Unreimbursed business expenses can be a major burden for employees and employers, as they leave the employee without compensation for necessary costs incurred in the workplace. For this reason, it’s essential to understand what qualifies as an unreimbursed expense and how it should be handled.
This guide will discuss unreimbursed business expenses, including who can deduct them from tax returns and other essential information employers and employees need to know.
What are Unreimbursed Business Expenses?
Unreimbursed Business Expenses are expenses that an employee incurs while performing their job duties but are not reimbursed by the employer. These may include costs related to travel, work supplies, professional development, and other work-related items. In the past, some of these expenses could be deducted on an individual’s tax return as itemized deductions, subject to certain limitations.
However, with the Tax Cuts and Jobs Act of 2017, most unreimbursed employee business expenses are no longer deductible for tax years 2018 through 2025. It is essential to consult a tax professional to understand the rules and exceptions related to your personal tax situation.
What Qualifies as an Unreimbursed Business Expense?
An Unreimbursed Business Expense (UBE) is a legitimate, work-related expense that an employee incurs while performing their job duties but is not reimbursed by their employer. Some examples of UBEs include:
- Travel Expenses: Costs associated with business trips, such as airfare, lodging, meals, transportation, and parking fees.
- Vehicle Expenses: If an employee uses their personal car for business purposes, they may incur expenses like fuel, maintenance, insurance, and depreciation.
- Work Supplies and Tools: The cost of materials, equipment, or tools required to perform a job but not provided by the employer.
- Home Office Expenses: A portion of the rent, utilities, and other expenses related to maintaining a home office, if it’s exclusively used for work purposes and not reimbursed by the employer.
- Professional Development: Costs related to continuing education, attending conferences, seminars, or workshops, and obtaining professional certifications or licenses.
- Dues and Subscriptions: Fees for membership in professional organizations, trade associations, or subscriptions to industry-specific publications.
- Uniforms and Protective Gear: The cost of purchasing and maintaining work uniforms or protective clothing required for the job if not provided by the employer.
Due to the Tax Cuts and Jobs Act of 2017, most unreimbursed employee business expenses are no longer deductible for tax years 2018 through 2025. However, there may be exceptions for certain professions, such as performing artists, military reservists, and fee-basis government officials. Always consult a tax professional to understand how these rules apply to your situation.
Who Can Deduct Unreimbursed Employee Expenses?
As a result of the Tax Cuts and Jobs Act of 2017, most taxpayers can no longer deduct unreimbursed employee expenses on their federal tax returns for tax years 2018 through 2025. However, there are a few exceptions for specific professions:
- Armed Forces Reservists: Military reservists who travel more than 100 miles from home to perform reserve duties can deduct unreimbursed travel expenses as an adjustment to gross income.
- Qualified Performing Artists: If a performing artist meets certain income requirements and criteria, they may be allowed to deduct unreimbursed employee expenses as an adjustment to gross income.
- Fee-Basis State or Local Government Officials: Government officials who are paid on a fee basis (rather than a salary) may be eligible to deduct unreimbursed employee expenses as an adjustment to gross income.
- Disabled Employees: Individuals with physical or mental disabilities may be able to deduct impairment-related work expenses necessary to perform their job.
It’s essential to consult a tax professional to determine if you qualify for these exceptions and understand the rules for claiming unreimbursed employee expenses on your tax return. Additionally, some states may still allow deductions for unreimbursed employee expenses on state income tax returns, so it’s worth checking the rules in your state.
How to Deduct Unreimbursed Employee/Business Expenses
As mentioned earlier, the Tax Cuts and Jobs Act of 2017 eliminated the ability for most taxpayers to deduct unreimbursed employee/business expenses on their federal tax returns for tax years 2018 through 2025. However, suppose you fall into one of the specific exceptions (Armed Forces Reservists, Qualified Performing Artists, Fee-Basis State or Local Government Officials, or Disabled Employees). In that case, you may still be able to claim deductions. Here’s a general guideline on how to deduct unreimbursed employee/business expenses:
- Keep Detailed Records: Maintain accurate records of all your unreimbursed business expenses, including receipts, invoices, mileage logs, and other documentation substantiating your expenses.
- Determine Eligibility: Ensure that you qualify for one of the exceptions allowing you to deduct unreimbursed employee expenses (as listed in the previous answer).
- Calculate Your Expenses: Add up all your qualifying unreimbursed employee expenses for the tax year.
- Complete the Appropriate Tax Forms: Depending on your specific situation, you may need to complete certain tax forms or schedules to claim your deductions. For example, Armed Forces Reservists might use Form 2106 or Form 2106-EZ, while Qualified Performing Artists and Fee-Basis Government Officials will typically use Schedule 1 (Form 1040) to report their expenses as an adjustment to income. Consult a tax professional to determine which forms are required for your circumstances.
- File Your Tax Return: Submit your completed tax return and any required forms or schedules by the applicable deadline.
Additionally, check the rules for your state income tax returns, as some states may still allow deductions for unreimbursed employee expenses. Always consult with a tax professional to ensure you’re following the correct procedure for your specific situation and to stay updated on any changes to tax laws.
Why Should Business Owners Reimburse Their Employees?
Business owners should consider reimbursing their employees for work-related expenses for several reasons:
- Employee Morale and Satisfaction: Reimbursing employees for their out-of-pocket expenses demonstrates that the company values their contributions and supports them in performing their duties. This can lead to increased job satisfaction, motivation, and loyalty.
- Recruitment and Retention: Offering a reimbursement policy can make a company more attractive to potential employees and help retain existing staff members. It shows that the organization cares about its employees’ well-being and is willing to support them financially.
- Tax Benefits: When a company reimburses employees for business expenses under an accountable plan, those reimbursements are generally not considered taxable income for the employees. Additionally, the company can typically deduct these reimbursed expenses as a business expense, reducing its overall tax liability.
- Productivity: Employees confident that they will be reimbursed for necessary expenses may be more likely to invest in tools, equipment, or training to help them be more efficient and effective.
- Expense Tracking and Control: A clear reimbursement policy allows a company to monitor and manage its business expenses more effectively. By requiring employees to submit documentation for their expenses, management can gain insights into costs and identify areas where savings might be possible.
- Legal Compliance: Some jurisdictions require employers to reimburse employees for work-related expenses. Ensuring your company complies with these regulations can help avoid legal issues.
How ReliaBills Can Help Business Owners
Dealing with reimbursements is essential for retaining employee confidence while running a business. At the same time, getting paid for your services is equally important. For the latter, it’s essential to have reliable billing software to get the job done in the background as you deal with other issues within your business—such as unreimbursed business expenses. That’s why you have to give ReliaBills a try!
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Unreimbursed business expenses can be a major burden for employees, who are usually unable to deduct them from their income tax returns. However, employers can benefit financially and create an attractive work environment by implementing an accountable plan that reimburses employees for necessary expenses.