A couple of weeks back, this column addressed the topic of the treatment of business related meal and entertainment expenses under various situations. As a result of that piece, I was contacted several times with questions about the treatment of employee business expenses in general.
Due to the interest generated, here is a quick primer on the type of employee incurred business expenses that might lead to a tax deduction, and how you go about taking such a deduction.
Let’s start at the foundation with something many do not even know – that if you are an employee, you may be able to deduct certain work-related expenses that you personally incur and for which you are not reimbursed by your employer.
To benefit form this deduction, you first must be someone that itemizes your deductions. Persons simply using the standard deduction amount will not benefit. Remember, some people may take the standard deduction on their federal return yet itemize for their state return. If this is you, you still might save some tax by taking the deduction on your state return.
Assuming you itemize, the following expenses may be deducted as an employee business expense:
- Business travel away from home, including airfare and lodging
- Business use of car
- Business meals and entertainment
- Use of your home, under limited circumstances
- Miscellaneous expenses
You need to keep good records to prove the business expenses you deduct. Lack of adequate records can result in your deductions being disallowed, no questions asked. A great resource for information on good recordkeeping is IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at www.irs.gov.
If your employer reimburses you under what is known as an accountable plan, you do not include the payments you receive in your gross income, but you also may not deduct any of the reimbursed amounts.
An accountable plan must meet three requirements:
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, and
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 does not meet these criteria, it is a non-accountable plan. That’s not generally good, as the payments you receive form a non-accountable plan should be included in the wages shown on your Form W-2. You must report the income and then itemize your deductions to deduct these expenses.
Page 2 of 2 - Unfortunately, as mentioned earlier, if you do not itemize deductions because the standard deduction is more valuable, you still must report these reimbursements in your income.
Lastly, in general if you qualify to deduct employee business expenses, you will report them on IRS Form 2106 or IRS Form 2106-EZ to figure you deduction. This form is should be attached to your Form 1040.
These deductible expenses are then reported on Form 1040, Schedule A, as a miscellaneous itemized deduction subject to a 2% of your adjusted gross income rule. Only employee business expenses that are in excess of 2% of your adjusted gross income can be deducted, further limiting their benefit.
As an employee, the ideal financial arrangement is for you to be reimbursed for your out-of-pocket business expenses on a tax-free basis under an accountable plan as discussed above.
However, if you don’t have that benefit, being able to deduct your expenses as employee business expense may help you soften the blow.
Lane Keeter, CPA is Office Managing Partner of the Heber Springs Office of EGP, PLLC, CPAs & Consultants