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Relocation is expensive.
Companies want to make sure they receive some benefit in the form of future
services for the costs incurred to move an employee. Therefore, relocation
programs generally incorporate provisions requiring employees to repay all or a
part of the expenses incurred to relocate them unless they continue to work for
the company for a specified period.
When the employee does in fact
leave early, the tax treatment of the employee’s repayment of costs becomes an
issue. Repayments in the same year as the move are not at issue, because such
repayments are accounted for by simply adjusting withholding and payroll taxes.
No deduction by the employee is necessary. However, if the repayment is in a
year subsequent to the move the employee has historically been allowed to claim
a deduction for the repayment.
In Rev. Rul. 79-311, 1979-2
C.B. 25, the United States Internal Revenue Service (IRS) held that an employee
who erroneously received wages and repaid them in a subsequent year was
entitled to an itemized deduction as an employee business expense. Rev. Rul.
79-311 has been applied to repayment of moving expenses in PLRs 9050053 and
9313015 (IRS private letter rulings).
Such a deduction, however,
would be a “miscellaneous itemized deduction”. The TCJA suspended the
availability of miscellaneous itemized deductions beginning in 2018 through
2025. Therefore, repayments in years subsequent to the move are no longer
An alternative to an itemized
deduction was to claim an adjustment under section 1341 (the so-called “claim of
right” provision). Section 1341 provides that when a taxpayer restores a
substantial amount (defined as exceeding $3,000) received under a claim of
right, the taxpayer can either claim the allowable deduction in the year of
restoration, or recompute the tax for the year in which the amount was received
and claim a deduction in the current year for the amount the taxes would have
been reduced in that prior year, whichever is most beneficial. The section 1341
adjustment is not subject to the 2 percent floor which was applicable to
miscellaneous itemized deductions.
However, section 1341 is not
applicable unless a deduction was allowable for the current year in the first
place. Therefore, it cannot be used beginning in 2018 for repayments under
Repayments after the year of
the move are no longer deductible and that may have serious consequences. Repayments
tend to be substantial. Therefore, the loss of deductibility by the employee may
be quite painful from a financial standpoint, and may inhibit companies’ efforts
to enforce payback agreements.
Worldwide ERC® continues to monitor the impact of the Tax Cuts and Jobs Act on talent mobility programs and policies.
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