By Michelle E. Botwinick, C.P.A.
It is becoming more common for employers to send employees out of town on assignment. The deductibility of expenses incurred in connection with such assignments depends on several factors.
The most important question for tax purposes relates to the length of the assignment. If you are away from home for more than one year, the assignment is classified as “indefinite” (as opposed to “temporary”), and you won’t be able to deduct any of your personal living expenses. On the other hand, if you are actually away for one year or less and it was realistic to expect that you would be away for one year or less, then your assignment can qualify as “temporary.”
The second question for tax purposes relates to the definition of “home.” Your tax home is the entire city or general area where you conduct business and may not necessarily be the same location as your family’s home. For most people though, their tax home will be where they are registered to vote, where their cars are registered, and where their homestead exemption is filed.
If your assignment qualifies as temporary, you can deduct the personal living costs you incur while away from home. Significantly, this includes the costs of lodging, such as rent for an apartment, and meals as long as they are not lavish or extravagant. Meals are still subject to the regular rules for deductible meals, which generally only allow half of their cost to be deductible. Other incidental living expenses, such as laundry or dry cleaning, are also deductible. You can deduct the costs of trips home on weekends, but only up to the amount you would have spent on meals and lodging at your temporary work location had you not gone home.
These employee business expenses are miscellaneous itemized deductions that are subject to the 2% floor rule. That means that your employee expenses, when added to your other miscellaneous itemized deductions, are deductible only to the extent that they exceed 2% of your adjusted gross income. If, however, your employer reimburses the expenses under a plan that meets certain requirements, a so-called “accountable” plan, you can avoid the 2% floor. Instead, you don’t include the reimbursements in income, and you don’t deduct the expenses. Expenses in excess of reimbursements, or expenses that are reimbursed from a non-accountable plan, are subject to the 2% floor.
These rules allow for substantial deductions in many cases, and you must be careful to meet the substantiation requirements. That is, save all receipts and documentation regarding your deductible expenses. Keep a logbook showing your costs while away from home on your temporary job assignment. Additionally, in the event the IRS seeks to make the case that your assignment was “indefinite,” it’s advisable to establish a record showing it was reasonable to expect the assignment would last one year or less. For example, save any memos or documentation from your employer regarding the nature of your assignment. An explicit statement in writing from your employer to the effect that the assignment isn’t expected to exceed one year could prove helpful.
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