Employee Business Expense Deductions Text Size:

Some people are paid for their expenses for work, for instance, travel is reimbursed or special clothing is provided by the employer. For most employees, however, that's not the case; you pay for some job-related needs with your own money.

Fortunately, the Internal Revenue Service (IRS) realizes this fact, and lets you deduct some of your work-related expenses on your federal income tax return, such as certain costs for travel and entertainment.

Like most things in the tax code, taking the deductions isn't always as easy and straightforward as it might seem. There are some strict rules on what can be deducted, how it's deducted, and how much you can deduct. Also, your deductions are directly linked to how your employer treats your expenses, and you have to keep detailed records to substantiate or "prove" your expenses.

How Does Your Employer Treat Expenses?

Generally, if your employer reimburses or repays you for all of your business-related expenses, then you don't have any tax deductions. On the other hand, if your employer doesn't repay all or part of an expense, you can take a deduction for what wasn't reimbursed.

Most employers treat employee business expenses either under an accountable or non-accountable scheme. In an accountable scheme, you:

• Pay or have tax deductible business expenses
• Have to give your employer proof of the expenses within a reasonable time period, like within 30 days of paying or having the expense
• Are required to give back to your employer any excess reimbursement or allowance

Under an accountable plan, you don't have to report reimbursements as income on your tax return. Rather, your employer subtracts the reimbursements from your taxable income when filling out your W-2 form, and so you won't pay taxes on the reimbursements.

If your employer uses a non-accountable plan and reimburses you for your expenses (or gives you an "allowance" to help you pay the costs as they come up), these payments are usually included on your W-2 as income. If the payments aren't included on your W-2, it's your responsibility to report them as income on your tax return. Either way, you're taxed on the reimbursements as income. So, you deduct the qualifying business expenses, that way you're only taxed on your true salary and wages.

Regardless of the scheme used by your employer, you'll have to report any deductions on a special IRS form, and then take an itemized deduction.

Also, keep in mind that you might not be able to take the deduction, even if it's valid, because they're limited to amounts more than 2% of your adjusted gross income (AGI). For example, if your AGI is $50,000, then you can deduct only the amount that's over $1,000 ($50,000 X 2%). So, if your deductible expenses are $1,200, then you can deduct $200. If your expenses are $998, you have no deduction. You can still list the $998 on your tax return, but it won't lower your taxes; it will just be ignored.

Substantiation

You have to keep records in order to back-up your claimed deduction. Keep some type of log or diary to record the expenses. In addition, you'll need documentary proof of the expenses, such as cash register receipts or paid bills. These records not only will help you fill out your tax return properly, but will also help you explain the deductions in case you're audited. Generally, you should keep these documents for at least three years.

Deductions

There are numerous business expense deductions that you might be able to take, but some of the most common deductions include:

Travel

Generally, you can't deduct the costs or expenses you pay for getting to or from work, whether you drive your own car or take a taxi or bus. However, you can deduct the costs of travel if you have to go from one workplace to another, such as when your employer has more than one office that you have to go to on occasion. Also, if you have a home office that's your principle work place, you can deduct the cost of traveling between your home office and your employer's offices, work places or to go see clients or customers.

If you have to travel out-of-town for business, you can usually deduct:

• The cost of the airline, train, or bus ticket, or the costs of driving your car
• Rental car costs, but only that part of the cost that's used for the job
• Fares you paid for taxis or other transportation needed for the job
• Hotel costs
• The cost of meals and entertaining customers, but these deductions are limited to 50%

Car

If you own or lease a car and use it for work, you can deduct part of the costs of operating it. During the year, you need to keep detailed records of when your car was used for work, as well as maintenance records and receipts. You can calculate the deduction by using the IRS' standard mileage rate, which is 50.5 cents per mile, or you can use the actual cost method and deduct the percentage of the costs (gas, maintenance, insurance, etc.) for using the car for work. Note that a special mileage rate of 58.5 cents per mile applied for the second half of 2008 due to high fuel costs, and the standard rate for 2009 is 55 cents per mile.

"Miscellaneous" Expenses

The IRS allows you to take deductions for various other work-related expenses, such as:

• The costs of tools you buy for use at work, but only if the tools break or wear-out and you throw them away within 1 year from the date you bought them
• Fees or dues you pay as a member of a union or professional or trade association
• Union dues and initiation fees
• Up to $25 of business gifts that you give to any one person, so if you give one person a $50 gift, you can only deduct $25
• The cost of buying and caring for work clothes, but only if the clothes are required by your employer and the clothes aren't suitable for everyday wear. Clothing for firefighters and police officers are good examples

Questions for Your Attorney

• I forgot to give my employer an expense report for some expenses I had several months ago, and the expenses were more than the amount my employer will reimburse me for. Can I still claim the deduction?
• Can I deduct the expenses for my wife if she travels with me on a business trip and helps me do my paper work and drives me to and from business meetings?
• What can happen if I get audited and I can't find all of my receipts and records for the business expenses I deducted?

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