Employee Business Expenses

Definition

Employee business expenses are costs that employees incur while performing their job duties, which can include travel, meals, lodging, and other necessary expenses. These expenses may be reimbursed by the employer or deducted from the employee's taxable income. Understanding how these expenses fit into the overall framework of exclusions from gross income is crucial for determining what amounts can be excluded when calculating taxable income.

5 Must Know Facts For Your Next Test

1. Employee business expenses are generally considered unreimbursed expenses unless they fall under an accountable plan.
2. Only expenses that are ordinary and necessary for the job qualify for deductions; personal expenses do not count.
3. In 2017, the Tax Cuts and Jobs Act eliminated the deduction for employee business expenses for employees subject to the 2% floor.
4. Certain professions, such as teachers, still have limited deductions available for unreimbursed classroom expenses.
5. Recordkeeping is essential; employees must keep receipts and documentation to substantiate any claims for deductions.

Review Questions

• How do employee business expenses relate to gross income exclusions, and what implications do they have on an employee's taxable income?
  • Employee business expenses can directly impact an employee's taxable income since they may be excluded from gross income if they meet certain criteria. When these expenses are reimbursed under an accountable plan, they do not need to be included in the employee's gross income. This means that understanding what qualifies as an employee business expense is essential for ensuring that employees do not pay taxes on money that they spend solely for work purposes.
• Analyze the changes brought about by the Tax Cuts and Jobs Act regarding employee business expenses and their implications for tax filings.
  • The Tax Cuts and Jobs Act significantly altered the landscape for employee business expenses by disallowing most deductions for unreimbursed employee expenses beginning in 2018. This change means that many employees can no longer claim these deductions, leading to higher taxable incomes for those who previously benefited from them. It creates a need for employees to seek alternative reimbursement arrangements or find ways to reduce their out-of-pocket costs associated with their jobs.
• Evaluate how understanding employee business expenses and their treatment in tax law can influence an employee's financial planning strategies.
  • Grasping how employee business expenses are treated in tax law allows employees to make informed decisions regarding their finances and tax strategies. For instance, knowing what qualifies as a deductible expense can help employees prepare better records and seek reimbursements more effectively. Additionally, understanding the implications of changes in tax law empowers employees to adjust their budgets or negotiate with employers about reimbursement plans, ultimately impacting their overall financial health and tax liabilities.

Related terms

Reimbursement: Payment made by an employer to an employee for expenses incurred while performing job-related duties.

Deductible Expenses: Expenses that can be subtracted from an individual's total income to reduce the amount of taxable income.

Accountable Plan:

A reimbursement plan where employees must provide proof of expenses and return any excess reimbursements to the employer, allowing for tax-free reimbursements.