Away From Home Deductions
The United States Internal Revenue Code (IRC) has a little present for us in Section 162. It says:
(a) There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including . . .
(2) Traveling 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 . . .
So, you ask, “Does that mean I get to deduct my living expenses while on a short-term cultural exchange visit to the United states?” And I say, “Maybe, but you need to meet the strict requirements of Section 162.” Let’s take a look at what they are.
- First, you need to be carrying on a trade or business in the United States,
- Second, you need to be away from your tax home while carrying on the trade or business, for a year or less, and
- Third, your expenses must be reasonable and necessary, rather than lavish or extravagant.
Carrying on a Trade or Business
Can you say you’re “carrying on a trade or business” if you go to work each day and do what the boss tells you to do? Isn’t it your employer who is carrying on the trade or business?
Yes, it’s your employer who is the business owner, but in tax speak, you, as an employee, are also deemed to be engaged in a trade or business. According to IRC Section 864(b), “the term ‘trade or business within the United States’ includes the performance of personal services within the United States at any time within the taxable year . . .” So whether you work in the U.S. as an employee earning wages or as an independent contractor, you are carrying on a trade or business when you go to work. This not only satisfies one condition under Section 162 for deducting away from home expenses, it also allows your income to be considered effectively connected with a U.S. trade or business, which is taxed at graduated rates rather than the flat rate of 30 percent (This rule is under IRC Section 871(b)(1)).
While Away From Home
Of course, when working in the United States you are away from your home country, which is your real home, so this one should be a slam dunk, right? Well, not so fast pilgrim. Remember, this is tax speak, which is a slightly different language than plain English (same words but different meanings). While the statute says “away from home,” it really means away from your tax home, which has a very limited, but vague, definition. According to Rev. Rul. 93-86 (1993-2 C.B. 71):
A taxpayer’s “home” for purposes of Section 162(a)(2) of the Code is generally considered to be located at (1) the taxpayer’s regular or principal (if more than one regular) place of business, or (2) if the taxpayer has no regular or principal place of business, then at the taxpayer’s regular place of abode, in a real and substantial sense. If a taxpayer comes within neither category (1) nor category (2), the taxpayer is considered to be an itinerant whose “home” is wherever the taxpayer happens to work.
Good grief, now what the heck does that mean? Basically, you have two chances to call your home country your tax home and claim away from home expenses.
Principal place of business. Under the first condition, your home must be where your regular or principal place of business is. Therefore, if you don’t have a “place of business” (like a regular job) in your home country, you will not meet this test. Alternatively, you might meet the second condition if your “regular place of abode” is in your home country. If you don’t meet either of these conditions, your tax home is deemed to be where you work in the United States, which means you don’t get to deduct your travel and living expenses.
Regular place of abode. The IRS and the courts have tussled with this term for decades and there is still no real definition. It is, as they say, a subjective question based on a taxpayer’s economic, familial, and personal ties to a claimed abode. However, a couple of basic components are consistently considered by the IRS and courts:
- Whether a taxpayer performs a portion of his/her business in the vicinity of the claimed home and uses the home for lodging while performing business there; and
- Whether the taxpayer’s living expenses incurred at the claimed home are duplicated because of the requirement to be away.
So it seems pretty clear that you need continuing business ties in your home country, like a job from which you are on a leave of absence. It also would help to be paying rent or maintaining a mortgage in your home country, and have a spouse or other relatives to return to. When questioning this deduction, the IRS routinely requests a letter from your foreign employer confirming that you are on a leave of absence and will return to work for them on the completion of your U.S. assignment.
Oh, One More Thing
Since the concept for this deduction was to provide compensation for duplicate living expenses while you are away, there has always been a prohibition on being away too long. This limitation was imposed informally, based on a taxpayer’s circumstances, until 1992 when a statutory limitation was added to IRC Section 162(a). It says, “For purposes of paragraph (2), the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year.” According to the IRS, your assignment must not expect to exceed one year and must not actually exceed one year in order to meet this condition.
This is a generous benefit for those who work in the United States on a short-term assignment and meet the conditions. I don’t want to discourage you from claiming these deductions if you qualify. However, if you are not on a sabatical or leave of absence from a job in your home country that you plan to return to, or your assignment in the U.S. is expected to exceed one year, do not claim away from home deductions. Although it will increase your refund and fill your heart with joy when you get the refund check, upon receiving the subsequent audit letter from the IRS, your joy will turn to remorse and frustration as the IRS does its best to make your life miserable until it gets its money back, plus penalties and interest.