Deducting Unreimbursed Employee Business Expenses

(More 1040 deductions are explained here)

The employers I’ve worked for so far have been good to me with the expense account: if something comes out of my pocket, they cough up the dough to put it back in.

Not everyone is so fortunate. Congress knows this, and in an attempt to provide some relieve for employees who have to bankroll part of their own work, they’ve added the Unreimbursed Employee Business Expenses Deduction.

Whew, long name. And oddly, my web browser thinks “unreimbursed” isn’t a word. But it also thinks I made up “internet,” so it might not be the most reliable spell checker.

Al Gore

Maybe it thinks I’m Al Gore?

This extremely long named deduction has some serious limitations, though, so your mileage will vary on whether it’ll do you any good.

What You Can Deduct

The IRS has remained vague on what’s allowed for Unreimbursed Employee Business Expenses. The standard is that the expense must be ordinary and necessary, which they define as follows:

Ordinary – A common and accepted expense in your field of trade, business, or profession.

Necessary – An expense that’s appropriate and helpful for your business (but does NOT have to be required).

Got that? So if you’re paying for something that’s helpful and a pretty normal for people in your line of work to get, and your boss doesn’t reimburse you for it, you can deduct the expense as an Unreimbursed Employee Business Expense.

SIDE NOTE: if you’re a educator, there’s a much better deduction available for your teaching expenses. Check it out.

Filling Out The Form

In most cases, all you’ll need to is list out your unreimbursed business expenses on the little gray box next to the arrow on 1040 Schedule A Line 21. The total will go then on the right of that line, behind the “21.”

line 21

 

You probably noticed that the little box is pretty small, so if you have more than one expense, it probably won’t fit. No worries, list out the expenses on a separate page (the IRS would likely prefer you use a word processor rather than doing it by hand, especially if you only have crayons), and attach it to the return when you file. Just make sure to reference the list in the gray box, and total the expenses on line 21.

Some people will have jump through a slightly smaller hoop–if your Unreimbursed Employee Business Expenses are related to travel, transportation (including your car), meals, or entertainment, you have to fill out form 2106 or 2106-EZ.

Form 2106-EZ is for those using the standard mileage rates for your car deduction (see link two paragraphs down for what the heck that means). If you’re not, you’ll have to do the regular 2106.

Neither form is too bad, at least by IRS standards. They walk you through your expenses. Mostly it’s to break out your car expense and your meals and entertainment. These are treated similarly to those running their own business, which means you can find out more about what counts by reading my business postings on those items:

Vehicle Expenses, including Simple vs. Regular Method

Meals and Entertainment

Limitations

The Unreimbursed Employee Business Expenses Deduction has a couple of serious limitations.

Limitation 1: The deduction is an itemized deduction. That means if you’re better off using the standard deduction, you get no benefit at all. Further discussion on standard vs. itemized deductions can be found here.

Limitation 2: The Deduction is subject to 2% of your AGI.

Let me explain this second one a bit more. Page 1 of your 1040 calculates something called Adjusted Gross Income, which accountants think they’re clever when they call it “AGI” (we don’t have a lot going for us in that department, so we take what we can). It’s basically your income, with a couple of random deductions that the government decided were better than all the other deductions, giving the other deductions serious body image issues.

Anyway, in the other deductions list, there’s a group of miscellaneous deductions that are limited by your AGI. Here’s a screenshot of the list the IRS gives, some of which I’ve talked about before.

2 percent agi

 

To calculate, take your AGI and multiply it by 2%. Then take this list of deductions and sum it up. You can only deduct any amounts that go OVER that 2% you calculated.

Example: Tom makes 40k a year. In his job, he has to use his own car, which gives him $8,000 of unreimbursed employee business expenses. Assuming Tom itemizes his deductions, what amount of unreimbursed employee business expneses can he deduct?

We’ll make this easy and assume his AGI is his income, which is usually the case. So multiply 40,000 x 2% to get the limitation, which comes out to $800. That means he can take any expenses over $800.

Since Tom has $8,000 in expenses, he can take $8,000 – $800 = $7,200 in unreimbursed employee business expenses deductions.

IMPORTANT NOTE: Last time I talked about how pointless the tax prep fees deduction is, which is true 90 – 99% of the time. In Tom’s case, however, it would be combined with his $8,000 of unreimbursed employee business expenses, making the deduction useful.

Conclusion

That about sums it up. Like all things in taxes, there’s always exceptions, but these are the general rules. If you have any specific questions, feel free to ask me below, and I’ll see if I can help you out.

Al Gore picture by Simone Brunozzi