One-year Limitation and Taxes Information

The IRS has long held that for an employee to be traveling away-from-home on business to receive tax-free travel benefits (meal, lodging, and transportation) the travel assignment must be temporary. Tax legislation and a clarifying IRS ruling in the early 1990s provides that for an assignment to be temporary it must be expected to last less than one year and cannot be indefinite in length. Otherwise the lodging at or near the worksite is considered the employee's tax home and all travel benefits paid would be considered taxable compensation. The rational for the rule is that for an assignment lasting more than one year, the employee would be reasonably expected to move his residence to minimize travel expenses.

ONE-YEAR LIMIT

More technically, the rules provide that an away from home assignment will meet this temporary requirement (travel expenses not subject to income tax) if the assignment is expected to last less than one year, and does in fact last less than one year. If an assignment is extended for which it will then last more than one year, all transportation, meal & incidental per diem, and housing allowances and corporate paid housing costs must be treated as taxable compensation beginning with expenses incurred when it first becomes known that the one-year limit is anticipated to be exceeded; not just when the 366th day is reached. Expenses incurred and paid prior to when it is first anticipated the one-year limit will be exceeded do not need to be reclassified as compensation, but all future expenses must be treated as taxable compensation.

The one-year limitation applies to the general work location, not just the same assignment, and would apply even if the travel nurse were employed by a different agency and continued to work in the same general area (within commuting distance of the current worksite or temporary lodging) without a significant break in service.

Since all travel nurse assignments should have definite lengths and be less than one-year, the uncertainty for indefinite assignments should not be applicable. A taxation concern arises when the assignment including extensions begins to approach the one-year limit. The travel nurse and recruiter must jointly monitor such situations.

BREAK IN ASSIGNMENT RESTART THE ONE-YEAR CLOCK

As explained in the One-Year Limitation discussion, the IRS has long held that for away-from-home travel benefits (meal, housing, transportation) to be provided tax-free to the employee, the assignment must be "temporary" and "temporary" is defined as less than one year and not indefinite. The rule is fairly objective. However, a very contentious issue is how long the traveler must stay away from the desired client assignment or location to start-over the counting of this one-year period; restart the one-year clock.

IRS Rulings:
The IRS has specifically ruled that a break of three weeks away from the current assignment work location is too short to start over the counting on the one-year limitation. The IRS has also ruled that a break from the assignment location of seven months is significant enough to restart the counting. Unfortunately, the IRS has provided no guidance for break lengths in between these extremes. Case law provides limited guidance and is very fact sensitive, other than concluding that annual seasonal work will not restart the clock.

Company Position:
We believe (consistent with NATHO guidelines) a break in an assignment of 13 or more weeks should be significant enough to restart the counting for the one-year limitation. The 13 weeks is approximately midway between the 3-week and 7-month ruling and is also the typical length of an assignment. The break may be for pleasure, education, another assignment, or any other reasons or combination as long as the break is in a different location outside of typical commuting distance from the current assignment and the current temporary housing. In addition, there must be no written or oral understanding during this break period of returning to the assignment or assignment area; otherwise the assignment break may not re-start the counting period. Multiple short breaks totaling more than 13 weeks will not accomplish the necessary break. As a result of the seasonal case law rulings, school-based assignments will not achieve a break in service for summer vacations.

The information contained herein is general in nature and based on authorities that are subject to change. Tax information contained in this document is not intended to be used, and cannot be used, by any person as a basis for avoiding tax penalties that may be imposed by the IRS or any state. We recommend each taxpayer seek advice based on their circumstances from an independent tax advisor.