STATE AND FEDERAL RULES DIFFER
State and federal rules for allowable business expenses differ. In some instances, federal limitations won’t apply to the amount of meals and entertainment expenses. In other instances, federal rules for accounting for the expenses don’t apply. Per diem rates allowable for federal purposes are NOT allowable for PA personal income tax purposes as the amount of the deductible expense; only expenses actually incurred are deductible. Since Pennsylvania does not have federal tax accounting limitations and thresholds, 100 percent of actual unreimbursed PA allowable employee business expenses may be deducted from income for Pennsylvania personal income tax purposes.
Under Pennsylvania rules an unreimbursed expense must meet the following conditions to be claimed, and supporting documentation is required:
- The actual amount paid must be reported. Expenses may not be estimated or guessed or calculated using federal per-diem rates. The actual amount paid must be reported. Expenses may not be estimated or guessed or calculated using federal per-diem rates.
- The expenses must be reasonable. The amount of expense should not be excessive in relation to income, type of expenditure or purpose of expense.
- The expenses must be necessary and a condition of employment. Expenses cannot be incurred to make the job more convenient or productive.
- Only ordinary expenses are allowable. The expenses must be similar to those incurred by other employees in the same trade or profession.
- The expenses must be directly related to the employee’s present trade, business or profession. Expenses from a previous job or incurred for a future occupation may not be taken as Unreimbursed Expenses.
- The expenses must be unreimbursed. An employee cannot deduct expenses if he or she was reimbursed by the employer, either partially or entirely, for the amount of the expenses claimed on Schedule UE. This includes a fixed mileage allowance or per diem living expense that the employer did not include in PA taxable compensation in Block 16 of federal Form W–2. However, if the employer did include reimbursements for the employee’s expenses in PA taxable compensation on the W–2, the employee may complete the PA-40 Schedule UE to deduct his or her reimbursement allowance as an allowable PA business expenses.
NOTE: The department may request a detailed breakdown of all expenses claimed, dated receipts and a letter from each employer. A letter from the taxpayer or the tax practitioner is not sufficient proof of the expenses claimed. However, in lieu of a letter from the employer, the department may accept a copy of the employer’s reimbursement policy, or an affidavit from the taxpayer, as evidence that these costs were required as a condition of employment.