Employers often pay for an employee’s business-related travel expenses. The employer must apply complex tax rules to figure out whether the payment is taxable to an employee. This article begins a two-part series that discusses how employers can navigate the rules.
The first step is for the employer to identify the employee’s tax home. The determination of tax home is important because any expenses paid by the employer for the employee’s transportation between his or her personal residence and his or her tax home are treated as personal commuting expenses and are taxable to the employee.
To identify the employee’s tax home, we suggest that the employer answer the following question:
What is the work location where the employee spends more of his or her time than any other work location?
The identified location is the employee’s tax home, which could be the employee’s personal residence if the employee spends more timing working there than at any other location.
Rev. Rul. 54-147 provides guidance on determining an employee’s tax home and states that the most important factors are (1) the total time spent by the employee at each business post, (2) the degree of business activity at each post, and (3) whether the financial return with respect to the business post is significant or insignificant. The ruling states that no one factor is determinative, but the third factor is given “great weight.” An employer could investigate all three factors separately, but in most cases, answering the question we have suggested above (which relates to the first factor) should be sufficient. In most cases, it seems reasonable to address only that factor, since the total time spent at a business post probably also closely reflects the remaining two factors (i.e., the degree of business activity at each post and the financial return at each post).
Step 2 involves identifying specific destinations to which the employee travels (other than his or her tax-home work location identified in Step 1) and determining the tax treatment of travel expenses paid by the employer related to those destinations. Each specific destination must be analyzed separately to determine whether the travel expenses related to the destination are taxable.
To determine the tax treatment, it is necessary to analyze the relationship between the tax-home work location and the other work location. The starting point is to explore an important concept referred to as “away from home.” If the other work location is away from the employee’s tax-home work location, all expenses paid by an employer related to travel between the tax-home work location and the other work location are nontaxable (tax code Section 162(a)(2)). This includes transportation, meals and lodging.
The IRS has issued several rulings over the years to address what it means to be “away from home.” The remainder of Step 2 is devoted to determining whether the employee’s travel between his or her tax-home work location and the other work location constitutes travel away from home. In this step, we will offer a practical approach by suggesting a series of questions to answer, below. The questions should be answered in the order presented.
The IRS rulings do not take distance into account in determining whether an employee is away from home. Instead, the rulings take into account the duration of the trip by considering whether the total time spent on the trip is long enough to require sleep or rest, and whether the duration of the trip is substantially longer than an ordinary day’s work. These rulings include Rev. Rul. 73-529, Rev. Rul. 75-170 and Rev. Rul. 75-432.
Employers have to figure out a practical way to apply these concepts to determine whether an employee’s travel is away from home. We believe the following questions provide a practical approach, starting with this question:
Does travel directly between the employee’s tax-home work location and the other work location require flying because of the distance?
If the answer is yes, then it seems reasonable to conclude that the employee is away from his or her tax home, and, therefore, travel expenses are nontaxable. One consideration in favor of this conclusion is the fact that if an employee drove to a destination that is far enough away to require flying, the employee would require sleep or rest during the trip. Another consideration in favor of this argument is the fact that even if an employee takes a round-trip flight in one day, the employee is likely to spend more time than an ordinary day’s work, given the amount of time spent at airports and the amount of time spent working. Thus, it seems reasonable to consider any travel that requires flying as away from home.
If the answer to the question about flying is no, it is still possible that the employee is away from home. As a next step, we suggest that the following question be asked:
For travel directly between the tax-home work location and the other work location, is the total time spent traveling by automobile and working at the location too long to reasonably complete a round trip in one day, and, thus, necessitating an overnight stay?
If the answer is yes, then it seems reasonable to conclude that the employee is away from his or her tax home, and, therefore, travel expenses are nontaxable. The IRS rulings provide that an employee is away from home if the duration of a trip is long enough to require substantial sleep or rest. If the duration is long enough to require an overnight stay, the employee is clearly away from home.
Even if the answer to the question is no, it is still possible that the employee is away from home. Rev. Rul. 75-170 provides that in order for the employee to be away from home, a trip need not be for an entire 24-hour day, 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 his or her regular duties, for sufficient time to obtain substantial sleep or rest. Rev. Rul. 75-432 provides that an employee is away from home if a trip lasts substantially longer than an ordinary day’s work, and the employee cannot reasonably be expected to make the trip without being released from duty for sufficient time to obtain substantial sleep or rest. The ruling does not define the term “substantially longer.” Therefore, this places the burden on the employer to define the term. As an example, an employer might define “substantially longer” as more than 20%. Given these concepts, we suggest that as a next step the employer ask the following question:
Even though an overnight stay is not required, for travel directly between the tax-home work location and the other work location, is the total time spent driving and working at the location substantially longer than an ordinary day’s work, and long enough that the employee needs to stop working in order to rest during the trip? In answering this question, use 20% as the standard for “substantially longer.” For example, if the employee ordinarily works 10 hours a day, 12 hours or more would be substantially longer.
If the answer is yes, then it seems reasonable to conclude that the employee is away from his or her tax home, and, therefore, travel expenses are nontaxable.
If the answer is no, then the employee is probably not away from home. If an employee is not away from home, then amounts paid by an employer for lodging and meals in connection with the travel are taxable to the employee, except for business-related meals (for example, a meal with a customer). Transportation expenses, such as automobile mileage paid by the employer, may still be nontaxable, even if the employee does not satisfy any of the criteria for being away from home. We will explore whether transportation expenses paid for travel that is not away from home are taxable or nontaxable next month in “Navigating the complex tax rules for employee travel expenses: Part 2.”
Partner, Washington National Tax Office
Human Capital Services Technical Practice Leader
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