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Trending Taxability of Travel Expenses

Taxability of Travel Expenses

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​​​​​​Rödl & Partner Tax Matters Vol 2016-17, republished in July 2024​​


​Long Term Travel Expenses Versus Temporary Away From Home Rules

Many clients often deal with the question of whether or not travel expenses like housing, car expenses and per diems are taxable for their employees and whether or not those payments should be included as compensation in the employees’ Form W-2. This topic is most common in assignment cases (short term assignment versus long term assignment), but it can also affect employees who travel within the U.S. without being assigned to a different entity. The treatment of travel expenses is dependent upon whether the travel is temporary or indefinite.

Tax Home

To determine whether you are traveling away from home, you must first determine the location of your tax home. Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located. If you have more than one regular place of business, your tax home is your main place of business. Once a determination has been made that a taxpayer is traveling away from their tax home, a determination can be made as to which travel expenses are deductible (or granted tax free to the taxpayer).

Temporary Assignment Versus Indefinite Assignment

If an assignment or job away from your main place of work is temporary, your tax home does not change. Travel expenses are deductible as long as they otherwise qualify as deductible expenses. If the assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than 1 year, whether or not it actually lasts for more than 1 year.

Temporary Away From Home Rules

Under the temporary away from home rules, travel expenses can usually be reimbursed or directly paid without creating taxable benefits to the employee. To be deductible (or granted tax free to an employee), under Internal Revenue Code (“IRC”) Section 162(a)(2), travel expenses must be: (1) ordinary and necessary, (2) incurred while away from home, and (3) incurred in pursuit of a trade or business. Therefore, it is critical to understand what these terms mean.

  1. Ordinary and necessary
    Ordinary and necessary expenses may include housing, a company car, and per diems, among other things. The taxpayer must be able to prove that the pay is reasonable based on the circumstances that existed when the taxpayer contracted for the services. If the pay is excessive, the excess pay is treated as income to the employee.
  2. Temporary versus indefinite assignment
    The taxpayer must be temporarily away from home rather than being on an indefinite assignment. The term “indefinite travel” is synonymous with “long-term travel” or “long-term detail.” Long-term travel is travel which lasts for more than one year, or for which there is a realistic expectation that such travel will last for more than one year, or for which there is no realistic expectation that such travel will end within one year.
  3. Incurred in pursuit of a trade or business
    The taxpayer must be able to prove that the fringe benefits were granted in the course of his employment versus for personal use, such as a private flight for vacation.

The chart below covers the taxability of the most common items included in an assignment.

​Compensation Component
​Temporary Assignment
Taxablility
​Citation
​Indefinite Assignment
Taxability​
​Citation
​Automobile (personal use)
​Taxable
​1.61-21
​Taxable
​1.61-21
​Housing in Assignment Location for Employee
​Nontaxable
​1.132-5 or 1.62-2
​Taxable
​1.61-21
​Moves from one host country location to another host country location for employee
​Nontaxable
1.132-5 or 1.62-2​​Nontaxable
​132(a)(6)
​Relocation airfare for employee
​Nontaxable
​1.132-5 or 1.62-2
​Nontaxable
​132(a)(6)

​
A. Local (daily) travel between a residence and a non-temporary work location.As mentioned above, long-term taxable travel is travel which lasts for more than one year, or for which there is a realistic expectation that such travel will last for more than one year, or for which there is no realistic expectation that such travel will end within one year. As such, long-term taxable travel includes:

B. Travel away from the residence involving overnight travel to a single location.

The realistic expectation for long-term travel is based on the current facts and circumstances known to the employee and the employee’s manager. However, prior work at a work location is also considered if there has not been a break of at least seven continuous months since the employee’s last visit to the location while on official duty.

For directors and employees traveling extensively to one location other than their usual place of work, the temporary away from home rules may not be applicable. This is the case if those individuals travel to one location more than 3 days per week on average and for a period of more than 12 months. As a result, those expenses may no longer qualify as temporary travel expenses and are fully taxable to the employee.

If travel to a location was originally expected to last for one year or less and the assignment is extended such that travel is now realistically expected to last for more than one year, the employee’s reimbursements are taxable from the date the employee learned of the extension. Thus, for example, if an assignment was scheduled to last for seven months and after working at the location for six months, an employee learns that employment at the location is scheduled to continue for eight additional months, the employee’s length of travel expectation (one year rule) would be determined from the first date of travel to that location. As that travel is now realistically expected to last fourteen months (the six months that have elapsed plus the eight months scheduled to remain) from its beginning date, all reimbursements for travel to the location from the date that the employee learned of the extension will be taxable.

Many companies will reimburse their directors for the taxes resulting from the taxability of these benefits. This can be done through a gross up within the payroll or through a tax equalization calculation after filing the U.S. Individual Income Tax Returns

Reimbursement of travel expenses should be addressed prior to an individual commencing travel so that the appropriate taxability of all travel expenses can be ascertained.

Please contact your Rödl & Partner representative with any questions or for more information.



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