Car expense and accountable plan

[NotEasy]

A company sends an employee to a big client's location to do works everyday. The employee usually goes there in the afternoon and then go home directly after finishing the works there without returning to the company.

(1) Can the employer reimburse the employee for the car expense under an accountable plan so the reimbursement won't be taxable to the employee?

(2) If yes, which part of the daily route of the employee is reimbursable? It's kinda obvious that the trip from the company to the client's location is fine. What about the trip that he goes home from the client's location?

(3) What does the company and the employee have to do in order to make sure that the plan is considered accountable?

Thank you.

[Edsel]

Illustrate

Not easy, eh? Well, at a minimum, your question is not easy, although it appears to be straightforward enough until you stop and think about it.

Not so sure I have an answer to all your questions. If he is seeking reimbursement under the accountable plan, is he wanting the round trip to the customer even though he is not returning? The "net" difference between mileage on his current assignment versus just driving to his primary place and back? Also you premise states that he goes to this customer's place EVERY DAY. This could throw a new perspective in that the IRS could declare the customer's place as his "tax home" instead of his employer.

With your permission, would you consent to the following just to illustrate: (after all, this is YOUR party, and I'm the one who seems to be getting drunk)

* Mileage from residence to employer is 7 miles.
* Mileage from employer to customer is 5 miles.
* Mileage from customer to residence is 10 miles.

For the benefit of other knowledgeable participants, does it help any to use these numbers to illustrate?

[NotEasy]

Not easy, eh? Well, at a minimum, your question is not easy, although it appears to be straightforward enough until you stop and think about it.

Not so sure I have an answer to all your questions. If he is seeking reimbursement under the accountable plan, is he wanting the round trip to the customer even though he is not returning? The "net" difference between mileage on his current assignment versus just driving to his primary place and back? Also you premise states that he goes to this customer's place EVERY DAY. This could throw a new perspective in that the IRS could declare the customer's place as his "tax home" instead of his employer.

With your permission, would you consent to the following just to illustrate: (after all, this is YOUR party, and I'm the one who seems to be getting drunk)

* Mileage from residence to employer is 7 miles.
* Mileage from employer to customer is 5 miles.
* Mileage from customer to residence is 10 miles.

For the benefit of other knowledgeable participants, does it help any to use these numbers to illustrate?

"is he wanting the round trip to the customer even though he is not returning?"

Well, he has no specific desire as to how many miles to claim. I think he wants to claim the allowable miles by the tax law. That's why I came over to ask for opinions of my fellow tax professionals about what they think is the allowable miles in that situation.

"Also you premise states that he goes to this customer's place EVERY DAY. This could throw a new perspective in that the IRS could declare the customer's place as his "tax home" instead of his employer."

I have never thought of this. Well, he has his own residential home and he lives and sleeps there every night. He goes to the company everyday and spends more of his working time there. Does the fact that he also goes to the client's location to do some works everyday can possibly make the client's place his "tax home"? I still find this kind of hard to understand.

"With your permission, would you consent to the following just to illustrate:
* Mileage from residence to employer is 7 miles.
* Mileage from employer to customer is 5 miles.
* Mileage from customer to residence is 10 miles."

Yes, we can use those numbers if it can help to the discussion easier.

[Snaggletooth]

Three Answers

Not easy, I'm going to offer an opinion using the illustrated numbers. With no other convolutions, this guy is driving 22 miles per day, and that's the easy part.

[By the way, the "tax home" is rarely the taxpayer's residence. It is normally where the taxpayer works -- purpose of designation of a tax home is to disallow commuting mileage between home and work]

Interpretation #1 The employer's premises are considered the "tax home" and thus 14 miles are disallowed. The taxpayer may deduct 8 miles per day.
Interpretation #2 The employer's customer is considered the "tax home" and thus 20 miles are disallowed. The taxpayer may deduct only 2 miles per day.
Interpretation #3 The IRS designates NO tax home, and declares that his "workplace" is an entire metropolitan area. Sometimes they do this, and if this occurs, then none of the mileage incurred in the illustration is deductible.

You can get all manner of opinions on this but I normally interpret in the taxpayers' favor for grey areas, and I would support #1 above. The only support for #2 is that he goes to the customer's premises every day, but he goes to the employer's premises also. I would consider the employer's premises as more permanent and also more germane to his job.

I would never volunteer #3 for one of my clients. Distinct economic areas represented by towns in my state are roughly 20 miles apart and an attempt by IRS would fail here. However, they once got away with designating the entire metro area of Philadelphia which is some 50 miles long or more. Not fair.

Not easy, my opinion. Hope you hear from other board members. I am not the smartest, in spite of my good looks, baritone radio voice, magnificent build, and dapper manner. (By the way, don't fall for that -- no one else has)...

[NotEasy]

Interpretation #1 The employer's premises are considered the "tax home" and thus 14 miles are disallowed. The taxpayer may deduct 8 miles per day.

Thank you for your opinion. I do not understand how you came up with 14 miles as non-deductible though. The employee basically drove three segments every day:

(1) Mileage from residence to employer is 7 miles.
(2) Mileage from employer to customer is 5 miles.
(3) Mileage from customer to residence is 10 miles

Let's assume that we can establish the employer's premises is his tax home.

(1) is obviously non-deductible because it's considered 'commune" miles from home to primary work location.

(2) is obviously deductible because it's business miles from his employer's location to the
client's location.

(3) is the grey area.

So I think the deductible miles is either 15 or 5 depending on whether (3) is considered commune or business miles.

Actually, I wonder whether we even need to determine the miles are deductible or not. What the employer wants to do here is to reimburse the employee for his car expenses under an accountable plan so it won't be taxable to him. Do the mileages being deductible or not have an effect on it?

[Snaggletooth]

Good Thinking

Not easy, since you're still up ...

Mileage to and from work (14 miles) is non-deductible under scenario #1, leaving 8 miles to deduct.

Good thinking on this -- the economic objective should be to get this reimbursed tax-free. If the taxpayer deducts this mileage as an occupational expense, the deduction is going to watered down by 2% of AGI, or maybe lost entirely if he doesn't itemize.

If there were a requirement to drive BACK to the employer, this would be easy. A weekly trip report showing mileage to and from the customer. He could be reimbursed for 10 miles per week at the IRS rate.

From a practical matter, I suppose the employer could tell him to return at the end of the day, and since after close of business no one would ever know whether he came back or not. So if he went directly home, no one would be the wiser. I would then reimburse him 10 miles per day.

But I would be interested in the theoretical answer (not the likely practical solution), so I hope others will post if they have some ideas.

[joanmcq]

Isn't the concept of 'tax home' for travel expenses, as in when you are considered to be 'away from home' overnight, and not for commuting? So someone who's family is in Pittsburgh, but they work in primarily in Philadelphia cannot deduct any of the expenses for meals and lodging etc in Philadelphia because their tax home is Philly. However, if they only are temporarily in Philly, and normally work in Pgh, they can deduct travel expenses, because their tax home is Pgh. travel within their tax home is commuting unless going from job one to job two in the same day. So only the 5 mile trip from employer to customer is deductible.

[Lion]

Miles

Yes, you do need to determine which miles are deductible for an accountable plan. If the employer reimburses for commuting mileage, then it's taxable to employee. If the employer reimburses for business mileage, then it's a non-taxable reimbursement to employee if according to company's plan. I agree that it's a lot cleaner if employee visits client in the middle of the day, like making a bank deposit and returning to work. Or, if the second location is sporadic and not on such a regular schedule. However, if he actually has two work locations, then the mileage going from #1 to #2 is deductible. But, then his beginning of the day and ending trip home are not; so that's not the best scenario for your client. It's one of those facts and circumstances things. You have to discuss it with your client.

[AJsTax]

Not really difficult.

Vehicle expenses from the first work location to the second is deductible business expense, employee or business. If he goes home first, then to second location then it is commuting milage. It does not matter if he does this every day, it is deductible and therefore can be reimbursed under an accountable plan if that is what they want to do. If the employer does not reimburse the employee he can claim the expense on a 2106 (if he can itemize deductions.)

[NotEasy]

Yes, you do need to determine which miles are deductible for an accountable plan. If the employer reimburses for commuting mileage, then it's taxable to employee. If the employer reimburses for business mileage, then it's a non-taxable reimbursement to employee if according to company's plan.

Thank you for clarifying this point.

Another question came to my mind. Does the employer have to reimburse the employee according to the standard mileage rate (ie $0.505 in 2008)? If the employer decides to reimburse the employee for a higher rate, like $0.75/mile, would the reimbursement still be non-taxable to the employee if everything else conforms to the requirements of an accountable plan? Or would it be partially non-taxable (like $0.505/mile is non-taxable and the excessive $0.245/mile is taxable?

[Lion]

Last Sentence

NotEasy: pretty sure it's your last sentence. Got two clients wanting me to finish today so they can pick up (a 2006 1040 and TWO trusts and a 2007 1040) so not going to look it up today. I'm interested, too, because I have a couple clients who are always looking to make some deal. Also, not sure if the excess is tracked by the employer and added to wages or if it gets taken care of on the 2106 when reimbursements are listed and exceed mileage... Let us know what you find out.

[Nashville]

Taxable if Excessive

I believe we have taxable compensation if the reimbursement exceeds the IRS allowed rate.

In practice, not many employers even want to MATCH the IRS rate. They know the rate covers fixed costs like depreciation, insurance, etc. and not many will pay the full rate. One of my customers pays 80% of the rate, rounded down to the nearest cent. Another customer currently is paying only 32 cents, and adjusts the rate periodically only when employees raise a furor about not being paid enough.

[JG EA]

The quotes for what's been already stated

Pub 463

"Two places of work. If you work at two places in one day, whether or not for the same employer, you can deduct the expense of getting from one workplace to the other. However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the amount it would have cost you to go directly from the first location to the second."

Or

"If you have one or more regular work locations away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location, regardless of distance."