Deducting Employee Business Expenses

• Author: by Major Vance M. Farrester
• Pages: 12

1. INTRODUCTION

   1. SCOPE OF ARTICLE

      Military personnel often incur out-of-pocket expenses in the performance of their official duties. This article will discuss the circumstances under which these expenses may be claimed as itemized deductions on federal income tax returns. The article will address the peculiar issues likely to confront military taxpayen and will highiight several problem areas unique to this categoly of taxpayers.

   2. BASIC STATUTORY AUTHORITY AND LIMITATIONS

      No specific statutory authority exists for the deduction of the employee expenses that will be discussed in this article. Several statutory provisions, however, provide the authority for, and limitations on, deductions from gross income. Deductible business expensesmay be gmauped mto several categories 1) travel expenses away from home; 2) local transportation expenses; 3) meal and entertainment expenses; and 4) several miscellaneous expenses. Military pemonnei generally may deduct these expenses arising out of official duties if they have not been reimbursed for the expenses by the military.

      The basic code section governing employee business expense deductions IS Internal Revenue Code (IRC) section 162(a). This sec-tion authonzes a deduction from gross income for expenses incurred if these costs are ordinary, necessary, reasonable in amount, and

      directly related to the taxpayer's trade or business' Conversely, IRC section 262 provides that a taxpayer may not deduct the costs incurred for personal, living. or family purposes.

      The Internal Revenue Service (IRS) and the courts have struggled to define when expenses are not personal m nature and are connected sufficiently to a trade or business to be deductible In this struggle the focus always has been on the particular facts and CII-cumstances of each case

      An ' ordinary" expense 1s one that IS customary or usual This does not mean customary or usual within the taxpayer's experience, but customary or usual within the experience of the particular trade or mdustr) involved As a result, the expense may be "ordmary' the first time it 1s incurred by the taxpayerZ

      An expense 1s "necessary" when It LS ''appropriate'' or 'helpful '

      rather than essential to the taxpayer's business Ordinarily. the taxpayer'sjudmnent of what 1s necessary will be accepted br the courts.*

      Coum generally have held that a taxpayer should not he penalized for business Ingenuity xhen the expense 1s new or unusuai in the industry Further, merely because the expense turned OUT to be un- wise does not necessarily mean the expense 1s not deductible o

      A legal abllgatmn to make an expenditure 1s not a prerequisite far deducting it as a business expense.' On the other hand. a legal obhgatmn to pay does not necessarily establish deductibility"

      Payments made by one penon on behalf of another who thereafter reimburses him or her are not deductible by the person who makes the initial payment. but rather by the person on ahase behalf the5 are rnade.O Courts hwe added a requirement not found m the Code-that the expenses be reasonable in amount. in addition to being ordinary and neces~ary!~

      rh Cir Lob71

      19911 DEDUCTING BUSINESS EXPENSES

      Code section 212 is the third Code section that war enacted as part of the 1964 Code to provide taxpayers with a deduction for expenses incurred ~n connection with the production of income Several years later, Code Section 274 was enacted to deal directly with entertainment expenses Entertainment expenses are m many ways the most troublesome type of trade or business expenses because of their somewhat penanal nature. Section 274 requires that these expenses be enher "directly related" to or "associated with' the taxpayer's trade, busmess. or Income-producing activity. Section 274 also Imposes strict substantiation requirements on the deductibihty of these expenses The taxpayer mu1 prove the nature and relationship of these expenses to the trade. business, or income-producing activit?

      Expenses incurred in connection with an individual taxpayer's trade or business are defined by the 1986 Tax Reform Act as "itemized deductions" by IRC section 63(d). Therefore. the taxpayer must itemize deductions to receive a tax benefit for these expenses. Further, these deductions fall into the categoly of expenses that are subject to the two-percent adpsted gross income (AGI) limitation of IRC section 67(b) Thus, all the expenses discussed ~n this article must exceed, in the aggregate, two percent of the taxpayers adlusted gross income before any deduction can be taken Ail of the expenses are added up and then two percent of adjusted gross income is subtracted. leaving the deductible amount.

   3. TYPES OF EXPENSES

      Travel expenses while away from home are deductible pursuant to IRC section 162(a)(2) if they are not reimbursed by the employer or any other source and are incurred in connection with employment. trade, or business. They mclude. but are not limited to the foilowmg. lodgmg; travel, such as plane, tram, rental car, bus, and cab fares, meals: laundry; telephone'telegraph; baggage charges, tips; parking fees and tolls, and car expenses.

      In general local transportation expenses m connection with employment or a trade or business are deductible. Again. these are deductible only if they are not reimbuned

      Konextravagant meal or entertainment expenses incurred ~n connection with work are deductible, as are miscellaneous expenses such as education expenses, professional fees or publications, expenses incurred while seeking employment. and uniforms or equipment re^

      quired by the job.

      Each of the categories of expenses will be discussed in more detail below

      11. TRAVEL EXPENSES AWAY FROM HOME

   1. GENERAL RULES

      Generally, unreimbuned away-from-home travel expenses may qualify as deductible business or nonbusiness expenses Trwel for personal reasons 1s not deductible. The expenses cannot be lavish or extravagant, and only eighty percent of the cost of meals cansumed on the business trip 1s deductible. These expenses are deductible if reasonable, necessary, and incurred by the taxpayer for the purpose of producing 01collecting income, or manaang property held for that purpose Deductibility of the travel expense IS not dependent an makmg a profit from the activitg"

      Travel expenses, such as meals and lodsng, that are incurred a%ay from home in pursuit of busmess or duty are deductible Remember, however, that these expenses are not deductible unless the taxpayer

      1s truly "away from home" For example the cost of lunch at work E not deductible because the taxpayer 1s not 'awq from home" hxpayen are considered 'way from home'' if duties require them to be away from the general area of home for a period substantially longer than an ordinary day's work and if during time off while away they need to sleep or rest to meet the demands of xorkl2 This has been referred to inappropriately as the "overnight" rule The tax-payer does not have to be away from the tax home for a whole day or even overnight as long as the rest time 1s sufficient to obtain necessary rest or sleep?3 The absence from the tax home must be of sufficient duration that the taxpayer cannot reasonably leave and return to that location before and after each day's *ork Yapping for short periods in an automobile will not be sufficient IO meet this test?'The location of a taxpager's "home" is wry importanr in determining deducribility because only expenses incurred away from that place are deductible The rule always has been that "home" for tax purposes 1s the place of business, employment. station. or post of duty, even though the family residence IS located m a different place"

      "Kluckhohni Colnmirrianer lXTC RS2(%)(1921 I RC 9

      19911 DEDUCTING BUSINESS EXPENSES

      The travel expenses must be incurred as a resuit of busmess necessity, not penanal convenience, to be deductible?6 For example, assume a taxpayer lives with his family in Manassas, Virginia, but he works during the week at The Judge Advocate General's (JAG) Schooi In Charlottesville, Virginia During the week he stays at the JAG Schooi in the bachelor officer's quartem (BOQ).

      On weekends, he travels to

      Manaisas to be with his family He cannot deduct any of his expenses for travel. meals. or lodging in Charlottesville because that is his tax home. Moreover, he cannot deduct the travel, meals. or lodging in Manassas because he goes there on penonal busmess.

      A taxpayer with two or more busmesses can deduct the costs of travel between businesses, but not the cammuting costs from his residence to one business" For example, a noncommissioned officer working for the government at an Army post and as a bartender off-post may deduct the cost of traveling from the installation to the bartender jab, but not the cost of traveling from home to the post.

      If a shift in job past or business location LS "temporary," the tax home does not shift to the new location, thereby allowing the taxpayer to deduct the travel costs at the new place!8 If a taxpayer shifts his or her job post or business location for an "indefinite" period. however, the tax home also moves, and the taxpayer cannot deduct traveling and living costs at the new iocation.18 A shift of job post or business location IS "indefinite" if its termination cannot be foreseen withm a fixed and reasonably short tune. Empiogment that lats more than one year will be presumed indefinite uniess the taxpayer can demonstrate to IRS that he or she realistically expected the employment to last less than two years. A jab of two years or more will be considered an indefinite stay.zo

      A nonresident alien cannot deduct the cost of living expenses incurred while permanently employed in the United States.ax Keep inmind that a nonresident alien is taxed under special rules-usually at a flat rate of thirty percent, on source income from the United state5.22

      "Thompson v Cammiisloner E TC 285 Urd LE1 F2d 185 126 C s 1816) ',Re\ Rul 54 497, 1954-2 C B 76'%oneman Y Commissioner, 40 TC bf...