I claimed employee business expenses on federal Form 2106 for 2018 and 2019, and the Department disallowed the deduction on my Virginia return -- can the Department override what I reported on my federal form?

Plain-English summary

This ruling is a clean explanation of why Form 2106 -- once a common way for W-2 employees to deduct unreimbursed job expenses -- largely stopped working starting with the 2018 tax year, and why Virginia disallows it the same way the IRS does.

Taxpayers filed Virginia resident returns for 2018 and 2019 claiming deductions from federal Form 2106 (Employee Business Expenses). When the Department audited the returns and asked for supporting documentation, no response came, so the deductions were disallowed and assessments issued. The taxpayers appealed, arguing the Department had no authority to adjust amounts that came straight from a federal tax form.

The Department explained its general approach first: Virginia's income tax starts from federal adjusted gross income (FAGI), and as a rule the Department relies on the accuracy of a federal return's numbers without looking behind them. But that deference isn't absolute -- Va. Code § 58.1-219 gives the Department authority to adjust FAGI and itemized deductions whenever there's clear evidence the reported amounts aren't actually consistent with the Internal Revenue Code, and the Department has exercised that authority independently of the IRS in a long line of prior rulings (P.D. 10-126, 12-141, 14-155, 16-53, 19-104, 21-67).

Here, that's exactly what happened: the 2017 Tax Cuts and Jobs Act (§ 11045 of P.L. 115-97, and IRC § 67(g)) suspended miscellaneous itemized deductions -- including unreimbursed employee business expenses claimed on Form 2106 -- for the 2018 through 2025 taxable years. During that window, only three narrow categories of workers remained eligible to use Form 2106 at all: Armed Forces reservists, qualified performing artists, and fee-based state or local government officials. When the auditor originally asked the taxpayers about their eligibility, their own response confirmed they weren't members of any of those three groups. Because the deduction simply wasn't available to them under federal law during 2018-2019, and Virginia's tax base follows federal law on this point, the Department upheld the assessments in full.

What this means for you

Anyone still claiming Form 2106 employee business expenses for a 2018-2025 tax year

Double-check your eligibility first. Since the Tax Cuts and Jobs Act, only Armed Forces reservists, qualified performing artists, and fee-based state or local government officials can use Form 2106 at all during this period -- everyone else lost this deduction entirely, on both federal and Virginia returns, regardless of whether the expenses themselves were legitimate business costs.

Anyone assuming Virginia can't second-guess numbers taken from a federal tax form

Virginia generally does defer to your federal return's numbers, but the Department has clear statutory authority (Va. Code § 58.1-219) to adjust your Virginia return whenever there's evidence the federal-form amounts aren't actually consistent with the Internal Revenue Code -- and it can and does exercise that authority independently of whatever the IRS itself does.

Taxpayers under audit who receive a documentation request

Respond to it. Here, the taxpayers' own prior admission (that they weren't in any of the three exempt worker categories) was what sealed the outcome -- silence or non-response during an audit doesn't prevent the Department from using the information it already has.

Common questions

Q: Can I still deduct unreimbursed employee business expenses on Form 2106 for tax years 2018 through 2025?
A: Only if you're an Armed Forces reservist, a qualified performing artist, or a fee-based state or local government official. The 2017 Tax Cuts and Jobs Act suspended the deduction for everyone else during these years.

Q: Does Virginia have to accept whatever deduction I claimed on a federal form?
A: No. Virginia generally relies on the accuracy of federal return computations, but the Department has authority under Va. Code § 58.1-219 to adjust amounts where there's clear evidence they're inconsistent with the Internal Revenue Code -- and can do so independent of any IRS action.

Q: I didn't respond to the Department's request for documentation supporting my deduction -- does that hurt my case?
A: Yes -- if you don't establish your eligibility (or provide supporting records), the Department can disallow the deduction outright, especially where, as here, an earlier response already showed the deduction wasn't available in the first place.

Citations and references

• Va. Code § 58.1-301 (Virginia conforms to IRC terminology/references unless a different meaning is clearly required)
• Va. Code § 58.1-219 (Department authority to adjust FAGI and itemized deductions inconsistent with the Internal Revenue Code)
• P.D. 10-126 (7/7/2010), P.D. 12-141 (8/29/2012), P.D. 14-155 (8/28/2014), P.D. 16-53 (4/11/2016), P.D. 19-104 (9/18/2019), P.D. 21-67 (5/25/2021) (Department's consistent exercise of authority to adjust FAGI/deductions independent of IRS action)
• § 11045 of P.L. 115-97 (Tax Cuts and Jobs Act; suspends miscellaneous itemized deductions, including unreimbursed employee business expenses, for 2018-2025)
• IRC § 67(g) (codifies the suspension of miscellaneous itemized deductions)

Subject

Deduction : Itemized - Employee Business Expense Limitation for 2018

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-65

Original ruling text

April 5, 2022

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessments issued to * (the “Taxpayers”) for the taxable years ended December 31, 2018 and 2019.

FACTS

The Taxpayers filed Virginia resident income tax returns for the 2018 and 2019 taxable years claiming deductions on federal Form 2106. Under audit, the Department requested documentation to support the deductions. When no response was received, the Department disallowed the deductions and issued assessments. The Taxpayers appeal the assessments, contending the Department lacks authority to adjust amounts reported on federal tax forms.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . 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). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Chapter 3 of Title 58.1 of the Code of Virginia .

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. The Department, however, 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 Virginia Code § 58.1-219. The Department has consistently exercised this authority in conducting its audit programs. See Public Document (P.D.) 10-126 (7/07/2010), P.D. 12-141 (8/29/2012), P.D. 14-155 (8/28/2014), P.D. 16-53 (4/11/2016), P.D. 19-104 (9/18/2019), and P.D. 21-67 (5/25/2021). In addition, such adjustments have been made independently from any actions taken by the IRS.

The Taxpayers claimed an adjustment to federal gross income in 2018 and 2019 for employee business expenses reported on Form 2106. For the 2018 and 2019 taxable years, only Armed Forces reservists, qualified performing artists and fee-based state or local officials were eligible to claim an adjustment to income using Form 2106. This change in the deductibility of employee business expenses came as a result of § 11045 of P.L. 115-97, commonly known as the “Tax Cuts and Jobs Act,” which generally suspended miscellaneous itemized deductions, including unreimbursed employee business expenses, for the 2018 through 2025 taxable years. See also IRC § 67(g).

With their appeal, the Taxpayers submitted their response to the auditor’s original information requests that indicated they were not members of any of the three classes of individuals eligible to claim an adjustment to income using Form 2106. The Taxpayers, therefore, were not eligible to claim the adjustment to income and the assessment must be upheld.

The Taxpayers will receive an updated bill that will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collection actions.

The Code of Virginia sections and public documents 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/3866.X

Related Documents

10-126

12-141

14-155

16-53

19-104

21-67