Unreimbursed Employee Business Expenses
You can deduct some expenses related to your job
It may seem unfair that you have to spend money in order to make money, particularly when you're not self-employed. The Internal Revenue Service agrees with you, at least to some extent. Employees who incur job-related expenses can potentially deduct those costs on their federal tax returns—except, of course, it's never that easy when it comes to federal taxes.
It's an Itemized Deduction
Job-related expenses fall into the category of miscellaneous deductions.
This means you have to itemize on your tax return to claim them so you'll have to go through all the recordkeeping, calculations and other tedium that itemizing entails. It will take you longer to prepare your tax return, and if you hire someone to prepare it for you, it will most likely cost you more. This isn't intended to discourage you, but make sure that you have sufficient unreimbursed employee expenses that you'll still come out ahead when you figure in what it will cost you in time and money to claim them.
Itemizing also means that you can't claiming the standard deduction for your filing status. If the total of all your itemized deductions doesn't exceed the standard deduction you're entitled to, it's usually not in your best interest to itemize—you'll actually end up paying more in tax dollars. So while it might be gratifying to use those expenses to shave a smidgen off your tax obligation, you might do better to ask your employer to reimburse you for what you spent instead.
Eligibility for the Employee Business Expense Deduction
"Unreimbursed" is the key word here. Make sure your employer hasn't paid you back for what you spent. He did not give you an advance toward these costs or an allowance to pay for them. If any of these circumstances apply, you can't claim the deduction.
If you had to give your employer an accounting, explaining exactly what the money was spent on, it was most likely an advance or an allowance, particularly if you had to return any money that was left over. Not only are these expenses not deductible, but the money given to you might appear in box 12 of your W-2 as income on which you must pay taxes. Several criteria must be met, however, before this money is charged to you as income.
Another rule states that the things you spend money on must be ordinary and necessary business expenses for your employer. "Ordinary" means that most people in your line of work—or their employers—also spend money on the same thing. "Necessary" means the purchase or expense was more or less integral to doing business. For example, it would not be considered ordinary or necessary for a stage performer to purchase a tool kit, whereas a stagehand might be required to have one to repair issues on the set.
Types of Employee Business Expenses That Can Be Deducted
Employees can incur a wide variety of expenses related to their jobs, but these five broad categories of tax-deductible job expenses are often claimed:
- Vehicle expenses: These include costs associated with using your personal vehicle for work-related reasons. You can either deduct a portion of your actual driving expenses based on your work-related mileage, or you can use the standard mileage rate set by the IRS each year. The rate is 53.5 cents per mile as of 2017. Allowable miles are limited to getting from one workplace to another, visiting clients or customers, going to a business meeting away from your regular workplace, or getting from your home to a temporary workplace when you have one or more regular places of work. Commuting is not included. IRS Publication 463, chapter 4 gives a detailed explanation of these rules.
- Parking, tolls and local transportation expenses: These are separate from vehicle expenses like fuel, oil, insurance and maintenance. They include the other costs of travel like parking, tolls, bus fare or train fare. And again, certain expenses are disallowed. If you have to pay to park your vehicle at your workplace, this isn't deductible. As long as you're driving for business purposes and not for commuting, however, these costs can be deducted.
- Travel expenses: These include the cost of hotels, airfare, car rental and similar expenses if you must travel away from your home at least overnight.
- Meals and entertainment expenses: If you're having a meal with or entertaining clients, customers, business associates or employees, these costs are deductible if they are directly related to and associated with conducting business. "Directly related" means that the purpose of the gathering was to conduct business, that you did indeed engage in business, and that you—or, more precisely, your employer—had every reason to believe that the event would result in income. Typically, only half the cost of meals and entertainment are tax deductible, but there are some exceptions to this rule. You can find them in Chapter 2 of Publication 463.
- Other business expenses: These include any expenses that aren't included in the above categories, such as the cost of business cards, subscriptions to trade and business publications, home office expenses, business gifts and work-related education. They can also include any tools or equipment that might be necessary to doing your job.
How to Deduct Employee Business Expenses
Claiming employee business expenses begins with completing Form 2106 to figure out the total amount of the deduction you're entitled to. If you want to deduct your actual vehicle expenses, you can calculate your deduction based on the miles you drove by completing page 2 of this form. The shorter Form 2106-EZ can be used if you want to claim the standard mileage rate instead of actual vehicle expenses.
You can then enter the deduction you've calculated on line 21 of Schedule A, the form you must use to itemize deductions. Enter the total of all your itemized deductions—determined after you've completed Schedule A — on line 40 of your Form 1040 in place of the standard deduction you'd otherwise be entitled to.
Other itemized deductions include costs such as uninsured medical and dental expenses, health insurance premiums in some cases, home mortgage interest and charitable contributions. Again, when you've completed Schedule A, the total of all these deductions should exceed the amount of the standard deduction you're entitled to.
The AGI Limitation
All miscellaneous deductions are reduced by 2 percent of your adjusted gross income or AGI. What's left over is the amount you can claim as a deduction and enter on Schedule A. For example, if your AGI is $80,000, you can only claim a deduction for the amount of your total miscellaneous expenses that exceed $1,600, or 2 percent of $80,000. If you have $1,800 in expenses, you'll get a $200 deduction. If your miscellaneous expenses don't add up to 2 percent of your AGI, they don't qualify for a deduction at all.
Assuming you meet all these rules and you want to deduct your work-related expenses, the IRS may expect you to be able to substantiate them. You'll need proof for each expense you claim showing the description of what you spent money on, the amount, the business purpose and relationship, and the date and place where the expense was incurred. You might want to keep a running file throughout the year to hold all your receipts, or make it a point to scan them into your smartphone or laptop on a regular basis. Not only will this make calculations easier at tax time, but you'll have the proof at your fingertips if the IRS ever asks you to produce it.