Tax Tip
Getting the Most Out of Employee Business Expense
Deductions
Individuals can deduct as miscellaneous itemized
deductions certain expenses that they incur in the course of their
employment. Generally, qualified
business expenses are un-reimbursed expenses that are both ordinary (common and
accepted in your industry) and necessary and do not include personal
expenses.
There are two major barriers to deducting employee
business expenses. The most commonly
encountered is the 2%-of-income (AGI) deduction floor that applies to most
(Tier II) miscellaneous deductions, which besides employee business expenses
also includes investment expenses, certain legal expenses, home office and
other expenses. The amount deductible as
miscellaneous expenses is the total of those expenses reduced by 2% of the
taxpayer’s adjusted gross income for the year.
Depending upon the taxpayer’s income, this reduction can substantially
lessen or eliminate the deductible amount.
The second major barrier is the alternative minimum tax (AMT), in which
the Tier II miscellaneous expenses are not deductible at all. Thus, to the extent that the taxpayer is
affected by the AMT, there is no benefit derived from these deductions. There are, however, some planning strategies
that can be applied to overcome these barriers, such as the following:
• Employer
Accountable Plan – This is a plan under which your employer reimburses you for
your employment-related expenses, but requires you to “adequately account” for
the expenses. Expenses reimbursed by the
employer under an “accountable plan” are excluded from income, thus essentially
allowing 100% of the expenses to be deducted, while avoiding the 2%-of-income
and AMT limitations. If the employer
does not wish to add a reimbursement plan on top of the employee’s existing
income, a salary reduction replaced with an accountable plan might be
negotiated.
• Bunch Deductions
– With proper planning, employee business expenses for more than one year can
be deferred or accelerated into one year, thus producing a larger deduction in
that one year to overcome the 2% floor for miscellaneous deductions.
• Education
Expenses – Although certain employment-related education expenses can be taken
as an employee business expense, there are other ways to gain a tax benefit and
avoid the 2%-of-AGI and AMT limitations.
These include income-limited education tax credits, and if your employer
has an educational assistance plan, your employer can reimburse you up to
$5,250 for most education expenses other than those associated with education
travel.
• Utilize the
Section 179 Deduction – Generally, business assets with a useful life of more
than one year must be deducted (depreciated) over several years. However, most business assets, other than
real estate, qualify for the Code Section 179 expense deduction that allows the
entire cost (up to $25,000 for 2015) to be deducted in one year. While vehicles used for business are eligible
for Section 179 expensing, other limitations cap the deduction at lower amounts. The depreciation or Section 179 deduction of
an employee’s business assets is part of employee business expenses subject to
the 2%-of-AGI floor. However, by claiming the Section 179 deduction in the year
the asset is purchased rather than deducting a lower depreciation amount over
several years, there is a greater chance that the total miscellaneous
deductions will be more than the 2%-of-AGI floor, thus allowing part of the
expense to be deducted.
If you would like to explore any of these techniques,
please give this office a call.
Joseph C Becker
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com
Ten Forty plus Quality Tax Preparation & Financial Services
www.tenfortyplus.com
281-397-7777, Fax 281-397-7443
joeb@tenfortyplus.com
