With passage of the Tax & Jobs Act of 2017, we see that most miscellaneous itemized deductions will not be allowed beginning January 1, 2018. This includes deductions for tax preparation fees, investment expenses, and unreimbursed employee business expenses. Today we will focus on the unreimbursed business expenses.
Through the end of 2017, taxpayers have been able to take a deduction for unreimbursed business expenses. These expenses include some of the following:
- Car expenses
- Dues to professional societies
- Home office used regularly and exclusively in your work
- Subscriptions to professional journals
- Tools and supplies used in your work
- Union dues and expenses
- And several others
Given the disallowance of these expenses, employees could consider approaching their employers to work out a salary reduction arrangement under IRS rules for an accountable plan. Under this plan, your employer agrees to reimburse you for your expenses. Then you would submit your unreimbursed employee expenses for reimbursement, usually monthly. The advantage to you the employee is your taxable income is reduced by the salary reduction and possibly at a better result than the expenses limited by the 2% of AGI floor. For the employer, there is a reduction to its payroll tax liability and they get to take a deduction for most of the expenses as well.
We have seen that in the past few years, Pennsylvania is also choosing to examine unreimbursed business expenses more closely. PA requires the following conditions to be allowable:
- The actual amount paid
- Expenses must be reasonable.
- Expenses must be necessary and ordinary.
- They must be directly related to the employee’s present trade or business.
- The expenses must be unreimbursed.
In many cases, PA is issuing notices from taxpayers requesting a detailed breakdown of the expenses, dated receipts to support the expense and a letter from the employer indicating that there is no reimbursement available
Use of the salary reduction plan would assist the employee in avoiding any inquiries from PA. For more information, give us a call.