Making Sense of the IRS Rules
For many businesses, sending employees on business trips is essential but can also result in tax problems if the proper tax regulations are not followed. If the employer follows the appropriate rules, the employee's travel can be fully-deductible to the employer. Meals are only 50% deductible and are a tax-free reimbursement for the employee. This reimbursement is also not subject to payroll withholding or FICA.
In contrast, if the rules have not been followed, the employer may still deduct the travel expenses, but the reimbursement must be added on to the taxable wages of the employee. These wages are subject to both payroll withholding and FICA.
An employer has the ability to deduct ordinary business expenses, including those that are related to an employee's work-related travel and lodging, if they are not extravagant. The rules of working condition fringe benefits indicate that the items that are deducted by the employer are not to be included in the employee's salary.
Any advance or reimbursement that occurs to the employee under an "accountable plan" can be deducted by the employer and will not be subject to income tax withholding or FICA. The employee must account for the expenses and refund any advances that are excessive.
Reimbursements that did not occur under an accountable plan are fully taxable for the employee and can not be deducted unless the expense is listed as a miscellaneous itemized deduction on a 1040. In order to do this, the employee must complete a Schedule A instead of doing a standard deduction. The employee business expense category on Schedule A often results in the employee not being able to deduct the full expense or just a portion of the expense due to the 2% of AGI nondeductible threshold.
With the exclusion of the exception below, the taxpayer must have an overnight stay away from home in order to deduct the costs associated with lodging and meals. Any business trip that requires the taxpayer to sleep or rest during the trip in order to resume work activities is considered "overnight."
However, the exception to the away-from-home rule indicates that the cost of local lodging can be deducted if the lodging is required for full participation of the taxpayer in bona fide training activities, business meetings, conferences or other business events and these events do not occur for more than five consecutive calendar days and more than once each calendar quarter.
The employer must also require that the employee remain at the activity or event overnight and the lodging may not be extravagant. There may not be a significant benefit in terms of personal pleasure, recreation or gain.
The taxpayer's home, for the purposes of determining if the taxpayer is away from home and can therefore take deductions for lodging and meals, is the place where the taxpayer lives and works under normal circumstances. However, this place can be difficult to determine and the IRS has several special rules that can apply.
When a taxpayer is on an away-from-home assignment, that lasts for less than one year, is considered to be temporary and occurs at a single location, the travel expenses are deductible. If the assignment will last over a longer period of time, it is likely that the expenses can not be deducted based on certain rules.
The rules regarding the treatment of travel expenses for away-from-home assignments that are temporary are complex.
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