The Effect of 2018 Tax Reform
The Tax Cuts and Jobs Act (TCJA) ended many itemized deductions, deduction for unreimbursed employee business expenses, when it was signed into law in December 2017. The TCJA eliminates the deduction for unreimbursed employee business expenses for tax years 2018 through 2025. You can still claim this deduction if you haven’t yet filed your 2017 tax return, however. You might even be able to go back and file an amended return to claim it if you failed to do so when you could have. You have a three-year window of time to file an amended return starting from the date when you filed the original tax return or two years from the date when you last made a tax payment on that return, whichever is later. Some employees are exempt. Armed Forces reservists, fee-basis state or local government officials, qualified performing artists, and employees with impairment-related work expenses can still claim this deduction.
Calculating Itemized Deductions
This is an itemized deduction, so you’ll have to go through all the recordkeeping and calculations that itemizing entails if you’re going to claim it. It will take you longer to prepare your tax return, and it will most likely cost you more if you hire someone to prepare your return for you. Itemizing also means you can’t claim the standard deduction for your filing status, so it’s not in your best interest to itemize if the total of all your itemized deductions doesn’t exceed the standard deduction you’re entitled to. You’ll actually end up paying more in tax dollars. It might be gratifying to use those expenses to shave a smidgen off your tax obligation, but you might do better to ask your employer to reimburse you for what you spent instead.
Eligibility for the Employee Business Expense Deduction
To take the tax deduction, your employer cannot have reimbursed you for these expenses, given you an advance toward these costs, or an allowance to pay for them. If you had to give your employer an accounting explaining exactly what the money was spent on, and if you had to return any money left over, you most likely received an advance or an allowances. Those expenses are not deductible. Another rule states that the things you spend money on must be ordinary and necessary business expenses for your employer. “Ordinary” means that most people in your line of work, or their employers, spend money on the same thing. “Necessary” means that the purchase or expense was more or less integral to doing business.
Vehicle Expenses
These include costs associated with using your personal vehicle for work-related reasons. You can either deduct a portion of your actual driving expenses based on your work-related mileage, or you can use the standard mileage rate set by the IRS each year. The rate was 56 cents a mile in 2021 and is 58.5 cents per mile for 2022, if you’re an employee who still qualifies for this deduction. Allowable miles are limited to getting from one workplace to another, visiting clients or customers, going to a business meeting away from your regular workplace, or getting from your home to a temporary workplace when you have one or more regular places of work. Commuting is not included.
Travel, Meals, and Entertainment
Travel expenses include the cost of hotels, meals, airfare, and car rental if you must travel away from your home for business at least overnight. After the TCJA was passed, business entertainment expenses were no longer deductible. For example, you cannot deduct a sporting event, concert, or trip to a resort. Meal expenses are still deductible, and you will usually be limited to 50% of allowable expenses.
Other Business Expenses
These are any expenses that aren’t included in the above categories, such as the cost of business cards, subscriptions to trade and business publications, home office expenses, business gifts, and work-related education. They can also include any tools or equipment that might be necessary to doing your job.
How to Deduct Employee Business Expenses
Claiming employee business expenses begins with completing Form 2106 and calculating the deduction you’re entitled to. If you weren’t reimbursed by your employer, you only need to fill in steps 1 and 3 in Part I. You’ll need to fill out Part II if you had vehicle expenses. Then, add your deduction to the Schedule A form, which is the form you must use to itemize your deductions. If you are using itemized deductions, you cannot take the standard deduction. The total of all of your itemized deductions should exceed the amount of the standard deduction you’re entitled to or else you’ll be paying more taxes than you have to.
The AGI Limitation
Miscellaneous itemized deductions subject to the 2% floor have been suspended until 2026. Previously, all miscellaneous deductions were reduced by 2% of your adjusted gross income (AGI). What was left over was the amount you could claim as a tax deduction. For example, you could only claim a deduction for the amount of your total miscellaneous expenses that exceed $1,600, or 2% of $80,000, if your AGI was $80,000. You’d get a $200 deduction if you had $1,800 in expenses. Your expenses didn’t qualify for a deduction at all if all your miscellaneous expenses didn’t add up to 2% of your AGI.
Recordkeeping Requirements
Assuming you meet all these rules and you want to deduct your work-related expenses, the IRS might expect you to be able to substantiate them, particularly if the total is significant. You should have proof for each expense you claim, showing the description of what you spent the money on, as well as the amount, the business purpose and relationship, and the date and place where the expense was incurred.
