Q: Our Boise-based company recently hired two new employees from out of state. We gave them a moving allowance to help move their families and household goods to Idaho, but we are a little confused as to whether we need to report this as income to them and what if anything they can deduct on their tax returns. Can you offer any guidance?
A: Your question has three concerns that need to be addressed: First, what qualifies as a moving expense; second, what are the employer’s responsibilities in reporting the moving allowance; and finally, what are the employees’ responsibilities? Let’s look at these issues in order.
Expenses that qualify
In order to qualify for beneficial tax treatment for deducting moving expenses, certain requirements must be met. First, the new job must be at least 50 miles farther from the employee’s former home than the previous job was from the former home. So if the employee traveled five miles from his old home to his old job, but would now need to travel at least 55 miles from the old home to the new job, this test will be met. If an employee is moving from another state, this test should be easy to meet, but make sure.
Second, there are a couple of time tests. The expenses must generally be incurred within one year of the date the new job starts. Also, the employee must work full-time for at least 39 weeks during the first year at the new job location. If the tax return is due before the 39-week time requirement is met, the rules for reporting and deducting the expenses still apply as long as the expectation is that the requirement will be met.
Assuming these tests are met, the expenses that will qualify include many of the costs of transporting the employee, his or her family, and the household goods to the new home. Travel expenses include lodging for the family while in transit as well as airfare, auto mileage, parking and tolls.
Be aware that the costs of only one trip per person will qualify. Also, any amounts paid for meals while in transit are not considered qualified moving expenses.
Other qualified expenses include the cost of packing and transporting your household goods and personal property, the cost of shipping household pets, and the costs of connecting or disconnecting utilities. But costs related to buying or selling a home, auto license or driver’s license renewals, the expenses of entering into or breaking a lease, and many other expenses will not qualify.
The employer’s responsibilities
An employer that provides a moving allowance has a number of responsibilities in reporting to the employee, and possibly to the IRS.
Generally, reimbursements for qualified expenses, whether paid directly to the employee or to the vendor, are considered nontaxable fringe benefits. But to qualify as a nontaxable fringe benefit, the reimbursement must be made under an “accountable plan.” Generally this means keeping accurate records documenting the validity of the costs, the date paid, the amount paid and the payee (either the employee or service provider). Both the employee and employer should work together to make sure this documentation is retained.
As long as the employer has documentation showing the moving expenses qualify, the reimbursements do not need to be reported to the employee as taxable income. On the other hand, if the employer does not have documentation, or if the employer does have knowledge that the expenses have been or will be deducted by the employee, the amount reimbursed must be included in the employee’s taxable wages and reported as part of the employee’s Form W-2.
The employee’s opportunities
Finally, how does the employee report the moving costs? If the expenses were reimbursed by the employer and treated as nontaxable fringe benefits, no deduction is allowed by the employee and no reporting is necessary.
To the extent the employee has paid for qualified moving expenses that have not been reimbursed or have been reported as taxable wages, a deduction is allowed by completing Form 3903 and including the form with the Form 1040, Individual Tax Return. The deduction calculated on Form 3903 is then reported on page 1 of the Form 1040 and is not subject to any further limitations. Consequently, the deduction is very valuable and worth the time and effort to report properly.
And remind your new employees how lucky they are to be in Idaho!
Addendum to Nov. 9 column: After publication of my Nov. 9 Talking Tax column in which I discussed the rental of a cabin or vacation home, my friend John McGown, an excellent tax and estate planning attorney with the Idaho law firm Hawley Troxell, called to remind me of an additional issue I failed to mention.
Under the Idaho Sales and Use Tax Administrative Rules, fees charged for providing certain lodging accommodations are subject to the 6 percent Idaho state sales tax, the 2 percent Idaho Travel and Convention taxes, and potentially even some local taxes. (Although leases in excess of 30 days may be exempt.)
In fact, the Idaho Tax Commission has begun a “Lodging Audit Project” in which it is stepping up efforts to enforce the collection of these taxes. As a result, the prudent owner of property that will be rented should consider obtaining an Idaho Seller’s Permit and collecting and remitting these taxes.
I know – one more tax! But at least these tax dollars do stay within Idaho and help to promote Idaho tourism, which in turn generates revenue for the state and more Idaho jobs.
To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.
Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates.
Have a question for Robbins? Email your question to email@example.com. Enter “Talking Tax” in the subject line.