Can Employees Write Off Business Expenses: A Comprehensive Guide
Navigating the world of taxes can feel like traversing a complex maze. For employees, understanding what business expenses are deductible and how to claim them is crucial for maximizing tax returns. This guide provides a detailed look at whether, and how, employees can write off business expenses, cutting through the jargon and offering practical advice.
Understanding the Basics: Employee vs. Self-Employed
The first step in determining if you can deduct business expenses is understanding your employment status. The rules differ significantly between employees and self-employed individuals. Self-employed individuals have much broader options for deducting business expenses, as they are essentially operating as their own business. Employees, on the other hand, face stricter regulations.
The Pre-2018 Landscape: A Look Back at Employee Deductions
Before the Tax Cuts and Jobs Act of 2017, employees could deduct certain unreimbursed business expenses as an itemized deduction. This meant you could claim these expenses on Schedule A of Form 1040, but only if the total of these and other miscellaneous itemized deductions (such as investment expenses) exceeded 2% of your adjusted gross income (AGI). This was often difficult to achieve.
The Impact of the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act, implemented in 2018, brought significant changes. It suspended the deduction for unreimbursed employee business expenses from 2018 through 2025. This means that the vast majority of employees can no longer deduct these expenses on their federal tax returns. This is a critical point to understand.
Current Rules: What Employees Can and Cannot Deduct
Currently, for federal tax purposes, most employees are unable to deduct unreimbursed business expenses. This includes things like:
- Office supplies: Pens, paper, printer ink, etc.
- Home office expenses: Rent, utilities, and other costs associated with using a portion of your home for work.
- Travel expenses: Transportation, lodging, and meals related to business travel.
- Professional development: Courses, seminars, and other training.
However, there are still exceptions and nuances to be aware of, as we’ll explore.
The Exception: Reimbursed Employee Expenses
While employees can’t generally deduct unreimbursed expenses, reimbursed employee expenses are treated differently. If your employer reimburses you for business expenses under an accountable plan, the reimbursement is generally not included in your gross income, and you do not need to report the expenses on your tax return. This is the ideal scenario. An accountable plan requires:
- That the expenses have a business connection.
- That you adequately account to your employer for these expenses.
- That you return any excess reimbursement.
The Exception: Certain Armed Forces Members, Performing Artists, and Others
While the general rule is that employees cannot deduct unreimbursed business expenses, there are some exceptions. Certain categories of employees are still able to deduct business expenses. These include:
- Armed Forces reservists
- Performing artists (who meet specific income and employment criteria)
- Fee-basis state or local government officials
These individuals may be able to deduct unreimbursed business expenses as an adjustment to gross income, meaning they don’t need to itemize.
State Tax Considerations: Variations in Deductions
The federal tax laws are not the only thing to consider. State tax laws may differ from federal laws. Some states may still allow employees to deduct unreimbursed business expenses, even if the federal government does not. It is essential to check the tax laws of your specific state. Consult with a tax professional or review your state’s tax guidelines to understand your options.
Keeping Records: The Importance of Documentation
Even if you are unable to deduct expenses currently, keeping thorough records is always a good practice. You should maintain detailed documentation of any business-related expenses you incur, including:
- Receipts: Save all receipts for expenses like travel, supplies, and training.
- Mileage logs: If you use your car for business, keep a log of your mileage, dates, destinations, and business purpose.
- Invoices and bills: Keep records of any invoices or bills related to your business activities.
This documentation can be useful if there are any changes to tax laws or if you need it for other purposes.
Understanding Accountable vs. Nonaccountable Plans
When it comes to employer reimbursement, understanding the difference between an accountable and nonaccountable plan is crucial. An accountable plan, as mentioned earlier, is where the reimbursement is not included in your income, and you do not report the expenses. A nonaccountable plan is where the reimbursement is included in your income, and you may be able to deduct the expenses, but they are subject to the same limitations as unreimbursed expenses.
The Future of Employee Deductions: Looking Ahead
The suspension of the deduction for unreimbursed employee business expenses is currently scheduled to expire in 2025. However, tax laws are always subject to change. Staying informed about potential changes in tax legislation is essential. Follow updates from the IRS, tax professionals, and reliable news sources.
Frequently Asked Questions
What happens if my employer reimburses me less than my actual business expenses?
If your employer reimburses you for less than your actual expenses under an accountable plan, you cannot deduct the difference. You are only able to deduct unreimbursed expenses if you meet the criteria for an exception (such as being a performing artist or member of the armed forces).
Can I deduct business expenses if I work from home?
In general, employees cannot deduct home office expenses. However, if you are self-employed, you may be able to deduct a portion of your home expenses.
What if I received a 1099-NEC?
A 1099-NEC is issued to those who are considered independent contractors. If you receive a 1099-NEC, you are considered self-employed and can deduct your business expenses.
How do I know if my employer’s reimbursement plan is considered an accountable plan?
You should ask your employer about their reimbursement plan. Look for a written policy. Ensure that your employer’s plan requires you to account for your expenses and return any excess reimbursements.
Where can I find more information about business expense deductions?
You can consult the IRS website (IRS.gov) for publications and forms, or seek guidance from a qualified tax professional.
Conclusion
In conclusion, the landscape of employee business expense deductions has changed significantly in recent years. While the vast majority of employees are currently unable to deduct unreimbursed business expenses on their federal tax returns, understanding the rules, keeping meticulous records, and staying informed about potential legislative changes are essential for maximizing your tax position. Remember the importance of employer reimbursement, the exceptions, and seeking professional advice when needed. Being proactive and informed is key to navigating the complexities of tax regulations and ensuring you are in compliance.