Chapter 58: moving expense reimbursement.
Many companies reimburse employees' moving expenses connected with changes in job location. While the reimbursements are taxable income to the employee, the moving expenses may be deductible from the employee's gross income. Moving expense reimbursement, therefore, not only helps employees bear a major expense but can be a form of tax-free compensation for employees.
WHEN IS IT INDICATED?
Because of the major benefits of a moving expense reimbursement to employees, employers should consider it whenever it is consistent with their recruitment and staffing needs.
1. A company may have to recruit executives and employees from a wide geographical area; reimbursing moving expenses can help induce a prospective employee to change jobs.
2. Larger companies with more than one geographical location can encourage mobility of their employees among company locations by adopting a moving expense reimbursement policy.
3. A moving expense reimbursement can be a tax-free form of compensation for employees.
4. Employers have complete flexibility in designing moving reimbursement plans. Reimbursement can be offered only to selected employees or even a single employee. Amounts and terms of reimbursement can be varied from employee to employee, and reimbursement can be offered as needs arise without having to adopt a formal plan in advance.
1. The distance test (see below) requires an employee's new main job location to be at least 50 miles farther from the employee's former home than the old main job location was in order to deduct moving expenses.
2. An employee may not deduct expenses for house hunting or expenses for selling, buying, or leasing a residence.
Employer tax treatment
1. Moving expense reimbursements to employees or to third parties (moving companies, etc.) on behalf of employees are deductible by the employer as compensation expenses if, together with all other forms of compensation, the amount is reasonable (the "reasonable compensation" test).
2. Reimbursement amounts must be reported as compensation on the employee's Form W-2 for the year. The employer does not have to withhold taxes if it reasonably believes that the employee will be entitled to an offsetting deduction; however, withholding is required on nondeductible moving expense reimbursements. (1)
3. There are no coverage or nondiscrimination rules that limit employer and employee deductions for moving expenses to "nondiscriminatory" plans. Reimbursement can be provided for whatever employee the employer chooses, and in whatever amounts the employer considers appropriate.
Employee tax treatment
Employees can deduct moving expenses as an above-the-line deduction (subtracted from gross income), if certain requirements are met. (2) The deduction is subject to a variety of typically complex rules and limitations:
1. the distance test;
2. the time test; and
3. limitations on the types of expenses that are deductible.
There are no dollar limits on otherwise deductible expenses.
Distance test. A move meets the distance test if the new main job location is at least 50 miles farther from the employee's former home than the old main job location was. For example, if the employee's old job location was 10 miles from his home, the distance test is satisfied if the new job location is at least 60 miles from the old home. Distances are measured by the shortest of the more commonly traveled routes. (3)
Time test. To deduct moving expenses, the employee must work full time for at least 39 weeks during the first 12 months after arriving at the new job location. The regulations contain numerous complex exceptions to and variations on this rule. (4)
Types of expenses deductible. Deductible moving expenses include only the reasonable costs of the following: (5)
(a) packing, crating, and moving household goods and personal effects (personal effects include a car and household pets; moving expenses include the costs of connecting and disconnecting utilities);
(b) storage and insurance within any consecutive 30-day period after moving out of the former home and before delivery to the new home;
(c) traveling to the new home--a 24 cents/mile allowance for 2009 can be used for travel in the employee's own car. (6) The cost of meals is not deductible as a moving expense.
Nondeductible expenses. The following expenses are not deductible as moving expenses: (7)
* home improvements to help sell the old home;
* loss on sale of the old home;
* mortgage penalties;
* forfeiture of club dues or entry fees;
* any part of the purchase price of the new home;
* real estate taxes;
* car registration or driver's license fees;
* reinstalling carpets or draperies;
* storage charges other than as described earlier; and
* expenses for house hunting and expenses for selling, buying, or leasing a residence.
Reporting by Employee. An employee claiming a moving expense deduction, whether or not the employer provided any reimbursement, must file Form 3903; copies of this form and instructions can be found at: http://pro.nuco.com/booksupplements/TTEB.
ERISA AND OTHER IMPLICATIONS
A moving expense reimbursement plan does not appear to fall within the definition of either a pension or welfare benefit plan for ERISA purposes. (8) Consequently, there is no reporting requirement (so no Form 5500 needs to be filed), nor do any other ERISA provisions apply.
WHERE CAN I FIND OUT MORE ABOUT IT?
IRS Publication 521, Moving Expenses, at: www.irs.gov.
QUESTIONS AND ANSWERS
Question--Suppose you change jobs to a more distant location and try commuting from your old home for several years, then decide it is too difficult and move closer to the new job. Are moving expenses deductible then?
Answer--The IRS position is that moving expenses are not closely related to work at the new job location (and therefore not deductible) unless they are incurred within one year from the date the employee first reported to work at the new job. However, the expenses can be deducted if the employee can show that circumstances did not permit a move within one year, such as the need for children to complete high school in the old location. The IRS probably would not view the circumstances in the question as justifying a moving expense deduction. (9)
Question--If an employer wants to protect an employee against obtaining an inadequate price on the forced sale of a residence when moving, what is the best way to do it?
Answer--If the employer simply reimburses the employee for any reduction in house/sale proceeds, the reimbursement is taxable income to the employee, and it is not offset by any moving expense or other tax deduction. (Capital losses on the sale of a personal residence by an individual are nondeductible. (10))
It is better from a tax standpoint for the employer to actually buy the house from the employee. Any capital gain (up to $250,000 per taxpayer, if certain requirements are met) that the employee realizes on the sale will generally be excludable under Code section 121. The sale price should be the fair market value as determined by an independent real estate appraiser. Although this price may legitimately be higher than a "forced sale" price, it should not exceed the fair market value, as any excess over fair market value could be deemed to be additional compensation income to the employee.
(1.) IRC Sec. 3401(a)(15).
(2.) IRC Sec. 62(a)(15).
(3.) IRC Sec. 217(c). However, if the new home is farther from the new job location than the old home was, the moving expenses are not deductible on the ground that the move is not related to starting work. Treas. Reg. [section]1.217-2(a)(3). For example, suppose the old home was 5 miles from the old job. You change job locations to a location 55 miles from the old home. You then move to a new home 60 miles from the new job. The distance test is met because the new job location is at least 50 miles farther from your old home, but moving expenses are not deductible because the move actually produces a longer commute than if you had stayed put. However, you can deduct the moving expenses if you can show that the 60-mile commute takes less time and money than the 55-mile commute from your old home, or if you are required as a condition of employment to live in the new home.
(4.) IRC Sec. 217(c)(2); see also, Treas. Reg. [section]1.217-2(c)(4).
(5.) The list given here is a summary of the rules in IRC Section 217(b), Treas. Reg. [section]1.217-2(b), and IRS Pub. 521.
(6.) IRS Publication 521, Moving Expenses ("Travel by Car") at: www. irs.gov. Revised annually.
(7.) Treas. Reg. [section]1.217-2(b)(3); see also, IRS Pub. 521.
(8.) See DOL Reg. [section]2510.3-1.
(9.) See Treas. Reg. [section]1.217-2(a)(3), Ex. (2).
(10.) Treas. Reg. [section]1.165-9(a). If a corporation purchases the house from an employee and later sells it at a loss, the loss is treated by the corporation as a capital loss. Azar Nut Co. v. Comm., 931 F.2d 314 (5th Cir. 1991).
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|Title Annotation:||Fringe Benefits|
|Publication:||Tools & Techniques of Employee Benefit and Retirement Planning, 11th ed.|
|Date:||Jan 1, 2009|
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