I made the decision to take the job knowing I would have to work in CA for less than 1 year and then be able to work from home. When I first went to work I was classified as a contractor and then a large company bought us out and I was moved to W2.
My company is a sole propietership. I made less than a $1000 in Rev for my company that year as all my wages were paid on W2.
I still work for the company as a remote employee. I would not have taken the position unless I knew I could work remote.
They have scheduled an examination. I spoke with them and their position is that I can't claim it as a business expense due to the fact I was on W2. They also said due to me only showing less than $1000 in rev (this is what flagged it) I could not write it off as a business expense. I said I may have not claimed it correctly and in talking with them on the phone, they told me that as soon as I took the job in CA (didn't matter if I was only going to be there temporally) it became my tax home. I could not write off any expenses.
I told them that I kept my home and family in AZ and I was only in CA temp to learn the product and then come home, but they said no it became my tax home and it didn't matter that my family lived in AZ or that I came home once per month or that my wife worked in AZ and so on.
The items I put on my tax form were all the items duplicated - rent, utilities, phone, internet. I also included mileage back and forth from CA to AZ 1 per month. I did not use a per diem just actual expenses. I had read in a taxe letter that as I was only there temp I could write these things off. Not sure I should of as a business expense but not sure where else to do it?
OK, although IRS Publications are not definitive, I believe I've got something you can use from Publication 463. (All page numbers are from the 2007 edition, the 2008 edition not being published yet.)
I can see the IRS arguments, but I believe you can make a good case that your 9 months in CA was a temporary assignment, making the travel expenses deductible, and that you can write them off as employee business expenses, rather than on your Schedule C.
If you were told (this doesn't have to be in writing) that you would be in California for less than a year, and after that you would be able to work from home, your tax home remains in AZ, especially if you maintained a home office in your home in AZ even while you were in CA. (See the section "Temporary Assignment or Job", subsection "Temporary assignment vs. indefinite assignment" on page 4.) If you weren't specifically told it would be less than a year, or that you would be able to work from home, then your assignment in CA becomes "indefinite", and your tax home is the work or training location. If you work from home or are expected to work from home, then the "No main place of business or work." subsection on page 3 seems to be the relevant section for determining your tax home, and you met points 2 and 3 even when you were in CA.
Once you've convinced the IRS that your tax home is in AZ, the expenses become deductible. However, it seems to me that they should be deductible as employee business expenses, as you eventually worked for them as an employee, rather than as an independent contractor.
I think you may also need to convince the auditor that the job that you were to take as an independent contractor is essentially the same as the job you ended up taking as an employee, if that's the case. That would lead rationally to some allocation of the allowable expenses between Schedule C (independent contractor)travel deductions and Form 2106 (employee) travel deductions.
Tax Preparer
20 years of tax preparation experience, including individual, trust, and estate returns.
As I'm not one of the classes of tax preparer allowed to represent clients at audit, I don't think I'm qualified to recommend audit tactics.
If you don't feel I've fully answered the question, I can opt out and let a CPA or EA handle it. I'm sorry not to be of more help.