What records do I need to keep unreimbursed employee expenses -- mileage, work clothing, cell phone -- as Virginia itemized deductions?

Plain-English summary

A married couple claimed itemized deductions for unreimbursed employee expenses — vehicle mileage, work clothing and laundry, and cell phone and internet — for 2015 through 2017. On audit the Department disallowed them for lack of documentation and assessed tax. The couple appealed, saying their records were enough.

The Department upheld the assessments but gave the couple one last chance (30 days) to substantiate the transportation and cell-phone expenses. The clothing stayed denied.

The standard: you have to prove it

Virginia's itemized deduction flows from the federal amount (Va. Code § 58.1-322.03), and business expenses must meet federal rules. An assessment is prima facie correct, so the burden of proof is on the taxpayer (Va. Code § 58.1-205), who must keep records sufficient to determine the correct tax (Treas. Reg. § 1.6001-1(a); Va. Code § 58.1-310). Note too that unreimbursed employee expenses were miscellaneous itemized deductions subject to the 2% of AGI floor (IRC § 67) for these pre-2018 years.

Where each deduction fell short

Transportation / mileage. You can deduct business driving using the standard mileage rate, and travel between jobs in the same area is deductible — but home-to-first-job and last-job-to-home commuting is not. The couple's log showed the week and miles but no starting point or destination, didn't show whether it included nondeductible commuting, and they gave no information on their employers' mileage-reimbursement policies. Too thin to allow — but the Department will take another look with proper detail.

Work clothing and laundry. Clothing is deductible only if it's required for work and not suitable for everyday wear (think firefighter, healthcare, or law-enforcement uniforms). The items listed — shirts, shoes, socks, professional outerwear, pants, blazers, suits — look suitable for everyday wear, so they're not deductible even if the employer required them. This one stays denied.

Cell phone and internet. These are deductible only for the business-use portion; mixed personal/business use must be allocated. The couple's log showed payments but drew no line between business and personal usage, so the deduction couldn't be allowed as claimed — but, like mileage, they get another chance to document the business share.

The 30-day second chance

The Department gave the couple 30 days to submit adequate documentation for the transportation and cell-phone expenses. It will review what they provide and adjust the assessments as appropriate; if nothing adequate arrives, the assessments stand.

What this means for you

• A bare mileage total won't cut it. Log the date, start and end points, business purpose, and miles, and be ready to show your employer didn't reimburse you.
• Commuting isn't deductible. Miles from home to your first job and from your last job home are personal — don't include them.
• "Required by my employer" isn't enough for clothing. It must be unsuitable for everyday wear. Ordinary business clothes — suits, shirts, pants — don't qualify.
• Split mixed-use phone/internet. Only the business portion is deductible, and you must be able to show how you calculated it.
• These were pre-2018 rules. Federal law suspended the miscellaneous itemized deduction for unreimbursed employee expenses starting in 2018, which changes the analysis for later years.

Common questions

Q: I keep a weekly mileage total. Is that enough to deduct my business driving?

A: No. You need the start and end points and business purpose for trips, and you must exclude nondeductible commuting. Be ready to show your employer's reimbursement policy too.

Q: My employer requires me to wear certain clothes. Can I deduct them?

A: Only if the clothing isn't suitable for everyday wear (like a genuine uniform). Ordinary business attire — suits, shirts, pants — isn't deductible even if required.

Q: Can I deduct my whole cell phone bill if I use it for work?

A: No. Only the business-use portion is deductible, and you must allocate between business and personal use with records supporting the split.

Citations and references

• Va. Code § 58.1-322.03 — Virginia itemized deduction conforms to the federal amount
• IRC § 162 and Treas. Reg. § 1.162-1 — ordinary and necessary business expenses
• IRC § 67 — 2% floor on miscellaneous itemized deductions
• Treas. Reg. § 1.162-17(d)(2) — substantiation of business expenses; Treas. Reg. § 1.6001-1(a) — recordkeeping
• Va. Code § 58.1-205 — assessment prima facie correct, burden on the taxpayer; Va. Code § 58.1-310 — Department may require records
• Related Virginia ruling cited: P.D. 16-53 (allocating mixed business/personal utility use)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-99

Original ruling text

August 27, 2019

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessments issued to * (the “Taxpayers”) for the taxable years ended December 31, 2015 through 2017.

FACTS

The Taxpayers, a husband and wife, filed Virginia resident income tax returns for the 2015 through 2017 taxable years claiming itemized deductions. Under audit, the Department disallowed the deductions for unreimbursed employee expenses for mileage, work clothing, laundry, cell phone and internet. The Department adjusted the returns and issued assessments. The Taxpayer appeals, contending the information provided was sufficient to support the disallowed deductions and requests the Department allow the deductions as claimed on their original returns.

DETERMINATION

Conformity

Virginia Code § 58.1-301 provides, with certain exceptions, 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it states the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income properly 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 Virginia Code § 58.1-322.01 through § 58.1-322.04.

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 the FAGI and itemized deductions where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. See Virginia Code § 58.1-219.

Virginia Code § 58.1-322.03 1 allows an individual to deduct from their Virginia adjusted gross income certain amounts allowed for itemized deductions for federal income tax purposes. These deductions include those for medical expenses, charitable contributions and business expenses provided they are claimed in accordance with the IRC and its related regulations.

Unreimbursed Business Expenses

Under IRC § 162, taxpayers are permitted to deduct all of the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. Such expenses must be directly connected with or pertaining to the taxpayer’s trade or business. See Treas. Reg. § 1.162-1. Under IRC § 67, an individual may only deduct the unreimbursed business expenses, along with certain other miscellaneous itemized deductions, to the extent they collectively exceed 2% of FAGI, commonly referred to as the “2% floor”.

Transportation Expenses

The expenses of operating and maintaining a car used for business purposes are deductible. Taxpayers may use the actual operating costs or the business standard mileage rate in computing the deductible costs. See Rev. Proc. 2010-51 (12/3/2010). In PLR 8023052 (3/12/1980), the Internal Revenue Service (IRS) determined an individual working several jobs in the same locality may deduct the transportation expense incurred in traveling between jobs. However, travel costs incurred from home to the first job and from the last job to home are generally nondeductible commuting expenses.

Expenses may be substantiated through the preparation of a daily diary or record of expenditures, maintained in sufficient detail to enable a taxpayer to readily identify the amount and nature of any expenditure, and the preservation of supporting documents, especially in connection with large or exceptional expenditures. See Treas. Reg. § 1.162-17(d)(2). The methodology for business expense record keeping is more fully described in IRS Publication 463, Travel, Entertainment, Gift and Car Expense.

The Taxpayers claimed the standard mileage deduction for all three taxable years in question. During the audit, the Taxpayers provided a travel log indicating the week and miles traveled, but did not indicate the starting point for the calculations, the destination, nor whether the calculation included the mileage from their home to the first location. Statements from the Taxpayers regarding their respective employer’s mileage reimbursement policies were also not provided.

Work Clothing and Laundry Expense

IRC § 162 permits employees to deduct the cost and dry cleaning expense of their work clothing or uniform so long as such clothing is worn as a condition of the taxpayer’s employment and such clothing is not suitable for everyday wear. See also IRS Publication 529 (2014). Merely distinctive clothing does not meet the standard under this section. Examples include, but are not limited to, firefighter, health care and law enforcement uniforms. The Taxpayers have provided a list of clothing items purchased that include shirts, shoes, socks, and professional outerwear. Without additional documentation about the specific items of clothing and employment dress requirements, these items appear to be suitable for everyday wear.

Cell Phone Expense

Under IRC § 280A, expenses can be deducted for the business use of utilities, such as a cell phone line and internet access. Expenses that benefit both the personal and business use of the taxpayer are required to be allocated and only the portion attributable to the business may be deducted. See Public Document (P.D) 16-53 (4/11/2016). The auditor disallowed the expense for cell phone and internet because it was also used for the Taxpayers’ personal use. A log showing payments for cell phone and internet were provided. However, there was no identifiable distinction between the business and personal nature of the usage. Cell phone and internet expenses would be deductible only for business related calls and usage.

CONCLUSION

Taxpayers must maintain records sufficient to allow the IRS to determine their correct tax liability. See Treas. Reg. § 1.6001-1(a). Similarly, Virginia Code § 58.1-310 provides:

Whenever in the opinion of the Department it is necessary to examine the federal income returns or any copy thereof any individual, estate, trust, partnership or corporation in order to properly audit such returns, the Department or the commissioner of the revenue shall have the right to require such taxpayer to provide such return or a copy thereof and all statements, inventories, and schedules in support thereof.

Under the provisions of Virginia Code § 58.1-205, in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the burden of proof is on the Taxpayer to show that the assessments were erroneous.

Documentation has been provided by the Taxpayers to show the weekly mileage totals for each taxable year. However, the Taxpayers did not include sufficient details regarding the beginning and ending locations for the calculations, nor did they furnish information regarding any reimbursement policy the Taxpayers’ employers may have had. The Taxpayers have also provided a list of the clothing for which they took a deduction, which included shirts, pants, socks, blazers and suits. While this clothing may be required to be worn as a condition of their employment, it also appears to be suitable for everyday wear. For that reason, it is not deductible as a business expense. Similar to the specificity issues with the Taxpayers documentation of the travel expenses, the evidence provided to support the deduction for cell phone expense lacks the necessary details. Based on the applicable law cited above and the information presented, there is no basis to abate the Department’s assessments for the 2015 through 2017 taxable years.

I will, however, give the Taxpayers one last opportunity to provide adequate documentation with regard to the expenses for transportation and cell phone usage. The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *, Tax Analyst. Upon receipt, the documentation will be reviewed and assessments may be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessments will be considered to be correct.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1983.A

Related Documents

16-53