Proving employee business expense deductions.

• Author: Liang, Rui

Prior to the passage of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, taxpayers were allowed to deduct unreimbursed employee business expenses as miscellaneous itemized deductions, subject to Sec. 67's 2% floor on miscellaneous itemized deductions and Sec. 68's overall limitation on itemized deductions, on Schedule A, Itemized Deductions, of Form 1040, U.S. Individual Income Tax Return. The deduction was disallowed for the years 2018 to 2025 by the enactment in the TCJA of Sec. 67(g), which suspends the allowance of miscellaneous itemized deductions. Nonetheless, because unreimbursed employee business expenses will be deductible again in 2026, and court cases involving disputes between the IRS and taxpayers over their deduction on tax returns for years before 2018 continue to make their way through the courts, knowledge of the details of the unreimbursed employee business expense deduction remains important.

Employee business expense deduction

To get started, what is a deductible unreimbursed employee business expense? Per Sec. 162(a), there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business. Performing services as an employee constitutes a trade or business (see, e.g., Primuth, 54 T.C. 374 (1970)). Thus, with respect to employee business expenses, a deduction under Sec. 162(a) will be allowed for an unreimbursed expense that is:

* Paid or incurred during an employee's tax year;

* For carrying on his or her trade or business of being an employee; and

* Ordinary and necessary.

An expense is ordinary if it is common and accepted in the taxpayer's trade, business, or profession. An expense is necessary if it is appropriate and helpful to the taxpayer's business; it does not have to be required to be considered necessary.

Employer reimbursements

To prevent a taxpayer from obtaining a double benefit, only unreimbursed business expenses are deductible. Also, business expenses are not "necessary" if reimbursement is possible (Podems, 24 T.C. 21 (1955)). Thus, if an employee incurs an expense that he or she has a right to reimbursement for under an expense reimbursement plan of his or her employer, but the employee fails to obtain reimbursement for the expense, the employee cannot take a Sec. 162(a) deduction for the expense.

This is true regardless of why an employee does not seek reimbursement for a business expense incurred on behalf...