Employee Business Expense Deductions
Often employees spend their own money in furtherance of their job. If these costs aren’t reimbursed, you may be able to get a tax deduction for them.
If your employer pays for or reimburses you for your business expenses, then you can’t deduct them. If your employer has an “accountable” plan, meaning that you must pay your own expenses and give your employer receipts or other proof of payment, then the expenses aren’t reported to you as income on your W-2 and you can’t deduct them. If your employee has a “non-accountable” plan, then anything your employer pays to you for reimbursement or any allowance given to you is reported as income to you on your W-2 and the only way to not pay tax on them is to deduct them.
If the expenses qualify, they are deductible as miscellaneous deductions on your 1040 Schedule A. Unfortunately you can deduct them only if you itemize deductions, and they are deductible only to the extent the total of your miscellaneous deductions exceeds two percent (2%) of your adjusted gross income. For example, if your adjusted gross income is $30,000, you must have more than $600 in miscellaneous deductions before they save you any taxes.
The 2% floor may seem high, but many folks overlook costs that could be deductible and could get them over the 2% floor.
To be deductible your expenses must have been required for you to carry out the job for which you were hired and must be “ordinary and necessary.” An “ordinary” expense is one that is common and accepted in your line of work. A “necessary” expense is one that is appropriate or helpful for the work you do, even if it’s not absolutely indispensable to your business.
The expenses are deductible only if they are not reimbursed by your employer. If you receive reimbursement for an expense, then it cannot be deducted.
Deductible expenses include union dues, tools, job-search expenses for a job in your current occupation, tools and supplies used in your work, work clothes and uniforms and their upkeep costs, medical examinations required by an employer, education that is employment related, dues to chambers of commerce and professional societies, home office used regularly and exclusively for your work when your employer does not provide you a place to work, legal fees related to doing or keeping your job, malpractice insurance premiums, passport for a business trip, subscriptions to professional journals and trade magazines related to your work, depreciation on a computer or cell phone required to do your job, and travel, transportation, and gift expenses (up to $25 to any one person) related to your work. Only 50% of the cost of meals and entertaining customers is deductible. Commuting expenses are not deductible. If you have more than one job, you can deduct the cost of traveling between them.
If you use equipment or have expenses for both business and personal purposes, you must allocate the expense between the two types of usage. The allocation must be made on a reasonable basis. If a car is used partly for business and partly for personal use, the allocation is based on the number of miles driven during the year for business, compared to the miles driven for personal use. You can use the standard mileage rate of 51 cents per mile, or you can use the actual cost method and deduct the percentage of gas, maintenance, insurance used for work. If you use a room in your home as a home office, the allocation is based on the number of square feet in the office as compared with the square footage of the entire home.
Some expenses must be treated as capital expenditures. In general, the cost of equipment used for more than one year must be treated as a capital expenditure and depreciated. Employees may claim a depreciation deduction for equipment they need in their job like a cell phone, or a computer. Use Form 4562, Depreciation and Amortization, to compute the proper amount to deduct.
The cost of work clothes and uniforms is deductible only if the clothes are required by your employer and the clothes aren’t suitable for everyday wear. A police uniform is a good example.
The total of unreimbursed employee business expenses is entered on line 21 of Schedule A of your 1040. Detail your expenses on either Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses.
Don’t forget other miscellaneous deductions such as tax advice and tax preparation fees, the cost of a safe deposit box to store investment-related material, and legal fees to collect income such as alimony.
If you are an eligible educator, you can deduct up to $250 ($500 if married filing jointly and both spouses are educators) of any unreimbursed expenses you paid for books, supplies, computer equipment, other equipment and supplementary materials that you use in the classroom. This deduction is an “above the line” deduction deductible on line 23 of Form 1040. It is not deducted with other employee business expenses and is not subject to the 2% floor for miscellaneous itemized deductions.