If you’re an employer who reimburses employees for travel expenses on a tax-free basis, it’s important to be versed in the rules surrounding a person’s tax home. An employee’s tax home is considered to be the location of that individual’s primary workplace (not the location of the employee’s residence). Being aware of the rules that determine the employee’s tax home, as well as the travel expenses that are eligible for reimbursement based on that person’s tax home, can prevent you from running into complications with the Internal Revenue Service.
“Tax Home”, Defined
In order for an employee to be reimbursed for business-related travel expenses on a tax-free basis, the expenses must meet three IRS criteria. According to the IRS, the travel expenses must be:
- Ordinary and necessary,
- Acquired while traveling away from the individual’s tax home, and
- Incurred in pursuit of business.
An employee’s tax home doesn’t refer only to the building or property of the individual’s workplace but includes the entire city or geography in which their workplace is located. Employees who always visit the same workplace location to conduct their business will claim that office’s geography as their tax home. Employees who work out of various offices on a consistent basis should consider their tax home to be the location of the office they work from most frequently. Travel expenses can only be deducted for tax purposes for any costs related to travel for business purposes that occur outside of the employee’s tax home geography.
If an employee can claim no principal workplace, their tax home is considered to be their “regular place of abode in a real and substantial sense.” Employees who have no principal workplace or regular abode are classified as “itinerants” whose tax home is identified as wherever they work. Itinerants are not entitled to claim travel expense deductions and will not qualify for tax-free reimbursement of their travel expenses as they have no known tax home to travel away from.
The Three-factor Test for Employees without a Principal Workplace
To determine whether employees without a principal workplace have a tax home or should be classified as itinerant, the IRS three-factor test is used. The three factors determine whether the employee:
- Performs some of their work near the residence they claim and use that residence for lodging purposes when working from that location,
- Must leave the residence to perform their job function, which duplicates the employee’s living expenses incurred at the residence, and
- Hasn’t abandoned the geographic region of their historical place of lodging and the residence; has marital or lineal family members currently living at the residence; or often uses the residence for lodging.
If the employee meets all three of these factors, their residence is considered to be their tax home. If only two of the three factors are satisfied, the answer is less clear-cut and will depend on various facts and circumstances. Speaking with your tax advisor will help you identify the employee’s tax home in this instance. The employee is deemed an itinerant if only one of the three factors is met.
The actual or expected length of an employee’s assignment to another location may affect whether travel-related expenses are treated as having been incurred while away from home. If an employee is assigned to another location, temporarily (meaning for a year or less), their tax home will not change from the location they’ve been using. An assignment that lasts indefinitely, however, can change a taxpayer’s tax home so it’s best to consult with your tax advisor to make that determination.
It’s always a wise idea to keep careful records of your employees’ travel expenses that include detailed information about dates, times, locations, amounts, and the precise business purpose for each, individual expense.
If you need assistance in determining your employees’ tax homes, contact your Untracht Early advisor for guidance.