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I have owned my own IT Consulting company (sole proprietorship) for 12 years now. My company is based in Iowa. I have a client in Iowa that I work onsite 1-2 days per week as well as additional time remote (total of 50 hours/week). I recently landed a 3 year sub-contract for a client in Wisconsin. I will be required to travel/be onsite 3-4 days per week in Wisconsin (40 hours/week), but will still maintain my Iowa based business, reside in Iowa and continue to work with other Iowa based clients. Since the duration is longer than 1 year. Does this mean I am not able to expense travel to Wisconsin? This seems odd if that is the case since the client requires me to travel to their site. If I am able to expense the travel, it would be more cost effective to lease an apartment then to stay in a hotel. Will leasing an apartment in Wisconsin muddy the water? Can I still expense a lease apartment in Wisconsin as a travel expense?
Please don't shoot the messenger here ....
IRS puts is this way " ... is determined as indefinite, if the [work project for your business or] assignment [for an employee] is in excess of one year, or if it is realistic to expect the assignment will be in excess of one year. If you expect the assignment to be longer than one year, travel expenses are not deductible even if the time period ends up being less.
THis makes this non deductible
Travel expenses paid or incurred for an indefinite work assignment are not deductible.
A work assignment is determined indefinite when the work assignment is in excess of one year, or if it is realistic to expect the assignment will be in excess of one year. If you expect the assignment to be longer than one year, travel expenses are not deductible even if the time period ends up being less.
If you can reasonably expect the assignment to last less than one year, and that expectation changes to a period of time longer than one year, travel expenses become nondeductible when the determination is made. (from: http://www.1040.com/federal-taxes/deductions/employee-business-expenses/business-travel-expenses/ )
This seems to make sense if I was an employee working a single job. A majority of my business will continue to be Iowa, so I wasn't sure how the IRS could state that I reside in two different states at the same time. I was hoping the rules were different for a business as opposed to an employee.
"Travel expenses are the ordinary and necessary expenses incurred while traveling away from your home for your business, profession, or job. You are traveling away from your home if duty requires you to be away from the general area of your tax home for a period longer than one day's work, and you need to get sleep or rest while you are away."
Sorry, ment to stae first that this (what i just pasted in from IRS, is how the define the travel expense
They call it duty for a business owner and assignment for an employee, but the rules are the same
As a head-up ... have you checked into the state income tax issues?
You'll probably need to file a non-resident return for WI (just for the WI source income), BUT Iowa DOES have a credit for taxes paid to another state
Still with me?
Ok, I'll move us to the "Q&A" mode ... maybe that will help ... before I do, you should be aware of this: from pub 463, mentoned above)
Going home on days off. If you go back toyour tax home from a temporary assignment onyour days off, you are not considered awayfrom home while you are in your hometown.You cannot deduct the cost of your meals andlodging there. However, you can deduct yourtravel expenses, including meals and lodging,while traveling between your temporary place ofwork and your tax home. You can claim theseexpenses up to the amount it would have costyou to stay at your temporary place of work.If you keep your hotel room during your visithome, you can deduct the cost of your hotelroom. In addition, you can deduct your expen-ses of returning home up to the amount youwould have spent for meals had you stayed atyour temporary place of work.
Still looking at this one .... given that you are only going to be there 3 days per week, you may bae able to make a case that your tax home has not changed and that this is not the same as an assignment
Hang with me here:
First, see this:
To determine whether you are traveling away from home, you must first determine the location of your tax home.
Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.
If you have more than one regular place of business, your tax home is your main place of business. See Main place of business or work , later.
Main place of business or work. If you have more than one place of business or work, consider the following when determining which one is your main place of business or work.
The total time you ordinarily spend in each place.
The level of your business activity in each place.
Whether your income from each place is significant or insignificant.
The publications (nor the code itself) really covers your situation, exactly ... especially given 2 days working for the other client and weekends at home as well
yes - it seems that my tax home would still be in Iowa since I will be residing there 4 days a week. I always work 7 days/week - so a majority of my work hours will continue to be performed in Iowa. Income will be slightly more in Iowa, but not a lot. Seems like this would be a common issue for consulting companies. 1 year + project are not uncommon. These projects are never permanent though.
Yes, I agree, the problame is that in the publication AND in the code, all the examples deal with start and stop times, rather than this 3 away/4 at home situation
Here's the closest thing that they give (and the underlined portion is a little troubling)
Determining temporary or indefinite. You must determine whether your assignment is temporary or indefinite when you start work. If you expect an assignment or job to last for 1 year or less, it is temporary unless there are facts and circumstances that indicate otherwise. An assignment or job that is initially temporary may become indefinite due to changed circumstances. A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment.
you have them at a "MAY" be considered ...
I caught that too - leave it to the IRS to be clear and concise. If I am able to expense, does expensing an apartment versus a hotel make any difference to the IRS?
You are so squarely on the line here that your renting an apt could very well be what gives them the ammunition to determine this as an indefinite duration... where the hotel would support that this is a less than one week business travel at a time
Does the income from the other client approximate the income from the WI contract ... over the same amount of time, say three months?
Income in Iowa will be slightly higher, but not significant.
The way this would play out ... should you record as travel expense, is that (on an audit) you'd be showing them hotel and airfare expenses....on the income? I think that IS significant
MUCH harder for them to make the case that your tax home has changed when that travel necessary job isn't MOST of your income
Correct. This will be the case for the foreseeable future.
Is there a way to set things up so that the travel is more sporadic (or you stay longer at one time with more time in between)?
Ironically, the work is for the State of Wisconsin. Their schedule is fairly fixed, so I won't have a lot of flexibility.
Is there anything in the contract about part of he compensation being to compensate for travel?
It is stated that all travel expenses are to be included within the rate that I bid. Travel cannot be expensed separately.
If you get audited, that's not gonna help (analogy is an employee deducting travel expenses that are reimbursed)
Back to the other side of the coin, this is NOT an indefinite time period, it's a fixed contract .... is this something with a likelihood of renewl after the three years?
I just consulted with my tax law professor from law school (I'm CFP and have been providing tax and other financial advice since 1986, but am in my last term of law shcool as well, specializing in tax, estate and business law). ... She says this: "a front line IRS agent will say this is indefinite, because it's longer than a year, and the travel expense is not deductible"
I think you have the extent of my wisdom :) ... Sorry to be the "messenger"
It is a fixed 3 year contract with no extension, but you are correct - it exceeds 1 year.
you could appeal it ... but the travel being included as part of the bid, longer than one year, and the regularity of it will be a had case to make
You are confirming what I expected. I really appreciate your assistance!
Thanks, XXXXX XXXXX have all the facts and maybe "see around some corners."
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sounds good - thank you again!
congratulations on the contract! you're very welcome
Jason:I just wanted to clarify something. You are self-employed, correct? Your business and other clients remain in Iowa? Then the expenses ARE deductible as ordinary and necessary business expenses. Under Internal Revenue Code (IRC) §162, you are allowed to deduct all expenses incurred in the pursuit of income. The rules that the expert above explained, while correct for employees, only apply to employees! IRC §162 says :(a) In general There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
(1) a reasonable allowance for salaries or other compensation for personal services actually rendered;
(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and
(3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.In determining whether you are away from your tax home, ALL facts and circumstances must be considered! You return to Iowa after the few days in Wisconsin. You continue to work on many other (a majority, you said) of your clients from Iowa, you are registered to vote in Iowa, you will probably keep your homeowners property tax break in Iowa, you will file an Iowa resident tax return, so you will be considered an Iowa resident. Under the Regs, your tax home is generally your "regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located. If you have more than one regular place of business, your tax home is your main place of business, and your tax home is your main place of business.Therefore, under this rule, since the Wisconsin client is only one of several clients, your office is maintained in Iowa even when you are out of state, and you continue to work on the majority of your other business in Iowa, your tax home remains in Iowa, and your Wisconsin trips are fully deductible.I actually just went to US Tax Court with a client over this very issue, so I could say I have become an expert in the area, whether I wanted to or not!The advise that the prior expert gave you was 100%, but for employees, who generally are assigned to long-term contracts and want to deduct their expenses.
That's fantastic! Thank you for the reply. Will leasing an apartment be an acceptable expense? Or would it be safer to incur the higher expense of a recurrent hotel?
Thanks again for the response.
Just a couple clarification points:
a) Contract will require me to be onsite 4 days per week for the remainder of 2013 and will then subside to 3 days per week for the remainder of the contract.
b) I actually have a number of clients in Iowa. The total income from them is greater then the income from the contract in Wisconsin, but not by a lot. I have also been doing business in Iowa for 12 years and plan to continue to do business in Iowa well after the Wisconsin contract will end.
c) I am working on having the contract reworded to state that expenses are not reimbursable and are the responsibility of the sub-contractor.
d) I work 7 days/week - so once I am down to 3 days in Wisconsin, a majority of my work will be performed in Iowa.
Not sure any of that really matters though. Sounds like the key question is whether the IRS will hold my self-employed status to the same travel limitations as an employee. Again, seems like every consulting company in this country would have this same issue. Doing business in other states on long term contracts is a fairly common practice for IT consulting companies.
I can't even begin to express how grateful I am for the assistance the two of you have provided! The information is invaluable. Posting the names of those cases would be very helpful. I'll keep them on file in the unlikely event that I do get audited. It is unfortunate that the tax laws are so confusing, but I guess it is all that we have to work with.
Thank you again!
Thanks Lane, I really appreciate all of your assistance on this! It was very informative. I am in the process of redrafting the contract based on all of your input and will then run it by a CPA. I am very grateful for all that you have done!