Prior to the Tax Cuts and Jobs Act (TCJA), taxpayers could deduct certain unreimbursed employee business expenses as miscellaneous expenses on their personal tax returns, subject to an annual floor of 2 percent of adjusted gross income (AGI). However, as evidenced by a new Tax Court case, Colbert TC Summary Opinion 2018-2/6/18, expenses of a personal nature don’t qualify. It has to be strictly business.
The deduction for miscellaneous expenses includes a hodgepodge of income production expenses and employee business expenses. However, no deduction is allowed for personal, living, or family expenses. In addition, strict substantiation requirements apply to deductions for “listed property” such as computers and peripheral equipment.
The taxpayer in the new case, a retired policeman, was employed by Screen International Security Service (SISS) in 2013. He performed security services for Hollywood celebrities. Typically, the taxpayer worked from home and traveled daily to the celebrities’ homes and worksites.
The duties the taxpayer performed included warding off paparazzi, chauffeuring the celebrities to appointments, monitoring construction at their homes, installing and monitoring security devices, patrolling their home grounds, performing access control for visitors and guests and responding to emergency and distress calls. He had a concealed weapon permit and usually carried a pistol while working.
SISS provided the taxpayer with a blue jacket or vest that constituted his uniform. He was also required to wear khaki trousers and polo shirts or similar attire.
On his 2013 return, the taxpayer reported wages of $25,546 from SISS and claimed $23,552 in unreimbursed business expenses in connection with this work. After applying the 2 percent-of-AGI floor, he showed a miscellaneous expense deduction of $19,599. The IRS disallowed the deduction for many of the expenses.
At trial, the IRS conceded the taxpayer had substantiated most of the expenses but questioned whether they constituted “ordinary and necessary” business expenses for tax purposes. The Tax Court allowed deductions for replacement of the duty pistol and target practice, the cost of an earbud to avoid annoying celebrity clients, a flashlight for evening patrols and sanitary handwipes and similar expenses paid while the taxpayer was on duty.
But it denied deductions for the following:
- Clothing and shoes worn to work and an estimated cost of dry cleaning his work attire;
- Personal expenses for newspapers and magazines, a gym membership, weight loss pills and satellite radio;
- Home office expenses because the room the taxpayer used as a home office was not used exclusively for that purpose;
- iPad and printer expenses; and
- Utility expenses, including a deduction for Verizon service and purchase of an iPhone and cover.
The latest case illustrates that only deductions for ordinary and necessary business expenses are allowed.
The TCJA, though, has repealed the deduction for miscellaneous expenses, beginning in 2018. Clients should be encouraged to use reimbursement arrangements, when possible. The reimbursements for qualified business expenses are exempt from tax and are deductible by the employer.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.