Can An Employee Write Off Business Expenses? A Comprehensive Guide

Navigating the world of taxes can feel like trekking through a dense jungle. One of the most common questions we encounter, especially for those of us who work for someone else, is: Can an employee write off business expenses? The short answer is, well, it’s complicated. Let’s delve into the intricacies of this topic, breaking it down so you can understand exactly what you can – and can’t – do when it comes to claiming deductions for work-related costs.

Understanding the Basics: Employee vs. Self-Employed

The first, and arguably most crucial, distinction to grasp is the difference between an employee and a self-employed individual (often referred to as an independent contractor). This classification significantly impacts your ability to deduct business expenses.

As a general rule, employees have significantly fewer options for writing off business expenses compared to self-employed individuals. This is primarily due to the changes made by the Tax Cuts and Jobs Act of 2017. Before that, employees could deduct unreimbursed business expenses as an itemized deduction, but this deduction was eliminated for most employees.

Self-employed individuals, on the other hand, are considered to be running their own businesses. They can deduct a broader range of business expenses, as long as those expenses are ordinary and necessary for their trade or business.

The Impact of the Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 brought about substantial changes to the tax landscape, particularly concerning employee business expense deductions. Prior to this legislation, employees could deduct certain unreimbursed business expenses, such as travel costs, supplies, and home office expenses, as an itemized deduction on Schedule A of Form 1040.

However, the 2017 tax law suspended this deduction for most employees. This means that, in the vast majority of situations, employees cannot deduct unreimbursed business expenses. This change significantly impacted how many employees approached their tax returns.

When Can Employees Still Claim Business Expenses?

Although the rules are restrictive, there are some specific scenarios where an employee might still be able to claim certain business expenses.

• Reimbursed Employee Expenses: If your employer reimburses you for your business expenses through an accountable plan, the reimbursements are generally not included in your taxable income. This means you don’t need to report the expenses or the reimbursement on your tax return.
• Certain Armed Forces Members, Qualified Performing Artists, and Fee-Basis Government Officials: These specific groups can still deduct certain business expenses. They must meet specific criteria to qualify.
• State and Local Government Officials: Some state and local government officials may be able to deduct certain business expenses as well.

Defining Reimbursed vs. Unreimbursed Expenses

Understanding the difference between reimbursed and unreimbursed expenses is key.

• Reimbursed Expenses: These are expenses your employer pays you back for. This can be through a formal reimbursement plan or other arrangements. The IRS has specific rules about what constitutes a qualified reimbursement plan.
• Unreimbursed Expenses: These are expenses you pay out-of-pocket that your employer does not reimburse. Due to the 2017 tax law changes, these are typically not deductible for most employees.

Common Business Expenses: What Could Be Deductible (If You Qualify)

If you do qualify to deduct business expenses, either because you are self-employed or fall under a specific exception, here are some common examples:

• Travel Expenses: This can include the cost of transportation (airfare, train tickets, mileage), lodging, and meals while traveling for business. Keep detailed records!
• Home Office Expenses: If you use a portion of your home exclusively and regularly for business, you might be able to deduct a portion of your home-related expenses, such as rent, mortgage interest, utilities, and insurance. This is often a complex area, so seek professional advice if you’re considering this deduction.
• Vehicle Expenses: If you use your vehicle for business, you can deduct the actual expenses (gas, repairs, insurance, etc.) or use the standard mileage rate. Again, meticulous record-keeping is essential.
• Supplies and Materials: Costs for office supplies, stationery, and other materials used for your business can often be deducted.
• Professional Development: Costs for courses, seminars, and other training related to your business can sometimes be deducted.

Keeping Meticulous Records: The Key to Claiming Expenses

Whether you’re self-employed or one of the few employees who can claim deductions, accurate record-keeping is absolutely critical. The IRS expects you to substantiate your expenses with documentation. This means keeping receipts, invoices, and other supporting documents.

Here’s what you should document:

• The amount of the expense.
• The date of the expense.
• The business purpose of the expense.
• The name of the vendor.
• Where applicable, the location.

Good record-keeping can save you money and protect you in the event of an audit. Consider using accounting software or a dedicated expense-tracking app to help you stay organized.

The Importance of Seeking Professional Advice

Tax laws are complex and constantly evolving. Because of this, it’s always a good idea to consult with a tax professional, such as a Certified Public Accountant (CPA) or a tax advisor. They can provide personalized advice based on your specific circumstances and help you understand how the tax laws apply to you. They can also guide you through the process of claiming deductions and ensure you’re complying with all the relevant regulations.

Common Mistakes to Avoid When Claiming Business Expenses

Avoid these common pitfalls to protect your tax return:

• Not keeping adequate records: This is the biggest mistake. Without proper documentation, you won’t be able to support your deductions.
• Mixing personal and business expenses: Keep your business and personal finances separate. This makes it easier to track expenses and avoid errors.
• Claiming expenses that are not ordinary and necessary: Deduct only expenses that are directly related to your business and are considered typical for your industry.
• Failing to understand the rules: Tax laws are complex. Make sure you understand the rules before claiming any deductions.

Frequently Asked Questions

Can I deduct the cost of my home internet if I work from home?

It depends. If you are self-employed and use a portion of your home exclusively for business, you might be able to deduct a portion of your home internet costs. However, if you are an employee, you generally cannot deduct these expenses.

What if my employer only reimburses me for some of my business expenses?

If your employer reimburses you for some expenses but not others, you may be able to deduct only the unreimbursed portion if you meet specific criteria (such as being a qualified performing artist). But remember, for most employees, these unreimbursed expenses are not deductible.

How do I know if my employer’s reimbursement plan is “accountable”?

An accountable plan requires your employer to reimburse you only for legitimate business expenses and requires you to substantiate those expenses. You must also return any excess reimbursements to your employer.

Is there a limit to the amount of business expenses I can deduct?

For self-employed individuals, business expenses are generally deducted from your gross income to arrive at your adjusted gross income (AGI). There is no overall limit on the amount you can deduct, but the expenses must be ordinary and necessary.

What happens if I get audited by the IRS?

If you are audited, the IRS will review your tax return and supporting documentation to verify the accuracy of your deductions. You’ll need to provide documentation to support your claims. If you can’t substantiate your expenses, the IRS may disallow the deductions and assess additional taxes and penalties.

Conclusion

So, can an employee write off business expenses? The answer is a nuanced one. The Tax Cuts and Jobs Act of 2017 significantly restricted the ability of most employees to deduct unreimbursed business expenses. However, self-employed individuals and certain other categories may still be able to claim deductions. The key is to understand the rules, keep meticulous records, and, when in doubt, seek professional tax advice. By understanding these complexities, you can navigate the tax landscape with confidence and ensure you’re taking advantage of all the deductions you’re entitled to.