Deducting Un-reimbursed Employee Expenses

by Kenneth Hoffman in , ,

You can deduct on your personal return business expenses that you're not reimbursed for by your employer or by a partnership in which you're a partner. But that's only true if you would not have been reimbursed because of a policy by the business. 

In Peter A. McLauchlan (T.C. Memo. 2011-289) the taxpayer paid various expenses (e.g., advertising, home office, automobile, travel, meals, entertainment, cell phone, professional organizations, continuing legal education, State bar membership, supplies, interest, banking fees and legal support services) in connection with work at the partnership. The partnership reimbursed him for over $60,000 of expenses for each of 2005 and 2006. The taxpayer contended, however, that he paid over $100,000 of partnership expenses in both 2005 and 2006 for which he was not reimbursed.

He categorized and claimed these expenses on Schedules C. Partners in the firm were required, under the partnership agreement, to pay expenses for business meals, auto, travel, entertainment, conventions, and continuing education, collectively called indirect expenses. Indirect expenses were reimbursable under the partnership agreement if approved by a managing partner. The firm had a written reimbursement policy that specifically provided for reimbursement of certain indirect expenses include reasonable travel expenses related to client maintenance and development. As a matter of routine practice, the firm would reimburse indirect expenses that were not provided for in the written reimbursement policy. The firm did not have a limit on the amount for which a partner could be reimbursed. Reasonableness, rather, was the overarching standard for approving reimbursement of indirect expenses. The firm would deem an expense unreasonable if it was personal, excessive or not in the firm's best interests.

The Court noted that the firm routinely reimbursed most of the expenses the taxpayer claimed. Moreover, the firm had no set limit on the amount of expenses for which it would reimburse a partner. The Court found the taxpayer was not required under the partnership agreement or by routine practice to pay such expenses. In addition, the taxpayer failed to point to any specific expense for which the firm denied him reimbursement. The Court disallowed the expenses.

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