Moving Expense Changes Affect Employers, Too

Caroline D. Strobel

he 1993 Tax Act made some significant changes to the rules regarding the deductibility of moving expenses. These changes T affect the mileage requirement, the deductibility of certain

movingexpenses, and employer reportingrequirements. These changes are effective for reimbursements made for moving expenses incurred after December 31, 1993.

The first significant change in the law provides that moving expenses will not be deductible unless the taxpayer’s new principal place of work is more than 50 miles farther from his or her former residence than was his or her former principal place of work. If he or she had no former principal place of work, then his or her principal place ofwork must be at least 50 miles from his or her former residence.

The definition of deductible movingexpenses has been narrowed to include only reasonable amounts incurred for moving the taxpayer, the taxpayer’s family and their household goods, and personal effects from the former residence to the new residence. These deductible costs include lodging, but not meals, during the period of travel to the new location.

Although it is not clear, pending issuance of new regulations, prior regulations indicate that the cost of storing and insuring household goods during a consecutive 30-day period after the date the household goods are moved from the employee’s prior residence will continue to be deductible.

A number of expenses that previously were deductible are now disallowed. These include the cost of house-hunting trips, temporary living expenses at the new location, meal expenses incurred at any time, and certain selling and buying expenses incurred in connection with settlement or acquisition of a lease or sale or purchase of a residence. If these latter expenses were incurred by the employee in 1993, but are not reimbursed by the employer until 1994, the expenses will be deductible subject to the limitation in effect in 1993. This will

Caroline D. Strobel is a professor Of accounting at the College of Business Administration, University of South Carolina, Columbia.

CCC 1044-8136/94/0601155-03 0 1994 John Wiley & Sons, Inc.

The Journal of Corporate Accounting and FinanceIAutumn 1994 155

Caroline D. Strobe1

be true even if the employee elects to deduct the expenses in 1994 when the employer actually makes the reimbursement.

Qualified moving expenses incurred in 1994 and later years are to be treated by the employer as fringe benefits excludible from the employee’s gross income, provided that the expenses would be deductible by the employee if he or she had paid or incurred the expenses directly. The employee must not have deducted these expenses in a year prior to 1994. According to the Conference Report, the reimbursed expenses are to be considered excludible from gross incomeunless the employer has knowledge that the employee deducted the expenses in a year prior to 1994. The employer is apparently under no obligation to actually make a determination whether or not the employee actually deducted the expenses in a prior year.

Any employer reimbursement is to be made following the “accountable plan rules.” These rules require an employee to make timely substantiation of his or her expenses and return to the employer any advances received in excess of substantiated expenses. This will require additional recordkeeping by the employer.

Excludible reimbursements made for moving expenses incurred in 1994 and later years are not to be reported as wages, tips, or other compensation. Rather, they are to be reported on a W-2 form in box 13 and identified with Code P as nontaxable reimbursement. Reimbursement made by the employer for expenses that do not qualify as an excludible fringe benefit must be reported as wages, tips, or other compensation in box 1 of the W-2 form. Reimbursement for nonqualified expenses will be considered a part of the employee’s compensation and will be subject to withholding and payroll taxes.

Some employers use a relocation company to purchase and sell an employee’s home. Previous rulings indicate that the IRS holds a position that the employer’s purchase of the employee’s home at fair market value does not amount to a payment of moving expenses. Relocation programs should be reviewed to determine the extent to which expenses borne by the employer will be taxable as income to the employee under current law.

FINAL REGULATIONS ISSUED UNDER SECTION 482 Final regulations were issued on July 6, 1994, covering

intercompany transfer pricing rules under Section 482. Numerous modifications were made in the final regulations, but they generally mirror the 1993 proposed and temporary regulations. The final regulations emphasize comparability, which was well-received by taxpayers.

The new regulations allow so-called inexact comparables to be used under all methods of allocation. The prohibition against use of elective and other methods has been removed, and the limitations regarding presence of valuable non-routine intangibles under CPM and profit split have been eliminated. These changes are intended to maximize the extent to which relevant information can be used in evaluating taxpayers’ results under the arm’s-length standard.

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IRS

The burden then falls on the taxpayer to use an allocation method that produces an arm’s-length result when calculatingtaxable income. The regulations provide that two controlled entities will account for intercompany transactions as though these transactions were being carried on between uncontrolled entities. The IRS has the power to reallocate any item of income, expense, credits, allowances, basis, or any other item or element affecting taxable income in order to produce an arm’s-length result.

In selecting an allocation method, the regulations recognize that different methods apply to different types of transactions. In some cases it may be necessary to apply more than one allocation method to a single transaction when the transaction is most reliably evaluated using more than one method. When more than one method could be applied to a transaction, the regulations provide that the best-method rule should be used in determining which of the methods to select.

The best-method rule provides that an arm’s-length result must be determined under the method that, given the facts and circumstances, provides the “most reliable measure” of an arm’s- length result. In comparing methods under the best-method rule, use is to be made of uncontrolled transactions that are comparable, rather than identical, to the controlled transaction. This recognizes the fact that it is usually not possible to locate uncontrolled transactions under identical circumstances to controlled transactions. In determining which comparable transaction and method to use, methods relying on uncontrolled transactions with the highest degree of comparability to the controlled transaction are to be preferred because of increased comparability.

Equally important to consider under the best-method rule are the three components of completeness and accuracy of data, reliability of assumptions, and sensitivity of results to deficiencies in data and assumptions. These components must be assessed to determine whether controlled and uncontrolled transactions are truly comparable when selecting an allocation method.

The regulations provide for six methods to use for transfers of tangible property. They include the CUP method, the resale price method, the cost plus method, the CPM, the profit split method, and unspecified methods. The method to be applied is selected using the best-method rule. The regulations provide guidance in selecting the proper method for a particular transaction.

Four methods of allocation have been provided for the transfer of intangibles: the comparable uncontrolled transaction (CUT) method, the CPM, the profit split method, and unspecified methods. The method used is to be selected based on the best-method rule.

The regulations provide much detail about the various allocation methods and the criteria to be used in selecting the proper method under the best-method rule. Corporations with transactions between domestic controlled entities or with international transactions between controlled entities will need to carefully review these regulations to determine whether changes are necessary in their transfer pricing procedures. +

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