Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.
Tuesday, October 10, 2017
SOME THOUGHTS ON EMPLOYEE BUSINESS EXPENSES
doing away with all itemized deductions except mortgage interest and charitable
contributions, as it is thought the “framework” for tax reform does, would
certainly simplify the Tax Code, it would, in some instances, be unfair.
look at the deduction for “employee business expenses”.
employers have established an “accountable” plan for reimbursing employees for
these expenses.If an employee incurs a
legitimate job-related out-of-pocket expense he/she submits proof of payment to
the employer and is reimbursed.
others, especially outside commission salesmen, are not reimbursed for the
expenses incurred to generate sales.The
employer pays the employee a draw and a commission based on sales volume.The employee is expected to “eat” his out of
pocket expenses, which could be extensive in terms of business miles, meals and
entertaining, and promotional expenses.
the case of the reimbursed employee, his net salary is, in effect, all “in-pocket”.In the case of the unreimbursed employee his
net “in pocket” is his net salary less his unreimbursed expenses.And the salary of the unreimbursed employee
is usually higher due to the “unreimbursementness”.The unreimbursed employee is being more
highly taxed than the reimbursed employee.
the commission salesman was self-employed instead of an employee he/she would
be able to deduct in full all related expenses, and pay tax, income and
payroll, on the true “in pocket”.
the unreimbursed employee can claim a tax deduction for his/her expenses on
Schedule A, although this is limited by the 2% of AGI exclusion for “miscellaneous”
expenses.FYI, back when I started in “the
business” (early 1970s) outside salesmen could deduct unreimbursed expenses as
an “Adjustment to Income”.
the other hand, allowing employees a deduction for business automobile expenses
that includes depreciation is perhaps excessive and unfair.
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.Although a large percentage of my current
driving is business related (because since 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.
the standard mileage rate for business is calculated using an annual study of
fixed and variable costs of operating an automobile - including insurance,
repairs and maintenance, tires, gas and oil, and depreciation. For example, the
2016 business standard mileage rate of 54 cents per mile included 24 cents
allocated to depreciation.
because the main reason for purchasing a car is personal and not business,
depreciating the cost of purchasing the car, based on business use, is not
really a true business expense.Only the
business use percentage of actual operating expenses should be allowed as a
deduction – because the more miles you drive the more you spend for gas, oil,
repairs and maintenance, tires, and probably insurance.
to be more representative of the actual out of pocket business expense the 2016
standard mileage allowance should have been 30 cents per mile – the 54 cents
less the 24 cents for depreciation.This
would apply on both Form 2106 and Schedule C.
the case of motor vehicles used 100% in a business, a deduction would be allowed for 100% of the
actual costs of maintaining and operating the vehicle, including depreciation. In
this situation perhaps the standard mileage allowance should not be allowed.