The tax-home rule is something you’ll run across a lot as a company taxpayer. We assume it’s a rule you haven’t thought about very much, or maybe a direction you aren’t familiar with. That is a rule you will never have to break. That being said, it’s a rule you should be aware of.

Tax Home

According to the IRS, your tax residence is the whole city or geographical region where your principal company or workplace is situated, regardless of where you maintain your family home.

Imagine you have a family in Chicago and work in Milwaukee, where you stay in a hotel and dine at restaurants. Weekends are spent in Chicago because you work in the city throughout the week.

Since Milwaukee is your tax residence, you will be unable to deduct any of your expenses there, including meals and housing.

Multiple Business Locations

If your company has more than one location, your tax home will be one of them. It’s the place where most of your business takes place.

The IRS considers three variables when identifying your primary location of business:

1. The amount of time you spend on business at each location;
2. the level of economic activity in each region; and.
3. Each area’s relative financial return 

The most critical factor is how much time you spend in each area.

Temporary Workplace

In the court case discussed below, the temporary work site rule is one of the rules considered. As an example, consider the following situation:

Travel expenditures paid or spent in connection with a temporary work assignment away from your tax residence are deductible, but travel expenses incurred in an indefinite work assignment are not deductible.

You cannot deduct travel expenses for work-related expenses if you reasonably anticipate working at a job site for more than one year, regardless of whether you can work at the job site for more than a year in a given month.

An important point to remember: Because of the “greater than one year” criterion, your temporary employment place becomes your tax residence for filing taxes. If you have one area of business, this is a major issue. Having two work locations makes the temporary work site redundant if you have two jobs to fill.

Suppose you genuinely expect to work at a temporary site for one year or less, and your expectations change so that you realistically expect to work there for more than one year at some time. In that case, travel expenditures become non-deductible when your expectations change.

After you’ve learned the regulations, let’s look at the case of a taxpayer who lost his lawsuit but whose experience gives some interesting insights.

Travel Expenses Cost The Lawyer $8,400

Akeem Soboyede, an immigration lawyer, was admitted to practice in Minnesota and Washington, D.C., where he had his firms in Minneapolis and Washington.

Even though Mr. Soboyede’s principal residence was in Minneapolis, he spent his working hours alternating between that city and Washington, D.C.

Soboyede worked as an employee of several law companies in addition to his practice. At least four organizations paid him a total of $46,130 in salary and benefits for document review work.

A total of $38,548 of Mr. Soboyede’s $46,130 wage income came from work done in the D.C. metro area. In contrast, the remaining $7,582 came from Minnesota-based jobs.

In Schedule C of his 1040, Mr. Soboyede reported $10,650 in gross revenue and $26,816 in total business expenses from his solo law practice, resulting in a $16,166 loss.

IRS Audit Results

During the audit, the IRS agent found that Mr. Soboyede’s tax residence was in Washington, D. C. As a result, the agent denied Mr. Soboyede’s claim for $8,400 in hotel costs and apartment rent relating to his housing expenditures while working in Washington, D.C.

The IRS agent denied Mr. Saboyede’s deductions for toll costs, parking expenditures, and vehicle and truck expenses because Mr. Saboyede failed to demonstrate such fees properly.

Points To Consider When Planning

You have to admire the statement: “I didn’t maintain records because I didn’t realize I was going to be audited.” Make sure you don’t make the same mistake. Always keep the possibility of an IRS audit in mind. Always maintain a record of everything.

 

In this particular instance, there were legitimate travel deductions available. Consider the following: you only have one tax residence. If you were this taxpayer, your tax residence would be Washington, D.C., and you would be able to deduct the costs of your business travel to Minneapolis, including flights, hotels, and meals.

Takeaways

If you do not have a family house, your tax home may be located somewhere else.

It’s important to understand the tax-home rule if you work in more than one location. In most cases, your tax residence is where you spend the majority of your time and earn the greatest amount of income.

Keeping records of your deductions is, of course, a guideline that should not be overlooked. It will take some time, but not much—certainly less time than you would spend dealing with the IRS and the court system if you were involved in a legal issue.

Good records are vital when it comes to travel deductions, according to the IRS.

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