• Key point. Expenses incurred in traveling “away from home” overnight for business purposes are a deductible business expense. These expenses include the costs of transportation, lodging, and meals. Since they are business expenses, they can be reimbursed under an employer’s accountable reimbursement arrangement and the reimbursements will not represent taxable income to the employee. However, if the travel occupies more than one year, the taxpayer’s home changes to the work location, and none of the travel expenses can be treated as a business expense since they are not incurred while “away from home.” The IRS has created two exceptions to this rule.
The IRS has issued a private letter ruling creating two limited exceptions to the general rule that business trips in excess of one year are “indefinite” in nature and therefore the travel expenses incurred during such trips cannot be treated as business expenses. Travel expenses are your ordinary and necessary expenses while traveling away from home for your work or business. It is important to determine where your tax home is, since you may deduct travel expenses only to the extent that they are incurred while you are traveling away from your home. Generally, your tax home is your main place of employment or work. If you regularly work in two or more areas, your tax home is the general area where your main place of work is located. Although you regularly work within the city or general area of your tax home, you occasionally may have to work or conduct business at another location. It may not be practical to return home from this other location at the end of each day’s work. You will be considered away from home, and your travel expenses (including meals and lodging) will constitute travel expenses, if you are away from home on a temporary rather than on an indefinite basis. Your assignment or job away from your regular place of work is temporary if it lasts 1 year or less. In such a case, your tax home does not change, and accordingly your travel expenses are incurred while away from home. On the other hand, if your assignment or job away from home lasts more than 1 year, then you will be deemed to be away from home on an indefinite rather than a temporary basis. If your work at the new location is indefinite, then that location becomes your new tax home. A consequence of this change in tax home is that you cannot deduct your travel, meals, and lodging expenses while there (since they are not travel expenses incurred while “away from home”). Any reimbursements or advances you receive from an employer must be included in your income even if they are called travel allowances. The IRS issued a private ruling in 2000 that creates two important exceptions to the definition of “temporary.”
(1) Breaks in service. The IRS ruled that a determination whether a break in service is so significant that it warrants treating the two periods of employment as separate periods or constitutes a hiatus in one continuous period of employment is made by taking into account all facts and circumstances. The IRS concluded:
While there is no general guidance on what is considered a significant break, we believe that a break of 3 weeks or less is not significant and will not “stop the clock” in applying the 1-year limitation. On the other hand, for employers administering transportation expense reimbursements under an accountable plan, we believe that it is reasonable to treat a break of at least 7 months as significant, thereby treating two work segments separated by a 7-month break as separate periods of employment for applying the 1-year limitation. In our view, this would be the case regardless of the nature of the employee’s work activities or the nature of the break, and regardless of whether the subsequent employment at the work location was anticipated. For the 7- month break to be considered a significant break, we believe there must be at least a 7-month continuous period during which the employee is absent from the work location in question.
(2) Infrequent work locations. The IRS ruled that in certain situations employment may be so infrequent or sporadic that it would be impractical or unreasonable to focus solely on the expectation of the total span of employment at the location in applying the 1-year limitation. In these particular cases, rather, “we believe that the realistic expectation surrounding the infrequent or sporadic nature of the employment at that other location may be treated as satisfying the 1-year limitation on employment at a temporary work location.” The IRS further explained:
For employers administering transportation expense reimbursements under an accountable plan, we believe that, if there is an initial realistic expectation that an employee will perform services at a work location for a period exceeding 1 year, but for no more than 35 workdays (or partial workdays) during each of the calendar years within that period, then employment at that location may be treated as temporary (rather than nontemporary) for a calendar year in which the employee actually works no more than 35 workdays (or partial workdays) at that location. We also believe, however, that if employment at a work location initially may be treated as temporary under the above interpretation of infrequent work at a location, but at some point this expectation changes, then the assignment at that location will not be considered temporary for at least the remainder of that calendar year.
• Example. Pastor B is employed as pastor of a church in Town X. In October of 2000 he began serving as an interim pastor at a church in Town Y, some 100 miles away. His duties as interim pastor require that he travel to Town Y one day each week to conduct religious services. He expects this assignment to last about four months. He makes 10 trips to Town Y in 2000, and an additional 15 trips in 2001 until the church hires a full-time pastor. The church in Town Y paid Pastor B’s travel expenses each week (round-trip miles multiplied times the standard business miles rate of 32.5 cents per mile, for a total of $1,625). Do these reimbursements constitute taxable income to Pastor B? Yes they do, unless the weekly trips to Town Y are “business” travel. While commuting between one’s home and job site generally is considered a personal rather than a business expense, the IRS has ruled that travel expenses between one’s home and a temporary job site can be treated as a business expense so long as the worker has a “regular place of work” in his or her home community. Further, the second job must be temporary, which the IRS defines as “irregular or short-term (i.e., generally a matter of days or weeks).” It would appear that Pastor B meets these requirements, and so the travel between his home and the church in Town Y can be treated as a business expense. This means that the accountable reimbursements of his travel costs by the church in Town Y would not be taxable income.
• Example. Same facts as the previous example, except that Pastor B’s assignment at the church in Town Y lasts for 75 weeks. It is doubtful that this assignment could be considered “temporary” under the IRS definition and therefore the reimbursement of his travel expenses ($1,625) by the church in Town Y would represent taxable income.
• Example. Same facts as the first example, except that Pastor B does not have a regular place of work in Town X. The travel expenses to Town Y are non-business commuting expenses, and therefore the reimbursements paid by the church in Town Y represent taxable income.
• Example. Pastor T is an associate pastor at a church in Town X. In 1999, the church congregation decided to start a new church in Town Y, 100 miles away. It appointed Pastor T as the pastor of the new church. The church anticipates that Pastor T will serve as pastor of the new congregation for two years. Pastor T continues to live in Town X, and still performs some duties at his home church. He travels to Town Y twice each week to conduct services and perform ministerial duties. His compensation is paid by his home church, as are his travel expense reimbursements. In 1999, Pastor T made 40 trips to the church in Town Y over the course of nearly four months. In 2000, Pastor T made 100 trips to the church in Town Y (about 2 trips each week for the entire year). Pastor T’s travel expenses incurred in making these trips to Town Y cannot be treated as a business expense. They are too frequent to be treated as commutes to a temporary job site. Further, the length of Pastor T’s service in Town Y exceeds one year, and therefore he will be deemed to be “away from home” on an indefinite rather than a temporary basis. This means that the job in Town Y became his new tax home. A consequence of this change in tax home is that Pastor T cannot deduct his travel, meals, and lodging expenses while there (since they are not travel expenses incurred while “away from home”). Any reimbursements or advances he receives from his employer must be included in his income.
• Example. Same facts as the previous example, except that Pastor T only visits the church in Town Y once every two weeks. He makes 8 trips to the church in 1999 and 25 trips in 2000. Under the “infrequent work location” exception recently recognized by the IRS, Pastor T’s travel expenses can be treated as business expenses even though his services in Town Y last more than one year. As the IRS noted, the exception applies “[i]f there is an initial realistic expectation that an employee will perform services at a work location for a period exceeding 1 year, but for no more than 35 workdays (or partial workdays) during each of the calendar years within that period, then employment at that location may be treated as temporary (rather than nontemporary) for a calendar year in which the employee actually works no more than 35 workdays (or partial workdays) at that location.” IRS Letter Ruling 200026025.
Copyright 2000 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m94 m27 m07 c0600