Temporary vs. not temporary travel expenses.

Sec. 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred in carrying on any trade or business during the tax year; these expenses include travel, transportation, meals, lodging and related expenses. Sec. 262, however, provides that personal, living or family expenses are not deductible.

Due to litigation in this area and a lack of clarity in the Service's own rulings, the IRS issued Rev. Rul. 99-7 to provide further guidance. This ruling renders Rev. Ruls. 190 and 59-371 obsolete. It modifies and supersedes Rev. Ruls. 90-23 and 94-47, and distinguishes Rev. Rul. 93-86. In Rev. Rul. 99-7, the Service stated it will not follow Charles Walker, 101 TC 537 (1993).

If a taxpayer travels away from home to a "temporary" work location, the travel expenses are fully deductible. This has a major effect on the deductibility of travel costs (airfare, lodging, meals, etc.) and transportation costs (primarily automobile).

A taxpayer's costs of commuting between his residence and place of business or employment generally are nondeductible personal expenses (Regs. Secs. 1.162-2(e) and 1.262-1 (b) (5)). However, the costs of going between one business location and another generally are deductible under Sec. 162(a).

For purposes of determining the deductibility of travel-away-from-home expenses under Sec. 162(a)(2), Rev. Rul. 93-86 defined "home" as the "taxpayer's regular or principal (if more than one regular) place of business." When there are two job locations, the taxpayer's principal place of business is his "tax home."

Sec. 280A(c)(1)(A) provides that a taxpayer may deduct expenses for the portion of his personal residence used on a regular basis as his principal place of business. In Edwin R. Curphey, 73 TC 766 (1980), the Tax Court held that daily transportation expenses incurred in a rental business by a dermatologist in going between an office in his residence and other work locations (the rental units) were deductible when the home office was his principal place of business (see also John Gosling, TC Memo 1999-148, and Valerie Jean Genck, TC Memo 1998-105).

In Walker, the taxpayer was a self-employed logger who used his residence as his "regular place of business"; his various job sites were "temporary work locations," according to the Tax Court. The Service has not appealed this decision, but would appear to lose under Sec. 280A(c)(1)(A).

Temporary Work Location

This definition particularly affects construction workers, computer contractors and other service providers who travel. It generally provides a one-year standard to determine whether a work location will be treated as temporary (replacing "irregular" or "short-term"):

1. If employment at a work location is realistically expected to last (and does in fact last) for one year or less, the employment is temporary in the absence of facts and circumstances indicating otherwise.

2. If employment at a work location is realistically expected to last for more than one year or there is no realistic expectation the employment will last for one year or less, the employment is not temporary, regardless of whether it actually exceeds one year.

3. If employment at a work location initially is realistically expected to last for one year or less, but at some later date the employment is realistically expected to exceed one year, that employment will be treated as temporary (in the absence of facts and circumstances indicating otherwise) until the date that the taxpayer's realistic expectation changes, and will be treated as not temporary after that date.

Daily Transportation Expenses

Daily transportation expenses are deductible under the following circumstances:

1. A taxpayer may deduct daily transportation expenses incurred in going between a taxpayer's residence and a temporary work location outside the metropolitan area in which he lives and normally works. However, unless the two circumstances noted below apply, daily transportation expenses incurred in going between the taxpayer's residence and a temporary work location within that metropolitan area are nondeductible commuting expenses.

2. If a taxpayer has one or more regular work locations away from his residence, he may deduct daily transportation expenses incurred in going between his residence and a temporary work location in the same trade or business, regardless of the distance.

3. If a taxpayer's residence is his principal place of business within the meaning of Sec. 280A(c)(1)(A), the taxpayer may deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance.

Example 1: A Phoenix, Arizona construction supervisor is assigned to a job in Los Angeles, California. He has no specific employment contract with his employer and goes where he is assigned. The Los Angeles construction contract is to complete a bridge job in two years.

This is not a temporary work location, because the job is realistically expected to last more than one year. If the employee is reimbursed for travel expenses to Los Angeles, the reimbursement would be taxable compensation, subject to withholding.

Example 2: A self-employed computer consultant lives in Phoenix, Arizona. He secures a software development job in San Diego, California, signing a contract to complete the job in 10 months. He goes to work on the job on Feb. 1,1999; the job is expected to be completed by Nov. 30, 1999. On Oct. 31, 1999, the company in San Diego decides to change some of the specifications of the software development and extends the contract an additional six months.

The work location is temporary from Feb. 1, 1999, through Oct. 31, 1999 (not Nov. 30, 1999), as the job was not realistically expected to last more than one year. The job ceases to be temporary when the taxpayer realistically expects the job to last more than one year, Which is when the contract was extended six months. The taxpayer's travel expenses for the period Feb. 1,1999, through Oct. 31, 1999 are fully deductible. Effective Nov. 1, 1999, the expenses are nondeductible. Note that the consultant's income is subject to self-employment tax and that expenses after Oct. 31, 1999 are nondeductible. He should take this into consideration when determining the amount to charge for services.

Example 3: A self-employed CPA in Scottsdale, Arizona has a qualifying office in his home, which is his principal place of business. He does per diem consulting for a large CPA firm in downtown Phoenix (30 miles away). He has a few clients in north Scottsdale and some out-of-state. During tax season, he commutes to downtown Phoenix five days a week; after tax season, he goes into the office about once a week.

The commuting expenses are fully deductible, regardless of whether the work location in Phoenix is regular or temporary and regardless of distance.

Example 4: A CPA, who is an employee of a multinational accounting firm, lives in Carefree, Arizona (a suburb on the north side of. the Phoenix metropolitan area). The CPA's office is in central Phoenix. The CPA is assigned to audit a client in Apache Junction, a suburb on the southeast side of the Phoenix metropolitan area, 35 miles from the CPA's home (70 miles roundtrip). He commutes to Apache Junction from his Carefree home for four weeks to complete the audit.

These transportation expenses are nondeductible even though this is a temporary work location, because it is not outside the Phoenix metropolitan area.

Example 5: A factory quality control specialist works in Chandler, Arizona (a part of the Phoenix metropolitan area). The company also has a plant in Tucson, approximately 100 miles away and outside the Phoenix metropolitan area. The company's vice president in charge of manufacturing asks the quality control specialist to work at the Tucson plant until the quality control problems can be corrected. Each day for two months, the quality control specialist drives to Tucson and back. The company reimburses the employee for the daily 200-mile roundtrip transportation costs.

Under Rev. Rul. 99-7, this assignment qualifies as temporary, as there is more than one regular work location. The assignment is outside the Phoenix metropolitan area and it is realistically expected to (and in fact does) last for one year or less.

FROM DAVID R. CURRIE, CPA, RSM MCGLADREY, INC., SCOTTSDALE, AZ (NOT ASSOCIATED WITH AFAI)