Posted on February 15, 2013May 31, 2016 by Jan Roberg

Employee Business Expenses: How to Claim Them (Part 2)

Photo by NewsRover on Flickr.com

Note: before you read this post, you should really see “Deducting Employee Business Expenses on Your Tax Return (Part 1)” first to see if you should even consider claiming them.

Okay, so you’ve decided that it makes sense for you to be reporting your job expenses on your tax return. Generally, people who report employee business expenses are in sales; folks who do a lot of driving and a lot of business entertaining. Those are the expenses I’m going to look at today.

Business miles: I have a lot of blog posts about mileage, usually I’m writing about self-employed people, but the rules for claiming mileage are the same for employees. If you are commuting to the office—that’s not a deductible expense. If you’re driving around town meeting clients—that is deductible.

For example: let’s say your average round trip commute is 20 miles every day. The average person commutes to work 250 days out of the year so if your commute is 20 miles a day, you can expect your commuting miles to be 5000 miles a year. That’s 5000 miles you can’t claim as a business expense.

But, let’s say you kept really good records of your business miles. You traveled 17,000 miles on business (including your commute) during the year. That means you drove 12,000 deductible miles and that’s pretty significant. (17,000 – 5,000 is 12,000 miles)

To claim your mileage, you’ll need to know what type of car you drive, and the year, make, and model. Also, when did you start using it for work? The paperwork is going to ask you how many business miles you drove, how many commuting miles, and how many other miles (they mean personal—picking up the kids at school, buying groceries, and stuff like that.)

Do not lie about the mileage! It is the most audited piece of any tax return. Keep a log, use MapQuest, and learn to read your odometer. Don’t make stuff up. Most people over estimate their business mileage.

Use our FREE mileage log on our downloads tab: http://robergtaxsolutions.com/free-downloads/. This is FREE to disburse amongst your family or friends.

Business entertaining: The business lunch. Just because you happen to have a receipt for eating a meal in a restaurant doesn’t make it a legitimate business expense. If you learn nothing else from this post, learn to write on your receipt. Who did you eat with and what was the meeting about? It doesn’t have to be fancy: Fred—networking, Marge—advertising, Peggy—sales call. Enough to jog your memory if you get asked.

Dinner with your spouse is not a deductible business expense even if you’re talking business. Don’t be naive. The receipt for the fancy restaurant with the $200 dinner dated February 14^th sure as heck better be well substantiated for business if you want to float that one by the IRS. Same goes for the McDonald’s Play Place, how many people really are conducting business there? (Okay, full disclosure, I’ve got a business client who does hold business meetings at McDonald’s—it works with balancing family duties, but the meetings are well documented.)

Remember, most business meals are in the 50% category; meaning that if you had $1,000 worth of business meals it only counts as a $500 deduction on your tax return.

Employee business expenses are a popular target for IRS audits. It doesn’t mean you shouldn’t claim them though, it just means that you need to be extra careful. Make sure you document everything. Write on your receipts, keep a log book, hold onto your proof and you’ll be just fine with your deductions.

Posted on February 12, 2013May 31, 2016 by Jan Roberg

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

Photo by brizzle born and bred on Flickr.com

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.

Posted on October 21, 2011May 31, 2016 by Jan Roberg

I Lost My Job, Now What? Tax Issues of Unemployment, Part 5: What Can I Deduct?

You may have heard about some of the things that you can deduct if you’re looking for a job: copying and mailing your resume, trips to another city for a job interview, fees you may pay to a headhunter, etc. Basically, any costs that you incur in trying to obtain a new job are considered tax deductible—but before you get too excited about that, let me explain the restrictions. When all is said and done, the likeliness that you’ll get a deduction for your job search is pretty slim.

First, you can only deduct your job search if you are looking for a job in the same career field—and boom, college students looking for their first job after graduation are automatically excluded because you have to already be in a career. For example; let’s say you’re a cop and you get laid off, but you also have a degree in accounting. You can write off your expenses if you’re looking for police work, but not if you’re looking for an accounting job.

Okay, so Dirty Harry would not be looking for an accounting job.

Sorry, I got a little off track. Anyway, the next issue you have to deal with in claiming these deductions is the 2% limitation rule. That means that any expenses that you deduct will have to be more than 2% of your income. So if you only spend $50 on copying and mailing your resume, then your income will have to be less than $2,500 for you to be able to take a deduction. Let’s face it, if your income is under $2,500 for the year—you don’t need a deduction!

But suppose you had some serious job search expenses—you took a few flights that were not reimbursed by the company, add a few hotel stays, paid a fee to an employment agency, etc. Maybe you spent $4,000 on job hunt expenses. Now if you had income of $40,000 before you were laid off, then your 2% threshold would be $800—that would give you a $3,200 deduction on your schedule A. So this is starting to look pretty good right? But what if you don’t have any other deductions to claim on your schedule A? You don’t own a home so there’s not real estate tax or mortgage interest to deduct. Maybe your other deductions only total $2,000. That means you’d still be better off claiming your standard deduction so there’s still no tax benefit for your job search expenses.

But that doesn’t mean you shouldn’t keep track of those expenses. Save your receipts and keep track of that mileage. Despite my gloomy forecast about being able to claim those expenses they just might come in really handy. For example: let’s say you’re in marketing. You join several networking groups, use your cell phone as a business line, meet with several different people over lunch to discuss opportunities, and you print up some personal business cards. Then company X needs a marketing guy to do a project for them—not a permanent hire but just a subcontracting job. They call you. At tax time, you don’t get a W2, you get a 1099MISC because you were contract labor. Suddenly, all those receipts become very handy because you can use many of them as self employed business expenses. Now, instead of being worthless, they are incredibly valuable deductions because 1099 income is taxed at the self-employment rate plus your regular tax rate.

When making spending decisions about your job hunt, make the assumption that you’ll get no tax benefit from what you’re doing. Make your decisions based upon, “Is this a smart move for me to make or not?” If you manage to get a deduction for it, great—but if you don’t, you won’t feel cheated because you’ll know that you spent the money for the right reason.

Posted on March 14, 2011May 31, 2016 by Jan Roberg

The Alternative Minimum Tax for Dummies

Okay, first, if you’re paying Alternative Minimum Tax, you’re probably not a dummy. Most people who have to pay the Alternative Minimum Tax (AMT) are highly paid employees. If you were really a dummy, you wouldn’t have a job that makes you pay AMT. That said, AMT taxes are really confusing and can make you feel like an idiot. I’ll try to make some sense of it here.

Why do we even have the AMT? Good question! Our tax laws have benefits for certain kinds of income and special deductions and credits for certain expenses. For example, you don’t pay tax on the interest from a munincipal bond and you get a tax deduction for paying mortgage interest on a house. If a person plays his cards right, he could drastically reduce his tax by taking advantage of these deductions. Congress created the AMT in 1969 so that high income taxpayers who claim lots of deductions still wind up paying income tax. That was the intention of the law—to make things fair.

Why is AMT such a pain in the behind now? For one thing, the AMT wasn’t indexed for inflation. What was considered to be wealthy in 1969 is fairly middle-class in 2011. People who were never originally targeted for the AMT are now subject to AMT taxes. Congress passed legislation last December for an “AMT patch” to adjust for inflation. The patch will be good for 2010 and 2011, but if they don’t make some type of permanent adjustment, we’ll be dealing with this over and over again starting in 2012.

Who has to pay AMT? Using the IRS definition: You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.

How’s that in plain English? For most people, if you don’t itemize your deductions, you probably won’t have to pay AMT. If you do itemize, one big deduction people lose has to do with employee business expenses—like when sales people take a deduction for their mileage, those people get hit with AMT. If you’re a salesperson who claims employee business expense deductions on your tax return, you’re much more likely to be hit with AMT than a person who doesn’t.

Other AMT hot spot issues are your state income taxes that you paid, and mortgage interest expense. With your mortgage, you can deduct the interest on the money that you used to purchase your home or improve your home. But if you refinanced your home to pay off a credit card, that part of your interest payment won’t be a deduction for you on the AMT form. Also, if you had enough medical expenses to claim a deduction on your regular return, it will be reduced or eliminated when calculating the AMT.

There are lots of items that affect the AMT, but those are ones that I see regularly when I’m doing tax returns with AMT. There are things like mining costs, intangible drilling costs, and research and experimental costs. I’m sticking with the issues that are fairly common.

If you’re using tax software, it will calculate the AMT for you automatically. You’ll notice that if your AMT is lower than your regular tax, you don’t get your taxes lowered. You only get to see the AMT tax if you owe more. (Doesn’t seem quite fair does it?)

If you’re still doing your return by hand, or just want to estimate of you will have to pay AMT for next year, you can use the AMT assistant on the IRS website. http://www.irs.gov/businesses/small/article/0,,id=150703,00.html