By Andrew Cook, Senior Associate
When you go on a business trip or take a client out to lunch, you can generally count on your employer to pick up the tab. Depending on your profession and employer, however, there may be times when you’re forced to pay a business expense out of pocket. Even if the company isn’t paying you back, you shouldn’t throw away the receipts – you may be able to deduct those expenses on your individual tax return.
As an employee, you can claim a deduction for unreimbursed business expenses by filing Form 2106 with your individual return. There are many rules about what expenses are and are not deductible, and you may want to consult with a CPA about your specific situation. In general, however, the following types of expenses can be claimed on Form 2106:
- 50 percent of the cost of business meals, provided business was discussed during the meal.
- 50 percent of the cost of tickets to sporting events, provided business was discussed at the event.
- Transportation and lodging for business trips.
- 50 percent of the cost of meals purchased during business trips.
- Other expenses deemed ordinary and necessary for your trade or business, including business gifts (limited to $25 per person), continuing education, and trade publications.
There is also a special rule that applies to educators – primarily grade school teachers, aides, counselors, and principals. They can take a special $250 above-the-line deduction for school supplies purchased out-of-pocket, and claim the rest on Form 2106.
If you did receive any reimbursements during the year, you’ll subtract them from the total expenses you paid to arrive at your unreimbursed expenses for the year. This figure will be added to a basket of other amounts known as “two-percent-of-AGI deductions,” which includes tax preparation fees, brokerage fees for your personal expenses, and safe deposit box fees. This total will then be reduced by two percent of your AGI, and the remainder will be treated as an itemized deduction. The “two-percent-of-AGI” rule can be quite a hurdle; the more income you have, the less benefit you will get from your unreimbursed business expenses.
The preceding discussion relates only to regular employees, however. If you are an officer or owner of a business, then the rules are different:
- If you are a partner in a partnership, you can claim unreimbursed expenses on page two of your Schedule E instead of Form 2106. These deductions will not be subject to the two percent limitation, and they will also reduce investment income for the purposes of calculating the Net Investment Income tax. However, you must have sufficient basis in the partnership to take the deduction.
- If you are an officer of a corporation, which includes C Corps, S Corps, and LLCs taxed as S Corps, then the IRS does not allow you to claim deductions related to the business on your 1040. However, if the corporation reimburses you, then it can claim those deductions on its own return. If the corporation does not reimburse you, you can have the corporation treat your payment as a capital contribution and then take a matching expense deduction.
The IRS requires you to keep records of the time, place, and business purpose for all the expenses you are claiming, in addition to receipts for all lodging expenses and all other expenses of $75 or more. You will not need to actually submit these with your return, but you will want to keep them on hand in case the IRS decides to pay you a visit.
Due to all the rules and limitations, there is a good chance that you won’t get any benefit from your unreimbursed expenses. However, there’s only one way to be sure.