Monday, September 10, 2012
REIMBURSED OR REIMBURSABLE
In a recent post at her BANKRATE.COM blog titled “Follow Work Expense Tax Claim Rules” Kay Bell discussed a Tax Court case from last year that “disallowed most of the more than $46,000 in business expenses claimed by a California woman in part because she didn't submit them first to her employer for reimbursement”.
You may deduct unreimbursed “ordinary and necessary” expenses related to your job as a Miscellaneous Expense on Schedule A to the extent that the total of all Miscellaneous Expenses (with a few exceptions – like gambling losses) exceed 2% of your Adjusted Gross Income (AGI). Employee business expenses are first reported on Form 2106, or 2106-EZ, and then carried over to Schedule A.
When it comes to employee business expenses, similar to the concept of “allowed or allowable” for depreciation, you cannot deduct items that are “reimbursed or reimbursable” by your employer under an “accountable plan”.
The judge in the court case that Kay referenced in her post explained -
“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.”
Think about it. If you could be reimbursed by your employer why would you not want to be?
The woman in the court case supposedly incurred $46,000 in employee business expenses. She was, again supposedly, “out of pocket” $46,000. By deducting these expenses on her Schedule A she would be “reimbursed” perhaps $11,000-$12,000 by “Uncle Sam” (the amount of allowable deductions, after the 2% of AGI reduction, at her federal tax rate), and maybe some more by her state. She would still be “out of pocket” over $30,000. If the employer reimbursed her the entire $46,000 she would be “out of pocket” $0! Even if the employer reimbursed only half of the expenses she would be better off.
Many, many years ago, when I was still an "apprentice" tax preparer, one of my mentor’s clients came in and proudly announced that his employer had offered to reimburse him for job-related mileage, but he turned it down because then he would not be able to deduct business travel on his Form 1040 (back then employee business expenses were deductible in full "above-the-line" as an Adjustment to Income).
My mentor avoided the temptation to tell the client that he was a complete idiot, and attempted to explain, with great patience and tact, that taxes are only pennies on the dollar. It is much "more better" for someone to give you $1.00 tax free than it is to be able to save 30 cents by claiming a tax deduction. Similarly, there is no benefit in spending $1.00 needlessly to save 30 cents in taxes. You have not saved 30 cents – you have actually lost 70 cents!
Also when it comes to employee business expenses you must remember to keep good, contemporaneous records. And certain types of business deductions require special recordkeeping or additional information. But that is a subject for another post.