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.

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.