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June 27, 2019

Deducting Travel Expenses for Travel Away from Home

IRS & State Audits

Houston Tax Attorney

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Contractors and business owners are able to deduct travel costs for travel away from home. This typically includes mileage and lodging costs. The amount of these expenses can be substantial. The IRS frequently audits and adjusts these expenses. Even with perfect records, the expenses may not be allowable depending on where the taxpayer’s “tax home” is. The recent Baca v. Commissioner, T.C. Memo. 2019-78 presents an opportunity to consider these rules.

Facts & Procedural History

The taxpayer lives in El Paso, Texas. He is an entrepreneur. He has owned and operated several businesses. Most of the businesses were operated from his personal residence in El Paso, Texas.

In 2011-2014, the taxpayer started a business in the oil field in Midland, Texas. He was paid to to move and operate fracking equipment.

He worked an average of 16 hours each day, 4 days a week. And he did this all while maintaining his residence in El Paso. The client would give the taxpayer notice of a job in advance, and the taxpayer would make the drive from El Paso to Midland, Texas.

The taxpayer’s wife remained in El Paso. She worked for a bank in El Paso.

The taxpayer deducted his mileage and lodging costs. The IRS disallowed the expenses on audit and litigation ensued.

Mileage and Lodging Away from Home

The question for the court was whether the taxpayer’s “tax home” was in El Paso or Midland. For a business owner or contractor, mileage and lodging while away from home are deductible for tax purposes. But what home counts?

The courts have said that the “home” for tax purposes is the vicinity of his principal place of business, where he has a permanent job, or at least where he is working indefinitely. It is not where he actually lives.

The court noted the law in the Fifth Circuit, which says that the following factors are to be considered to determine if the work is sufficiently indefinite:

  • whether the taxpayer’s job required him to travel to the distant worksite;
  • where the taxpayer spends more of his time;
  • where the taxpayer engages in greater business activity, even if he still maintains business at his perceived place of abode; and
  • where the taxpayer derives a greater proportion of his income.

If these factors show that the remote area is the taxpayer’s tax home, the taxpayer cannot deduct his mileage and lodging expenses for going to and from the remote area.

Travel Away from Tax Home

In the present case, the taxpayer testified that his work in Midland, Texas was temporary. This was in fact true, as the work did not continue beyond 2014. The taxpayer noted that he maintained his residence in El Paso, and had more connections there. This would allow him to deduct his expenses for travel away from home.

The court concluded that the taxpayer’s tax home was in Midland. It did so by concluding that the taxpayer’s work in Midland was sufficiently indefinite. The court noted:

even though Baca may have gone into the job with AST in 2011 worried that it could end at any moment, we find that at some point after his first year he felt some assurance that the work would continue. Buying a belly dump and starting a business with it in Midland is evidence of such assurance. And finally, Baca’s AST income was much higher than what he earned from his other businesses—nearly $100,000 versus $13,000 in 2012. … It is understandable that the Bacas didn’t want to pack up their home and move to Midland, especially with Mrs. Baca’s job at the bank, but the work in Midland was consistent for nearly four full years. The Bacas’ decision to remain in El Paso was their personal decision.

As such, the court disallowed the mileage and lodging expenses as they were personal in nature and not business expenses.

The Takeaway

Taxpayers who claim travel expenses for work away from home should keep records to establish the amount of the expenses. They should also take steps to document that their tax home is their residence. This may entail documenting that the home, such as El Paso in this case, is the true tax home by showing that they spent more time there, that the remote location was temporary and not prolonged or permanent, etc.

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