If you receive a temporary job assignment away from your home, you may be able to claim a tax deduction for your expenses. The deduction applies to both independent contractors and employees. To qualify, you must have duplicate living expenses, meaning you must continue to keep a residence in your home city. However, before taking the deduction, you should ask yourself five questions to see if you can deduct your rent.
Although it is possible to deduct a portion of your rent as part of your expenses, you will need to meet a stringent series of IRS requirements in order to do so.
Your Tax Home
The IRS defines your tax home as the city or area in which you normally conduct business. It includes the entire city and its suburbs. Some metropolitan areas, such as Texarkana and Kansas City, straddle two state lines, but the IRS considers the cities and their suburbs as one tax home. For example, if you normally work in Texarkana, Texas, a temporary assignment in a suburb of Texarkana, Arkansas, is still within your tax home, so you cannot deduct your rent.
Assignment Length Matters
To be able to deduct your rent, you must reasonably expect the temporary assignment to last no longer than 12 months. If you expect to work at the location for more than a year, you cannot deduct your rent, even if you return home sooner. If you expect the assignment to last no more than a year and you later find you will be working there for a longer time, the rent paid prior to learning of the extension is eligible, but the rent paid after you learn of the extension is not. An exception to the 12-month rule exists for federal prosecutors and investigators on temporary duty.
Traveling Companions Matter
If you take your spouse, dependent or another person with you, you must prorate your rent unless the other individual has a legitimate business reason for accompanying you. The other person must be your employee or a business associate, and the other person must be eligible to take a business expense deduction if they paid their own expenses.
Is Your Rent Reasonable?
The IRS regulations forbid deducting travel expenses that are extravagant or lavish. Visiting a nightclub or expensive hotel isn't expressly disallowed, nor is spending over a certain dollar amount, but any needs to be reasonably related to your work. The cost of your rent must be reasonable for your occupation and business as well as for the area where you're traveling. Staying at a luxury hotel may not be considered reasonable if there are other options available that would allow you to do your work equally well but might be reasonable if you're traveling to a place where those are the only accommodations available.
Did You Receive Reimbursement?
If your employer or your client reimbursed you in full, you cannot deduct your rent. If you received partial reimbursement, you may deduct only the portion for which you did not receive reimbursement. If you received a per diem or other allowance, you may deduct your rent only if your employer included the allowance with your taxable income.