Taxation of employees’ use of corporate apartments
Taxable compensation from use of an employer-provided corporate apartment
Absent an applicable exclusion, the fair market value (FMV) of any fringe benefit, less any amount the employee paid for the benefit, is included in the employee’s taxable compensation (see Regs. Sec. 1.61-21(b)(1)). For use of a corporate apartment, the potential amount of taxable compensation generally is based on the market rent or lease payments and may be includible in an employee’s income either at the specific rental rate for the number of personal-use nights or on a pro rata basis if the apartment is rented at a weekly or monthly rate. However, several exceptions permit exclusion from gross income for the value of fringe benefits; the use of a corporate apartment as part of business travel generally could be excluded as a working condition fringe benefit, provided substantiation and other requirements are met.
Exclusion as a working condition fringe benefit
Sec. 132(d) and Regs. Sec. 1.132-5 define a working condition fringe benefit and exclude its FMV from employee gross compensation and wages. Working condition fringe benefits generally are any property or services provided by an employer to an employee that, if paid by the employee, would be deductible as a trade or business expense or depreciation deduction under Sec. 162 or 167. Specifically, a working condition fringe benefit must meet the following conditions:
- The benefit relates to the employer’s business;
- The employee would have been entitled to an income tax deduction if the employee had paid the expense personally;
- The business use is substantiated with records; and
- The expense is ordinary and necessary (and so not lavish).