Unusually high 2106 expenses

[kamckinley]

Hi All,

I have a client who is in construction (pipeline mostly) and frequently works out of town (he is an employee, jobs qualify as temporary). His travel expenses for 2015 seem unusually high, so just checking in to see what others think.

Client worked for 9 different companies in five different states in 2015. Almost all of his work in 2015 was out of town, usually several hundred miles from home. He drove home every weekend so he has a LOT of mileage. He was also responsible for lodging and food. He did not receive any per diem pay or reimbursements from his employers (this year, in past years he has).

Here's where I'm concerned. He made $87K in 2015, but his out of town travel, food and lodging expenses were $27,500. So he's deducting 30% of his income in travel expenses.

He says he has receipts for everything, but this is just screaming red flag to me. Does anyone else have clients in the construction field who work away from home frequently? Are these numbers out of the norm?

Also, what about the weekend trips home? Pub 463 indicates that travel to temporary place of work to home are deductible, so he should be able to deduct the weekend trips home, correct? Just want to be sure I'm handling correctly.

Thanks in advance,
Kristine

[ATSMAN]

I guess the first thing you will need to determine is his tax home based on the actual facts:

From IRS Pub 463: Temporary assignment vs. indefinite assignment. If your assignment or job away from your main place of work is temporary, your tax home does not change. You are considered to be away from home for the whole period you are away from your main place of work. You can deduct your travel expenses if they otherwise qualify for deduction. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less.

However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than 1 year, whether or not it actually lasts for more than 1 year.

If your assignment is indefinite, you must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them. You may be able to deduct the cost of relocating to your new tax home as a moving expense. See Publication 521 for more information.


Assuming taxpayer meets this test then it is a matter of documentation and if the expenses are necessary and ordinary in that line of work. It probably will flag the return for a desk audit (I had one with a traveling salesman with 40K in mileage). If proper documentation is kept it will save the day!

[Roland Slugg]

I'm curious about his employment. Did he work for one company which, in turn, sent him to nine temporary job assignments at nine different other companies? Or did he keep changing jobs and actually work for nine different companies as an employee of each? Or is he self-employed, and the nine jobs were his normal work engagement pattern? If it's the first of these, his employee business deductions should all be deductible. If it's the second, I don't believe any of them are. If it's the third, then all his expenses are deductible on Schedule C.

[ATSMAN]

I'm curious about his employment. Did he work for one company which, in turn, sent him to nine temporary job assignments at nine different other companies? Or did he keep changing jobs and actually work for nine different companies as an employee of each? Or is he self-employed, and the nine jobs were his normal work engagement pattern? If it's the first of these, his employee business deductions should all be deductible. If it's the second, I don't believe any of them are. If it's the third, then all his expenses are deductible on Schedule C.

Good points and in certain industry when you are hired you are expressly told that the gig will last x months and it is not permanent. I have a client who is a logger and he gets this "temporary w2" jobs that last no more than 6 months in various states in the north east. Some of them also issue 1099. He uses many of his own tools and equipment.

Based on the fact pattern we use MA as his tax home. A lot of the expenses relating to the W2 jobs go on 2106 and others go on Sch C. He also takes the safe harbor OIH deduction.

[dan doshan]

Also, what about the weekend trips home? Pub 463 indicates that travel to temporary place of work to home are deductible, so he should be able to deduct the weekend trips home, correct? Just want to be sure I'm handling correctly.

The part I always had trouble with is the catch that (according to the pubs, etc.) this mileage would only be deductible up to the cost it would have been had the employee stayed at his work location. So if he had say a 600 mile RT home and back on weekends which resulted in say a 350 or so deduction for mileage but it would have cost him only 100 dollars to stay at his work location then only 100 would be deductible.

[Snaggletooth]

Deduction not Unreasonable

For some of these guys making above-average money for "booming" a deduction of $24K is not entirely out-of-reason, if you take the high-end of everything deductible. It's higher than expected, and high enough to warrant questions on the part of the preparer, but entirely possible.

[DaveO]

I have a client who trains state employees in the use of Medicare compliance software. They will work for 2 to 6 months at various locations. Their 2106 is always 30% or more of W-2 income. They have been audited three times with none or minimal changes and we have suppressed two more audits under the repetitive audit rule. Your concerns about a red flag are justified but no reason to deny them legitimate deductions.

[Gretel]

Also, what about the weekend trips home? Pub 463 indicates that travel to temporary place of work to home are deductible, so he should be able to deduct the weekend trips home, correct? Just want to be sure I'm handling correctly.

The part I always had trouble with is the catch that (according to the pubs, etc.) this mileage would only be deductible up to the cost it would have been had the employee stayed at his work location. So if he had say a 600 mile RT home and back on weekends which resulted in say a 350 or so deduction for mileage but it would have cost him only 100 dollars to stay at his work location then only 100 would be deductible.

Yes, that is correct, for home trips the lower of the two. Last year in went through a State audit on this and the lady was highly impressed that I actually did all these calculations, sometimes actual travel expenses were higher, sometimes not. She said she has never seen that before.