Pennsylvania Department of Revenue (DOR) Secretary Eileen McNulty confirmed earlier this month in a letter to state legislative leaders that the DOR has formalized into policy its supporting documentation requirements for all business expenses claimed on personal income tax returns.
Business Expenses in Pennsylvania
Examples of unreimbursed business expenses that can be deducted on Pennsylvania state income tax include:
- Work clothes
- Small tools and supplies
- Travel and mileage
- Educational expenses
- Moving expenses into PA
DOR Increasing Scrutiny
The policy announcement is the latest chapter in ongoing efforts by the DOR to increase scrutiny and documentation of unreimbursed business expense deductions. Additionally, Secretary McNulty announced in her letter that the DOR would broaden its review of such deductions to include examination of PA-40 Schedule C expenses (profit or loss from business or profession).
DOR’s actions over the past year regarding these deductions have caused consternation and headaches for practitioners and taxpayers alike. So what does this mean for your state tax filings?
New Methods to Justify Deductions
Under this new policy, the DOR will accept one of three forms of documentation to demonstrate that a taxpayer’s employer requires unreimbursed business expenses. One of the below items must be submitted with the originally filed tax return to support these deductions:
- A letter from the employer
- A copy of the employer’s employee expense reimbursement policy
- A signed (and notarized) affidavit
More Supporting Documentation May Be Required
In addition to the above forms, however, the DOR also indicated that it might request additional information to justify expenses the department believes may have been erroneously reported or not sufficiently substantiated.
Due to this higher level of scrutiny and review these deductions now trigger, RKL recommends that taxpayers submitting these expenses be hyper-vigilant when it comes to retaining documentation. Taxpayers will benefit from erring on the side of over retention of receipts, paperwork, emails, and any other proof of authorization or accumulation of expenses.
This is just the latest change in a constantly shifting tax landscape, and your RKL advisor is here to help. Our tax professionals can help clients compile the additional documentation and guide them through best practices for record retention. Contact one of our local offices today with any questions.
Contributed by Frank J. Tobias, CGFM, Principal in RKL’s Tax Services Group. He specializes in the area of multi-state planning and compliance, with extensive experience in all areas of Pennsylvania taxation.