Photo Credit: David Castillo Dominici

Despite the ability to communicate readily via various technologies, there’s still often a need, some might even say more of a need than in the past, to travel to work and meet with out-of-town clients, prospects, vendors, etc. I’m often asked whether and when travel-related costs (lodging, meals, etc.) are deductible. There are some fairly extensive rules to determine this, and depending on the level of travel expenses, the result may have a significant bottom line tax impact.

So, when are these expenses deductible? As with many tax rules, the specific facts and circumstances of the situation dictate the deductibility.

The Internal Revenue Code is short on guidance. IRC §162(a)(2) states that travel 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 (are deductible). As is so often the case, the devil is in the details, and in this case, the detail involves defining two seemingly simple words: “away” and “home. ” The deduction for travel-related expenses depends on the definition and application of these two words.

Away – For purposes of deducting lodging expenses, a business trip is considered travel if it is of a duration that the taxpayer may reasonably be expected to need to obtain substantial sleep or rest to complete a round trip. (Rev. Rul. 75-432) This is known as the “overnight rule” or the “sleep/rest rule. ” The IRS has consistently denied deductions for travel-related expenses incurred on any trips that do not require sleep or rest, regardless of how many cities a single trip may have touched, how many miles it may have covered, or how many hours it may have consumed. Following are two examples that demonstrate the application of the sleep/rest rule:

Example A – Corkery is a railroad conductor. He leaves his home terminal on a regularly-scheduled round-trip run between two cities and returns home 16 hours later. During the run, Corkery is given six hours off at the turnaround point, during which he eats two meals and rents a hotel room to get necessary sleep before starting the return trip. Corkery satisfies the sleep/rest rule and may deduct the meals, lodging, etc.

Example B – Adams is a truck driver. He leaves his terminal and returns to it later the same day. Adams gets an hour off at the turnaround point to eat. Since Adams is not off work long enough to get necessary sleep and the brief time off is not an adequate rest period, the trip is not considered travel away from home. Any meals, etc. are not deductible in this case.

(Note that the duration of both trips above is less than 24 hours and this doesn’t affect the determination of the deductibility of the travel-related expenses.)

Tax Home – The IRS’s position is that the term “home” means the location of the taxpayer’s principal place of business and not of his/her residence. (Rev. Rul. 75-432) The Tax Court generally supports this position. Thus, a taxpayer may not be away from home with respect to travel expenses between the taxpayer’s personal residence and the taxpayer’s principal place of business (or employment).

Both the IRS and the Tax Court take the position that the tax home encompasses the entire general area or vicinity of the principal place of business or employment. Thus, a taxpayer is not considered away from home with respect to travel if they are near their principal place of business even though the taxpayer may be away from their personal residence.

Taxpayers who choose to live away from the area of their principal place of business or employment may be denied deductions for traveling expenses to the area and living expenses because the expenses result from the taxpayer’s personal choice of residence location, rather than as a result of business considerations.

The following cases illustrate these issues:

• A self-employed truck driver’s tax home was in Knoxville where he regularly received his cargo and hauling assignments, even though his residence was in another city. He could not deduct lodging and meal expenses incurred while in Knoxville. (P.H. Duncan v Commr, 80 TCM 283, Dec. 54,019(M), TC Memo. 2000-269)
• A taxpayer who was employed as chief of a hospital clinical laboratory maintained a residence 45 miles from the hospital. Taxpayer also maintained a mobile home in the vicinity of the hospital to be available to go to the hospital while on emergency call. The taxpayer’s tax home was the hospital. The taxpayer could not deduct …the costs of maintaining the mobile home near the hospital. (C.W. Bailey v Commr, 44 TCM 726, Dec. 39,247(M), TC Memo. 1982-452.)
• A taxpayer lived at his residence in Missouri while he was employed as an airline pilot based in Minneapolis, Minnesota. The taxpayer lived in a hotel in Minneapolis for one month while he attended a ground training school there, as required by his employer. The taxpayer’s tax home was Minneapolis and the taxpayer’s living expenses for the hotel in Minneapolis were nondeductible personal expenses. (P.V. Bowman v Commr, 39 TCM 381, Dec. 36, 401(M), TC Memo. 1979-432)
• A taxpayer who owned a shop in Santa Clara could not deduct travel expenses to and from his principal residence, even though he lived in a city 140 miles from the business. He could not deduct travel expenses for motels near the business because he was not away from home and chose to live away from the business for personal reasons. (R. Kirsch v Commr, 70 TCM 768, Dec. 50,904(M), TC Memo. 1995-451)

There may be instances for which it isn’t possible to determine a tax home due to the frequency and nature of travel and other factors. If this is the case, then the lodging related expenses may not be deductible. ( K.H. Hicks v Commr, 47 TC 71, Dec. 28,150 (1966))

Temporary Travel – Many times, a business trip may last an extended period of time (weeks or months). How does this affect the deductibility of lodging expenses?

Generally, so long as the duration of the assignment is reasonably expected to be for one year or less, the lodging costs of the trip are deductible. Once the assignment is reasonably expected to last longer than one year, the assignment is no longer considered temporary and the lodging costs are not deductible (they are considered personal expenses). These become non-deductible the moment the expectation that the duration will be longer than one year changes. (Rev. Rul. 93-86)

Code section 162(a)(2) specifically notes that travel expenses which are extravagant or lavish are not deductible. However, these terms are not defined in the code or regulations and there is only brief mention of this in a revenue ruling where the IRS indicates that expenses will not be disallowed merely because they are more than some fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs or resorts. (Rev. Rul. 63-144, 1963-2, Q&As 41,42).

In summary, lodging and related travel expenses are deductible when they meet the following criteria:

1. The travel must be related to your business purpose; and
2. The travel must be of sufficient duration that it would reasonably be expected to require rest/sleep in order to complete (but not exceeding one year); and
3. The travel must be away from your tax home; and
4. The travel expenses should not be lavish or extravagant (although no clear definitions of these terms have been established).

If you have any questions or comments regarding deducting lodging expenses, please leave a comment on this post or send me an email.

I recently had an associate ask me “What clothing expenses can I deduct?” This person frequently appears on television and provides his own wardrobe. He came to me with the “Can I Deduct This?” question after reading this SmartMoney post about a U.S. Tax Court rejecting a news anchor’s business deductions.

While this seems like a fairly simple question, the answer involves clearly understanding the specific facts of each situation and balancing at least two seemingly incongruent tax code sections, as well as often contradictory IRS guidance and court decisions. IRC §162 generally allows a deduction for “all the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business.” Yet IRC §262 prohibits deductions for “personal, living, or family expenses.” Business clothing is one of several items of potential tax deduction that, depending on the specific facts and circumstances of each situation, can be covered by both code sections. I’ll highlight some others in future blog posts.

Since the IRS’s job is to raise revenue and administer the overall federal tax system, it interprets the applicable code sections very restrictively (Rev. Rul. 70-474, and IRS Publication 17):

1. Clothing must be specifically required as a condition of employment/self-employment.
2. Clothing must not be adaptable to general usage as ordinary clothing.

It’s under these rules that the IRS (with court agreement) has disallowed the deduction for:

• A taxpayer who wears an apron or other protective clothing to save wear and tear on other clothing, if the employer does not specifically require its wear. (J. Donnelly v Commr, CA-2, 59-1 USTC ¶9196, 262 F2d 411).
• Painters whose work clothing consists of a white cap, white shirt, white bib overalls and standard work shoes; the cost of these clothes was found not deductible even though the union required that these items be worn on the job. (Rev. Rul. 57-143, 1957-1 CB 89).
• A welder whose foreman requests that the color of the work clothing be blue. (J.F. Conn v Commr, 11 TCM 600, Dec. 19,037(M)).

The Tax Court, however, has on occasion taken a slightly more liberal stance:

1. The clothing must be required or essential in the taxpayer’s business;
2. The clothing must be unsuitable for general or personal wear; and
3. The clothing must not in fact be so worn. (Yeomans v. Commissioner [ Dec. 23,064], 30 T. C. 757, 767 (1958)).

It’s the third point “clothing must not in fact be so worn,” where the Tax Court has added some slight leeway in providing for the deduction for clothing. In these cases, the Tax Court allowed the deduction for clothing that was suitable for general/personal wear as long as it wasn’t worn outside the workplace.

One of the more significant cases in this regard is O.G. Nelson v Commr, 25 TCM 1142, Dec. 28,141(M), TC Memo. 1966-224, where Ozzie and Harriet Nelson of the television show The Adventures of Ozzie and Harriet were allowed the deduction for clothing. While the clothing was adaptable to personal use, they didn’t use the clothing for personal purposes beyond a “de minimis” (minimal) amount in the opinion of the court. In fact, the clothing they wore on the show stayed in the studio where they shot their show; the Nelsons only took the clothes out of the studio when production moved to an outside location.

Other cases where the Tax Court ruled in favor of the taxpayer are:

• An employee in a dairy was allowed to deduct the cost of white shirts worn only in the dairy. (B.A. Puente v Commr, 10 TCM 735, Dec. 18,482(M)).
• An engineer was allowed to deduct the cost of overalls worn only at work. (R.W. Hastings v Commr, 44 TCM 1328, Dec. 39,405(M), TC Memo. 1982-583).
• A hospital worker was allowed to deduct the cost of white shirts and black shoes worn only at work. (O.W. Bryant v Commr, 11 TCM 430, Dec. 18,937(M)).

However, the Tax Court’s application of this relaxed standard isn’t always upheld on appeal. In B.D. Pevsner v Commr, (CA-5, 80-2 USTC ¶9732, 628 F2d 467, rev’g, 38 TCM 1210, Dec. 36,238(M), TC Memo. 1979-3), a boutique manager was required by her employer to purchase and wear expensive designer fashions at work. The taxpayer claimed she didn’t wear the clothing apart from work because it didn’t fit her lifestyle, and the Tax Court allowed the deduction, using a subjective test. The U.S. Court of Appeals for the Fifth Circuit reversed, applying the IRS’s objective two-part standard. The Fifth Circuit reasoned that an objective test, under which evidence of lifestyle is not considered, is necessary for administrative convenience.

You’ll have the best case for sustaining your deduction for clothing upon review by the IRS or the Courts if the clothing is essential to your business and the clothing isn’t adaptable to general or personal use and if you are not in the Fifth Circuit. If the clothing is adaptable to personal use, you’ll then want to make sure that you don’t wear it outside of your work environment and it’s best to maintain the clothing on business premises.

As with so many expenditures, the deductibility of your business clothing depends on the facts and circumstances of your particular situation. Consult your tax advisor before claiming a deduction for clothing on your income tax returns.

One question folks might have on these clothing cases is: “Why would such an issue end up in court – how material (no pun intended) could the matter be relative to the time and cost of going to court to battle the IRS?”

Unless it’s one heckuva large wardrobe of very expensive clothes, it’s actually quite rare that a court case would involve the clothing issue only. More often, the court case deals with other significant Section 162 and 262 interplay issues, or involves other matters altogether and the clothing issue just gets swept up with all the others in the examination and subsequent IRS litigation. Or the taxpayer just wants to try prove a point or fight “for principle.”

Do you have questions about claiming business clothing expenses on your income tax returns? Leave a comment below or email me.

Photo courtesy of Corporate Apparel Trends blog.