At (Tax) Home and Away
Once there was a taxpayer who lived in a suburb far outside Boston yet owned a small business right in downtown. Each day he got up and drove an hour and half to work, more than eighty miles roundtrip, battling weather and brutal traffic. He paid two hundred dollars a month just for parking. In a year he put twenty thousand miles on his car going to work and back, and spent $2,400 on parking. By tax time he was burned out, angry, and frazzled. When he filed his tax return, in a fit of pique he deducted $11,300 for the miles (at 56.5 cents per mile) and the $2,400 in parking as business travel expenses. With an effective tax rate of 30% that saved him giving him a tax savings of $4,110.
Cool, he thought, and took a well-deserved vacation in Paris. Or maybe he spent it buying his ailing, elderly mother’s medicine. Or did he donate it to feed the widows and orphans of the world?
It doesn’t matter how he spent the money because a year later, long after the glow of his extra refund had faded, the IRS sent him a letter demanding he pay the money back…plus interest and penalties. His business travel expense deduction had been disallowed.
Our taxpayer had rightly understood that the IRS deems his tax home to be where his business was located, i.e., in Boston. And he had certainly traveled each day from beyond the general Boston area, i.e., his faraway suburban home, for business purposes.
But our hard-working taxpayer has mistaken “commuting” for “business travel”. They are not the same and IRS regulation §1.162-2(e) specifically excludes commuting expenses from this deduction. Bottom line: Live wherever you like, it’s up to you, after all, but there’s no tax bonus for choosing to live far from your usual workplace.
Now, if the taxpayer had travelled first to his workplace and from there traveled to a second, temporary workplace then at least the costs of traveling to the second workplace could have been deducted. Or if his business interests had compelled him to travel from his suburban residence to a different, temporary work site then he could have deducted those costs, too. Even then, though, if the second work assignment was meant to last more than a year it would not be considered “temporary” and even those costs would not have been deductible.
For qualifying business travel a taxpayer can deduct the costs of transportation and lodging, and half the cost of meals. The burden is always on the taxpayer to justify the deductions he takes and that means more than just keeping receipts. It means knowing the rules that surround the deduction taken. A disqualified deduction can mean a nasty tax surprise, made worse by the imposition of interest and possibly even penalties.
This article is for informational purposes only and does not constitute legal advice. You should consult a qualified attorney before taking any action.