Home is where the job is
It has become the custom of candidates in the presidential elections to release their income tax returns. Occasionally, the candidate suffers the annoyance of having to promptly amend returns because of an obvious error, but mostly this is just a chance to see how much more our would-be leaders make than we do, and how selective they are about charitable donations.
Sometimes, though, we can learn from the candidates' tax issues. This past week it came out that Vice-Presidential Candidate Sarah Palin received "per diem" meal allowances when she stayed at her Wasilla, Alaska residence. The IRS explains "per diem" expenses:
Generally, amounts employers pay employees to reimburse them for substantiated business expenses are not subject to income tax or employment tax. For reimbursements for expenses for meals and other incidentals associated with business travel, employees get this exclusion for reimbursements for each day of travel up to the federal per diem rates without having to actually substantiate the amounts of the expenses.
The tax law normally applies strict documentation requirements for business meals. But if you reimburse employees for business travel away from home at the IRS per-diem rates, you don't have to collect receipts from the employees for their meals. If you don't follow the IRS rules, the employer has to put the reimbursements on the employee W-2 as income. If reimbursements exceed the per-diem amount, the excess is W-2 income.
We'll assume that an Alaska governor has plenty of business travel from the isolated capital of Juneau to Anchorage, Alaska's largest city; in Alaska terms, Wasilla is near Anchorage, so it's reasonable to stay there on Anchorage business. But how can staying in your own house be travel "away from home?"
Under the tax law, your "tax home" is the focal point of your business activities. If an Iowa executive only keeps an apartment in Des Moines, where his job is, but jets to Scottsdale for weekends with his family at the mansion, his "tax home" is in Des Moines. That means his expenses of traveling to and from Scottsdale are non-deductible "commuting," and if the business pays his Des Moines meal and apartment costs, they have to go on his W-2.
Likewise, we can expect the tax home of the Governor of Alaska to be Juneau, the state capital. If the trip to Wasilla is a business trip, it is "away from home" as far as the tax law is concerned, and the state can pay the governor per-diems up to the IRS limits without having to put them on her W-2. Any per-diems in excess of IRS amounts, or for amounts on non-business trips, would be taxable compensation.
In the interest of non-partisanship, our next installment will use the Obama family returns to illustrate a tax-saving opportunity for the self-employed.