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Ambush! State is rejecting employee business expenses

Apparently, getting smacked with a hike and other fee increases that bring Pennsylvania’s gas taxes to the highest in the nation, according to the American Petroleum Institute, is not enough.

The Pennsylvania Department of Revenue is further harming taxpayers by aggressively disallowing otherwise allowable employee business expenses on Schedule UE. This comes on the heels of the gas-tax increase that will result, after the series of hikes over five years has been implemented, in about another $2.50 a week for a typical Pennsylvania driver.

The DOR initiative to deny a taxpayer’s unreimbursed business deductions on Schedule UE has set off criticism among taxpayers and tax preparers. There were no changes to the tax laws that define allowable employee business expenses that resulted in a change in policy. And there has been very little warning from the DOR to alert taxpayers or tax preparers of the change.

In other words, the DOR changed the tax-return review process that blindsided taxpayers who have legitimate, employee business expenses by disallowing previously allowed items.

Previously, taxpayers’ unreimbursed employee business expenses were generally accepted and only disallowed in the event of an audit. The new process arbitrarily disallows taxpayers’ legitimate allowable employee business expenses, resulting in additional taxes and compliance costs to taxpayers.

Before blindly paying the increase in taxes, which in many cases are relatively small, taxpayers should investigate the disallowance because the additional tax can quickly become very expensive.

If taxpayers don’t challenge, the DOR can and often will go back three years and disallow previously allowed expenses. In addition, getting your expenses accepted in the future may prove to be very difficult.

Further, these disallowed expenses may negatively affect both your federal and local tax returns. Keep in mind that taxing agencies share information, so just blindly accepting the disallowance can have negative consequences on previous and future years and on other returns.

Many tax-return software packages, as a default, pick up the information from the federal tax return and carry those numbers to Pennsylvania’s Schedule UE. But it should be noted that allowable employee business expenses for Pennsylvania purposes are similar, but not exactly the same, as expenses allowable for federal purposes.

For example, commuting costs between jobs are not allowable for Pennsylvania tax purposes but are on the federal tax return.

Pennsylvania also does not allow dues to fraternal organizations, professional societies or chambers of commerce, which may be allowable for federal tax purposes.

It is important to first determine if the disallowed expenses are deductible for Pennsylvania tax purposes and vigorously challenge disallowed but otherwise legitimate expenses.

Once you determine that the expenses are allowable for Pennsylvania tax purposes, you should aggressively challenge the disallowance. The DOR often is arbitrarily disallowing expenses, hoping that it is correct or most taxpayers will just blindly pay the additional tax.

Often, the DOR is just disallowing expenses without providing any detailed explanation of why they are not accepting them.

Because the amount of additional tax is relatively small, many taxpayers figure it is cheaper just to pay the tax rather than pay a professional tax preparer to investigate the notice – no matter how wrong and costly that decision could be.

John D. Rossi III is a business leader, lecturer, accountant and financial planner with more than 30 years of business and academic experience. An associate professor of accounting at Moravian College in Bethlehem, he also is president of JR3 Virtuoso Solutions Inc., specializing in financial reporting, taxation, professional training and consulting services.

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