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Temporarily-Away-From-Home Travel Expenses
by Paula N. Singer, Esq.
Section 62 of the Internal Revenue Code (the Code) imposes income taxes on compensation for services, whether from employment or self-employment. Compensation for services includes the fair market value of benefits-in-kind. As a result, travel expenses, whether reimbursed to or paid on behalf of a worker, such as to an airline or hotel, are taxable income subject to withholding and reporting unless an exception applies.
Excludable Travel Reimbursements
Section 162 of the Code allows an exclusion from income for travel expenses for lodging and meals and incidentals (other than amounts which are lavish or extravagant under the circumstances) paid or incurred while the recipient is away from home in the pursuit of a trade or business. When these business expenses are made under an accountable plan as allowed by Section 62(c) and described in Treas. Reg. Section 1.62-2, they are not subject to withholding or reporting.
Therefore, in order for payments and reimbursements to be excluded from income, the travel expenses must:
- Have a business connection
- Be paid or incurred for travel while the recipient is “away from home”
- Be paid or reimbursed under an accountable plan
If any one of these requirements is not met, the payments and reimbursements are subject to tax and withholding and reporting in accordance with their character of income unless another exception applies.
The business connection requirement is met only if the individual being reimbursed for travel is performing services for the employer as an employee or independent contractor (referred to hereafter as a “worker”). If the travel expenses are not in connection with such services, they are taxable unless another exception applies. (See the article “Travel Expenses” in the July/August, 2009 edition of the Crow’s Nest for further discussion of the business requirement.)
“Away From Home”
Section 162(a)(2) provides some relief for a worker who incurs substantial continuing expenses of a home which are duplicated by business travel away from home on a temporary basis, by allowing a deduction for the expenses of such travel.
To be "away from home" so as to claim traveling expenses, a worker must have a "tax home." Courts have held that for purposes of section 162(a)(2) a worker's "home" is generally the vicinity of the worker’s principal place of employment.
A worker’s residence, when different from the vicinity of the worker’s principal place of employment, may be treated as the worker’s tax home if the worker’s employment is "temporary" rather than "indefinite." A worker has a "home" when substantial continuing living expenses are incurred at a permanent place of abode.
The determination of whether a worker is away from home is factual. If a worker does not have a tax home to be away from, then the worker is not entitled to a deduction under section 162(a)(2). A worker without a tax home is deemed to have "carried his home on his back," to have been an itinerant, and is not entitled to a deduction because the worker is not "away from home."
“Temporary”
Section 162(a) of the Code provides that the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds one year (twelve elapsed months).
IRS issued Rev. Rul. 93-86, 1993-2 C.B. 71, to assist employers and taxpayers in determining when tax homes change to the new work location. This revenue ruling applies to foreign nationals as follows:
- Employees from abroad who are on temporary work assignments in the United States that are anticipated to last one year or less are not considered to have changed their tax homes to the United States;
- Employees from abroad who are on temporary work assignments in the United States that are anticipated to last one year or less, but whose employer extends the assignment beyond one year, are considered to have changed their tax home to the United States as of the date when their assignment is extended; and
- Employees from abroad who are on work assignments in the United States that are anticipated to last more than one year are considered to have changed their tax home to the United States from the outset of their assignment.
Employees from abroad whose tax home has changed to the new work location in the United States are not eligible for deductions for travel, food, or lodging at the new work location. However, they might be eligible for certain moving expense deductions. See IRS Publication 521, Moving Expenses for information about taxable and nontaxable moving expenses. (They may also be able to claim temporarily-away-from-home expenses while away from their new U.S. tax home at other locations within or outside the United States.)
Taxable Travel Expenses
If a worker is not away from home, reimbursed travel expenses are taxable under the same rules as other compensation paid to or on behalf of the worker unless another exception applies (such as exemption under a tax treaty).
Taxable travel expenses of an employee are wages subject to payroll taxes and Form W-2 reporting. Taxes related to the value of benefits-in-kind would have to be withheld from salary or other cash compensation paid to the employee.
Taxable travel expenses paid to or on behalf of an independent contractor who is a citizen or resident alien are subject to Form 1099-MISC reporting if the amount in the aggregate exceeds $600 in the tax year. If, however, the worker fails to provide a U.S. social security number or individual taxpayer identification number, the amounts including the value of benefits in kind are subject to 28 percent backup withholding and reporting on Form 1099-MISC regardless of the amount.
Taxable travel expenses reimbursed to or on behalf of a nonresident alien independent contractor are subject to 30 percent withholding and reporting on Form 1042-S under Income Code 16.
Paula Singer, Esq., Co-founder and Chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.
Watch for Volume 6, Number 6, for a discussion on Accountable Plans.
Q: We have been covering rent for a visiting professor from Europe whose original program in the U.S. was expected to last nine months. We have been excluding the rent from income under Section 162(a). After six months, however, the department has decided to extend his program to twenty-four months. I know we need to start including the value of the rent in his gross income as of the date the program was extended, but what about the first six months’ worth of rent?
A: You need to treat the value of lodging as income only from the date that the program was extended because up to that point the professor was still considered to be temporarily away from home. The first six months’ worth of rent, therefore, remains excludable from income and not reportable or withholdable as long as you followed accountable plan rules.
Register Today for Windstar’s Year-end Nonresident Alien Tax Training Workshop December 8th – 11th
Registration is now available for Windstar’s next comprehensive Nonresident Alien Tax Training, being held December 8th – 11th at the Doubletree Guest Suites in Boston, MA.
NEW!! This session has dedicated tracks featuring consecutive days of substantive tax and immigration-based class sessions along with consecutive days of Tax Navigator training. This format gives you the flexibility to attend all four days of training or just the two days that are specific to your needs.
The first two days of tax and immigration sessions include:
- Effectively connected income (ECI)
- Fixed or determinable, annual or periodic income (FDAP)
- The IRS’ tier 1 compliance initiative
- Nonresident alien tax overview
- Immigration basics
- Information reporting and year-end processing
The two-day software based training will feature a Tax Navigator basics track and a special topics track for more advanced users. Topics include:
- International Tax Navigator training
- 1042-S processing
Special topics include:
- Tax Navigator reporting functionality
- Interfacing with your paying system
- Foreign National Information System (FNIS)
Don’t miss this opportunity to improve your nonresident alien taxation knowledge now – before the IRS’ 1,500 new international enforcement specialists start their work.
Click here to view a detailed schedule outline and register.
New from Windstar – Tax Return Resource for Foreign Nationals – free webinar
Introducing Windstar's newest product: Tax Return Resource for Foreign Nationals.
Join us Wednesday, October 7th from 1:00 - 2:00 pm ET for a free webinar to learn about Windstar’s exciting new product that helps your foreign nationals understand and do their U.S. taxes.
This new online resource gives your students, scholars, and employees an extensive web-based content library that answers questions about US and state taxes, whether they are nonresident alien, resident alien or dual status. They also have access to tax preparation software for completing their 1040NR-EZ or 1040NR U.S. tax returns.
Online, comprehensive help with:
- Tax Treaty benefits explained
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- Help resource page for each state
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- W-7 Form
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Don’t miss the opportunity to learn more about this comprehensive resource.
Register today.
Windstar Chairman Featured as One of Thirty-Two Essayists In Tax Analysts' Toward Tax Reform: Recommendations for President Obama’s Task Force.
“Individual Nonfilers and the International Tax Gap,” an essay by Windstar’s Paula N. Singer, Esq., was one of thirty-two essays featured in Tax Analysts’ book Toward Tax Reform: Recommendations for President Obama’s Task Force. The purpose of the book was to provide recommendations on tax reform from America’s prominent tax experts to the President’s task force on tax code reform.
Visit the Tax Analysts website to learn more about the book and read the recommendations.
Windstar Will Dock at the Following Events
American Payroll Association (APA) Educational Institutions Payroll Conference (EIPC)
Hyatt Regency
Indianapolis, IN
November 1 – 4, 2009
* * * * * * * * * * * * *
NAFSA Regions X and XI Bi-regional Conference
Sheraton Springfield Monarch Place Hotel and Springfield Marriot
Springfield, MA
November 3 – 5, 2009
* * * * * * * * * * * * *
Pennsylvania Banner Users Group Annual Conference
Harrisburg/Hershey Holiday Inn
Grantville, PA
November 23 -24, 2009
* * * * * * * * * * * * *
Windstar Technologies Year-end Nonresident Alien Tax Training
Doubletree Guest Suites
Boston, MA
December 8-11, 2009
* * * * * * * * * * * * *
Look in future issues of Crow’s Nest or visit http://www.windstar.com/public/events.html for the latest in event information.
©Copyright 2009 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication. While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.
Since 1995 educational
institutions, hospitals, research institutions, and corporations
have relied on Windstar Technologies, Inc. to deliver the expertise
to comply with the U.S. tax residency rules, tax rates, and special
tax exemption rules under the law and U.S. treaties. When government
agencies require information about foreign nationals in the workplace,
Windstar provides straightforward analysis and reporting. Comprehensive
software for analysis and reporting, expert knowledge, and unparalleled
customer service combine to make Windstar the first choice for nonresident
alien tax compliance.