Taxability of State Travel, Transportation and Commuting

Authority

• U.S. Code, Title 26, §2162(a), 262, and 274(d) (Internal Revenue Code)
• 26 CFR Ch 1, §1.274-5T - Substantiation Requirements (Temporary) (Treasury Regulations) Rev
• IRS Publication 15-B Employer’s Tax Guide to Fringe Benefits
• IRS Publication 463 Travel, Gift, and Car Expenses
• IRS Publication 5137 Fringe Benefit Guide, Office of Federal, State, and Local Governments
• IRS Rev. Rul. 75-170
• IRS Rev. Rul. 75-432
• IRS Rul. 99-7, 1999-5 C.B. 4 - Deductibility of Daily Transportation Expenses
• IRS Local Travel Guide 

Purpose

The purpose of this Technical Guidance is to inform State Agencies and Institutions of Higher Education (IHEs) of tax issues related to reimbursement for State travel, transportation, and commuting costs. This guidance applies to Travel Fiscal Rule 5-1 and State Controller Travel Guidance.  State Agencies and Institutions of Higher Education are responsible for compliance with all IRS regulations and should consult a tax advisor as they deem necessary.

Definitions

• See Fiscal Rule 5-1, §2 Definitions.  
• Indefinite Assignment – Employee’s job away from the Traveler’s Regular Work Location is indefinite and is one that is realistically expected to last more than one year, whether or not it actually lasts for more than one year.
• Internal Revenue Code – U.S. Code, Title 26, §§, et seq.
• IRS Publications – Publications issued by the Internal Revenue Service, including without limitation the Internal Revenue Service cumulative bulletins.
• IRS Regulations – The rules and regulations of the Internal Revenue Service Department of the Treasury promulgated under the Internal Revenue Code.

Relationship Between Reimbursement and Taxable Income  

• Reimbursement - Travel and transportation expense reimbursement policies are set by the State. 
  • Travel Expenses While Traveling Away from Home – Fiscal Rule 5-1, §7 provides for the reimbursement of various types of travel expenses provided that the Traveler is Traveling Away from Home.
  • Standard Allowance –The State of Colorado has chosen to use the standard allowance method, rather than the actual cost method, for meals and incidental expenses.
  • Actual Costs - For lodging, rental vehicles, airfare, and other allowable expenses included in Fiscal Rule 5-1, §7, the State will reimburse a Traveler for actual costs.
  • Mileage - For mileage, the State will reimburse a Traveler based on mileage, as provided in the State Controller Policy, entitled “Mileage Reimbursement”, and at rates as provided in §24-9-104(2) CRS.
• Taxable Income or Deduction – The Internal Revenue Code, IRS Regulations, and IRS Publications determine if a reimbursement is taxable income to the Traveler or if a non- reimbursed amount may be taken as a deduction on a Traveler’s income tax return.
• The State Fiscal Rules comply with IRS Regulations. 
• The State Fiscal Rules align with IRS Regulations with the following exceptions: 
  • Mileage reimbursement rates set by §24-9-104(2) CRS
  • Moving and Relocation set by §24-50-134 CRS and Fiscal Rule 2-6

Transportation

• Transportation occurs when a State employee:
  • Travels within the employee’s Metropolitan Area
  • Travels outside the employee’s Metropolitan Area for travel within a single day.
• Transportation expenses include:
  • Mileage expenses (see State Controller Policy “Mileage Reimbursement” to calculate mileage expenses;
  • Train, bus, shuttle, taxi, and other transportation services; and
  • Tolls and parking fees.
• Transportation expenses do not include:
  • Meals and lodging;
  • Commuting; and
  • Travel expenses.
• General Reimbursement for Mileage
  • A state may choose a reimbursement plan for mileage that differs from the IRS rates and allowable miles. CRS §24-9-104(2) provides that State employees shall be reimbursed at 90% of the prevailing IRS mileage reimbursement rate for two-wheel drive vehicles and 95% of the IRS rate for four-wheel drive vehicles. Under the State Controller Policy entitled “Mileage Reimbursement,” when an employee uses his/her personal vehicle while on State Business, the employee shall be reimbursed for an amount equal to the State’s prevailing mileage rate multiplied by the allowable miles as outlined in the Policy. The difference between the reimbursement provided by the State Agency or Institution of Higher Education and the allowable reimbursement provided by the IRS regulations will result in a tax consequence for the employee. The employee should seek independent tax advice regarding their individual tax situation if they believe the difference between the IRS allowable amount and the State reimbursement amount is significant.
• Travel to a Temporary Work Location
  • A State Agency or Institution of Higher Education may reimburse an employee for the cost of traveling to a Temporary Work Location in accordance with the State Controller Policy entitled “Mileage Reimbursement.” Taxability does not govern reimbursement. Rev Rule 99-7 provides three exceptions to the general rule, that commuting expenses are nondeductible personal expenses:
    • One or More Regular Work Locations – In this exception, an employee has one or more Regular Work Locations. Where there is more than one State Work location, the main place of business is generally determined by the time worked, degree of business activity, and income earned in each location.  An employee may be reimbursed for transportation expenses to a Temporary Work location as an IRS qualified reimbursable nontaxable transportation expense, regardless of distance, only if the Temporary Work Location is in the same trade or business as the employee’s Regular Work Location.
      • An employee may travel directly from his/her residence to the Temporary Work Location rather than traveling to the Regular Work Location first. In this instance, under Rev Rule 99-7, there is no distance requirement that would act to make the reimbursement taxable to the employee.
      • The Temporary Work Location may be inside or outside the metropolitan area in which the taxpayer normally lives and works.
      • Key elements for this exception: 1) the temporary job is in the same trade or business as the employee’s regular job, and 2) the employee has a Regular Work Location away from his/her residence.
    • Employee’s Residence is the Principal Place of Business – The IRS allows the home office deduction for independent contractors and disallows the home office deduction for employees.  As a result, an employee who works from their residence will be follow one of the approaches for employees with No Regular Work Location.
    • No Regular Work Location – Employees do not have a State Work Location where an employee is assigned to work.  Generally, these employees work from the Employee’s Residence.  These employees are not itinerant workers under IRS Regulations and so are entitled to be reimbursed for travel expenses.  The State of Colorado includes two categories for these employees:
      • Employee’s work duties can be performed at any location. 
      • Employee’s work duties can be performed only in a particular geographic area and the employee was hired to perform those work duties in that geographic area.  
• See Fiscal Rule 5-1 §2.5 and State Controller Policy entitled, “Mileage Reimbursement.” 

Travel

• Travel occurs when a Traveler is Traveling Away from Home.  See Fiscal Rule 5-1 §2.37.  
• Metropolitan Area
  • IRS Regulations - Generally, IRS regulations do not define Metropolitan Area.  The State uses a 50-mile radius based on the IRS Local Travel Guide.  
  • The federal government defines “metropolitan area” for IRS personnel and other federal employees as a mileage radius of not greater than 50 miles within or outside the limits of the physical location of an IRS office.
  • Legislature uses 50 miles as the Metropolitan Area.
• Courts have generally interpreted Traveling Away from Home as requiring the Traveler to sleep overnight while away from home.  See United States v. Correll, 389 U.S. 299 (1967).  If a Traveler does not sleep overnight, then the employee should be reimbursed only for the costs to travel to and from the business destination.
• Merely working overtime or at a great distance from the employee’s Regular Work Location is not Traveling Away from Home if the Employee returns to the Employee’s Residence without spending the night or stopping for substantial sleep or rest.  Rev. Rul. 75-170; Rev. Rul. 75-432.
• To determine whether an employee meets the “substantially longer than an ordinary day’s work,” for travel within a single day, State agencies should review State Controller Travel Guidance, §4.
• Travel expenses include:
  • Costs to travel to and from the business destination (transportation expenses);
  • Transportation costs while at the business destination;
  • Lodging, meals, and incidental expenses; and
  • Cleaning, laundry, and other miscellaneous expenses.
• Temporary Assignment vs. Indefinite Assignment
  • Temporary Assignment – Reimbursement is not taxable to the employee.
  • Indefinite Assignment – Reimbursement is taxable to the employee.
• Travel to Conferences, Meetings, and Training Sessions
• A Traveler may be reimbursed for travel expenses to conferences, meetings, and training sessions as an IRS qualified reimbursable nontaxable travel expense if the Traveler is Traveling Away from Home and the purpose of the conference, meeting, or training session is connected to the Traveler’s present business or area of responsibility. If the Traveler is reimbursed, the reimbursement is a qualified reimbursable nontaxable travel expense and would not be included on the employee’s W2. 
  • Time Limitations – There are no limitations in the IRS Regulations as to the duration of conferences, meeting or training sessions. Examples provided in the IRS Regulations include time periods extending for days or weeks. If a training period extends beyond weeks, to months, then the training situation may fall outside of the IRS Regulations pertaining to conferences, meetings, and training sessions.
  • Distance Requirements – There are no distance requirements. A Traveler may be reimbursed as an IRS qualified reimbursable nontaxable travel expense for travel to a conference, meeting, or training session. 
• Lodging
  • Reimbursement and Traveling Away from Home – If an Agency or Institution of Higher Education reimburses a Traveler for travel expenses incurred while the Traveler is Traveling Away from Home, such reimbursement is an IRS qualified reimbursable nontaxable travel expense and would not be included on the employee’s W2.
  • Reimbursement and Not Traveling Away from Home - If an Agency or Institution of Higher Education reimburses a Traveler for travel expenses incurred while the Traveler is not Traveling Away from Home, then that reimbursement is taxable income to the Traveler and must be included on the employee’s W2.  This is not an allowable reimbursement under Fiscal Rule 5.1.  
  • In cases where the employee stays at the Governor’s Residence, the State Agency or IHE shall impute income based on the costs of comparable long-term lodging in downtown Denver.  
• Travel within a Single Day
  • A State Agency or Institution of Higher Education may reimburse a Traveler for Transportation Expenses, but not Travel Expenses when travel is completed in a single day.  Meals are a non- allowable travel expense for travel in a single day.  Fiscal Rule 5-1 §8. 

Commuting

• The cost of commuting from an Employee’s Residence to the employee’s Regular Work Location is a nondeductible personal expense and will not be reimbursed by a State Agency or Institution of Higher Education.
• Taxability of Commuting - If an employee has been assigned a State-owned vehicle, and the use of this vehicle is Commuting, then the State Agency or IHE shall follow the tax guidance in State Controller Technical Guidance entitled, “Taxability of State-Owned Vehicles.”

Reimbursement Policies

• State Agencies and IHEs shall develop reimbursement policies regarding State travel. In all cases, these policies shall comply with Fiscal Rule 5-1, the Internal Revenue Code, IRS Regulations, IRS Publications and all other Internal Revenue Service guidance.

 State Controller Policies

• View Policies & Guidance
• View Contract Policies