Short-term relocations offer many benefits, but watch out for tax liabilities effective after 12 months.
How does this sound for a new reality TV show? “In this high-stakes game of corporate advancement, contestants must leave behind their family, friends, home and most beloved possessions for up to one year. While away, they must accomplish a series of challenges to meet their employer’s goals in an environment devoid of familiar comforts and support.”
This isn’t a game show, but it is reality for a growing number of employees who must relocate temporarily to accomplish a mission in another part of the country or the world. Until recently, they might have transferred permanently with their families, but today’s employers are shifting away from costly relocations and toward temporary assignments.
In 2003, 70 percent of assignments were scheduled for one year or less, according to the Global Relocation Trends 2003-04 Survey Report sponsored by the Society for Human Resource Management, GMAC Global Relocation Services and the National Foreign Trade Council. That was a significant increase over the historical average of 13 percent in past global relocation surveys. Although these data reflect international assignments only, the trend is mirrored in domestic relocations.
Mobility Services International (MSI) in Newburyport, Mass., has seen a sharp increase in the number of clients looking for help in developing policies and practices for short-term domestic moves, says CEO Timm Runnion. “This trend is clearly the result of today’s business drivers. Corporate America wants to reduce costs while increasing productivity around whatever the business initiative is.”
The financial incentives are considerable. With a transfer of less than one year, “you’ll rarely see the family moving with the employee,” says Lina Paskevicius, consulting manager for Cendant Mobility in Chicago. It’s more likely that an employee will be put up in furnished corporate housing, paid a carefully budgeted per diem for living expenses and offered a small household goods shipment of just a few hundred pounds. “If the primary residence will be vacated, property management services could be arranged,” but there is no need to sell or purchase housing.
Shorter assignments also offer significant tax savings to employers and employees. Relocations of less than one year, in which the employee is expected to return to the original workplace afterward, are typically treated by the company—and the IRS—as a business expense, not a relocation expense, and are deductible.
Traditionally, short-term postings were used mostly in project-oriented fields like construction and engineering, but today they cross the spectrum of industries. “In recent years, companies have faced reductions in available talent, so they have to move it around on short-term assignments to bring expertise to local situations,” says Runnion, who adds that more consulting firms and information technology companies in particular are asking for help with these placements. The assignments also serve the purpose of training and developing workers.
A recent uptick in mergers and acquisitions also is fueling the growth in short-term relocations. Susan Wong, VP for global benefits and executive compensation at Avaya, a major provider of Internet-based telecommunications services based in Basking Ridge, N.J., says her firm has been involved in several mergers and buyouts requiring staff to be posted away from home for months at a time. “We need people on-site during the transition period to handle policies, systems, accounts receivable, payroll, inventory, etc.—just pulling everything into alignment.”
Alone and Far from Home
Certainly, leaving home, friends and family is a hardship for most people, but it’s often the price paid for career advancement. “Experiencing how other parts of the corporation function is often part of the management track,” Paskevicius says. To ease separation difficulties, “it’s common practice for companies to pay for the employee to travel home for the weekend every few weeks or so.”
Moreover, many employers are now bypassing bland corporate lodging in favor of apartments or homes in real neighborhoods. “We circumvent the typical corporate housing arrangement, getting our clients’ employees unfurnished apartments which we’ll furnish for them,” Runnion says.
This approach often is more cost-effective. Nightly lodging costs in Colorado Springs, Colo., for example, average $38.27 for an unfurnished apartment and furniture rental, compared with $81 for a corporate apartment and $128 for a corporate hotel suite, according to travel management consultant Runzheimer International.
Employers who can’t make the leasing commitment typically required for an apartment will be happy to note that corporate lodging is changing to make longer stays more comfortable. For example, Oakwood Worldwide, the world’s largest corporate housing property management firm, frequently hires social directors for its properties to plan barbecues, holiday parties and other events to ease the isolation of residents.
“We expect guests to stay longer these days, and also to invite their families to visit,” says Account Executive Beth Roser. She encourages corporate clients to give employees a say in their accommodations, especially the location. “Some might prefer a unit out in the suburbs, rather than in the middle of the city near the office. They also might want a larger unit that would allow their children to come for weekend visits.” Oakwood can provide children’s furnishings for such clients.
Biggie-Sized Business Trip
So what’s the difference between a short-term relocation and an extended business trip? Not much, as long as the assignment lasts less than 12 months and the employee returns to home base afterward. But these distinctions are important because they greatly impact employee benefits and tax liability, which depend on the length of the assignment.
The IRS statutorily defines an assignment of less than 12 months as “temporary” and one of 12 months or more as “indefinite,” says Jeffrey Arouh, a partner in the New York law firm of Holland & Knight. Temporary status allows employers to deduct costs related to the relocation—travel, lodging, transportation, meals—as business travel expenses. “The IRS’s revenue ruling on this subject tells you that for travel expenses to be deductible, they have to be ‘ordinary and necessary expenses’ incurred while away from home while employed in a trade or business.” In this context, he clarifies, “home” is where the worker is regularly employed or principally resides.
But if at any point during the year the employer becomes aware that the assignment will last longer than 12 months, the status changes to indefinite, and from that point on all future expenses become taxable. Expenses incurred before the intent changed remain deductible.
“As you go along in the process, and in the eighth month you realize the employee will need to stay even a day longer than 11 months and 31 days, that’s when you have to start changing your tax treatment,” Arouh says. “Don’t wait out the 12 months to try to get the tax advantages,” lest you raise a red flag to the IRS.
What if the indefinite status doesn’t become clear until the 11th hour? Just to be safe, Arouh suggests, “make sure you ‘paper your file’ to provide proof that you reasonably and truly believed the assignment would be less than a year.”
For example, signing a month-to-month rental property lease supports your case better than signing a lease for a year or more. The paperwork “should also establish with some degree of precision the reasoning that you followed to determine the duration of the assignment, and your conclusion that the assignment was temporary.”
Runnion says one key service that MSI provides is helping clients determine the length and intent of a short-term assignment up front. “We will work with the client’s relocation administrator to answer a few key questions to make sure a short-term assignment is the right decision, and that it can be completed in less than one year. If the intent seems unclear—and it can be very difficult to assess in some assignments—we make sure [the company is] clearly advised of ramifications if that assignment changes, and what to do if it does.”
Among the questions Runnion and his team might probe with the HR executive are:
- Is the assignment realistically intended to last less than one year?
- Is the company aware of different housing options and their costs in the temporary location?
- Is the short-term assignment likely to create family hardship, and has the company factored return visits into the cost of the assignment?
- Is the company’s policy for assignees competitive, and does the company have the ability to administer all of the arrangements necessary to keep the employee productive on the assignment?
- For relocations within the United States, is the company aware of state personal income tax policies for temporary residents, and has any cost been included in the budgeted cost of the assignment?
Many states have reciprocal agreements that allow income to be taxed in the state of permanent residence rather than the state where the income is earned. When dual tax returns are required, a credit is usually given by the resident state on taxes paid to the other state. If the employee ends up paying more, however, the employer often reimburses for the additional taxes—a practice called “grossing up.”
“But because this reimbursement counts as taxable income, the employer is put in the position of ‘grossing up the gross-up,’ ” explains Arouh, “and this requires a formula to figure out the right amount.” Therefore, he advises, “in any situation like this, since particular facts and circumstances are so important, it’s always advisable to consult your counsel before making any decision that could potentially create a problem for you.”
Short-Term Policies Less Defined
The short-term assignment phenomenon “is still evolving and in flux,” says Runnion. In most instances, companies have an overarching general policy, but take a case-by-case approach.
At Avaya, “We use a lot of common sense, rather than strict, one-size-fits-all policies,” Wong says. “For example, we allow our staff on assignment to come home at least once a month if the project is to last three months or more. But if the family situation requires more visits, we try to make that easy for them.” Typically, the employee’s supervisor approves the benefit, since it comes out of the department’s business travel budget. “We tell supervisors what the norm is, but it’s up to them. We advise them not to promise too much, but to also keep extenuating circumstances in mind.”
Clearly, there are unique factors that guide each individual relocation, “and policies are less defined around temporary assignments than permanent relocations, which have become very sophisticated, with multitiered, closely defined benefits,” says Runnion. He explains that in a typical client consultation, the goal is to find the level of benefit the client wants to provide to balance cost savings with employee productivity. “Cost is always paramount, but talent is key, too; it’s a balancing act to make sure the employee can stay productive under these sometimes difficult circumstances.”
In hammering out the right balance of benefits, Runnion cites three key considerations: the direct cost of the relocation; the cost of incenting the employee to take on the assignment, such as a promotion or bonus; and the cost to maintain the employee’s productivity if he or she becomes distracted by family concerns. This last consideration is the hardest to quantify, he notes.
“These assignments can’t be treated as extra-long business trips,” Runnion notes. “You can’t approach them casually—they are a different animal.”
Martha Frase-Blunt is a freelance business writer based in Shepherdstown, W.Va.