U.S. Tax Preparation Worldwide

James Maertin, CPA

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Temporary Living Expenses 

What are temporary living expenses?  Temporary living expenses are travel expenses incurred during an extended business trip or temporary work assignment that was intended to last one year or less.  The expenses may only be claimed for a stay for business.  Personal or school stay expenses generally are not deductible.  Temporary living expenses also have no relation to having alien status.  A U.S. citizen working temporarily in another city can also claim them.  However, the time limitation of the visa makes it easier for a foreigner to claim that he is "away from home" on a business trip if he intends to work in the new location for less than a year.  Temporary living expenses include hotel lodging (or apartment rent for longer stays), meals, and local transportation.  Meals may be estimated using federal per diem rates.  For example, the IRS allows $46 per day for a high cost locality (e.g., New York City).  On the tax return, temporary living expenses are deducted as unreimbursed employee business expenses.

What are the rules for taking temporary living expenses? 
1.  A person must be working at a location on a temporary assignment (defined below); and
2.  A person's tax home (defined below) must be in a foreign country, or in another state beyond commuting distance.

Temporary Assignment:  The IRS states that if you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise.  If you expect it to last for more than 1 year, it is indefinite.  However, if you expect your employment away from home to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes.  Starting with the date your expectation changes, travel expenses will no longer be deductible.  (IRS Publication 54, page 12).  What determines a temporary versus an indefinite assignment is the intent of the taxpayer.  If assignment contracts can be made to last a year or less, this makes it much easier to document and support the position that your job was temporary in the uncommon event of an audit (see below).

Tax Home:  The IRS defines your tax home as the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home.  In addition, the IRS states that your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual.  If you are not a U.S. citizen or Green Card holder and you claim temporary living expenses, you will be asserting that your tax home is in your home country, and not in the U.S. because your stay is limited to the length of your visa.  Since you have no regular place of work (the U.S. assignment is only for a limited period), your regular place of abode (where you normally live) is your tax home.

Does being present in the U.S. before working  (e.g., as a student) cause the U.S. to be my tax home? 
No, as a student your tax home would still be where you last worked.  If you didn't work before, it will be your permanent home (e.g., parent's home).  However, if you start working in the U.S., the IRS may presume the U.S. to be your tax home, since you did not establish a career in your home country.  The rebuttal could be that the U.S. cannot be your tax home since it would have to be your regular place of business.  Since you are limited by the length of your visa, it is not possible for the U.S. business to be "regular."

Chance of audit:  Temporary living expenses are treated as unreimbursed employee business expenses on your tax return.  You are more at risk for being audited on the temporary living expense deduction if your expenses are high relative to income.  This would be the case if your rent is very high relative to income, and/or if you are claiming other large business expenses such as tuition.  Nevertheless, chance of audit remains low.  I have only had one client audited.  A few other clients were disallowed the expense automatically without audit, and additional tax was taken out of their refunds.

Substantiating temporary living expenses, if audited:  Documentation is critical to support the position that an assignment is expected to last less than a year, especially when the assignment is later extended.  An assignment letter stating the employee's temporary job location and expected assignment duration should be sufficient if done contemporaneously with the start of the assignment.  If you are audited and the IRS decides to disallow your claim for temporary living expenses, you will be assessed interest at the prevailing rate from the date you filed or the due date of the return, which is later, plus late payment penalties of 1/2% of the balance due per month.

For more information, please see The CPA Journal