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My wife and I own a home-based computer consulting service structured as an S-Corp. Although the business is registered in Florida, we got a contract job in Texas and vacated our apartment, moving to Houston in January. Can I take per diem on my paychecks while we are working here? If so, do I need to show proof of residence in Florida?
Yours is a tricky question that raises several tax issues, and getting the answers right is important. The answers will depend on the specific details of your situation, so you should go over all of them with a professional such as a qualified accountant, tax attorney, or enrolled agent.
Let's get the easy part out of the way first: Texas and Florida are among the seven states nationwide that do not impose state income tax (the others are Alaska, Nevada, South Dakota, Washington, and Wyoming). Moving from one tax-free state to another means that you won't have to deal with what could have been complex state tax issues.
Now to the concept of per diem. Per diem is "a concept of reimbursement or allowance by an employer that the government allows statutorily for various items such as travel or daily expenses," says Donald Lucove, an accountant with Lucove, Say & Co. of Calabasas, Calif. "The amount [of allowable per diem payments] varies by location." Here's the first question you should answer with your professional consultant: Did your S-Corporation enter into a formal contract with the Texas firm?
DECISIONS, DECISIONS. If your answer is yes, and you and your wife are the only employees of the corporation, it is unlikely that you'll be able to take per diem payments, experts say. Although your corporate mailing address may still be in Florida, your corporate business activities have relocated to Houston and you have physically moved there as well. That means, for tax purposes, that your home base is Texas. "Once you're working out of your home base, your cost of living expenses are personal, and not subject to per diem reimbursement," Lucove says.
Jan Zobel, an enrolled agent and the author of Minding Her Own Business: the Self-Employed Woman's Guide to Taxes and Recordkeeping, agrees. "'Moving' and 'per diem' don't go together. Either you moved, or you are temporarily (defined as less than a year) working in a location other than your normal home base," she says. "If you moved, you can deduct moving expenses but no travel, lodging, or per diem expenses."
If your corporation's business activity has relocated to Texas, you must register your business in that state and pay taxes on any corporate profits you earn in Texas, says Alan E. Weiner, a CPA and partner at Melville (N.Y.)-based Holtz Rubenstein Reminick.
TEMP VS. PERM. If your answer to the first question was no, here's your second question: Did you personally contract with the Texas firm where you are currently working, and is it strictly a temporary assignment? If you are working for the Houston-based firm purely as a temporary independent contractor, and you'll get a 1099-MISC form from them at the end of the year, Weiner says, you may be able to take per diem on your paychecks. "You would file a Form 1040, schedule C, deduct business expenses, which (depending upon the length of the work) might include 'away from home' housing expenses, and pay self-employment tax on the net income," he says.
If you are temporarily in a new work location, you can deduct meals, lodging, and other "travel" expenses, says Zobel. But if you have permanently moved out of Florida, those expenses will be questionable. "You would need to be able to prove that your regular home and work location is in Florida" if you do so, she says.
To complicate matters further, if you answered "yes" to the second question, there's a third question: Are you and your wife truly "independent contractors" on this job, as the term is defined by the Internal Revenue Service? Here's how the IRS defines an independent contractor: A taxpayer who contracts to do work according to his own methods and who is not subject to control, except as to the results of such work.
TAKE IT TO THE PROS. If you and your wife are working full-time on this contract at the employer's site and under that employer's direction, the IRS may question your status as independent contractors, says Janet Attard, of www.businessknowhow.com.
Set up a meeting with a tax professional who is familiar with small-business issues and run through all these scenarios. It will be well worth your time and money to get expert advice tailored specifically for your situation.
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