Q: In what circumstances can a company pay for the lodging of an employee? Specifically, if I owned a multi-unit building and lived in one unit, would that be "for the convenience of the employer?"
Kym, Bethesda MD
A: The first distinction to be made here is between temporary lodging costs while the employee is away from home (which are nearly always deductible as an ordinary and necessary business expense), and personal lodging in the employee's tax home (which is obviously far more limited)...
These two cases--being away from home and being at home--are treated in two separate IRS publications.
Publication 463, "Travel, Entertainment, Gift, and Car Expenses," deals with travel costs away from home. The ordinary and necessary costs of overnight travel away from the employee's tax home (the place where the employee normally conducts business) are deductible to the employer and don't need to be included in the employee's income. The self-employed can directly deduct these costs.
These type of costs also include temporary assignments (generally, those less than one year in duration) away from an employee's tax home.
On the lodging side, these costs include hotel rooms and other such expenses.
In contrast, business-provided lodging is far more restricted. Publication 15B, "Employer's Tax Guide to Fringe Benefits," discusses what types of employer benefits are excluded from taxation. It's important to note that these benefits are generally not available to the self-employed, general partners, and more than 2% shareholder-employees of S-corporations. Those left include C-corporation employees and employees of the self-employed, partnerships, and S-corporations.
In order for employer-provided lodging to be excluded as a qualified fringe benefit, it must meet three tests:
- It is furnished on the employer's business premises (also must be the employee's place of work);
- It is furnished for the employer's convenience (must be for a substantial business reason, other than to provide the employee with additional compensation)
- It is a condition of employment (employees are required to live on the business premises in order to conduct their duties)
The clear intent of this fringe benefit is for special cases like farmhands and housekeepers. Even if a C-corporation arranged this for an employee (presumably the CEO), they would have a difficult time justifying either the "substantial business purpose" part of the employer's convenience test, or the "conduct of their duties" part of the condition of employment test.
One caveat here is that any lodging costs not deductible as travel or excludable as a fringe benefit simply defaults to wages, with the resultant FICA responsibilities. If the employer is self-employed, the denied deduction is liable for SECA.