This article is reproduced with permission from Spidell Publishing, Inc.
A concierge CFO was denied travel expense deductions because he incorrectly treated his principal residence as his tax home instead of the location of his primary employment. Determining a taxpayer’s tax home comes into play when a taxpayer does not have a permanent place of business, and this rule can catch taxpayers off guard.
The taxpayer lived in Atlanta and entered into a three-year employment agreement with a customer in New Jersey. Under the terms of the agreement, he spent four days per week in New Jersey. He did not move his family to New Jersey and while he typically had several clients at once, for the taxpayers at issue he only entered into the one agreement discussed here. On his 2012 and 2013 returns, the taxpayer deducted travel expenses between Atlanta and New Jersey totaling over $21,000, which the IRS disallowed.
The taxpayer argued that he had no principal place of business because he worked at multiple locations for various clients and, therefore his tax home was his principal residence in Atlanta. Even though he spent four days a week in New Jersey, he claimed that he actually spent more time working from Atlanta.
The IRS argued that when he executed the agreement in New Jersey, his tax home shifted there and thus he could not deduct the expense of traveling to and from Atlanta.
The court agreed with the IRS because the taxpayer was not required to be in Atlanta to accomplish his other duties, nor was he able to substantiate the amount of work he did while he was in Atlanta. In order to deduct the travel expenses from New Jersey (his tax home) to Atlanta, he would have to prove that the travel to Atlanta was in pursuit of a trade or business, which he was not able to establish.
Can your home be your tax home?
If a taxpayer does not have a permanent place of business, for example, if he or she works at a variety of temporary locations, then the taxpayer’s principal residence is their tax home. In this case, commuting expenses to other worksites may be deductible. But if the taxpayer were to accept a permanent or indefinite position, then his or her tax home would shift to the new location.
In a nutshell, the tax home can be a moving target, determined by looking at the location where the taxpayer:
- spends the most time;
- engages in a greater amount of business activity; and
- earns a greater proportion of income.
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