MEMORANDUM No. 98-40

I.  MOVING EXPENSES FOR 1998
As we reported to you earlier; the IRS, in Announcement 97-77, is requiring employers to change the manner in which moving expenses are reported to the employee for years beginning after December 31, 1997.  Please note, what to tax has not changed, but how to report it has.

The requirement that Form 4782, Employee Moving Expense Information be provided to the employee has been eliminated.  The reporting has also been simplified.  For 1998, qualified moving expenses paid to a third party, such as a moving company, on behalf of the employee, and services furnished in kind to the employee will not be reported on the W-2 at all.  Qualified moving expense reimbursements an employer pays directly to an employee will be reported in Box 13 of Form W-2 and identified using Code P.  All non-qualified (taxable) moving expense will continue to be included in wages in Box 1 of Form W-2, whether or not paid directly to a third party.  They are subject to income tax withholding and social security and Medicare taxes.

II.   TAXATION OF MOVING EXPENSES UNDER OSBM REIMBURSEMENT POLICY
The OSC has received requests that we try to clarify which moving expense reimbursements made under the State’s Budget Policy are subject to inclusion in the employee taxable wage and which payments are not considered compensation.

Also, it has come to our attention that some employees have been taxed in the past for State subsistence at the new duty station when the facts and circumstances indicated that the old dwelling had not been abandoned and the employee’s living expenses were being duplicated so that it could be argued that the employee was “traveling away from home overnight”.  Expenses for travel while away from home on business overnight are not taxable to the employee if the expense substantiation rules are followed.  The tax treatment of “travel while away from home on business” is set forth in IRS Regulation 1.162-2(f).  A short discussion of these rules is included so that agencies can make a more informed determination of when to tax the 40 business days of subsistence payments that are available under the State’s moving expense reimbursement policy.

Moving Expenses:
Internal Revenue Code Section 217 allows a deduction for moving expenses paid or incurred during the taxable year in connection with the commencement of work by the employee.  Moving expenses are defined as the reasonable cost of moving household goods and personal effects from the former residence to the new residence, and of traveling from the former residence (including lodging, but not meals) to the new residence.

No deduction is allowed for moving expenses unless the employee’s new principal place of work is at least 50 miles farther from his former residence than was his former place of work, or if he had no former principal place of work, is at least 50 miles from his former residence.  Also, the employee must either be a full-time employee at the new general location for at least 39 weeks following the start of work at the new location, or during the 24 month period immediately following his arrival in the general location of his new principal  place of work, he is a full-time employee or is self employed during at least 78 weeks, of which not less than 39 weeks are during the 12-month period referred to previously.  The 50 mile or 39 week rule does not apply if the employee is unable to satisfy the conditions due to death, disability or involuntary separation.

In general, the move must occur in connection with the commencement of work at the new location and must be incurred within one year from the time the taxpayer begins work at the new location.  Moving expenses may be deductible after this one-year period if the taxpayer can show that circumstances prevented the taxpayer from incurring the expense of moving within the one-year period.

Qualified moving expenses under Code Sec. 132(g) are excludable from the gross wages and wages for income and employment tax purposes to the extent paid for or reimbursed by the employer, whether paid for directly or through reimbursement.  The employer is required to treat the qualified moving expenses as excludable from wages unless he has actual knowledge that the employee deducted the qualified expenses in a prior year or will not meet the distance requirement or the 39/78 week test.

Expenses of Travel Away From Home:
For travel expenses to be excludable from the employee’s income, they must be incurred while, (1) away from home, (2) and in pursuit of a trade or business.  IRS Regulation 1.162-2(f) sets forth three objective factors that are to be used to determine if an individual’s home is truly his tax home.  The factors are:

1. whether the individual performs a portion of his business in the vicinity of the abode while he is using the abode for lodging;
2. whether the individual’s living expenses are duplicated because his business requires him to be away from the area; and
3. whether the individual has (a) not abandoned the vicinity in which his historical place of lodging and his claimed abode are both located, (b) has a member of his family currently residing at the claimed abode, or (c) uses the abode frequently for purposes of lodging.

Conversely, any employer reimbursement of travel expenses would be includable in the employee’s wages, subject to employment taxes.

When employees work away from home it is sometimes impractical for them to return home at the end of the work day.  When this occurs, the employee’s travel expense reimbursements  (meals and lodging) are not taxable if the period of work away from home is temporary.  Should the period of work become indefinite, travel expenses are considered compensation because the employee is considered to have changed the location of his tax home  to his work location.  Any employment that actually exceeds one year is treated as indefinite.  The inclusion in income applies to all expenses reimbursed, not just those reimbursed after one year.

Differences Between Office of State Budget and Management’s Moving Expense Reimbursement Policy and Expenses Allowable Under the Internal Revenue Code:
North Carolina General Statute 138-8 authorizes the Office of State Budget and Management (OSBM) to set a policy for the reimbursement of State employees who are required to relocate their duty station, when that relocation is “deemed” to be in the best interest of the State.  That policy, as it presently exist, conflicts in several instances with what is allowable under the Internal Revenue Code.  It is important to note that the definition of taxable versus non-taxable moving expenses, per the IRC, has changed twice since 1993.  Also, how the moving expenses are to be reported for Form W-2 purposes has changed three times since 1993; the most recent change becoming effective January 1, 1998.

OSBM  policy requires that for a move to be reimbursed, the new duty station must be 35 miles or more from the existing or prior duty station.  Simply stated, the IRC requires the move to be 50 miles or more.  Therefore, any reimbursement of moving expenses where the distance is more than 35 but less than 50 miles would  be includable in wages for income and employment tax reporting.  Also, OSBM policy does not have a 39 week or 39/78 week test that must be met by the employee.  Therefore, where the employer has knowledge that the 39 week or 39/78 week test will not be met and the stated exceptions are not applicable, the moving expense reimbursement must be included in taxable wages.

OSBM policy allows for the movement of household and personal goods.  The weight limitations stated in that policy are not found in the IRC, so that additional cost borne by the employee in connection with the household move should be allowable as an itemized deduction to the employee on his/her tax return.  The tax treatment of insurance, appliance connections, mobile home set up cost, etc. per OSBM policy  would normally not be taxable compensation since it would qualify as moving household goods (personal property), unless other IRC requirements for the move are not met by the employee.

OSBM policy allows for travel and subsistence to the employee for the cost of travel in locating a new residence for a maximum of three trips at the statutory rate (presently $.325/mile for round trips under 60 miles and $.22/mile in excess of 60 miles.  The IRC does not allow the reimbursement of travel for house-hunting purposes.  The house-hunting mileage reimbursement is taxable compensation to the employee.  Subsistence and lodging paid while looking for a new home is taxable compensation to the employee.

For the day of the move, OSBM policy allows for mileage, subsistence for meal cost for each family member, and overnight lodging.  The IRC does not allow for the tax free reimbursement of meal expenses incurred while moving.  Therefore, all meal subsistence reimbursements for the day of the move is taxable compensation to the employee.  Mileage paid in excess of the $.10/mile (moving mileage rate) would also be taxable compensation.  The overnight lodging reimbursement is not taxable income.

OSBM policy allows for the payment of subsistence at the new duty station for a period not to exceed five days a week and mileage for one-round trip per week from the employee’s current residence to the new duty station, not to exceed 40 business days.  IRC Section 217 rules require that all per diem reimbursements be included in the taxable wage of the employee, subject to employment taxes.  While the general rule of Section 217 is that payments of subsistence will be taxable compensation to the recipient, IRC Regulation 1.162-2(f) (see above) sets forth criteria that must be met in order to exempt business travel expenses from taxable wages.  When at least two of the three stated criteria are met by the employee, for instance where the employee’s living expenses are duplicated and family members are still living in the claimed abode, it is our opinion that the facts and circumstances would indicate that the employee, for IRC purposes, would qualify for being in overnight travel status and the subsistence would be a non-taxable fringe benefit, excludable from taxable wages under IRC 132(g).  When two of the three Reg. 1.162-2(f) criteria are no longer being met, the subsistence for the 40 business days would be taxable compensation.  This is also true for the one-round trip mileage reimbursement.  Please note, the applicable mileage rate for overnight travel while on business is $.325/mile for 1998, not the $.10/mile moving mileage rate.

III.  PATIENT THERAPEUTIC WAGES NOT SUBJECT TO SELF EMPLOYMENT TAX
Prior to 1997, a large number of State institutions issued W-2 forms to patients in State facilities who were performing services that were “deemed” to be of a therapeutic nature.  Beginning in 1997, these payments were reported to the patients at year-end on a Form 1099-MISC.  This change was consistent with the treatment of these wages accorded patients in federal facilities.  Since these wages were exempt from FICA under both Code Section 3121 and the State’s 218 Agreement with the SSA, social security and Medicare was never withheld from these wages.

The question has been raised about whether the amounts reported on Form 1099-MISC are now subject to self-employment tax.  Also, which block of the Form 1099-MISC should the payment amounts be reported in.  After researching this issue, it appears that these therapeutic wage amounts are not subject to self employment tax and block 3 of Form 1099-MISC should be used to report therapeutic wage amounts.  For 1997 payments that were reported in block 7 of Form 1099-MISC, IRS procedures do not require that corrected 1099s be issued.   For 1998 reporting, these payments should be reported in block 3, Form 1099-MISC.

IV.  FORM 1098-T, TUITION PAYMENTS
The Taxpayer Relief Act of 1997 imposed information reporting requirements on organizations that receive payments of qualified tuition and related expenses.  The 1997 Act also required businesses, including State agencies, that reimbursed tuition to report the tuition reimbursements. For 1998, the IRS has dropped the requirement that employers report qualified tuition reimbursements; however, there is still reporting required of educational institutions that receive payments of qualified tuition.

By now most State universities have probably made significant progress in meeting the reporting requirements of Code Section 6050S for 1998 reporting.  In case any school is not aware of the reporting requirements the following is a recap of the Code Section 6050S reporting requirements for Tuition Payments as originally stated as set forth for 1998 reporting.

Original Reporting Requirements (Not Applicable for 1998, but May be Imposed Later)
Section 6050S(b) provides that the return must be in the form prescribed by the Secretary and contain:
(1)  the name, address, and taxpayer identification number (TIN) of the individual with respect to whom the qualified tuition and related expenses were received or the reimbursement or refund was paid,

(2)  the name, address, and TIN of any individual named in the first item as the taxpayer who will claim that individual as a dependent for any tax year ending with or within the year for which the information return is filed,

(3)  the aggregate amount of payments of qualified tuition and related expenses received by the eligible educational institution or the aggregate amount of reimbursements or refunds paid to the student, and

(4)  such other information that the Secretary may prescribe.

Section 6050S(d) provides that every person required to make an information return must furnish to each individual whose name is required to be on the return a written statement showing the name, address, and phone number of the reporting person’s contact, and the aggregate amounts required to be included in the return.

Filing Requirements for 1998
Eligible educational institutions that receive payments of qualified tuition and related expenses for 1998 are required to file Form 1098-Ts for each student.  Form 1098-T is not required if the institution makes reimbursements or refunds of tuition or related expenses that equal or exceed the payments that were made on behalf of the student.

Form 1098-T is also not required for students whose tuition was paid entirely with scholarships.

Persons, other than eligible educational institutions, engaged in a trade or business and making refunds of qualified tuition and related expenses are not required to file information returns for 1998.  This means that general government agencies making payments of qualified educational expenses under the State’s Section 127 plan will not have to file Forms 1098-T for 1998.

Educational institutions must provide reports on students who are enrolled in the institution for any academic term beginning in 1998.  The institution should determine its enrollment as of any of the following three dates:

1. 30 days after the first day of the academic term;
2. a date during the term on which enrollment data must be collected for purposes of the Integrated Postsecondary Data System administered by the Department of Education; or
3. a date during the term on which the institution must report enrollment data to the State, the institution’s governing board or some other external governing body.

Information Required for 1998
Eligible educational institutions must file a properly completed Form 1098-T, Tuition Payments, for each student with respect to whom information reporting is required.  For 1998 the properly completed Form 1098-T must include:

1. the name, address, and TIN of the eligible educational institution,
2. the name, address, and TIN of the student,
3. an indication of whether the student was enrolled for at least half the full-time academic workload during any academic period commencing in 1998, and
4. an indication as the whether the student was enrolled exclusively in a program or programs leading the a graduate level degree, graduate level certificate, or other recognized graduate level educational credential.

Each student must be provided a statement containing the same information that is provided to the IRS.  In addition, the form to the student must contain the phone number of the person to contact for information about this return.  The form to the student must be provide by February 1, 1999.

New IRS Form W-9S can be used to obtain the student’s name, address, TIN, and other information required

V.   FORM 1098-E, STUDENT LOAN INTEREST PAYMENT REPORTING
Code Section 6050S, as added by the Taxpayer Relief Act of 1997, requires the recipients of interest payments that exceed $600 or more and may be deductible as qualified education loan “student loan” interest to furnish information returns with respect to these payments.  A qualified education loan is a loan used to pay the cost of attendance at an eligible educational institution for a student enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.    For 1998,  the recipients of the interest payments are required to report interest received only with respect to student loans that have a “covered period” ending during or after January 1, 1998.

Information Required for 1998 Reporting
 Payees (including governmental agencies and educational institutions) are required to properly complete a Form 1098-E, Student Loan Interest Payment for all student accounts that contain one or more covered student loans.

For 1998, a properly completed Form 1098-E must include:

1. the name, address, and TIN of the payee;
2. the name, address, and TIN of the payor; and
3. the aggregate amount of interest received during 1998 with respect to the student loans in the account or accounts included on the return.

The payee must provide the payor a statement containing the same information as above by February 1, 1999.  IRS Form W-9S can be used to collect the information necessary to provide these forms to the payor.

Should you have any questions concerning the above, please call Randy Thomas at (919)981-5488.