Are Employee Business Expenses Deductible?

Employee business expenses, incurred by individuals while performing their job duties, are a complex area for taxpayers. Understanding whether these expenses can be deducted has become a source of confusion for many. Federal tax laws have significantly changed how employees can treat work-related costs. While the ability to deduct many such expenses has been largely curtailed, specific situations and types of employment still allow for certain deductions. This article clarifies the current landscape surrounding employee business expenses and their deductibility.

Understanding the General Rule

For most W-2 employees, unreimbursed business expenses are no longer deductible on federal income tax returns. This change came into effect with the Tax Cuts and Jobs Act (TCJA) of 2017, which suspended miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) limit for tax years 2018 through 2025. This means common work-related costs paid by an employee and not reimbursed by their employer cannot be claimed.

Examples of expenses no longer deductible include unreimbursed travel costs, such as airfare or lodging for business trips, and mileage for using a personal vehicle for work purposes. Meals consumed while traveling for business, even if ordinary and necessary, also fall under this non-deductible category. Costs associated with maintaining a home office for the convenience of the employer, professional development courses, and specialized uniforms not suitable for everyday wear are no longer deductible for most employees.

The intent of the TCJA was to simplify the tax code, but it effectively eliminated a common deduction for many employees. Consequently, individuals cannot reduce their taxable income by the amount of these unreimbursed expenses. This shift places a greater emphasis on employer reimbursement policies.

Qualifying for Specific Exceptions

While the general rule limits deductions for most employees, federal tax law provides exceptions for certain individuals. These allow specific groups to deduct business expenses under defined conditions. Each exception is narrowly tailored to address unique employment circumstances.

Armed Forces Reservists can deduct unreimbursed travel expenses when traveling over 100 miles from home for duties. Expenses include transportation, lodging, and meals. This deduction is claimed as an adjustment to income, reducing gross income before calculating adjusted gross income.

Qualified Performing Artists can deduct unreimbursed employee business expenses. To qualify, an individual must have adjusted gross income of $16,000 or less before deducting these expenses. Their gross income from performing services must exceed 10% of their adjusted gross income, and their performing artist business expenses must exceed 50% of their gross income from performing services. This deduction is also an adjustment to income.

Fee-Basis Government Officials can deduct their unreimbursed employee business expenses. These are state or local government employees compensated on a fee basis. The deduction applies to expenses paid or incurred in connection with their official duties. This deduction is also claimed as an adjustment to income.

Individuals with impairment-related work expenses can deduct these costs. This applies to employees with disabilities who incur necessary work expenses. Examples include attendant care services or specialized equipment. These expenses are deductible as itemized deductions, and they are not subject to the 2% adjusted gross income limitation that applied to other miscellaneous itemized deductions before the TCJA.

The Role of Employer Reimbursement Plans

The way an employer reimburses employee business expenses impacts their tax treatment for the employee. Understanding the distinction between “accountable plans” and “non-accountable plans” is important. These classifications determine whether the reimbursement is considered taxable income to the employee and if the employee can deduct the underlying expenses.

An accountable plan is an employer-sponsored arrangement that meets specific Internal Revenue Service (IRS) requirements. Under such a plan, expenses must have a business connection, meaning they were incurred for business. Employees must also substantiate these expenses to the employer within a reasonable period. Furthermore, any excess advance or reimbursement must be returned to the employer within a reasonable period.

Reimbursements received under an accountable plan are not included in the employee’s gross income and are not reported on their Form W-2. Since these are not taxable income, the employee does not need to deduct the expenses on their tax return. This arrangement is favorable for employees, as it avoids both income inclusion and the need for personal deduction.

In contrast, a non-accountable plan does not meet the IRS requirements for an accountable plan. For example, a fixed allowance without requiring substantiation or return of excess amounts is non-accountable. Reimbursements paid under a non-accountable plan are included in the employee’s gross income.

These reimbursements are reported as wages on the employee’s Form W-2 and are subject to income tax withholding and employment taxes. While the employee receives the reimbursement, they cannot deduct the underlying expenses on their federal income tax return due to the suspension of miscellaneous itemized deductions. This makes non-accountable plans less tax-efficient.

Essential Record Keeping

Maintaining thorough and accurate records for business expenses is an important practice, regardless of whether those expenses are deductible or reimbursed. Proper documentation is essential for substantiating costs to an employer for reimbursement purposes or to the IRS if an exception allows for a personal deduction. Without adequate records, proving expense legitimacy can be challenging.

For each expense, employees should retain receipts, invoices, canceled checks, or credit card statements. These should show the amount, date, and vendor. For travel, include records for lodging, airfare, and rental cars.

Beyond financial documents, employees must record the business purpose and relationship of any individuals involved. For example, a meal expense should note who was present and its business relation. For vehicle usage, a mileage log detailing date, destination, purpose, and miles driven is necessary.

These records serve multiple purposes. They enable compliance with employer reimbursement policies, ensuring timely repayment. In an IRS audit, detailed documentation provides proof to support claimed deductions or demonstrate proper exclusion of reimbursements. Failing to maintain records could result in expense disallowance or taxation of untaxed reimbursements.