior staff for a four-day retreat at a facility near our headquarters to work on our long-term business plan and receive some training. This would not be travel “away from home” for most of them, and we understand that the usual travel exclusion rules will not apply to our local employees. But will we need to treat the value of lodging provided to those local employees as taxable income?

ANSWER: Whether your local employees will be able to exclude the value of their lodging will depend on whether the lodging qualifies as a working condition fringe benefit. To qualify for that exclusion, property or services provided to an employee must be ones that would be deductible as business expenses if the employee had paid for the property or services without reimbursement. Generally, the cost of lodging when an employee is not traveling away from home fails that condition because it is a personal expense. But IRS regulations published in 2014 establish two ways to show that employer-provided local lodging is deductible, and consequently excludable from income as a working condition fringe benefit.

To be deductible as a business expense under the final regulations, local lodging must satisfy either a safe harbor or a facts-and-circumstances test. The safe harbor applies if all of the following conditions are met:

  • the lodging is necessary for the individual to fully participate in or be available for a bona fide business meeting or other business function;
  • the lodging is not provided for more than five consecutive calendar days and does not recur more often than once per calendar quarter;
  • the employer requires employees who incur the expenses to remain at the activity or function over-night; and
  • the lodging is not “lavish or extravagant” under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.

If the safe harbor is not met (e.g., if the lodging is provided for more than five consecutive calendar days), local lodging will be deductible only if, considering all of the facts and circumstances, the expense is paid or incurred in carrying on the employee’s trade or business (including the trade or business of being an employee). The regulations do not attempt to describe all of the factors that might enter into that determination, but they do note that one factor is whether the local lodging expense was incurred “because of a bona fide condition or requirement of employment imposed by the taxpayer’s employer.” Examples in the regulations suggest that the facts-and-circumstances test will typically be met if an overnight company event is a bona fide condition or requirement of employment, the employer has a noncompensatory business purpose for paying the lodging expense, the expense is not being paid primarily to provide a social or personal benefit to employees, and the lodging is not lavish or extravagant.

If you structure your event so it satisfies the requirements of the safe harbor, or you can establish the deductibility of the lodging expense using the facts-and-circumstances test, the value of the lodging provided to your local employees when they attend your retreat should be excludable from their gross income. For more information, see EBIA’s Fringe Benefits manual at Sections XXIII.B (“What Is a Working Condition Fringe?”) and XXIII.E (“Local Lodging”).

Contributing Editors: EBIA Staff.

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