Employee Business Expenses: What is Deductible?

Posted on Mon, Aug 25, 2014 ©2021 Drucker & Scaccetti

Miller, TC Summary Opinion 2014-74

Recently, the U.S. Tax Court ruled on the deductibility of various unreimbursed expenses of an employee whose apartment in New York City (NYC) was also the New York (NY) location for her unrelated employer’s business.  While the Tax Court allowed some of the expenses that the taxpayer attempted to deduct, others were disallowed.

 

The Case

The taxpayer, Ms. Miller, lived in NYC and was the only NY employee of BIW, a company headquartered in Los Angeles.  Ms. Miller’s boss asked her to work from her NYC studio apartment until the company could obtain commercial office space.  BIW never obtained its own NY office space and, thus, Ms. Miller used part of her apartment as an office throughout 2009. 

 

Ms. Miller generally worked weekdays between 9am and 7pm, but she generally was expected to be available at all times.  She claimed that one-third of her apartment was used as the office and she frequently met with BIW clients in that space.   Furthermore, BIW listed Ms. Miller’s apartment address and telephone number on its website as the address and phone number for its NY office.  As such, on her 2009 tax return, Ms. Miller claimed a deduction of $34,933 on Schedule A for unreimbursed employee business expenses related to the following: rent, cleaning, cable, internet, telephone, electric, cell phone, and uniform expenses.

 

The IRS disallowed all of these expenses.

 

The Background

Internal Revenue Code (IRC) Section 280A(a) indicates that a taxpayer is generally not entitled to deduct any expenses related to a dwelling unit used as a residence during the year.  Section 280A(c)(1), however, provides an exception to this general rule if the expenses are allocable to a portion of the dwelling unit that is exclusively used on a regular basis as the principal place of business for the taxpayer’s trade or business.  When the taxpayer is an employee, this exception only applies if the exclusive use of the office space is for the convenience of the taxpayer’s employer.

 

IRC Section 274(d) provides strict substantiation requirements that must be met for a taxpayer to deduct certain categories of expenses, including “listed property” as defined in Section 280F(d)(4)(A).  Listed property includes cell phones.  In order to meet the substantiation requirements, a taxpayer generally must maintain records and supporting documentary evidence which are sufficient to establish the amount, date, and business purpose for an expense related to listed property.  These records could include a log book, a diary, a statement of expense, or similar records that were made at or near the time of the expenditure. 

 

The Tax Court Decision

The Tax Court concluded that some of Ms. Miller’s expenses were deductible and others were not, as outlined below:

  • Business Use of Home:

The Tax Court agreed with Ms. Miller’s assertion that she regularly used one-third of her apartment space as an office to conduct BIW business.  The Court felt it had sufficient evidence that the apartment was Ms. Miller’s principal place of business, that she was obliged to use the space as an office for the convenience and benefits of BIW, and that BIW was not able or unwilling to reimburse her for any of her apartment-related expenses.  Thus, the Court allowed Ms. Miller to deduct one-third of her rent and cleaning expenses.

 

  • Bundled Cable, Internet, and Telephone Expense

The Tax Court determined that the taxpayer’s records were not entirely clear as to how much of the total bill related to each type of charge.  They determined, however, that it was reasonable to divide the charges equally.  Because Ms. Miller admitted to using the cable solely for personal purposes, that expense was disallowed.  Ms. Miller estimated that 70% of her internet usage was for business purposes and the Tax Court determined that this was a reasonable estimation.  Regarding the telephone portion, because Ms. Miller did not provide specific records regarding the personal vs. business usage, the Court determined that only one-half of the telephone expense was for business purposes.

 

  • Electric Expenses

While Ms. Miller produced a spreadsheet showing $1,176 of electric expenses paid during 2009, she did not provide any supporting documentation, such as copies of her electric bills, to substantiate the expenses.  Thus, the Court disallowed this expense.

 

  • Cell Phone Charges

Because cell phones fall under the “listed property” category, Ms. Miller needed to provide a log-book or other record showing the business use of her cell phone.  Because she did not provide any sort of written log or record, the Court disallowed the cell phone expenses.

 

  • Uniform Expenses

Ms. Miller attempted to deduct $2,093 that she spent on evening dresses that she purchased to wear to BIW events during 2009.  In order for the cost of clothing to be deductible, it must be “required or essential in an employment, and which are not suitable for general or personal wear.”  The Tax Court determined that these dresses did not meet this definition and thus, were not deductible. 

 

The Tax Warrior Perspective

This Tax Court decision highlights the need for taxpayers claiming home office deductions and unreimbursed employee expenses to maintain appropriate and accurate records and to keep copies of any documents that could be used to substantiate the expenses.  This decision also emphasized the highly-factual nature of the deductibility of certain expenses.  While the Court ruled in this case that Ms. Miller’s utility expenses were not deductible, the utility expenses of another taxpayer with a slightly different fact pattern and different substantiation records could be deductible. 

 

In the tax world, there is rarely a clear-cut answer.  Taxpayers using a home office or taxpayers who have large amounts of unreimbursed employee expenses should discuss their particular situations with their tax advisors as early as possible.  By understanding the deductibility and substantiation requirements before the expenses are incurred, taxpayers will have a better chance of having their deductible expenses sustained during an IRS examination.

 

The Tax Warriors® at Drucker & Scaccetti have extensive experience in representing taxpayers with various employment and/or home-office expenses.  We can help you navigate these sections of the IRC to help you make tax-efficient decisions and advise about proper substantiation requirements.  Contact us via the “Ask A Tax Warrior” button below if you have any questions about your specific situation.  We are always prepared to help you with this or any other tax matter related to your employment or business

Topics: deductions, Home Office, work form home, disallowed, BIW, tax court, expenses

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