Posted by Abundant Wealth Planning LLC

Are Non-reimbursable Employee Expenses Deductible This Year?

Are Non-reimbursable Employee Expenses Deductible This Year?

When my friend doesn't pay me for a meal we promised to split the bill, it's called losing a friend's trust. When my employer does not reimburse a business expense that I covered, it is called an employee reimbursement expense.

What are the unreimbursed employee expenses?

Whether it's providing every employee with a work computer or covering a hotel on a business trip, it is recommended that you prevent your employees from rummaging through their wallets for necessary business expenses. When your employees pay out-of-pocket expenses that a business must reimburse, it is an unreimbursed employee expense.

Unlike employees, independent contractors and other independent professionals pay their own way. With the help of tax software, freelancers can easily deduct ordinary and necessary business expenses.

There is no general federal law that requires employers to reimburse employees for business expenses. However, the Fair Labor Standards Act (FLSA) provides that employees cannot incur business expenses that reduce their income below the applicable minimum wage. 

Are unreimbursed employee expenses deductible for the 2020 tax year?

The vast majority of W-2 workers won't be able to deduct unpaid employee expenses in 2020. The TCJA eliminated deductions for unpaid employee expenses for all but a few protected groups.

The TCJA restriction lasts until 2026, when more detailed deductions are expected to return for all employees.

Unreimbursed employee expenses do not apply to those who are not classified as employees. Therefore, freelancers, independent contractors, and other business owners can deduct current and necessary business expenses.

You can still deduct unpaid employee expenses if you belong to one of the following groups:

  • Armed forces reservist: Members of a military reserve component can continue to deduct unreimbursed expenses.

  • Employees with impairment-related work expenses: Employees with a physical or mental disability can deduct the expenses they have to incur to work. Expenses can include the cost of assistants and equipment needed to do your job.

  • Local or state officials: these cases are rare. Government employees and taxes paid, at least in part, fall into this category. It is unlikely that a salaried civil servant will qualify.

  • Qualified performing artists: this definition is narrow. The artist, musician, or actor must have at least two employers per year, earn at least $200 per employer, and report $ 16,000 or less in adjusted gross income. Income obtained in any other way cannot exceed 10% of the person's total income.

Educators cannot deduct all unreimbursed employee expenses but can deduct up to $ 250 of certain educational expenses. 

What is classified as unreimbursed employee expenses?

Unreimbursed employee expenses include work-related expenses covered by an employee. The IRS explicitly excludes daily transportation costs, but most other expenses count.

Educator's expenses

The educator expense deduction is one of the few unreimbursed expenses for employees that taxpayers can still deduct on their statements. A teacher, instructor, counselor, principal, or teaching assistant at any level, Kindergarten to Grade 12, can deduct up to $ 250 in non-refundable qualification fees.

The qualified expenses include books, consumables, computer hardware, software, and professional development courses. 

Business trip

While daily transportation costs are not considered unreimbursed expenses for employees, longer business trips apply.

Visits to customer premises and nights in business hotels are considered unreimbursed expenses by employees when their employer does not offer mileage reimbursement, per diem allowance, or actual expenses reimbursement. Parking fees, road taxes, bus, and train travel, are also considered business travel expenses.

Meals are eligible if they are related to a business trip or needed for business purposes, such as meeting a client. But, you can only deduct 50% of unreimbursed meal expenses.

Tools and supplies

When used for essential jobs, tools and supplies can be considered unreimbursed employee expenses.

Professional organization dues

Many companies reimburse their employees for membership in professional associations and unions. When the employer does not pay you or reimburse you for being in the local society for your trade, your commissions are considered unpaid for the employee.

Work clothes and uniforms

Protective clothing and uniforms required for the job are considered unpaid employee expenses. Your smart suit and fine leather shoes are not considered an employee's unpaid expense, but boots with steel heels and safety glasses are eligible.

Artists can deduct the cost of self-funded costumes when the clothes are "not suitable for everyday use," according to the IRS. It's not clear where the line between good and bad is for everyday wear.

How to claim a non-refundable business expense

Group members entitled to deduct unreimbursed business expenses must complete Form 2106 with personal income tax returns. Limitation of the deduction depending on the employee's classification and the nature of your expenses. 

The form demands you to enter the total amount of business expenses that you paid out of pocket, including your employer's part reimbursed. You must keep your receipts, even after your employer reimburses you.

Unlike other unreimbursed employee expenses, the educator expense deduction is included on line 10 of Schedule 1 of Form 1040.

Businesses can deduct reimbursed expenses.

Businesses of all sizes need to ensure that employees do not use their funds to run the business. By reimbursing employees for expenses incurred on your behalf, you can deduct them from your business taxes, thereby reducing your taxable income.



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