Unreimbursed employee expenses would be deductible again under bill

Perhaps Washington D.C. isn’t yet on board with this whole “gig economy” thing. Exhibit A could be how the 2017 Tax Cuts and Jobs Act eliminated independent contractors’ ability to deduct “unreimbursed employee expenses” on their federal tax returns.

But a bill laid over by the House Taxes Committee Thursday for possible omnibus bill inclusion would put that deduction back in at the state level. HF1122, sponsored by Rep. Ben Lien (DFL-Moorhead), would update the definition of “net income” on Minnesota’s individual income tax forms. It would pull a section of state tax law into conformity with federal, except that it would retain the itemized deduction for unreimbursed employee expenses.

Rep. Ben Lien

The companion is SF1197, sponsored by Sen. David Senjem (R-Rochester). It awaits action in the Senate Taxes Committee.

Prior to the 2017 changes in federal tax law, independent contractors were allowed to claim as an itemized deduction the total of their miscellaneous expenses that exceeded 2 percent of their adjusted gross income. But that deduction was suspended for tax years 2018 through 2025 under the act.

So what are unreimbursed employee expenses? The Internal Revenue Service keeps a long list of them, but some frequently used prior to the change in law – and still available on Minnesota returns for tax year 2018 -- were educator expenses, work clothes, and work-related education, tools, travel and transportation.

Testifying in favor of the bill were representatives from three labor unions: the Minnesota AFL-CIO, the American Federation of State, County and Municipal Employees Council 5, and the International Brotherhood of Electrical Workers 292.

The Department of Revenue estimates that about 93,400 returns would be affected in tax year 2019 -- with an average decrease in tax of $436 – and that the state would collect $40.7 million less in taxes in Fiscal Year 2020.

A 2017 study by Intuit, the owner of tax preparation software TurboTax, showed 34 percent of the American workforce received most of its income from work as freelancers or independent contractors, with the number expected to rise to 43 percent by 2020.