In your tax practices, you may be dealing with clients who have businesses in two or more states and thus are incurring business related traveling expenses. Travel expenses also include expenses for meals and lodging when the taxpayer is traveling away from home.

Are you thinking, hmmm… which state is the tax home if my client is doing business in multiple states? While the question of tax home has always been a concern to practitioners, the issue may be more prevalent recently due to the pandemic and taxpayers working remotely.

IRS guidance can help determine the answer to that question:

1. When a taxpayer travels for business purposes, expenses for travel, including meals and lodging, are deductible when the taxpayer is away from home. The takeaway words from the previous sentence are “away from home.”

In determining if a travel deduction is allowed for tax purposes, the location of the taxpayer’s tax home is important. Generally, a taxpayer’s tax home for travel deduction purposes “means the vicinity of the taxpayer’s principal place of employment [or business] and not where his or her personal residence is located.”

2. The length of a job or work assignment is also a factor to look at when determining tax home. Typically, a shift in tax home to a new location will result when a taxpayer moves a work location for over a year; however, facts and circumstances will ultimately determine if there has been a shift in a tax home.

As most of us know, ordinary and necessary business expenses may generally be deducted by a taxpayer. To deduct travel-related expenses as an ordinary and necessary business expense, some requirements need to be met. The expense must:

• Be reasonable (not lavish)
• Be incurred while away from home and
• Be incurred in the pursuit of a trade or business

Now we have the basics out of the way, let’s look at an example of a recent court case to consider when determining a client’s tax home:

• Akeem Soboyede is an attorney licensed to practice in Minnesota and Washington, D.C.

  • During 2015 he had a solo law practice in both places
  • On his 2015 Schedule C, Profit or Loss From Business, $8,400 in apartment and hotel expenses were deducted for Washington D.C. work
    • For those that aren’t familiar with Schedule C, it’s used to report income or loss from a business operated as a sole proprietor

• The Commissioner contends

  • Maryland lodging expense was not incurred while away from home
  • Maryland, not Minnesota, is the tax home

• In accounting for the days in 2015, the court found Soboyede spent:

  • At least 161 days in the Washington D.C. area
  • 54 non-working days in Nigeria and
  • At least 115 days in Minnesota

• Soboyede said the remaining 35 unaccounted for days were spent in Minnesota

• The court ruled in the Commissioner’s favor. This was based on:

  • Majority of time was spent in Washington D.C.
  • Significantly more income was earned in Washington D.C.
  • No support for Washington D.C. work as temporary

In this case the hotel was considered Soboyede’s tax home. The IRS and the Tax Court stated Soboyede made most of his money and spent most of his time in the Washington D.C. area. Based on this, the Washington D.C. area, not Minnesota, was his tax home. Soboyede was not able to deduct any of his travel cost from Minnesota to Washington D.C.

These expenses were considered nondeductible personal expenses. Soboyede was considered to be commuting from Minnesota to the Washington D.C. area. If the Washington D.C. area was his tax home, he should be able to deduct substantiated business travel expenses from Washington D.C. area to Minnesota.

It should be noted that this court case only considers Soboyede’s activities in 2015. The case doesn’t address where Soboyede spent his time or earned his money in years before or after 2015. If the court had taken into account these years it may have ruled differently, stating that 2015 was an anomaly and Soboyede’s tax home is Minnesota if in fact the data supported that conclusion.

This case may provide some guidance when dealing with clients in a similar situation (a client with one business in two locations), but it’s important to consider the full scope of your clients’ activities when preparing their returns as each situation is different.