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by Paula N. Singer, Esq.
An employer may exclude from income an employee’s business-related travel if the expense qualifies as a working condition fringe benefit under Section 132(a)(2) of the Internal Revenue Code and the amounts are paid or reimbursed under an accountable plan. A working condition fringe benefit is an expense that the employee would be allowed to deduct from income. The regulations under Section 132 extend this rule to independent contractors providing services to the employer as well.
To come under the accountable plan rules, travel expenses must be 1) ordinary and necessary expenses, 2) incurred while away from home, and 3) in the pursuit of a trade or business. Such expenses include meals and lodging (to the extent not lavish or extravagant), transportation expenses and the costs for operating a car for business. An “ordinary” expense is a common or frequent occurrence for the business; a “necessary” expense is appropriate and helpful for the development of employer’s business. (For a discussion of “away from home,” see the September/October 2009 edition of Crow’s Nest “Temporarily-Away-From-Home Travel Expenses.”)
Expenses for travel from a residence to business location are generally nondeductible commuting expenses. Also, under Section 274(m)(3), travel expenses of an individual accompanying an employee on business travel, including the employee’s spouse or dependent, are nondeductible personal expenses treated as the employee’s wages unless:
- The accompanying individual is an employee of the employer paying the expenses,
- The travel of the accompanying individual is for a bona fide business purpose, and
- The expenses would otherwise be deductible by the accompanying individual.
When an employee and family members live at a temporary place of business, the employee may deduct travel expenses (including commuting), but the deduction for meals and lodging is limited to the employee’s expenses allocable to the presence there for the performance of the employee’s duties (Rev. Rul. 55-604, 1955-2 C.B. 49).
A reimbursement or other expense allowance arrangement qualifies as an accountable plan if:
- There is a business connection,
- The worker substantiates the expenses to the employer within a reasonable period of time, and
- The worker is required to return excess unsubstantiated amounts to the employer within a reasonable period of time.
Travel expenses reimbursed under an arrangement that fails to meet these requirements are income to the worker either as wages or self-employment compensation.
Business Connection
An arrangement meets the business connection requirement if the employer pays advances, allowances (including per diem allowances, allowances only for meals and incidental expenses, and mileage allowances), or reimbursements only for deductible business expenses that the worker pays or incurs while performing services for an employer while away from home. For the meal allowances, advances, or reimbursements to be excluded from income, the meal expenses must be incurred while the worker is away from home a sufficiently long time, typically long enough to require a period of sleep or rest, which generally means an overnight stay. Workers who travel and return to their main work area within the course of a normal workday are normally not considered away from home.
Substantiation of Expenses
For expenses governed by Section 162, the worker must submit enough information to allow the employer to identify the specific nature of each expense and attribute the expense to the worker’s business activity. Generally, the worker must submit an expense account or other written statement showing the business nature and amount of each expense. However, under Section 274(d) of the Code, workers must submit actual substantiation of the amount of their expenses, as well as the time, place, and business purpose for expenses generally considered to be entertainment, amusement, or recreation.
Expenses may be substantiated by the following documentation:
- Lodging receipts: These should show the travel location, duration of stay, costs, and expenses incurred. Workers should submit records for cleaning and laundry, telephone charges, tips, and other charges not shown separately.
- Transportation receipts: These include airplane, train or bus ticket stubs, travel agency receipts, rental car or taxi receipts, etc., showing the amounts, dates, and destinations.
- Meal Receipts: Generally, workers must keep a log of meal expenses and save receipts for amounts of $75 or more. The substantiation of expenses may also be satisfied by using per diem allowances.
Car expenses may be substantiated using either of two methods: the Standard Mileage Rate for use of a car or actual expenses.
If travel includes both business and personal travel, the worker’s records must show how much is related to business. Foreign travel expenses are generally required by Section 274(c) of the Code to be prorated between business and non-business expenses.
Excess Return Requirement
To meet the return of excess requirement, a worker must refund to the employer any amount paid in excess of the worker’s substantiated (or deemed substantiated) expenses within a reasonable time. Generally, the time period is reasonable if:
- An advance is received within 30 days of the time that expenses are incurred,
- An advance is adequately accounted within 60 days after the expenses were paid or incurred, and
- Any amounts in excess of expenses are returned within 120 days after the expenses were paid or incurred
Also, it is considered reasonable if workers are provided with a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days.
If an organization’s arrangement routinely pays allowances in excess of the amount that may be deemed substantiated without requiring actual substantiation of all the expenses or repayment of the excess amount, the IRS will treat the arrangement as a nonaccountable plan and the entire amount of the allowance will be subject to tax as wages or self-employment income of the worker. (See Rev. Rul. 2006-56, 2006-46 IRB 874.)
For more information about these rules, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, and Publication 535, Business Expenses.
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 7, Number 1, for a discussion on Per Diem Allowances.
Q: We have an employee who routinely submits his travel expense reports at least six months after the travel has taken place. Our standard is 60 days. When he does finally submit them, everything is in order and accounted for, including receipts when required. Can we still exclude his reimbursements from income?
A: No. Because the expense reports are not being turned in within a reasonable time period, he is not complying with your organization’s accountable plan rules and the reimbursements must be reported on his W-2 as taxable wages.
2010 Windstar NRA Tax Training Dates Announced
Hundreds of individuals have received comprehensive education on nonresident alien taxation, immigration practices, and the International Tax Navigator®. Don’t miss your opportunity to join this group of educated colleagues.
Dates for the 2010 workshops are:
Spring Nonresident Alien Tax Training
April 27th – April 30thSummer Nonresident Alien Tax Training
July 27th – July 30thYear-end Nonresident Alien Tax Training
December 7th – 10th
In addition to receiving high quality instruction, all attendees receive:
- Informative binder filled with hundreds of pages of helpful resources and presentation slides
- Breakfasts and lunches, along with morning and afternoon breaks
- Continuing education credits (for individuals who apply)
- Certificate of completion
The Doubletree Guest Suites Boston will host all three trainings. The Doubletree Guest Suites is an all suite hotel located on the banks of the Charles River, just minutes from downtown Boston and its major attractions. Hotel features include:
- Shuttle service to major tourist destinations in Boston and Cambridge and nearby train stations
- Low cost transportation to and from Logan International Airport
- High-def flat screen televisions in each room
- Scullers Jazz Club
Complete agendas and registration will be available approximately ninety days before each session.
Visit www.windstar.com for more information on Windstar’s Nonresident Alien Tax Training program. Or e-mail Paul.Carpinella@windstar.com to receive notification of registration for each training.
Free Webinar on the Foreign National Tax Resource – Help Your Students, Scholars, and Employees Understand and Do Their Taxes
Join Windstar on Wednesday, January 20th 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.
The Foreign National Tax Resource gives you easy-to-use preparation software along with an extensive online library of information researched, organized, and translated into clear language by Windstar’s tax experts.
Benefits include:
- Tax preparation software for 1040NR and 1040NR-EZ
- Form W-7 preparation
- Extensive, searchable content library
- Tax treaty explanations and analysis
- Data storage
- Information for nonresident and resident aliens and dual status individuals
- Tax resource page for each state
Don’t miss the opportunity to learn more about this comprehensive resource.
Register today!
Coming Soon - Cross-Winds: What You Need to Know About Honorarium Payments and Service Fees
Watch for an announcement in early 2010 on the newest tax guide from Windstar Publishing’s Cross-Winds series, What You Need to Know About Honorarium Payments and Service Fees, authored by Windstar experts Paula N. Singer, Esq. and Linda Dodd-Major, Esq.
The Cross-Winds series provides easy-to understand information about the complicated tax and immigration-related issues that apply to individuals involved in cross-border activities.
To receive notification once the book is available in early 2010, e-mail publishing@windstar.com.
Windstar’s Experts Continue to Educate Hundreds of Individuals on NRA Tax Issues
Windstar experts served as speakers at many prominent trade shows and events in 2009. Paula N. Singer, Esq., Linda Dodd-Major, Esq., and Terri Crowl spoke on nonresident alien tax and immigration issues to attendees at trade shows and events such as:
- American Payroll Association (APA) Annual Conference
- American Payroll Association (APA) Educational Institutions Payroll Conference
- New England Payroll Conference
- COKALA Nonresident Alien Payments Seminar
Windstar experts also participated in educational webinars. Paula served as the discussion leader for ILW.com’s three-part phone series on U.S. tax compliance. The series covered tax residency determinations, withholding and reporting requirements, and tax returns for foreign nationals. Industry experts Lowell Hancock, International Tax Specialist with the IRS, Marianne Couch, JD, Principal with COKALA Tax Reporting Solutions, LLC, and Windstar’s Terri Crowl joined Paula as speakers in the series.
Hundreds of individuals also received advice from Windstar experts from the bi-monthly Crow’s Nest e-newsletter, as well as the Windstar client resources the WindstarUsers website and listserv, and TaxHelp.
Visit the Windstar website, www.windstar.com, for the latest in event and product information.
Recently Published Article by Paula N. Singer
Paula N. Singer, Esq. recently had the following article published:
- “Paying Foreign Employees Requires Thorough Knowledge Base,” PAYTECH, American Payroll Association, November, 2009.
PAYTECH is the monthly publication of the American Payroll Association
E-mail publishing@windstar.com to receive a copy of the article.
Windstar Will Dock at the Following Events in 2010
Higher Education Users’ Group (HEUG) Alliance 2010
San Antonio Convention Center
San Antonio, TX
February 28 – March 3, 2010
* * * * * * * * * * * * *
Datatel Users Group (DUG) Conference and Expo
Gaylord National Resort and Convention Center
National Harbor, MD
March 28 – 31, 2010
Don’t miss Paula N. Singer, Esq.’s presentation on nonresident alien taxation.
* * * * * * * * * * * * *
American Payroll Association (APA) 28th Annual Conference
Gaylord National Resort and Convention Center
National Harbor, MD
May 25 – 29, 2010
* * * * * * * * * * * * *
NAFSA 2010 Annual Conference and Expo
Kansas City Convention Center
Kansas City, MO
May 30 – June 4, 2010
* * * * * * * * * * * * *
18th Annual New England Payroll Conference
Radisson Hotel
Nashua, NH
June 9 – 10, 2010
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.