EMPLOYEE BUSINESS EXPENSES AND OTHER EXPENSES

This section covers a variety of expenses that you are allowed to deduct on your individual return. These personal business expenses can be broken down into three broad categories: deductible employee expenses, deductible expenses of producing income, and other deductible expenses. Business-related travel and entertainment expenses are discussed in Chapter 3.

The general rule is that you may deduct any business expense incurred by you personally that is related to your trade or business, connected with producing income, or paid to determine your tax. Expenses other than these are generally considered personal and typically may not be deducted. But, with careful and proper planning, you may be able to deduct more than you think.

Deductions Subject to the 2%-of-Adjusted-Ciross-lncome Limit

Most miscellaneous itemized deductions are deductible only to the extent that the total of all these deductions is more than 2% of your adjusted gross income. Miscellaneous deductions that are not subject to this limitation are discussed later in this chapter.

Your deduction is the excess of the total of the allowable deductions over 2% of your adjusted gross income. The 2% limit is applied after any other deduction limit (such as the 50% limit on meals and entertainment) is applied.

Unreimbursed employee business expenses are also subject to the overall limit on itemized deductions for taxpayers with adjusted gross income in excess of $128,950; $64,475 for married persons filing separately. See discussion on page 56.

Employee Business Expenses

If you are an employee, including an outside salesperson, you may deduct as an adjustment to gross income only the amount reimbursed by your employer for work-related business expenses. Any expenses that are not reimbursed by your employer are deductible only as a miscellaneous deduction (subject to the 2% limit) on Schedule A. Form 1040.

If you claim a deduction for any employee business expenses, you must complete Form 2106 and attach it to your Form 1040. You do not have to complete the form if your business expenses were equal to the reimbursements you received from your employer, the reimbursements were not included in your W-2 form, and you adequately accounted to your employer for those expenses. If none of your employee business expenses are reimbursed by your employer, however, and you are not claiming any meal, entertainment, travel, or transportation expenses, you do not have to complete Form 2106. Instead, list your employee business expenses on Schedule A

TAXSAVER

If you can get your employer to reimburse you for what would otherwise be unreimbursed business expenses in lieu of an equal amount of salary, you should do so. You gain at no additional cost to your employer. Reimbursed employee business expenses are not subject to the 2% floor that might otherwise limit their deductibility.

Business Gifts

Deductions for business gifts are limited to $25 per individual recipient per year.

TAXSAVER

When there IS an overlap, in fact, it is usually to your advantage to treat a particular item as an entertainment expense rather than as a gift. Although entertainment expenses are subject to a 50% limitation and must be considered ordinary and necessary, there IS no fixed dollar limitation on the deduction.

Club Dues

No deduction is allowed for dues or assessments paid for membership in a business, social, athletic, luncheon, sporting, hotel, or airport club, including dues and fees paid to a country club. However, dues paid to professional or service organizations, such as the ABA, AICPA, Kiwanis, or Rotary clubs, are deductible if paid for business reasons and the organization is not principally an entertainment organization. Specific business expenses, such as meals and entertainment that may Occur at a club, are deductible to the extent that they otherwise satisfy the standard for deductibility.

Educational Expenses

In general, educational expenditures, such as tuition, books, supplies, lab fees, and certain travel and transportation costs, are deductible (whether or not the education leads to a degree) if the education (1) maintains or improves skills required in your employment or business or (2) meets the express requirements of your employer, or applicable law, imposed as a condition of employment. However, educational expenditures that are made to meet minimum educational requirements or that qualify you for a new trade or business, such as a law degree, are not deductible. Therefore, only expenses for education relating to your present work are deductible.

Employer-Provided Educational Assistance.

Up to $5,250 of employer-provided tuition reimbursement for undergraduate education is excludable from an employee's income each calendar year.