Know the Travel Rules for the Best Advantage
Many companies need employees to travel for business. Whether the purpose is to drum up business, attend a conference, take care of a customer service issue or anything else, sending a representative out into the field is standard operating procedure. Unfortunately, there are some companies that make the mistake of not following tax regulations when it comes to business trips.
When companies pay attention to the rules and follow proper procedure, they are able to deduct 50% of the cost of the traveling employee’s meals, and fully deduct all of the employee’s other travel costs, and the employee can be reimbursed without facing any tax ramifications themselves. When proper procedures are not adhered to, the employee ends up being taxed on the amounts that they are reimbursed in the same way that their wages are, without the employer withholding FICA or payroll taxes. This makes more headaches for the employee, while the employer is still able to fully deduct the expense.
What Are the Travel Rules?
There are many tax rules regarding employee travel, and it is important that business owners understand them. Though ordinary and necessary expenses for travel and lodging for business are completely deductible, those that are considered extravagant or lavish are not. All of the travel expenses that an employer can deduct as business expenses can be excluded from being counted as employee salary or wages.
The same is true when an employee is asked to keep an accounting, or “accountable plan” of their expenses for which they will either be provided with either reimbursement or advance payment. Under the rules of working condition fringe benefits, these expenses are not subject to income tax withholding or FICA, though they are fully deductible by the employer.
Watching Out for the Better Interest of the Employee
Where companies often make a mistake in the way they handle reimbursements is when they provide reimbursements without requiring an accountable plan. In these cases the reimbursements are taxable to the employee. This means that if the employee wants to be able to deduct the expense on their 1040, they have to do so as a miscellaneous itemized deduction, and are only able to do so if they itemize.
Those who take the standard exclusion are therefore excluded from being able to deduct the expenses for which they were reimbursed. Making matters even more difficult is the fact that in order for the itemized deduction to be taken for an employee business expense, the expense has to exceed 2% of Adjusted gross income. More often than not, employee expenses do not come close to this threshold, and the employee ends up being unnecessarily tax burdened.
Overnight Travel and the Safe Harbor Exception
In most cases, in order for a taxpayer to be able to deduct the cost of food and lodging for business expenses, the government requires that the trip requires an overnight stay away from home, as well as that the purpose of the trip falls into the category of ordinary and necessary.
The government has carved out an exception to this rule called the safe harbor exception, which makes allowances for employees who are required to attend a business meeting, training activity, conference or other business function and to stay overnight in order to do so, even if they are close to home. The safe harbor exception is limited in its availability: it cannot be utilized for more than five days in a row and can’t happen more than once for every quarter. The rules barring lavish or extravagant expenses also apply, and the government forbids this type of activity to involve a significant level of entertainment, pleasure, or personal benefit.
The government has recognized that there are a number of circumstances in which employers require their employees to travel and to incur these expenses, so they have provided a fair amount of leeway regarding its treatment of business expenses. The rules have been written to provide relief for employees who are already paying the expense of maintaining a home and then also having to incur expenses for lodging and meals away from home. The rules are written around what the IRS refers to as a “tax home”, which is the employer’s principal place of business. In situations where there is no specific tax home or an employee has no regular abode, these expenses are not necessarily duplicated, and therefore deductions for meals and lodging are not permitted.
How Temporary is Temporary?
In some situations, employee travel lasts for an extended period of time, and that brings up the question of whether expenses are temporary or whether an employee has actually moved. When an employee relocates to a new location, the cost of lodging and meals in that location are not deductible, but they are when the expenses are considered temporary, which the IRS has ruled is travel to a single location that is expected to last for a year or less. If that is the initial plan and then the time away is extended so that it exceeds a one year period, then it is still considered temporary up until the date when the plans changed.
The rules regarding business travel and the correct way to treat expenses are complex, and going about it the wrong way can cause unnecessary hardship for employees. If you need to review your process, contact our office today to set up a convenient appointment.
For help with your small business employee travel, call our office at 727-345-7790.