Daily Transportation Expenses for Temporary Work Locations

Letter Ruling (CCA) 200018052 demonstrates the proper application of Rev. Rul. 99-7 in determining if employer-reimbursed daily transportation expenses to a temporary work location are includible in an employee's gross income. Generally, daily transportation expenses incurred in going between an employee's residence and a work location are nondeductible commuting expenses. However, Rev. Rul. 99-7 provided an exception to the general rule when the employee had one or more regular work locations in the same trade or business, regardless of the travel distance.

Usually, an employer must include payments made to an employee in his gross wages and pay employment taxes on them. However, if the payments are deductible business expenses and meet accountable plan requirements, the employee does not need to include them in income and they are not subject to employment taxes.

Under Rev. Rul. 99-7, daily transportation expenses that an employee incurred traveling between his residence and a temporary work location were deductible business expenses. It also redefined a “temporary work location,” using a one-year standard illustrated by three rules:

1. If employment at a work location is realistically expected to last for one year or less, the employment is temporary (in the absence of facts and circumstances indicating otherwise).

2. If employment at a work location is realistically expected to exceed one year or there is no realistic expectation that the employment will last for one year or less, it is not temporary, regardless of whether it actually exceeds one year.

3. If employment at a work location is initially realistically expected to last for one year or less, but at some later date it is realistically expected to exceed one year, the employment is temporary until the date that the realistic expectation changes, and is not temporary after that date.

Letter Ruling 200018052 presents eight scenarios for situations that assume an employee has a regular work location away from his residence, he does not use the residence as a work location and the reimbursement meets the accountable plan's requirements.

Scenario 1. An employee on assignment performs services at the office of his employer's client. The assignment is expected to be completed in approximately 36 months. The employee spends approximately 95% of his total available time onsite.

Conclusion 1. Employment is more than one year; therefore, the client's office is not a temporary work location. The commuting expenses are nondeductible and any reimbursements are includible in income.

Scenario 2. An employee oversees three teams of employees. Each team performs services onsite for a different client of the employer. The projected dates for completing each of the projects are within 9 or 10 months; the starting dates are staggered two or three months to give the employee time to complete the planning of each project before he begins the next. During these planning phases, the employee spends essentially all of his available time at the project site. After the planning phase, he divides his time equally between the three cases, spending one to five days onsite for each. The employee completes the three projects within 15 to 20 months.

Conclusion 2. Employment at each location is less than one year; therefore, each is a temporary work location. The commuting expenses are deductible and reimbursements are not includible in income.

Scenario 3. The facts are the same as in Scenario 2, but the employee works with smaller teams. Because his involvement in the day-to-day work at each site increases, he divides his time approximately equally among the projects. The employee expects to complete each project in 1 1/2 years.

Conclusion 3. Employment at each location is more than one year; therefore, each is not a temporary work location. The commuting expenses are nondeductible and reimbursements are includible in income.

Scenario 4. An employee routinely carries an “inventory” of eight projects at a time for his employer's clients. The employee can complete each project using 75 to 150 staff days. Because the budget for each project is 18 to 24 months, the employee works for a few days each month onsite on each project. He first performs planning activities and sometimes asks the client for further information; while waiting for responses, he works on other projects. After counting additional time to develop and research complex issues for and meet with the client, the assignment for each project is usually two years.

Conclusion 4. Employment at each location is more than one year; therefore, each is not a temporary work location. The commuting expenses are nondeductible and reimbursements are includible in income.

Scenario 5. An employee is a technical specialist, and consults onsite for minor projects or becomes a team member for major projects. He generally spends 100–120 days per year on the major projects, with an estimated “cycle” time from beginning to end of 10 to 18 months. The employee spends the balance of his available time on minor cases, either onsite or in his office.

Conclusion 5. The realistic expectation is that employment at each location is for less than one year; therefore, each is a temporary work location, unless or until the realistic expectation changes. The commuting expenses are deductible and any reimbursements are not includible in income.

Scenario 6. An employee on assignment to six projects expects each to last for more than one year. During the course of the year, three of the projects are unexpectedly completed.

Conclusion 6. The realistic expectation for employment at each location is for more than a year; therefore, each is not a temporary work location. The commuting expenses are not deductible and reimbursements are includible in income.

Scenario 7. An employee receives a six-month assignment on a long-term project; more than a year after completing it, he unexpectedly receives a reassignment to the project for a seven-month period.

Conclusion 7. The initial six-month assignment meets the requirement of a temporary work location; therefore, the commuting expenses are deductible and reimbursements are not includible in income. There is no IRS guidance on how significant work-period breaks must be to reset the clock for the one-year work limit at the same work location. However, a break greater than a year is generally thought to be sufficient to reset the clock.

Scenario 8. An employee on assignment performs services at a client's office for a period exceeding one year; his employer pays a mileage allowance based on the lesser of (1) the distance from the employee's residence to the assignment or (2) the distance from his regular office to the assignment.

Conclusion 8. The expectation for employment is for more than a year; therefore, the work location is not temporary. The commuting expenses are not deductible and reimbursements are includible in income.

Summary

Employer-reimbursed daily transportation expenses are deductible business expenses, excludible from the employee's gross income if they meet the following conditions:

1. The employee has one or more regular locations away from his residence;

2. The travel is between the employee's residence and a temporary work location in the same trade or business; and

3. The realistic expectation for employment at the work location is for one year or less.

From Judith M. McGhee, CPA, Oak Brook, IL