PA Personal Income Tax Update – Guidelines for Reporting Unreimbursed Employee Business Expenses on Schedule UE
The Pennsylvania personal income tax return, Form PA-40, has generally allowed an employee to deduct unreimbursed business expenses to reduce taxable compensation. However, beginnning with 2013 tax returns the PA Department of Revenue (“DOR”) began a program of more closely reviewing unreimbursed employee business expenses reported on Form PA-40 Schedule UE. As a result of this program, many PA return filers had their unreimbursed business expenses severely reduced or eliminated. This update is intended to provide an overview of the Schedule UE guidelines and to offer tips on how to successfully deduct unreimbursed employee business exepenses on PA personal income tax returns.
Allowable unreimbursed business expenses, which are reported on PA Schedule UE, Allowable Employee Business Expenses, are deducted from Gross Compensation on Line 1B of Form PA-40. In order for an expense to be considered allowable it must meet the following guidelines and supporting documentation is required:
- The actual amount paid has to be reported – PA does not allow deductions for IRS
“per diem”amounts and estimated amounts are not allowed
- The expenses have to be reasonable – for example claiming deductions for multiple cell phones may not be allowed
- The expenses have to be necessary and a condition of employment – See below for DOR guidelines to substantiate that expenses are a condition of employment
- Only ordinary expenses are allowable – expenses must be ordinary for the taxpayer’s business or profession
- The expenses have to be directly related to the employee’s present trade, business or profession – cannot be for past jobs or potential future jobs
- The expenses have to be unreimbursed – unless reimbursed amounts are included in taxable wages, remibursed expenses cannot be deducted.
In a recent 2016 tax notice the DOR updated its policy to allow the following options to substantiate that unreimbursed business expenses are required by your employer:
- A letter from the employer
- A copy of the employer’s employee expenses reimbursement policy
- A signed affidavit – the DOR has provided an affidavit template on its website
Note that this substansiation is only required to be maintained in the taxpayers record to provide support if audited, these document do NOT need be included with Form PA-40.
In addition, the DOR has provided the following tips to aid taxpayers in successfully filing a Schedule UE. These tips include:
- Include detailed documentation for each line item at the time the return is filed
- Documentation should clarify unreimbursed expense responsibilities – why the unreimbursed expenses are necessary
- If mileage is reimbursed by an employer at an amount less than the federal mileage rate and the reimbursement is not included in compensation cannot deduct the differenceCommuting expenses are not deductible in PA
- Cell phones may be claimed for business use only
For more information, please refer to these DOR documents:
- REV-637, UNREIMBURSED ALLOWABLE EMPLOYEE BUSINESS EXPENSES FOR PA PERSONAL INCOME TAX PURPOSES http://www.revenue.pa.gov/FormsandPublications/FormsforIndividuals/Documents/Personal%20Income%20Tax/rev-637.pdf
- REV-489, TIPS FOR SUCCESSFULLY FILING PA SCHEDULE UE http://www.revenue.pa.gov/FormsandPublications/FormsforIndividuals/Documents/Personal%20Income%20Tax/rev-489.pdf
Article compiled by Brian Sands. For additional information regarding this article or PA Schedule UE contact Barry Groebel at [email protected] or a member of the Herbein tax team.