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Section 119 Lodging Exclusion
In the Winter 2001 edition of CampLine, we ran an article on “Camp Employment Taxation” with specific information on employee taxation issues. The “Alert” at the end of the article advised readers that a camp had recently been audited and required to pay back taxes because of insufficient documentation that the provision of lodging for their year-round staff met the IRS requirements. This article provides follow-up information on the lodging exclusion.
— The editor
The value of lodging on the business premises of an employer, furnished by or on behalf of the employer for the convenience of the employer, and required to be accepted by the employee as a condition of employment, is excluded from the employee’s gross income. This value is not subject to income tax withholding, or to FICA or FUTA taxes, if, when the lodging is furnished, the employer reasonably believes the value is excludible. Thus, if excludible, the value of the lodging is not reported on Form W-2, and no taxes should be withheld or paid with respect to the value.
The employer must provide in-kind lodging. A cash allowance for a hotel or motel room, or to rent an apartment, is not excludible from income.
The employer’s “business premises” is generally the location where the employee actually works. Provision of in-kind lodging through rental of off-premises apartments or motel rooms is not ordinarily excludible. Alternately, the lodging must constitute “an integral part” of the business property, or the employer must carry on some substantial part of its business activities in the lodging.
A typical example of lodging on the premises is the hotel manager who lives in a suite in the hotel. However, in one case, lodging provided to a manager in a house across the street from the hotel, and located on a lot adjacent to parking lots used by the hotel, was held to be on the hotel’s business premises. In contrast, in two other cases, the courts ruled that a house “two short blocks,” and one 3 to 4 blocks, away from the hotel managed by the employee were not on the employer’s business premises.
In most cases, lodging provided on the camp property will be considered to be on the employer’s business premises. However, there may be unusual circumstances, such as lodging provided in an isolated area (probably of a relatively large camp property) not near the area used for camp activities or support operations, in which the IRS or a court might conclude that the property was not the business premises of the employer. (More likely, if the employee’s lodging is too distant from e.g., where emergencies are likely to occur, the location might undermine the argument that the lodging is furnished for the convenience of the employer.)
Convenience of the employer
The lodging must be provided in-kind “for the convenience of the employer.” This is essentially the same test as whether the employee is required to accept the lodging “as a condition of employment.” Under this test, there must be a “direct nexus” (that is, a direct connection or link) between the lodging furnished and a substantial non-compensatory business purpose of the employer that requires the employee to live in employer-provided lodging on the business premises. The employee must have real duties that effectively require his or her presence on the employer’s premises around the clock. For example, a camp counselor’s duties of supervising resident campers clearly require the counselor to live in camp-provided accommodations, in or near those provided to campers.
The following factors should be considered in determining whether lodging provided to camp employees is for the convenience of the employer:
- Is the employee required to be available or “on-call” 24 hours? Camp counselors, nurses, and/or maintenance supervisors probably qualify under this factor. Camp directors may not.
This exclusion can also be pro-rated, based on the number of days in a week the employee is actually on call, as compared to the number of days when the employee is not on call.
- How often is the “on-call” employee actually called out? Are records maintained showing how frequently this occurs?
- Is the employee a “night watchman” who locks up, check gates, “makes rounds,” and identifies and addresses anomalies discovered?
- Is the employee required to respond immediately to emergencies at night? An employee who is in the second or third tier of those who respond to emergencies probably doesn’t need to be on premises. If the employee is supposed to be the first to respond to emergencies, is the duty properly reflected in the procedures issued to staff or guest groups? How frequently do such emergencies actually occur?
- Does the employee regularly and frequently perform significant duties in the residence provided? Does the residence include the only office or workshop provided to the employee? Is the employee required to meet with camper, parents, guest group leaders, other program sponsors seeking facilities for rent, donors, etc., or to conduct other business functions, in the residence?
- For seasonal employees who do not live nearby in the off-season, are there other adequate facilities nearby? In one case, that the nearest adequate facilities were 60 miles away was an important factor in an IRS ruling that the value of the lodging provided was excludible from income.
- Are all employees with similar duties required to live on the premises? The fact that some live off-premises, even if due to lack of on-premises space, undermines the argument that the job requires the employee to live on-premises.
In early 2001, one camp settled an IRS audit because it did not have a sufficiently close factual relationship between the lodging provided and the duties required of the employees in question. Camps would do well to review their policies and practices, and either (1) ensure that lodging provided is closely related to the job requirement, perhaps restructuring jobs, or (2) simply treat the value of the lodging as additional taxable income.
Technical questions on these matters should be directed to a qualified tax attorney or financial consultant.
Originally published in the 2001 Spring issue of The CampLine.