Deducting Employee Business Expenses on Your Tax Return (Part 1)

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People ask me every day, “I heard I can claim driving for my job on my taxes, can I?”  Or, “I spend a lot of money on lunches with clients, how do I deduct that?”   Or the most common one, “I just bought a new computer for home but I use it mostly for work, how do I write that off?”

These things all fall under the category of “employee business expenses”.  You’ll see a section for that on your Schedule A of your tax return, but if you’re serious about claiming them, you’ll be using form 2106—the number from that form gets rolled onto your schedule A.

Before you even try to start deducting employee business expenses—here’s some things you need to know.

The Basics

1.  If your employer reimburses you for something—you can’t deduct it…  Example:  you fly to Chicago for a business trip and charge it all on your American Express Card.  You pay American Express but then you submit an expense report to your employer who writes you a check reimbursing you for your trip expenses.  That’s called a reimbursable plan and you cannot claim the trip as a deduction.

2.  If your employer pays for the expense up front—you can’t deduct it.  Recently I had a young man in my office wanting to claim 69,000 miles on his taxes.  Yes, that’s a lot of miles but it was perfectly in line with his occupation and he had the documentation to prove it.  But the income didn’t match up—there wasn’t enough income in his W2 to pay for the gas to drive the vehicle that far.  It turns out that the vehicle was owned by his employer and his employer paid for all the gas and maintenance.  There’s no deduction to the employee in this case.

3.  If your employer pays you a stipend for something, you may still be able to claim the expense, but you have to deduct the stipend from your claim.  For example, I have a client who requires a cell phone and needs to drive for his job.  His employer gives him $100 a month towards the cost of the cell phone and gas.  The employee doesn’t submit any special paperwork to his boss; he just gets the $100 a month no matter what.  That’s called a “non-reimbursable plan. “  We prepare his 2106 form claiming all of his business related expenses, and then we back out the $1200 extra that his employer pays him for his phone and gas expense.  It’s important to show on your tax return the stipend and that you’ve backed it out of your calculations.  This is probably the number one point of contention when these returns get audited.

4.  In order to claim an employee business expense deduction, your business expenses must be more than 2% of your adjusted gross income for it to even register on your tax return.  For example, let’s say you made $50,000 last year and you took a special training class for work which cost $950.  Well, 2% of $50,000 is $1,000 so you wouldn’t have even spent enough for it to begin to count.  But let’s say you spent $1,350 on that training class.  Well now you’ve got enough to make a claim—you could claim $350 on your schedule A.  But here’s the next issue—if you don’t have enough other items on your Schedule A to make itemizing your deductions worth it, then you still don’t have a deduction.

5.  it’s harder to claim employee business expenses if you’re married.  If you are married, when figuring the 2% threshold figure, you use both incomes together.  For example, let’s say you have a job where you make $30,000 a year and you have $1,000 in employee business expenses.   You’re clearly over the threshold (30,000 x 2% is $600) so you have a $400 deduction.  But if you’re married and your spouse also makes $30,000 a year, then the threshold just moved to $1,200 and you’ve completely lost that deduction.  (30K plus 30K = 60K.   60K times 2% = $1,200.)

You hear a lot in the news about claiming employee business expenses, and for some people, it’s a great deduction.  But as you can see from the list above, it’s a rather limited deduction for many people.