Did a salesperson's mileage schedule and meal receipts substantiate the unreimbursed employee expenses claimed on a 2013 Virginia return?

Subject

Mileage and business-meal deductions were substantiated

Plain-English summary

Virginia accepted the taxpayers' records for the salesperson's unreimbursed travel and business-meal deductions and restored the balance of their 2013 refund with interest.

For automobile expenses, the taxpayers supplied a weekly itinerary showing mileage between clients, a statement documenting the employer's flat mileage reimbursement, and a schedule netting that reimbursement. They stated that the mileage from home to the first client was excluded. The ruling distinguished deductible business travel between work locations from nondeductible commuting between home and the first or last work stop.

For meals purchased for client employees, the taxpayers provided receipts. The ruling applied the then-current rule allowing 50% of qualifying meals that were directly related to or associated with active business and supported by a clear business purpose.

The Commissioner found the documentation sufficient and reversed the Department's adjustments. If the IRS later changed federal adjusted gross income or Schedule A, however, the taxpayers had to report that final federal change to Virginia within one year.

What this means for you

• Maintain a route or mileage log that distinguishes business travel from commuting.
• Track and subtract employer reimbursements from the claimed employee expense.
• Keep meal receipts and evidence of the business purpose and relationship.
• This ruling applied 2013 law; current federal treatment of unreimbursed employee expenses may differ.

Common questions

Q: Was all travel from the taxpayer's home deductible?

A: No. The ruling described home-to-first-job and last-job-to-home travel as generally nondeductible commuting. The taxpayers said their schedule excluded the first leg.

Q: Why were the meal expenses accepted?

A: The taxpayers supplied the meal receipts, and the ruling found the overall documentation sufficient to support the claimed business expenses.

Q: What relief did the taxpayers receive?

A: The remaining refund reported on their 2013 Virginia return was to be paid with interest.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322 A and D 1, 58.1-219, 58.1-310, 58.1-311, and 58.1-312 A 3.
• IRC §§ 162, 67, and 274(a)(1)(A) and (n)(1).
• Treas. Reg. §§ 1.162-1, 1.274-2(d)(2), and 1.6001-1(a).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-21

Original ruling text

February 17, 2015

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the Department's adjustments made to the Virginia individual income tax return filed by your clients, * (the "Taxpayers"), for the taxable year ended December 31, 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers, a husband and wife, resided in Virginia during the 2013 taxable year. They filed a 2013 Virginia resident income tax return, claiming itemized deductions that included business expenses incurred by the wife.

The wife was employed as a salesperson with a weekly regional sales route. She used the business standard mileage rate to determine her automobile expenses based on the weekly mileage of the route, less a partial reimbursement by her employer. The wife also claimed a deduction for 50% of the cost of breakfast, lunches and dinners she purchased for client employees.

Under review, the Department disallowed automobile and meal expenses claimed as unreimbursed business expense deductions, resulting in the reduction of the Taxpayers' income tax refund. The Taxpayers appeal the adjustments, contending that the disallowed deductions were for deductible unreimbursed travel and meal expenses incurred by the wife in the ordinary course of business.

DETERMINATION

Conformity

Virginia Code § 58.1-301 provides 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. For individual income tax purposes, Virginia conforms to federal law in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). See Va. Code § 58.1-322 A.

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 Va. Code § 58.1-219. Virginia Code § 58.1­322 D 1 allows a taxpayer to deduct from its Virginia adjusted gross income the amount allowed for itemized deductions for federal income tax purposes.

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. Under IRC § 67, an individual may only deduct the unreimbursed business expenses, along with certain other miscellaneous itemized deductions, to the extent that they collectively exceed 2% of FAGI, commonly referred to as the "2% floor".

Travel Expenses

The wife used the business standard mileage rate in computing her deductible automobile expenses. The auditor disallowed the business expense deduction because there was insufficient documentation showing that the travel costs excluded commuting mileage.

The expenses of operating and maintaining a car used for business purposes are deductible. Taxpayers may use the actual operating costs or the business standard mileage rate in computing the deductible costs. See Rev. Proc. 2010-51 (12/3/2010). In PLR 8023052 (3/12/1980), the Internal Revenue Service (IRS) determined an individual working several jobs in the same locality may deduct the transportation expenses incurred in traveling between jobs. However, travel costs incurred from home to the first job and from the last job to home are generally nondeductible commuting expenses.

The Taxpayers have provided a schedule of the wife's weekly travel itinerary with the mileage between each client. They also provided a statement from the wife's employer that shows it reimbursed the wife for her mileage at a flat rate. The schedule shows the wife's travel expenses less the mileage reimbursements. The Taxpayers stated that the mileage from their house to the wife's first client was not included in the schedule.

Meal Expenses

The auditor disallowed the meal expenses claimed by the Taxpayer because they did not provide the wife's employer's policy regarding the reimbursement of meal expenses. The Taxpayers contend that the wife's employer has no policy or reimbursing meal expenses.

Meals, which qualify as a business expense, are deductible up to 50% of their cost. See IRC § 274 (n)(1). An expenditure must be directly related to the conduct of the taxpayer's trade or business or associated with the active conduct of the taxpayer's trade or business. See IRC § 274(a)(1)(A). An expenditure is considered associated with the active conduct of the taxpayer's trade or business if the taxpayer establishes that he had a clear business purpose in making the expenditure, such as to obtain new business or to encourage the continuation of an existing business relationship. See Treas. Reg. § 1.274-2(d)(2). The Taxpayers' have provided a copy of all the meal receipts for meals claimed by the wife as meal expenses.

CONCLUSION

Taxpayers must maintain records sufficient to allow the Internal Revenue Service (IRS) to determine their correct tax liability. See Treas. Reg. § 1.6001-1(a). Similarly, Va. 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 of 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.

I find that the documentation provided by the Taxpayers is sufficient to show that the travel and meal expenses the wife claimed were properly deducted. As such, the balance of the refund as reported on the Taxpayers' 2013 Virginia income tax return will be refunded with interest.

While the Department's adjustments to the Taxpayers' deductible business expenses are reversed, if the Taxpayers' FAGI is changed by the IRS, including changes to Schedule A, Va. Code § 58.1-311 requires such change or correction to be reported within one year of the IRS's final determination by filing an amended return with the Department. If an individual fails to file an amended return, Va. Code § 58.1­312 A 3 permits the Department to assess the appropriate tax at any time.

The Code of Virginia sections 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/1-5769012819.B