MLR

Forced to move your business? Know the tax rules

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A business that is forced to move does not have to include move-related reimbursements in income, but the business cannot deduct relocation expenses to the extent it is reimbursed, according to a private letter ruling by the IRS.

The business lessee also does not have basis for acquired replacement property to the extent the cost does not exceed reimbursements, according to the ruling (PLR 201401001).

Title II of the Uniform Relocation Assistance and Real Property Acquisitions Policies Act, 42 USC Sections 4621-4638, was enacted to establish a uniform policy for the fair and equitable treatment of all affected persons displaced as a result of federal and federally assisted programs and projects. Whenever a program or project undertaken by a displacing agency will result in displacing any persons, Section 4622(a) provides that the displaced persons will be paid:

  • Actual reasonable expenses in moving themselves, their business or other personal property;
  • Actual direct losses of tangible personal property as a result of moving or discontinuing their business, but not to exceed an amount equal to the reasonable expenses that would have been required to relocate the property, as determined by the head of the agency; and
  • Actual reasonable expenses in searching for a replacement business.

No payment received under Sections 4621-4638 is treated as income for purposes of the Internal Revenue Code.

The IRS cited Revenue Ruling 78-388 for the proposition that a taxpayer cannot claim a deduction for an expense for which there is a right or expectation of payment. The IRS also concluded that basis cannot be assigned to substitute equipment acquired to replace non-movable equipment and leasehold improvements at the new location, to the extent such costs are reimbursed with the relocation payments and the additional payments. Because these payments reimburse the taxpayer for the cost of such property, the taxpayer does not incur a cost to acquire that property.