SOME THOUGHTS ON EMPLOYEE BUSINESS EXPENSES

While 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.

 

Let’s look at the deduction for “employee business expenses”.

 

Many 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. 

 

However, 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. 

 

In 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.

 

If 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”.

 

Currently 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”.

 

On the other hand, allowing employees a deduction for business automobile expenses that includes depreciation is perhaps excessive and unfair.

 

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.  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.   

 

Currently 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.  

 

But 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.

 

So, 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.

 

In 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.

 

More stuff to think about.  So what do you think?

 

TTFN