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Travel Expense Reimbursements for Assignments Involving Breaks in Service at Work Locations Question (1). X assigns an employee of a California branch office to its Washington, DC headquarters for an eight-month period. While on assignment, the employee accepts a six-month assignment at a client’s office in Washington, DC, beginning after the first assignment ends. The employee takes long-term leave (more than a month) at his residence in California between the assignments. Are the travel expenses in Washington, DC deductible? Question (2). X assigns several employees from various branch offices to one of the departments at the headquarters office for five months. During this period, a selection process to fill permanent vacancies in that department is underway. When the five-month period ends, two of the employees are competitively selected for the positions. Pursuant to these positions, they will perform services for the department at the branch offices at which they were originally employed, and will also regularly travel to Washington, DC.
Analysis Sec. 61(a)(1) provides that compensation for services (including fees, commissions, fringe benefits and similar items) is includible in gross income. In addition, remuneration for services that an employer pays to an employee is wages subject to employment taxes, which generally include income tax withholding and FICA taxes. Under Sec. 6051 and the regulations, wages are reported on Form W-2. Sec. 62(a)(2)(A) allows a deduction for employees’ reimbursed expenses covered under a reimbursement or other expense allowance arrangement with the employer. Sec. 62(c) provides that an arrangement will not be treated as a “reimbursement or other expense allowance arrangement” if (1) it does not require substantiation of covered expenses or (2) the employee may retain any amounts in excess of substantiated expenses. Regs. Sec. 1.62-2 sets forth rules for reimbursement or other expense allowance arrangements and for payments made under such arrangements. An amount that an employer pays to an employee under an arrangement that meets specified requirements is treated as paid under an “accountable plan.” Amounts are treated as paid under an accountable plan only if (1) the requirements of business connection, substantiation and return of excess (set out in detail in the regulations) are met and (2) the amounts are provided for business expenses deductible under Secs. 161–197 by the employee in connection with the performance of services as an employee of the employer. If one or more of the requirements of business connection, substantiation and return of excess is not met, or if amounts are paid for nondeductible bona fide business expenses, the amounts will be treated as paid under a nonaccountable plan. An amount treated as paid under an accountable plan is excluded from the employee’s gross income, not reported as wages and exempt from withholding and payment of employment taxes. An amount treated as paid under a nonaccountable plan is included in the employee’s gross income, reported as wages and subject to withholding and payment of employment taxes. As discussed above, the advances, allowances or reimbursements must be provided for business expenses deductible under Secs. 161–197 to be treated as paid under an accountable plan. Sec. 162(a)(2) allows a deduction for ordinary and necessary business expenses paid or incurred in carrying on a trade or business, including traveling expenses (including amounts expended for meals and lodging other than amounts that are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business. Deductible expenses include business expenses paid or incurred by a taxpayer in connection with the performance of services as an employee. Travel expenses are not deductible under Sec. 162(a)(2) unless the expenses are incurred while “away from home” overnight. Rev. Rul. 93-86 provided that, for purposes of Sec. 162(a)(2), a taxpayer’s “home” is generally considered to be located at (1) the taxpayer’s regular or principal (if more than one regular) place of business or (2) if the taxpayer has no regular or principal place of business, his abode in a real and substantial sense (i.e., a residence where he maintains certain personal and business connections, as discussed in Rev. Rul. 73-529). If the taxpayer is not in either of these categories, he is considered an itinerant whose “home” is wherever he happens to work. Travel expenses related to temporary employment in a single location away from home generally are deductible under Sec. 162(a)(2). For most taxpayers, the flush language of Sec. 162(a) provides a one-year limit on temporary employment: a taxpayer is not treated as being temporarily away from home during any period of employment if such period exceeds one year. Rev. Rul. 93-86 provided the following guidance on this provision:
For a taxpayer employed at more than a single location for more than one year, the general rule in Rev. Rul. 93-86 provided that the taxpayer’s “home” is the taxpayer’s principal place of business. The more important factors to be considered in determining which place of business is the principal place are the total time that the taxpayer ordinarily spends at each of his business posts, the degree of business activity at each such post and whether the financial return for each post is significant or insignificant; see Rev. Rul. 54-147. A taxpayer in this situation is considered to be “away from home” while at a minor post of duty; business travel expenses for that location are deductible under Sec. 162(a)(2). The IRS has not published guidance on whether (or to what extent) a break in service at a work location will affect the determination that a taxpayer is or is not employed in a single location for one year or less; see Blatnick, 56 TC 1344 (1971), which held that brief work interruptions at a particular location do not (standing alone) cause employment that would otherwise be indefinite to become temporary.
Conclusion Answer (1). Rev. Rul. 93-86 provides that, 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, it will be treated as temporary (in the absence of facts and circumstances indicating otherwise) until the date that the realistic expectation changes. Here, when the employee agrees to continue to work in Washington, DC, there is a realistic expectation that the employment in a single location (Washington, DC) will last for more than one year. The employee is no longer temporarily away from home, and the travel expenses are no longer deductible, at the point the expectation changes. It is not relevant that the second assignment is for a different employer. Although the Service has not published guidance on breaks in service, under these circumstances the break between the assignments in Washington DC, should be ignored. The employee should not be treated as working in more than a single location during this period (because the employee is not working during the break), and the second assignment in Washington, DC should be treated as extending the initial period of employment (because the break occurred after it was realistically expected that the employment would last more than one year). Answer (2). As discussed, Rev. Rul. 93-86 provided that, 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, it will be treated as temporary (in the absence of facts and circumstances indicating otherwise) until the date that the taxpayer’s realistic expectation changes. Here, the assignment at the headquarters office in Washington, DC is initially expected to last for less than one year. Once it is determined that employment in Washington, DC is realistically expected to last for more than one year, the employment is no longer temporary within the meaning of Rev. Rul. 93-86. However, unlike the facts in the first question, once the employees are selected for the position, they are not employed in a single location, but rather, have more than one regular place of business. As stated in Rev. Rul. 93-86, a taxpayer’s “home” for purposes of Sec. 162(a)(2) is his principal place of business, if he has more than one regular place of business. Determining which location is the principal place of business is simply a question of fact. The more important factors to be considered in making this determination are the total time that the taxpayer ordinarily spends at each of his business posts, the degree of business activity conducted at each such post and whether the financial return for each post is significant or insignificant. If a selected employee’s branch office location is his principal place of business, business travel expenses for the Washington, DC, headquarters would be deductible under Sec. 162(a)(2) as “away from home” business travel expenses. IRS Letter Ruling (CCA) 200020055 (3/24/00) |
