What does Virginia Ruling of the Tax Commissioner P.D. 21-37 conclude about Deduction: Itemized - Documentation, Unreimbursed Business Expenses, Employee Business Expenses, Health Sanitation Supplies, Tax Preparation Fees, Work Clothing?

Plain-English summary

A married couple filed a 2016 Virginia resident income tax return claiming itemized deductions in several categories: unreimbursed business expenses for work uniforms and clothing "upkeep," health sanitation supplies (one spouse works in health care), and other employee business expenses reported on federal Form 2106 (parking fees, tolls, and transportation costs that didn't involve overnight travel or commuting). Under audit, the Department asked for documentation supporting these deductions. When the couple didn't provide sufficient proof, the Department disallowed part of the deductions and assessed additional tax. The couple appealed, arguing their documentation was adequate.

The Department disagreed, category by category:

• Work clothing. Clothing is only deductible under IRC § 162 if it's required as a condition of employment and not suitable for everyday wear -- merely distinctive clothing, such as an item bearing a company logo, doesn't qualify. Qualifying examples include firefighter, health care, and law enforcement uniforms. Here, the couple gave no list of the clothing items purchased and no evidence the clothing wasn't suitable for everyday wear.
• Health sanitation supplies. These could potentially qualify as deductible "incidental supplies" under Treas. Reg. § 1.162-3(a)(2) -- items costing $200 or less that are deductible in the year paid when no consumption records are kept. The Department acknowledged this expense might fall within that rule, but the couple provided no evidence to support the amount they claimed.
• Form 2106 expenses. For the parking, tolls, and transportation costs, the couple gave no documentation that these were actually incurred for business purposes.
• Tax preparation fees. These are deductible as a miscellaneous expense, but Virginia Code § 58.1-310 requires supporting documentation. The Department asked for it, and the couple never furnished it.

Virginia starts its income tax computation from federal adjusted gross income and generally relies on the accuracy of the federal return, but the Department retains authority under Va. Code § 58.1-219 to adjust FAGI and itemized deductions where there's clear evidence of inconsistency with the Internal Revenue Code. Under Va. Code § 58.1-205, a Department assessment is presumed ("prima facie") correct, so the burden falls on the taxpayer to prove it wrong -- and taxpayers must keep records sufficient for the IRS to verify their tax liability under Treas. Reg. § 1.6001-1(a).

Because no documentation was provided for any of the categories, the Department found no basis to reduce the assessment as things stood. However, it gave the couple one last chance: 30 days from the date of the letter to submit documentation specifically for the clothing and supplies expenses -- a list of clothing items purchased plus evidence the clothing wasn't suitable for everyday wear, and support for the claimed supplies amount. If that documentation wasn't submitted in time, the assessment would be treated as final and correct. The letter didn't extend that same 30-day opportunity to the Form 2106 travel expenses or the tax-preparation fees.

What this means for you

Employees claiming unreimbursed job expenses

If you deduct the cost of a required work uniform, keep an itemized list of what you bought and be ready to explain why it isn't suitable for everyday wear -- a shirt with your employer's logo on it, by itself, generally isn't enough. The same goes for Form 2106 items like parking, tolls, and local transportation: keep receipts or records tying each expense to a specific business purpose, not just a general assertion that the costs were work-related.

Health-care workers deducting sanitation supplies

Health sanitation supplies can potentially qualify as deductible "incidental supplies" if each item costs $200 or less and you don't track consumption item by item. But you still need to substantiate the dollar amount you're claiming -- an audit can accept the concept while still rejecting the number if there's no support behind it.

Accountants advising clients on substantiation

This ruling is a clean illustration of the burden-of-proof default: under Va. Code § 58.1-205, the Department's assessment is presumed correct, and a taxpayer who submits no documentation at all -- across every deduction category -- gets no relief on appeal, regardless of how plausible the underlying expenses sound. When the Department does offer a second chance, as it did here for clothing and supplies, make sure clients understand it may not extend to every category in dispute, and that missing the stated deadline (30 days, addressed to a specific P.O. box) makes the assessment final.

Common questions

Q: Why did the Department disallow the deductions even though the couple worked in jobs that plausibly required uniforms and supplies?
A: Plausibility isn't proof. The couple didn't provide a list of clothing items purchased, evidence the clothing wasn't suitable for everyday wear, support for the dollar amount of supplies claimed, documentation tying the Form 2106 costs to business purposes, or support for the tax-preparation fee. Without documentation, the Department's assessment stands under the prima facie correctness rule of Va. Code § 58.1-205.

Q: What makes work clothing deductible versus not deductible?
A: Under IRC § 162, clothing is only deductible if it (1) is required as a condition of employment and (2) is not suitable for everyday wear. Distinctive clothing -- for example, an item with a company logo -- doesn't meet the second prong by itself. The ruling cites firefighter, health care, and law enforcement uniforms as examples that typically qualify.

Q: Did the couple lose completely, or is there still a chance to fix this?
A: Not completely. The Department gave them 30 days from the date of the letter to submit documentation specifically for the clothing and supplies expenses -- a list of items purchased, evidence the clothing wasn't suitable for everyday wear, and support for the claimed supplies amount. If they miss that window, the assessment becomes final. That same opportunity was not extended to the Form 2106 travel expenses or the tax-preparation fees.

Q: Does the 2%-of-FAGI floor still apply even if the expenses are otherwise substantiated?
A: Yes. Unreimbursed employee business expenses are miscellaneous itemized deductions subject to the "2% floor" under IRC § 67 -- only the portion of these expenses (combined with other miscellaneous itemized deductions) that exceeds 2% of federal adjusted gross income is deductible, separate from the documentation requirement.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-301 (Virginia tax terminology conforms to the IRC unless a different meaning is clearly required)
• Va. Code § 58.1-219 (Department's authority to adjust FAGI and itemized deductions for IRC inconsistency)
• Va. Code § 58.1-322.03(1) (Virginia itemized deductions mirroring certain federal deductions, including business expenses, if properly claimed under the IRC)
• Va. Code § 58.1-310 (Department may require the federal return and supporting schedules)
• Va. Code § 58.1-205 (a Department assessment is deemed prima facie correct)
• IRC § 162 (deduction for ordinary and necessary business expenses, including work clothing meeting the two-part test)
• IRC § 67 (the "2% floor" on miscellaneous itemized deductions)
• Treas. Reg. § 1.162-1 (expenses must be directly connected with the taxpayer's trade or business)
• Treas. Reg. § 1.162-3(a)(2) (incidental supplies deductible in the year paid if no consumption records are kept)
• Treas. Reg. § 1.162-3(c)(1)(iv) (incidental supplies defined as a unit of property costing $200 or less)
• Treas. Reg. § 1.6001-1(a) (taxpayers must keep records sufficient for the IRS to verify tax liability)

Related Department guidance referenced in the ruling: IRS Publication 529 (2014, on miscellaneous deductions including work clothing); P.D. 19-99 (8/27/2019, on the work-clothing deductibility test).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-37

Original ruling text

March 16, 2021

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 assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2016.

FACTS

The Taxpayers, a husband and wife, filed a Virginia resident income tax return for the 2016 taxable year claiming itemized deductions for unreimbursed business expenses for uniform and upkeep and health sanitation supplies, as well as employee business expenses. Under audit, the Department requested documentation to support the deductions. When insufficient proof was provided, the Department disallowed a portion of the itemized deductions, and issued an assessment. The Taxpayers appeal, contending the provided documentation was sufficient to support the claimed deductions.

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 starts the computation of Virginia taxable income (VTI) 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 Chapter 3 of Title 58.1 of the Code of Virginia .

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. Unreimbursed employee expenses are considered expenses incurred in carrying on a trade or business and are reportable on federal Schedule A. Under IRC § 67, however, an individual may only deduct the expenses, along with certain other miscellaneous itemized deductions, to the extent they collectively exceed 2% of FAGI, commonly referred to as the “2% floor.”

Work Clothing

IRC § 162 permits employees to deduct the cost of their work clothing or uniform so long as such clothing must be worn as a condition of the taxpayer’s employment and such clothing is not suitable for everyday wear. See also IRS Publication 529 (2014) and Public Document (P.D.) 19-99 (8/27/2019). 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 not provided a list of clothing items purchased, nor evidence that the clothing required to be worn for their employment was not suitable for everyday wear.

Health Sanitation Supplies

The Taxpayers assert that costs incurred for health sanitation supplies used in the Taxpayers employment, as a health care provider should be deductible as an unreimbursed business expenses. Treas. Reg. § 1.162-3(a)(2) states that amounts paid to acquire incidental supplies that are carried on hand and for which no record of consumption is kept are deductible in the taxable year in which these amounts are paid, provided taxable income is clearly reflected. Such supplies are defined under Treas. Reg. § 1.162-3(c)(1)(iv) as a unit of property that has an acquisition cost of $200 or less. It appears that the Taxpayer’s expense for health sanitation supplies may fall within this deduction, however, the Taxpayer has not produced evidence to support the claimed amount.

Form 2106 Expenses

The Taxpayers also claimed a deduction for expenses from IRS Form 2106, that included parking fees, tolls, and transportation costs that did not involve overnight travel or commuting to and from work. The Taxpayers have provided no documentation to show that these expenses were incurred for their business purposes.

Tax Preparation Fees

Taxpayers are permitted to deduct fees paid for tax preparation as a miscellaneous expense. Taxpayers are, however, required to provide documentation to support the claimed expense under Virginia Code § 58.1-310. The Department requested documentation to substantiate this deduction, which the Taxpayer failed to furnish.

CONCLUSION

Taxpayer’s 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 assessment was erroneous.

Documentation has not been provided by the Taxpayer to support the claimed deductions for work clothing nor supplies. Documentation sufficient to support the deduction for clothing would include a list of items purchased as well as evidence of the requirement to wear such items as a condition of their employment. Additionally, while clothing may be required to be worn as a condition of their employment, it must also not be suitable for everyday wear. Similar to the specificity issues with the Taxpayers’ documentation of their clothing expense, there has been no evidence provided to support the deduction for health sanitation supplies. Based on the applicable law cited above and the information presented, there is no basis to abate the Department’s assessment for the 2016 taxable year.

I will, however, give the Taxpayers one last opportunity to provide adequate documentation with regard to the expenses for clothing and supplies. 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 the assessment may be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessment will be considered correct.

The Code of Virginia sections and public documents 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/3274.A

Related Documents

19-99