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Any way to get around the one year rule for travel in IRS Publication 463?

irs publication 463I run a consulting business and my w2 employees are often times on contracts which extend beyond one year. They travel to the client site most weeks and incur anywhere from a few hundred dollars a week to $2000 a week. Most employees use their personal cards for all travel expenses and we reimburse them. We do not withhold any taxes on this money and do not report it as income on their w2s. These expenses are also billed to our clients and reimbursed to us which we pay no taxes on as they zero out the expenses we pay to the employees.

The issue is according to the IRS pub 463, once the duration goes over one year or once we learn of the contract going over one year, we must start withholding taxes. To do that, we must increase the reimbursement to our employees so they don't feel the impact of this tax burden, and in turn, increase our rate to our clients to offset our increased costs.

Is there any way around this? Can we have the contract not state the individual employee's name? Can we have our employees' use corporate credit cards so that we're not reimbursing them and therefore have nothing to tax? Just trying to find a way around this b/c I feel like IRS pub 463 unfairly increases our customers' costs and adds complex calculations to our accounting dept to figure out the formulas for offsetting these increases.

Thanks!

Answers

Anonymous
(Accounting Manager) |

Do you misread the Pub? Would the text below not apply to your W2 employees?

"Who does not need to use this publication:

Partnerships, corporations, trusts, and employers who reimburse their employees for business expenses should refer to their tax form instructions and chapter 11 of Publication 535, Business Expenses, for information on deducting travel, meals, and entertainment expenses.

If you are an employee, you will not need to read this publication if all of the following are true.

•You fully accounted to your employer for your work-related expenses.
•You received full reimbursement for your expenses.
•Your employer required you to return any excess reimbursement and you did so.
•There is no amount shown with a code “L” in box 12 of your Form W-2, Wage and Tax Statement.

If you meet all of these conditions, there is no need to show the expenses or the reimbursements on your return."

michael j. gasiewicz
Title: CONTROLLER
Company: ZENGER BONCRAFT, INC.
(CONTROLLER, ZENGER BONCRAFT, INC.) |

I will state up-front I am not a tax specialist, but this is how it appears to me...

As with all tax regulations, read and interpret the wording in the publications carefully. IRS Pub 463 states as a guide the "realistic expectation" of being at the indefinite location, even if it does not actually last 1 year. The issue is that the job assignment location becomes the employee's 'tax home' if the project can be 'reasonably expected' to last one year or so, or later extends beyond one year by customer request. That makes the travel / lodging / meal expenses non-deductible by the employee on Form 2106 or becomes W-2 income to them if reimbursed by the employer. IRS Pub. 521 {Moving Expenses} may then be applicable to the employee. Whether the employee's name is on the contract or not is most likely irrelevant. And using a corporate-issued credit card may simply make the expenses non-deductible by the company for tax purposes because of the 'realistic expectation' concept.

You may also have issues with the various state withholdings, worker's comp, unemployment insurance, etc. in the 'tax home' state. Foreign travel is a whole other ball game.

I * FULLY * recommend you consult your tax accountant or contact one of the Proformative members who is a tax specialist on this and carefully explain the scenarios you are experiencing, how long this has been happening, and your options.

If you would be so kind I would like to read what the tax specialist determines.

Wray Rives
Title: CPA CGMA
Company: Rives CPA PLLC
(CPA CGMA, Rives CPA PLLC) |

Unfortunately there is not really any legitimate way around the "one year rule". The IRS has consistently taken a very firm stand that travel reimbursements become taxable income at the point the job is reasonably expected to exceed one year. They have even taken a hard line stance that one year does not necessarily mean 365 consecutive days, so short term breaks do not restart the clock.

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