Discussion:Business expense part 2

Facts: Client is regional sales manager for New England region of a national company. The company's regional office is in New Hampshire. He goes there a lot, but they do not provide him with an office and it's not his main place of work: He's on the road most of the time. His home and family are in Connecticut. He goes back there most weekends, holidays, etc, but because most of his clients are in eastern MA and NH he rents an apartment in Boston, and also rents a parking space, and he sleeps there 3-4 nights a week. He says it's a lot cheaper than staying in hotels, but he also sometimes stays in hotels at various spots around New England, depending on which cleints he's visiting.

Just to make things more complicated, for half the year he was paid commission (ie he was not an employee, files a sched C), no expenses were reimbursed; for the other half he was on salary and some but not all of his expenses were reimbursed.

Issues: Does he have a tax home? If so, where is it? Can he deduct his travel and lodging expenses when he is on the road? Can he deduct his Boston rent and parking fees? Can he deduct his mileage from Boston to his clients? Can he deduct his mileage for travel between Boston and his CT home? For which locations can he deduct meal expenss? Are any of these answers different for the time he was self-employed and for the time he was an employee?

That's as much as I remember about the case.

Thanks, DavidH

Seems to me that by renting, and staying 3-4 nights a week, he has created a tax home in Boston. You state that most clients are in this area. However, you also state that half year he was on commission (temporary assignment?), and now on salary. So the year maybe could be split with regard to expenses.

It would seem he could deduct expenses while traveling to clients if not reimbursed, and depending how far from "(tax) home" the clients are. I don't see mileage deduction from Boston to CT.

I'd be interested to hear any contrary opinions.

DavidH

Client seems to be on the thin edge of being a Mass. resident. Lots of CT residents keep NYC apartments. Nice tax break if you can get away with it. ♫

I agree that if he lived in CT but did all his business in Boston that Boston would be his tax home (even if he didn't sleep there several nights a week). But his clients were all over New England, so although he was sleeping in Boston he was on the road every day (you can get to a lot of New England and back to Boston in one day, and sometimes he'd sleep over if he went too far, like to Vermont). In my opinion that means "no fixed place of work", so the tax home defaults to the domicile, assuming that he has one, and I think his domicile is clearly CT. I don't think the "temporary position" enters into it at all. I'm still unclear on whether the drive from CT to Boston or to his first client counts as communing or business travel, however.

My manager thought he did have a fixed place of work and it was Boston. She also argued that the rule that applied to car travel was "You have no regular office, and you do not have an office in your home. In this case, the location of your first business contact is considered your office. Transportation expenses between your home and this first contact are nondeductible commuting expenses." Therefore if he drove from Boston to Concord NH, spent the day with one client and drove back, he couldn't deduct. My argument was that the whole thing was deductible as travel expenses away from his tax home in CT. Seemed fairer.

I'm basing this in part on pub 463, discussion of where is your tax home if you have no permanent place of work (see below). I think he meets at least 2 out of the three criteria (#s 2 & 3), and has some points on number 1 as well because he did some business while going to or from his main home, so I think we're in "facts and circumstances" territory with a good argument that CT is his tax home.

======= pub 463 ========

Factors used to determine tax home. If you do not have a regular or main place of business or work, use the following three factors to determine where your tax home is. 1) 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. 2)You have living expenses at your main home that you duplicate because your business requires you to be away from that home. 3)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 you often use that home for lodging.

 If you satisfy all three factors, your tax home is the home where you regularly live. If you satisfy only two factors, you may have a tax home depending on all the facts and circumstances. If you satisfy only one factor, you are an itinerant; your tax home is wherever you work and you cannot deduct travel expenses.

Clearly, there are valid arguments in both directions and your client is not in a black and white scenario. Thus, your manager would in all likelihood opt for a conservative position in order to "audit-proof" the return and reduce the company's overhead for Errors & Omissions insurance. Meanwhile, you valiantly have only the clients' interests at heart (that's why you're not the manager, BTW) and stick to your guns regarding the aggressive position, which is very defensible but not necessarily 100% winnable on audit.

Your company's policy on conservative/aggressive positions alas takes precedence over your desire to save your client money. You can resolve your problem in any of the following ways.

1) Get your manager to agree to having the aggressive position if the client signs off on a waiver of responsibility: The waiver stipulates that he understands the position could be overruled upon audit and that he (not your company) is responsible for the cost of any audit associated with the position. Your company's legal team should have stock documentation for this purpose available with blank spaces for the specific details of the case. Make sure the case is documented as to whether or not the position meets the definition of a covered opinion under Circular 230 - if it does, the legal disclosure paperwork is more lengthy than the tax savings warrants.

2) Tell your client that there are two positions available, but that your company is not comfortable taking the aggressive position. Let him know that another firm might be willing to take that position, and that if he chooses to take his business elsewhere, he still must pay you for the work done to date. He should be pleased by your candor and pay up, but yes you risk losing the client.

3) Don't tell your client anything about the internal company conflict, and take the conservative position as required by your employer.

Personally, I'd opt for #1. I used to work at a tax company with 25 offices and 125 employees; during my ten+ years of employment there, we did hundreds of these a year and didn't have a single lawsuit on waiver cases.