If you are an employee, you may be able to deduct your un-reimbursed work-related expenses as an itemized deduction on Schedule A. Employee business expenses are subject to the 2% of AGI limitation (see below). You can deduct un-reimbursed employee business expenses incurred in the normal course of carrying out your responsibilities as an employee.
You can deduct un-reimbursed travel expenses that you incur as an employee if you temporarily travel away from your tax home for your job. These expenses include transportation, car expenses, lodging and meals (meals are only allowed if you are traveling overnight). You can also deduct your job-related education expenses. You claim your employee business expenses on line 21 of Schedule A.
Although commuting costs (travel between home and work) are not deductible, some local transportation expenses are. Deductible local transportation expenses include the ordinary and necessary expenses of going from one workplace to another. If you have an office in your home that you use as your principal place of business for your employer, you may deduct the cost of traveling between your home office and work places associated with your employment.
You may deduct the cost of traveling between your residence and a temporary work location outside of the metropolitan area where you live and normally work. If you have one or more regular work locations away from your residence, you may also deduct the cost of going between your residence and a temporary work location within your metropolitan area.
Where is your tax home?
In determining the deductibility of travel expenses when you travel outside your general work area, the location of your tax home must first be established. Your tax home is your main place of business or work, regardless of where you maintain your family home. The following factors are used to determine your main place of business or work:
- The total time ordinarily spent working in each area.
- The level of business activity in each area.
- Whether the income from each place is significant or insignificant.
You are considered away from your tax home if you are required to be away from the general area of your tax home for longer than an ordinary workday, and you need to get sleep or rest.
What expenses are deductible?
If you are on a temporary assignment or job away from your tax home, your job expenses may or may not be deductible. A temporary assignment is one that is expected to last for one year or less, and does in fact last for one year or less. The following factors are used to determine if traveling expenses to that temporary assignment or job are deductible or not:
- If the assignment has a fixed ending date (one year or less), the expenses are deductible.
- If the assignment or job lasts or is expected to last indefinitely, the expenses are not deductible.
Your employee business (job) expenses can be deductible as long as they were:
- Paid or incurred during the tax year.
- Incurred for carrying out your job as an employee.
- Ordinary and necessary business expenses.
To figure your meal expenses when traveling away from your tax home, you can use either the actual expenses incurred, or a standard rate of $46 per day. The standard rate can be higher in some cities, and you can find this information on the IRS website. Whichever method you use, tax law allows you to deduct ONLY 50% of your un-reimbursed meal expenses.
You can deduct expenses of up to $2,000 per year for attending conventions, seminars, or similar meeting held on cruise ships.
Meal and entertainment expenses
If your job requires you to entertain customers, you can deduct ordinary and necessary meals and entertainment expenses, but only if they are directly related and associated with your business.
The directly related test is met if:
- The meal or entertainment takes place in a clear business setting.
- The main purpose of the meal and entertainment is for the conduct of business.
- You did in fact engage in business.
- You had more than a general expectation of getting income or some other business benefit.
The associated test is met if:
- The meal or entertainment is associated with the active conduct or your trade or business.
- The meal or entertainment directly precedes or follows a substantial business discussion.
In general, you can deduct only 50% of business related meal and entertainment expenses. Therefore if you receive one bill, which includes the costs of meals, lodging, transportation, etc., you must allocate the expenses between the cost of meals and entertainment, and the cost of the other services.
If you gave away tickets to an entertainment event, you can deduct only the face value of the tickets. If you gave a customer tickets and did not accompany the customer to the event, you can treat the cost of the tickets as either an entertainment or a gift expense, whichever is to your advantage.
Business gift expenses
If the nature of your job requires you to give gifts to customers, the cost of gifts given directly or indirectly to a customer is deductible up to a maximum limit. The following rules apply to gifts:
- You cannot deduct a gift of more than $25 per person (incidental costs, such as engraving on jewelry, or packaging and mailing, are not included in determining the cost of the gift).
- A gift to a customer’s family member is considered an indirect gift to that customer.
- If both spouses give gifts, they are treated as one taxpayer with one $25 limit per customer.
- Items costing less than $4, and used for promotional purposes, such as pens, key chains, mugs, etc., with the business name clearly imprinted, are not included in the $25 limit.
An item that could be categorized as either a gift or an entertainment expense is generally considered to be an entertainment expense, and hence subject to the 50% deduction rule.
You can deduct the ordinary and necessary costs of business-related transportation expenses incurred within the area of your tax home. Transportation expenses include the cost of transportation by air, rail, bus, taxi, etc., and the cost of driving and maintaining your car. This following transportation costs are deductible:
- Traveling from one workplace to another.
- Visiting clients.
- Traveling to a business meeting away from your workplace.
- Traveling from home to a temporary workplace, if you have more than one regular workplace.
Commuting expenses are never deductible, and include the following:
- Traveling between your home and your regular place of business.
- Parking fees incurred at your regular place of business.
- Traveling from a union hall where you get your assignment, to your place of work.
If you use your own car, van, pickup, or panel truck, for the purposes of performing your duties on your job, you can claim a deduction for the use of your vehicle. You can claim EITHER the standard mileage rate OR the actual expenses for operating your vehicle on the job.
The standard mileage rate is a rate allowed per mile for every business mile traveled. You can claim mileage at a standard rate of 51 cents per mile for each business mile traveled for the period 1/1/2011 to 6/30/2011, and 55.5 cents per mile for the period 7/1/2011 to 12/31/2011.
You cannot claim the standard rate if:
- You used the car for hire (for example, as a taxi).
- You operate five or more cars at the same time.
- You claimed depreciation, or claimed a Section 179 deduction (see chapter 12) in an earlier year.
- You are a rural mail carrier who received a qualified reimbursement.
Your actual expenses that can be deductible include the following:
- The cost of lease payments.
- Tires, gas, oil.
- Insurance, registration fees, and licenses.
If you opt to claim your actual expenses, you must first of all ascertain your total expenses, and then divide your total expenses between business use and personal use, based on the number of miles driven for each purpose.
You can claim your business related parking fees and tolls as an additional deduction, whichever method you use.
If you are an employee, you cannot deduct any interest paid on a car loan. This applies even if the car is used 100% for business. However, if you are self-employed you can deduct the part of the interest expense that represents the business use of the car.
The cost of traveling between home and regular job is considered commuting expenses and is not deductible. If you have two workplaces, you can deduct the cost of traveling from one workplace to the other.
Business use of your home deduction
You can claim a deduction for the business use of your home if you use part of your home for your employer’s business. There are some tests that you must meet to be eligible for this deduction:
- To deduct expenses for business use of the home, part of your home must be used regularly and exclusively for your employer’s business.
- You cannot deduct business expenses for any part of your home that you use for both personal and business purposes.
- The use of your home must be for your employer’s convenience.
- You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.
Deductible expenses for business use of your home include the business portion of real estate taxes, deductible mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs. Generally, the amount of your deduction for whole-house related expenses, like utilities, is limited to the square footage of the area you’re using for business purposes. You may not deduct expenses for lawn care in general, or for painting a room not used for business.
You must use the worksheet in Publication 587,Business Use of Your Home, to figure your deduction. You claim this deduction on line 21 of Schedule A.
(Off-the-shelf tax software will effectively bring up and complete theBusiness Use of Your Home worksheet for you)
Job-related education expenses
You may be able to deduct job-related education expenses paid during the year, as an itemized deduction on Schedule A. These expenses are also subject to the 2% of AGI limitation (see below).
To be deductible, your expenses must be job-related, and must be for education that is:
- Required by your employer or by law, to keep your present salary, status, or job.
- Required to maintain or improve the skills needed in your present work.
Although the above requirements may be met, no deduction will be allowed on Schedule A, if the education is:
- Needed to meet the minimum education requirements for your current job or trade.
- Part of a program of study that can qualify you for a new job or trade, even if you have no plans to enter that job or trade.
If you are not allowed to deduct your job-related education expenses on Schedule A, you may however, be able to deduct them of Form 1040, as a tuition and fees adjustment, or as a lifetime learning credit.
Deductible job-related education expenses include the following costs:
- Tuition, books, lab fees, supplies and similar items.
- Certain transportation and travel costs, including driving from work to school.
- Transportation from home to school if you are regularly employed and go to school on a temporary basis.
- Other educational expenses, such as costs of research and typing a paper.
- Travel, meals, and lodging for overnight travel, to obtain qualified education.
You must keep proper records to prove your education expenses; otherwise the IRS will disallow them in the case of an audit.
Employer reimbursement plans
If your employer does not reimburse you for your work-related expenses, any allowable expense in excess of 2% of your adjusted gross income is fully deductible on Schedule A.
If your employer does reimburse you, the deductibility of the expense depends on the type of reimbursement plan you have. There are two types of employer reimbursement plans – an accountable plan and a non-accountable plan.
An accountable plan
Under an accountable plan, your employer’s reimbursement or allowance arrangement must require you to: (a) adequately account your expenses to your employer, and (b) return any excess reimbursement or allowance.
The rules under an accountable are as follows:
- Your employer reimburses you for all the work-related expenses that you incurred, upon you accounting to your employer for all your expenditure.
- Reimbursements are not taxable, and your employer should not include them in wages on your Form W-2.
- You cannot claim a deduction for any amount for which you have been reimbursed.
A non-accountable plan
Under a non-accountable plan:
- You do not account to your employer for the work-related expenses that you incurred.
- The entire reimbursement is included as wages in box 1 of your Form W-2, and is treated as taxable income.
- You figure your eligible work-related expenses on Form 2106, Employee Business Expenses, and deduct them on Schedule A.
Completing Form 2106
You must complete Form 2106 to figure your deductible work-related expenses, which include:
- All your travel, car, and other local transportation expenses incurred under a non-accountable plan, whether or not you are reimbursed for them.
- All other expenses for which you are reimbursed under a non-accountable plan.
- Any expenses for which you are not reimbursed under an accountable plan.
Your expenses from Form 2106 are claimed on line 21 of Schedule A. However, you can only deduct the amount that exceeds 2% of your adjusted gross income. For expenses for items such as safety equipment, uniforms, protective clothing and dues, for which you have not received reimbursement, these can be entered directly on line 21 of Schedule A (you do not have to use Form 2106).
It is imperative that you keep proper records to support all your employee business expenses, especially if you plan to deduct travel, entertainment, gift, local transportation, and car expenses. The records should be in written format, and you should retain your bills, receipts, and cancelled checks. If you are audited and cannot provide the records to support your deductions, it is quite likely that the IRS will disallow the deductions.
Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. For example, a hotel receipt is enough to support expenses for business travel if it has all the following information: (a) the name and location of the hotel, (b) the dates you stayed there, (c) separate amounts for charges such as lodging, meals, and telephone calls. A restaurant receipt is enough to prove the expenses for a business meal if it has all of the following information: (a) the name of the restaurant, (b) the number of people served, and (c) the date and amount of the expense.