We previously alerted taxpayers about the PA Dept. of Revenue’s (DOR) stringent rules regarding the substantiation required by taxpayers who wish to claim unreimbursed employee expenses on PA Form UE-1 (see our blog postings dated June 10, 2015, March 24, 2015, and Sept. 23, 2014).
The PA DOR has now provided guidance on its website. A taxpayer may use PA Schedule UE, Allowable Employee Business Expenses, to report allowable unreimbursed business expenses, which can be excluded from compensation on Line 1A of the PA-40 Personal Income Tax Return. For an expense to be allowable, it must meet the following conditions, and supporting documentation is required:
- The actual amount paid must be reported. Expenses may not be estimated or guessed or calculated using federal per-diem rates.
- The expenses must be reasonable. The amount of expense should not be excessive in relation to income, type of expenditure or purpose of expense.
- The expenses must be necessary and a condition of employment. Expenses cannot be incurred to make the job more convenient or productive.
- Only ordinary expenses are allowable. The expenses must be similar to those incurred by other employees in the same trade or profession.
- The expenses must be directly related to the employee’s present trade, business or profession. Expenses from a previous job or incurred for a future occupation may not be taken as Unreimbursed Expenses.
- The expenses must be unreimbursed.
NOTE: The department may request a detailed breakdown of all expenses claimed, dated receipts and a letter from each employer. A letter from the taxpayer or the tax practitioner is not sufficient proof of the expenses claimed. However, in lieu of a letter from the employer, the department may accept a copy of the employer’s reimbursement policy, or an affidavit from the taxpayer, as evidence that these costs were required as a condition of employment.
NOTE: An employee cannot deduct expenses if he or she was reimbursed by the employer, either partially or entirely, for the amount of the expenses claimed on Schedule UE. This includes a fixed mileage allowance or per diem living expense that the employer did not include in PA taxable compensation in Block 16 of federal Form W–2. However, if the employer did include reimbursements for the employee’s expenses in PA taxable compensation on the W–2, the employee may complete the PA-40 Schedule UE to deduct his or her reimbursement allowance as an allowable PA business expenses.
What happens if the employer is not willing to provide the employee with a detailed breakdown of all expenses claimed, dated receipts, etc. on company letterhead and you are unable to provide the PA DOR with the employer’s expense reimbursement policy? The PA DOR then will require the employee to submit Form REV-775 which is an affidavit signed by the employee providing very detailed information and photocopies of any original expense documentation. Furthermore, this form needs to be witnessed by a notary public.
Upon completion of Form REV-775, the taxpayer can mail the form along with the required substantiation to the PA Dept. of Revenue, PO Box 280501, Harrisburg, PA 17128-0501 or fax the information to the PA DOR using its DEX-93 Personal Income Tax Fax Cover Sheet.
Since most taxpayers who claim expenses on PA Form UE-1 are usually due a refund, rest assured that if you are expecting a refund check from PA it will be delayed because of the due diligence review by the PA DOR with respect to your claim for unreimbursed expenses.
If you want to discuss your personal tax planning and tax preparation concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
