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Tax.appeal.168
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What are the compensatory tax rules?

Companies sending an employee on domestic (in the United States) assignment outside of his or her home location must determine whether the assignment is temporary, long term, or indefinite in order to properly report compensation. In conjunction with an assignment, the company reimburses the employee items such as lodging, transportation, and meals (i.e., reimbursed expenses). These reimbursed expenses are not considered taxable income to the employee provided that the business trip that correlates to the assignment is temporary in nature.

Defining a business trip is a 'facts and circumstances' determination that is dependent upon the overall nature of the stay and the length of the assignment away from the taxpayer's principal place of business. Assignments of less than one year are considered temporary business trips and the associated reimbursed expenses are not taxable. Alternatively, if the assignment is indefinite, expected to last more than one year, or actually exceeds one year, the assignment is considered long term. As a result, the taxpayer's tax home is considered shifted to the new location and reimbursed expenses are compensatory.

LINK TO REFERENCE SOURCE:

http://www.us.kpmg.com/microsite/tax/ies/tea/summer2004/stories/article03.htm

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Resolved Question:

What are the compensatory tax rules around consulting at a location out of your home state for more than a year?

Submitted: 4 years ago.
Category: Tax
Expert:  Tax.appeal.168 replied 4 years ago.

Hopefully the information provided will be helpful to you.

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Companies sending an employee on domestic (in the United States) assignment outside of his or her home location must determine whether the assignment is temporary, long term, or indefinite in order to properly report compensation. In conjunction with an assignment, the company reimburses the employee for many items such as lodging, transportation, and meals (i.e., reimbursed expenses). These reimbursed expenses are not considered taxable income to the employee provided that the business trip that correlates to the assignment is temporary in nature.

Defining a business trip is a 'facts and circumstances' determination that is dependent upon the overall nature of the stay and the length of the assignment away from the taxpayer's principal place of business. Assignments of less than one year are considered temporary business trips and the associated reimbursed expenses are not taxable. Alternatively, if the assignment is indefinite, expected to last more than one year, or actually exceeds one year, the assignment is considered long term. As a result, the taxpayer's tax home is considered shifted to the new location and reimbursed expenses are compensatory.

LINK TO REFERENCE SOURCE:

http://www.us.kpmg.com/microsite/tax/ies/tea/summer2004/stories/article03.htm

Customer: replied 4 years ago.

I am trying to understand if I'm at all liable for any tax implications related to expenses incurred/reimbursed for being on a project lasting more than a year.

Expert:  Tax.appeal.168 replied 4 years ago.

Yes, for assignments lasting more than a year, any reimbursed expenses are deemed as compensatory, and are taxable to you.

Customer: replied 4 years ago.

Thank you. Just one last bit of clarification.

I live in MN and that is where my company's office is. I have been in CA past 11 months.

If I stay the one year mark I am going to have to treat all the incurred expenses as income, since it will be an and pay taxes on those personal tax return.

Whether or not I stay the 1 year mark I need to pay both non-resident taxes to the state of California as well as Minnesota State taxes based on the time I was earning income in each state.

Expert:  Tax.appeal.168 replied 4 years ago.

You are welcome. If you stay over a year, The REIMBURSED expenses will be considered as income, and you will be required to pay taxes on that amount.

Regarding the state taxation, yes, regardless to whether you stay in CA for a year or not, you will need to file two state tax returns, one for MN and the other for CA. On the CA return, you will list yourself as a non-resident, and on the MN return, you will be listed as a resident. As a non-resident, the state of CA will tax you on your CA source income only. You should be able to receive a credit from the state of MN for taxes paid to CA. The California state return that you will file is the 540-NR. The state taxing agency for California is the California Franchise Tax Board. See below for a link to their website.

https://www.ftb.ca.gov/index.shtml?disabled=true

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