Capturing all available tax benefits for your business is challenging because tax rules change often. One new tax law is a substantial change in the way businesses have been handling employee travel.
Previously, tax-deductible travel expenses applied only when employees traveled away from home. If an employer paid for local accommodations for employees working late, it was not tax deductable; rather, the cost of accommodations became a personal expense not deductible by that employee.
Reimbursing employees for local accommodations caused difficulties for a business. Employer reimbursements of personal expenses to employees were being added to employees’ compensation amounts, triggering payroll taxes and difficulty in preparing accurate W-2s.
A new rule permits tax deduction for local lodging when it satisfies a bona fide requirement imposed by the employer; for example, providing local accommodations so an employee can participate in meetings.
In these instances, a business may provide tax-free reimbursement to the employee and deduct the cost as a travel expense.
Extravagant expenses are not eligible, and the employee must stay overnight at the function’s locale. Special provisions limit the local stay to five consecutive nights, and this deduction is allowed on only one occasion per calendar quarter.
The new rules are good news for employers and employees. Businesses can avoid tax complications when arranging local lodgings so employees can attend early morning presentations or late-night business social events.