Schedule C Expenses or Unreimbursed Employee Expenses

[rptax]

Hi, fellow Tax Pros,

Hope everyone is having a good tax season.

I Have a quick question about a client who is a Priest.

In addition to his small wages on his W-2, he receives a small stipend for any extra Masses, Funerals, or Weddings that he volunteers for. He used to receive a 1099-MISC recording those stipends. I would then report unreimbursed mileage, dues & subscriptions, and uniforms that he would pay for in the performance of his duties on schedule C of his Form 1040 which flows to his state and local tax returns.

The Diocese changed its stipend policy and is now giving all Priests a $300 payment per month ($3,600/year) which is now being reported on their W-2s; no Form 1099-MISC is issued.

Going forward, should I continue to report his expenses on Schedule C or on Form 2106 as unreimbursed employee expenses even though the expenses would not benefit him on his federal tax return but would benefit him on his state and local earned income tax returns here in Pennsylvania?

Thank you in advance!

[qbteachmt]

Keeping in mind that 1099-Misc box 7 is now 1099-NEC, and it still only is issued by a business, when their total payments to a person for services reaches $600.

So, first, your taxpayer might still have independent earnings from weddings, etc. Not reported on a 1099-NEC doesn't mean never happened.

Next, if the related expenses are associated with a W2, you have an employee. It doesn't matter the justification or the amount for that additional payment. It's all "as an employee."

So you treat it no differently than any other possible State deduction, but not for Fed. It's not just his "addition" because it's all the same pot, now.

[rptax]

First, thank you for your time, assistance, and kindness.

So, if there is no 1099 MISC./1099-NEC issued and if there are no other earnings outside of what the Church has decided to include on his Form W-2 as a predetermined stipend, does that mean his valid expenses should be reported as unreimbursed employer expenses?

For example, my client has valid mileage, uniform, and continuing education expenses. Are those expenses now reported on Form 2106 and therefore not greatly beneficial on the Federal Form 1040 (since TCJA tax reforms) rather, dependent on state tax law, more beneficial on the state and local tax returns? Is moving these valid business expenses going to make my client more prone to an audit on his state tax return since his unreimbursed employee expenses greatly increase?  

Thank you

[qbteachmt]

"Is moving these valid business expenses going to make my client more prone to an audit on his state tax return since his unreimbursed employee expenses greatly increase?"

What you want to understand is that "valid" and "business" do not by definition go together.

Everyone who works has expenses for working. That doesn't make them business or write offs.

The tax regulation wants you to match ordinary costs against that income it earns. As a business, that is a stand-alone proposition. As an employee, your employer is considered as incurring costs of being in business.

If an employee uses their personal vehicle to do the work of the employer, there is a provision called An Accountable Plan. The employee turns in a mileage report, and the employer reimburses under the IRS mileage rates. If they do this (or less), it isn't even taxable to the employee.

"my client has valid mileage, uniform, and continuing education expenses."

You keep using the valid as if that changes how something applies to something. You can read what the IRS states about job-related education and how the employer can cover some of these types of costs. These rules have been recently expanded. Nothing prevents the employer from requiring uniforms, and then stocking them for the staff. "Uniforms" is not street clothes or clothes worn for every day use. It would be specialty items, safety items,etc.

You don't "move" things around. You put them where they apply. There either is a provision for it, or there isn't. It might not be what you used to do. It might be better.

Even if your taxpayer has no one issuing an informational reporting form (1099-NEC), that doesn't mean they are not also in business independently of that employer. But you can't move everything they incur, to the Sched C. The employer-related costs are not Sched C. Only expenses incurred to earn that Sched C income, are part of Sched C reporting.

This part has not changed, from prior years.