Some employees receive a salary and are reimbursed in full for any and all “employee business expenses” via an “accountable plan”. Others, generally outside salesmen, receive a base salary and/or commissions, and perhaps a flat monthly “expense allowance” which is included in W-2 wages, and any and all employee business expenses are truly “out of pocket”. Allowing a deduction for unreimbursed employee business expenses assures that the true net economic benefit is being taxed.
I would, however, make some changes to the current rules for deducting business use of an automobile – which would apply to both employee business expenses and Schedule C, E and F.
For the most part, taxpayers who use their car for business, other than commuting, would own a car whether or not one was needed for business. The business use, however extensive, is basically secondary to personal use.
I own a car. I have always owned a car, even when I was an employee (many, many, many years ago). Although a large percentage of my current driving is business related (because, as I work out of a home office, I have no “commute”), I own the car primarily for personal and not business reasons, and would own a car whether it was needed for business or not.
If you use your car for business, either as an employee or a self-employed individual, the standard mileage allowance for business miles would not include a factor for depreciation. Basically the standard mileage allowance for business miles would be the same as the standard mileage allowance for medical and moving miles. This standard mileage allowance would also be used for miles related to doing volunteer work for a church or charity – the standard mileage allowance for charitable driving would no longer be determined by Congress.
There would be one standard mileage allowance for all deductible travel, which would be indexed annually for inflation in the same manner as everything else in the Tax Code is indexed for inflation, and not based on a separate calculation.
Taxpayers using their car for business would continue to have the option of using the appropriate business use percentage of actual expenses, but without depreciation. Those who lease a car and use it for business could also use the standard mileage allowance or actual expenses, but this deduction would not include the monthly lease payment.
In the case of motor vehicles used 100% in a business – trucks, vans, limos, cars that are leased out to others (including one’s corporation) or used exclusively by couriers or for deliveries – a deduction will be allowed for 100% of the actual costs of maintaining and operating the vehicle, including depreciation. The standard mileage allowance would not be allowed, and there would be no Section 179 deduction.
Deductible investment expenses would be limited to investment advisory fees charged by brokerages and consultants, subscriptions to investment advisory services, fees to collect dividends and interest (often reported on Form 1099-DIV), including service charges paid as part of a dividend reinvestment plan, investment management software, although there would be no deduction for actual computer usage, and certain pass-through investment expenses from partnership K-1s.
There would be no deduction for minor pedestrian expenses like safe deposit box rental fees, subscriptions to Smart Money or the Wall Street Journal, and basic account maintenance fees.
Losses on IRA investments (if all IRA accounts have been liquidated and the total amount received is less than the “tax basis”) and losses on deposits in an insolvent or bankrupt financial institution would be claimed on Schedule D. A theft loss deduction would be allowed for losses in Madoff-like Ponzi schemes. Repayments of Social Security and other taxable benefits received in prior years would be treated as an adjustment to income.
Gambling losses, to the extent of reported gambling winnings, would also now be deductible “above-the-line” as an adjustment to income. This way individuals would not be paying tax on net gambling activity for the year of 0, or a loss, as is currently possible.
A taxpayer winning a legal settlement in the hundreds of thousands of dollars will usually pay a substantial percentage of the award in legal fees, so that the resulting economic benefit to the “winner” is much less. Taxpayers receiving taxable legal judgments and settlements include the gross settlement in taxable income. While the legal fees relating to awards for claims of unlawful discrimination, and certain other claims, are currently deductible “above-the-line”, in all other cases these fees are claimed as a Miscellaneous deduction on Schedule A. In my new Tax Code all contingent legal fees would be fully deductible “above-the-line” as an adjustment to income.
If the Estate Tax were to remain in the Tax Code in some form I would continue to allow a Miscellaneous deduction for estate taxes paid on income that is taxed on both the Form 706 and the Form 1040 (i.e. retirement plan distributions).