Can Employees Write Off Business Expenses?
Understand the current tax rules for employee business expenses. Learn why most deductions are suspended and how accountable reimbursement plans serve as an alternative.
Many employees who pay for work-related costs out of pocket wonder if they can deduct these expenses on their tax returns. The rules governing these deductions have seen substantial changes, altering the ability for most workers to write off these costs. Understanding the current tax landscape is important, as the treatment of unreimbursed employee expenses is not as straightforward as it once was.
The General Suspension of Employee Expense Deductions
For most W-2 employees, unreimbursed business expenses are no longer deductible on federal income tax returns. This change is a result of the Tax Cuts and Jobs Act of 2017 (TCJA), which suspended miscellaneous itemized deductions subject to a 2% of adjusted gross income (AGI) threshold. This suspension is in effect for tax years 2018 through 2025.
Before this change, employees could deduct qualifying job-related expenses that exceeded 2% of their AGI. For example, an employee with a $60,000 AGI and $2,000 in unreimbursed expenses could have previously deducted $800, which is the amount exceeding the $1,200 threshold.
This suspension covers a wide range of common work-related costs. Expenses such as professional society dues, non-reimbursed home office costs, work-related travel, and the cost of work supplies or tools are now non-deductible for most employees.
The rationale behind this suspension was to simplify the tax code and help offset revenue loss from other tax cuts within the TCJA. This suspension is temporary, and the deduction for unreimbursed employee expenses is scheduled to be reinstated in 2026 unless Congress passes new legislation.
Exceptions for Specific Employee Categories
Despite the broad suspension, federal tax law provides exceptions for a few specific categories of employees. These individuals can continue deducting unreimbursed business expenses. These deductions are claimed as adjustments to income, meaning taxpayers do not need to itemize to benefit from them.
Armed Forces Reservists
Members of the reserve components of the Armed Forces, including the Army, Navy, Air Force, Marine Corps, Coast Guard Reserve, Army National Guard, and Air National Guard, can deduct unreimbursed travel expenses. To qualify, the reservist must travel more than 100 miles from home for their service. Deductible expenses include costs for transportation, meals, and lodging.
Qualified Performing Artists
An individual who works as a performing artist can deduct job-related expenses if they meet several conditions.
- Performed services in the performing arts as an employee for at least two employers during the tax year.
- Received at least $200 in wages from each of those two employers.
- Had allowable business expenses that were more than 10% of their gross income from performing arts.
- Had an adjusted gross income, before deducting these expenses, that did not exceed $16,000.
Fee-Basis State or Local Government Officials
An official employed by a state or its political subdivision who is compensated partly or entirely on a fee basis can deduct their work-related expenses. This category includes public officials, such as justices of the peace or constables, who are paid for specific tasks rather than a salary.
Employees with Impairment-Related Work Expenses
Employees with physical or mental disabilities can deduct impairment-related work expenses. These are defined as costs for attendant care at the workplace and other expenses necessary for the employee to work. These deductions are not subject to the 2% of AGI floor that applied to other miscellaneous deductions before the TCJA.
Employer Reimbursement as the Primary Alternative
With the deduction suspended for most workers, the primary way for employees to cover work-related costs is through employer reimbursement. The tax treatment of these reimbursements depends on whether the employer uses an “accountable plan” or a “nonaccountable plan,” which determines if the reimbursement is taxable income.
An accountable plan is a reimbursement arrangement that meets three IRS requirements. The expenses must have a business connection, the employee must adequately account for them in a timely manner, and any excess reimbursement must be returned. When a plan meets these criteria, reimbursements are not counted as wages and are not subject to income or employment taxes.
If a reimbursement arrangement fails to meet one or more of these requirements, it is a nonaccountable plan. For example, a flat expense allowance provided without requiring documentation of actual costs is a nonaccountable plan. Under such a plan, all reimbursements are treated as supplemental wages and are included in the employee’s income on their Form W-2, subject to all income and employment taxes.
Process for Claiming an Allowable Deduction
Eligible employees must follow a specific process, which begins with detailed recordkeeping. Taxpayers must keep receipts for any lodging expenses and for any other business expense of $75 or more. For smaller expenses, detailed records of the amount, date, place, and business purpose are still required. For vehicle expenses, this means keeping a mileage log with the date, destination, business purpose, and mileage for each trip. This information is used to complete Form 2106, Employee Business Expenses.
After completing Form 2106, the total deductible expense is not entered on Schedule A as an itemized deduction. Instead, the amount is transferred to Schedule 1 (Form 1040), “Additional Income and Adjustments to Income.” This transfer integrates the deduction into the employee’s overall tax return.