Business Expense Deductions

January 08, 2025

8745 / Can a taxpayer deduct business-related transportation expenses incurred when the taxpayer is not travelling away from home on business?

A taxpayer who is not considered to be "away from home" for purposes of deducting business-related travel expenses may still be entitled to claim a deduction for business-related transportation expenses. A taxpayer is generally not entitled to deduct the cost of commuting from the taxpayer's residence to the taxpayer's primary place of business. However, business-related transportation costs other than commuting costs may be deducted as business expenses.

March 13, 2024

8750 / When is a business-related entertainment or meal expense "ordinary and necessary" so that it may be deducted?

<div class="Section1"> Editor’s Note: Under the 2017 tax reform legislation, the previously existing 50 percent deduction for entertainment expenses that are directly connected with a business activity is suspended for 2018-2025. This applies to any activity considered entertainment, recreation or amusement, including membership dues with respect to any club organized for business, pleasure, recreational or social purposes.<a href="#_ftn1" name="_ftnref1">1</a> The 50 percent deduction for meal expenses remains in effect (including meals consumed while travelling for business). The 2017 tax reform legislation also expanded the 50 percent deduction for meals to include expenses associated with providing meals through an eating facility meeting de minimis fringe benefit requirements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8910">8910</a>).<a href="#_ftn2" name="_ftnref2">2</a> The deduction for meals provided at the convenience of the employer expires after December 31, 2025.<a href="#_ftn3" name="_ftnref3">3</a> <hr> Planning Point: Post-tax reform, employees are permitted to exclude the cost of employer-provided meals furnished to employees on the premises and for the employer’s convenience. The IRS guidance clarifies that the previously applicable standard, which requires that the meals are deemed to be provided for the employer’s convenience only if they are necessary for employees to properly perform their duties, will continue to apply even post-reform. Employers who wish to provide meals under this “convenience of the employer” provision must be able to substantiate that they have policies in place reflecting the need, and must be able to show that those policies connect the employer’s stated needs and goals to the necessity of providing employee meals. Sufficient substantiation will depend on the facts and circumstances of each case. <hr> Whether a business-related entertainment (prior to 2018) or meal expense is ordinary and necessary is generally a question of fact. The courts have recognized that the taxpayer is entitled to exercise a certain degree of discretion in determining whether an expense is ordinary and necessary in the taxpayer’s particular business.<a href="#_ftn4" name="_ftnref4">4</a> Expenditures are generally found to be sufficiently necessary if, based on all the facts and circumstances, they are “appropriate and helpful” to the taxpayer’s business.<a href="#_ftn5" name="_ftnref5">5</a> Expenditures are generally found to be sufficiently ordinary if they are made for “sound and normal” business expenses of a nature and amount determined by general commercial standards.<a href="#_ftn6" name="_ftnref6">6</a> The Tax Court has allowed a deduction for entertainment expenses incurred by a bank that paid for private dinner parties at a country club (hosted by the bank’s officers) for its significant customers (“key people” from among the bank’s top five hundred clients and prospective clients in the upper echelon of the financial community).<a href="#_ftn7" name="_ftnref7">7</a> The court noted that, in this case, there was evidence that these customers were not being reached by more direct methods, so it was not unreasonable for the bank to resort to private entertainment in order to entice their business. Note that country club dues would no longer be deductible under the 2017 tax reform legislation. On the other hand, when a public defender who supervised several attorneys attempted to deduct the cost of taking those attorneys to lunches at the public defender’s country club, the Tax Court denied the deduction on the grounds that such expenses were not ordinary and necessary for a taxpayer who is engaged in the business of being a public defender. This was the case even though the court recognized that the lunches tended to boost morale and encourage efficient work. Also important was the Tax Court’s recognition that these expenses might have been found to be ordinary and necessary were they incurred by a partner operating in a private law firm.<a href="#_ftn8" name="_ftnref8">8</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 274(a). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 274(n). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 274(o). <a href="#_ftnref4" name="_ftn4">4</a>.  Cravens v. Commissioner, 272 F.2d 895 (10th Cir. 1959). <a href="#_ftnref5" name="_ftn5">5</a>.  First National Bank v. United States, 276 F. Supp. 905 (D. Neb. 1967). <a href="#_ftnref6" name="_ftn6">6</a>.  Byers v. Commissioner, 199 F.2d 273 (8th Cir. 1952). <a href="#_ftnref7" name="_ftn7">7</a>.  See First National Bank, above. <a href="#_ftnref8" name="_ftn8">8</a>.  Wells v. Commissioner, TC Memo 1977-419. </div></div>

March 13, 2024

8752 / What substantiation requirements apply when a taxpayer deducts business-related entertainment and meal expenses?

<div class="Section1">Editor’s Note: Under the 2017 tax reform legislation, the previously existing 50 percent deduction for entertainment expenses that are directly connected with a business activity is suspended for 2018-2025. This applies to any activity considered entertainment, recreation or amusement, including membership dues with respect to any club organized for business, pleasure, recreational or social purposes.<a href="#_ftn1" name="_ftnref1">1</a> The 50 percent deduction for meal expenses remains in effect (including meals consumed while travelling for business).<div class="Section1"> In order for a taxpayer to deduct business-related meal expenses, the taxpayer must maintain records adequate to provide the following information: (1)  The amount of each separate expense; (2)  The time and date upon which the expense was incurred; (3)  The name, address and/or location where the expense was incurred (prior to 2018, if the location information does not make the type of entertainment apparent, the taxpayer must indicate whether it was a dinner, theater, sporting event, etc.); (4)  The business reason for the meal or the business benefit expected to be derived from the event, and (except in the case of business meals furnished on employer premises), the nature of any business discussion or activity;<a href="#_ftn2" name="_ftnref2">2</a> (5)  A description of the business relationship between the taxpayer and the parties who were present (name, title or other description sufficient to establish the business relationship). See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8749">8749</a> for a discussion of how the final regulations define “business associate”.<a href="#_ftn3" name="_ftnref3">3</a> The taxpayer’s records must contain all of the above information or the deduction may be disallowed.<a href="#_ftn4" name="_ftnref4">4</a> However, if a large group of individuals is involved, the taxpayer is not required to provide a name, title and description for each individual—a general description, such as “directors of Company X,” will suffice if the group is homogeneous enough so that such a description will provide adequate identification. If, however, the group that is so diverse that such a label will not identify the business relationship at issue, the IRS will require a listing on an individual basis.<a href="#_ftn5" name="_ftnref5">5</a> Prior to 2018, if a taxpayer held season tickets for purposes of business entertaining, the event represented by each individual ticket must be treated as a separate entertainment event. For example, a taxpayer who held season tickets for Boston Red Sox home baseball games was required to keep records providing the above information as it applied to each individual game.<a href="#_ftn6" name="_ftnref6">6</a> Post-reform, taxpayers continue to be able to deduct up to 50 percent of business-related meal expenses despite the disallowance of a deduction for entertainment. When meals are provided at the same time as entertainment, the regulations require that the cost of the meal be accounted for on a separate receipt or separately stated from the entertainment if billed on a single receipt. Further, to prevent employers from inflating the cost of food and beverage to make up for the disallowance of the entertainment deduction, the regulations provide that the cost stated on the receipt must be that which is ordinarily charged by the venue if they were purchased apart from entertainment.<a href="#_ftn7" name="_ftnref7">7</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 274(a). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 274(e). <a href="#_ftnref3" name="_ftn3">3</a>.  Treas. Reg. § 1.274-5T(b)(3). <a href="#_ftnref4" name="_ftn4">4</a>.  See, e.g., Newman v. Commissioner, TC Memo 1982-61 (deduction disallowed for insufficient substantiation because taxpayer failed to include location and business purpose information). <a href="#_ftnref5" name="_ftn5">5</a>.  Rev. Proc. 63-4, 1963-1 CB 474. <a href="#_ftnref6" name="_ftn6">6</a>.  Rev. Proc. 63-4, above, Q&A 17. <a href="#_ftnref7" name="_ftn7">7</a>.  Prop. Treas. Reg. § 1.274-11(b)(ii). </div></div>

March 13, 2024

8754 / How does an employer's reimbursement or failure to reimburse an employee's expenses impact a taxpayer's business expense deductions?

<div class="Section1"> The tax treatment of an employee's business expenses depends on whether the employee is reimbursed for them by the employer. The IRC provides that expenses paid or incurred by the taxpayer, in connection with the performance of services as an employee, under a reimbursement or other expense allowance arrangement with the employer are deductible in full from gross income, to arrive at adjusted gross income, so long as the expenses otherwise qualify as business expense deductions.<a href="#_ftn1" name="_ftnref1">1</a> Generally, this deduction will be available only to the extent that the reimbursement is includable in the employee's gross income.<a href="#_ftn2" name="_ftnref2">2</a> <hr /> Planning Point: In some jurisdictions (California and Illinois, for example) employers are required to reimburse employees for employment expenses. This may create the need for employers to reimburse employees for the cost of maintaining a home office. Further, the FLSA does not permit an employer to require an employee to pay for business expenses if doing so would reduce the employee's earnings to below the minimum wage. However, simply providing cash reimbursement may generate additional taxable income for the employee. The miscellaneous itemized deduction for expenses incurred in the "trade or business of being an employee" was suspended for 2018-2025. Employers may instead wish to consider a program where the employer leases or purchases the required equipment for the employee's use. <hr /> Employers are generally required to report certain employee reimbursements for business expenses on Form W-2. The reporting requirements apply to the following groups: (1) employers who do not require substantiation (or whose employees fail to substantiate expenses); (2) employers who advance amounts for expenses and do not require the return of (or do not receive) unused amounts; and (3) employers who reimburse a per diem or other fixed amount that exceeds government specified rates. The rules, thus, generally apply only to reimbursements for unsubstantiated expenses and unreturned excess amounts.<a href="#_ftn3" name="_ftnref3">3</a> It is not uncommon for an employee to incur expenses in connection with work that are not reimbursed by the employer. Examples include an employee's use of his own automobile or subscriptions to work-related professional journals. Prior to 2018, the same business expenses that are deductible by a self-employed person are deductible if incurred by an employee, but in the case of an employee, the deduction is allowable only as an itemized deduction. As such, it is treated as a so-called "miscellaneous itemized deduction."<a href="#_ftn4" name="_ftnref4">4</a> Miscellaneous itemized deductions are allowed only to the extent that the aggregate of such deductions exceeds 2 percent of the taxpayer's adjusted gross income.<a href="#_ftn5" name="_ftnref5">5</a> Note that all miscellaneous itemized deductions subject to the 2 percent floor were suspended for 2018-2025. An employee cannot choose to forego reimbursement for a business expense for which his employer would pay and claim a deduction. "[A] business expense deduction is not allowable to an employee to the extent that the employee is entitled to reimbursement from the employer for an expenditure related to his status as an employee."<a href="#_ftn6" name="_ftnref6">6</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 62(a)(2). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 62(c), Treas. Reg. §§ 1.162-17(b)(2), 1.162-17(c). <a href="#_ftnref3" name="_ftn3">3</a>. Treas. Reg. § 1.62-2. <a href="#_ftnref4" name="_ftn4">4</a>. Treas. Reg. § 1.67-1T(a)(1)(i). <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 67. <a href="#_ftnref6" name="_ftn6">6</a>. Lucas v. Commissioner, 79 TC 1 (1982). </div>

March 13, 2024

8747 / Can an employer deduct moving expenses for which it reimburses its employees? Are reimbursed moving expenses included in the taxpayer-employee's gross income?

March 13, 2024

8745 / Can a taxpayer deduct business-related transportation expenses incurred when the taxpayer is not travelling away from home on business?

<div class="Section1"> A taxpayer who is not considered to be “away from home” for purposes of deducting business-related travel expenses (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8738">8738</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8744">8744</a>) may still be entitled to claim a deduction for business-related transportation expenses. A taxpayer is generally not entitled to deduct the cost of commuting from the taxpayer’s residence to the taxpayer’s primary place of business. However, business-related transportation costs other than commuting costs may be deducted as business expenses. Examples of such expenses include the following: (1)  Travelling from one business place to another business place within the general area that is considered a taxpayer’s “tax home” (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8739">8739</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8738">8738</a>); (2)  Visiting clients and customers; (3)  Travelling to a business meeting outside of the taxpayer’s principal place of business; (4)  Travel from the taxpayer’s residence to a temporary workplace if the taxpayer has one or more regular workplaces. A work location is considered temporary if it is realistically expected to last (and does last) for one year or less, unless the circumstances indicate otherwise.<a href="#_ftn1" name="_ftnref1">1</a> If a taxpayer’s residence is also the taxpayer’s principal place of business, that taxpayer may deduct the costs of commuting between the residence and another place of business, whether or not that second place of business is considered “regular” or “temporary.”<a href="#_ftn2" name="_ftnref2">2</a> Example: Brent is a representative for a cheese manufacturing company and works out of his home. He has no permanent office, but regularly must drive to visit clients who have questions about his company’s cheese products. Brent may deduct the cost of driving between his home and client sites, even though these visits occur on a regular basis. If Brent were required to travel outside of his regular area of business on an overnight trip, those costs would be deductible as travel expenses, not transportation expenses. Because Brent travels by car, he can either deduct the actual costs of his car or the standard mileage rate for the year (58 cents in the first half of 2022 and 62.5 cents in the second half of 2022, 65.5 cents in 2023 and 67 cents in 2024).<a href="#_ftn3" name="_ftnref3">3</a> <hr> Planning Point: Because all miscellaneous itemized deductions were suspended for 2018-2025, taxpayers who previously deducted business mileage expenses as a miscellaneous itemized deduction will no longer be entitled to do so. However, for taxpayers who were eligible to claim the deduction as an above-the-line deduction, the business standard mileage rate remains relevant. <hr> As stated above, expenses incurred for commuting from the taxpayer’s residence to place of business are generally nondeductible. This is the case even though the taxpayer works during the commute—for example, by taking work-related calls or discussing business while carpooling with a business associate. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRS Publication 463. <a href="#_ftnref2" name="_ftn2">2</a>.  IRS Pub. 463. <a href="#_ftnref3" name="_ftn3">3</a>.  Notice 2022-03, A-2022-13; Notice 2023-03, Notice 2024-08. </div></div>

March 13, 2024

8749 / What special rules apply when a taxpayer deducts business-related entertainment expenses and meals?

<div class="Section1"> Editor’s Note: Congress lifted the 50 percent cap for 2021 and 2022, so that business meals were fully deductible under the 2020 year-end Consolidated Appropriations Act (CAA). This change was designed to support the restaurant industry during the COVID-19 recovery efforts, and, as such, the deduction was limited to food and beverages purchased in a restaurant. IRS guidance clarified that “restaurants” for this purpose include only businesses that prepare and sell food or beverages to customers for immediate consumption on the premises or off the premises. Pre-packaged meals and goods that are purchased for consumption at a later time, such as from a grocery store or convenience store, did not qualify. Meals provided through an employer-operated eating facility were not eligible for the 100 percent deduction even if the employer contracted with a third-party vendor to supply the meals. As is typically the case, the deduction was subject to the caveat that the meal expense was not lavish or extravagant.<a href="#_ftn1" name="_ftnref1">1</a> Editor’s Note: Under the 2017 tax reform legislation, the previously existing 50 percent deduction for entertainment expenses that are directly connected with a business activity was suspended for 2018-2025. This applies to any activity considered entertainment, recreation or amusement, including membership dues with respect to any club organized for business, pleasure, recreational or social purposes.<a href="#_ftn2" name="_ftnref2">2</a> The 50 percent deduction for meal expenses remains in effect (including meals consumed while travelling for business). The 2017 tax reform legislation expanded the 50 percent deduction for meals to include expenses associated with providing meals through an eating facility meeting de minimis fringe benefit requirements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8910">8910</a>).<a href="#_ftn3" name="_ftnref3">3</a> The deduction for meals provided at the convenience of the employer expires after December 31, 2025.<a href="#_ftn4" name="_ftnref4">4</a> Special restrictions apply when a taxpayer deducts business meal and entertainment expenses. A taxpayer is generally entitled to deduct the cost of a business meal if (a) the meal is not lavish or extravagant (b) the taxpayer (or employee of the taxpayer) is present at the meal and (c) the food or beverages are provided to the taxpayer or a business associate.<a href="#_ftn5" name="_ftnref5">5</a> Entertainment expenses (prior to 2018) were typically only deductible if the taxpayer established that the activity was directly related to or associated with the taxpayer’s trade or business.<a href="#_ftn6" name="_ftnref6">6</a> Recently released IRS guidance has confirmed that the rules governing the deductibility of business meals prior to tax reform will continue to apply (i.e., the 50 percent deduction for business meals will continue in effect). However, if the food or beverage in question is purchased in connection with a simultaneous event that constitutes “entertainment,” the food and beverages must either be purchased separately, or must be separately stated on the receipt.<a href="#_ftn7" name="_ftnref7">7</a> Under the regulations, what amounts to “entertainment” is determined on an objective basis so that if an activity is generally considered to be entertainment, it will be treated as such even if it can be characterized as something else. However, the specific trade or business involved is taken into account.<a href="#_ftn8" name="_ftnref8">8</a> Example: A theatre critic attends a theatrical production that she will review. Even though attending a theatrical performance is usually considered entertainment, with respect to the theatre critic, it is business and, thus, the cost of the ticket would not be disallowed under the new rules. If a manufacturer had taken a client to attend the same production, the manufacturer would not be entitled to deduct the ticket costs. Generally, the deduction for the ordinary and necessary cost of business meals (i.e., those expenses which are not lavish and extravagant), are reduced by half, so that only 50 percent of allowable costs are deductible.<a href="#_ftn9" name="_ftnref9">9</a> For certain taxpayers who are employed in the transportation industry, and are frequently required to have meals away from home (such as flight crews, interstate truck drivers, etc.), 80 percent of the cost of business meals is deductible for tax years beginning after 2007.<a href="#_ftn10" name="_ftnref10">10</a> In order to deduct the cost of business-related meals, taxpayers must also establish that the meal was either “directly related” or “associated with” the taxpayer’s business (i.e., the taxpayer must show that the expense was incurred directly before, during, or after a bona fide business discussion) in order to deduct the cost.<a href="#_ftn11" name="_ftnref11">11</a> Under the final regulations, the food or beverages must be provided to a current or prospective business associate. The regulations define this to include a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective. The final regulations clarify that employees are also included in the definition of business associate.<a href="#_ftn12" name="_ftnref12">12</a> The deduction for business entertainment expenses was also generally limited to 50 percent of otherwise allowable costs.<a href="#_ftn13" name="_ftnref13">13</a> If the amount of the allowable deduction is reduced because the expense is found to be lavish or extravagant, the 50 percent limitation is applied after the cost has been reduced by the portion that is deemed to be unacceptable.<a href="#_ftn14" name="_ftnref14">14</a> <hr> Planning Point: Elimination of the deduction for business-related entertainment expenses while preserving the 50 percent deduction for business meals generated questions as to when a business meal becomes entertainment so as to be non-deductible under the tax reform law. Some speculated that this line is crossed when the meal becomes “lavish and extravagant”, a standard that existed pre-reform to deny the deduction for meal expenses that were essentially deemed unreasonable. The final regulations continue to reference the pre-existing “lavish and extravagant standard” (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8751">8751</a>), which can help in determining whether the 50 percent deduction for business meals is permissible. <hr> If an employee is fully reimbursed for the expense of business meals and entertainment (prior to 2018), such expenses are fully deductible by the employer, although the 50 percent limitation will apply to the employer’s deduction.<a href="#_ftn15" name="_ftnref15">15</a> However, if the expenses are not reimbursed, the employee is subject to the 50 percent limitation described above. Furthermore, the unreimbursed expenses that are deductible after that limitation are then subject to the 2 percent floor on miscellaneous itemized deductions (all miscellaneous itemized deductions subject to the 2 percent floor were suspended from 2018-2025).<a href="#_ftn16" name="_ftnref16">16</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  Notice 2021-25. <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 274(a). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 274(n). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 274(o). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 274(k), Treas. Reg. § 1.274-12(a). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 274(a). <a href="#_ftnref7" name="_ftn7">7</a>.  Notice 2018-76. <a href="#_ftnref8" name="_ftn8">8</a>.  Treas. Reg. § 1.274-11(b)(1)(iii). <a href="#_ftnref9" name="_ftn9">9</a>.  IRC § 274(n). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 274(n)(3). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 274(a)(1)(A). <a href="#_ftnref12" name="_ftn12">12</a>.  Treas. Reg. § 1.274-12(b)(3). <a href="#_ftnref13" name="_ftn13">13</a>.  IRC § 274(n). <a href="#_ftnref14" name="_ftn14">14</a>.  H.R. Rep. No. 841, 99th Cong., 2d Session at II-25 (1986). <a href="#_ftnref15" name="_ftn15">15</a>.  IRC § 274(n)(2)(A). <a href="#_ftnref16" name="_ftn16">16</a>.  IRC §§ 274(n)(1), 67(b). </div></div>

March 13, 2024

8751 / What limitations apply to prevent a taxpayer from deducting lavish or extravagant business-related entertainment expenses?

<div class="Section1"> Editor's Note: Under the 2017 tax reform legislation, the previously existing 50 percent deduction for entertainment expenses that are directly connected with a business activity is suspended for 2018-2025. This applies to any activity considered entertainment, recreation or amusement, including membership dues with respect to any club organized for business, pleasure, recreational or social purposes.<a href="#_ftn1" name="_ftnref1">1</a> The 50 percent deduction for meal expenses remains in effect (including meals consumed while travelling for business). The 2017 tax reform legislation also expanded the 50 percent deduction for meals to include expenses associated with providing meals through an eating facility meeting de minimis fringe benefit requirements.<a href="#_ftn2" name="_ftnref2">2</a> The deduction for meals provided at the convenience of the employer expires after December 31, 2025.<a href="#_ftn3" name="_ftnref3">3</a> The prohibition on the deductibility of lavish or extravagant business-related expenses is tied to the notion that the expense must be reasonable in order to be deducted—a determination that is made based on the facts and circumstances of each individual case. Based on this premise, the courts have allowed taxpayers to deduct expenses that might be considered unreasonable in other contexts. For example, the Tax Court has upheld a taxpayer's deduction for expenses incurred in using a chauffeured Cadillac to provide local transportation for securities analysts and investment advisors in New York.<a href="#_ftn4" name="_ftnref4">4</a> Conversely, the Tax Court has disallowed deductions for lease payments made on a Rolls Royce by a plastic surgeon. The court's opinion reflects the importance of whether the expense is reasonable, rather than the level of extravagance displayed. In this case, the taxpayer-surgeon claimed that the Rolls Royce was used in advertising and promoting the quality of his services, and that he only used the car for business travel between the hospital and medical conventions. The Tax Court rejected the petitioner's argument that the Rolls Royce would attract customers, finding that it had no reasonable relationship to his skill and performance as a plastic surgeon and that there was no evidence that any patients were attracted based on the leasing of the car.<a href="#_ftn5" name="_ftnref5">5</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 274(a). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 274(n). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 274(o). <a href="#_ftnref4" name="_ftn4">4</a>. See Denison v. Commissioner, TC Memo 1977-430. <a href="#_ftnref5" name="_ftn5">5</a>. Connelly v. Commissioner, TC Memo 1994-436. </div>

March 13, 2024

8753 / When is a taxpayer entitled to deduct expenses incurred in maintaining a home office?

<div class="Section1"> Editor's Note: The 2020 CARES Act did not change the rules governing the home office deduction. While more employees are working from home in the wake of the coronavirus pandemic, the business expense deduction for home office expenses of employees remains suspended under the 2017 tax reform legislation's suspension of all miscellaneous itemized deductions. Only self-employed taxpayers are entitled to the existing home office deduction. A taxpayer is only entitled to deduct expenses for a home office if the taxpayer is able to meet the restrictive requirements imposed by the IRC and the courts with regard to this business deduction. A deduction for use of a part of the taxpayer's residence as an office will not be allowed unless a portion of the dwelling is used exclusively and on a regular basis as (a) the principal place of business for any trade or business of the taxpayer; or (b) the place of business used by the taxpayer for meeting patients, clients or customers in the normal course of the taxpayer's business.<a href="#_ftn1" name="_ftnref1">1</a> If the taxpayer uses a separate structure as a home office, the use requirements are less restrictive and the use must only be "in connection with" the taxpayer's trade or business.<a href="#_ftn2" name="_ftnref2">2</a> A home office will qualify as a taxpayer's principal place of business if both of the following are true: (1) The taxpayer uses the home office exclusively and regularly for administrative or management activities of the trade or business; and (2) The taxpayer has no other fixed location for conducting substantial administrative or management activities of the trade or business.<a href="#_ftn3" name="_ftnref3">3</a> That a taxpayer chooses to have a third party perform administrative or management activities (such as billing) for the taxpayer will not, in itself, cause a disallowance of the deduction. Example: Josh is an electrician who is self-employed. Most of his time is spent on-site with customers examining and repairing their electrical systems, but he maintains a small office in his home that is used exclusively and regularly for activities such as ordering supplies, calling his customers and keeping his books. Josh writes up estimates and records of work completed on-site at his customers' premises. He has engaged a local bookkeeping service for billing his customers, but he does not conduct any other substantial administrative or management activities outside of his home office. His home office will qualify for a home office deduction. <hr /> Planning Point: If the taxpayer is an employee and uses part of the taxpayer's home for business, the taxpayer must be able to show that, in addition to the requirements discussed above (1) the use is for the convenience of the employer and (2) no part of the home is rented to the employer and used to perform services as an employee for that employer.<a href="#_ftn4" name="_ftnref4">4</a> Note that the 2017 tax reform legislation eliminated the deduction for expenses associated with the trade or business of being an employee (in other words, the home office deduction for traditional W-2 workers was suspended for 2018-2025). <hr /> If the home office is merely appropriate and helpful, the deduction for home office expenses will be disallowed.<a href="#_ftn5" name="_ftnref5">5</a> For tax years beginning on or after January 1, 2013, the IRS has authorized an optional safe harbor method for calculating the amount of a taxpayer's home office deduction. The taxpayer calculates the home office deduction by multiplying the square footage of the home used for business purposes by a prescribed rate of $5.00. Under this safe harbor, the maximum allowable portion of a home that may be used for qualified business purposes is 300 square feet, which results in a maximum allowable home office deduction of $1,500.<a href="#_ftn6" name="_ftnref6">6</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 280A(c)(1). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 280A(c)(1)(C). <a href="#_ftnref3" name="_ftn3">3</a>. IRS Publication 587, Business Use of Your Home (2018). <a href="#_ftnref4" name="_ftn4">4</a>. IRS Pub. 587. <a href="#_ftnref5" name="_ftn5">5</a>. IRS Pub. 587, above. <a href="#_ftnref6" name="_ftn6">6</a>. Rev. Proc. 2013-13, 2013-6 IRB 478. </div>

March 13, 2024

8746 / When is a taxpayer entitled to deduct moving expenses?

<div class="Section1"> Editor’s Note: The 2017 tax reform legislation suspended the ability of taxpayers to deduct moving expenses under IRC Section 217 for 2018-2025. Although the Section 132 employer deduction for moving expenses is also suspended from 2018 through 2025, an exception exists for members of the armed forces (and their spouses and dependents) who are on active duty.<a href="#_ftn1" name="_ftnref1">1</a> The rules discussed below generally apply for tax years beginning prior to 2018. For tax years prior to 2018, if certain conditions are met, a taxpayer may deduct reasonable moving expenses incurred in connection with beginning work at a new principal place of business, whether as an employee or self-employed person.<a href="#_ftn2" name="_ftnref2">2</a> The following general requirements apply: (1)  The taxpayer must have incurred moving expenses; (2)  Those moving expenses must be related to the taxpayer’s start of work at a new principal place of work; (3)  The taxpayer’s new principal place of work must be at least 50 miles further from his principal residence than his former principal place of work or, if the taxpayer had no former principal place of work, at least 50 miles from his former residence;<a href="#_ftn3" name="_ftnref3">3</a> and (4)  The taxpayer must work in the general location of the new principal place of work for a specified period. Specifically, this means that the taxpayer is either: a. a full-time employee in the general location of the new principal place of work for at least 39 weeks during the 12-month period following his or her arrival or, b. in the 24-month period following arrival, a full-time employee or self-employed individual (on a full-time basis) in the general location of the new principal place of work during at least 78 weeks (39 weeks must be in the first 12-month period). See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8722">8722</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8723">8723</a> for a discussion of when a taxpayer is considered to be self-employed.<a href="#_ftn4" name="_ftnref4">4</a> For moving expenses that meet the requirements above to be “qualified,” and thus deductible, they must relate to the expenses described below (the distinction also becomes important for determining whether the employee must include the costs of any employer-reimbursement in gross income, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8747">8747</a>). “Qualified moving expenses” are: (1)  the costs incurred to move the taxpayer’s household items from the first location to the second location; and (2)  the travel expenses (excluding meals, but including lodging) incurred by the taxpayer in travelling from the first location to the second location.<a href="#_ftn5" name="_ftnref5">5</a> The expenses described in (1), above, may include costs such as those related to packing, disconnecting and connecting utilities, and in-transit storage and insurance if incurred in the 30 day period after moving the goods from the taxpayer’s former residence. The IRS specifically excludes costs such as losses sustained upon ending membership in clubs, wasted tuition fees, costs incurred in buying property or losses sustained upon selling property because of the move.<a href="#_ftn6" name="_ftnref6">6</a> Travel expenses described in (2), above, must be reasonable based on the facts and circumstances of the particular situation. Though the route travelled must usually be the shortest and most direct route, the taxpayer does not lose the deduction if the taxpayer incurs expenses that increase the cost of the move and are personal in nature. Instead, the deduction is reduced by the additional costs incurred for personal reasons.<a href="#_ftn7" name="_ftnref7">7</a> The deduction is further reduced by any expenses deemed to be lavish or extravagant under the circumstances. Example: Jeff is moving from Michigan to California for business reasons. He intends to drive but, rather than directly making the trip, he decides to stop and visit friends in St. Louis and Las Vegas along the way. Jeff is entitled to deduct the cost of moving from Michigan to California, minus any additional costs he incurs while visiting friends in other cities for personal reasons. <hr> Planning Point: Travel expenses from the former to the new residence are deductible for one trip only. The trip must be made by the taxpayer and members of the taxpayer’s household. It is not necessary, however, that the taxpayer and all household members travel together or at the same time.<a href="#_ftn8" name="_ftnref8">8</a> The cost of traveling from a former home to a new one should be by the shortest, most direct route available using conventional transportation.<a href="#_ftn9" name="_ftnref9">9</a> <hr> A taxpayer is also entitled to deduct the moving expenses of other members of his household, provided that the household member’s principal place of residence was both at the first location and at the second location.<a href="#_ftn10" name="_ftnref10">10</a> Generally, moving expenses are treated as “above the line” deductions; thus, if allowable, such expenses are deductible directly from gross income.<a href="#_ftn11" name="_ftnref11">11</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 132(g). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 217(a). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 217(c)(1). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 217(c)(2). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 217(b)(1). <a href="#_ftnref6" name="_ftn6">6</a>.  Treas. Reg. § 1.217-2(b)(3). <a href="#_ftnref7" name="_ftn7">7</a>.  Treas. Reg. § 1.217-2(b)(2). <a href="#_ftnref8" name="_ftn8">8</a>.  Treas. Reg. § 1.217-2(b)(4). <a href="#_ftnref9" name="_ftn9">9</a>.  IRS Pub 521, Moving Expenses (2017). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 217(b)(2). See also Shah v. United States, 450 F. Supp. 1136 (E.D.N.Y. 1978). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 62(a)(15). </div></div>