March 16, 2021
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the “Taxpayers”) for the taxable year ended December 31, 2016.
FACTS
The Taxpayers, a husband and wife, filed a Virginia resident income tax return for the 2016 taxable year claiming itemized deductions for unreimbursed business expenses for uniform and upkeep and health sanitation supplies, as well as employee business expenses. Under audit, the Department requested documentation to support the deductions. When insufficient proof was provided, the Department disallowed a portion of the itemized deductions, and issued an assessment. The Taxpayers appeal, contending the provided documentation was sufficient to support the claimed deductions.
DETERMINATION
Conformity
Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income (VTI) with federal adjusted gross income (FAGI). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Chapter 3 of Title 58.1 of the Code of Virginia.
As a general rule, the Department relies on the accuracy of information and computations reflected on the federal income tax return when reviewing Virginia individual income tax returns. If the information provided on the federal return looks reasonable, there is generally no reason to look behind those computations. However, the Department retains the authority to adjust the FAGI and itemized deductions where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. See Virginia Code § 58.1-219.
Virginia Code § 58.1-322.03 1 allows an individual to deduct from their Virginia adjusted gross income certain amounts allowed for itemized deductions for federal income tax purposes. These deductions include those for medical expenses, charitable contributions and business expenses provided they are claimed in accordance with the IRC and its related regulations.
Unreimbursed Business Expenses
Under IRC §162, taxpayers are permitted to deduct all of the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. Such expenses must be directly connected with or pertaining to the taxpayer’s trade or business. See Treas. Reg. § 1.162-1. Unreimbursed employee expenses are considered expenses incurred in carrying on a trade or business and are reportable on federal Schedule A. Under IRC § 67, however, an individual may only deduct the expenses, along with certain other miscellaneous itemized deductions, to the extent they collectively exceed 2% of FAGI, commonly referred to as the “2% floor.”
Work Clothing
IRC § 162 permits employees to deduct the cost of their work clothing or uniform so long as such clothing must be worn as a condition of the taxpayer’s employment and such clothing is not suitable for everyday wear. See also IRS Publication 529 (2014) and Public Document (P.D.) 19-99 (8/27/2019). Merely distinctive clothing does not meet the standard under this section. Examples include, but are not limited to, firefighter, health care and law enforcement uniforms. The Taxpayers have not provided a list of clothing items purchased, nor evidence that the clothing required to be worn for their employment was not suitable for everyday wear.
Health Sanitation Supplies
The Taxpayers assert that costs incurred for health sanitation supplies used in the Taxpayers employment, as a health care provider should be deductible as an unreimbursed business expenses. Treas. Reg. § 1.162-3(a)(2) states that amounts paid to acquire incidental supplies that are carried on hand and for which no record of consumption is kept are deductible in the taxable year in which these amounts are paid, provided taxable income is clearly reflected. Such supplies are defined under Treas. Reg. § 1.162-3(c)(1)(iv) as a unit of property that has an acquisition cost of $200 or less. It appears that the Taxpayer’s expense for health sanitation supplies may fall within this deduction, however, the Taxpayer has not produced evidence to support the claimed amount.
Form 2106 Expenses
The Taxpayers also claimed a deduction for expenses from IRS Form 2106, that included parking fees, tolls, and transportation costs that did not involve overnight travel or commuting to and from work. The Taxpayers have provided no documentation to show that these expenses were incurred for their business purposes.
Tax Preparation Fees
Taxpayers are permitted to deduct fees paid for tax preparation as a miscellaneous expense. Taxpayers are, however, required to provide documentation to support the claimed expense under Virginia Code § 58.1-310. The Department requested documentation to substantiate this deduction, which the Taxpayer failed to furnish.
CONCLUSION
Taxpayer’s must maintain records sufficient to allow the IRS to determine their correct tax liability. See Treas. Reg. § 1.6001-1(a). Similarly, Virginia Code § 58.1-310 provides:
"Whenever in the opinion of the Department it is necessary to examine the federal income returns or any copy thereof any individual, estate, trust, partnership or corporation in order to properly audit such returns, the Department or the commissioner of the revenue shall have the right to require such taxpayer to provide such return or a copy thereof and all statements, inventories, and schedules in support thereof."
Under the provisions of Virginia Code § 58.1-205, in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct”. As such, the burden of proof is on the Taxpayer to show that the assessment was erroneous.
Documentation has not been provided by the Taxpayer to support the claimed deductions for work clothing nor supplies. Documentation sufficient to support the deduction for clothing would include a list of items purchased as well as evidence of the requirement to wear such items as a condition of their employment. Additionally, while clothing may be required to be worn as a condition of their employment, it must also not be suitable for everyday wear. Similar to the specificity issues with the Taxpayers’ documentation of their clothing expense, there has been no evidence provided to support the deduction for health sanitation supplies. Based on the applicable law cited above and the information presented, there is no basis to abate the Department’s assessment for the 2016 taxable year.
I will, however, give the Taxpayers one last opportunity to provide adequate documentation with regard to the expenses for clothing and supplies. The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *****, Tax Analyst. Upon receipt, the documentation will be reviewed and the assessment may be adjusted, as appropriate. If the documentation is not received within the allotted time, the assessment will be considered correct.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3274.A