Tax benefits of relocation costs.

• Author: Eike, Betsy

With many businesses moving or expanding their operations to new locations, tax practitioners should carefully review the costs associated with the relocation effort to maximize the available tax benefits. The costs involved in searching for and ultimately moving to a new business location are often substantial. Taxpayers often invest considerable time and resources investigating several possible sites, but will only choose one, or may decide not to move at all. The question for the tax practitioner then arises as to how expenses attributable both to the site chosen, as well as to those investigated but subsequently abandoned, are treated for tax purposes, i.e., whether they may be deducted currently or must instead be capitalized.

Typical relocation expenses include legal and consulting fees for feasibility studies, architectural planning, engineering services, contract negotiations, computer installations and other professional services, as well as the cost of physically moving machinery, equipment and office furniture. Expenses for travel to proposed sites and meetings with state economic development groups for the purpose of negotiating tax and other financial incentives to induce the company to relocate to its jurisdiction are often involved. CPAs may be consulted to determine the tax implications of the move, and to formulate budgets and projections as a consequence of the move.

For financial statement purposes, relocation costs are generally expensed when incurred. For tax purposes, Sec. 162 allows a current deduction for ordinary and necessary business expenses, while expenses incurred for the acquisition of a capital asset generally must be added to the asset's cost basis under Sec. 263. The origin of the expense determines whether it may be deducted or capitalized and amortized. To be currently deductible for tax purposes, however, two additional tests must be met. Under the "all events" test of Sec. 461(h)(4), an accrual-method taxpayer is entitled to a deduction only when "all events" that determine that the liability does in fact exist have occurred, and the amount of such liability can be determined with reasonable accuracy. The second test permits a taxpayer a deduction only after "economic performance" with respect to the item has occurred (Sec. 461(h)(1)). For services, economic performance is deemed to occur as the services are provided. These rules do not apply to expenses otherwise capitalizable under Sec. 263(a). (A...