When is travel for independent contractors deductible?
Independent contractors have an incentive to find all the deductions they can, but sometimes there’s a fine line between what’s deductible and what’s not. Travel can be one of the most problematic areas for many of your self-employed clients.
The crux of the matter is defining when a drive is a commute and when it’s a deductible travel expense. This definition depends crucially on the worker’s principal place of business.
Driving between home and a worker’s principal place of business is considered commuting. Commuting – whether a worker is an independent contractor or an employee – is never deductible. However, driving between one’s principal place of business and a workplace is a deductible travel expense.
What is a principal place of business?
A principal place of business is the primary location where the work of that business is performed. It’s generally the place where the books and records are kept, and where other administrative functions are performed.
A home office can be a principal place of business if two criteria are met:
- This location in the home is used regularly and exclusively for performing the business and administrative functions of the business.
- There is no other location where the worker spends more time on these functions.
For freelancers, remote workers, and others who work from home, their home office is their principal place of business. Therefore, any business-related travel will be deductible. This includes trips to the post office or to a client’s place of business.
What about temporary workplaces?
The principal place of business can be dicey to define for someone who works outside of the home on a temporary basis, as Deborah Louise Biegalski discovered in a recent tax court case. Special rules apply for deducting travel expenses to temporary workplaces.
A temporary workplace is defined as a place where a work assignment is expected to last less than a year, and actually does last less than a year. Travel expenses between home and a temporary workplace may be deductible. To be deductible, the worker must have a principal place of business, which could be a home office or another regular workplace.
If a worker has no principal place of business, travel expenses between home and the workplace are only deductible if the temporary workplace is outside of the metro area where the worker lives. If the temporary workplace is within that metro area, driving from home to work is considered commuting and is not deductible.
Beware of contract extensions
If the assignment changes so that the expected duration is more than a year, travel between home and the workplace is now considered commuting and no longer deductible. The switch from deductible travel to nondeductible commuting happens as soon as the worker knows that the assignment will last more than a year, even if a separate contract covers the extension. This is what tripped up Ms. Biegalski in her appearance before the tax court.
Ms. Biegalski accepted a contract position with First Tek in New Jersey. Her initial work order covered the period from Oct. 14, 2013 to Oct. 10, 2014. Since this just barely scooted under the one-year mark, First Tek qualified as a temporary workplace for Ms. Biegalski. However, sometime around Sept. 30, 2014, Ms. Biegalski signed another contract to work for First Tek, this time from Oct. 11, 2014 to Oct. 10, 2015. On May 15, 2015, she left First Tek for a different job.
Ms. Biegalski contended that because she worked for First Tek under two separate contracts which were both for less than one year, she was employed on a temporary basis for the entire time she worked at First Tek. For 2014 and 2015, the years under examination by the IRS, she wanted to deduct all of her commuting expenses between her home and First Tek.
However, the IRS disagreed. Regardless of the separate contracts, when Ms. Biegalski signed the second work order, the IRS contended that she knew that she would be working for First Tek for more than one year. Therefore, only her travel expenses between Jan. 1, 2014 and Sept. 30, 2014 were deductible. Everything after she signed the second contract became nondeductible commuting.
With more workers working as independent contractors, it’s essential for advisors to understand these rules to help their clients get all the deductions they’re entitled to!