reimbursive travel allowance taxable

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Tax issues arise when employers pay employee business travel expenses

Employers must determine proper tax treatment for employees.

Most employers pay or reimburse their employees’ expenses when traveling for business. Generally, expenses for transportation, meals, lodging and incidental expenses can be paid or reimbursed by the employer tax-free if the employee is on a short-term trip. However, the tax rules become more complex when the travel is of a longer duration. Sometimes the travel expenses paid or reimbursed by the employer must be treated as taxable compensation to the employee subject to Form W-2 reporting and payroll taxes.

The purpose of this article is to address some of the more common travel arrangements which can result in taxable income to employees for federal tax purposes. Although business travel can also raise state tax issues, those issues are beyond the scope of this article. This article is intended to be only a general overview as the tax consequences to an employee for a given travel arrangement depend on the facts and circumstances of that arrangement.

In the discussion below, it is assumed that all travel expenses are ordinary and necessary and incurred by an employee (or a partner in a partnership) while traveling away from home overnight for the employer’s business. In addition, it is assumed that the expenses are properly substantiated so that the employer knows (1) who incurred the expense; (2) where, when, why and for whom the expense was incurred, and (3) the dollar amount. Employers need to collect this information within a reasonable period of time after an expense is incurred, typically within 60 days.

Certain meal and lodging expenses can fall within a simplified substantiation process called the “per diem” rules (although even these expenses must still meet some of the substantiation requirements). The per diem rules are outside the scope of this article.

One of the key building blocks for the treatment of employee travel expenses is the location of the employee’s “tax home.”  Under IRS and court holdings, an employee’s tax home is the employee’s regular place of work, not the employee’s personal residence or family home. Usually the tax home includes the entire city or area in which the regular workplace is located. Generally, only expenses paid or reimbursed by an employer for an employee’s travel away from an employee’s tax home are eligible for favorable tax treatment as business travel expenses.

Travel to a regular workplace

Usually expenses incurred for travel between the employee’s residence and the employee’s regular workplace (tax home) are personal commuting expenses, not business travel. If these expenses are paid or reimbursed by the employer, they are taxable compensation to the employee. This is the case even when an employee is traveling a long distance between the employee’s residence and workplace, such as when an employee takes a new job in a different city. According to the IRS, if it is the employee’s choice to live away from his or her regular workplace (tax home), then the travel expenses between the two locations which are paid or reimbursed by the employer are taxable income to the employee.  

Example: Bob’s personal residence is in Chicago, but his regular workplace is in Atlanta. Bob’s employer reimburses him for an apartment in Atlanta plus his transportation expenses between the two cities. Since Atlanta is Bob’s tax home, these travel expenses are personal commuting expenses and the employer’s reimbursement of the expenses is taxable compensation to Bob.

Travel to two regular workplaces

Sometimes an employer requires an employee to consistently work in two business locations because of the needs of the employer’s business.  Factors such as where the employee spends the most time, has the most business activity, and earns the highest income determine which is the primary location with the other being the secondary location. The employee’s residence may be in either the primary or the secondary location. In general, the IRS holds that transportation costs between the two locations can be paid or reimbursed by the employer tax-free. In addition, lodging and meals at the location which is away from the employee’s residence can generally be paid or reimbursed tax-free.

Example:  Caroline lives in Location A and works at her company headquarters there. Her employer opens a new store in Location B and asks her to handle the day-to-day operations for two years while the store is getting up to speed. But Caroline is also needed at the headquarters so her employer asks her to spend two days a week at the headquarters in Location A and three days a week at the store in Location B.  Because the work at each location is driven by a business need of Caroline’s employer, she is treated as having primary and secondary work locations and is not treated as commuting between the two locations. Caroline’s travel between the two locations and her meals and lodging at Location B can be reimbursed tax-free by her employer.

As a practical matter, the employer must carefully consider and be able to support the business need for the employee to routinely go back and forth between two business locations. In cases involving two business locations, the courts have looked at time spent, business conducted and income generated in each location.  Merely having an employee “sign in” or “touch down” at a business location near his or her residence is unlikely to satisfy the requirements for having two regular workplaces. Instead, the IRS would likely consider the employee as having only one regular workplace with employer-paid travel between the employee’s residence and the regular workplace being taxable commuting expenses.

Travel when a residence is a regular workplace

In some cases an employer hires an employee to work generally, or only, from the employee’s home, as he or she is not physically needed at an employer location.  If the employer requires the employee to work just from his or her residence on a regular basis, does not require or expect the employee to travel to another office on a regular basis, and does not provide office space for the employee elsewhere, then the residence can be the tax home since it is the regular workplace for the employee.  When the employee does need to travel away from his or her residence (tax home), the temporary travel expenses can be paid or reimbursed by the employer on a tax-free basis.

Example: Jason is a computer programmer and works out of his home in Indianapolis for an employer in Seattle. He periodically travels to Seattle for meetings with his team. Since Jason has no assigned office space in Seattle and is expected by his employer to work from his home, Jason’s travel expenses to Seattle can be reimbursed by his employer on a tax-free basis.  

Travel to a temporary workplace

Sometimes an employer temporarily assigns an employee to work in a location that is far from the employee’s regular workplace, with the expectation that the employee will return to his or her regular workplace at the end of the assignment. In this event, the key question is whether the employee’s tax home moves to the temporary workplace.  If the tax home moves to the temporary workplace, the travel expenses between the employee’s residence and the temporary workplace that are paid or reimbursed by the employer are taxable compensation to the employee because they are personal commuting expenses rather than business travel expenses. Whether or not the employee’s tax home moves to the temporary workplace depends on the duration of the assignment and the expecations of the parties.

• One year or less . If the assignment is expected to last (and actually does last) one year or less, the employee’s tax home generally does not move to the temporary workplace. Therefore, travel expenses between the employee’s residence and temporary workplace that are paid or reimbursed by the employer are typically tax-free to the employee as business travel.

Example: Janet lives and works in Denver but is assigned by her employer to work in San Francisco for 10 months. She returns to Denver after the 10-month assignment. Janet’s travel expenses associated with her assignment in San Francisco that are reimbursed by her employer are not taxable income to her as they are considered temporary business travel and not personal commuting expenses.

• More than one year or indefinite .  If the assignment is expected to last more than one year or is for an indefinite period of time, the employee’s tax home generally moves to the temporary workplace. This is the case even if the assignment ends early and actually lasts one year or less. Consequently, travel expenses between the employee’s residence and the temporary workplace that are paid or reimbursed by the employer are taxable compensation to the employee as personal commuting expenses.

Example: Chris lives and works in Dallas but is assigned by his employer to work in Oklahoma City for 15 months before returning to Dallas. Chris’s travel expenses associated with his assignment to Oklahoma City that are reimbursed by his employer are taxable income to him as personal commuting expenses.

• One year or less then extended to more than one year . Sometimes an assignment is intended to be for one year or less, but then is extended to more than one year. According to the IRS, the tax home moves from the regular workplace to the temporary workplace at the time of the extension. Therefore, travel expenses incurred between the employee’s residence and the temporary workplace that are paid or reimbursed by the employer are non-taxable business travel expenses until the time of the extension, but are taxable compensation as personal commuting expenses after the extension.

Example:  Beth’s employer assigns her to a temporary workplace in January with a realistic expectation that she will return to her regular workplace in September.  However, in August, it is clear that the project will take more time so Beth’s assignment is extended to the following March. Once Beth’s employer knows, or has a realistic expectation, that Beth’s work at the temporary location will be for more than one year, changes are needed to the tax treatment of Beth’s travel expenses. Only the travel expenses incurred prior to the extension in August can be reimbursed tax-free; travel expenses incurred and reimbursed after the extension are taxable compensation.

When an employee’s residence and regular workplace are in the same geographic location and the employee is away on a temporary assignment, the employee will often return to the residence for weekends, holidays, etc. Expenses associated with travel while enroute to and from the residence can be paid or reimbursed by an employer tax-free, but only up to the amount that the employee would have incurred if the employee had remained at the temporary workplace instead of traveling home.

Travel to a temporary workplace – Special situations

In order for an employer to treat its payment or reimbursement of travel expenses as tax-free rather than as taxable compensation, the employee’s ties to the regular workplace must be maintained. The employee must expect to return to the regular workplace after the assignment, and actually work in the regular workplace long enough or regularly enough that it remains the employee’s tax home. Special situations arise when an employee’s assignment includes recurring travel to a temporary workplace, continuous temporary workplaces, and breaks in assignments to temporary workplaces.

• Recurring travel to a temporary workplace . Although the IRS has not published formal guidance which can be relied on, it has addressed situations where an employee has a regular workplace and a temporary workplace to which the employee expects to travel over more than one year, but only on a sporadic and infrequent basis.  Under the IRS guidance, if an employee’s travel to a temporary workplace is (1) sporadic and infrequent, and (2) does not exceed 35 business days for the year, the travel is temporary even though it occurs in more than one year.  Consequently, the expenses can be paid or reimbursed by an employer on a tax-free basis as temporary business travel.

Example: Stephanie works in Location A but will travel on an as-needed basis to Location B over the next three years. If Stephanie’s travel to Location B is infrequent and sporadic and does not exceed 35 business days a year, her travel to Location B each year can be reimbursed by her employer on a tax-free basis as temporary business travel.

• Continuous temporary workplaces .  Sometimes an employee does not have a regular workplace but instead has a series of temporary workplaces. If the employee’s residence cannot qualify as his or her tax home under a three-factor test developed by the IRS, the employee is considered to have no tax home and is “itinerant” for travel reimbursement purposes. In this case, travel expenses paid by the employer generally would be taxable income to the employee.

Example: Patrick originally worked in Location A, but his employer sends him to Location B for eleven months, then assigns Patrick to Location C for another eight months. Patrick will be sent to Location D after Location C with no expectation of returning to Location A. Patrick does not maintain a residence in Location A. Travel expenses paid to Patrick by his employer will likely be taxable income to him.    

• Breaks between temporary workplaces . In an internal memorandum, the IRS addresses the outcome when an employee has a break in assignments to temporary workplaces. When applying the one-year rule, the IRS notes that a break of three weeks or less is not enough to prevent aggregation of the assignments, but a break of at least seven months would be. Some companies choose to not aggregate assignments when the breaks are shorter than seven months but are considerably longer than three weeks, given the lack of substantive guidance from the IRS on this issue.

Example: Don’s regular workplace is in Location A. Don’s employer sends him to Location B for ten months, back to Location A for eight months, and then to Location B again for four months. Although Don’s time in Location B totals 14 months, since the assignments there are separated by a break of at least seven months, they are not aggregated for purposes of applying the one-year rule. Consequently, the travel expenses associated with each separate assignment to Location B can be reimbursed by the employer on a tax-free basis as temporary business travel since each assignment lasted less than a year.

  Conclusion

The tax rules regarding business travel are complex and the tax treatment can vary based on the facts of a situation. Employers must carefully analyze business travel arrangements to determine whether travel expenses that they pay or reimburse are taxable or nontaxable to employees.

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Is A Logbook Really Necessary? Or Can SARS Use Code 3702 To Audit Potential Business Kilometers Travelled?

Contributor.

I have often wondered whether the South African Revenue Service (SARS) officials thoroughly review the submitted logbooks when taxpayers claim for travel expenses incurred as a result of business travel or are these requested just to tick a box? This sense of wonder has been recently resolved, SARS audits the logbooks to the extent of even requesting the details of the person or company being visited.

SARS recently changed the format in which logbooks should be captured. It is now compulsory to keep a logbook of all business kilometres travelled if taxpayers want to claim a travel deduction. The logbook must contain the following minimum information relating to business travel:

• The date of travel
• Total Kilometres travelled (business and private)
• Travel details (where to and reason for the trip)

Taxpayers have to record their odometer readings on 1 March each year (the first day of the tax year for individuals), and again on the last day of February the following year (the last day of the tax year for individuals).

The difference between the closing and opening readings will give the total kilometres travelled for the year.

It is true that the above exercise can be quiet stressful sometimes, you could also simply forget to update the logbook timeously. Which again poses the question of whether the logbooks submitted to SARS are a true reflection of the taxpayers business travel.

SARS however reserves the right to audit and query the content or information recorded by the taxpayer in any logbook.

Is there not a way to redirect SARS audit focus and resources on other things?

Let's look into this further.

Travel Allowance

The Income Tax Act No.58 of 1962 (Income Tax Act) allows taxpayers who receive a travel allowance to claim a deduction for the use of their private vehicles for business purposes. Reference is made to Section 8 (1)(b)(ii)&(iii) of the Income Tax Act.

A travel allowance is any allowance paid or advance given to an employee in respect of travelling expenses for business purposes.

Generally, the two different travel allowance classifications are-

• A travel allowance given to an employee to finance transport (for example, a set rate or amount per pay period).
• A reimbursement given to an employee based on actual business travel.

Let us now have a look at the difference between the two.

Travel allowance

The total travel allowance (100%) must be reflected on the IRP5 certificate under code 3701.

80% of the travel allowance paid to an employee is subject to the deduction of employees' tax. Where the employer is satisfied that at least 80% of the use of the motor vehicle for a year of assessment will be for business purposes. 20% of the allowance is subject to the deduction of employees' tax. This determination must be done on a monthly basis to cater for any possible changes in employee's circumstances.

A perfect example of this would be the working situation during the current Covid 19 pandemic. Employees had structured their packages to cater for business travel but during the pandemic, no travel or even less travel was required.

Reimbursive allowance

A reimbursive travel allowance is where an allowance or advance is based on the actual distance travelled for business purposes (that is excluding private use). For the 2022 tax year, the rate per kilometre fixed by the Minister of Finance is currently 3.82 per kilometre.

It is trite practice that most employers would offer their employees a rate per kilometre that is above the fixed rate by the Minister (e.g. R4,40 instead of R3,82) - reference is made to Notice 271 of the Government Gazette, paragraph 4 of the Fixing of Rate per Kilometre i.e. Motor Vehicle Regulation. In such an instance, the IRP5 code to use is code 3702, which is a taxable code.

Where the employer reimburses the employee at a rate lower than the prescribed rate (e.g. R3,70 instead of R3,82), the IRP5 code to use is 3703 which is a non-taxable code.

Let us now assume that the employee received both travel allowance and reimbursive allowance of code 3702 and discuss below.

Hybrid of travel allowances

Where a travel allowance is paid in addition to a reimbursive allowance or reimbursive allowance is paid in addition to a travel allowance, both the amounts will be combined on assessment by SARS. These combined allowances will be treated as a taxable travel allowance. Generally, the employee will claim a travel deduction based on kilometres travelled. But before SARS can allow this deduction, it requires a logbook as discussed above.

Let us now address our question of whether a logbook is required or SARS can use the code 3702 to determine the business travel for the tax year.

Considering the hybrid of travel allowances mentioned above, the general business practice is that employers will reimburse employees based on business kilometres travelled. Is it not correct then to consider what is reflected under the reimbursement code 3702 as business kilometres travelled?

The only question from SARS should be how much was the employers' reimbursement rate or by how much is the employers' reimbursement rate high when compared to the fixed rate by the Minister?

Example: The total business kilometres travelled for the period is 21 000km per the taxpayer's submitted logbook. The amount that is reflected under code 3702 is R48 000. It was confirmed that the company reimburses its employees at a fixed rate of R4,40. Therefore the estimated business travel for the said employee should be R48 000/R4,40 = 10 909 business kilometres that were approved and paid by the employer.

The question for SARS to pose then would be - why are the business kilometres per the logbook submitted by taxpayers higher than what was reimbursed by the employer?

Example: code 3702 reflects R48 000 as indicated above, which deems the employee to have travelled 10 909 kilometres for business purposes vs a logbook showing 21 000 business kilometres travelled (difference of 12 091 i.e. 21 000 km - 10 909 km.).

Well, it may be arguable to say that the taxpayer did not claim all its travel expenditure (due to one reason or the other) hence the amount reflecting under code 3702 is less than the actual business kilometres per the logbook.

This argument would again be reasonable if the variance between the actual business kilometres per the logbook and deemed business kilometres per code 3702 is not material.

Now taking the difference of business kilometres not claimed in the above example of 12 091, this would imply that the taxpayer forego R53 200 ( 12 091 x R4,40) worth of travel reimbursement. Now, show me an employee that does not want to be compensated or reimbursed for expenditure incurred for business purposes!

The onus is still however on the taxpayer or employer to prove to SARS the correctness of the details therein.

Being tax compliant and 'paying our fair share' is not just good for taxpayers, but also contributes to the positive growth of our country's economy which in turn benefits all South Africans.

In line with SARS's continued effort to improve compliance and to make it even easier for taxpayers to manage their tax affairs, a review of the process followed currently to claim travel expenses will go a long way . We therefore urge SARS to continue trying to find means and ways for more taxpayers to be auto assessed- e.g. auto assessment of allowing a travel deduction based on code 3702. This will help lessen the administration burden of having to maintain yearly logbooks. The normal rule will apply where if a taxpayer is not in agreement with the auto-assessment, and can over-ride it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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• 30 April 2020
• The Tax Faculty

This article is based on tax law effective from 1 March 2020..

Where an allowance or advance is based on the actual distance travelled by the employee for business purposes, employees’ tax will not be withheld on the allowance paid by an employer to an employee if the rate does not exceed 398 (previously 361) cents per kilometre, regardless of the value of the vehicle.

The portion by which the allowance paid by the employer exceeds 398 (previously 361) cents per kilometre will form part of the balance of remuneration calculation for employees’ tax purposes.

Where a travel allowance is paid in addition to a reimbursive allowance both amounts will be combined on assessment and treated as a single travel allowance.

With effect from 1 March 2020 both a travel allowance and reimbursive travel allowance are included in the definition of variable remuneration. This means that the allowance only accrues to the employee when it is paid. The distance travelled for business purposes will also be deemed to be travelled in such a year of assessment.

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IRS issues standard mileage rates for 2023; business use increases 3 cents per mile

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IR-2022-234, December 29, 2022

WASHINGTON — The Internal Revenue Service today issued the 2023 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on January 1, 2023, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 65.5 cents per mile driven for business use, up 3 cents from the midyear increase setting the rate for the second half of 2022.
• 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, consistent with the increased midyear rate set for the second half of 2022.
• 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2022.

These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.

The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

It is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station. For more details see Moving Expenses for Members of the Armed Forces .

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Taxpayers can use the standard mileage rate but generally must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses. Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.

Notice 2023-03 PDF contains the optional 2023 standard mileage rates, as well as the maximum automobile cost used to calculate the allowance under a fixed and variable rate (FAVR) plan. In addition, the notice provides the maximum fair market value of employer-provided automobiles first made available to employees for personal use in calendar year 2023 for which employers may use the fleet-average valuation rule in or the vehicle cents-per-mile valuation rule.

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South African Tax Guide

Taxation Made Easy by Nyasha Musviba

Employees tax – travel allowances and reimbursements

Author page Most employers are aware that a travel allowance may be granted to an employee where it is anticipated that the employee will be required to undertake business travel by virtue of the duties of his/her employment and that a travel allowance should not be merely used as a mechanism to reduce an employees employees tax (PAYE) liability.

However, the South African Revenue Service (SARS) has in some instances issued employees tax assessments in respect of travel allowances granted to employees on the basis that, in order to qualify for a travel allowance, an employee must in fact have travelled on business. SARS is further of the view that where employees who received travel allowances were also able to claim a reimbursement for business mileage (typically on a rate per kilometre basis) and he/she did not do so, it may be concluded that an employee did not in fact travel on business. In these circumstances, it is then reasoned that the employees travel allowance does not fall within the ambit of section 8(1) of the Income Tax Act, 1962 (Act) and that consequently the full amount of the travel allowance should have been subject to PAYE.

There are two aspects to the above argument. Firstly, is it a requirement when granting a travel allowance to an employee that the employer must ensure that that employee does in fact travel for business purposes? The second aspect is whether it is reasonable to conclude that an employee who received a travel allowance but did not submit a claim for business mileage, did not travel for business purposes and that such employees travel allowance accordingly does not fall within the ambit of section 8(1) of the Act.

Currently, 80% of a travel allowance is subject to PAYE. However, in earlier tax years which may still be under review by SARS, this percentage was as low as 50% or 60%. Should it be found that the allowance did in fact not qualify as a travel allowance as envisaged in the Act, the potential exposure to the underpayment of PAYE could be significant.

Requirement to travel for business purposes

Section 8(1)(a)(i) of the Act provides for an inclusion in the taxable income of the recipient of any amount which has been paid or granted as an allowance or advance by his/her principal, excluding any portion actually expended by that recipient, inter alia, on travelling on business. Section 8(1)(a)(i) therefore deals with an individual taxpayers final tax liability in respect of an allowance or advance granted by a principal (employer).

Section 8(1)(b) of the Act provides that any allowance or advance in respect of transport expenses shall, to the extent to which such allowance or advance has been expended by the recipient on private travelling (including travelling between his place of residence and his place of employment or business or any other travelling done for his private or domestic purposes), be deemed not to have been actually expended on travelling on business.

Section 8(1)(a)(i) does, in our view, not require that an employee must have travelled for business purposes or account to his or her employer for actual business travel undertaken in order for the allowance granted to him to qualify as a travel allowance. There is furthermore no requirement imposed by legislation on an employer who grants an employee a travel allowance to monitor the use of this allowance by the employee.

This is confirmed in SARS Interpretation Note No.14 (Issue 2) which states that an allowance is an amount of money granted by an employer to an employee in circumstances where the employer is certain that the employee will incur business-related expenditure but where the employee is not obliged to prove or account for the business expenditure to the employer.

We maintain that a travel allowance may be given to an employee on a prospective basis having regard to the reasonably anticipated business travel requirements of the employees position, without the employer being required to confirm whether or not the employee actually travels for business.

Reimbursive fuel claims

Where an employers travel allowance policy also allows those employees who receive travel allowances to submit reimbursive fuel claims at a rate per kilometre for business travel, submission of these claims by the employee is typically optional.

The fact that an employee may not have claimed a per kilometre reimbursement in respect of his or her business travel does not imply either that such an employee was not required by the nature of his duties of employment to travel on business, or that he/she did not in fact travel on business.

In practice, it is often the case that employees who travel for business purposes choose not to submit a claim for a fuel reimbursement in addition to their fixed monthly travel allowance because it is not worth their time and effort to do so. Also, the requirement to keep a log book was only introduced in the 2010 tax year. Prior to this, most employees used the gazetted tables to calculate their allowable travel allowance deductions in their annual tax returns. It was therefore not necessary to keep a record of actual business travel.

It therefore cannot be said that employees who received travel allowances but who choose not to submit reimbursive fuel claims, did not in fact travel for business purposes.

In addition, whether or not a reimbursive fuel claim was submitted by an employee should, in our view, not be regarded as a criterion to be applied with hindsight as to whether the employee qualified for a travel allowance.

Provided that the employer duly applied its mind whether to grant a particular employee a travel allowance based on the business travel requirements of his/her job and not, for example, as an automatic benefit by virtue of his/her position within the organisation, a travel allowance granted on this basis should be regarded as an allowance in respect of transport expenses as envisaged in section 8(1)(b) of the Act.

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