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Many employees incur expenses during the course of performing their jobs. These expenses may or may not be reimbursed by your employer. Can you deduct these expenses on your tax return? Maybe. It depends on 1) how your employer treated any reimbursements they made to you and 2) how you incurred and accounted for those expenses.
Unreimbursed Expenses
If you weren't reimbursed for your expenses, and your expenses were bona-fide business-related expenses, you may deduct them on Schedule A, line 20. You'll have to use Form 2106, Employee Business Expenses, to report travel, transportation and entertainment expenses. You'll also have to itemize your deductions in order to get any tax benefit from your expenses, so if you don't have enough deductions to exceed your standard deduction ($4,850 if you're single, $9,750 if you're married and filing a joint return), your expenses won't lower your taxes.
Reimbursed Expenses
If your employer has a plan that provides for reimbursement of expenses, then you first have to determine which kind of plan your employer has before you can determine how to deal with reimbursements on your tax return.
Accountable Plan
Most large companies have accountable expense reimbursement plans. Your employer's reimbursement plan is accountable if it follows these three rules:
1. The plan requires that your expenses have a business purpose.
2. You're required to account to your employer for your expenses within a reasonable amount of time after incurring them. (Accounting can be in the form of an expense report. A reasonable amount of time is generally within 60 days after your expenses were incurred).
3. You're required to return any excess reimbursements you received or any excess allowances given to you within a reasonable period of time.
Business Purpose
Following is more explanation regarding these three rules: It's fairly obvious that your expenses must have a business purpose; your employer probably won't reimburse you if they don't. This basically means that you must have incurred the expenses while performing services as an employee.
Accounting for Your Expenses
Accounting for your expenses usually involves completion of an expense report. In order to substantiate your expenses, each line item identifies the amount spent, the date, time and place of expenditure and the business reason for the expense.
There are exceptions for business meals and lodging, like per diem allowances. If you're reimbursed according to per diem rates (published by the IRS every year), you're considered to have met the substantiation requirements. As a result, reimbursements at this rate aren't taxable.
Returning Excess Allowances
Returning any excess allowances or reimbursements must occur in order for the plan to be considered accountable. You meet this requirement if you're given a statement at least once every quarter that asks you to return your advances or account for them within 120 days of the statement.
Why is it important to have an accountable plan? Because any reimbursements you receive from an employer who has an accountable plan are not included in your W-2 wages. (This means you aren't taxed on those amounts.) This also means that you don't report the expenses you were reimbursed for on your tax return. Instead, it's a wash and the income and the expenses stay off of your return.
Note
If you also incurred expenses that you weren't reimbursed for, for whatever reason, and the expenses were incurred in the course of doing your job, then you can report those expenses on your return as described earlier under Unreimbursed Expenses.
Non-accountable Plan
If your employer's mode of expense reimbursement doesn't meet the requirements listed in the accountable plan section above, the rules for reporting reimbursements and expenses are quite different.
Even if your employer's plan is an accountable plan, if your expenses didn't quite meet the requirements listed above, or perhaps you didn't return all of your employer's excess allowances, your expense reimbursements are considered made under a non-accountable plan.
Ask your employer's expense reimbursement department if you're not sure which plan you're under.
What happens if your reimbursements or allowances were made under a nonaccountable plan? Your reimbursements are supposed to be included in box 1 of your Form W-2 as taxable wages. You then must fill out Form 2106 and itemize your deductions on Schedule A in order to deduct your expenses and offset those reimbursements. And, they'll be limited to an amount that exceeds 2% of your adjusted gross income (Form 1040, line 35).
If you don't have enough expenses to itemize, then your reimbursements are still included in your taxable wages and you can't deduct your expenses. Avoid this type of tax treatment by making sure any allowances or reimbursements you receive are part of an accountable employee reimbursement plan.
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