Commuting vs. transportation: what is deductible?
* The expenses of travel between a taxpayer's home and place of business or work (i.e., commuting expenses) are generally nondeductible personal expenses of the taxpayer.
* Expenses for travel between the taxpayer's residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works are considered deductible transportation expenses.
* If a taxpayer has one or more regular work locations away from home, expenses for travel between the taxpayer's residence and a temporary work location in the same trade or business--regardless of distance--are considered deductible transportation expenses.
* If the taxpayer's residence is her principal place of business, expenses for travel between her residence and another work location in the same trade or business are considered deductible transportation expenses.
* The Tax Court and other courts have addressed the issues of whether a work location is temporary and whether a work location is within the taxpayer's metropolitan area.
Transportation expenses are deductible under Sec. 162(a) when incurred as ordinary and necessary costs to carry on a trade or business. Most taxpayers are aware that the cost of commuting between one's personal residence and a job or place of employment is generally considered a nondeductible personal expense.
However, there are some specific instances in which this travel may be deductible. Travel from home to a temporary job site may qualify for a deduction, and travel between job sites, including home offices when defined by Sec. 280A(c)(1)(A), is considered a deductible business expense. These provisions may be overlooked and require careful application. A number of court decisions demonstrate the importance of considering all aspects of the situation in determining the deductibility of transportation expenses. This article examines the application of Rev. Rul. 99-7 (1) more closely and looks at its interpretation by the IRS and the court system.
Rev. Rul. 99-7
The IRS issued Rev. Rul. 99-7 to explain the tax treatment of transportation expenses for travel from a residence to a work location. The ruling clarifies prior pronouncements that resulted in different interpretations of the law by the IRS and the courts. (2) The discrepancies involved the difference in the Service's intent and the court's strict interpretation of the rulings' wording.
Basically, the intent of prior rulings had been to distinguish between nondeductible commuting mileage and deductible business mileage. However, these rulings inadvertently provided an opportunity for the taxpayer to deduct mileage for travel from a residence to a job site in certain situations in which the taxpayer did not have a regular workplace outside the home. In order to qualify, the taxpayer had to use the residence as a "regular place of business" such as for storing tools or supplies or conducting maintenance on business equipment, but not necessarily as a "principal place of business" as defined in Sec. 280A(c)(1)(A).
In general, the Service considered this travel to be personal, commuting mileage if the taxpayer does not have a qualifying home office. However, the Tax Court disagreed, stating that the term "regular place of business" in Rev. Rul. 90-23 (3) allowed the taxpayer to deduct transportation costs from his residence where it was a regular (but not principal) place of business for him. (4)
In order to clarify the government's position, the IRS issued Rev. Rul 99-7 to supersede previous rulings. This pronouncement states that transportation expenses may be deducted if they are for:
1. Travel between "the taxpayer's residence and a temporary work location outside the metropolitan area where taxpayer lives and normally works";
2. Travel between "the taxpayer's residence and a temporary work location in the same trade or business, regardless of distance," if the taxpayer has "one or more regular work locations" away from home; and
3. If the residence is the taxpayer's principal place of business within the meaning of Sec. 280A(c)(1)(A), travel "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 distance."
While the circumstances are spelled out in this ruling, its application can still be confusing.
Because two of the stipulations in the ruling pertain to temporary jobs, the first issue to consider is the definition of a temporary job. Rev. Rul 99-7 defines a temporary work site as one where "employment is expected to last (and does last) for one year or less." The definition includes jobs away from the regular work location that last anywhere from less than a day to an entire year.
If a job is expected to last less than one year at the outset, but eventually it becomes evident that it will last longer than a year, the job is considered temporary until the expectation changes. At that time, the expenses will be considered nondeductible rather than deductible commuting expenses. By the same logic, if employment is expected to last more than one year, it is not considered temporary. The intentions of the taxpayer and the employer are significant in Tax Court rulings on this matter, and substantiation of this intent is important.
In Brockman, (5) the taxpayer was a salesman at a car dealership. Due to his difficulty in getting along with the general manager, the taxpayer was transferred to a dealership in another town. The personnel manager who authorized the transfer had indicated that the taxpayer would be transferred back to his original position and job location when the general manager changed locations. That change was expected to occur within a few months of the taxpayer's transfer.
The taxpayer worked at the new location for approximately four months. Upon the general manager's departure, the taxpayer requested to return to the original position. The request was denied, and he subsequently quit the job. The Service contended that the transfer did not meet the definition of "temporary"; thus, his commuting expenses were nondeductible. The Tax Court ruled in favor of the taxpayer, stating that his request for reassignment back to the original work site and his decision to leave the dealership when the company did not reassign him indicated that the intent of the transfer to another dealership was that it would be temporary.
In another case,(6) a nurse who normally worked in the town where she lived was sent on a series of temporary assignments to medical facilities in other cities. Her supervisor assured her that each assignment was temporary and that she would soon be back at her usual job location. After an entire year of temporary assignments, she began to doubt that she would be placed back at her original hospital located in her hometown. She subsequently left her employment and took another job in a health care facility in her town of residence.
While the IRS argued that her assignments were indefinite rather than temporary (and thus her expenses were nondeductible; see below), the court decided in favor of the taxpayer. The temporary nature of the assignments was evidenced by the supervisor's repeated assurances and by the nurse's termination of employment when she felt she would not be reassigned close to her home.
In a situation where an off-site project is expected to last more than one year, the taxpayer's employment may still be considered temporary if his or her assignment on the project is expected to be less than a year. (7) In addition, if the work is infrequent or sporadic, it may be considered temporary even if the total assignment lasts for more than one year. For example, if an individual is assigned to work at a temporary location for six months and then returns to the project several months later to do an additional four-month stint, the work site is considered temporary even though the entire time span for the employee was more than one year. (8) In order for this condition to apply, the break in the assignment must be significant.
A job is not considered temporary when the assignment is for an indefinite period of time. This distinction is critical in assessing the deductibility of transportation expenses. No deduction for travel expenses is allowed if the employment is indefinite rather than temporary. (9)
The burden of proof falls on the taxpayer to satisfy the authorities that the job is temporary. The focus of the "temporary or indefinite" test is on the "taxpayer's prospects for continued employment" in the job. (10)
In one case, (11) a taxpayer worked as an electrician on a nuclear power plant project that was located approximately 150 miles from his residence. During breaks in the taxpayer's employment, he did not take smaller assignments at jobs within the town where he lived, although some were available. In addition, he was continually notified of proposed completion dates and extensions of the project.
The taxpayer's employment contract limited the employer's right to terminate employees, and there was a regular and continuing need for electricians. The court determined that the taxpayer's "prospects for future employment" on the job were good. The court stated that "it reasonably appeared that there was a high probability for the job to continue." Therefore, the job was indefinite, not temporary, and the transportation expenses were not deductible.
On the other hand, in Kobr, (12) the taxpayer accepted an assignment from his union in another town while seeking work in the town where he lived. He was able to show his economic and family ties to his community, that he continued to seek out jobs in his local union's jurisdiction, and that he had valid concerns about the viability of the project where he was working.
The taxpayer convinced the court that he viewed his employment as a day-to-day assignment, due to large cost overruns, antinuclear sentiment that threatened closure of the project, delays, and court hearings. He contended that his prospects for future employment at that facility were consequently questionable on a daily basis. The court held that the taxpayer had met the burden of proof, and the assignment was temporary rather than indefinite.
Travel to a Temporary Job Site
In general, the tax authorities consider the location where an individual chooses to live to be a personal decision. Consequently, the commute from home to work is considered personal mileage rather than business mileage. (13) However, there are times when individuals need to accept an assignment or take a temporary job that extends their regular commute. The Service realizes that it is unreasonable to expect someone to physically move for a job that is not expected to last beyond a relatively short period of time. Thus, the transportation expense incurred in traveling to an outlying temporary job is considered a business expense.
Rev. Rul. 99-7 allows a deduction for travel between a taxpayer's residence and a temporary work location if the job site is outside the metropolitan area where the taxpayer normally lives and works. It is important to note that this section of the ruling pertains to taxpayers who do not currently have a regular work location. One common example is skilled laborers such as electricians or construction workers who travel to various project sites or customer homes but have no "regular" office or site where they normally work.
The court cases cited above also give good examples of the types of assignments that qualify for this treatment. In Brockman, the taxpayer was no longer reporting to the original dealership but drove directly to the reassigned car dealership in another city. In Daiz, the taxpayer was reassigned to various hospitals and no longer reported to her regular work location. Taxpayers may overlook the deductibility of their transportation expenses in these situations because they consider the expense of driving from home to the temporary job to be a regular commuting expense and thus nondeductible.
In addition to a job's being temporary rather than indefinite, the location of the job site in relation to the taxpayer's residence is important. In order for the transportation expenses to be deductible, the job site must be outside the metropolitan area where the taxpayer normally lives and works. The term "metropolitan area" is not defined in the Code or in Rev. Rul 99-7. Without a specified definition, the Tax Court has at times adopted the definition of "metropolitan" provided by Webster's Third New International Dictionary (14) when the meaning and application of "metropolitan area" are challenged. (15) Metropolitan, according to Webster's, refers to the "region including a city and the densely populated surrounding areas that are socially and economically integrated with it."
In Marple, (16) the taxpayer defined the metropolitan area as the area within 45-50 miles of his hometown. Marple drove 51 miles one way to a temporary job site. This distance met his definition of being outside the metropolitan area where he lived and worked. While the IRS disagreed with the suggested boundaries, it gave no reasons why the defined area was inappropriate. Consequently, the Tax Court accepted the taxpayer's suggested metropolitan area.
While the Tax Court documented that the metropolitan area defined by Marple was reasonable, the court disallowed the deduction because Marple drove 19 miles out of his way on his route to and from work in order to frequent a particular convenience store/gas station that he liked. The court ruled that the most direct route of 32 miles was the only route eligible for the business deduction. Since the taxpayer had defined his metropolitan area as the area within 45-50 miles of his hometown, the 32-mile distance was within the defined area. Thus, the mileage was not deductible.
In another case, (17) the taxpayer contended that a 35-mile radius surrounding Wisconsin Rapids, Wisconsin, was the metropolitan area. The IRS argued that since Wisconsin Rapids was not a metropolitan area, as defined by the U.S. Census Bureau, the entire state of Wisconsin should be considered his regular place of employment. In the alternative, the Service proposed a larger radius around Wisconsin Rapids than that suggested by the taxpayer but did not put forth any arguments as to why the 35-mile radius was unreasonable. The taxpayer was not asked to justify his definition of metropolitan area and, with no effective rebuttal from the IRS, the court accepted the taxpayer's definition.
In Walker, (18) there was no "city" involved. Walker was a logger who drove daily from his residence to numerous job sites throughout the Black Hills National Forest. In this case, the metropolitan area was considered to be the contiguous geographic area. The entire Black Hills area of South Dakota was considered to be a metropolitan area even though the typical context of the word "metropolitan" did not seem to apply.
Another hurdle in this ruling is that the taxpayer must normally both live and work in the designated metropolitan area in order to deduct expenses traveling outside the area. The IRS and the courts look very specifically at the intent of these passages. In Aldea, (19) the taxpayer did not normally work in the metropolitan area where she lived. Consequently, when she was on a temporary assignment, the court ruled that she could not deduct the transportation expenses between her residence and her temporary job site because she did not normally work near her home and she had no prospects of doing so. Although the temporary job site was outside the metropolitan area where she lived, the court was not convinced to rule in her favor.
One or More Regular Work Locations Away from Home
The Service recognizes that some taxpayers have jobs that will occasionally require travel to locations away from their regular workplace. Individuals often go directly from their residence to the temporary job site rather than going to the regular work location first. In these instances, under Rev. Rul. 99-7, there is no distance requirement to make the expense eligible for a tax deduction. The temporary site may be inside or outside the metropolitan area in which the taxpayer normally lives and works.
The key components in this situation are that (1) the temporary job is in the same trade or business as that of the regular job and (2) the taxpayer has a regular work location away from the residence. This second condition distinguishes this portion of the ruling from the previous section. When there is a "regular" work location, the temporary job can be located anywhere and the transportation is deductible. When there is no "regular" work location, the temporary job must be located outside the metropolitan area in order to receive a deduction for transportation expenses.
The IRS says in Rev. Rul. 99-7 that in order to deduct transportation expenses from one's residence to a job site, the taxpayer must have one or more regular places of business away from the residence. Without having a regular place of business outside the home, the taxing authorities consider the trip from a residence to the first job site and from the last job site back home to be commuting miles.
As previously discussed, the stipulation that the regular place of business must be away from the residence prompted the issuance of Rev. Rul. 99-7. Consequently, skilled laborers, construction workers, and others in trades and professions who do not have a regular work location outside their home, but rather travel within their metropolitan area working on temporary projects, are prohibited from deducting the transportation expenses to their first job and from their last job back home.
Residence Is Principal Place of Business
Sec. 162(a) provides a deduction for transportation expenses when a taxpayer is traveling between job sites. Typical situations involve traveling from an office to a client's place of business, traveling from one project location to another project location, or traveling from a full-time job to a second job. In these instances, there are no requirements involving the distance between the work sites. Any transportation expenses incurred in traveling between jobs are deductible regardless of whether the jobs are in the same or different metropolitan areas.
Rev. Rul 99-7 explains that taxpayers with an office in the home that meets the definition of the "principal place of business" under Sec. 280A(c)(1)(A) may deduct transportation expenses from the residence to a related job site. When the residence is the principal place of business the taxpayer is, in essence, traveling from one job site (i.e., the home office) to another during the course of the day. There is no requirement specifying that the destination job site be permanent or temporary, and there is no stipulation regarding distance to the site. There is, however, a requirement that the work at the job site be in the same trade or business as the work performed in the home office. This requirement is not imposed on travel between job sites outside the residence.
In Steinhort, (20) a riverboat pilot who was commissioned under the laws of Texas piloted numerous vessels in the Harris County Houston Ship Channel Navigation District. While on duty, the pilot received assignments throughout the day. While he did some charting and other duties at home, the work performed at his residence did not qualify the residence as his principal place of employment. Under the rules at the time, his principal place of employment was on the boats. Consequently, his first trip of the day to whatever port he was assigned and his last trip from a port back to his residence were judged nondeductible commuting trips.
On days when the pilot had to travel between ports to pilot different ships, the cost of transportation between the sites was deductible. Also, when his first assignment of the day was deemed to be outside the metropolitan area where he lived and normally worked, he was able to deduct transportation expenses. While the Tax Court acknowledged that the application of the law may seem illogical because the taxpayer did not have a central "office" assigned to him, the ruling was necessary for administrative consistency between taxpayers.
In Strohmaier, (21) a taxpayer in a situation similar to Walker was denied the deduction for transportation expenses due to the Tax Court's acknowledgment of the revised revenue ruling. Strohmaier was an independent contractor for an insurance agency as well as a minister who provided services for a mobile home community and various other locations. He did not have an office outside his home for either of the activities. Strohmaier did not meet with insurance clients or perform religious services in his home. Thus, although the court acknowledged that he used a portion of his residence exclusively and regularly in his two business activities, it was not his principal place of business as defined in the years examined (1993 and 1994). Therefore, the court upheld the Service's position and disallowed the transportation expenses from the taxpayer's residence to his first appointment of the day and from his last appointment back to his residence. He was allowed to deduct the transportation expenses incurred when traveling between his appointments and services during the day.
Principal Place of Business
The deciding factor in determining the deductibility of transportation expenses is often whether or not the taxpayer's residence qualifies as his or her principal place of business under Sec. 280A(c)(1)(A). While Strohmaier's residence did not qualify as a home office for the years in question, Congress expanded the definition of a home office and, importantly, the definition of a principal place of business in 1998. Consequently, in recent situations similar to Strohmaier's, the taxpayer's home will likely meet the qualifications as a principal place of business.
The requirements under Sec. 280A(c) (1)(A) for deducting expenses of a home office are that a portion of the residence must be exclusively used as:
1. The principal place of business for any trade or business of the taxpayer;
2. A place for meeting or dealing with patients, clients, or customers in the normal course of business; or
3. If the home office is located in a separate structure that is not attached to the dwelling unit, the office is used partially or totally in connection with the taxpayer's trade or business.
Before 1998, the term "principal place of business" was defined as the "the most important or significant place for the business" in Sec. 280A. Consequently, in the cases cited above (Strohmaier and Steinhort), the most important place of business was deemed by the courts to be where the actual work was being performed (i.e., on the boat or in a client's home). The broader definition now encompasses when
1. The office is used by the taxpayer for administrative or management activities of the taxpayer's trade or business, and
2. There is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business.
While the definition now includes a home office where administrative tasks can be performed, one should remember that the "office" portion of the residence must be used exclusively for that purpose in order to qualify for a tax deduction. (22) Simply doing the administrative work in a spare bedroom or on a dining room table will not qualify the residence as the principal place of business under Sec. 280A(c)(1)(A).
Assessing the deductibility of transportation expenses for trips originating from a personal residence can be confusing. There are many factors to consider. Attention to detail and thorough documentation are crucial when determining whether a deduction is warranted.
When deducting expenses related to temporary work sites, taxpayers would be prudent to note the conversations, correspondence, and intents of the parties in order to support the position that the job is temporary. Discussions with superiors concerning the expected date of reassignment back to a regular work location are best done through written correspondence such as e-mail. When the conversations take place over the phone, a follow-up e-mail clarifying and confirming the pertinent details in the phone conversation should be written.
While the courts have not rigorously questioned the use of the term "metropolitan area," the IRS does so more frequently. Taxpayers should be proactive by documenting a justifiable reason for their definition of a metropolitan area in the event they are asked to provide support for their position. The definition may hinge on whether the surrounding area is economically integrated. Among other things, documentation can include statistics on how many people commute into an area and where they commute from to work and/or shop.
When deducting travel from a home office, taxpayers need to be certain that their residential office meets the requirements for being the principal place of business. Also, when traveling from the home office, the client should document that the destination job site is related to the activities performed in the office. Otherwise, the expenses may be personal commuting mileage rather than travel between two jobs.
While the law permits a tax deduction for ordinary and necessary business expenses, including business travel, the allowance in the law for the deductibility of some transportation expenses related to commuting mileage is truly legislative grace. Allowing the deductibility of travel to temporary jobs is intended to ease the hardship of having to commute long distances in order to remain employed in the short term. Taxpayers deducting these expenses should be able to show that their situation falls within the scope of that intent.
Stacy Wade is an assistant professor at Western Kentucky University in Bowling Green, KY, For more information about this article, please contact Prof. Wade at firstname.lastname@example.org.
By: Stacy R. Wade, Ph.D., CPA
(1) Rev. Rul. 99-7, 1999-1 C.B. 361.
(2) See Rev. Rul. 190, 1953-2 C.B. 303 (obsoleted by Rev. Rul. 99-7); Rev. Rul. 59-371, 1959-2 C.B. 236 (obsoleted by Rev. Rul. 99-7); Rev. Rul. 90-23, 1990-1 C.B. 28 (modified and superseded by Rev. Rul. 99-7); and Rev. Rul. 94-47, 1994-2 C.B. 18 (modified and superseded by Rev. Rul. 99-7).
(3) Rev. Rul. 90-23, 1990-1 C.B. 28.
(4) Walker, 101 T.C. 537 (1993).
(5) Brockman, T.C. Memo. 2003-3.
(6) Daiz, T.C. Memo. 2002-192.
(7) Chief Counsel Advice 200018052.
(8) Chief Counsel Advice 200025052.
(9) H.R. Conf. Rep't No. 102-1018, 102d Cong., 2d Sess., 430 (1992).
(10) Frederick, 603 F.2d 1292, 1295 (8th Cir. 1979).
(11) Walraven, 815 F.2d 1246 (8th Cir. 1987).
(12) Kohr, 655 F. Supp. 306 (M.D. Penna. 1987).
(13) Regs. Secs. 1.162-2(e), 1.262-1(b)(5).
(14) Gove, ed., Webster's Third New International Dictionary, Unabridged (Merriam-Webster 1961). The Tax Court cites the 1986 and 1993 revisions.
(15) See, e.g., Wheir, T.C. Summ. 2004-117; Marple, T.C. Summ. 2007-76.
(16) Marple, T.C. Summ. 2007-76.
(17) Wheir, T.C. Summ. 2004-117.
(18) Walker, 101 T.C. 537 (1993).
(19) Aldea, T.C. Memo. 2006-136.
(20) Steinhort, 335 F.2d 496 (5th Cir. 1964).
(21) Strohmaier, 113 T.C. 106 (1999).
(22) Sec. 280A(c)(1).
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|Author:||Wade, Stacy R.|
|Publication:||The Tax Adviser|
|Date:||Oct 1, 2008|
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