Could a minister deduct an amount equal to a tax-exempt housing allowance as an unreimbursed employee business expense on the Virginia return?

Plain-English summary

The taxpayers could not deduct the minister's housing allowance after excluding it from income. The husband was a clergyman who received a housing allowance. The couple treated an equal amount as unreimbursed employee business expenses in their 2008 itemized deductions.

Virginia begins with federal adjusted gross income and generally follows the federal itemized deductions allowed. Federal law permitted ordinary and necessary employee business expenses, while IRC § 107 allowed a qualifying minister to exclude a housing allowance from gross income within its limits.

The couple's documents showed that the housing amount had already been excluded federally. An amount not included in income could not also be deducted as an ordinary and necessary expense. Virginia upheld the assessment.

Common questions

Q: Did the ruling say ministerial employee expenses can never be deductible?
A: No. It denied this amount because the same housing allowance had already been excluded from income.

Q: Why did Virginia follow the federal treatment?
A: Virginia taxable income starts from federal adjusted gross income and uses federal itemized deductions unless Virginia law requires a different result.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, and 58.1-219.
• IRC §§ 62 and 107.

Subject

Ministerial trade expenses by employee are permitted as itemized deductions

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-141

Original ruling text

August 29, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you request correction of the individual income tax assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers, a husband and a wife, reported itemized deductions on their 2008 Virginia individual income tax return. The husband is a clergyman who received a housing allowance. This allowance was reported as unreimbursed employee expenses included in itemized deductions.

Under review, the Department disallowed the deduction claimed for unreimbursed employee expenses and issued an assessment. The Taxpayers appeal the assessment, contending that ministerial trade or business expenses as an employee are permitted as itemized deductions.

DETERMINATION

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.

As a general rule, the Department relies on the accuracy of information and computations reflected on the federal income tax return when reviewing Virginia individual income tax returns. If the information provided on the federal return looks reasonable, there is generally no reason to look behind those computations. However, the Department retains the authority to adjust FAGI where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the Internal Revenue Code (IRC). See Va. Code § 58.1-219. Virginia Code § 58.1-322 D 1 allows a taxpayer to deduct from its Virginia adjusted gross income the amount allowed for itemized deductions for federal income tax purposes.

Under IRC § 62, a deduction is permitted for ordinary and necessary expenses paid or incurred by an employee on behalf of a trade or business. Such expenses must be paid for in the case of a cash-method taxpayer or incurred in the case of an accrual-method taxpayer. The Taxpayers included an amount equal to the housing allowance as unreimbursed employee business expenses in their itemized deductions.

Pursuant to IRC § 107, an individual who qualifies as a minister of the gospel can exclude a housing allowance, subject to certain limitations, from gross income. According to documentation provided by the Taxpayers, an amount spent for housing was excluded from the husband's income for federal income tax purposes. Because the housing allowance was not included in the Taxpayers' FAGI, it would not also be deductible as an ordinary and necessary expense paid or incurred on behalf of a trade or business during the taxable year.

Accordingly, the Department's assessment issued to the Taxpayers for the 2008 taxable year is upheld. An updated bill will be mailed to the Taxpayer. The Taxpayer should remit payment of tax and interest within 30 days to avoid the accrual of additional interest.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4964558254.E