Taxing Definitions

Definition — Employee Business Expenses

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Image source: RambergMediaImages via Flickr.com Creative Commons
Image source: RambergMediaImages via Flickr.com Creative Commons

When you pay expenses for the benefit of your employer, such as vehicle expenses, work-related travel, and job-related legal fees, and you receive no reimbursement, you can generally claim an itemized deduction on your federal income tax return. The deduction is typically limited by your adjusted gross income. Do you know

In addition, other rules still apply. For example, deductions you claim for meal expenses are typically limited to 50% of the cost, and travel expenses such as lodging must be reasonable and necessary, incurred “while away from home”, and made in pursuit of a “trade or business.”

As always, disputes arise in the definition. “Home” (or tax home) generally means your principal place of employment, not your personal residence. However, there’s an exception when you accept temporary employment away from your personal residence.

And, while you may think of “trade or business” as meaning something you do that produces income from selling goods or performing services, the term also includes performing services as an employee.

In T.C. Summary Opinion 2014-10 (Snellman), the IRS said  $27,200 of travel expenses were not deductible because they were not incurred while the taxpayer was “away from home.” The court disagreed, finding that the taxpayer’s work in Missouri, which led to the deductions, was temporary, and his actual tax home was his residence in Florida. [Editorial note: The court did not allow the entire $27,200, in part due to lack of proof on the taxpayer’s part. This case contains other issues as well.]

The taxpayer in T.C. Summary Opinion 2014-11 (Vitarbo), claimed $66,554 of deductions related to her work as a neurosurgeon on the income tax form for a sole proprietor (Schedule C) instead of the form for itemized deductions (Schedule A). The effect was a larger deduction since she used the expenses to reduce her gross income instead of her adjusted gross income.

The IRS said she had been an employee in the year at issue (2008), and that she did not practice medicine as a sole proprietor at any time relevant to the year at issue, and therefore any income or deductions attributable to that practice were not properly reported on a Schedule C. The court agreed that the expenses should be reported as itemized deductions on Schedule A.

Extra credit: In addition to Schedule A, do you know what  you use to report employee business expenses on your federal income tax return?

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You subtract 2% of your adjusted gross income from your total unreimbursed expenses and deduct what’s left. Tax preparers sometimes call this the 2% haircut.
Form 2106
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