Avoid tax roadblocks for relocation assistance — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily

Avoid tax roadblocks for relocation assistance

Get PDF file

by on
in Leaders & Managers,Management Training

If your company has to transfer an employee, you may help by providing relocation services. For instance, you might arrange for the sale of the employee’s home to a third party through a relocation firm.

Advice: Set up an agreement with no tax strings attached. Unless you’re careful, the arrangement could result in taxable income to the employee.

Basically, it boils down to this: If the IRS says only one home sale is taking place during the transaction, the employee is liable for tax relating to carrying charges before the final sale to the third-party buyer. If two sales are involved, the employee is off the hook tax-wise.

In a new ruling, the IRS provides guidance for three common situations: (IRS Revenue Ruling 2005-74)

Example 1: The employer contracts with a relocation management company to provide assistance, including a home-purchase program, for the employee. The relocation company purchases the home at its fair market value.

Result: There are two home sales. Thus, any expenses incurred by the employer on the second sale aren’t treated as taxable compensation paid to the employee.

Example 2: The facts are the same as in Example 1, except that the contract allows the employee to list the home with a broker to market to potential buyers under an “amended value” option. If a higher offer is obtained, the relocation management company must buy the home at the higher price.

Result: This option doesn’t change the fact that there are two sales.

Example 3: The facts are the same, but the relocation company isn’t required to offer the higher amount until it enters into a sales contract with a third-party buyer. The employee can reject any offer.

Result: In this case, there is one sale for tax purposes. So, the expenses are treated as taxable compensation to the employee.

Leave a Comment

Previous post:

Next post: