Business travel, a necessary evil at many companies, can be an expensive and time-consuming activity for both the employer and employee. It also can create tax headaches for all concerned unless the rules are followed. If it is done correctly, business travel will be fully deductible by the company (but only 50% of travel meals are deductible), tax-free to the employee, and free of payroll tax withholding. If the rules are not followed, the expense will still be deductible by the employer, but it will be taxed to the employee and fully subject to withholding.
In general, a business may deduct all the ordinary and necessary business expenses paid or incurred during the tax year in carrying on any trade or business, including travel expenses (such as lodging expenses) that are not lavish or extravagant while away from home in the pursuit of a trade or business. An advance or reimbursement made to an employee under an “accountable plan” is deductible by the employer and is not subject to payroll and income tax withholding. In general, an advance or reimbursement is treated as made under an accountable plan if: (1) the employee receives the advance, etc., for a deductible business expense that he paid or incurred while performing services as an employee of his employer; (2) the employee must adequately account to his employer for the expense within a reasonable period of time; and (3) the employee must return any excess reimbursement or allowance within a reasonable period of time. By contrast, an advance, etc. made under a “nonaccountable plan” is fully taxable to the employee and subject to payroll and income tax withholding. It will be treated as compen-sation to the employee and, in general, deducted as such by the employer.
A business trip has the status of business travel only if:
- it involves overnight travel;
- the taxpayer travels away from his tax home; and
- the trip is undertaken solely, or primarily, for ordinary and necessary business reasons, and the trip is “temporary,” i.e., the traveler is temporarily away from home.
Deductions for meals and lodging on business trips are allowed because expenses for these items are duplicative of costs normally incurred at the taxpayer’s regular home and require the taxpayer to spend more money while traveling. Consequently, the taxpayer cannot claim deductions for meals and lodging unless he has a home for tax purposes, and travels away from it overnight. There are no deductions when, for instance, a business person sleeps at a local hotel because of a late workday in the city, instead of traveling back to his nearby suburban home.
A taxpayer’s “tax home,” that is, his home for purposes of the business-travel deduction rules (1) is defined as being located at his regular or principal (if more than one regular) place of business, or (2) if the taxpayer has no regular or principal place of business, the taxpayer’s regular place of abode in a real and substantial sense. Where a taxpayer has two or more work locations, his main place of work is his tax home. In determining which location is the main place of work, the factors to be taken into account include the total time at, the degree of business activity in, and the amount of income derived from, each business location. However, there may be situations where the taxpayer does not maintain a permanent residence. For example, an itinerant salesperson who moves from place to place is “home” wherever he or she stays at each location. Since the taxpayer does not have duplicative expenses, there’s no deduction for meals and lodging.
Except for certain federal criminal investigators and prosecutors, a taxpayer will not be treated as temporarily away from home during a period of employment lasting more than one year. The IRS has ruled that if employment away from home in a single location is realistically expected to last (and does in fact last) for one year or less, the employment is “temporary” in the absence of facts and circumstances indicating otherwise. If employment away from home in a single location initially is realistically expected to last for one year or less, but at some later date the employment is realistically expected to exceed one year, the employment will be treated as temporary (in the absence of facts and circumstances indicating otherwise) until the date that the taxpayer’s realistic expectation changes.
An employee may be asked to work at offsite location 1 for a specified period, then be shifted to offsite location 2 or back to the home office, and then reassigned back to offsite location 1. How long does the “break in service” (i.e., the period at offsite location 2 or back at the home office) have to be for employment at offsite location 1 to be treated as two separate periods of employment for purposes of the 1-year rule for temporary travel away from home?
In Chief Counsel Advice (CCA), the IRS dealt with this question in the context of Revenue Ruling 99-7, 1999-5 CB 361, which provides a 1-year rule for determining whether transportation between an employee’s home and a work location is “temporary” and therefore deductible. The 1-year rule in Revenue Ruling 99-7 is very similar to the 1-year temporary away-from-home rule in Revenue Ruling 93-86. The CCA said that while there’s no general guidance on when a break is significant, a break of three weeks or less isn’t significant and won’t “stop the clock” in applying the 1-year temporary workplace limit. By contrast, a continuous break of at least seven months would be significant. Thus, two offsite work assignments separated by a 7-month continuous break would be treated as two separate periods of employment for purposes of the 1-year temporary workplace limit. The CCA said that this would be the case “regardless of the nature of the employee’s work activities or the nature of the break, and regardless of whether the subsequent employment at the work location was anticipated.”
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