For many years, temporary domestic assignments (TDA) have been commonplace to satisfy the needs of project based businesses, such as engineering or construction firms. However, in recent years, a wide range of companies are finding numerous reasons to send employees on temporary domestic assignments.
Whether your company is sending someone on a TDA to provide specialized skills for a defined period of time, as an opportunity to train critical talent or to lead a new project, it is important to define your policies.
In the past, the shorter types of these assignments may have often been covered as extended business travel, but NEI recommends that all companies develop written TDA policies to define the process, timeframes and benefits for each duration category, along with indicating that any change of timeframe or intent of the assignment be documented.
IRS Definitions for Temporary and Indefinite Assignments
For taxing purposes, the IRS defines a temporary domestic assignment as temporary if employment in the new location is intended to be for one year or less (non-taxable) and indefinite if the employment away from home is expected to last for more than one year (taxable).
- It is important that the employee receive a letter of assignment at inception detailing the length and reason for the assignment
- In the event, the reason or length of the assignment changes, this document must be updated accordingly
If the above two conditions are not met, the IRS may conclude that the original expectation was indefinite from its inception and treat all expenses as taxable. It is also important to note that once the assignment length changes to be indefinite, the expenses become taxable at that time—not when they exceed a year.
Returning to Home Base Is Critical
Additionally, for most expenses of a temporary assignment to be deemed non-taxable, it is critical that the employee maintain a home at the departure location and return to that home after the assignment is complete to be considered “away from home” by the IRS.
Ensuring Temporary Assignment Allowable Expenses Remain Non-Taxable
For travel expenses to be considered non-taxable, they must be ordinary and necessary, incurred while away from home overnight, and incurred in the pursuit of a trade or business.
Advances are only non-taxable if the employee accounts for the allowable expenses within a reasonable period of time. Typically, 60 days is considered reasonable for submitting receipts for expenses paid from the advance and 120 days for returning any remaining balance from the advance.
It should also be noted that many companies use per diem rates, which in most cases are not considered an advance or taxable by the IRS for qualified short-term assignments. Government per diems are generally accepted without question, however, if increased per diems are required, you may be asked to document why the increase is needed in the event of an audit.
Return trips to the home location are non-taxable only if the primary purpose of the trip is business. However, there is one exception. If the cost of the trip home is less than the employee would have spent had he or she remained in the temporary location, it can be considered non-taxable as well.
The majority of companies with employees on temporary assignment provide tax assistance for any expense considered taxable to the employee, using the same gross-up methodology as would be used for relocation expenses.
Developing TDA Benefits
While many relocation policies are based on job level or homeowner/renter status, temporary domestic assignments are best based on timeframe, talent needs and company culture. A defined policy ensures equitable treatment to all.
Policy elements should address:
- Whether the employee is accompanied or unaccompanied*
- Guidelines for personal effects to be transported
- Travel to and from the location
- Housing guidelines
- Allowances provided/expenses covered
- Return trips to see family
- Gross-up methodology
Along with developing a defined policy, you should provide each employee with an assignment letter, outlining the employee’s:
- Base location or permanent employment site
- Assignment location
- Assignment start date
- Assignment duration
- Appropriate TDA policy
*Many short-term assignments are unaccompanied, that is only the employee’s costs are covered. If a short-term assignment is accompanied, i.e., including any other family member(s), any incremental costs for anyone other than the employee that are paid by the company would be considered taxable income to the employee. This would include any flights, meals, larger living facilities or other amounts paid to accommodate their needs.
Defining your temporary domestic assignments in formal policies will help ensure that there is a common understanding of necessary processes and will help to minimize your company’s tax exposure.