Deductibility of temporary assignment living expenses.
An employer will not be able to deduct living expenses unless - based on the facts and circumstances, the employee's away-from-home assignment is reasonably expected to last less than one year, and - the assignment actually does, in fact, last less than one year.
If the assignment is expected at its start to last more than a year (even if it is actually terminated before one year), no deductions are allowed. If an assignment is expected at the outset to last less than one year, deductions for living expenses are allowable. However, if it becomes clear during the assignment that it will last more than one year, no deductions are allowable from the time that the expectation changed.
Multiple locations: These rules deal with assignments to a single location. If an employee is sent to one location for eight months and then to another location for 10 months, living expense deductions are allowable even though the total length of time away from home exceeds one year.
Planning is crucial: It is crucial to establish that the reasonable expectation at the beginning of an assignment is that it will last for less than one year. Employers should consider promulgating company travel policies which state that no assignment away from home will exceed 11 months. Such a policy should help to document the employer's reasonable expectation of the maximum length of out-of-town assignments.
Escaping the substantial
The Service is preparing to release two new forms for nonresident alien individuals who otherwise meet the substantial presence test, but claim to be exempt individuals or have a closer connection to a foreign country.
In general, an individual is considered a U.S. resident if he meets the substantial presence test. The test is met for 1993 if the individual was physically present in the United States for at least (1) 31 days during 1993 and (2) 183 days during the period 1993, 1992 and 1991, counting all the days of physical presence in 1993 but only one-third the number of days present in 1992 and only one-sixth the number of days in 1991.
Generally, an individual is treated as present in the United States on any day if he is physically in the country at any time during the day. Certain days are not counted, including days that an individual is in the United States for less than 24 hours while in transit between two places outside the United States, and days the individual was unable to leave the United States because of a medical condition that developed while the individual was in the United States.
There are two principal exceptions to the substantial presence test.
Exempt individuals: For purposes of computing the number of days physically present in the United States, days that an individual qualifies as an exempt individual are not counted. An exempt individual is a foreign government-related individual, teacher or trainee, student or professional athlete temporarily in the United States to compete in a charitable sports event. Form 8843, Statement for Exempt Individuals (Under Section 7701(b)), may be used to explain the basis of a claim for excluded days of presence in the United States for an exempt individual or for an individual claiming that a medical condition developed while he was in the United States prevents him from leaving.
Individuals with a closer connection to a foreign country than to the United States: Even though the substantial presence test would otherwise be met, an individual is not a resident if (1) he is present in the United States for fewer than 183 days during 1993, (2) he has a tax home in a foreign country in 1993 and (3) he has a closer connection to a foreign country in which a tax home was maintained than to the United States (unless he had a closer connection to two foreign countries).
An individual's tax home is considered to be located at his regular or principal (if more than one regular) place of business. If no regular or principal place of business is maintained because the individual is not engaged in any trade or business, the regular place of abode will be considered the individual's tax home. The tax home must be in existence for the entire calendar year.
Taxpayers claiming the closer connection exception may complete Form 8840, Statement of Closer Connection Exception (Under Section 7701(b)). This form asks specific questions about contacts with the United States and the foreign country. An individual has a closer connection to a foreign country in which the tax home is maintained if more significant contacts are maintained with the foreign country than with the United States.
Forms 8840 and 8843 have not yet been finalized by the IRS and are currently available in draft form only
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|Author:||Dichter, Arthur J.|
|Publication:||The Tax Adviser|
|Date:||Mar 1, 1994|
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