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Employees: Don't Miss Out on Key Business Expense Deductions

By Marcia Richards Suelzer, MA, JD | June 29, 2012

If you work for someone else, you may be distressed to know that there are some significant limitations placed on your ability to deduct business-related expenses. However, there is a chance that you may be able to deduct certain unreimbursed, work-related expenses. The IRS has provided some tips to help employees to maximize the amount of deductible business expenses.

It seems obvious, but it is worth noting, that you cannot claim a deduction if you were reimbursed for your expenses. Basically, if your employer reimburses you under an accountable plan, the transaction is a wash for tax purposes. You should not include the reimbursement payments in your gross income, and you may not deduct any of the reimbursed amounts.

Tip

To qualify for this tax treatment, three conditions must be met:

  1. You must have paid or incurred expenses that are deductible while performing services as an employee.

  2. You must adequately account to your employer for these expenses within a reasonable time period.

  3. You must return any excess reimbursement or allowance within a reasonable time period.

If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages shown on your Form W-2. You must report the reimbursements as income. Unfortunately, you can't simply turn around and claim the entire amount as a business expense deduction. In order to claim any business expense deductions, you must itemize your deductions on Schedule A. Unfortunately, this means that you lose the value of the deduction unless the total of all of your itemized deductions (such as medical expenses, home mortgage interest, and charitable contributions) exceeds the amount that you are allowed as a standard deduction.

Expenses that qualify for an itemized business expense deduction generally include:

  • business travel away from home
  • business use of your car
  • business meals and entertainment
  • travel
  • use of your home
  • education
  • supplies
  • tools, and
  • miscellaneous expenses

You report unreimbursed expenses on IRS Form 2106 or IRS Form 2106-EZ, and attach it to Form 1040. Bear in mind that your business expense deduction is subject to the usual rules related to those expenses. For example, you can deduct only 50 percent of the actual cost of your business means, unless you opt for the standard meal allowance.

Your deductible expenses are then reported on IRS Schedule A, as a miscellaneous itemized deduction. Because employee business expenses are considered miscellaneous itemized deductions, you can deduct them only to the extent that the total amount exceeds 2 percent of your adjusted gross income.

Example

Joe Smith has $5,000 worth of unreimbursed business expenses. Of these expenses, $2,000 was for business meals. Due to the business meal limitation, only 50 percent ($1,000) of this amount is deductible; so his deductible expenses are $4,000. Joe's adjusted gross income for 2011 was $50,000. Assuming he meets all the substantiation and recordkeeping requirements, Joe's Schedule A business expense deduction is limited to $3,000, because of the 2-percent of AGI rule. If Joe's income were higher, the allowable deduction would be lower.

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