Archive for March 15th, 2011

Section 162 allows a deduction for all ordinary and necessary expenses in carrying on a trade or business. Since a taxpayer may be in the trade or business of being an employee, an employee can deduct those business expenses that are not reimbursed by the employer as a Schedule A itemized deduction. Seems simple enough, right?

Today, the Tax Court decided De Werff v. Commissioner, T.C. Summary Opinion 2011-29, which reminds us that an employee is not entitled to an unreimbursed employee expense — even if they meet the “ordinary and necessary” tests and the substantiation requirements of Section 274 — if the employee was entitled to reimbursement from the employer (see Orvis v. Commissioner, 788 F.2d 1406 (9th Cir. 1986).

In 2004, De Werff deducted food, travel, vehicle and parking expenses incurred in her role as an employee. For each expense, the court held that the since the employer’s reimbursement policy would have repaid De Werff for her expenses had she documented and submitted the claims, the expenses were not allowable as unreimbursed employee expenses under the case law cited above.

The lesson to be learned? An employee cannot covert a business expense of her company into one of her own simply by failing to seek reimbursement.  Instead, as De Werff clearly illustrates, in this scenario everyone loses, and the deduction simply disappears.

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