Guidelines for Definite, Temporary Assignment
TCJA CAUTION
For 2018 through 2025, employees are not able to deduct their job-related travel expenses because the TCJA of 2017 suspended the Schedule A miscellaneous deductions that are subject to the 2% of AGI reduction, including employee business expenses. Employees should consider negotiating with their employers to be covered by an accountable plan that would provide tax-free reimbursement to them for their employee business expenses.
Find details about IRS guidelines for definite and temporary work assignments away from a taxpayer's regular business location.
During employment of short and fixed duration away from a taxpayer’s regular business location, tax home does not change. The advantage of this is that a taxpayer on a temporary assignment may deduct the necessary travel expenses in first getting to the temporary place of work and in returning to the tax home after the assignment is completed. Reasonable expenses for meals, lodging, and other ordinary and necessary business expenses are deductible while at the temporary location (even for days off).
A taxpayer is deemed not on a temporary assignment if the stay away from home exceeds one year. This means that for stays away from home of over one year, no travel or living cost deductions at the assignment location are allowed, even though the taxpayer’s family remains at the old job location.
Local Transportation Within Tax Home
Transportation between a taxpayer’s home and a temporary work location in the same trade or business WITHIN the metropolitan area where the taxpayer lives and normally works is deductible business transportation only if one of the following two conditions is met:
Multiple locations: The taxpayer has one or more regular work locations away from his/her home; or
Home office: The taxpayer’s home is his/her principal place of business (as defined under the home office rules).
Lodging Per Diem
Although per diem rates may be used to substantiate deductions for lodging, meals, and incidental expenses, or for meal expenses and/or incidental expenses only, they may not be used to substantiate deductions for lodging expenses only. Self-employed individuals are not entitled to use the federal per diem rates to substantiate lodging expenses under any circumstances (Starr v. Commissioner, TC Memo. 2000-305). From 2021 Pub 463, page 6: “There is no optional standard lodging amount similar to the standard meal allowance. Your allowable lodging expense deduction is your actual cost.”
Local (Within Tax Home) Lodging
IRS has issued final regulations permitting certain non-away-from-home lodging expenses to be treated as deductible business expenses by the employer and tax-free working condition fringe benefits or accountable-plan reimbursements to the employee. The regulations provide a safe harbor; local lodging expenses are treated as ordinary and necessary business expenses if all these conditions are met (Reg § 1.162-32(b)):
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The 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.
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The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter.
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If the individual is an employee, his employer requires him to remain at the activity or function overnight.
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The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.
The final regulations added a provision that, even if the safe harbor conditions aren’t met, “facts and circumstances” may still allow favorable treatment of the expenses. According to Reg § 1.162-32(a), “whether local lodging expenses are paid or incurred in carrying on a taxpayer's trade or business is determined under all the facts and circumstances. One factor is whether the taxpayer incurs an expense because of a bona fide condition or requirement of employment imposed by the taxpayer's employer. Expenses paid or incurred for local lodging that is lavish or extravagant under the circumstances or that primarily provides an individual with a social or personal benefit are not incurred in carrying on a taxpayer's trade or business.”
Example – Safe Harbor: A business conducts a 2-day business-related sales training program at a hotel and conference centre near its main office. The employer requires both its field and in-house sales force to attend the training and stay at the hotel overnight between Day 1 and Day 2 for the bona fide purpose of facilitating the training. If the company pays the lodging costs directly to the hotel, 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 the company may deduct the cost as an ordinary and necessary business expense. If the employees pay for the lodging costs and are reimbursed by the company, the reimbursement is of the accountable plan variety and is tax-free to the employees and deductible by the company as an ordinary and necessary business expense.
- Safe Harbor Example
Example – Self-Employed: Continuing the example above. . .If a locally based self-employed consultant who does business with the company was required by the company to attend the sessions and to stay at the hotel, he could deduct the lodging expense if he paid for it himself or exclude the expense if he were reimbursed by the company after accounting to it in full for his costs.
Example – Facts and Circumstances: Able Company conducts a seven-day training session for its employees at a hotel near the company’s main office. The training is directly connected with Able's trade or business. Some employees attending the training are traveling away from home and some employees are from the local area. Able requires all employees attending the training to remain at the hotel overnight for the bona fide purpose of facilitating the training. The company pays the costs of the lodging at the hotel directly to the hotel and does not treat the value as compensation to the employees.
Because the training is longer than five calendar days, the safe harbor does not apply. However, the value of the lodging is excluded from income since the facts and circumstances test is satisfied: The training is a bona fide condition or requirement of employment and Able has a non compensatory business purpose for paying the lodging expenses and is not paying the expenses primarily to provide a social or personal benefit to the employees. The lodging Able provides is not lavish or extravagant. If the employees who are not traveling away from home had paid for their own lodging, the employee could have deducted the expenses under section 162(a) as ordinary and necessary business expenses except for 2018 through 2025 when employee business expenses are not deductible. Therefore, the value of the lodging is excluded from the employees' income as a working condition fringe under section 132(a) and (d), and the company may deduct the lodging expenses of all the employees as ordinary and necessary business expenses under section 162(a). (Based on example 1 from final regs)
Effect on Sole Proprietors
Part of paragraph (a) of the final regulations says, “Under certain circumstances, however, local lodging expenses may be deductible under section 162(a) as ordinary and necessary expenses paid or incurred in connection with carrying on a taxpayer's trade or business, including a trade or business as an employee.” Therefore, deducting local lodging could apply to a sole proprietor. However, the self-employed individual would still have to meet the "no personal benefit" and "bona fide activity" tests. For example, if a self-employed tax return preparer attends a two-day tax update seminar in the same city where his office is located, it would be hard to qualify to deduct overnight hotel costs at the meeting location unless there was an evening session, too.