The basics of moving expense taxation (in the U.S.)

Has anything changed much in the last 10 years as it relates to U.S. domestic relocation tax rules? Peter Scott, tax counsel for Worldwide ERC, explains that, for the most part, not much has changed when it comes to taxation on relocation benefits in the United States.  

The basic premise is that "with the exception of the shipment of household goods and travel to the new location, any relocation expenses that an employer reimburses or pays on behalf of an employee must be included in the employee’s gross income. That payment or reimbursement is subject to withholding and employment taxes."

To qualify for any exclusion or tax deduction, consider the work-related test, the 50-mile rule and the 39-week test.

One of the most unique and beneficial elements discussed is the ruling around corporate homesale programs. With the publication of Rev. Rul. 72-339 in 1972, the IRS has agreed that if the employer buys a home from an employee in a bona fide purchase for fair market value, the costs the employer incurs to dispose of the home are not income to the employee. In November 2005, the IRS reiterated and expanded on that agreement in Rev. Rul. 2005-74. The 2005 ruling includes considerable detail as to the procedures that will result in a purchase from the employee being considered a bona fide transaction in which the employer obtains all the benefits and burdens of ownership.

The IRS position is based on the premise that two separate, independent sales have occurred, one from the employee to the employer, and a second sale from the employer to the outside buyer. The employee is not a part of the second sale and does not benefit from it.

Consequently, the costs incurred are considered expenses of the employer incurred for its own benefit to dispose of the home, and not taxable to the employee. Note that this result is unrelated to whether the employee would be allowed to deduct moving expenses. That is, there are no work-related, time or distance tests.

The ruling helps many companies save hundreds of thousands of dollars.

Stay educated. The updated version is here: http://mobility.worldwideerc.org/i/686568-june-2016