Have you ever had to pay out of pocket for a job or business related expense that you were unable to receive a reimbursement from your employer?
To most Americans, unreimbursed employee business expenses are one of the least understood areas of the tax code. Many of us believe it is an automatic deduction and some even believe it is a tax credit. This deduction is extremely hard to qualify for and we must be diligent to ensure we have proper documentation to claim this deduction on our tax return.
A tax deduction for unreimbursed employee business expenses is only available to those people who itemize. This means you are filing an IRS Schedule A – Itemized Deductions with your 1040 tax return. On average, roughly 30% of taxpayers itemize their taxes when filing. Even if you itemize, this deduction is denied to you if you are subject to the Alternative Minimum Tax (AMT) and/or the Pease limitation (both of these are reserved for high income taxpayers). If you are not subject to either of these barriers, the deductions is still be reduced by 2% of your Adjusted Gross Income (AGI).
Many people assume this deduction is open for everyone, but that simply isn’t true. Each year, roughly 5% of my tax clients can claim this deduction.
Eligible unreimbursed employee business expenses must:
1. Be paid during the tax year
2. Be used to carry on the trade or business of being an employee, and
3. Be ordinary (common and accepted) and necessary (appropriate and helpful) expenses in your trade or business
The IRS publishes a pretty exhaustive list of unreimbursed employee business expenses. It is by no means comprehensive, but these are the most common:
1. Business bad debt (a debt incurred in your line of work that goes bad)
2. Business professional liability insurance
3. Damages for breach of employment contract
4. Depreciation on computers or cellular telephones. The equipment must be for the convenience of the employer and a condition of your employment. If you use the equipment a majority of the time for business, you can expense it under Section 179 or use the general depreciation system. If you use it less than 50% of the time, you must use the slower alternative depreciation system.
5. Dues to professional societies. The only limitations here are that no money can go to lobbying, and the primary purpose of the organization cannot be entertainment.
6. Work-related education. The education must either maintain/improve current job skills, or be required by your employer.
7. Teacher expenses above and beyond the educator adjustment (The educator adjustment is $250 for the taxpayer and $250 for an eligible spouse, if both are in the education profession.)
8. Home office. You can deduct pro-rated expenses of your home for an office if it is the principle place of business or a place to regularly meet clients.
9. Job search expenses. These are only for expenses in searching for a job in your same career field.
- Legal fees (those related to your job)
- Licenses and regulatory fees
- Occupational taxes
- Research expenses of a professor
- Tools used in your work
- Travel, transportation, meals, entertainment, and gift expenses.
- Union dues and expenses
- Work clothes and uniforms. (Clothes cannot be used also for personal attire)
For more information on this, see IRS Publication 529,Miscellaneous Deductions.
Derek Henderson serves as the Managing Member of Henderson Accounting and Tax Service, LLC. He has 15 years of accounting experience in the federal, state and local sectors and provides income tax preparation to both corporate and individual tax clients. He received his Bachelors of Business degree from Temple University and his Masters of Public Administration from Norwich University. He holds certifications as a Registered Tax Return Preparer, Certified Government Financial Manager and Certified Internal Control Auditor. For more information, please visit www.ghendersonaccounting.com.