Relocation Expenses

Expense Management – Key Functions Capturing Data Expense Reimbursements 3 rd Party Vendor Invoices Other Data Reporting Data Billing / Invoicing Payroll Year End Understanding US Tax Implications Relocation Taxability Gross Up

Expense Management Process Flow Accurate Reporting: Billing, Payroll & Year End Other Relo Data Vendor Invoices Expense Forms Entry of Data:

Ultimate Goals at AIReS 100% Client and Transferee customer service satisfaction Expense processing turn time of 3–5 business days. Payroll Processing to not exceed 3 business days. No W-2C’s AIReS 2014 W-2 Accuracy Rating 99.94%

Expense Reimbursements Reimbursements are any relocation expenses incurred and initially paid by the transferee in which the company agrees to reimburse the employee. Common expense reimbursements are: –Transportation (airfare, taxi, train, etc.) –Hotel Lodging –Meals

Other Relocation Data Other Relocation Data may include –Items charged to corporate credit cards –Items booked through travel provider –Corporate Apartments Important to collect and track this data for total spend and payroll reporting purposes

Data Coding At the time the data is entered, an appropriate code is selected based on the type of expense, client policy and assignment details of the transferee. Capability to specify which codes are available based on policy benefits. (Code Lockdown) Expense codes are tied to US taxability and Relocation categories that feed directly to client reporting.  Category Reports, Billing Reports, Payroll Reports

Payroll Report – Update Earnings Most relocation expenses are considered taxable income to the transferee and must be reported on the US W-2. The AIReS Expense Management team partners with the client payroll contacts to ensure reporting accuracy based on tax and gross up methodology. Frequency varies - Bi-Weekly or Monthly is recommended for compliance. Data is reviewed for accuracy, taxability and gross up/withholding calculations. Reconciliations

US Taxability of Relocation Expenses * Reportable on W-2 (box 12 code P) only if reimbursed directly to the employee

US Tax Implications - Relocation A relocation must meet certain guidelines before ‘excludable’ moving expenses can be deducted under IRC § 217 (or excluded from income if paid by the employer) –Distance Test New primary place of work must be at least 50 miles farther from your former residence than the old work location was –Time Test The transferee must work full-time for 39 weeks during the first 12 month period after arriving. If the EE does not move within 1 year of the start date, ordinarily expenses cannot be deducted. Some exceptions exist. *If these requirements are not met, all relocation reimbursements will become taxable to the transferee

US Tax Implications - Relocation Move Types Temporary Assignment – A move lasting 12 months or less. Most expenses excludable under IRC § 162(a)(2), some miscellaneous allowances can be taxable, unless specific in nature and under the GSA guidelines. Long Term Assignment – 12 to 36 months typically, taxability guidelines follow IRC § 217. Permanent – over 36 months typically, follows IRC § 217 Intern – Does not qualify as a move, IRS views Interns as not having a “Tax Home” all expenses are taxable.

US Tax Implications - Relocation IRC § 162 (a)(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business IRC § 217 (a) Deduction allowed There shall be allowed as a deduction moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work. (b) Definition of moving expenses (1) In general For purposes of this section, the term “moving expenses” means only the reasonable expenses— (A) of moving household goods and personal effects from the former residence to the new residence, and (B) of traveling (including lodging) from the former residence to the new place of residence. Such term shall not include any expenses for meals.

US Tax Implications - Relocation Treasury Regulation (c)(3)(iii) – Where a taxpayer maintains inconsistent positions by claiming a deduction for expenses of meals and lodging while away from home (incurred in the general location of the new principal place of work) under section 162 (relating to trade or business expenses) and by claiming a deduction under this section for moving expenses incurred in connection with the commencement of work at such place of work, it will be a question of facts and circumstances as to whether such new place of work will be considered a principal place of work, and accordingly, which category of deductions he will be allowed. Concerns not allowing a transferee on temporary assignment to claim deductions under both sections 217 and 162. Specifically some people will try to do this with a HHG move. Rev. Rul , C.B. 71 – IRS advised that if an assignment realistically is expected to last more than a year at its inception, no expenses are deductible. Also, if at any point during a temp assignment the intent should change to more than 12 months expenses at that point forward are taxable.

US Tax Implications - Relocation Home Disposal Program guidelines: The best way to minimize tax liability for the employer and employee is to ensure the residence is put through two separate, independent sales. Typically the employer buys the home from the employee, then a second sale of the residence by the employer to a third-party occurs. Since publication of Rev. Rul in 1972, IRS has agreed that if the employer buys a home from an employee in a bona fide purchase for fair market value, the costs the employer incurs to dispose of the home are not income to the employee. In November 2005, IRS reiterated and expanded on that agreement in Rev. Rul The 2005 ruling includes considerable detail as to the procedures that will result in a purchase from the employee being considered a bona fide transaction in which the employer obtains all the benefits and burdens of ownership. The IRS position is based on the premise that two separate, independent sales have occurred, one from the employee to the employer, and a second sale from the employer to the outside buyer. The employee is not a part of the second sale, and does not benefit from it.

Gross Up / Tax Assistance All taxable reimbursed relocation expenses must be reported as income. This additional income will create an additional tax liability. To assist with the additional tax burden, many companies provide tax assistance (also called gross up) to help offset the additional tax that results from being relocated.

Gross Up / Tax Assistance The amount of tax assistance that is provided is entirely dictated by the client’s policy. There are no required guidelines for a tax assistance calculation nor is it required that a company provide tax assistance. If tax assistance is provided, it is also considered income and will create an additional tax liability (Old Colony Trust Co. v. Commissioner 279 U.S. 716 (1929)).

US Gross Up Methodology Gross Up calculations are based on 2 items:

AIReS Year End Process Communication/Meeting with clients regarding their requirements Communication to transferees PRE Year End (August) Data Audits Final Payroll Reporting/Detail Files True Up / Delta Files DURING Year End (Oct-Dec) Reconciliations between client and AIReS data RTRs (Relocation Tax Reports) & Detail Files POST Year End (January)

Fiscal Year Reporting Publication 5137 Under a special rule, benefits provided in November and December, or a shorter period in the last two months of the year, may be treated as paid in the following year. Only the value of benefits actually provided during the last two months may be treated as paid in the subsequent year. You do not have to notify the IRS that you are using this special accounting rule. IRS Ann ; Reg (b)(7) An employer may use this rule for some fringe benefits and not others. The special accounting period need not be the same for each fringe benefit. However, if an employer uses the special accounting period rule for a particular benefit, the rule must be used for that benefit for all employees who receive it.

Year End True Up What is a True Up? –A recalculation of expense gross up provided during the year to equalize the employee and possibly save the client some gross up cost –The True Up basically Calculates an estimated tax return once without moving expenses included and once with moving expenses included. The difference between the two calculations is the tax assistance the EE should receive for the year. An adjustment is provided to get the EE to their tax assistance amount based on the gross up they received during the year.

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