IRS Revisits Commuting Expense Deductions

By Kaye F. McClung

In Brief

A Deductible First Trip

Since the middle of the last century, IRS rules on the deductibility of home office and commuting expenses have, to some degree, kept pace with the changing way Americans work. The country has evolved in recent decades into one where many people--including traditional full-time employees--work in multiple or untraditional locations, including, sometimes, their homes.

From important revenue rulings in the early 1990s to more recent rulings, the pace has accelerated. The tax law now more fully recognizes the complexity of defining "doing business." Taxpayers, especially self-employeds, and their advisors should be aware of the most recent revenue rulings to maximize their deductions, including one that distinguishes between a principal place of business and a regular place of business.

The Taxpayer Relief Act of 1997 changed the rules for the home office deduction. These new rules for the home office deduction, effective for 1999, may permit transportation expense deductions that were previously disallowed.

IRC section 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred in carrying on a trade or business. Therefore, daily transportation expenses paid or incurred in connection with the taxpayer's trade or business are deductible under this section.

However, IRC section 262 allows no deduction for personal, living, or family expenses. Treasury Regulations sections 1.162-2(e) and 1.262-1(b)(5) provide that a taxpayer's costs of commuting to a place of business or employment are personal expenses and do not qualify as deductions. When a taxpayer works at home, the ability to deduct transportation expenses between the taxpayer's home and away-from-home work locations has been a source of contention.

Rules Change as the World Changes

The courts have long debated this issue, resulting in several important IRS revenue rulings:

* In 1953, the IRS issued Rev. Rul. 190 [1953-2 C.B. 303], which allowed a deduction for daily transportation expenses between a taxpayer's residence and a temporary work location outside the taxpayer's metropolitan area if the taxpayer has no specific regular place of business or employment.

According to Rev. Rul. 190, when a taxpayer lives and ordinarily works in a particular metropolitan area but is not regularly employed at any specific work location, daily transportation expenses in going between the taxpayer's residence and a temporary work site outside the metropolitan area are deductible. However, daily transportation expenses are not deductible when paid or incurred by the taxpayer in going between the taxpayer's residence and a temporary work site inside that metropolitan area because that area is considered the taxpayer's regular place of business.

* Rev. Rul. 55-109 [1955-1 C.B. 261] provided that daily transportation expenses paid or incurred by a taxpayer in going between two specific business locations (whether in the same business or different businesses) are deductible business expenses. Rev. Rul. 55-109 does not address transportation expenses for taxpayers with a home office.

* In 1980, in Curphey v. Comm'r [73 T.C. 766], the Tax Court held that daily transportation expenses resulting from a taxpayer's travel between an office in his residence and other work locations were deductible if the home office qualified as the taxpayer's "principal place of business" under IRC section 280A(c)(1)(A).

* In 1990, the IRS issued Rev. Rul. 90-23 [1990-1 C.B. 28], which distinguished Rev. Rul. 190 and modified Rev. Rul. 55-109. Rev. Rul. 90-23 provided that, for a taxpayer with one or more regular places of business, daily transportation expenses paid or incurred in going between the taxpayer's residence and a temporary work location of the taxpayer are deductible business expenses, regardless of the distance.

For purposes of determining whether daily transportation expenses within the metropolitan area are deductible business expenses or nondeductible commuting expenses, a "regular place of business" is any location at which the taxpayer works or performs services on a regular basis, and a "temporary place of business" is any location at which the taxpayer performs services on an irregular or short-term basis. "Short-term" was defined as generally a matter of days or weeks. The ruling provided that a taxpayer may be considered as working or performing services at a particular location on a regular basis whether or not the taxpayer works or performs services at that location every week or on a set schedule.

Rev. Rul. 90-23 presented an example in which the daily transportation expenses incurred by a doctor going between the doctor's residence and one or more offices, clinics, or hospitals at which the doctor works or performs services on a regular basis would be nondeductible commuting expenses. However, daily transportation expenses incurred by a doctor going between a clinic and a hospital or between the doctor's residence and a temporary work location would be deductible business expenses.

* In C.W. Walker v. Comm'r [101 T.C. 537 (1993)], a logger drove daily from his residence to several job sites. Walker worked approximately six to seven hours per day cutting trees and approximately seven hours per week at his residence on tool repairs and maintenance. He also used the residence to store his equipment and supplies and take calls for logging jobs. The IRS disallowed Walker's transportation expenses between job sites and his residence, reasoning that these expenses were nondeductible commuting expenses because Walker's residence was not established as his principal place of business according to the standards in IRC section 280A.

The IRS Response. While Walker's residence was not established as his principal place of business under the home-office deduction standards, it was established as his regular place of business under the language of Rev. Rul. 90-23. The Tax Court found the standards used in establishing a residence as a regular place of business were not the same as those for determining a principal place of business. Therefore, because Walker's residence was a regular place of business and his job sites were temporary work locations, the transportation expenses were deductible under Rev. Rul. 90-23.

In response to Walker, the IRS issued Rev. Rul. 94-47 [1994-2 C.B. 18], which amplified and clarified Rev. Rul. 190 and Rev. Rul 90-23. Rev. Rul. 94-47 provided several rules for determining whether daily transportation expenses between a taxpayer's residence and a work location were deductible business expenses under IRC section 162(a). It stated the IRS would not follow the Tax Court's position in Walker and provided three situations when transportation expenses between a residence and work location would be deductible:

* Daily transportation expenses paid or incurred between the taxpayer's residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works

* When the taxpayer has one or more regular work locations away from her residence, daily transportation expenses paid or incurred between the taxpayer's residence and one or more temporary work locations in the same trade or business, regardless of the distance traveled

* When a taxpayer's residence qualifies as a principal place of business under IRC section 280A, daily transportation expenses paid or incurred between that residence and another work location in the same trade or business, regardless of whether the other work location was regular or temporary and regardless of the distance traveled.

Contrary to the Walker decision, Rev. Rul. 94-47 held that a taxpayer's residence would be considered a business location for purposes of Rev. Rul. 90-23 only if the residence satisfied the principal place of business requirements of IRC section 280A(c)(1)(A).

Another important case was Comm'r v. Soliman [113 S.Ct. 701]. Since Soliman, many taxpayers have found it difficult for their residence to satisfy the principal place of business requirement under IRC section 280A. In Soliman, the Supreme Court ruled that the home office of Nader Soliman, an anesthesiologist, was not his principal place of business and, therefore, disallowed the deduction for various home office expenses. Because Soliman performed the primary income-generating activities of his business at various hospitals and the office in his home was used only to manage the administrative and billing aspects of his practice, the IRS and the Court did not consider his home office to be his principal place of business. Instead, the Court found that the hospitals were his principal place of business.

Advantages

The 1997 Taxpayer Relief Act changed the requirements to qualify a residence as a "principal place of business" for purposes of the home office deduction. The IRS amended IRC section 280A to provide that a home office qualifies as a principal place of business if--

* the taxpayer uses the office to conduct administrative or management activities of a trade or business and
* there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business.

As under prior law, the IRS will allow home office deductions only if the taxpayer uses the office exclusively on a regular basis as a place of business. In addition, if the taxpayer is an employee, use of the home office must be for the convenience of the employer.

As a result of the change to IRC section 280A, the IRS issued Rev. Rul. 99-7 [I.R.B. 1999-5 4] in January 1999. The ruling modifies and supersedes Rev. Rul. 90-23 and 94-47 and renders Rev. Rul. 190 obsolete. The new rule provides three situations in which daily transportation expenses incurred in going between a taxpayer's residence and a work location are deductible business expenses under IRC section 162(a):

* Daily transportation expenses incurred by a taxpayer traveling between a residence and a work location are deductible if the work location is temporary and outside the metropolitan area where the taxpayer lives and normally works. However, unless the taxpayer has one or more regular work locations away from the taxpayer's residence or the taxpayer's residence qualifies as the taxpayer's principal place of business, daily transportation expenses incurred in going between the taxpayer's residence and a temporary work location within the metropolitan area are nondeductible commuting expenses. Rev. Rul. 99-7 defines "temporary" as employment at a work location that is realistically expected to last for one year or less. This is a change from Rev. Rul. 90-23's definition of a matter of days or weeks.

* If a taxpayer has one or more regular work locations away from the residence, daily transportation expenses in traveling between the taxpayer's residence and a temporary work location in the same trade or business are deductible, regardless of the distance.

* If a taxpayer's residence qualifies as a principal place of business under IRC section 280A, daily transportation expenses between the residence and another work location in the same trade or business are deductible, regardless of whether the other work location is regular or temporary and regardless of the distance.

The ruling states that the IRS will continue to not follow the Walker decision. Therefore, unless the taxpayer's residence qualifies as a principal place of business under IRC section 280A or a taxpayer has a regular place of business outside the residence, the cost of travel from a residence to a temporary work location will not be deductible. However, because Walker used his residence to conduct management and administrative activities, it appears that, under the current rules of IRC section 280A, Walker's residence would qualify as a "principal place of business" for the home office deduction. Therefore, Walker's daily transportation expenses between his residence and the temporary work locations in the forest would be deductible under the circumstance described in paragraph three of Rev. Rul. 99-7.

Looking into the Future

Beginning in 1999, the home office deduction is available to many self-employed taxpayers that were previously disallowed this deduction.

If the home office qualifies under IRC section 280A as a principal place of business, transportation expenses between the residence and other business locations will be deductible under IRC section 162(a) as ordinary and necessary expenses paid or incurred in carrying on a trade or business. This will provide an opportunity to deduct daily transportation expenses between the taxpayer's residence and other work locations, which would have been considered nondeductible commuting expenses under prior law.

By changing the definition of temporary from "generally a matter of days or weeks" to less than one year, Rev. Rul. 99-7 provides a new opportunity for some taxpayers that do not qualify for the home office deduction. Taxpayers that commute every day, for more than a few days or weeks but less than a year, from their home to an office away from the metropolitan area where they usually work, may now be able to deduct their travel expenses. *

Kaye F. McClung, DBA, CPA, is an assistant professor of accounting at Troy State University, Troy, Ala.

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