Can I Deduct Business Expenses as an Employee?

May 3, 2019

Authored by Michael DeVries

Prior to January 1, 2018 employee business expenses could be deducted as an itemized deduction on your tax return if the amount, along with other miscellaneous deductions, exceeded 2% of your adjusted gross income.

However, under the new TCJA tax law, all miscellaneous itemized deductions subject to the 2% floor are eliminated and have been suspended through 2025. This includes all tax preparation fees, unreimbursed business expenses, investment expenses, and the home office deduction for an employee working from home.

So, what are your options if you have legitimate business expense?

Those who incur expenses related to their work should request that their employer reimburse them for such costs, even if that would mean having to lower your salary by the amount the employer wouldn’t typically pay.

The key to being able to make this option work for you and your employer is to have a written accountable reimbursement plan.

The IRS states that expense reimbursements do not have to be included in an employee’s wage if the employer or business has an “accountable” plan.

What is an “accountable” business reimbursement plan?

In order to have an accountable plan, an expense reimbursement policy or an advance payment plan must meet the following three conditions:

1. Business Connection– The expense must occur in the performance of service as an employee of the employer.

2. Substantiation– Keep your receipts. The employee must substantiate his or her business expenses by providing the employer with evidence of the amount, time, place, and business purpose of the expense. The employee also must submit business expenses within a reasonable period after they occurred.

3. Return Excess Amounts– If any amounts the employer pays to the employee exceed the amounts the employee spent, the employee must return excess amounts to the employer within a reasonable period of time.

What is considered valid employee business expenses?

As noted above, when an employer reimburses an employee for a business-related expense, the reimbursed amount is not included as wages or taxable income to the employee. The employer will be able to deduct such expenses so long as the expense qualifies as a business deduction.

IRS Publication 535, Business Expenses, states the following: “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”

For a medical or dental practice, expenses that would typically qualify are work-related supplies, computer software subscriptions used for office work, cell phone expenses, travel, meals, and potentially entertainment.

Supplies, etc– these types of expenses that are paid for by an employee can be reimbursed to the employee at the cost to the employee and not treated as income so long as it is part of an accountable plan.

Transportation costs– The cost of work-related travel, including transportation, lodging, meals, and entertainment that meet the criteria outlined in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses are generally reimbursable expenses.

Many employers will reimburse an employee who uses their personal vehicle for business at a standard mileage rate. Generally, this won’t include commuting expenses between an employee’s home and workplace. The standard mileage rate is set by the IRS each year. (The standard federal mileage rate for business in 2019 is 58 cents per mile.)

Implement an Accountable Plan

Without an accountable plan, expense reimbursements made to an employee, which can include a doctor who is an employee of their own corporation, are considered wages subject also to employment taxes such as Social Security, Medicare and Federal Unemployment taxes.

So, even if the expenses are ordinary and necessary, if the employer does not have an accountable plan, then any reimbursements are taxable income.

Consider drafting a plan; doing so will likely save everyone time, confusion and stress.

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