Deductibility of temporary assignment living expenses.

• Author: Dichter, Arthur J.

Generally, reimbursements paid to an employee for living expenses incurred while temporarily away from home on business are deductible by the employer. Before 1993, an employer could treat assignments of less than two years as temporary assignments, and therefore deduct living expenses for those assignments. Beginning in 1993, assignments of longer than one year are no longer treated as temporary. The IRS recently published Rev. Rul. 93-86, implementing this change.

An employer will not be able to deduct living expenses unless - based on the facts and circumstances, the employee's away-from-home assignment is reasonably expected to last less than one year, and - the assignment actually does, in fact, last less than one year.

If the assignment is expected at its start to last more than a year (even if it is actually terminated before one year), no deductions are allowed. If an assignment is expected at the outset to last less than one year, deductions for living expenses are allowable. However, if it becomes clear during the assignment that it will last more than one year, no deductions are allowable from the time that the expectation changed.

Multiple locations: These rules deal with assignments to a single location. If an employee is sent to one location for eight months and then to another location for 10 months, living expense deductions are allowable even though the total length of time away from home exceeds one year.

Planning is crucial: It is crucial to establish that the reasonable expectation at the beginning of an assignment is that it will last for less than one year. Employers should consider promulgating company travel policies which state that no assignment away from home will exceed 11 months. Such a policy should help to document the employer's reasonable expectation of the maximum length of out-of-town assignments.

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The Service is preparing to release two new forms for nonresident alien individuals who otherwise meet the substantial presence test, but claim to be exempt individuals or have a closer connection to a foreign country.

In general, an individual is considered a U.S. resident if he meets the substantial presence test. The test is met for 1993 if the individual was physically present in the United States for at least (1) 31 days during 1993 and (2) 183 days during the period 1993, 1992 and 1991, counting all the days of physical presence in 1993 but only one-third the number of...