Revenue Ruling 82-70: Shareholder Moving Expenses

IRS Revenue Ruling 82-70 provides a framework for how a corporation should handle the payment of moving expenses for an individual who is both a shareholder and an employee. The Tax Cuts and Jobs Act of 2017 (TCJA) altered the tax landscape for these payments. For tax years through 2025, any moving expense reimbursement paid to an employee is treated as taxable wages.

The central issue for the corporation remains whether the payment, as part of the employee’s total compensation, is reasonable for the services provided or if an excessive portion should be treated as a constructive dividend. This distinction dictates the tax consequences for the paying corporation.

The Reasonableness Test for Payments

The “reasonableness” test is used to determine if an employee’s total compensation is justifiable as a business expense. For the compensation to be considered reasonable, the total amount—including salary, bonuses, and the moving expense reimbursement—must be appropriate for the services actually rendered. The IRS evaluates several factors, including the shareholder-employee’s qualifications, the complexity of their duties, and their entire compensation package relative to what comparable companies would pay for similar services.

The analysis requires an assessment of the shareholder-employee’s role within the corporation. For instance, the compensation for a highly specialized executive with unique skills would be evaluated differently than that of an employee with more general duties. The burden of proof falls on the corporation to demonstrate that the total compensation is a justifiable business expense.

Corporate Tax Implications

The outcome of the reasonableness test directly impacts the corporation’s tax position. If the shareholder-employee’s total compensation package is deemed reasonable, the corporation can deduct the full amount, including the moving expense reimbursement, as an ordinary and necessary business expense, which reduces its taxable income.

If the total compensation is found to be unreasonable, the excess amount is reclassified as a constructive dividend. A constructive dividend is a payment to a shareholder that is not formally declared as a dividend but is treated as such for tax purposes. Unlike compensation, dividends are distributions of corporate profits and are not deductible by the corporation, leading to a higher tax burden.

Shareholder-Employee Tax Implications

The entire reimbursement must be included in the employee’s gross income as wages. As such, it is subject to federal and state income taxes as well as payroll taxes, which include Social Security and Medicare (FICA). During this period, the employee cannot deduct any moving expenses on their personal tax return.

If the IRS determines that the shareholder-employee’s total compensation is excessive, the unreasonable portion is treated as a constructive dividend. This amount would be reported as dividend income rather than wages. Dividend income is not subject to FICA taxes and may be considered a qualified dividend, which is taxed at lower long-term capital gains rates.

Documentation and Reporting Requirements

To support the compensation’s reasonableness, the corporation should have records that justify the employee’s entire pay package. This includes corporate minutes from board of directors’ meetings that explicitly authorize the salary and any reimbursements. An employment agreement detailing the terms of the compensation can also serve as evidence.

The moving expense reimbursement must be included in the employee’s total wages on their Form W-2, Wage and Tax Statement. If a portion of the employee’s total compensation is determined to be a constructive dividend, the corporation must report that specific amount to the shareholder on Form 1099-DIV, Dividends and Distributions. Adhering to these distinct reporting requirements is necessary for compliance.