Tax Carnival #84: Spring Tax Time
Corporate taxes: time to cut the tax rate or to make sure companies pay at all?

When deducting work expenses, ask your boss for reimbursement first

When it comes to padding deductions, unreimbursed employee expenses might seem to be an easy one.

You picked up some office supplies here. You attended a work-related conference there. Your boss never paid you for those out-of-pocket costs.

So you simply add the work-related expenses to the rest of your miscellaneous itemized deductions and voila, you've overcome the 2 percent of adjusted gross income threshold. Your Schedule A deductions are a bit bigger and your tax bill is a bit smaller.

Whoa up there, cowboy. Or cowgirl, as was the case in a recent Tax Court ruling.

Cheryl Lynn de Werff contested an IRS ruling that her 2004 filing was $8,418 short on taxes paid, in large part because some of her itemized deductions weren't allowed. She also protested the IRS' penalty assessment of $1,683.60.

On her 2004 tax return, de Werff claimed the following itemized deductions:

Medical and dental expenses of $2,802
Cash gifts to charity of $4,581 
Noncash gifts to charity of $8,500 
Miscellaneous expenses of $46,651

While all these deduction claims and the Tax Court's evaluation of them are interesting, for our purposes today, let's focus on that whopping $46,651 miscellaneous expenses claim.

Of that almost 50 grand attempted write-off, de Werff listed $44,598 for unreimbursed employee business expenses.

For the 2004 tax year in question, de Werff worked as director of professional development for the Solano County Office of Education in Fairfield, Calif. On her tax return for that year, her Form 2106, Employee Business Expenses, included:

Vehicle expenses of $8,969 
Parking fees, tolls, and transportation of $433 
Overnight travel expenses of $5,883
Other business expenses of $26,763
Meals and entertainment expenses of $8,232

Since meals and entertainment expenses are not fully deductible (remember, you generally can claim only 50 percent of these allowable business costs) she reduced that line item.

And she also reported employer reimbursement for her meals etc. of $3,132.

But that slightly more than three grand was the only money, according to de Werff (and the Tax Court document), that she got back that year from the Solano County Office of Education.

Whoa up, cowgirl, said the Tax Court, although in more formal legalese.

What Judge Robert P. Ruwe did say was, "Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving she is entitled to the deductions claimed."

I love it when I see this sentence in a Tax Court opinion. I know that the ruling is going to be a fun read of someone trying to claim outrageous deductions.

Of course, de Werff didn't find it so entertaining.

The ruling goes into detail about the various deduction claims and ordinary and necessary business expenses and substantiation requirements.

But a section dealing with claims of her unreimbursed employee expenses caught my eye:

"A trade or business expense deduction is not allowable to an employee to the extent that the employee is entitled to reimbursement from her employer for an expenditure related to her status as an employee.  This rule forecloses an avenue for tax manipulation by preventing the taxpayer from converting a business expense of her company into one of her own by simply failing to seek reimbursement."

That final phrase bears repeating: "…by simply failing to seek reimbursement."

In other words, don't try to con the IRS into giving you a tax deduction for an expense that you didn't even ask your company to pay for in the first place.

Judge Ruwe found for the IRS.

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Comments

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Kay

That's true. The mileage rates set by the IRS are usually used by companies as their rates, but it's not a requirement. So yes, you could have used the unreimbursed amount as a claim. Is it enough to make filing an amended return worthwhile?

AffordAnything.org

Within that rule, a phrase caught my eye: "employee is entitled to reimbursement".

My former employer told me, explicitly, that they're not required to reimburse me when I asked for the full IRS mileage amount to compensate my vehicle expenses. They reimbursed me 50% of the standard IRS mileage allowance.

I guess I could have claimed the other 50%, since I had -- in writing, in an email -- proof that I requested it from my employer.

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