Employee travel can signal tax problems. It can be a headache for the employer. It can be a headache for the employee to if the tax regulations are not followed. It is common practice for companies to send employees on business trips. If the rules are followed, the cost of employee travel will be fully deductible to the employer. The exception are meals, which are only 50% deductible, and are a tax-free reimbursement to the employee. In addition, the reimbursement is not subject to FICA or payroll withholding.
On the other hand, if the rules are not followed, the expenses are still deductible by the employer. However, the reimbursement must be added to the employee’s taxable wages. Those wages are subject to both FICA and payroll withholding.
Ordinary and Necessary Business Expenses
An employer is able to deduct ordinary and necessary business expenses. These expenses include employee travel and lodging expenses that are job-related. The expenses cannot be defined as lavish or extravagant by the IRS. Otherwise they are known as Working Condition Benefits or fringe benefit. Any such item that is deductible by the employer is not included in the employee’s salary. In addition, an advance or reimbursement made to an employee, under an Accountable Plan, which requires the employee to adequately account for the expenses and return any excess advances, is deductible by the employer. This type of plan is not subject to FICA or income tax withholding.
Reimbursements not made under an Accountable Plan are fully taxable to the employee. The only way for the employee to deduct the expenses is as a miscellaneous itemized deduction on his or her Form 1040. To do that, the employee must itemize the deductions on the Schedule A, instead of taking the standard deduction. The employee business expense category on Schedule A is subject to a 2% of AGI nondeductible threshold (Adjusted Gross Income). Often, this results in the employee deducting only a portion of the expenses or none of the expense at all.
With the exception noted below, to deduct the cost of lodging and meals, the taxpayer must be away from home overnight. Overnight is defined by the IRS as any trip that requires sleep or rest to enable the taxpayer to continue working.
Away-From-Home Rule Exception
Under an exception to the Away-From-Home Rule, the cost of local lodging is deductible. This deduction is restricted to the following:
- The lodging is necessary for the individual to participate fully in
- For the purpose for a bona fide business meeting, conference, training activity, or other business function.
- For the duration cannot exceed five calendar days, and
- Does not happen more frequently than once per calendar quarter.
For an employee, the employer must require:
- The employee to remain at the activity or function overnight
- The lodging must not be lavish or extravagant, and
- There can be no significant element of personal pleasure, recreation, or benefit.
Employee Travel for a Temporary Living Arrangement
A taxpayer’s home, for purposes of determining if he or she is away from home and can deduct lodging and meals, is generally where the taxpayer normally lives and works. However, that fact is sometimes difficult to determine, in which case the IRS has numerous special rules that apply.
An away-from-home assignment, at a single location, lasting for one year or less, is considered temporary, and the travel expenses are deductible. If the assignment is longer, there is a good chance the expenses will not be deductible based upon some complex rules.
Do You Need More Information?
The rules for the tax treatment of travel expenses and temporary away-from-home assignments can be complex. Please give Alex Franch, BS EA at this office a call at 781-849-7200 for further details or assistance.