Frequently Asked Tax Questions 

 

More detailed information on these topics and more is available through Tax & Legal MasterSource.

Prepared by Worldwide ERC® Tax Counsel, Peter K. Scott
Peter K. Scott Associates
Current as of January, 2017

Home Purchase Programs

Q.  Do home purchase programs have to meet the 50-mile or one-year rules?

 A.  No.  Those rules are limited to the moving expense provisions of section 217.  There are no time or distance rules that apply to home purchase expenses.  That is, it does not matter if the purchase of a home from the transferee by a company or Relocation Management Company occurs four years after the move, or if the move does not meet the 50-mile rule.  As long as there is a company business purpose for the purchase, and it meets standards for home purchase programs such as those established in the “eleven key elements of an amended value program” and Rev. Rul. 2005-74, costs will not be taxable to the employee. 

For more on this topic, see 50-mile/one-year rules and home purchase programs  in the Worldwide ERC® Tax & Legal MasterSource.

Q.  Are Amended Value programs accepted by the Internal Revenue Service?

A.  Yes.  In Rev. Rul. 2005-74, the IRS holds that properly structured Amended Value programs result in two separate, independent sales and that the costs incurred are not taxable to the employee.  The ruling includes facts that mirror procedures developed by Worldwide ERC in the “eleven key elements of an amended value program,” and says that the IRS will not seek to apply the holding in the Amdahl case to such facts.  These facts include use of a blank deed to pass title, which the IRS holds not to be inconsistent with a completed sale from employee to employer or Relocation Management Company. 

For more on Rev. Rul. 2005-74, see Rev. Rul. 2005-74 in the Worldwide ERC® Tax & Legal MasterSource .

Q.  Are Buyer Value Option programs accepted by the Internal Revenue Service?

A.  Not clear.  There is no mention of a Buyer Value Option (BVO) program in Rev. Rul. 2005-74, which holds that costs incurred in Amended Value programs are not taxable to the employees.  Although a BVO lacks the initial appraisals and guaranteed buyout offer characteristic of an AV program, it otherwise follows all of the procedures incorporated in the “eleven key elements of an amended value program” developed by Worldwide ERC, and all of the procedures cited with approval by the IRS in Rev. Rul. 2005-74.  Therefore, there is a good case that it meets the requirements of the ruling.  However, many IRS agents have questioned that conclusion, particularly if the BVO is operated to reduce risk and make sure that purchases and sales are close together.  Consequently, Worldwide ERC has recommended that companies operating BVO programs adhere scrupulously to the eleven key elements, and that they consider incorporating delayed appraisals and a delayed guaranteed buyout offer in the program

For more on these issues, see Buyer Value Option and Rev. Rul. 2005-74 in the Worldwide ERC® Tax & Legal MasterSource .

Q.  Is it permissible to use a blank deed to pass title in a home purchase program?

A.  Yes.  In Rev. Rul. 2005-74, the Internal Revenue Service says that use of a “blank deed” (a single deed executed by the employee homeowner with the name of the buyer of the home left blank, to be filled in by the employer or Relocation Management Company when it sells the home) to pass title in a relocation home sale program is not inconsistent with a conclusion that two separate, independent sales occur.  Consequently, Worldwide ERC’s 2001 recommendation that two deeds be used in relocation home sales, which was based primarily on the previous IRS position that the blank deed caused sales costs to be taxable to employees under the Amdahl case, is no longer in effect.  However, there may be other reasons to use two deeds, and some states in which use of two deeds is common or recommended for reasons not related to federal tax. 

For more on this topic, see Blank Deed: State Issues and Rev. Rul. 2005-74 in the Worldwide ERC® Tax & Legal MasterSource .

Q.  Is a second home, or a home to which the employee does not have title, eligible for a home purchase program?

A.  Yes.  From a tax treatment standpoint, it makes no difference whether the home being purchased under a home purchase program is the employee’s primary residence or a second home, as long as there is a legitimate business purpose for the home purchase.  Similarly, it is irrelevant who actually owns the home, or whether or not the transferee is married to his or her co-owner.  If the employer purchases the home in a bona fide, arm's length purchase, and that purchase is in order to facilitate moving the employee to another job location, the costs will not be taxable to the employee or subject to employment taxes. The reasons are the same as the reasons why the move does not need to qualify under Section 217.  Nor should companies use such strategies as quit claim deeds to vest title in the employee, since that has other consequences that may be unfavorable.   

For more on these topics, see Employee Not the Owner and  Second Homes in the Worldwide ERC® Tax & Legal MasterSource.

Q.  What is a “directed offer,” and how do we determine the value of a home?

A.  If a company or Relocation Management Company (RMC) pays an employee more than fair market value for the employee’s home, the excess over fair market value is taxable to the employee as wages, goes on the W-2, and is subject to withholding and payroll taxes.  This is generally referred to as a “directed offer.”  Fair market value is the price at which a property would change hands between a willing buyer and seller, each fully informed and trying to negotiate the best deal for themselves.  Because the employer and employee are related parties, and the employer is assumed to be motivated to benefit the employee rather than negotiate the most favorable purchase price for itself, the price they determine will not necessarily meet this standard.  Consequently, other means must be employed to show that the price paid by the employer is fair market value.  The best evidence of fair market value is an actual sale in the open market, as occurs in an Amended Value or Buyer Value Option program.  However, appraisals are also commonly used to establish value, and are accepted by IRS as good evidence of value if they follow accepted standards and procedures, and are well done by qualified appraisers.  In the relocation industry, detailed appraisal procedures have been developed that incorporate procedures designed to determine the most likely sale price of the home in the market over the time it should take to sell a comparable home in the local market, not to exceed 120 days.  These procedures do not purport to determine “fair market value,” but are accepted as doing so by IRS and are recommended by Worldwide ERC.   

For more information on these topics, see Directed Offers and Penalties  and Determining Fair Market Value  in the Worldwide ERC® Tax & Legal MasterSource .

Q.  What rules apply to purchases of employee homes in foreign countries?

A.  There are United States tax consequences for employers when a foreign national is moved to the United States to work and the employer pays the costs to dispose of the house in the home country. The payment of home disposal expenses generally is considered attributable to employment in the United States, and U.S. rules will apply in determining whether the employee is taxable. Therefore, companies moving foreign nationals to the United States must ensure that the procedures used to dispose of the foreign home meet the U.S. "two-sale" tax rules. If they do not, the expenses will be considered U.S. taxable income of the employee; tax will be due; and gross-up expense may be incurred. 

For more information on this topic, see Foreign Country Home Purchase Programs  in the Worldwide ERC® Tax & Legal MasterSource.

Q.  Are costs and losses on home purchase programs deductible by the employer?

A.  Yes, but IRS and the relocation industry differ as to what type of deduction is allowable.  Under Rev. Rul. 82-204, IRS typically contends that the homes acquired are capital assets, and that the costs result in capital loss deductions, which are deductible only against capital gains.  However, Worldwide ERC believes that the ruling is wrong, and that unlimited ordinary deductions are allowable because the homes are excluded from capital asset treatment as property held for sale in the ordinary course of business under section 1221(a)(1).  Further, many companies will have arguments that Rev. Rul. 82-204 is distinguishable.  The result may also differ under “fixed fee” programs.  The majority of companies do not follow the IRS ruling.   

For more on this topic, see Capital versus Ordinary Loss in the Worldwide ERC® Tax & Legal MasterSource , and the Federal Tax Hotline article from MOBILITY Magazine, December, 2007.

Moving Expenses

Q.  What is the “50-mile” rule?

A.  Under section 217, certain costs of moving (shipment of household goods and final move travel) are deductible in addition to itemized deductions or the standard deduction in calculating federal income taxes.  Reimbursement of such expenses or direct payment of them by the employer is not taxable to the employee.  However, certain requirements must be met.  These include a rule that the distance between the former residence and the new place of work must be at least 50 miles more than the distance between the former residence and the former workplace.  That is, if the employee did not move, the employee’s commute would increase by at least 50 miles.  There are no exceptions to this rule, which must be met if moving expenses are to be deducted.   

For more information, see Moving Expenses-Requirements for Deductibility in the Worldwide ERC® Tax & Legal MasterSource   and The Basics of Moving Expense Taxation printed in MOBILITY Magazine, June, 2016.

Q.  What is the “one-year” rule?

A.  Under section 217, certain costs of moving (shipment of household goods and final move travel) are deductible in addition to itemized deductions or the standard deduction in calculating federal income taxes.  Reimbursements of such expenses or direct payments of them by the employer are not taxable to the employee.  However, certain requirements must be met.  These include a requirement that the costs must be proximately related in time to the commencement of work at the new location.  In the regulations under section 217, the IRS provides a presumption that any expenses incurred within one year of beginning the move are proximately related to the move, and deductible.  However, the one-year rule is merely a taxpayer favorable presumption; costs incurred later than one year after commencement of the move may also be deductible if the taxpayer can show that circumstances prevented the taxpayer from incurring them earlier.  Commonly accepted reasons for delay include children finishing school. 

For more information, see Moving Expenses-Requirements for Deductibility in the Worldwide ERC® Tax & Legal MasterSource  and The Basics of Moving Expense Taxation printed in MOBILITY Magazine, June, 2016.

Q.  Are moving expenses paid to terminated or retiring employees taxable?

A.  Payments or reimbursements of moving expenses for a terminated employee will be considered compensation for services previously rendered to the employer by the terminated employee.  The employer should, therefore, treat the amounts exactly the same as it would treat payments or reimbursements with respect to current employees.  On the other hand, if the employee is retiring, he or she will ordinarily not qualify to deduct moving expenses because the employee will not be moving to a new principal place of work, nor will he or she be employed in that location for 39 weeks after the move. Consequently, all payments or reimbursements of moving expenses will be taxable wages, subject to withholding and payroll taxes and inclusion on the W-2. If, however, the employee can show that he or she will, in fact, be employed or truly self-employed in the new location, then the employer will have a "reasonable belief" that the moving expenses are deductible or excludable, and should treat them the same as for a terminated employee, as above. 

For more on this topic, see Terminated/Retiring Employee's Moving Expenses in the Worldwide ERC® Tax & Legal MasterSource.

Q.  Are expenses of moving household goods from a location other than the employee’s home deductible?

A.  Yes.  However, the regulations provide that the deductible amount cannot exceed the amount that it would have cost to ship the goods had they been moved from the taxpayer’s former principal residence rather than from the other location where the goods were at the time of shipment. 

For more on this topic, see Moving Expense Issues: Other Location in the Worldwide ERC® Tax & Legal MasterSource

Payroll and Withholding Issues

Q.  When are withholding and tax deposits required for taxable relocation expenses?

A.  Reimbursements or payments of taxable relocation expenses are subject to withholding and payroll taxes.  Generally, allowances must be reported in the year they are provided to the employee and withholding and deposit of taxes must occur at the time of the payment or reimbursement, just as with regular wages. Companies sometimes believe they can adopt a "cutoff" date for relocation reimbursements, under which they do not pass to payroll payments made after some date late in the year, such as November 30. However, this practice is not correct, and could result in penalties for failure to withhold and deposit payroll taxes. A cutoff may, however, properly be utilized if reimbursements and taxable payments are themselves stopped at the cutoff dates. If such payments are actually made thereafter, they must be included in payroll calculations for the proper period. 

For more on this topic, see Withholding and Payroll Taxes-Time for Withholding and Tax Deposits in the Worldwide ERC® Tax & Legal MasterSource .

Q.  What is “gross-up” and how is it calculated?

A.  Because reimbursements or payments of non-deductible relocation expenses increase the employee’s taxable income, the employee will pay more tax and lose part of the benefit of the payment or reimbursement. The great majority of companies alleviate this impact to some extent by paying the employee an additional amount to help with the tax liability. This tax assistance usually is referred to as "gross-up." The term refers to the fact that the employee is paid a larger gross amount so that the net benefit, after taxes, will approximate the moving expenses. The gross-up payment itself also is taxable to the employee and subject to withholding and payroll tax. Therefore, to fully tax protect the employee, the gross-up must itself be "grossed up," and the gross-up of the gross-up must be grossed up, and so on.  Consequently, a reciprocal formula is generally used to calculate the gross-up.  The gross-up formula to fully tax protect for income taxes is: gross-up percentage equals the employee’s marginal rate divided by (1.0 minus the employee’s marginal rate).  For example, if the employee’s marginal tax rate is 28%, then gross up would be .28 divided by (1 minus .28 = .72) = 38.9%.  The taxable payments or reimbursements would be multiplied by this percentage to calculate the additional amount necessary to protect for federal taxes. 

For more on this topic, see Gross-Up (Tax Assistance) in the Worldwide ERC® Tax & Legal MasterSource

Loans

Q.  Can companies make no-interest relocation loans to employees?

A.  Yes.  But there are a number of complicated requirements in order to avoid the tax consequences of so-called “below market” loans.  When a loan is made at a below market interest rate, or with no interest at all, the Internal Revenue Code may impute interest to the loan even though the lender and borrower never did. If imputed interest rules apply to an employee relocation loan, the amount by which a market rate of interest exceeds the loan’s actual rate of interest is considered income to the employee borrower. (The market rate used is the "applicable federal rate," which is computed by the IRS under a formula in the Internal Revenue Code and periodically adjusted.) This income is considered to be derived from the employer-lender, because the employer-lender is considered to have paid interest on the loan to itself on behalf of the employee-borrower. 

If interest is imputed to loans it has negative tax consequences for the employer-lender and may have for the employee-borrower. The employer-lender must pay payroll taxes (FICA, RRTA, and FUTA) on the amounts imputed as interest income to the employee-borrower. (The employer-lender, however, does not have to withhold federal income taxes on the imputed interest income.) The employee-borrower may or may not be eligible for a deduction of the imputed interest. The interest on a mortgage or bridge loan may be deductible as "qualified residence interest" under the general rules applicable to homeowners. However, there may be situations in which interest income is imputed to the employee, but the employee is unable to take a corresponding interest deduction. For example, there is a $100,000 limit on the amount of home equity debt upon which interest is deductible.

When regulations were written under these provisions, Worldwide ERC® was successful in obtaining exemption from the rules for two types of employee relocation loans, bridge loans and mortgage loans.  Under section 1.7872-5T of the regulations, no interest is imputed on employee relocation bridge loans or mortgage loans, even if they are interest free, provided they meet a number of requirements set forth in the regulations.  Consequently, it is common for companies to make interest-free loans to transferees of the equity in their old home so they can purchase a new one (a bridge loan), or loan them money for their new mortgage (a mortgage loan). 

For more information on this topic, and for the requirements such loans must meet to avoid imputed interest, see Tax Concepts in Relocation-Employer Provided Relocation Loans and Below Market Interest Rate Loans in the Worldwide ERC® Tax & Legal MasterSource.

Q.  Are mortgage subsidies taxed to employees?

A.  Yes.  Mortgage subsidies are taxable, but should not be grossed up.
Mortgage subsidy payments the employer makes directly to the lender are treated for tax purposes as additional compensation to the employee. However, the tax law then assumes that the employee has received compensation and used it to pay the interest. Therefore, the employee is able to claim a corresponding deduction for mortgage interest, and the employer generally does not need to gross up the subsidy because the employee usually is not adversely affected. Note, however, that if the employee is in an income bracket high enough that itemized deductions are cut back, or lives in one of the states that do not allow mortgage interest as a deduction, the employee will, in fact, owe extra taxes as a result of the subsidy. These situations are best handled as part of a gross-up adjustment rather than grossing up all subsidies. 

For more on this topic, see Mortgage Subsidy in the Worldwide ERC® Tax & Legal MasterSource.

Temporary Assignments

Q.  When do expense reimbursements for a short-term assignment become taxable to the employee?

A.  Travel and living expenses of an employee while away from home overnight on business are deductible (and reimbursements by the employer are not included in the employee’s income), but only if the assignment is “temporary” as opposed to permanent or indefinite.  Generally, “home” is considered to be located at the employee’s regular place of work.  The tax law includes a provision under which an assignment is no longer considered temporary if it exceeds one year.  The IRS has interpreted this provision to mean that an assignment must at its inception be realistically expected to last one year or less, and that it ceases to be temporary if that expectation changes at any time during the year.  Consequently, if an assignment is expected initially to be for six months, but at the seventh month it becomes apparent that the assignment will in fact last longer than one year, expenses up to the seventh month are deductible/excludable, but expenses thereafter are not.  As a result, temporary assignments must be constantly monitored and evaluated to make sure the original expectation is still valid. 

For more on this topic, see Temporary Assignment  in the Worldwide ERC® Tax & Legal MasterSource.

Q.  If an employee’s relocation to another work location is delayed, are travel and living expenses up until the actual move deductible as temporary assignment expenses?

A.  No.  Once it has been decided to relocate an employee to another job location, travel to and from than location and living expenses there are no longer considered business travel.  They are considered taxable temporary living expenses.  That is because the work location is expected to be permanent, not temporary, and the assignment is expected to last longer than one year.  The fact that the employee delays in actually moving to that location, and commutes to his or her home in the city of the original assignment, is not relevant.  Commuting costs are not deductible. 

For more on this topic, see Temporary Assignment in the Worldwide ERC® Tax & Legal MasterSource.

Q.  Are reimbursements of travel and living expenses taxable to summer interns?

A.  Yes.  The reimbursements to the interns should be included in gross income as compensation. As compensation, the reimbursements must be included in the summer intern’s W-2 and are subject to withholding for income and payroll taxes.  The expenses do not constitute business travel expenses while away from home since it appears that the courts would find a summer intern’s "home" for purposes of away-from-home travel expenses to be located where the summer job is, even if the summer intern continues to maintain a school-located or other-located residence. 

For more on this topic, see Summer Interns in the Worldwide ERC® Tax & Legal MasterSource.

 

The foregoing is intended as general information only. Regarding your specific situation, Worldwide ERC® suggests that you consult with your own tax or legal advisor as appropriate.

For reprint information contact: GovernmentRelations@WorldwideERC.org