Could Employee Deduct Unreimbursed Business Expenses?

“Why didn’t you ask your boss about a reimbursement for your business expenses?” Penelope asked Steven, her husband.

“I was worried I might lose my job if I asked,” Steven said. “I made sure to keep records, so I should be able to claim a deduction without a problem.”

Facts: An employee worked as a pipefitter for two employers in 2013. Over the course of a year, the employee worked at four temporary work sites. The employee used personal vehicles to drive from his home to the work sites, which were 45 to 92 miles from his residence.

The employee maintained a record of incurred employment-related mileage. He did not seek reimbursement for his travel expenses from his employer because he was concerned that he would be terminated for doing so.

The employee’s family had a mobile phone plan that included a line for the employee, his wife, and their son. The employee claimed that some mobile phone calls were related to his employment.

The employee and his wife jointly filed Form 1040, U.S. Individual Income Tax Return. On Schedule A, Itemized Deductions, they claimed an unreimbursed business expense deduction that included $24,918 for vehicle expenses and $612 for mobile phone expenses.

The Internal Revenue Service did not allow the deduction because the couple did not establish that the expenses were incurred or that they were necessary.

The agency filed a notice of deficiency regarding the couple’s federal income tax return. The employee and his wife filed a petition with the U.S. Tax Court.

Issue: Was the employee entitled to a deduction for the unreimbursed business expenses?

Decision: The U.S. Tax Court upheld the IRS decision to reject the deduction claims by the employee.

Workers generally may deduct ordinary and necessary business-related expenses, but an employee’s expenses are not ordinary and necessary if the employee is entitled to reimbursement under an employer’s policy and does not seek reimbursement, the court said.

“We understand his reluctance to seek reimbursement,” the court said of the employee’s concerns about his employment status. However, the employee was not relieved of the responsibility of seeking reimbursement, the court said.

Because the employee did not establish that he was ineligible for reimbursement from his employers, he failed to prove that the expenses were ordinary and necessary and therefore deductible, the court said.

The employee could not claim a deduction for his family’s mobile phone expenses because he did not provide evidence that the expenses were paid, the court said. Additionally, he did not provide documentation distinguishing business-related charges from personal-use charges. Without the documentation on paid expenses and evidence to distinguish between business and personal use, the court said it was unable to estimate a deductible amount.

The case discussed is Archuleta v. Commissioner, No. 21109-15S, 12/3/18.

Pointers: Under the tax code overhaul (Pub. L. 115-97), employee deductions of unreimbursed business-related expenses were suspended from Jan. 1, 2018, to Dec. 31, 2025. Before the new tax law, travel expenses paid or incurred in connection with a temporary work assignment were deductible to employees.

Employers may provide tax-free reimbursements to employees for temporary work site expenses if the reimbursements are made under an accountable plan. To be considered an accountable plan, a reimbursement arrangement must ensure that reimbursements are for business-related expenses. Additionally, employees must be required to substantiate the amount, time, use, and business purpose of the payment, and to return amounts that exceed the substantiated expenses.

A work site assignment is temporary if it is expected to last up to one year. Assignments realistically expected to last longer than a year are considered indefinite. Travel expenses paid or incurred in connection with an indefinite work assignment are not tax deductible and are subject to federal income tax withholding, the Federal Insurance Contributions Act, and the Federal Unemployment Tax Act.

An assignment realistically expected to last more than a year is considered indefinite even when it takes less than a year to complete.

For more information, see Payroll Administration Guide’s “Meals and Lodging” chapter.