Saturday, October 22, 2016

Travel Expenses And Your “Tax” Home

I have a friend who used to commute from northern Kentucky to San Francisco.

He has a unique skill set, and the California employer wanted that skill set badly enough to allow him to work a  week there and a week here.

While his employer paid for his commute - and his lodging and meals while in California - let us frame a tax question for more ordinary taxpayers like you and me:

   Can you deduct your expenses while working out of town?

We will use the Collodi decision to walk through this issue.

Mario Collodi lived in northern California - Paradise, California, to be precise. In 2011 he was working for an employer in southern California. He would work a week of 12-16 hour workdays, and then he would return home for a week off. His wife and children lived in Paradise year-round. He was not trying to find work closer to home.

When he filed their 2011 tax return he claimed almost $30 thousand in travel expenses.

The IRS pulled their return and disallowed his travel expenses.

Off to Tax Court they went.

Let's go through Collodi's argument:
  • He was a motor hand on an oil rig, meaning that he took care of the motors on the rig.
  • The uncertainty of his job made it unreasonable to relocate the family.
  • Which meant that he had to travel for work.

He makes a certain amount of sense. 

The IRS fired back with the following:
  • The Code allows a taxpayer to deduct ordinary and necessary expenses, including traveling expenses while away from home.
  • Which means that one has to determine the location of the taxpayer's home.
  • Which is not what you would immediately think. The Code considers your tax home to be where you work, not where you live. For most of us, that is one and the same, but that was not the case for Collodi. He lived in northern California but worked in southern California.
COMMENT: It is odd to think of one's tax home that way, but it makes more sense if you consider that the term "home" is being used in an income-tax context. If one's purpose to tax your income, then it makes sense that “home” would be redefined to where you earn that income.
  • Collodi immediately had a problem, as his work-home was in southern - not northern - California. He cannot be away from home under this definition.
  • But there is an exception: if you can expect to start and end that out-of-town job in a year or less, the IRS will consider you to be temporarily away from your home, now defined to mean where your wife and kids are. That would cover, for example, the consultant constantly on the road.
  • The flip side is that - if you expect to be there more than a year - then you are hosed. You are considered "indefinitely" away from home, meaning your tax home moved with you and there are no travel deductions.

It all came down to this: how long was Collodi in southern California?

He started in 2010, worked all through 2011 and ended in October, 2012.

More than a year, way more than a year. He was not "temporary." He was "indefinite" and did not qualify for any travel deduction.

At least the Court did not pop them for penalties, reasoning that they relied on a tax professional to prepare the return.
OBSERVATION: The professional should have known better, though. While not said, I wonder whether he/she drew a preparer penalty.
Circling back to my commuting friend, he would not have been able to deduct his northern Kentucky - California travel expenses as he worked there for well over a year. He would have been deemed "indefinite," meaning his tax home moved with him when he traveled to San Francisco.

Why did he not move?

His wife refused.

How did the story turn out?

He changed jobs eventually. The commute and hassle wasn't worth it.

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