Employee and Self-Employed Business Expense Deductions

Posted on Aug 1, 2024 in Economy

Transportation Expenses

  • Expenses for auto, taxi, buses, plane, parking, and tolls
  • Commuting expenses are generally not deductible, except for:
    • Two jobs: commuting between jobs is deductible
    • Miles greater than normal commuting are deductible
    • Temporary assignments: all or nothing, temporary

Amounts Deductible

  • Automatic mileage method (per diem rate):
    • 56 cents/mile for business miles
    • Tolls and parking fees
  • Conditions for per diem rate usage:
    • Self-employed: at most 4 cars used simultaneously
    • No MACRS or 179 deduction allowed
  • Actual Expenses * Business use %

Travel Expenses

  • Includes transportation, meals, lodging, and incidental business expenses
  • Taxpayer must be away from home overnight
    • Taxpayer must have a work city
    • Taxpayer must be away from the general vicinity of work
  • Temporary Assignments:
  • Indefinite Assignments: > 1 year = travel expenses not deductible

Combined Business and Pleasure Travel

  • Domestic Travel:
    • If primary business: deduct all transportation expenses and business portion of other travel expenses
    • If primary personal: no transportation deduction, but deduct business portion of other travel expenses
  • Travel Expenses to attend meetings, seminars for 212 activities are not deductible

Entertainment Expenses

  • Deductible limited to 50% if one of the following is met:
    • Directly related to business:
      • Expect to get business benefit
      • Discussion of business takes place
      • Primary purpose was business
      • Taxpayer must be present, no substantial distraction (night club, Super Bowl)
    • Associated with Business:
      • Entertaining before or after business discussions
      • Taxpayer must be present
      • No substantial distractions

Business Meals

  • Deductible if:
    • Related/associated with business
    • Taxpayer present
    • Not lavish
    • Meals including tips limited to 50%, transportation not limited

Business Gifts

  • Limited to $25 per person/year
  • Incidental costs may extend another $25 (wrapping/engraving)
  • Gifts
  • Gifts to high positions in the company are not business gifts

Club Dues

  • Not deductible

Ticket Purchases

  • 50% of face value deductible, not premium

Moving Expenses

.

2If these expenses are reimbursed, they are Dfor AGI. However, see B below.

3These are miscellaneous ID so they are only deductible in excess of 2% of AGI.

4A limited amount of expenses are Dfor within AGI limits.

5These are only 50% deductible (before applying the 2% of AGI limit).

1.Reimbursements=Expenses Full

a.If adequate accounting made

i.Reimbursement not reported on w2=no deduction

ii.Reimbursement reported on w2=DFOR

b.Adequate accounting not made=DFROM

2.Reimbursement

a.Adequate accounting made

i.Not on w-2 (not on wages)=DFROM (unreimbursed)

ii.Reported on w-2=DFOR(reimbursement),DFROM(unreimbursed)

3.Reimbursement>Expenses

a.Adequate accounting made

i.Excess reimbursement returned

1.Not reported on w2=No Decuction

2.Reported on w-2=Dfor

ii.Excess not returned=Dfrom

1.Adequate accounting not made=Dfrom

Adequate Accounting Requirements-1)substantiate expenses to ER and provide receipts Z(per diem rate for mileage fine)

                                                                    2)Return excess reimbursements to ER

Substantiation-1.Amount,2.Time and Place,3. Business Purpose,4. Business relationship of personal entertained

*expenses must be allocated on a pro-rata basis for partial reimbursement

Transportation Expenses-expenses for auto,taxi,buses,plane,parking+tolls

1.Commuting Expenses-Generally no deductible except

a.Two Jobs-commuting between jobs is deductible

b.Miles greater than normal commuting deductible

c.Temporary Assignments-all or nothing, temporary

Amounts Deductible

1.Automatic mileage method (per diem rate)

d..56 cents/mile for business miles

e.Tolls and parking fees

2.Conditions for per diem rate usage

a.Self employed-at most 4 cars used simultaneously

b.No MACRS or 179 deduction allowed

c.Actual Expenses*Business use %

3.TP can switch from automatic mileage method and actual expenses unless MACRS or 179 deduction claimed

4.For switched from automatic mileage to actual expenses depr. Ajustments must be made

a.‘14=.22,’13=.23,’12=.34,’11=.22,’10-.23,’09=.21,’08=.21,’07=.19,’06-.17,’05=.17,’04=.16,’03=16,’02=.15,’01=.15

i.Bais-(mileage*rate)-every year before

ii.Then depreciate over rest of useful life

Travel Expenses-includes transportation, meals, lodging, and incidental bus exp

1.TP must be away from home overnight

a.TP must have a work city

b.TP must be away from general vicinity of work

Temporary Assignments-

Indefinite Assignments->1yr=travel exp not deductible

Combined Business and Pleasure Travel

1.Domestic Travel

a.If primary business deduct all transportation exp, and bus portion of other travel exp

b.If primary personal-no transportation deduction, but deduct business portion of other travel exp

*Travel Expenses to attend meetings, seminars for 212 activities not deductible

Entertainment Expenses

Deductible limited to 50% if one of the following is met

1.Directly related to business

a.Expect to get business benefit

b.Discussion of business takes place

c.Primary purpose was business

i.TP must be present, no substantial distraction (night club, superbowl)

2.Associated with Business

a.Entertaining before or after business discussions

i.TP must be present

ii.No substantial distractions

Business Meals

1.Deductible if: 1)related/associated with business,2)TP present,3)not lavish,4)meals including tips limited to 50%, transportation not limited

Business Gifts

1.1. Limited to $25.person/year, 2. Incidental cost may extend another $25 (wrapping/engraving), 3.Gifts

Club Dues=not deductible

Ticket Purchases-50% of face value deductible, not premium

Moving Expenses (Both Distance and Time Test must be met)

1.Must be work related- incurred within 1 year of beginning work

a.Examples-new job, transferred in same job, self-employed changing location, TP started 1st job

2.Distance Test-D1(home to new job)D2(home to old job)-D1-D2 must be greater than 50 miles to deduct

3.Time Test-(39/78) week tests, 1.) EE must be employed at least 39 weeks during 12.mo immediately following move, 2)Self Employed must be employed >78 weeks during 24 mo following move, 3.)39/78 week test waived for death ,diability, transfer, or dismissal

Deductible Amounts

1.1. Direct Expenses-moving household belongings, 2. Travel to New Residence-23.5 cents/mile of transportation

a.Deductible expenses does not include house hunting trips, temporary living expenses, meals, storage costs in excess of 30 days, selling home expenses, lease cancellation charges

2.Year of Deduction

a.Deduct in year of payment

i.May wait until reimbursement received in different year, may wait to see if 39/78 test met then file amended return, if deduction claimed in y1, and time test not met follow TB rule in Y2

Education Expenses

Tests for Deductibility-Must pass one positive test and avoid both negative tests (to be deductible as EE expenses)

1.Positive Tests

a.Skills Maintenance Test0education will improve or maintain job skills

b.ER Mandate Test- ER required education to keep job

2.Negative Tests

a.Entry-Level Test-education is minimum requirement for job

b.Upward-bound test-education qualifies TP for new job

Deductible Items-1).Actual Education-tuition, books, supplies, fees, 2). Travel-transportation, meals, lodging

Education Deduction-Up to $4,000 may be deducted as Dfor without meeting Positive or Negative Tests

Education Phaseout-1. Married (AGi between 130K and 160K, Dfor ded. limited to 2k) (AGI>160K, no deduction)

                                      2.   Unmarried- (AGI between 65K and 80K Dfor ded, limited to 2K)(AGi>80K no deduction)

  *no deduction when travel itself constitutes education

Home Office Expenses

1. Deductible if office used regularly and exclusively as-principal place of business, ONLY place of bus to meet customer/clients/patients

2. For employees must be for convenience of employer

3. Exclusively-for bus not personal use. Regularly-not just occasionally

4. Amt of Deduction-limited to GI from home office (deducted in this order)

                a. GI from home office

                b. –home office% of mortgage int, R/E tax, casualty loss

                c. business expenses not directly related to home office

                d. operating exp. Directly related to home office (supplies, compensation)

                e. home office% of indirect exp. (maintenance. Utilities, insurance, depreciation)

                f. =Net Income from home office (cannot be less than 0)

5. any disallowed expenses=indefinite CF

6. % of home expenses deductible based on (% of floor space used or % of rooms used)

Miscellaneous Employee Expenses

1. 2% nondeductible floor

                a. Unreimbursed business expenses-professional journals, union dues, supplies, job-hunt exp, special clothing

                b. Investment exp, fees for tax advice/prep, hobby expenses

2. Exceptions to 2% nondeductible floor

a. impairment related work exp for handicapped EE’s, amortizable bond premiums, terminate annuity payment, gambling losses (to  extent of winnings), casualty loss for investment assets