AP Regulatory e-Alert: New Case Reveals T&E Tax Trap

From: IOMA

Make sure employees realize they need to put in for reimbursements of business expenses. Otherwise, they could be in for a tax surprise if they try to write them off on their personal returns, as a new court case illustrates.

NEW CASE An employee traveled for business during a time when his company required prior approval before reimbursing expenses. The employee assumed he wouldn't get the approval, so he wrote off the costs on his personal tax return. But the Tax Court said the expenses can not be deducted. Reason: The employee never gave the company the chance to turn down his requests for reimbursement [Contreras, T.C. Memo. 2007-63].

The IRS will not allow an employee to deduct business expenses that could have been reimbursed by the employer. If a particular expense is reimbursable by the employer, but the employee fails to claim the reimbursement, the expense is not deductible by the employee as a business expense. There are a number of cases on this issue. In one case, reimbursable entertainment and gift expenses were ruled not deductible by a vice president and sales supervisor [Coplon, 60-1 USTC 9425 (6th Cir. 1960]. In another case, reimbursable travel expenses incurred by a salesman were ruled not deductible [Kravatte, T.C. Memo 1987-124].

To be deductible, the expense must be "necessary and reasonable." Expenses for which reimbursement is available, but for which it is not sought, are not "necessary or reasonable" [Orvis, 788 F.2d 1406 (9th Cir. 1986), aff'g T.C. Memo 1984-533].

What to do: Make employees aware of this rule so that they don't get a surprise note from the IRS disallowing their deduction. And, as the new case illustrates, the expenses should be submitted even if they may not be approved.

For the full text of the new Tax Court case, click on the case citation above.