Historical Background

The Pennsylvania Tax Reform Code of 1971 does not explicitly address how business expenses are treated. However, the Pennsylvania Supreme Court has interpreted an exclusion for “payments to reimburse actual expenses” to mean that all legitimate business expenses are excludable from compensation. Commonwealth v. Staley , 381 A.2d 1280, 1285 (Pa. 1978). Further, the Court has held that amounts reimbursed by an employer for ordinary, actual, reasonable, and necessary business expenses are excluded from compensation. Ritz v. Commonwealth , 432 A.2d 169, 171 (Pa. 1981).

If parties to an employment contract recognizes that the employee will pay for some business expenses out of his or her own pocket, these amounts may be excluded from income. Id . at 170. However, personal expenses, including daily living expenses of an employee, may not be excluded from compensation. Williamson v. Commonwealth , 525 A.2d 475, 477 (Pa. Cmwlth. 1987).