Travel Deduction Regulations – New Guidance on Local Travel Deductions
A person’s daily commute between a home and an office is, of course, not deductible. On the other hand, when a person travels between two-work locations- for example, a primary office and a secondary office- the costs are deductible. But beyond that, things start getting a little fuzzy.
For example, suppose a person drives directly from his or her home to a customer’s office or another business location that isn’t regular work location. Is the trip deductible? Or suppose the person has a home office. Does that change things?
NEWS FROM THE IRS: The IRS has tried to tackle these questions before, but apparently questions still remain. In two recent internal memoranda, the IRS takes another stab at them.
BACKGROUND: Ten years ago, the IRS ruled that local travel between a taxpayer’s personal residence and a “temporary work location is deductible”. In the past, the IRS’ definition of “temporary” was very narrow. The IRS said “temporary” meant a matter of days or weeks. So, for example, if a taxpayer worked on a long-term project at a customer’s business premises, there would be no deduction for trips between the taxpayer’s home and the customer’s premises.
In a 1999 revenue ruling, the IRS liberalized the definition of temporary to include any job assignment that is realistically expected for one year or less. If the job is initially expected to last one year or less, but that expectation changes, the assignment is no longer temporary, and the daily transportation expenses become nondeductible.
The rules for employer reimbursements of business travel expenses parallel the deduction rules. If a person’s employer reimburses the person for deductible expenses, the reimbursement is not included in income and not subject to employment taxes, as long as proper substantiation is provided to the employer.
OVERNIGHT TRAVEL– In its new internal memos, the IRS points out that the temporary work location rules only apply to “daily” transportation expenses-that is, transportation expenses incurred going from home to a work location and then back home within the same day. Overnight trips are deductible if a person is away from his or her “tax home” long enough to require sleep or rest. The person’s tax home is the location of the persons business or employment, regardless of where he or she lives. So, for example, if someone regularly takes overnight trips out of town to a branch office or a customer’s office, he or she can deduct the travel costs (including meals and lodging), even though this goes on for more than a year and the work location out of town is not temporary.
THE TYPE OF WORK A PERSON DOES– The IRS says that the temporary work location rules depend on his or her physical presence performing services at a particular location. The nature of those services is generally irrelevant.
For example, if a person expects to work “on-site” on a project for only six months, it would be irrelevant that the project as a whole is expected to last for 18 months. By the same token, if he or she works at a project site for 18 months, the employment would not be temporary even if the work consisted of separate phases of the project.
The IRS also says that an employee’s job classification is irrelevant in determining whether he or she is performing services at a location for a temporary period.
BREAKS IN SERVICE: Suppose there is a break in service at a particular temporary work location. How big a break does it have to be before it “restarts the clock” for purposes of the one-year rule? The IRS says that whether a series of assignments at the same location are separate periods of employment or one continuous depends on the facts and circumstances. However, the new IRS memos offer this-
RULE OF THUMB: A break of three weeks or less is not significant and will not stop the clock in applying the one-year limitation. On the other hand, the IRS says a break of at least seven months in significant. Therefore, it would be reasonable to treat two work segments separated by a seven-month break as separate periods of employment in applying the one-year limit.
The IRS says a seven-month break would be significant regardless of the nature of the break, and regardless of whether the subsequent assignment to the work location was anticipated. The IRS cautions, however, that there must be at least a seven-month continuous period during which the employee is absent from the work location.
EXAMPLE 1– On Jan. 1, Helen Blue receives her work assignments for the coming months. Blue is assigned to work at Client ABC’s office for eight months from jan.1- Aug. 31. She is then assigned to Client DEF’s office for a three-week stint from Sept.1-Sept.21, after which she will return to ABC’s office for an additional four months from Sept. 22 to Jan. 22 of the following year.
RESULT– The IRS says the three-week break in service at ABC’s office is inconsequential. Therefore, as of Jan. 1, there is reasonable expectation that Blue will be employed at ABC’s office for a period exceeding one year. Blue’s employment at ABC’s office is temporary, and any reimbursement for travel expenses between her residence and ABC’s office are taxable wages.
EXAMPLE 2– Same facts as Example 1, except that Blue’s assignment at DEF’s office will last for seven months from Sept. 1 to March 31 of the following year, followed by a four-month assignment to ABC’s office from April 1 to July 1.
RESULT– On Jan. 1, there is a realistic expectation the Blue will work at ABC’s office for two discrete periods of employment of one year or less, separated by a period of seven or more months when she will be absent from ABC’s office. Therefore, each of Blue’s assignments to ABC’s offices in considered temporary and reimbursements for travel expenses between Blue’s residence and ABC’s offices will not be treated as taxable wages. The IRS says the same would be true even if Blue spent some of the interim seven-month period on vacation or at training, rather than at DEF’s office.
EXAMPLE 3– Joshua Brown is instructed to work at Client Chi’s office for an eight-month period from Jan.1 – Aug. 31. At the end of that period, Brown is assigned to Client JKL’s office for a ten-month period from Sept.1 through June 30 of the following year. However, on Sept. 22, three weeks into the JKL assignment Brown is reassigned to GHI’s office for a four-month period from Sept. 22 through Jan. 22 of the following year. Brown’s reassignment to GHI’s office was due to unforeseen complications.
RESULT– At the time Brown began service at GHI’s office, there was a realistic expectation that his employment at the location would last for one year or less. That expectation did not change during the initial eight-month assignment. Therefore, Brown’s travel costs during the initial eight-month period are deductible.
However, because the three-week break in service was not significant, Brown’s reassignment to GHI’s office is considered part of the one continuous period of employment. Moreover, when Brown returns to GHI’s office it is expected that employment at that location will last for more than one year (that is, beginning with the initial Jan. 1 assignment until Jan. 22 of the following year). Therefore, at the time of Brown’s reassignment, his employment at GHI’s office is no longer temporary and his travel expenses are not deductible.
EXAMPLE 4– Same facts as Example 3, except that the unexpected reassignment to GHI’s office occurs seven months after Brown began work at JKL’s office.
RESULT– Brown’s initial eight-month assignment at GHI’s office is considered temporary. Moreover, because the break following the initial assignment is significant, Brown’s reassignment to GHI’s office in considered a separate period of employment, which is realistically expected to last for one year or less. Therefore, Brown’s travel expenses during each period of employment are deductible. Again, the IRS says that would be the case even if brown spent some of the seven-month period on vacation or training rather than working at JKL’s office.
It’s common for many taxpayers to make periodic but infrequent trips to a business location. For example, once a quarter a taxpayer drives to a nearby city for a managers’ meeting at a company headquarters. These quarterly trips may go on for years. Is the headquarters a temporary work location?
The IRS says that, in some situations, work at a particular location may be so infrequent or sporadic that it would be unreasonable to focus on the total span of employment at that location in applying the one-year rule. In those situations, assignments that are infrequent or sporadic can e considered separate temporary work assignments, even if they take place over a period of more than a year.
RULE OF THUMB: If there is an initial realistic expectation that an employee will perform services at a work location for a period of more than one year, but for not more than 35 workdays (or partial workdays) during each calendar year in the period, the employment may be considered temporary for any year in which the employee actually works no more than 35 workdays (or partial workdays) at the location.
EXAMPLE 5– On Jan. 1, Susan Green, who has a regular office at her employer’s headquarters, is assigned to manage five projects, each of which is expected to last 18 months. Projects 1 &2 will each require her presence at least once a week. However, the other three projects require her presence only on an “as needed” basis. Green expects to visit Projects 3,4, and 5, no more than 35 times during any calendar year.
RESULT– Projects 1 &2 are not temporary work locations because Green visits each site regularly over a period of more than one year. However, even though Projects 3,4 &5 will last for more than one year, those projects are temporary work locations because Green expects to go to each site no more than 35 times during each calendar year. Expenses for travel between Green’s home and Projects 3,4 &5 are deductible, and any reimbursements would be tax-free.
EXAMPLE 6– Same facts as example 5, except that on Oct. 1, Green is instructed to spend all of her working hours during October and November at Project 5. She resumes her example on Dec. 1.
RESULT– Project 5 is no longer considered a temporary work location as of Oct. 1 and for the rest of the calendar year. At that time, there is a realistic expectation that Green will spend more than 35 days at the Project 5 site during the calendar year. However, Project 5 is again considered a temporary work location at the beginning of the second year because Green realistically expects to visit the site no more than 35 times during that year. Travel expenses between Green’s home and Project 5 are deductible for the period before Oct. 1 of the first year and on or after Jan. 1 of the second year. However, travel expenses for travel between Oct. 1and Dec. 31 of the first year are not deductible.
NO REGULAR PLACE OF BUSINESS: Up to now, we have assumed that your client has regular place of business somewhere and he or she is temporarily going to another business location. However, in some cases, a client may have no regular place of business-his or her work is simply a series of temporary work sites. There is one exception. Day trips to temporary work locations are deductible if they are outside the general metropolitan area.
OFFICE IN HOME: New types of working arrangements have complicated the local travel deduction issue. For example, today an employee may have a workplace on the company’s premises and other telecommunicating office that allows the employee to work at home.
The IRS says that if the home office is the employee’s principal place of business, trips between the home office and another work location are deductible business-to-business travel. However, the IRS has not issued a ruling on whether a telecommuting arrangement meets the requirements. If the employee’s home office is not his or her principal place of business, then trips between home and another work location are deductible only if the employee’s assignment to the other work location is temporary.