Travel Expenses When You Have One Client

It is an issue I know well: when are your away-from-home travel expenses deductible?

Granted, this issue has a lot less lift underneath it now that miscellaneous itemized deductions are disallowed, but it can still affect the self-employeds, including partners and LLC members.

What sets it up is the concept of a “tax home.”

This term does not mean what you would first think.

A tax home is primarily an economic concept: where do you earn your paycheck? Depending on that answer, you may or may not have deductible travel expenses.

Say that you live in northern Kentucky. Your job is in San Francisco. Every Sunday you catch a plane out, and every Friday you return home.

COMMENT: I am not making this up. I had a client who did this – for a while. It was a VERY good paycheck.

You do not have deductible travel. You earn your paycheck in San Francisco. You are not travelling away from your tax home. You are travelling away from your residence, but in this case your residence is not your tax home.

Let’s mix it up. Say that you work one week in San Francisco and one week from Kentucky. Have you moved the needle?

You may have.

Let’s mix it up again.

Say you have five clients. One week you travel to San Francisco. Another week you travel to Nashville. One week you stay home and work on your three other clients.

Have you moved the needle?

Yep.

When a taxpayer does not have a permanent place of business but rather is employed by various clients and at different locations, the default rule is that the taxpayer’s residence is deemed the tax home. This is the Zbylut case, and feel free to call me on how to correctly pronounce the name.

I am looking at the Brown case (TC Memo 2019-30).

Brown was based out of Atlanta. He was a business consultant working as a CFO. If you needed his skill set but not a full-time CFO, Brown might be your guy. He had several clients over several years, and in 2012 he picked up a sweet multiyear contract in New Jersey.

Two key facts:

(1)  For 2012 and 2013, his only business income was from New Jersey.

(2)  And wouldn’t you know that the IRS audited his 2012 and 2013 returns.

Brown argued that New Jersey was a temporary gig.

In the sense of eternity, he is right. In real time, however, the contract was for three years. The IRS considers one year to be the demarcation between temporary and indefinite. There is probably no deduction if you go indefinite.

But New Jersey could terminate the contract, argued Brown.

Could but not likely, replied the Court.

Brown then wanted to rely on Zbylut.

The IRS wanted to see other paychecks.

Brown argued that in 2013 he started working one week in New Jersey and one week at home.

The IRS wanted to see his travel and other records.

Which he never provided. Why? Who knows.

He argued that he was working on other clients and that focusing solely on cash received during the period under audit was misfocused.

Yep, I get it. Maybe he could not invoice until a job was complete or materially so. Or some client stiffed him.

The Court paused. Provide us a schedule or calendar with client meetings, work assignments, business-related tasks, correspondence. Help us out here.

That seems reasonable. Surely he can come up with telephone records, exchanged e-mails, any snail mail correspondence….

Brown provided nothing.

Folks, the Tax Court has a long-standing rule-of-thumb:

If you fail to produce documentation in your possession that would be favorable to you, the Court will take the presumption that the documentation, if presented, would be unfavorable to you.

And that is what the Court did: it ruled against Brown.

He did not lose because of uninterpretable technical issues. He lost for the most basic reason: he provided no support or documentation for his position.

And I suspect I know why: he really had only one gig and that gig was in New Jersey. There was no travel as defined in the tax Code. His tax home locked arms with his paycheck and they both moved to New Jersey. It’s OK.

But there is no tax deduction.

The Mobile Workforce State Income Tax Simplification Act

I was glad to see that Senator Sherrod Brown (D – OH) introduced the Mobile Workforce State Income Tax Simplification Act on August 2, 2012.  The bill is being promoted by the American Institute of CPAs, and a version of the bill passed the House on voice vote May 15^th.

The bill would establish a uniform standard for the withholding of state income taxes on nonresident employees.  It would lessen the burden the current system places on employers and traveling employees. 

Both bills would require nonresidents to work in a state for more than thirty days before becoming subject to a state‘s income tax withholding.

Why is this an issue? Let’s say that you start a consulting firm. Business takes off. You develop a national client base and hire employees. You send your employees throughout the country, sometimes for 4 or 5 days and other times for longer. You meet with me to discuss your tax filing requirements, especially your payroll. You tell me that you have engagements coming up in the following states and ask me how to handle the employee withholding.

               State                                      Exempt from Employer Withholding if …

Arizona                                               60 days or less

California                                            exempt if less than $1,500

Delaware                                             no exception

Georgia                                               23 days or less

Hawaii                                                 60 days or less

Idaho                                                   exempt if less than $1,000

Maine                                                  10 days or less

Maryland                                             exempt if less than $5,000

Massachusetts                                     no exception

Ohio                                                    less than $300 in any quarter

Virginia                                               exempt if less than $7,000

Now seriously, how are we to work with this? Remember that payroll may have some very nasty penalties for just minor errors. Do we simply withhold from day one on all employees in all states? That is the safest way to go, but now you are going to have monthly or quarterly reporting to almost every state in the nation. Perhaps the report says “zero”, but it will still take time to prepare and file. You may have additional end of year considerations, such as submitting W-2s to the state. Why not just shut down the account every time, you ask? That likely will save little to no time overall and may create more problems whenever you try to reactivate an account.

This all takes time. It may be my time, it may be your employee’s time, but you will be paying for this time. You can now see the issue. If you ship an employee into Delaware for 1 1/2 days, do they really expect you to withhold, remit and keep reporting to Delaware until the cows come home? Perhaps this made sense years ago when our parents worked at the factory down the street, but it makes no sense today. It is unreasonable to threaten an employer with payroll taxes (and penalties) because they made the mistake of sending an employee into your state for 3 or 4 days. This is not the Lewis and Clark era.

Will this bill pass Congress? My hunch is that no tax bill will pass Congress until the elections are resolved, and then only a tax extender bill passed at the last hour of the last day. This bill will not pass this Congress, but at least the issue is being discussed and highlighted. Perhaps next time and next Congress.