Compensation considerations related to coronavirus relocations

Global responses to the coronavirus (COVID-19) continue to evolve

In light of this uncertainty, authorities across the globe are issuing travel and health guidance.

This alert addresses employment tax reporting and withholding considerations for employers relocating employees based on current federal tax rules. Given the lack of any formal guidance from the IRS, as of the issuance of this alert, employers should continue to follow existing Federal guidance for the following travel related expenses.

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Temporarily relocating employees

A temporary relocation is any relocation that is expected to last for 1-year or less.¹ To the extent an employer wishes to temporarily relocate an employee to work at a remote location, the travel related expenses (i.e., airfare, temporary lodging, etc.) are deductible to the employee.² The deductible expenses are excluded from compensation as a working condition fringe benefit, to the extent paid directly or reimbursed by the company.³

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Permanently relocating employees

A permanent relocation would be any relocation that is expected to last for more than 1-year.⁴ For tax years 2018 through 2025, the deduction of moving expenses is suspended for nonmilitary taxpayers.⁵ Therefore, to the extent an employer wishes to permanently relocate or repatriate an employee, the travel and move related expenses are nondeductible to the employee. These nondeductible expenses are included in compensation, to the extent paid directly or reimbursed by the company.

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Travel expenses of family

The travel or relocation expenses for an employee’s family are a nondeductible event.⁶ These nondeductible expenses are included in compensation, to the extent paid directly or reimbursed by the company.

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Private aircraft usage

In response to COVID-19, employers may consider relaxing their rules on corporate aircraft travel and allowing additional employees to utilize the aircraft. To the extent the aircraft is used for qualified business travel (i.e., travel from the employee’s tax home to a temporary business location), the travel is considered deductible to the employee.⁷ That deductible usage is excluded from compensation as a working condition fringe benefit.⁸ However, to the extent an employee uses the aircraft for personal purposes (e.g., commuting from their residence to their tax home) the travel is nondeductible to the employee.⁹ In addition, any spousal or dependent related travel on the aircraft is a nondeductible expense to the employee.¹⁰ These nondeductible expenses are typically included in compensation and valued under the fair charter value or the Standard Industry Fare Level (SIFL) method.¹¹ 

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Expenses if an employee is quarantined

The tax treatment of any expenses incurred while an employee is quarantined will be driven by facts and circumstances of each case. If the employee is quarantined away from their tax home for a temporary period, the living expenses (i.e., lodging and meals) are deductible to the employee.¹² The deductible expenses are excluded from compensation as a working condition fringe benefit, to the extent paid directly or reimbursed by the company.¹³ On the other hand, if the employee is quarantined while away from their tax home for a permanent period, the living expenses (i.e., lodging and meals) are nondeductible to the employee.¹⁴ These nondeductible expenses are included in compensation, to the extent paid directly or reimbursed by the company. 

Whether the employee is working from home on a temporary or permanent basis, certain ordinary and necessary business expenses incurred while carrying on the employer’s business are deductible to the employee.¹⁵ However, which qualified business expenses (e.g., internet or phone access) are considered deductible to the employee, will depend on the facts and circumstances of each situation. Any deductible expenses are excluded from compensation as a working condition fringe benefit, to the extent paid directly or reimbursed by the company.¹⁶

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Deloitte’s view

Events related to COVID-19 are changing and evolving daily and employers are continually prioritizing the health and well-being of their employees and, in some cases, proactively relocating them. Nevertheless, these relocations potentially carry employer reporting obligations, and it is important these reporting obligations are not overlooked. Employers should regularly follow IRS pronouncements to see if/when guidance will be issued, and in the meantime, can follow the guidelines above for considerations around how to report their employer expenses.

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Contacts

References

¹ Rev. Rul. 93-86
² IRC § 162(a)
³ IRC § 132(d)
⁴ Rev. Rul. 93-86
⁵ Tax Cuts and Jobs Act, Pub. L. No. 115-97, § 13304, 131 Stat. 2054, 2123 (2017)
⁶ Treas. Reg. § 1.162-2(c) & Tax Cuts and Jobs Act
⁷ IRC § 162(a)
⁸ IRC § 132(d)
⁹ Treas. Reg. § 1.162-2(e)
¹⁰ Treas. Reg. § 1.162-2(c)
¹¹ Treas. Reg. §§ 1.61-21(b)(6) & 1.61-21(g)
¹² Rev. Rul. 93-86 & IRC § 162(a)
¹³ IRC § 132(d)
¹⁴ Rev. Rul. 93-86
¹⁵ IRC § 162(a)
¹⁶ IRC § 132(d)