Business travel can be an inconvenience and the tax treatment of travel expenses can be complicated. If proper procedures are followed, business travel is fully deductible by the company and is tax-free to the employee. If proper procedures are not followed, business travel is still deductible by the company, but will be taxed to the employee. In addition payroll taxes will have to be paid by both the company and the employee if proper procedures are not followed.
Proper Procedure for Travel Expenses
An advance or reimbursement made to an employee under an accountable plan is deductible by the employer and is not subject to FICA and income tax withholding.
An allowance or reimbursement will be treated as made under an accountable plan if three requirements are met:
- the employee receives the advance for a deductible business expense that she paid or incurred while performing services as an employee of the employer
- the employee must adequately account to the employer for the expense within a reasonable period of time
- the employee must return any excess reimbursement or allowance within a reasonable period of time
An advance or reimbursement under a nonaccountable plan is fully taxable to the employee and is subject to FICA and income tax withholding. It will be treated as compensation to the employee and deducted by the employer, and the employee and employer will be subject to payroll taxes. The employee may then deduct the travel expenses as a miscellaneous itemized deduction subject to the 2% rule.
Qualifying as Business Travel
A business trip has the status of business travel only if:
- it involves overnight travel
- the taxpayer travels away from his tax home
- the trip is undertaken primarily for ordinary and necessary business reasons, and the trip is temporary
What is Overnight Travel?
The employee does not have to literally be away from home from dusk to dawn. Any trip that is of such a length as to require sleep or rest to enable the taxpayer to continue working is considered overnight.
There is a special rule for local lodging expenses that are deductible even if the overnight travel requirement is not met.
What is a Tax 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.
A taxpayer’s tax home is located at:
- his principal place of business
- if the taxpayer has no principal place of business, the taxpayer’s regular place of abode (his home in the normal sense of the word)
There may be situations where a taxpayer does not maintain a permanent residence. For example, a traveling salesperson who moves from place to place is home wherever he or she stays at each location. Since this taxpayer does not have duplicative expenses, there is no deduction.
What is Temporarily away from Home?
The IRS has ruled that if employment away from home is realistically expected to last for one year or less, the employment is temporary in the absence of circumstances indicating otherwise. If employment away from home is realistically expected to last for one year or less, but at some later point the employment is realistically expected to exceed one year, the employment is temporary until the date the taxpayer’s realistic expectation changes.
If you have questions on how this relief applies to you, give us a call.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.