Did you know that as an employee, you may be able to exclude the value of lodging provided by your employer from your income taxes? According to Sec. 119 of the Internal Revenue Code, there are certain conditions that must be met in order for an employee to exclude employer-provided housing costs from their income.
For example, the lodging must be furnished on the business premises of the employer, for the convenience of the employer, and the employee must be required to accept such lodging as a condition of their employment. This means that if you are an employee and are provided with housing by your employer, there is a chance that you may not have to pay income tax on that housing, as long as it meets the requirements outlined in Sec. 119.
It’s important to note that the determination of whether the lodging is on the business premises of the employer is a factual question, and it depends on the employee’s duties as well as the nature of the employer’s business. The recent Smith v. Commissioner, T.C. Memo. 2023-6, case provides an opportunity to consider these rules.
Facts & Procedural History
The taxpayer is an Air Force veteran and engineer who received an offer of employment from the Raytheon Company, a private defense contractor, to work as an engineer at the Joint Defense Facility at Pine Gap in Australia.
While waiting to move to Australia, Mr. Smith received a copy of Raytheon’s Australian Operations Overseas Handbook which informed him that he was eligible for housing in Alice Springs and that he would be responsible for the taxable income on the local market rental value of furnished housing and the associated utilities. The handbook also stated an alternative housing assistance option, which was a payment to compensate him for the general costs associated with owning or renting non-[Pine Gap] housing.
The taxpayer believed that this option was available to him only after moving to Australia and starting his employment with Raytheon. The taxpayer learned that he was assigned housing in Alice Springs in August 2010 and moved there in September 2010.
The taxpayer received a Form 1099-MISC from the Air Force reporting the value of his housing accommodation as nonemployee compensation for the years 2016, 2017, and 2018. He initially reported the value of the housing on his taxes as gross income, but later filed amended returns claiming deductions for “employee benefit programs” in the same amount, effectively excluding the value of the housing from his gross income.
The IRS conducted an audit and issued a notice of deficiency disallowing the deductions. The taxpayer petitioned the U.S. Tax Court for redetermination and both parties have moved for summary judgment on the issue.
Tax on Employer-Provided Lodging
Amounts paid to an employee for rendering services are generally taxable to the employee. This compensation is reported as wages on a Form W-2 that is issued by the employer.
There are exceptions to this general rule, such as reimbursements, loans, etc. There is also an exception for certain employer-provided lodging.
For an employee to be able to exclude the value of lodging from their income for tax purposes, the following conditions have to be met:
- the lodging must be furnished on the business premises of the employer,
- the lodging must be furnished for the employer’s convenience, and
- the employee must be required to accept it as a condition of employment.
The court only looked at the first condition in this case and found that it was the determining factor in their decision.
On the Business Premises of the Employer
As the court notes, the phrase “on the business premises” has been litigated several times.
The courts have said that the “business premises of the employer” generally means the employee’s “place of employment.” This is the place where the employee performs a significant portion of his duties or on the premises where the employer conducts a significant portion of his business. The touchstone of the business premises test is the lodging’s relationship to the business activities of the employer.
The court in this case concluded that the Pine Gap location was not the business premises of the employer. The court reached this conclusion noting that the lodging was not significant enough to show that it was “integral” to Raytheon’s business or “part and parcel” of Raytheon’s workplace as the taxpayer did not require immediate access to Pine Gap at all hours to perform his job and he did not have this type of access.
This case highlights the potential for employees to exclude the value of lodging provided by their employer from their income taxes, as outlined in Sec. 119 of the Internal Revenue Code. However, the lodging must meet certain conditions, including being furnished on the business premises of the employer, for the convenience of the employer, and the employee must be required to accept such lodging as a condition of their employment. This is where advanced tax planning can help, as it can help ensure that the deduction will be respected if reviewed by the IRS or litigated in court.