Many employers and employees have work-related expenses. The economics of the matter are simple: The more you have to spend on expenses means less profit for the employer and less take-home pay for the worker.
It's not all a loss, though. The federal tax code gives some relief for a number of business expenses, such as lodging you provide for your employees. If the lodging qualifies, you and your employees get some big tax savings. There are a few requirements that must be met for the lodging to qualify for these tax benefits, however.
What's the Tax Benefit?
For tax purposes, gross income includes practically anything of value that a taxpayer receives. For employees, it includes their wages, of course, but also anything else that they're given as "compensation." Normally, then, it would include lodging you provide for your employees.
If the lodging qualifies, however:
- You can take a tax deduction for its full value, and
- You can exclude the value of the lodging from your employee's gross income (they're not taxed for it)
What's Qualified Lodging?
In order to qualify, the lodging must be:
- Provided on the business premises
- For convenience of the employer
- A condition of the employee's employment
On the business premises generally means 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 do a significant part of their duties or where you carry on a significant portion of your business activities.
This requirement is easily met when the worker actually lives on the premises, such as a motel manager living in one of the rooms of your motel. It's more difficult when the employee lives off but near the business premises.
For example, you provide your hotel manager with housing that's located across the street from the hotel and next to the hotel parking lot. The manager is required to be on call 24 hours a day, and he keeps in 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 and is close enough to take care of hotel business.
For your convenience means you provide lodging for a substantial business reason other than to provide a worker with additional pay or salary. So long as there's a substantial business reason for providing it, lodging can be "for your convenience." That's so 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.
Accepted as a condition of employment. This means the worker has to accept the lodging in order to enable him to properly perform his job. You don't have to expressly require that the employee accept the housing. Rather, the test is, can the worker do his job if he doesn't accept the housing?
Employer-provided housing enables a worker to properly perform his job when he:
- Is required to be present for duty at all times, or
- Can't perform his duties in the absence of the housing
For example, housing provided to a miner at the mine site is qualified housing when there are no other living accommodations in the area, winter travel conditions are hazardous, and the job often requires 12-hour night shifts.
If you give an employee the option of taking or refusing lodging provided by you, the lodging probably isn't a "condition of employment." Likewise, if you give a worker the choice of getting free lodging on the business premises or receiving a cash allowance in lieu of lodging, the lodging doesn't qualify.
For example, you own a nursing home and you offer a staff member the choice of living on the premises free of charge or living nearby and receiving a cash allowance, plus her salary. If she chooses to live on the premises, the lodging doesn't qualify because she's not required to live there to properly perform her job.
More than a Room
Lodging includes a number of things, including gas, electric, water, heat and sewer service. The costs of these things, however, aren't deductible by you (and they're taxable for the worker) if the worker:
- Contracts for the utilities directly from the utility company
- Has to pay for the utilities without reimbursement from you
Generally, if you provide meals to an employee who's also getting qualified lodging, you can take a tax deduction for the value of the meals, and the value isn't included in the employee's gross income. However, providing the employee with non-food items like household supplies generally don't qualify for the deduction.
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?
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