April 15, 2015
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek an additional refund of individual income tax paid by ***** (the "Taxpayers") for the taxable year ended December 13, 2013.
FACTS
The Department audited the Taxpayers for the 2013 taxable year and adjusted business expense deductions the husband claimed for an Internet connection in his home office and business use of his personal vehicle. The adjustments reduced the overpayment reported on the Taxpayers' return. The Taxpayers filed an appeal, contending that the deductions properly reflected the husband's unreimbursed employee business expenses.
DETERMINATION
Virginia Code § 58.1-301 provides 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. For individual income tax purposes, Virginia conforms to federal law in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). See Va. Code § 58.1-322 A.
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 Va. Code § 58.1-219.
Virginia Code § 58.1-322 D 1 a allows an individual to deduct from their Virginia adjusted gross income certain amounts allowed for itemized deductions for federal income tax purposes. Under IRC § 67, an individual may only deduct certain miscellaneous itemized deductions to the extent that they collectively exceed 2% of FAGI, commonly referred to as the "2% floor." One such miscellaneous itemized deduction is for unreimbursed employee business expenses.
Internet Services
The Taxpayers claimed a deduction for fees for an internet connection used in the husband's home office. Generally, a deduction or credit must be claimed for the taxable year which is the proper taxable year under the method of accounting used for computing FAGI. See IRC § 461(a). Most individuals use the cash receipts and disbursements method of accounting. Under this method, amounts representing allowable deductions are taken into account for the taxable year in which paid. See Treas. Reg. § 1.461-1(a)(1). The Taxpayers have not indicated that they were using a different method.
Based on the billing statements provided by the Taxpayers, the Department adjusted the deduction to correspond to the aggregate amount of payments the Taxpayers made for the Internet connection during the taxable year. The Taxpayers have provided no documentation to support the amount of internet service expenses reported on their return.
Vehicle Expenses
The Internal Revenue Service (IRS) generally allows two methods for determining deductible transportation costs. A taxpayer may use actual expenses associated with operating a motor vehicle in connection with a trade or business, or a taxpayer may claim the standard mileage rate to compute the allowable deduction for transportation costs. Deductions claimed using the standard mileage rate are permitted in lieu of actual expense deductions for depreciation or lease payments, maintenance and repairs, tires, gasoline, oil, insurance, and registration fees. Expenses, however, are only deductible to the extent they are unreimbursed.
In this case, the Taxpayers chose the standard mileage method in computing the deduction. It appears that the auditor denied the deduction, however, because the husband's employer paid for fuel. The standard mileage rate, however, is designed to cover all of the expenses of operating a vehicle, not just fuel costs. See IRS Rev. Proc. 10-51 § 4.02 (12/20/2010).
The Taxpayers reduced the deduction by the amount the husband's employer paid for fuel. Employees, however, are permitted to deduct expenses to the extent they exceed reimbursements provided that such expenses and reimbursements are properly accounted for on their federal income tax returns. See Treas. Reg. § 1.162-17(b)(3). It appears that the Taxpayers properly completed the worksheet required to compute the total deductible employee expenses.
CONCLUSION
Based on the evidence provided, the Department correctly adjusted the Taxpayers' internet service connection expenses. However, because taxpayers are permitted to deduct motor vehicle expenses to the extent they exceed employer reimbursements, the Taxpayers were entitled to the net mileage deduction reported on their 2013 tax return.
The audit will be returned to the audit staff to be adjusted in accordance with this determination. After the auditor makes the appropriate adjustments, an additional refund for the 2013 taxable year will be issued to the Taxpayers along with any applicable refund interest.
The Code of Virginia sections 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/1-5835698132.M