United States: Navigating The Complex Tax Rules For Employee Travel Expenses: Part 2

Last Updated: December 21 2016
Article by Eddie Adkins

Employers often pay for an employee's business-related travel expenses. An employer must apply complex tax rules to figure out whether the payment is taxable to an employee. This article completes a two-part series that discusses how employers can navigate the rules.

The first article presented two steps and questions within those steps to determine whether an employee's travel to a specific work location is away from his or her tax-home work location. This determination is important because all expenses paid by an employer related to travel to a work location that is away from the employee's tax-home work location are nontaxable to the employee (tax code Section 162(a)(2)). This includes transportation, meals and lodging.

If an employee is not away from his or her tax-home work location, 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).

On the other hand, transportation expenses, such as automobile mileage paid by the employer, may still be non-taxable even if the employee does not satisfy any of the criteria for being away from his or her tax-home work location. This article explores whether transportation expenses paid for travel that is not away from an employee's tax-home work location home are taxable.

First, it is important to note that based on Rev. Rul. 55-109, any transportation expenses paid by an employer for an employee's transportation between two work locations are non-taxable. In that situation, no further analysis is required. As noted in Part 1, transportation expenses paid by an employer for travel between an employee's personal residence and tax-home work location are taxable to the employee.

The focus in Part 2 is transportation between an employee's personal residence and a work location other than the employee's tax-home work location. This article picks up where the first article left off by starting with Step 3.

STEP 3

Rev. Rul. 99-7 provides that costs for transportation between a taxpayer's personal residence and a temporary work location are deductible. Thus, employers can pay for these costs on a tax-free basis to employees. In CCA 200026025, the IRS states that if there is a realistic expectation that an employee will perform services at a work location for no more than 35 workdays (or partial workdays) during a calendar year, then employment at that location may be treated as temporary for a calendar year in which the employee actually works no more than 35 workdays (or partial workdays) at that location. Thus, if an employee goes to a work location 35 days or less in a calendar year, the transportation expenses paid by the employer are non-taxable to the employee, and no further analysis with respect to that location is required. Based on this, we suggest that an employer answer the following question:

Does the employee spend 35 days or less in a calendar year at the work location? Note that in answering this question, a day counts as a full day even if the employee is at the work location for only part of the day.

If the answer is yes, then expenses paid by the employer for the employee's transportation expenses are non-taxable to the employee. If the answer is no, the employer should proceed to Step 4 because further analysis is required to determine whether the transportation expenses paid by the employer are taxable or non-taxable to the employee.

STEP 4

Rev. Rul. 99-7 provides that if a taxpayer's residence is the taxpayer's principal place of business within the meaning of tax code Section 280A(c)(1)(A), the taxpayer may deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of whether the work location is regular or temporary and regardless of the distance. Thus, if an employee qualifies for this treatment, transportation expenses paid by the employer are non-taxable, and no further analysis is required. Under Section 280A(c)(1), a portion of the personal residence must be used exclusively by the employee for administrative or management activities, and there must be no other fixed location of the trade or business where the employee conducts substantial administrative or management functions. In addition, the personal residence must be used for the convenience of the employer.

To apply the rules described above, we suggest that an employer start by answering the following question:

Does the employee use a portion of his or her residence exclusively for administrative or management activities related to the employer?

If the answer is no, the employer should skip to Step 5 for further analysis, since the employee does not qualify for this special home office rule. If the answer is yes, the employer should answer the following additional question:

Is there any other work location of the employer where the employee performs substantial administrative or management activities for the employer?

If the answer is yes, then the employer should skip to Step 5, since the employee does not qualify for this special home office rule. If the answer is no, then the transportation expenses that the employer pays related to the work location are non-taxable to the employee, as long as the employee's use of his or her personal residence is for the convenience of the employer. If an employee is using a portion of his or her residence exclusively for the employer's business, that use is probably a convenience to the employer.

STEP 5

As noted earlier, Rev. Rul. 99-7 provides that a taxpayer may deduct daily transportation expenses incurred in going between the taxpayer's residence and a temporary work location. The ruling provides rules for determining whether a work location is temporary. Under the ruling, if employment at a work 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 at a work location is realistically expected to last for more than one year or there is no realistic expectation that the employment will last for one year or less, the employment is not temporary, regardless of whether it actually exceeds one year. If employment at a work 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; it will be treated as not temporary after that date.

CCA 200026025 provides break-in-service rules for purposes of applying the one-year rule in Rev. Rul. 99-7. It provides that if there is a continuous break of seven months or more, the one-year clock is stopped, and starts again if and when the employee resumes employment at the work location. It also provides that a break of three weeks does not stop the clock. No guidance is provided with respect to breaks that are between three weeks and seven months.

Thus, an employer needs to adopt a rule with respect to breaks that are between three weeks and seven months. The most conservative approach is to adopt a rule that only a break of seven months or more is sufficient to stop the one-year clock, and that any breaks that are less than seven months will not stop the one-year clock. The remainder of this article assumes that the employer has adopted the most conservative approach, since such an approach ensures that the employer will not treat a transportation expenses as nontaxable in situations where the IRS might take a contrary position.

To apply these rules, we suggest the employer ask the following questions in the order presented:

Has the employee been going to this work location for more than one year?

To answer this question in a manner that accurately applies the rules, the following instructions are necessary:

Answer yes even if the employee has not gone to this location on a regular schedule, and even if the employee has not gone frequently.

If the employee has had a break of seven months or more in the past during which he or she completely stopped going to the location, answer yes only if the employee has been going to the work location for more than one year following the break.

If the answer is yes, then the work location is not temporary, and any transportation expenses paid by the employer are taxable to the employee. No further analysis is necessary.

If the answer is no, the employer should continue to the following question:

Do you anticipate that when you add the time the employee has been going to this location and the future time that you anticipate the employee will be going to this location, it will add up to more than one year?

To answer this question in a manner that accurately applies the rules, the following instructions are necessary:

Answer yes even if the employee's work at this location is not on a regular schedule and even if it is infrequent.

When you count the time the employee has been going to this location, if the employee has had a break of seven months or more in the past during which he or she completely stopped going to the location, count only the time the employee has gone to the location since the break.

When you count the future time that you anticipate the employee will be going to the location, if you anticipate that the employee will have a break of seven months or more in the future during which he or she completely stops going to the location, count only the time you anticipate the employee will go to the work location before the break.

If the answer is yes, then the work location is not temporary, and any transportation expenses paid by the employer are taxable to the employee. No further analysis is necessary.

If the answer is no, then the work location is temporary. Any transportation expenses paid by the employer are nontaxable to the employee. No further analysis is necessary.

In summary, the rules for determining whether transportation expenses paid by an employer are taxable to an employee are complex. An employer can get to the correct answer regarding taxation by answering a series of questions that apply the rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions