Strategy: Rent a room near the office for the night. Under a new IRS ruling, you can deduct the cost of the room as an employee business expense. If your company foots the bill, the payment is tax-free to you as a “working-condition” . (IRS Notice 2007-47)
The new ruling represents a complete about-face from regulations previously issued on this point.
Here’s the whole story: Generally, you can deduct the “ordinary and necessary” business expenses you incur, including travel costs away from home on business. That includes lodging expenses that are not lavish or extravagant. But you can’t deduct your personal, living or family expenses. Under the prevailing regulations, the IRS generally treats lodging costs as nondeductible personal expenses. (IRC Regulation 1.262-1(b)(5) If your employer pays for the lodging, it’s taxable income to you.
But now, the IRS is approving a special exception for local lodging that enables you to catch 40 winks before or after . It has issued interim guidance for hard-working execs.
New rule: The IRS says it will amend the regs to allow deductions for local lodging costs as an ordinary and necessary business expense. This exception will apply if your employer requires you to obtain local lodging. Until the IRS formally amends the regulations, the new rule applies if the following three conditions are met:
1. The lodging is provided on a temporary basis.
2. The lodging is necessary for the employee to participate in, or be available for, a business meeting or function of the employer.
3. The expenses would otherwise be deductible by the employee or would be deductible if paid by the employee.
Furthermore, the IRS also noted that employer reimbursements of such expenses would qualify for tax-free treatment as a working-condition fringe benefit. That perk covers services provided to an employee that the employee could deduct if he or she paid for it.
Tip: The IRS won’t contest this issue in audits until the smoke clears.