New Tax Rule for Local Lodging Expenses

The IRS recently issued long-awaited regulations that permit certain not-away-from-home lodging expenses to be deducted by workers if they are not reimbursed by their employer. Alternatively, if paid for by the employer, the expense can be treated as a tax-free working condition fringe benefit (WCFB) or tax-free accountable-plan reimbursement.

Thanks to prior IRS guidance, the value of an employer-provided WCFB is excluded from the recipient employee’s gross income for federal income and employment tax purposes. A WCFB is defined as any property or service provided to an employee to the extent that, if the employee paid for the property or service, it would be deductible by the employee as an unreimbursed employee business expense. Employer-paid lodging for an employee who is out of town on the employer’s business counts as a tax-free WCFB.

Prior regulations provide that the cost of an individual’s lodging that is not incurred while traveling away from home on business is generally a personal expense and is therefore generally not deductible by the individual. An individual is not considered away from home unless he or she is away from home overnight, or at least long enough to require rest or sleep.

The new regulations stipulate that an individual’s local lodging expenses can be deducted by the individual as business expenses if the applicable facts and circumstances dictate that such treatment is appropriate. In turn, expenses that would qualify for deductions if paid for by an employee will qualify as a tax-free WCFB if paid by the employer, or if advanced or reimbursed by the employer under an accountable plan. However, local lodging expenses will not qualify for the aforementioned tax-favored treatment if the lodging is lavish or extravagant, or if it is primarily to provide the individual with a social or personal benefit.

Safe Harbor Rule. Under the new regulations, local lodging expenses are automatically treated as ordinary and necessary business expenses if all of the following conditions are met: (1) the lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function; (2) the lodging is for a period that does not exceed five calendar days and does not occur more frequently than once per calendar quarter; (3) in the case of an employee, the employer requires the employee to remain at the activity or function overnight; and (4) the lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.

Example: Tax-favored treatment allowed for employees.
Distant Corporation puts on periodic employee training sessions at a hotel near its main office. Distant requires all attending employees, including employees from the local area, to remain at the hotel overnight for the bona fide business purpose of maximizing the effectiveness of the training sessions.

If Distant directly pays the lodging costs for attending employees, the costs qualify as tax-free WCFBs for the attending employees, including those who live in the local area, and Distant can deduct the costs as business expenses. If Distant reimburses attending employees for the lodging costs under an accountable plan, the reimbursements are tax-free to the employees, including those who live in the local area, and Distant can deduct the reimbursements as business expenses.

Foreign Financial Assets Reporting – Form 8938

My friend and associate Hale Sheppard has written an article called “The New Duty To Report Foreign Financial Assets on Form 8938: Demstifying the Complex Rules and Severe Consequences of Noncompliance.”  It was just published in the International Tax Journal.

You might find the article interesting because (i) taxpayers and their adviors are struggling for the first time in 2012 with whether and/or how to complete the Form 8938, (ii) the article contains a thorough analysis of the Form 8938 filing requirements, incorporating guidance from multiple sources, (iii) the article addresses the confusing overlap between Form 8938 and the FBAR, and (iv) the article explains the unappreciated, and severe consequences for taxpayers who fail to file the Form 8938.

Please follow this link to read the article – Click here

Dutch Tax Update

The 2013 Budget Bill or the so called Spring Deal has recently been approved by the Dutch Senate. This Budget Bill contains a number of measures which are intended to bring and keep the Dutch budget deficit at the EU required 3%. The Budget Bill measures will in principle be implemented on January 1, 2013.

One of these measures consists of an additional one time employer end levy of 16% over salaries over Euro 150,000 in 2013. This end levy will be due on March 31, 2013 and will be calculated over the 2012 wage. Please note that this end levy will be fully for the account of the employer and will have to be paid in addition to the “normal” wage tax which was already withheld and paid over the wages in 2012. Consequently the end levy can not be recovered from the employee and the employee is also unable to report the end levy in his income tax return as already withheld wage tax. Of course the end levy can be deducted from the profits on an corporate income tax level, the same way as regular wage tax is.

The end levy is calculated over the 2012 wage. Consequently there are not many ways to prevent or mitigate the end levy. One of the possible solutions, spreading the total wage over various Dutch group companies, is for example explicitly prohibited in the applicable legislation. In that case the wages from the various group companies are added up and the end levy will still be applicable. Additionally the legislation also contains a special provision which enables further repair measures in case of avoidance of this end levy. Please note in this respect, that the end levy will of course not be applicable for employees who have multiple unrelated employers and thus earn a total wage of over Euro 150,000.

In the light of the above, in principle, there are only two possible options left to prevent or mitigate this end levy:

·         The first option consist of, where possible,  postponing the grant and payment of certain wage elements until 2013. This could be done for example with bonuses, tax equalization payments or with commissions. However if a bonus or commission would  habitually be granted and paid out in 2012, the tax authorities may not accept this postponement for tax purposes, especially not when employer and employee have formally agreed to postpone the payment until 2013. Consequently, in order to successfully postpone the payment, the employee would simply have to condone the later payment. Please also note that the grant of the wage element must also be postponed until 2013. If the employee would already be entitled to the wage element in 2012, regardless of the actualy payment date, the wage element would already be subject to taxation in 2012.

·         The second option consists of a salary split with one or more foreign group companies. The ratio behind this is that, if the salary above Euro 150,000 is not (fully) subject to Dutch taxation, the end levy would in principle not apply. However before implementing a salary split, advice and tax calculations are needed and also the implementation of any split will involve costs with respect to payroll services and the filing of personal income tax returns abroad. Also a salary split will have to be be in accordance with the actual situation and the employee must consequently actually physically be working abroad. A salary split that only exists on paper will consequently not be accepted by the tax authorities.
Please note that, depending on the applicable tax treaty, a  salary split could also apply to board members of foreign entities, even when they do not physically perform their activities in the other country.

We are of course gladly willing to discuss the above with you in further detail or to discuss the possible solutions for individual employees. In case you have any questions or would like to plan a meeting to discuss this end levy, please do not hesitate to contact us.

Kind regards,
Gilianne Nelissen – Van der Leeuw

Luminous Tax Matters N.V.