Although moving expenses are deductible/excludable if incurred within one year of the beginning of the move, there are numerous acceptable reasons for incurring expenses later. Consequently, companies should not assume that delays result in non-deductibility, but should inquire as to the reasons, and document them. In most instances, there will be acceptable reasons for a delay of a year or two. Moreover, the one-year rule has no application to expenses incurred in a home sale program.
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Today’s tax quote: “The United States is the only country where it takes more brains to figure your tax than to earn the money to pay it.” Edward J. Gurney
One of the more brain-bending aspects of relocation is the application of the moving expense one-year rule. Although companies often assume that expenses incurred more than a year after the beginning of the move are not deductible/excludable, usually there is an acceptable reason for a delay.
To be deductible/excludable under section 217 of the Internal Revenue Code, moving expenses must be incurred "in connection with the commencement of work...at a new principal place of work." Section 1.217-2(a)(3) of the regulations elaborates on this test. The regulation requires that the move bear a "reasonable proximity" in both time and place to the commencement of work at the new principal place of work. It goes on to say that moving expenses incurred within one year of the date the employee begins work are considered reasonably proximate in time and, therefore, are deductible/excludable if the move meets the other requirements of section 217, such as distance moved and time spent in the new location.
But that is not the end of the inquiry. Under the regulation cited above, expenses incurred after the one-year period also may be deductible if the taxpayer can demonstrate that “circumstances existed which prevented” him or her from incurring them within that period. Consequently, the one-year rule operates as a presumption in favor of the taxpayer, with expenses beyond that period deductible/excludable based on the facts and circumstances.
Factors taken into account in making this determination include the length of the delay and whether the taxpayer actually incurred some of the expenses of the move within the one-year period. The regulations provide a helpful example in which a transferee was allowed to deduct the expenses of moving his wife and family to the new residence 16 months after he was transferred because the family stayed in the old location until the children could complete grade school. In Rev. Rul. 78-200, 1978 C.B. 77, a taxpayer was permitted to deduct the expenses of moving his family 30 months after he was transferred, also for reasons related to the children’s education.
Other reasons for delay may involve spouse employment, or other issues such as parent or dependent care if those individuals are a part of the employee’s household. However, the reason must be a persuasive one. For example, in a 1983 letter ruling the IRS held that moving expenses were not deductible when a woman waited more than a year to move because she did not wish the move to interfere with her husband’s obtaining tenure at a university in the old location. She commuted to the new job from the old location until he received tenure, but did not show how the tenure issue prevented incurring moving expenses.
One reason sometimes cited for failure to move a household is that a depressed real estate market in the departure location prevented sale of the employee’s home. Assuming that it can be demonstrated that the employee is unable to sell the old residence without incurring an unsustainable loss (for example, the employee owes more on the mortgage than the employee can pay), or has made good faith but unsuccessful efforts to sell, these could be considered circumstances under which the one-year period would be extended. However, if the employee is merely waiting to sell because the employee is dissatisfied with the price obtainable in the current market, that is not likely to be respected as a reason "preventing" the employee from incurring moving expenses.
Note that regardless of the reason for delay in selling the home, home sale expenses incurred in a properly organized employer home purchase program will not be taxable to the employee even if that sale occurs several years after the move. The moving expense "one-year rule" has no application to home sale expenses; it is only relevant to the costs deductible under section 217, that is, shipment of household goods and expenses of final move travel. So if the employee moves to temporary rental quarters in the new location, and sells the old home three years later, but has no acceptable reason for the delay, the expenses of moving the household goods to a new home in the new location will not be deductible/excludable, but the costs of taking the old home into a qualifying home sale program will still not be taxable to the employee.
In applying the one-year rule to deductible moving expenses, other relevant factors, as noted, would include whether the employee incurred other moving expenses within the one-year period and the length of the delay. In one case, a taxpayer was denied a deduction for moving expenses incurred six years after commencement of work in the new location.
However, in most circumstances there will be a plausible argument that the expenses should be allowed notwithstanding the one-year rule, provided the employee has acted reasonably.
Many companies have policies that require that moving expenses be incurred within one year of commencement of the move. As explained above, these policies are not needed for tax compliance, although the policies do generally prevent companies from having to deal with claimed moving expense reimbursements for extended periods. In cases in which the employee wants to incur moving expenses beyond the one-year presumption period, and either the company policy does not prevent it or the company wishes to make an exception, the employer should be careful to document in the file the reasons given for the delay.
The reason the company should do so is that moving expense payments or reimbursements are excludable from the employee’s income only if the the employer has a "reasonable belief" that the employee will be entitled to the deduction. If the employer documents the reasons given by the employee in its file, and those reasons appear reasonable, the employer may still exclude the costs from the employee’s income as moving expenses, even if the employee’s reasons are later rejected by the IRS. In such a case, it would be the employee who would incure additional tax liability, not the employer.
To summarize, generally the one-year rule is not a serious impediment to deducting/excluding moving expenses if the employee has a good reason for delay, some of the expenses are incurred within the one-year period, and the delay does not exceed a year or two.
Posted by Peter K. Scott