Updated: Jul 7, 2021
A Commonly Misinterpreted Tax Deduction
Who doesn’t love tax season!? Oh that’s right, no one does! Except the government maybe, or a few quirky accountants like ourselves. Nonetheless, we all have to deal with taxes, and getting the most out of qualified expenses and deductions can be one of the best ways to lower that tax bill. After all, I don’t think anyone loves giving their hard earned money to the government. So capitalizing on deductions is of utmost importance. However there are many deductions that have been misinterpreted over the years that the IRS clearly says are a no no. Here is one.
Travel expenses for work
There is no doubt that travel for work can be a qualified expense. But in order for it to be qualified, the right circumstances must be in place. Travel expenses are ordinary and necessary expenses incurred when a taxpayer is temporarily traveling away from his or her “tax home” for business purposes. Some examples are:
Flights, bus, train, or car travel between the “taxpayer’s home” and the business destination.
Use of a car for business while at the business destination.
Transportation between airports and hotels, and between hotel to business destinations (including tips.)
Meals, lodging, laundry.
Along with other ordinary and necessary expenses related to business travel.
Key word being “tax home.”
What does the IRS consider to be the tax home? According to “The Tax Book, Deluxe Edition 2019,” the taxpayer’s tax home is generally his or her regular place of business or duty post, regardless of the location of the family residence. The taxpayer’s home includes the entire city or general area in which the taxpayer’s business is located.
Notice that the tax home can be different from the personal residence. If the taxpayer’s regular place to live is different from where the tax home is considered, then the travel between the tax home and personal residence is NOT a deductible travel expense.
To quote Emmet from the “Lego Movie”: Okay wait, I think I got it, but just in case… Tell me the whole thing again. I wasn’t listening,
Here is an example of a Court Case to help clear it up: A taxpayer took a job as a barge mate in New York but maintained residence in Jacksonville, Florida. The employer paid the travel expenses from New York to other business locations. But the taxpayer took deductions on their own tax return for the travel expenses from Jacksonville to New York. The IRS contended and the court ruled that the taxpayer’s residence in Florida was a personal choice and the travel expenses were not qualified deductions from Jacksonville to New York, and they were disallowed.
There are many others that fall into this category. For example, some have decided to go work a few states away, such as North Dakota, to work in the Oil Fields. But say the worker lives in Washington, and goes back to work in North Dakota. They stay for three weeks then come “home” for two weeks. The tax home then becomes North Dakota, and their primary residence is Washington. The travel to get back and forth to North Dakota is therefore NOT a deductible expense, as it is their choice to stay living in Washington.
Don’t push your luck
While we all want to get as many deductions as possible, imagine if someone took $4,000 a year for 10 years as a tax deduction that was not allowed and they were audited. The IRS can go back as far as they want and make them pay back the tax owed on the disallowed deductions along with penalties and interest. They could potentially owe tax on that $40,000 after the audit. In my opinion, just do it right the first time. There are other ways to capitalize on savings. If someone is not sure of the tax rule, we suggest doing the research, or better yet, hire a professional. To save a couple hundred dollars now, could cost you thousands in the future.
Contact us to make your next tax appointment.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk and you may lose your principal.