The 12-Month Tax Trap: When a Locums Assignment Stops Being Temporary
Special Trivia Question at the End!
The Good News: Your Contract Was Extended. The Bad News: So Was Your Tax Home.
One of the financial advantages of locum tenens work is the ability to deduct certain travel expenses when you take a temporary assignment away from home. Hotel bills, airfare, mileage, and meals can add up quickly, so these deductions may be substantial.
But there is an important rule that locums physicians should understand:
Once an assignment is expected to last more than one year, the tax treatment changes significantly.
And, despite the convenient shorthand of calling this the “12-month rule,” you don't necessarily get 12 months of deductions.
First, What Is Your Tax Home?
For tax purposes, your “tax home” isn't necessarily where you own a house or where your family lives. Your tax home is generally the area of your main place of business or work.
For many self-employed locums physicians, this may be the city where they ordinarily conduct their business, maintain their primary practice, or otherwise have their principal business base.
Why does your tax home matter?
The tax code allows qualifying business travel expenses when you are away from your tax home in pursuit of your business. The IRS generally considers you to be traveling away from home when your business requires you to be away from the general area of your tax home substantially longer than an ordinary day's work and you need sleep or rest to meet the demands of your work.
Temporary Locums Assignments Can Create Valuable Deductions
Consider a physician whose tax home is Phoenix.
The physician accepts a nine-month locums assignment in Los Angeles. Because the assignment is temporary and requires the physician to travel away from their established tax home, qualifying expenses may include:
Airfare or mileage between Phoenix and Los Angeles
Lodging in Los Angeles
Rental cars or other local transportation
50% of qualifying business meals while traveling
Other ordinary and necessary travel costs
The IRS generally considers a work assignment temporary if it is realistically expected to last one year or less and actually does last one year or less.
For a self-employed locums physician, these expenses can potentially be deductible business expenses rather than nondeductible personal living expenses.
What Happens When the Assignment Exceeds One Year?
This is where things change.
If your assignment at a location is realistically expected to last more than one year, the IRS considers the assignment indefinite rather than temporary. You are no longer considered temporarily traveling away from your tax home for that assignment.
As a result, expenses such as lodging and meals at the assignment location generally become personal living expenses rather than deductible business travel.
For example, suppose you live in Phoenix and accept an 18-month assignment in Los Angeles. If you know from the beginning that you will be working there for 18 months, you cannot simply deduct the first 12 months of hotels, apartments, meals, and travel.
The assignment is indefinite from the beginning because it was realistically expected to exceed one year.
It's About Your Expectation — Not Just the Calendar 📅
This is one of the most misunderstood parts of the rule.
Suppose instead that you initially sign a nine-month contract in Los Angeles. At the time you sign it, everyone genuinely expects the assignment to end after nine months.
That is potentially a temporary assignment.
But in month eight, the hospital offers you another nine-month contract and you decide to stay.
At that point, your realistic expectation has changed. You now expect to work in that location for approximately 18 months.
The IRS says that when an assignment was originally expected to last one year or less but circumstances change so that it is now realistically expected to exceed one year, the travel expenses become nondeductible when the expectation changes.
You don't get to continue deducting the expenses until the first anniversary.
How Does the IRS Determine What You “Expected”?
There isn't a single document that determines the answer. This is ultimately a facts-and-circumstances question.
But a good place to start is the locums contract.
A six- or nine-month contract with a definite ending date provides strong contemporaneous evidence that the assignment was originally expected to be temporary.
Other facts can matter as well, including subsequent extensions, communications with the hospital or staffing company, housing arrangements, and whether there was already an understanding that the physician would remain for a longer period.
A series of short contracts also shouldn't be viewed as automatically restarting the clock. The substance of the arrangement matters.
TaxSmart Takeaway
The most important step is simply to plan assignments with this rule in mind. One of the big draws of locums work is that assignments are temporary, and in exchange for uncertainty, you reap financial benefits.
If maintaining temporary-assignment treatment is important, consider keeping assignments in the same work location to one year or less.
Before accepting an extension that pushes an assignment beyond one year, consider the potential loss of travel deductions along with the additional compensation.
A few months of additional work can change the tax treatment of thousands of dollars of travel expenses.
Special Trivia Question!
This blog post describes how temporary travel expenses can be deducted for locums physicians who maintain a tax home elsewhere. How does this work if there is no place where you regularly live?
A. You can deduct 100% of your travel expenses
B. Wherever you made the most money is your tax home
C. No travel expenses are deductible
D. Wherever you spent the most time (days per year) is your tax home.
Click here for the answer!