As a refresher, employee business expenses are ordinary and necessary expenses you pay or incur during a tax year for carrying on the trade or business of being an employee. If you recognize those rules, that’s because you’ve heard them before in practically every tax court case determining the outcome of the deductibility of trade or business expenses. (section 162(a))
Deductible expenses include uniforms that are required or essential to your employment, and which are not suitable for general or personal wear. You can also deduct expenses such as rent and utilities when you use part of your home as your principal place of business and are obliged to use the space as an office for the convenience and benefit of your employer.
Like other trade or business expenses, costs you pay related to your business of being an employee must meet other rules. For example, strict substantiation rules apply when you use your car or (prior to a change in the tax law) your cell phone, or incur expenses for meals and entertainment (section 274(d)).
Other requirements vary a bit from the general rule. For example, you cannot have received reimbursement, nor have the right to obtain reimbursement, of the expenses from your employer. In addition, your expenses are deductible only to the extent they exceed 2% of your adjusted gross income.
Finally, the tax court can estimate your expenses if you’re unable to substantiate the exact amount (the Cohan rule). However, the court must have sufficient evidence to conclude a deductible expense was paid or incurred in at least the amount allowed.
In T.C. Summary Opinion 2014-74 (Miller), the taxpayer was an account director for a public relations firm. Her employer did not maintain a formal expense reimbursement policy and reimbursed the taxpayer only for expenses that could be itemized and billed directly to clients. The taxpayer submitted three expense reports for taxi fares and small gifts to clients during 2009.
The taxpayer deducted $34,933 on her 2009 federal income tax return for unreimbursed employee business expenses.
Though she testified that she maintained complete and accurate records in respect of her business expenses for 2009, including meeting logs, receipts and invoices, she lost most of her business records when she moved in 2011.
The taxpayer provided three spreadsheets that were created in the spring of 2010 in conjunction with the preparation of her 2009 tax return. The spreadsheets listed amounts paid during 2009 for rent, electric, cleaning services, cable, telephone, taxi fares, meals and entertainment, uniforms, office supplies and “R&D.” The spreadsheets listed the date and amount of each expenditure, but did not identify the business purpose for individual expenditures.
The taxpayer also provided checking account statements that corroborated most of the expenses and she indicated that her employer did not reimburse her for them.
The IRS disallowed the expenses, saying the taxpayer had not substantiated them (because she had no receipts), and that they were not ordinary and necessary business expenses.
How do you think the court ruled on the following?
Business use of home. We are persuaded that the taxpayer’s apartment was her principal place of business, that she was obliged to use the space as an office for the convenience and benefit of her employer, and that her employer was not able or willing to reimburse her for any of her apartment-related expenses.
Although the taxpayer admitted she used portions of the office space for nonbusiness purposes, we find that her personal use of the space was de minimis and wholly attributable to the practicalities of living in a studio apartment of modest dimensions.
We hold that the taxpayer is entitled to a deduction for the business use of her apartment (i.e., one-third of her rent and cleaning service charges for the year).
Telephone and internet. The taxpayer admitted she used the cable television service exclusively for personal use. Consequently, she is not entitled to deduct the portion of the charges attributable to cable television.
Under the circumstances, we conclude that maintaining the telephone line was an ordinary and necessary business expense, and that the taxpayer is entitled to a deduction.
The taxpayer used the wireless internet service for both personal and business purposes and estimated that approximately 70% of her wireless internet use was business related. Although she did not offer a log or other record of her wireless internet use, we have previously held that internet access expenses are not subject to the strict substantiation requirements of section 274(d).
Considering all the circumstances, we conclude that the cost of wireless internet access was an ordinary and necessary business expense and we accept as reasonable the estimate that approximately 70% of the wireless internet use was business related. As a result, the taxpayer is entitled to a deduction of 70% of the charges attributable to that service.
Electricity. Without more, we are unable to apply the Cohan rule to estimate the amount of a deduction for electric utility charges, and no deduction is allowed for this item.
Meals and entertainment and transportation expenses. Deductions for such expenses are subject to the strict substantiation requirements of section 274(d). In the absence of corroborating evidence supporting the taxpayer’s statement, a deduction for meals and entertainment and transportation expenses is not allowed.
Cellular phone charges. Cellular phones constituted listed property under section 280F(d)(4)(A)(v) as in effect during 2009, and, therefore cellular phone expenses are subject to the strict substantiation requirements of section 274(d). As a result, we conclude the taxpayer is not entitled to a deduction for cellular phone expenses.
Uniform expenses. The cost of clothing “required or essential in employment, and which are not suitable for general or personal wear and not so worn, is a deductible item in arriving at taxable net income.”
The taxpayer was not required to wear a uniform to work and she admitted the dresses she purchased and wore to employer events were also suitable for personal wear. Though she wore the dresses only to employer events because they did not fall within her “personal aesthetic”, she is not entitled to a deduction for these items.
Office supplies and R&D. Under the circumstances, we are unable to determine whether the items constitute ordinary and necessary business expenses that may be deducted pursuant to section 162(a). Accordingly, a deduction for office supplies and R&D expenses is disallowed.