There are tax consequences if an employer provides an employee with local lodging, either temporarily at a nearby hotel, or permanently in housing on the employer’s business premises. The general rule is that the value of the lodging must be included in the employee’s wages. However, if the requirements covered below are met, local lodging expenses are tax free to the employee and may be deducted as business expenses by the employer--the best possible tax outcome for everyone.
Local Lodging As a Working Condition Fringe Benefit
Sometimes it is not convenient or efficient for employees to go to their homes at night and return to work the next day. Instead, an employer might decide to pay for employees to stay at a local hotel or other nearby lodging. Ordinarily, if an employer pays for an employee’s local lodging expenses, the cost must be included in the employee’s compensation and the employee must pay tax on it. However, if the expenses meet the requirements under either:
- the safe harbor test, or
- the facts and circumstances test
Safe Harbor Test
The IRS established the safe harbor test for local lodging expenses in late 2014. Under this test, local lodging expenses—that is, hotel or other lodging expenses while an employee is away from home overnight—need not be included in the employee’s income if:
- the lodging is necessary for the employee to participate fully in, or be available for, a bona fide business meeting, conference, training activity, or other business function
- the lodging lasts for no more than five calendar days and does not recur more than once per calendar quarter
- the employer requires the employee to remain at the activity or function overnight, and
- the lodging is not lavish or extravagant and does not provide any significant element of personal pleasure, recreation, or benefit. (IRS Reg. § 1.162-32(a).)
Example: Acme, Inc. conducts a three-day training session for its employee salespeople at a hotel near its main office. Some salespeople attending the training are not traveling away from home. Acme requires all attendees to remain at the hotel overnight for the bona fide purpose of facilitating the training. Acme pays for the cost of the hotel. Acme need not include in its employees’ compensation the cost of the hotel, and it may deduct the cost as its own business expense.
Facts and Circumstances Test
The safe harbor test only applies to local lodging of five days or less. Fortunately, local lodging that does not meet the safe harbor test may still be excluded from the employer’s income and deductible by the employer if it satisfies the facts and circumstances test. To satisfy this test, the local lodging expense must:
- be incurred because of a bona fide condition of employment imposed by the employer
- be for a business purpose and not primarily to provide a social or personal benefit to the employee
- not be considered lavish or extravagant under the circumstances, and
- not provide a significant element of personal pleasure or recreation.
Example: Acme, Inc. requires one employee in its IT department to be on duty each night to respond quickly to emergencies that may occur outside normal working hours. IT employees who work daytime hours each serve a duty shift once each month. Emergencies that require the duty shift employee to respond occur regularly. Acme has no sleeping facilities on its business premises, so it pays for a hotel room nearby where the duty shift employee stays until called to respond to an emergency. Acme need not include in its IT employees’ compensation the cost of the hotel, and it may deduct the cost as its own business expense.
Examples of local lodging that don’t satisfy the facts and circumstances test include:
- providing an employee with a weekend at a luxury hotel or resort
- paying for local lodging to enable an employee to avoid a long distance commute
- providing local lodging to a recently relocated employee while he or she searches for permanent housing, or
- providing local lodging for an employee's indefinite personal use.
Lodging on the Employer’s Business Premises
Some employers provide lodging to their employees on their business premises—for example, apartment managers are often provided with free lodging on the building premises. The value of such lodging is a tax-free employee working condition fringe benefit if is:
- provided on the employer’s business premises
- furnished for convenience of the employer, and
- is a condition of the employee's employment.
On the Business Premises
The requirement that the lodging be on the business premises means at the employees' place of work. It doesn't have to be where they do all of their work. Rather, it's enough if the lodging is at a place where they perform a significant part of their duties or where the employer carries on a significant portion of its business activities.
This requirement is easily met when the worker actually lives on the sole business premises, such as a motel manager living in one of the rooms of a motel. However, this requirement can also be met if an employee lives off but near the business premises.
Example: The Acme Hotel provides its hotel manager with housing that's located across the street from the hotel and next to the hotel parking lot. Acme owns the home. The manager is required to be on call 24 hours a day. He keeps an office in his home, and his telephone is connected directly to the hotel switchboard so that he can work from home. The lodging likely qualifies. It's an integral part of the business premises because the manager can be reached by telephone, is close enough to take care of hotel business, and also performs some of his duties from inside the home.
For the Employer’s Convenience
The requirement that the lodging be for the employer’s convenience means the employer provides the lodging for a substantial business reason other than to provide a worker with additional pay or salary. As long as there is a substantial business reason for providing it, lodging can be for the employer's convenience. This applies even if an employment contract says the lodging is furnished as pay or if your state's employment laws require you to provide lodging.
The test for satisfying the convenience of the employer requirement is practically the same as the test for satisfying the condition of employment test. So, when lodging is for the convenience of the employer rule, it's almost always a condition of employment as well.
Condition of Employment
Lodging meets the condition of employment test if the worker has to accept the lodging to properly perform his or her job. The employer doesn’t have to expressly require that the employee accept the housing. Rather, the test is: Can the worker do his job if he or she doesn't accept the housing?
Employer-provided housing enables an employee to properly perform his or her job when the worker:
- is required to be present for duty at all times, or
- can't perform his or her duties without the housing.
Example: Acme Mining, Inc., provides its miner-employees with lodging at a mine site where there are no other living accommodations in the area, winter travel conditions are hazardous, and the job often requires 12 hour night shifts. The miners can’t do their work without the housing so it meets the condition of employment test.
If an employer gives an employee the option of taking or refusing lodging, the lodging probably isn't a condition of employment. Likewise, if a worker is given the choice of getting free lodging on the employer’s business premises or receiving a cash allowance, the lodging doesn't qualify.
Example: The Acme Old Age Home offers a staff member the choice of living on the premises free of charge or living nearby and receiving a cash allowance, plus salary. If the employee chooses to live on the premises, the lodging doesn't qualify because he or she not required to live there to properly perform the job.
Questions for Your Attorney
- Can I let key employees stay in the home I own near my factory and take advantage of the tax break for lodging?
- Do I lose the tax benefits if my employee gets married and they live together on my property?
- Is there a limit on how much I can deduct for employee lodging?