EMPLOYEE BUSINESS EXPENSES
See also: IRS Publication 587 Business Use of Your Home
Tips You Should Know about Employee Business Expenses
If you paid for work-related expenses out of your own pocket, you may be able to deduct those costs. In most cases, you claim allowable expenses on Schedule A, Itemized Deductions. Here are several tax tips that you should know about this deduction.
1. Ordinary and Necessary. You can only deduct un-reimbursed expenses that are ordinary and necessary to your work as an employee. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is appropriate and helpful to your business.
2. Expense Examples. Some costs that you may be able to deduct include:
This list is not all-inclusive. Special rules apply if your employer reimbursed you for your expenses. To learn more, check out Publication 529, Miscellaneous Deductions. You should also refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.
3. Forms to Use. In most cases you report your expenses on Form 2106 or Form 2106-EZ. After you figure your allowable expenses, you then list the total on Schedule A as a miscellaneous deduction. You can deduct the amount that is more than two percent of your adjusted gross income.
4. Educator Expenses. If you are a K through 12 teacher or educator, you may be able to deduct up to $250 of certain expenses you paid for in 2014. These may include books, supplies, equipment, and other materials used in the classroom. You claim this deduction as an adjustment on your tax return, rather than as an itemized deduction. This deduction had expired at the end of 2013. A recent tax law extended it for one year, through Dec. 31, 2014. For more on this topic see Publication 529.
5. Keep Records. You must keep records to prove the expenses you deduct. For what records to keep, see Publication 17, Your Federal Income Tax.
1. Ordinary and Necessary. You can only deduct un-reimbursed expenses that are ordinary and necessary to your work as an employee. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is appropriate and helpful to your business.
2. Expense Examples. Some costs that you may be able to deduct include:
- Required work clothes or uniforms that are not appropriate for everyday use.
- Supplies and tools you use on the job.
- Business use of your car.
- Business meals and entertainment.
- Business travel away from home.
- Business use of your home.
- Work-related education.
This list is not all-inclusive. Special rules apply if your employer reimbursed you for your expenses. To learn more, check out Publication 529, Miscellaneous Deductions. You should also refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.
3. Forms to Use. In most cases you report your expenses on Form 2106 or Form 2106-EZ. After you figure your allowable expenses, you then list the total on Schedule A as a miscellaneous deduction. You can deduct the amount that is more than two percent of your adjusted gross income.
4. Educator Expenses. If you are a K through 12 teacher or educator, you may be able to deduct up to $250 of certain expenses you paid for in 2014. These may include books, supplies, equipment, and other materials used in the classroom. You claim this deduction as an adjustment on your tax return, rather than as an itemized deduction. This deduction had expired at the end of 2013. A recent tax law extended it for one year, through Dec. 31, 2014. For more on this topic see Publication 529.
5. Keep Records. You must keep records to prove the expenses you deduct. For what records to keep, see Publication 17, Your Federal Income Tax.
Work at Home? You May Qualify for the Home Office Deduction
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The IRS has the following six requirements to help you determine if you qualify for the home office deduction.
1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.
3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on Form 1040 Schedule C, Profit or Loss From Business.
6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.
1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
- as your principal place of business, or
- as a place to meet or deal with patients, clients or customers in the normal course of your business, or
- in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.
2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.
3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on Form 1040 Schedule C, Profit or Loss From Business.
6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.
Employee Business Expenses
Some employees may be able to deduct certain work-related expenses. The following facts from the IRS can help you determine which expenses are deductible as an employee business expense. You must be itemizing deductions on IRS Schedule A to qualify.
Expenses that qualify for an itemized deduction generally include:
If your employer reimburses you under an accountable plan, you should not include the payments in your gross income, and you may not deduct any of the reimbursed amounts.
An accountable plan must meet three requirements:
1. You must have paid or incurred expenses that are deductible while performing services as an employee.
2. You must adequately account to your employer for these expenses within a reasonable time period.
3. You must return any excess reimbursement or allowance within a reasonable time period.
If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages shown on your Form W-2. You must report the income and itemize your deductions to deduct these expenses.
Generally, you report unreimbursed expenses on IRS Form 2106 or IRS Form 2106-EZ and attach it to Form 1040. Deductible expenses are then reported on IRS Schedule A, as a miscellaneous itemized deduction subject to a rule that limits your employee business expenses deduction to the amount that exceeds 2 percent of your adjusted gross income.
Expenses that qualify for an itemized deduction generally include:
- Business travel away from home
- Business use of your car
- Business meals and entertainment
- Travel
- Use of your home
- Education
- Supplies
- Tools
- Miscellaneous expenses
If your employer reimburses you under an accountable plan, you should not include the payments in your gross income, and you may not deduct any of the reimbursed amounts.
An accountable plan must meet three requirements:
1. You must have paid or incurred expenses that are deductible while performing services as an employee.
2. You must adequately account to your employer for these expenses within a reasonable time period.
3. You must return any excess reimbursement or allowance within a reasonable time period.
If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages shown on your Form W-2. You must report the income and itemize your deductions to deduct these expenses.
Generally, you report unreimbursed expenses on IRS Form 2106 or IRS Form 2106-EZ and attach it to Form 1040. Deductible expenses are then reported on IRS Schedule A, as a miscellaneous itemized deduction subject to a rule that limits your employee business expenses deduction to the amount that exceeds 2 percent of your adjusted gross income.
Employee Business Expenses
If you are an employee, you may be able to deduct your work–related expenses as an itemized deduction (subject to limitations) on Form 1040, Schedule A. Additional information on this subject can be found in the instructions for the Form 1040, Schedule A. Also, you may refer to Topic 511 for additional information on business travel expenses.
Although commuting costs are not deductible, some local transportation expenses are. Deductible local transportation expenses include the ordinary and necessary expenses of going from one workplace (away from the residence) to another. If you have an office in your home that you use as your principal place of business for your employer, you may deduct the cost of traveling between your home office and work places associated with your employment. Refer to Topic 509 for information on home offices. You may deduct the cost of going between your residence and a temporary work location outside of the metropolitan area where you live and normally work. If you have one or more regular work locations away from your residence, you may also deduct the cost of going between your residence and a temporary work location within your metropolitan area. For information on transportation expenses related to your car, refer to Topic 510.
Business entertainment expenses and business gift expenses may be deductible, but subject to certain limits. For information on business entertainment expenses, refer to Topic 512. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses, for additional information on business expenses.
You must keep records to prove the expenses you deduct. For general information on record keeping, refer to Topic 305.
If your employer reimbursed you or gave you an advance or allowance for your employee business expenses that is treated as paid under an accountable plan, the payment should not be shown on your Form W-2 (PDF) as pay. You do not include the payment in your income, and you may not deduct any of the reimbursed amounts.
To be an accountable plan, your employer's reimbursement or allowance arrangement must include all three of the following rules:
If you were reimbursed for travel or transportation under an accountable plan, but at a per diem or mileage rate that exceeds the Federal rate, the excess should be included in the wages on your Form W–2. The amount up to the allowance would be reported in box 12 of your Form W-2. If your actual expenses exceed the Federal rate, you must itemize your deductions to deduct the excess. For information about the Federal per diem rates, refer to Publication 1542 and for information regarding mileage rates refer to Publication 463.
Generally, you must use Form 2106 or Form 2106–EZ to figure your deduction for employee business expenses and attach it to your Form 1040 (PDF). Your deductible expenses are then taken on Form 1040, Schedule A, as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor. Topic 508 and Publication 529, Miscellaneous Deductions, also discusses the 2% floor and explains some of the other expenses that are deductible as employee business expenses.
Although commuting costs are not deductible, some local transportation expenses are. Deductible local transportation expenses include the ordinary and necessary expenses of going from one workplace (away from the residence) to another. If you have an office in your home that you use as your principal place of business for your employer, you may deduct the cost of traveling between your home office and work places associated with your employment. Refer to Topic 509 for information on home offices. You may deduct the cost of going between your residence and a temporary work location outside of the metropolitan area where you live and normally work. If you have one or more regular work locations away from your residence, you may also deduct the cost of going between your residence and a temporary work location within your metropolitan area. For information on transportation expenses related to your car, refer to Topic 510.
Business entertainment expenses and business gift expenses may be deductible, but subject to certain limits. For information on business entertainment expenses, refer to Topic 512. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses, for additional information on business expenses.
You must keep records to prove the expenses you deduct. For general information on record keeping, refer to Topic 305.
If your employer reimbursed you or gave you an advance or allowance for your employee business expenses that is treated as paid under an accountable plan, the payment should not be shown on your Form W-2 (PDF) as pay. You do not include the payment in your income, and you may not deduct any of the reimbursed amounts.
To be an accountable plan, your employer's reimbursement or allowance arrangement must include all three of the following rules:
- You must have paid or incurred expenses that are deductible while performing services as an employee.
- You must adequately account to your employer for these expenses within a reasonable time period, and
- You must return any excess reimbursement or allowance within a reasonable time period.
If you were reimbursed for travel or transportation under an accountable plan, but at a per diem or mileage rate that exceeds the Federal rate, the excess should be included in the wages on your Form W–2. The amount up to the allowance would be reported in box 12 of your Form W-2. If your actual expenses exceed the Federal rate, you must itemize your deductions to deduct the excess. For information about the Federal per diem rates, refer to Publication 1542 and for information regarding mileage rates refer to Publication 463.
Generally, you must use Form 2106 or Form 2106–EZ to figure your deduction for employee business expenses and attach it to your Form 1040 (PDF). Your deductible expenses are then taken on Form 1040, Schedule A, as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor. Topic 508 and Publication 529, Miscellaneous Deductions, also discusses the 2% floor and explains some of the other expenses that are deductible as employee business expenses.
Business Entertainment Expenses
Entertainment expenses that are both ordinary and necessary in carrying on a trade or business may be deductible if they meet one of the two tests discussed in Publication 463.
You must have records to prove the business purpose (under the applicable test) and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. For further information on record keeping, refer to Topic 305.
Generally, only 50% of food and beverage ("meal") and entertainment expenses are allowed as a deduction. For exceptions to the 50% limitation, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.
If you are an employee whose deductible business entertainment expenses are fully sustained and reimbursed under an accountable plan, the reimbursement should not be included in your wages on Form W-2 (PDF) and you should not deduct the expenses. If you are not reimbursed fully under an accountable plan, your expenses exceed the reimbursement you received under an accountable plan, or you are not reimbursed at all, use Form 2106 (PDF), or Form 2106-EZ (PDF) to report business entertainment expenses. These expenses, including expenses that exceed the reimbursement under an accountable plan, are carried over to Form 1040, Schedule A, and are generally subject to the 2% of adjusted gross income limit. Refer to Topic 508 for more information on the 2% limit, Topic 305 for more information on record keeping requirements, and Publication 463 for a definition of accountable and nonaccountable plans.
If you are self–employed, use Form 1040, Schedule C (PDF), or Form 1040, Schedule C-EZ (PDF), or if you are a farmer, use Form 1040, Schedule F (PDF) to deduct these expenses.
You must have records to prove the business purpose (under the applicable test) and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. For further information on record keeping, refer to Topic 305.
Generally, only 50% of food and beverage ("meal") and entertainment expenses are allowed as a deduction. For exceptions to the 50% limitation, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.
If you are an employee whose deductible business entertainment expenses are fully sustained and reimbursed under an accountable plan, the reimbursement should not be included in your wages on Form W-2 (PDF) and you should not deduct the expenses. If you are not reimbursed fully under an accountable plan, your expenses exceed the reimbursement you received under an accountable plan, or you are not reimbursed at all, use Form 2106 (PDF), or Form 2106-EZ (PDF) to report business entertainment expenses. These expenses, including expenses that exceed the reimbursement under an accountable plan, are carried over to Form 1040, Schedule A, and are generally subject to the 2% of adjusted gross income limit. Refer to Topic 508 for more information on the 2% limit, Topic 305 for more information on record keeping requirements, and Publication 463 for a definition of accountable and nonaccountable plans.
If you are self–employed, use Form 1040, Schedule C (PDF), or Form 1040, Schedule C-EZ (PDF), or if you are a farmer, use Form 1040, Schedule F (PDF) to deduct these expenses.
Business Travel Expenses
Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. Generally, employees deduct these expenses using Form 2106 (PDF) or Form 2106-EZ (PDF) and on Form 1040, Schedule A. You cannot deduct expenses that are lavish or extravagant or that are for personal purposes.
You are traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away.
Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals, or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.
In determining your main place of business, take into account the length of time you are normally required to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time spent at each location.
Travel expenses paid or incurred in connection with a temporary work assignment away from home are deductible. However, travel expenses paid in connection with an indefinite work assignment are not deductible. Any work assignment in excess of one year is considered indefinite. Also, you may not deduct travel expenses at a work location if it is realistically expected that you will work there for more than one year, whether or not you actually work there that long. If you realistically expect to work at a temporary location for less than one year, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.
You may deduct travel expenses, including meals and lodging, you had in looking for a new job in your present trade or business. You may not deduct these expenses if you had them while looking for work in a new trade or business or while looking for work for the first time. If you are unemployed and there is a substantial break between the time of your past work and you're looking for new work, you may not deduct these expenses, even if the new work is in the same trade or business as your previous work.
Travel expenses for conventions are deductible if you can show that your attendance benefits your trade or business. Special rules apply to conventions held outside the North American area.
Deductible travel expenses while away from home include, but are not limited to, the costs of:
The deduction for business meals is generally limited to 50% of the unreimbursed cost.
If you are an employee, your allowable travel expenses are figured on Form 2106 or Form 2106-EZ. Your allowable unreimbursed expenses are carried from Form 2106 or Form 2106-EZ to Form l040 Schedule A, and are subject to a limit based on 2% of adjusted gross income. Refer to Topic 508 for information on the 2% limit. If you do not itemize your deductions, you cannot deduct these expenses. If you are self-employed, travel expenses are deductible on Form 1040, Schedule C (PDF), Form 1040, Schedule C-EZ (PDF) or, if you are a farmer, Form 1040, Schedule F (PDF).
If you are a member of the National Guard or military reserve you may be able to claim a deduction that reduces adjusted gross income rather than an itemized deduction on Form 1040, Schedule A, for unreimbursed travel expenses paid in connection with the performance of services as a reservist. To qualify the travel must be overnight and more than 100 miles from your home. Expenses must be ordinary and necessary. This deduction is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. These expenses are claimed on Form 2106, or Form 2106-EZ and carried to the appropriate line on Form 1040. Expenses in excess of the limit can be claimed only as an itemized deduction on Form 1040, Schedule A.
Good records are essential. Refer to Topic 305 for information on record keeping. For more information on these and other travel expenses, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.
You are traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away.
Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals, or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.
In determining your main place of business, take into account the length of time you are normally required to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time spent at each location.
Travel expenses paid or incurred in connection with a temporary work assignment away from home are deductible. However, travel expenses paid in connection with an indefinite work assignment are not deductible. Any work assignment in excess of one year is considered indefinite. Also, you may not deduct travel expenses at a work location if it is realistically expected that you will work there for more than one year, whether or not you actually work there that long. If you realistically expect to work at a temporary location for less than one year, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.
You may deduct travel expenses, including meals and lodging, you had in looking for a new job in your present trade or business. You may not deduct these expenses if you had them while looking for work in a new trade or business or while looking for work for the first time. If you are unemployed and there is a substantial break between the time of your past work and you're looking for new work, you may not deduct these expenses, even if the new work is in the same trade or business as your previous work.
Travel expenses for conventions are deductible if you can show that your attendance benefits your trade or business. Special rules apply to conventions held outside the North American area.
Deductible travel expenses while away from home include, but are not limited to, the costs of:
- Travel by airplane, train, bus, or car between your home and your business destination. If you are provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero.
- Using your car while at your business destination,
- Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another
- Meals and lodging
- Tips you pay for services related to any of these expenses.
- Dry cleaning and laundry.
- Business calls while on your business trip. This includes business communications by fax machine or other communication devices.
- Other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to and from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer.
The deduction for business meals is generally limited to 50% of the unreimbursed cost.
If you are an employee, your allowable travel expenses are figured on Form 2106 or Form 2106-EZ. Your allowable unreimbursed expenses are carried from Form 2106 or Form 2106-EZ to Form l040 Schedule A, and are subject to a limit based on 2% of adjusted gross income. Refer to Topic 508 for information on the 2% limit. If you do not itemize your deductions, you cannot deduct these expenses. If you are self-employed, travel expenses are deductible on Form 1040, Schedule C (PDF), Form 1040, Schedule C-EZ (PDF) or, if you are a farmer, Form 1040, Schedule F (PDF).
If you are a member of the National Guard or military reserve you may be able to claim a deduction that reduces adjusted gross income rather than an itemized deduction on Form 1040, Schedule A, for unreimbursed travel expenses paid in connection with the performance of services as a reservist. To qualify the travel must be overnight and more than 100 miles from your home. Expenses must be ordinary and necessary. This deduction is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. These expenses are claimed on Form 2106, or Form 2106-EZ and carried to the appropriate line on Form 1040. Expenses in excess of the limit can be claimed only as an itemized deduction on Form 1040, Schedule A.
Good records are essential. Refer to Topic 305 for information on record keeping. For more information on these and other travel expenses, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses.
Business Use of a Car
If you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.
You can generally figure the amount of your deductible car expense using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, before choosing a method, you may want to figure your deduction both ways to see which gives you a larger deduction. Please refer to Publication 463, Travel, Entertainment, Gift and Car Expenses, for the current standard mileage rate. If you use the standard mileage rate, you can add to your deduction any parking fees and tolls incurred for business purposes.
To use the standard mileage rate, you must own or lease the car; the car must not be used to transport persons or property for compensation or hire, for example as a taxi; you must not operate five or more cars at the same time, as in a fleet operation; you must not have claimed a depreciation deduction using the Modified Accelerated Cost Recovery System (MACRS) on the car in an earlier year (including any additional first-year depreciation or "bonus depreciation" or any method other than straight-line for its estimated useful life; you must not have claimed a Section 179 deduction or the special depreciation allowance on the car; and you must not have claimed actual expenses after 1997 for a car you leased. You cannot use the standard mileage rate if you are a rural mail carrier who received a "qualified reimbursement".
Further, to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.
However, for a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals).
To use the actual expense method, you must determine what it actually costs to operate the car for the portion of the overall use of the car that is business use. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.
Other car expenses for parking fees and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.
Generally, the Modified Accelerated Cost Recovery System is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service, and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct. For additional information on the depreciation limits, please refer to Topic 704. Publication 463, Travel, Entertainment, Gift, and Car Expenses, explains the depreciation limits, and it discusses special rules applicable to leased cars.
The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement. For further information on record keeping, refer to Topic 305.
If you are an employee whose deductible business expenses are fully reimbursed under an accountable plan, i.e., a plan that meets the 3 accountable plan requirements, the reimbursements should not be included in your wages on your Form W-2 (PDF), and you should not deduct the expenses.
If your employer uses a non-accountable plan to reimburse you for the expenses, the reimbursements are includable in your wages. Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a non-accountable plan with your wages, salary, or other compensation and report the total on your Form W-2. Your employee business expenses may be deductible as an itemized deduction. For a definition of Accountable and Non-Accountable plans, refer to Publication 463 and Topic 514.
Generally, if you are an employee, to deduct your car expenses including expenses that exceed reimbursement under an accountable plan, you must complete Form 2106 (PDF) or Form 2106-EZ (PDF) and itemize your deductions on Form 1040, Schedule A. Your expenses will be subject to the 2% of adjusted gross income limit. Refer to Topic 508 for information on the 2% limit. If you are self-employed, car expenses are deductible onForm 1040, Schedule C (PDF) or Form 1040, Schedule C-EZ (PDF), or on Form 1040, Schedule F (PDF) if you are a farmer.
You can generally figure the amount of your deductible car expense using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, before choosing a method, you may want to figure your deduction both ways to see which gives you a larger deduction. Please refer to Publication 463, Travel, Entertainment, Gift and Car Expenses, for the current standard mileage rate. If you use the standard mileage rate, you can add to your deduction any parking fees and tolls incurred for business purposes.
To use the standard mileage rate, you must own or lease the car; the car must not be used to transport persons or property for compensation or hire, for example as a taxi; you must not operate five or more cars at the same time, as in a fleet operation; you must not have claimed a depreciation deduction using the Modified Accelerated Cost Recovery System (MACRS) on the car in an earlier year (including any additional first-year depreciation or "bonus depreciation" or any method other than straight-line for its estimated useful life; you must not have claimed a Section 179 deduction or the special depreciation allowance on the car; and you must not have claimed actual expenses after 1997 for a car you leased. You cannot use the standard mileage rate if you are a rural mail carrier who received a "qualified reimbursement".
Further, to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.
However, for a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals).
To use the actual expense method, you must determine what it actually costs to operate the car for the portion of the overall use of the car that is business use. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.
Other car expenses for parking fees and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.
Generally, the Modified Accelerated Cost Recovery System is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service, and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct. For additional information on the depreciation limits, please refer to Topic 704. Publication 463, Travel, Entertainment, Gift, and Car Expenses, explains the depreciation limits, and it discusses special rules applicable to leased cars.
The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement. For further information on record keeping, refer to Topic 305.
If you are an employee whose deductible business expenses are fully reimbursed under an accountable plan, i.e., a plan that meets the 3 accountable plan requirements, the reimbursements should not be included in your wages on your Form W-2 (PDF), and you should not deduct the expenses.
If your employer uses a non-accountable plan to reimburse you for the expenses, the reimbursements are includable in your wages. Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a non-accountable plan with your wages, salary, or other compensation and report the total on your Form W-2. Your employee business expenses may be deductible as an itemized deduction. For a definition of Accountable and Non-Accountable plans, refer to Publication 463 and Topic 514.
Generally, if you are an employee, to deduct your car expenses including expenses that exceed reimbursement under an accountable plan, you must complete Form 2106 (PDF) or Form 2106-EZ (PDF) and itemize your deductions on Form 1040, Schedule A. Your expenses will be subject to the 2% of adjusted gross income limit. Refer to Topic 508 for information on the 2% limit. If you are self-employed, car expenses are deductible onForm 1040, Schedule C (PDF) or Form 1040, Schedule C-EZ (PDF), or on Form 1040, Schedule F (PDF) if you are a farmer.
Business Use of a Home
Whether you are self-employed or are an employee, you may be able to deduct certain expenses for the part of your home you use for business despite the general denial of business expense deductions for the home.
To deduct expenses for business use of the home, part of your home must be used regularly and exclusively as one of the following:
Deductions also may be taken for regular use of a residence for the provision of day care services or for business storage purposes; exclusive use is not required in these cases. You also may take deductions if you rent out your residence. For more information, see Publication 587.
Deductible expenses for business use of your home include the business portion of real estate taxes, deductible mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs. You may not deduct expenses for lawn care in general or for painting a room not used for business.
When figuring the amount you can deduct for the business use of your home, you can use the entire amount of expenses attributable solely to the portion of the home used in your business. The amount you can deduct for expenses attributable to the whole house depends on the percentage of your home used for business. To figure this percentage, you may divide the number of square feet used for business by the total square feet in your home. Or, if the rooms are approximately the same size, divide the number of rooms used for business by the total number of rooms in your home. You figure the business portion of your expenses by applying this percentage to the total of each expense. If you are a qualified day-care provider who does not use any area exclusively for day care, your business portion is further limited by the ratio of the number of hours the area is used exclusively for business to the total number of hours the portion was available for any use.
If your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home, other than mortgage interest, taxes, casualty losses, and the like is limited. However, those business expenses that can not be deducted because of the gross income limitation can be carried forward to the next year but will be subject to the deduction limit for that year.
If you are in the business of farming or are an employee, use the worksheet in Publication 587 , Business Use of Your Home, (including use by daycare providers) to figure your deduction. As an employee, you must itemize deductions on Form 1040, Schedule A to claim expenses for the business use of your home. Farmers claim their expenses on Form 1040, Schedule F (PDF). If you are self-employed, use Form 8829 (PDF) to figure your business-use-of-the-home deductions and report those deductions on Form 1040, Schedule C (PDF).
Publication 587 has detailed information on rules for the business use of your home, including how to determine if your home office qualifies as your principal place of business.
To deduct expenses for business use of the home, part of your home must be used regularly and exclusively as one of the following:
- The principal place of business for your trade or business
- The place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business; or
- In connection with your trade or business, if you use a separate structure that is not attached to your home
Deductions also may be taken for regular use of a residence for the provision of day care services or for business storage purposes; exclusive use is not required in these cases. You also may take deductions if you rent out your residence. For more information, see Publication 587.
Deductible expenses for business use of your home include the business portion of real estate taxes, deductible mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs. You may not deduct expenses for lawn care in general or for painting a room not used for business.
When figuring the amount you can deduct for the business use of your home, you can use the entire amount of expenses attributable solely to the portion of the home used in your business. The amount you can deduct for expenses attributable to the whole house depends on the percentage of your home used for business. To figure this percentage, you may divide the number of square feet used for business by the total square feet in your home. Or, if the rooms are approximately the same size, divide the number of rooms used for business by the total number of rooms in your home. You figure the business portion of your expenses by applying this percentage to the total of each expense. If you are a qualified day-care provider who does not use any area exclusively for day care, your business portion is further limited by the ratio of the number of hours the area is used exclusively for business to the total number of hours the portion was available for any use.
If your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home, other than mortgage interest, taxes, casualty losses, and the like is limited. However, those business expenses that can not be deducted because of the gross income limitation can be carried forward to the next year but will be subject to the deduction limit for that year.
If you are in the business of farming or are an employee, use the worksheet in Publication 587 , Business Use of Your Home, (including use by daycare providers) to figure your deduction. As an employee, you must itemize deductions on Form 1040, Schedule A to claim expenses for the business use of your home. Farmers claim their expenses on Form 1040, Schedule F (PDF). If you are self-employed, use Form 8829 (PDF) to figure your business-use-of-the-home deductions and report those deductions on Form 1040, Schedule C (PDF).
Publication 587 has detailed information on rules for the business use of your home, including how to determine if your home office qualifies as your principal place of business.
Miscellaneous Expenses
There are three types of expenses that are subject to the 2% limit. They are unreimbursed employee expenses, tax preparation fees and other expenses. For an explanation of deductible and nondeductible expenses refer to Publication 529, Miscellaneous Deductions.
Certain employee expenses are deductible as miscellaneous itemized deductions on Form 1040, Schedule A. Miscellaneous itemized deductions are subject to a 2% limit, which means you only can deduct certain expenses to the extent that they exceed 2% of your adjusted gross income.
For additional information, refer to the Form 1040, Schedule A Instructions, and Publication 529, Miscellaneous Deductions, or Publication 946, How To Depreciate Property. If you want more in-depth information about educational expenses, refer to Topic 513. For further information on employee business expenses, refer to Topic 511, and Topic 512.
Certain employee expenses are deductible as miscellaneous itemized deductions on Form 1040, Schedule A. Miscellaneous itemized deductions are subject to a 2% limit, which means you only can deduct certain expenses to the extent that they exceed 2% of your adjusted gross income.
For additional information, refer to the Form 1040, Schedule A Instructions, and Publication 529, Miscellaneous Deductions, or Publication 946, How To Depreciate Property. If you want more in-depth information about educational expenses, refer to Topic 513. For further information on employee business expenses, refer to Topic 511, and Topic 512.