Q&A with the Pennsylvania Department of Revenue

Scenario: Unreimbursed expense claims

Dec 08, 2016
Scenario:

In recent years, the issues of unreimbursed employee business expenses have become highly scrutinized and narrowly scoped. In January 2016, the Department issued some expanded documentation, an affidavit form, guidance in the form of FAQ, and a notice of tips (REV-489) to underline increased tightening of the allowance of these deductions.
In a great many flow-thru entities, partnerships, LLCs, LLPs, and s-corporations, provide that owners (partners, members and/or shareholders) incur ordinary and necessary business expenses outside of the entity paying, and these expenses are not reimbursed to the incurring partners, members and/or shareholders. Federal tax law provides for an unreimbursed expense claim against the schedule E K-1 income, and such adjustment has traditionally been claimed for Pennsylvania.

Q:

In light of the above-referenced increased scrutiny and limiting expense allowances, is the Department intending to target the owners of flow-thru entities for similar possible claims of disallowance unless “sufficient support documentation” is provided? And if so, has the Department developed specific guidelines and requite forms of support documentation for these types of unreimbursed expense claims?

A:

The Department has and will continue to examine unreimbursed partner/ member /shareholder (“owner”) expenses. Personal expenses and expenses claimed for the owner’s convenience are not deductible unless required by and stated in the entity’s partnership agreement, LLC operating agreement, and/or PA S corporation’s articles of incorporation. A complete copy of such agreement or articles must be provided to the Department upon request.

In addition, the owner expenses must satisfy the requirements of any other business deduction. The owner expenses must be ordinary, necessary, reasonable, actually incurred, and directly related to the production of income/provision of service. An itemized list of expenses must be provided. Documentation including proof of payment and business purpose must be maintained and provided to the Department upon request.

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These documents provide a summary of the answers provided by the Department of Revenue to the PICPA Committee on State Taxation at its annual question and answer session. These documents are classified as revenue information issued for informational purposes only for the convenience of PICPA members. Pursuant to 61 Pa. Code Section 3.4, these documents should not be relied upon for any purpose or used in tax appeals. Taxpayers requiring a binding opinion on their specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.