Employee Business Expenses – Avoiding Tax Problems


Tax Issue

Employees may be able to deduct their unreimbursed work-related expenses as itemized deductions subject to the 2% AGI limitation. Deductible expenses are those that are ordinary and necessary expenses and which are not reimbursed. Various substantiation rules apply depending on the type of deduction that is claimed. Without properly planning ahead of time so that the taxpayer retains the necessary documentation required, the IRS could disallow deductions for unreimbursed employee business expenses.

Applicable Tax Law

  • Ordinary and necessary expenses which are not reimbursed by an employer are deductible.

1.) Ordinary expense: An expense that is common and accepted in the taxpayer’s line of work.

2.) Necessary expense: An expense that is helpful and appropriate for work. It does not have to be required to be considered necessary.

  • Meals and entertainment expenses are deductible if incurred while traveling on business or while entertaining a client, customer, or employee. Entertaining clients must be directly related to, or associated with, the active conduct of business, such as discussing business with a client directly before, during, or after the entertainment period. The taxpayer must be present when the meals and entertainment are provided to clients and business associates.
  • The employee must substantiate meals and entertainment deductions with evidence that includes:

1.) The amount of the expense.

2.) The time and place of the travel, entertainment, amusement, recreation, or use of the facility or property.

3.) The business purpose of the expense.

4.) The business relationship to the taxpayer of persons entertained, using the facility or property.

  • If a fire department requires the firefighter-employee to make payments into a common meal fund as a condition of employment, the expense is deductible. However, when payments into a common meal fund are voluntary, the expense for meals is a nondeductible personal expense. A firefighter should retain the necessary documentation that indicates the cost of his or her meals are deductible.
  • Travel and lodging expense are the ordinary and necessary expenses of traveling away from home for a taxpayer’s job. A taxpayer travels away from home if his or her duties require the taxpayer to be away from his or her tax home substantially longer than an ordinary day’s work, and the taxpayer needs to get sleep or rest to meet the demands of work while away. The taxpayer should retain the necessary documentation (such as distance logs) to prove the taxpayer was away from his or her tax home.
  • Travel expenses paid or incurred in connection with a temporary work assignment away from home are deductible. However, travel expense paid in connection with an indefinite work assignment are not deductible. Any work assignment in excess of one year is considered indefinite. A taxpayer may not deduct travel expenses at a work location if it is realistically expected that the assignment is for more than one year, whether or not the taxpayer actually works there that long. If the expectation changes so that at some point the taxpayer realistically expects to work away from home for more than one year, travel expenses become nondeductible when the expectation changes. The taxpayer should retain the necessary documentation to prove the expense was incurred at a time the work assignment was considered temporary.
  • Employees can claim a depreciation deduction for a computer that is used for work if its use is (1) for the convenience of the employer (the use of the computer is for a substantial business reason of the employer), and (2) required as a condition of employment (the employee cannot properly perform his or her duties without the computer). Documentation should be retained to prove these two requirements are met.
  • Education expenses are deductible, even if the education leads to a degree, if it meets at least one of the following tests: (1) The education maintains or improves skills required for the taxpayer’s present work, or (2) the education is required by the taxpayer’s employer or by law. Documentation should be retained to prove the taxpayer met one of these requirements.
  • The cost and upkeep of uniforms and work clothes are deductible if (1) the taxpayer must wear them as a condition of employment, and (2) the clothes are not suitable for everyday wear. The second requirement is highly subjective and may take special documentation to prove the deduction (photos, statements from employer, etc.).

Tax Planning Strategies

When it comes to unreimbursed employee business expenses, tax planning is more than following the rules and proving an expense was incurred. Tax planning for unreimbursed employee business expenses involves planning ahead so that the taxpayer can prove an expense incurred is tax deductible. Planning ahead involves compiling adequate records to substantiate a particular deduction claimed. Recreating the records after the fact is not as effective. IRS auditors view recreated records as less substantiated than records created around the time of the event. Records may be maintained in an account book, logbook, diary, statement of expense, or similar record. A taxpayer should keep documentary evidence that, together with their records, will support each element of an expense. Documentary evidence includes, but is not limited to, receipts, canceled checks, invoices marked paid, etc., which indicate the amount, date, and place where the expense was incurred. Computerized records are an acceptable form of documentary evidence to the IRS as long as the taxpayer can access the records and print off hard copies of the records if requested.

Taxpayers should keep all receipts for items not reimbursed by the employer. Additionally, taxpayers should request a statement from the employer that says the employer will not reimburse a particular type of (or any) expense incurred by the employee. The employee should get this statement from the employer while the employee is still employed.

If a taxpayer uses his or her personal vehicle for work, the taxpayer should keep a log book in the vehicle to record mileage. A tax preparer should strongly stress the importance of maintaining a written log book for vehicle miles, including a comparison of the taxes saved for deducting the mileage versus the increase of tax should the IRS throw out the deduction for lack of written evidence. The tax preparer should also inform the client that not having written evidence (such as a log book) must be disclosed on the tax return if the client wants to claim the deduction.


Example #1: The union requires James to wear a white cap, white shirt, white bib overalls, and standard tennis shoes as a painter. Because these clothes could also be suitable for wear outside of his job, their costs are not deductible. It is irrelevant that the same clothes are specifically for his job and that they get ruined by paint after their first use of the job. However, if James has his name and company name sewn on the clothes, courts have ruled the clothes are not suitable for wear outside of the job.

Example #2: Jason wears traditional Celtic costumes while performing accordion folk music at parties and weddings. Because the clothing is not suitable for everyday wear, the cost and upkeep (cleaning costs) are deductible.

Example #3: Jennifer is an engineer with an engineering firm. She occasionally takes work home at night rather than work late at the office. She owns and uses a computer that is similar to the one she uses at the office to complete her work at home. Since her use of the computer is not for the convenience of her employer and is not requires as a condition of her employment, she cannot claim a depreciation deduction for it.

Example #4: Tim lives with his family in Chicago but work in Milwaukee where he stays in a hotel and eats in restaurants. He returns to Chicago every weekend. He may not deduct any of his travel, meals, or lodging in Milwaukee because that is his tax home. His travel on weekends to his family home in Chicago is not for his work so these expenses are also not deductible.

Example #5: Annie is a bus driver and periodically purchases magazines to have on her bus for passengers to read. Other bus drivers do not engage in this practice and the magazine purchases are not required by her employer. Therefore, Annie cannot deduct the cost of the magazines as is it a personal expense.

Example #6: Brandon is a painter and lives in Kansas and travels to Oklahoma for a job assignment expected to last nine months. After seven months, it is apparent that he will have to remain in Oklahoma five months longer to finish the job. His living expenses in Oklahoma for the first seven months are deductible as travel expenses. However, once it was determined that he would remain in Oklahoma another five months (making his total time away from home greater than a year), his Oklahoma living expense are no longer considered deductible travel expenses.

Possible Risks

  • If the employee could have been reimbursed for an expense, but elects not to request or fails to put a claim in for reimbursement, the expenses are not deductible.
  • Keeping written records can be burdensome, but if the taxpayer does not substantiate an expense, the IRS may deny a deduction.
  • To be deductible, work clothes have to be required and not suitable for everyday wear. Therefore, it if not enough that the taxpayer wears unique or distinct clothing on the job, or that the taxpayer does not in fact wear the clothing away from work.
  • Taxpayers cannot deduct commuting expense. Making business calls, carpooling with business associates, and having business discussions in the care while commuting does not change the trip from personal to business.
  • Round-trip transportation and lodging while conducting business at a destination within the United States is a deduction that is all or nothing. If the trip is primarily for business, it is 100% deductible. If the trip is primarily personal, none of it is deductible.
  • If a taxpayer does not itemize their deductions, they cannot deduct and unreimbursed employee business expenses.

Court Cases

Court Case: Mr. Orvis was employed by Fresno County in 1978 as an assistant district attorney and was required to use his personal automobile in the course of his employment. Mr. Orvis was not aware that the county had a policy of fully reimbursing its employees for travel expenses, and he did not seek reimbursement for these expenses during 1978. Mr. Orvis deducted $1,275 of travel expenses on his and his wife’s 1978 joint tax return. Mr. Orvis did not dispute that he could have received reimbursement from the county for his automobile expenses had he requested it. The Court affirmed the denial of the deduction and reasoned that a bright line rule prohibiting deductions for reimbursable expenses avoids the difficult inquiry into the taxpayer’s knowledge and gives the taxpayer an incentive to determine which expenses are reimbursable. Thus, an item is not deductible as a necessary expense of a taxpayer’s trade or business when the taxpayer could have sought reimbursement from his employer but failed to do so. Lack of knowledge that his employer had a policy of reimbursing such expenses is not relevant to their deductibility as personal business expenses. (Orvis, U.S Court of Appeals, 9th Cir., May 1, 1986).