Is Local Travel a Deductible Business Expense?

Recently issued Letter Rulings 200025052 and 200026025 provide additional guidance to Rev. Rul. 99-7 on whether daily transportation expenses are deductible, or, for an employee, whether the reimbursement for such expenses is excludible as a nontaxable fringe benefit.

In general, daily transportation expenses incurred between a taxpayer's residence and his place of business or employment are nondeductible personal expenses under Regs. Secs. 1.162-2(e) and 1.262-1(b)(5). Under Rev. Rul. 99-7, however:

1. A taxpayer commuting between his residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works can deduct daily transportation expenses as business expenses. Unless (2) or (3) below applies, however, commuting expenses between the taxpayer's home and a temporary work location within that metropolitan area are nondeductible expenses, because that area is considered his regular place of business.

2. If a taxpayer has one or more regular work locations away from his residence, he may deduct daily transportation expenses incurred on trips between his residence and a temporary work location in the same trade or business, regardless of the distance. As long as a taxpayer has one or more regular places of business, the metropolitan area issue will not be considered. Daily commuting expenses for point-to-point travel, between home and temporary work locations inside or outside the metropolitan area, are deductible in the same way as in (1).

3. A taxpayer may deduct daily transportation expenses incurred in commuting between his home office 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. The home office must be the taxpayer's principal place of business under Sec. 280A(c)(1)(A).

Rev. Rul. 99-7 modified the term temporary work location, as defined in Rev. Ruls. 90-23 and 94-47. Previously, a temporary work location was where the taxpayer performed services on an irregular or short-term (generally days or weeks) basis. Under Rev. Rul. 99-7, a one-year standard is used to determine whether a work location is temporary rather than regular.

Letter Ruling 200025052

Letter Ruling 200025052 provides the following:

• The scenarios in Rev. Rul. 99-7 dealt only with "daily" transportation expenses incurred in traveling from the taxpayer's residence to a work location and back to the residence within a day. Rev. Rul. 99-7 did not apply to overnight travel expenses.
• The holdings in Rev. Rul. 99-7 dealt with residence-to-business trips, rather than business-to-business trips. Rev. Rul. 99-7 restated that the costs of going between two business locations are deductible business expenses. Therefore, reimbursements to an employee between work sites away from his residence continue to be nontaxable.
• When a taxpayer maintains a home office that does not meet the requirements of Sec. 280A(c)(1)(A), the trips between the residence and other work locations are nondeductible commuting expenses (unless the temporary work location rules apply).
• A work location is determined to be temporary by looking at the individual's physical presence at the location; the nature of his duties is ignored. For example, if an employee expects to work at a temporary site on a project for only six months, it is irrelevant that the project is expected to last for more than one year. Similarly, if the individual works on a series of separate phases of a project each lasting only a few months, but will be at the site for more than one year, the job site is not temporary.

Letter Ruling 200026025

Letter Ruling 200026025 emphasizes the differences between "temporary" and "regular" work locations, based on breaks in service and the frequency of the work location. Generally, an employee's regular work location is a site at which he performs services on a regular basis, whether or not he works at that location every week or on a set schedule. A regular basis is determined by the one-year standard in terms of realistic expectation of employment.

The ruling looks at whether a break in service will cause a new one-year period to start and determines that, while each case is fact-specific, a reasonable approach would determine that:

• A break of three weeks or less is not significant and will not stop the clock on the one-year limit.
• A break of seven months is significant.
• The realistic expectation that the work location will last for less than a year is the key criterion. Circumstances may change, but the initial expectation is key.

The ruling illustrates what constitutes a significant break period. On January 1, an employee receives the following work assignments: work at Client DEF's office for an eight-month period (January 1–August 31), work exclusively at Client GHI's office for three weeks (September 1–September 21) and then work again at DEF's office for a four-month period (Sept-ember 22–January 22). Because the three-week break in service at DEF's office is insignificant, on January 1 there is a realistic expectation that the employee will be employed at DEF's office for a period exceeding one year (from January 1 until January 22 of the following year). The employee's employment is not temporary. Transportation expenses between his residence and DEF's office are personal expenses, and any reimbursements are taxable wages.

Guidance is also provided on infrequent work locations. What happens when an individual performs services at several locations on a recurring, but infrequent or sporadic, basis for a period of more than one year? Again, facts and circumstances will determine the true nature of the expense; however, the IRS realizes that some locations may be so sporadic or infrequent that it would be impractical or unreasonable to focus solely on the expectation of the total span of employment at the location in applying the one-year test.

While no general guidance is forthcoming, the Service believes that, if there is an expectation that an employee will perform services at a work location for a period exceeding one year, but works for no more than 35 days during each of the calendar years within that period, employment at that location will be treated as temporary.

Example: On January 1, individual T, who has a regular office at his employer's headquarters, is assigned to manage five projects, each of which is expected to last 18 months. Projects 1 and 2 require visits at least once a week. Projects 3, 4 and 5 only require visits on an "as needed" basis, which are expected to be fewer than 35 times during a year. Projects 1 and 2 are not temporary work sites, while the other three are. If, in October, T is instructed to spend October and November at site 5, and in December resumes the pre-October schedule, site 5 is no longer a temporary site as of October, as the total number of site visits will be more than 35. Beginning in January of the next year, however, site 5 is again a temporary work site.

Rev. Rul. 99-7 provides general guidance for local travel expenses and letter rulings continue to be issued to provide more specific guidance. Is 34 days per year the right number of visit days at a temporary location? Is a five-week break in service sufficient? While no general guidelines have been issued, these letter rulings can provide a basis for the rationale to be used in making the case for a work site to be a temporary one.

From Tessa Lucero, CPA, and Jeannette Wong, Brown, Dakes & Wannall, P.C., Fairfax, VA