Unreimbursed Business Expenses

Proper documentation is key to supporting unreimbursed business expenses. The department strongly encourages taxpayers to keep their receipts for 7 years, and document the purpose of the business related expense when it is incurred. Undocumented expenses can be denied.

While it is impossible to outline the exact documentation a taxpayer may need and/or be required to support an unreimbursed business expense being claimed on a PA Schedule UE, the department has provided some guidance on what could be acceptable.

Work clothes, uniforms, small tools and/or supplies

• Receipts for each purchase and documentation of why the specific attire, tool or supply is required by your employer.
• A copy of your employer’s work policy that outlines these requirements can be submitted for consideration instead of a letter from your employer.

Union dues

• A copy of a final pay stub for the year or a receipt from your union that confirms the amount being claimed. (if union dues are not clearly marked on your W2)

Professional license fees, malpractice insurance or fidelity bond premium

• You may be required to supply the photocopies of the license/policy, receipt from the purchase and documentation of why it is required by your employer.
• A copy of your employer’s work policy that outlines these requirements can be submitted for consideration instead of a letter from your employer.

Mobile phones

• Cell phone expenses claimed should be limited to calls made for business purposes when required by an employer.
• The employee should maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the unreimbursed expense amount claimed must be reasonably calculated so as to not exceed expenses the employee actually incurred in maintaining the cell phone.
• Monthly phone bills may be requested. Costs for family plans, bundles, or for additional lines are not reimbursable.

Vehicle mileage expense

Read more details about vehicle mileage expenses.

Parking, tolls and other transportation related expenses

• Dated receipts for each transaction. The department will consider EZ-Pass bills, credit card statements and/or other similar documentation in some situations. Make sure you provide information on the business purpose of the expenses.

Lodging, meals and/or entertainment expenses

• These types of expenses can only be claimed while traveling overnight.
• Meals cannot be claimed by a taxpayer that is working late.
• Federal per diem rates are not allowable.
• A taxpayer may claim entertainment that is ordinary and necessary to the trade of business or profession, and directly related to the active conduct of business or immediately precede or follow the active conduct of business.

To support these expenses please keep copies of receipts, information on the business purpose of the expense and verification from your employer that the expense was required.

Home office or work area expenses

The following three conditions must be met for the expense to be allowable:

1. The job requires an employee to have a suitable work area.
2. The employer does not provide a suitable work area.
3. The home office is the employee's principal place of work.

To support these expenses you need an itemized list and proof of your direct office expenses and other apportioned expenses. Keep copies of utility, tax and other bills used to compile the expense figures.

Moving expenses

These types of expenses are only allowed if the move is necessary for the convenience of your employer AND if you pass the distance test.

Distance Test -- Your new workplace must be at least 35 miles farther than the distant between your old residence and your old workplace. Example: If your old workplace was 3 miles from your old residence, your new workplace must be at least 38 miles from your old residence.

Allowable moving expenses include the cost of transportation to your new home. You may use actual out-of-pocket costs or the federal mileage allowance. The expenses for the storage of household goods, for meals and lodging on the way, including such costs on the day you arrive, and parking fees and tolls are allowable.

To support these expenses you need to have an itemized list and proof of each expense. You should also include your previous home & work addresses and your current home & work addresses.

Educational expenses

For Pennsylvania purposes, costs for education expenses are allowable only if:

• The education is specifically required by law or by your employer to retain an established employment status or rate of compensation; and
• The education is not part of a program that would qualify you for a new occupation, trade, or business, even if you do not intend to enter that new occupation, trade, or business.

To support these expenses you need to keep copies of your tuition bill and verification from your employer that the education is specifically required by law or by your employer to retain an established employment status or rate of compensation.

Employee Business Deductions Not Allowed For Pennsylvania Tax Purposes

• Expenses based upon federal per-diem allowances. (You may only deduct those expenses actually paid while performing the duties of your employment)
  
• Public transportation cost
• Commuting expenses
• • Between different jobs for different employers
  • Cost to drive a vehicle between your home and main work location

You did not incur an allowable business expense during the year if you:

• Received a fixed-mileage allowance or a per-diem allowance for the allowable business expense and your employer did not include the allowance in your compensation; or
• Accounted for your allowable expenses to your employer and your employer reimbursed you in the exact amount of your expenses.

Note: For tradesmen, commuting costs also include mileage for any job 35 miles or fewer from the closer of the union hall or personal residence to the jobsite.

Record Keeping

It is recommended that you keep a log detailing your mileage activity when claiming unreimbursed business mileage expenses. Since there is no uniform or required reporting format. taxpayers are free to use any mileage log book, GPS programs or other documentation they are currently using. This sample business mileage report [PDF]  may be helpful if you need guidance.

If you travel a lot annual, the department recommends recording the following:

• Odometer readings on the first day a vehicle is used for business driving purpose and last day a vehicle was used for business purposes in given year. (Jan. 1 through Dec. 31)
• For each business trip, record the date, starting location, starting mileage, end mileage and total miles driven for business purposes. Log entries should also include a brief description of each trip. Only job-related mileage can be deducted. Personal errand conducted while on a business trip must be subtracted from the overall trip mileage.

Important:  If your employer pays you more than the standard IRS rate, the extra amount is taxable compensation and must be added to your wages and other compensation.

EXAMPLE 1: James is regional manager for a chain of retail stores. He is required by his employer to drive his personal vehicle when visiting each retail location within his region at least one time per month. James’ employer reimburses him at a rate of $0.40 per mile and provides a lunch per diem of $8.00 per travel day. James is not permitted to deduct a mileage expense on his PA Schedule UE for the difference between the federal allowance, his employer’s reimbursement or an expense for meals while traveling to visit the retail locations within his region unless his employer includes the reimbursements in his PA compensation.

EXAMPLE 2: Jane is regional manager for a chain of retail stores and is required by her employer to drive her personal vehicle and visit each retail location within her region at least one time per month. Jane’s employer does not reimburse her for travel, but does provide a lunch per diem of $8.00 per travel day. Jane is permitted to deduct the actual business mileage expense on her PA Schedule UE. However, since Jane’s employer provided a per diem for lunch while she was traveling, she cannot claim any meals and entertainment expenses.

IMPORTANT:

• If your reimbursement is more than your actual expenses, you must report the excess as taxable compensation on Line 1a of your PA-40 tax return.
• A taxpayer and spouse must keep separate records and schedules for each job or position when claiming unreimbursed business expenses.

State and federal rules for allowable business expenses differ. In some instances, federal limitations won’t apply to the amount of meals and entertainment expenses. In other instances, federal rules for accounting for the expenses don’t apply. Per diem rates allowable for federal purposes are NOT allowable for PA personal income tax purposes as the amount of the deductible expense; only expenses actually incurred are deductible. Since Pennsylvania does not have federal tax accounting limitations and thresholds, 100 percent of actual unreimbursed PA allowable employee business expenses may be deducted from income for Pennsylvania personal income tax purposes.

Under Pennsylvania rules an unreimbursed expense must meet the following conditions to be claimed, and supporting documentation is required:

1. The actual amount paid must be reported. Expenses may not be estimated or guessed or calculated using federal per-diem rates. The actual amount paid must be reported. Expenses may not be estimated or guessed or calculated using federal per-diem rates.
2. The expenses must be reasonable. The amount of expense should not be excessive in relation to income, type of expenditure or purpose of expense.
3. The expenses must be necessary and a condition of employment. Expenses cannot be incurred to make the job more convenient or productive.
4. Only ordinary expenses are allowable. The expenses must be similar to those incurred by other employees in the same trade or profession.
5. The expenses must be directly related to the employee’s present trade, business or profession. Expenses from a previous job or incurred for a future occupation may not be taken as Unreimbursed Expenses.
6. The expenses must be unreimbursed. An employee cannot deduct expenses if he or she was reimbursed by the employer, either partially or entirely, for the amount of the expenses claimed on Schedule UE. This includes a fixed mileage allowance or per diem living expense that the employer did not include in PA taxable compensation in Block 16 of federal Form W–2. However, if the employer did include reimbursements for the employee’s expenses in PA taxable compensation on the W–2, the employee may complete the PA-40 Schedule UE to deduct his or her reimbursement allowance as an allowable PA business expenses.

NOTE: The department may request a detailed breakdown of all expenses claimed, dated receipts and a letter from each employer. A letter from the taxpayer or the tax practitioner is not sufficient proof of the expenses claimed. However, in lieu of a letter from the employer, the department may accept a copy of the employer’s reimbursement policy, or an affidavit from the taxpayer, as evidence that these costs were required as a condition of employment.

By Phone:

Please feel free to call 717-787-8201 with questions regarding unreimbursed expenses.

By Fax:

717-783-5823

In Person:

The department offers support across the state through our district offices. Please call ahead to verify a district office’s address and its services. Taxpayer assistance hours are 8:30 a.m. to 5:00 p.m. Monday through Friday.

By E-mail:

RA-RVPASCHEDULEUE@pa.gov

Writing:

PA Department of Revenue
Bureau of Individual Taxes
P.O. Box 280501
Harrisburg, PA 17128-0501