Home Isn’t Always Where the Heart Is

Generally travel expenses for business purposes are tax deductible. Generally. “Generally your tax home is your regular place of business or post of duty, regardless of where you maintain your family home,” according the IRS Publication 463 Travel, Entertainment, Gift, and Care Expenses,

By definition, travel expenses are incurred when you are working away from home. However, the way you think of home and the way tax authorities think of home are sometimes different.

When I use the word home I think about Fort Smith, Arkansas. I grew up in Fort Smith, went to twelve years of school here, went to church here, etc. I visualize my house where my wife and I raised our son and created years of memories. In my particular case, my personal definition of home is the same as the tax law’s definition. Each day I get up and go to work at my office seven miles away. When I leave the city limits of Fort Smith to conduct business, it is easy to determine which expenses are deductible travel expenses. Some people don’t have occupations that allow such a clear definition of home for tax purposes. These individuals have to determine the location of their tax home.

For income tax purposes, your tax home isn’t about where a person’s residence is located. It is more about where you make your money, where you do business. Your tax home is geographical by nature, the area you work. People who earn their keep in different locations can run into trouble by assuming their tax home is where their spouse and kids live.

So what occupations are people involved in that might be affected by the tax law’s definition of home? Some of the occupations or business activities that the tax court has had to deal with the issue of a person’s tax home include consultants, people who work overseas, truck drivers, project managers in the construction trade, welders, and the list goes on. If you are or become mobile in your work or business activities, where your tax home is could be important.

How do you determine where your tax home is? It depends. It depends on the facts and circumstances of your situation. There isn’t a checklist that when completed answers the question definitively. But here are the factors the IRS tells you to consider.

If you have more than one place of work, the IRS tells you to consider the following in order to decide which place is you tax home:

  • The total time you ordinarily spend in each place.
  • The level of your business activity in each place.
  • Whether your income from each place is significant or insignificant.

It is possible under income tax law to hold a job and be homeless. The IRS defines this as itinerate rather than homeless, but if you are defined as an itinerate worker, then you have no tax home and none of your travel expense can be deducted because you are never away from home.

Here are the factors the IRS will consider to determine if you are tax homeless (itinerate).

  • You perform part of your business in the area of your main home and use that home for lodging while doing business in the area.
  • You have living expenses at your main home that you duplicate because your business requires you to be away from that home.
  • You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or your often use that home for lodging.

Publication 463 says that if you satisfy all three of the above factors, you tax home is where you live. If you meet two of the three factors, it’s up in the air. You may or may not have a tax home. But if you only satisfy one factor, you’re out of luck. You are itinerate and cannot deduct any travel expenses.

Then you have the question of whether your work location is temporary or indefinite. A temporary location is a location where you work for less than a year. You cannot deduct travel expenses to and from a temporary work location. However, if the work assignment is indefinite, it becomes your tax home.

I really don’t expect you to become an expert on what the tax law considers your tax home by reading this post. However, I do want to illustrate with this post that the determination of you tax home can be complex. I will take a deeper look at travel and what requirements tax law and the IRS impose on taxpayers in order for travel expenses to be deductible. In the meantime, if this issue is important to you and you need answers now, call our office and as to talk with one of our CPAs or download IRS Publication 463 from IRS.gov. [As of January 21, 2015 the IRS Publication 463 is for the one published to assist tax payer in preparing their 2013 income tax year. The rules regarding to the definition of your tax home hasn’t changed, but if you are concerned, I’m sure an updated publication will be posted soon by the IRS.]

 

David

Personal Use of a Company Owned Vehicle Can Cost You

The Internal Revenue Code taxes individuals and businesses on “all income from whatever source derived.” This includes fringe benefits provided by an employer. Certain benefits provided by an employer are excluded from income by law. The personal use of an employer-provided vehicle is not a fringe benefit that is excluded.

When an employee has the benefit of using an employer-provided vehicle for their personal use, the IRS requires that the value of that benefit be included in the employee’s compensation even though the benefit is a non-cash benefit.

Why Is This Important?

The law requires that each employer provides its employee’s with a W-2 Wage and Tax Statement by February 2, 2015. Required to be reported in each employee’s W-2 taxable wages is the value of any non-cash fringe benefits. This includes the value of each employee’s personal use of a company owned vehicle.

What is Taxable and What Isn’t?

Not every “vehicle” used by an employee will result in a taxable fringe benefit. If a farmer wants to jump on a combine and drive it to the grocery store, the IRS would allow him to do so without taxing him on his personal use. That is because the IRS has defined certain vehicles as “qualified nonpersonal use vehicles. These are vehicles that wouldn’t be used for personal purposes except minimally. Qualified nonpersonal use vehicles listed in IRS Publication 15-B Employer’s Tax Guide to Fringe Benefits include:

  • Clearly marked, through painted insignia or words, police, fire, and public safety vehicles
  • Unmarked vehicles used by law enforcement officers if the use is officially authorized.
  • An ambulance or hearse used for its specific purpose.
  • Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.
  • Delivery trucks and seating for the driver only, or the driver plus a folding jumpseat.
  • A passenger bus with a capacity of at least 20 passengers used for its specific purpose.
  • School buses.
  • Tractors and other special-purpose farm vehicles.
  • Bucket trucks, cement mixers, combines, cranes and derricks, dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks.

A pickup truck with a loaded gross vehicle weight of 14,000 pounds or less is a qualified nonpersonal vehicle if is clearly marked with permanently affixed decals or painted and identifies the truck as a company vehicle and has been specially modified so it is not likely to be used more than minimally for personal purposes. These modifications would include heavy equipment such as a hydraulic lift gate, permanent tanks or drums, an electric generator, a welder, etc.

A pickup truck will also be considered as a qualified nonpersonal vehicle if is used to transport a particular load in a construction, manufacturing, processing, farming, mining, drilling, timbering, or other similar operation for which it was specially designed or significantly modified.

Demonstrator cars used by salespeople employed by a car dealership can qualify as a nontaxable working condition benefit if the use is primarily to facilitate the sale or lease of cars, but there are substantial restrictions on personal use.

When an employer provided vehicle does not meet the definition of a qualified nonpersonal use vehicle, the personal use of the vehicle is a taxable benefit to the employee. The general rule for valuing a fringe benefit is what the employee would have to pay a third-party in an arms-length transaction to buy or lease the benefit, in this case the use of the vehicle. Since calculating the fair market value of the vehicle used personally by an employee isn’t as simple as it sounds, the IRS has provided four other ways to determine the value of the benefit. These four methods are known as:

  • Lease Value Rule
  • Cents-Per-Mile Rule
  • Commuting Rule
  • Unsafe Conditions Commuting Rule

Almost all of Potts & Company’s clients use the Lease Value Rule. I expect that is the valuation rule you will use too. Therefore, I am not going to elaborate on the other valuation methods listed. If you have any questions about the other methods, call Joe, Rob, or me or consult the IRS’s Publication 15-B Employer’s Tax Guide to Fringe Benefits.

Lease Value Rule 

The lease value rule is basically the default rule. If you do not qualify for the Cents-Per-Mile Rule or the Commuting Rule you’re left with the Lease Value Rule.

To determine the taxable benefit amount of the personal usage of a company vehicle using the lease value rule, you first determine the fair market value of the vehicle on the first date it was made available to the employee. The IRS publishes its annual lease value table each year in Publication 15 B Employer’s Tax Guide to Fringe Benefits. Using the fair market value of the vehicle provided to the employee, you locate the annual lease value calculated by the IRS. This annual lease value multiplied by the percentage of personal miles to the total miles driven by the employee is the amount that is added to the employee’s W2.

As an employer, you will find that many of your employees do a poor job at tracking their mileage. If you’re like the average business owner, you have difficulty tracking your mileage accurately. (Interestingly enough, I have yet to meet an IRS agent that had difficulty in disallowing a mileage deduction for lack of adequate documentation.) Unfortunately if a company owns vehicles which an owner or an employee drive for their personal benefit, keeping up with the mileage is a requirement.

The IRS says that it is the employee’s duty to account for business mileage by substantiating the usage, the time and place of travel, and the business purpose of travel. Any mileage that is not substantiated as business mileage is therefore included in their income. So if you’re having trouble having an employee substantiate your mileage, reminding that the personal portion is included in the W-2 wages might incentivize them to keep adequate records. Of course what is good for the goose is good for the gander, if you catch my drift.

Bottom Line: 

If you are going to comply with the rules and report an employee’s personal usage of a company vehicle on their W-2, you need to be aware of the rules and the methods the IRS allows to value this benefit. Potts & Company recommends that the business owner or responsible person provide a form to each employee to report their personal and business use of company vehicle(s) they drove in 2014. This information can then be used to calculate the taxable value of their personal vehicle business use and added to their 2014 W-2.

If you need a form or an example of a form to accumulate this information from your employees, please contact Leacretia, Terra, or Debbie by calling 479-648-2846 or by emailing them using their name with @potts-cpa.com (e.g. Leacretia@potts-cpa.com).

 

David

A Preferred Tax Rate

There is much said and written in the news about the long-term capital gains rate, that it is preferential and biased toward the uber wealthy. That is a political and philosophical call, but I would point out it is also preferential toward plain folk too, but only if you own and sell a capital asset for a gain. If you have recently sold or are contemplating the sale of property and expect to realize a gain, to determine if you might qualify for a lower and preferential tax rate on the sale of your property, you first need to understand what a capital asset is, the way you calculate the gain, and when it qualifies as long-term. First let’s understand what is meant by the sale of a “capital asset.”

Tax law doesn’t define what a capital asset is, it defines what it isn’t. The Internal Revenue Code states, “…the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—“

Here is a short list of what is not considered a capital asset.

  • Inventory or property primarily for sale to customers in the ordinary course of a trade or business;
  • Property used in a trade or business that can be depreciated. This is generally personal property like automobiles, office furniture, equipment and real estate;
  • A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that the taxpayer’s personal efforts created;
  • Accounts or notes receivable acquired in the ordinary course of a trade or business for services;
  • Any commodities derivative financial instrument held by a commodities derivatives dealer (with some exceptions);
  • Certain hedging transactions;
  • Supplies used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.

If it’s not listed above, then there is a good chance your property is a capital asset. However, I modified and shortened the list and therefore, when in doubt, you should do your own due diligence or ask a CPA if your property might qualify as a capital asset.

Keep in mind that to qualify for a preferred long-term capital gain rate, there are a few more rules where compliance is required. Next I will discuss the rules you need to know to correctly calculate your capital gain…or loss.

T. David