Any Commanding Officer (CO) of a military unit will tell you that leading an organization is an honor and a privilege. One of the hidden realities is it can also be very expensive – some estimate they’ve spent close to $10,000 during a command tour! The vast majority of these expenses are not compulsory but as the spouse of a current commander, I began researching what portion of these expenses may be deductible as an “Unreimbursed Employee Expense”. Here’s what I’ve uncovered with examples of how it may apply to you.
50% of Entertainment Expenses
I’ve spoken with a number of current and former COs and their spouses and many agreed that the majority of funds are spent on entertainment. Examples of entertainment expenses are; postage, stationary & printing, the cost of a meal (food & beverage), rent paid for a room in which you hold a dinner or cocktail party, tips, and meals provided to families in need.
According to the IRS, expenses must be both ordinary (common & accepted) and necessary (helpful & appropriate) and meet one of two “tests”. COs typically meet the “Associated Test” since they have the clear business objective of encouraging the continuation of existing relationships and business discussions are held anytime that day. Therefore, the timing of your social event is key to satisfying the rules of this test.
Example 1: CO Wright holds a staff meeting in the afternoon and later that evening spends $500 on a social event for those same individuals. Since a meeting was held earlier in the day, the entertainment expense is deductible.
Example 2: CO Wright spends $500 on a social event held over the weekend and no prior meeting was held. Since no meeting was held earlier in the day, the entertainment expense is not deductible.
Generally speaking, you can’t deduct the costs of entertaining spouses unless you can show a clear business relationship.
Example 1: CO Wright holds a staff meeting in the afternoon with 10 individuals from the unit and later that evening spends $500 on a social event for those same individuals and their spouses (21 people total). Since the spouses were not part of the earlier meeting, they can not be included in the deduction and the CO can only deduct $262 (11/21 x $500).
Example 2: CO Wright holds a meeting in the afternoon to discuss family readiness with 10 individuals and their spouses and later spends $500 on a social event for those same individuals (21 people total). Since the spouses were part of the earlier meeting, they can be included in the deduction and the CO can deduct the entire $500.
There is a $25 per person, per year limit for this deduction. Popular gift items for some may include farewell, holiday, and thank-you gifts. The cost of engraving, gift wrapping, mailing and packaging the gift can not be included in determining the cost since they do not increase the value of the gift.
Example: CO Wright wants to thank the 5 members of the Family Readiness Team and purchases a gift for each person valued at $30. CO Wright is able to deduct $125 ($25 x 5).
Before you start digging for old receipts, keep these two things in mind.
1) Your total unreimbursed employee expenses must exceed 2% of your adjusted gross income (AGI)
An O-5 commander with an AGI of $90,000, must have more than $1,800 in expenses ($90,000 x .02) to claim this deduction.
2) You must itemize deductions using Schedule A to claim unreimbursed employee expenses
A taxpayer would only choose to itemize if the total deductions on Sch A exceed the standard deduction for your filing status (the 2015 standard deduction for Married Filing Jointly is $12,600). Items in addition to unreimbursed employee expenses you may deduct on Sch A include; home mortgage interest, real estate taxes, charitable donations, volunteer expenses, certain uniforms, educational expenses, tools & supplies, professional publications & dues, and tax preparation fees.
*Please keep in mind, when you begin to deviate from “the norm” on your tax return, you need to be prepared to present written evidence of your claim and it may be denied. This information is my personal interpretation of this tax law. Please contact me with questions or if assistance is needed.