Managing travel-related tax depends on finding an employee’s tax home

Travel-related taxMegan Mobile is a business executive who works at her employer’s headquarters in Blacksburg, Va., but she often travels to two of the company’s other offices — one in Arlington, Va., a 540-mile round trip, and one in Christiansburg, Va., a 16-mile round trip.  

Mobile and her employer want to make sure they’re correctly interpreting IRS requirements covering taxes for travel reimbursement. For example, if she’s reimbursed for travel expenses to Arlington and Christiansburg, are those reimbursements taxable? The answer is no, as long as she’s considered away from home. Sec. 162(a)(2) allows a deduction for traveling expenses “while away from home in the pursuit of a trade or business.”

If Mobile isn’t away from home, the answer depends on whether the work location is temporary, according to Rev. Rul. 99-7. If it’s temporary, the reimbursements aren’t taxable, but if the location isn’t temporary, they are taxable.

To figure out whether the IRS considers Mobile to be away from home, we have to determine her tax home. Under IRS rules, Mobile has only one tax home, and it is her principal place of business. Rev. Rul. 54-147 addresses the tax home when an individual has more than one place of business. Here are the factors used to determine the tax home:

  1. The total time the employee ordinarily spends at each business post
  2. The degree of business activity the employee performs at each post
  3. Whether the financial return related to the business post is significant or insignificant

Let’s assume the headquarters in Blacksburg is Mobile’s tax home. The next question is whether she is considered away from home when she’s in Arlington or Christiansburg.

Here’s what IRS revenue rulings say:

  • “Away from home” means the duration was long enough “as to require stop for substantial sleep or rest” (Rev. Rul. 73-529).
  • The trip must last “substantially longer than an ordinary day’s work” (Rev. Rul. 75-432).
  • The trip “need not be for an entire 24-hour day or throughout the hours from dusk until dawn, but it must be of such duration or nature that the taxpayer cannot reasonably be expected to complete the round trip without being released from duty, or otherwise stopping the performance of their regular duties for sufficient time to obtain substantial sleep or rest” (Rev. Rul. 75-170).

Based on this guidance, Arlington is away from home. The 540-mile round-trip distance requires a four-hour trip each way. After spending the day at the office in Arlington, Mobile needs to sleep or rest before returning to Blacksburg. Christiansburg, however, isn’t away from home, because it’s only a 16-mile round trip and not far enough away to require Mobile to need sleep or rest.

Whether Mobile’s reimbursements for transportation between her personal residence and Christiansburg are taxable depends on whether the Christiansburg work location is temporary. If it is, the reimbursements are excluded from income, but if not, the reimbursements are included in income.

To determine whether a work location is temporary, Rev. Rul. 99-7 lists the following three rules:

  1. If Mobile is realistically expected to work in Christiansburg for one year or less, transportation reimbursements are excludable from income.
  2. If Mobile is realistically expected to work in Christiansburg for more than one year (even part-time), that isn’t a temporary location; regardless of whether she ultimately works in Christiansburg for more than one year, transportation reimbursements aren’t excludable from income.
  3. If Mobile is initially realistically expected to work in Christiansburg for one year or less, but at some later date, she’s realistically expected to work in Christiansburg for more than one year, the location is considered temporary until the date the expectation changes; initial transportation reimbursements are excludable from income, but subsequent transportation reimbursements after the expectation changes aren’t excludable from income.

As noted earlier, an individual has only one tax home, so even if he or she works multiple places, it’s critical to determine where that home is and whether other work locations are temporary.

Where and how people work has evolved. Employers need to know the tax considerations for varied arrangements, including when an employee works from a home office.

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