Table of Contents
This chapter explains where and how to report the expenses discussed in this publication. It discusses reimbursements and how to treat them under accountable and nonaccountable plans. It also explains rules for independent contractors and clients, fee-basis officials, certain performing artists, Armed Forces reservists, and certain disabled employees. The chapter ends with illustrations of how to report travel, entertainment, gift, and car expenses on Forms 2106 and 2106-EZ.
This section provides general information on where to report the expenses discussed in this publication.
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Report your travel expenses, except meals, on line 24a,
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Report your deductible meals (actual cost or standard meal allowance) and entertainment on line 24b,
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Report your gift expenses and transportation expenses, other than car expenses, on line 27, and
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Report your car expenses on line 9. Complete Part IV of the form unless you have to file Form 4562 for depreciation or amortization.
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You are an employee deducting expenses attributable to your job.
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You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements).
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If you claim car expenses, you use the standard mileage rate.
If you are entitled to a reimbursement from your employer but you do not claim it, you cannot claim a deduction for the expenses to which that unclaimed reimbursement applies.
If your employer provides you with a car, you may be able to deduct the actual expenses of operating that car for business purposes. The amount you can deduct depends on the amount that your employer included in your income and the business and personal miles you drove during the year. You cannot use the standard mileage rate.
This section explains what to do when you receive an advance or are reimbursed for any of the employee business expenses discussed in this publication.
If you received an advance, allowance, or reimbursement for your expenses, how you report this amount and your expenses depends on whether the reimbursement was paid to you under an accountable plan or a nonaccountable plan.
This section explains the two types of plans, how per diem and car allowances simplify proving the amount of your expenses, and the tax treatment of your reimbursements and expenses. It also covers rules for independent contractors.
To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules.
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Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
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You must adequately account to your employer for these expenses within a reasonable period of time.
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You must return any excess reimbursement or allowance within a reasonable period of time.
“Adequate accounting” and “returning excess reimbursements” are discussed later.
An excess reimbursement or allowance is any amount you are paid that is more than the business-related expenses that you adequately accounted for to your employer.
The definition of reasonable period of time depends on the facts and circumstances of your situation. However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time.
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You receive an advance within 30 days of the time you have an expense.
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You adequately account for your expenses within 60 days after they were paid or incurred.
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You return any excess reimbursement within 120 days after the expense was paid or incurred.
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You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement.
Example.
Your employer's plan reimburses you for travel expenses while away from home on business and also for meals when you work late at the office, even though you are not away from home. The part of the arrangement that reimburses you for the nondeductible meals when you work late at the office is treated as paid under a nonaccountable plan.
The employer makes the decision whether to reimburse employees under an accountable plan or a nonaccountable plan. If you are an employee who receives payments under a nonaccountable plan, you cannot convert these amounts to payments under an accountable plan by voluntarily accounting to your employer for the expenses and voluntarily returning excess reimbursements to the employer.
One of the rules for an accountable plan is that you must adequately account to your employer for your expenses. You adequately account by giving your employer a statement of expense, an account book, a diary, or a similar record in which you entered each expense at or near the time you had it, along with documentary evidence (such as receipts) of your travel, mileage, and other employee business expenses. (See Table 5-1 in chapter 5 for details you need to enter in your record and documents you need to prove certain expenses.) A per diem or car allowance satisfies the adequate accounting requirement under certain conditions. See Per diem and Car Allowances, later.
You must account for all amounts you received from your employer during the year as advances, reimbursements, or allowances. This includes amounts you charged to your employer by credit card or other method. You must give your employer the same type of records and supporting information that you would have to give to the IRS if the IRS questioned a deduction on your return. You must pay back the amount of any reimbursement or other expense allowance for which you do not adequately account or that is more than the amount for which you accounted.
If your employer reimburses you for your expenses using a per diem or a car allowance, you can generally use the allowance as proof for the amount of your expenses. A per diem or car allowance satisfies the adequate accounting requirements for the amount of your expenses only if all of the following conditions apply.
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Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade or business.
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The allowance is similar in form to and not more than the federal rate (defined later).
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You prove the time (dates), place, and business purpose of your expenses to your employer (as explained in Table 5-1) within a reasonable period of time.
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You are not related to your employer (as defined next). If you are related to your employer, you must be able to prove your expenses to the IRS even if you have already adequately accounted to your employer and returned any excess reimbursement.
If the IRS finds that an employer's travel allowance practices are not based on reasonably accurate estimates of travel costs (including recognition of cost differences in different areas for per diem amounts), you will not be considered to have accounted to your employer. In this case, you must be able to prove your expenses to the IRS.
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Your employer is your brother or sister, half brother or half sister, spouse, ancestor, or lineal descendant,
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Your employer is a corporation in which you own, directly or indirectly, more than 10% in value of the outstanding stock, or
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Certain relationships (such as grantor, fiduciary, or beneficiary) exist between you, a trust, and your employer.
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For per diem amounts:
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The regular federal per diem rate.
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The standard meal allowance.
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The high-low rate.
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For car expenses:
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The standard mileage rate.
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A fixed and variable rate (FAVR).
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Provides you with lodging (furnishes it in kind).
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Reimburses you, based on your receipts, for the actual cost of your lodging.
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Pays the hotel, motel, etc., directly for your lodging.
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Does not have a reasonable belief that you had (or will have) lodging expenses, such as when you stay with friends or relatives or sleep in the cab of your truck.
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Figures the allowance on a basis similar to that used in computing your compensation, such as number of hours worked or miles traveled.
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Method 1:
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For the day you depart, add ¾ of the standard meal allowance amount for that day.
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For the day you return, add ¾ of the standard meal allowance amount for the preceding day.
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Method 2: Prorate the standard meal allowance using any method that you consistently apply and that is in accordance with reasonable business practice. For example, an employer can treat 2 full days of per diem (that includes M&IE) paid for travel away from home from 9 a.m. of one day to 5 p.m. of the next day as being no more than the federal rate. This is true even though a federal employee would be limited to a reimbursement of M&IE for only 1½ days of the federal M&IE rate.
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The federal rate.
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Whether the allowance or your actual expenses were more than the federal rate.
Example 1.
In April, Jeremy takes a 2-day business trip to Denver. The federal rate for Denver is $176 per day. As required by his employer's accountable plan, he accounts for the time (dates), place, and business purpose of the trip. His employer reimburses him $176 a day ($352 total) for living expenses. Jeremy's living expenses in Denver are not more than $176 a day.
Jeremy's employer does not include any of the reimbursement on his Form W-2 and Jeremy does not deduct the expenses on his return.
Example 2.
In June, Matt takes a 2-day business trip to Boston. Matt's employer uses the high-low method to reimburse employees. Since Boston is a high-cost area, Matt is given an advance of $246 a day ($492 total) for his lodging, meals, and incidental expenses. Matt's actual expenses totaled $700.
Since Matt's $700 of expenses are more than his $492 advance, he includes the excess expenses when he itemizes his deductions. Matt completes Form 2106 (showing all of his expenses and reimbursements). He must also allocate his reimbursement between his meals and other expenses as discussed later under Completing Forms 2106 and 2106-EZ.
Example 3.
Nicole drives 10,000 miles a year for business. Under her employer's accountable plan, she accounts for the time (dates), place, and business purpose of each trip. Her employer pays her a mileage allowance of 35 cents a mile.
Since Nicole's $4,850 expenses computed under the standard mileage rate (10,000 miles × 48½ cents) are more than her $3,500 reimbursement (10,000 miles × 35 cents), she itemizes her deductions to claim the excess expenses. Nicole completes Form 2106 (showing all of her expenses and reimbursements) and enters $1,350 ($4,850 - $3,500) as an itemized deduction.
Example 1.
Laura lives and works in Austin. Her employer sent her to Albuquerque for 2 days on business. Laura's employer paid the hotel directly for her lodging and reimbursed Laura $65 a day ($130 total) for meals and incidental expenses. Laura's actual meal expenses were not more than the federal rate for Albuquerque, which is $49 per day.
Her employer included the $32 that was more than the federal rate (($65 - $49) × 2) in box 1 of Laura's Form W-2. Her employer shows $98 ($49 a day × 2) in box 12 of her Form W-2. This amount is not included in Laura's income. Laura does not have to complete Form 2106; however, she must include the $32 in her gross income as wages (by reporting the total amount shown in box 1 of her Form W-2).
Example 2.
Joe also lives in Austin and works for the same employer as Laura. In May the employer sent Joe to San Diego for 4 days and paid the hotel directly for Joe's hotel bill. The employer reimbursed Joe $75 a day for his meals and incidental expenses. The federal rate for San Diego is $64 a day.
Joe can prove that his actual meal expenses totaled $380. His employer's accountable plan will not pay more than $75 a day for travel to San Diego, so Joe does not give his employer the records that prove that he actually spent $380. However, he does account for the time, place, and business purpose of the trip. This is Joe's only business trip this year.
Joe was reimbursed $300 ($75 × 4 days), which is $44 more than the federal rate of $256 ($64 × 4 days). The employer includes the $44 as income on Joe's Form W-2 in box 1. The employer also enters $256 in box 12 of Joe's Form W-2.
Joe completes Form 2106 to figure his deductible expenses. He enters the total of his actual expenses for the year ($380) on Form 2106. He also enters the reimbursements that were not included in his income ($256). His total deductible expense, before the 50% limit, is $124. After he figures the 50% limit on his unreimbursed meals and entertainment, he will include the balance, $62, as an itemized deduction.
Example 3.
Debbie drives 10,000 miles for business. Under her employer's accountable plan, she gets reimbursed 55 cents a mile, which is more than the standard mileage rate. Her total reimbursement is $5,500.
Debbie's employer must include the reimbursement amount up to the standard mileage rate, $4,850, in box 12 of her Form W-2. That amount is not taxable. Her employer must also include $650 ($5,500 - $4,850) in box 1 of her Form W-2. This is the reimbursement that is more than the standard mileage rate.
If Debbie's expenses are equal to or less than the standard mileage rate, she would not complete Form 2106. If her expenses are more than the standard mileage rate, she would complete Form 2106 and report her total expenses and reimbursement (shown in box 12 of her Form W-2). She would then claim the excess expenses as an itemized deduction.
Under an accountable plan, you are required to return any excess reimbursement or other expense allowances for your business expenses to the person paying the reimbursement or allowance. Excess reimbursement means any amount for which you did not adequately account within a reasonable period of time. For example, if you received a travel advance and you did not spend all the money on business-related expenses, or you do not have proof of all your expenses, you have an excess reimbursement.
“Adequate accounting” and “reasonable period of time” were discussed earlier in this chapter.
Example.
Your employer sends you on a 5-day business trip to Phoenix in March 2007 and gives you a $400 ($80 × 5 days) advance to cover your meals and incidental expenses. The federal per diem for meals and incidental expenses for Phoenix is $59. Your trip lasts only 3 days. Under your employer's accountable plan, you must return the $160 ($80 × 2 days) advance for the 2 days you did not travel. You do not have to return the $63 difference between the allowance you received and the federal rate for Phoenix (($80 - $59) × 3 days). However, the $39 will be reported on your Form W-2 as wages.
A nonaccountable plan is a reimbursement or expense allowance arrangement that does not meet one or more of the three rules listed earlier under Accountable Plans.
In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan:
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Excess reimbursements you fail to return to your employer, and
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Reimbursement of nondeductible expenses related to your employer's business. See Reimbursement of nondeductible expenses, earlier, under Accountable Plans.
An arrangement that repays you for business expenses by reducing the amount reported as your wages, salary, or other pay will be treated as a nonaccountable plan. This is because you are entitled to receive the full amount of your pay whether or not you have any business expenses.
If you are not sure if the reimbursement or expense allowance arrangement is an accountable or nonaccountable plan, ask your employer.
Example 1.
Kim's employer gives her $1,000 a month ($12,000 total for the year) for her business expenses. Kim does not have to provide any proof of her expenses to her employer, and Kim can keep any funds that she does not spend.
Kim is being reimbursed under a nonaccountable plan. Her employer will include the $12,000 on Kim's Form W-2 as if it were wages. If Kim wants to deduct her business expenses, she must complete Form 2106 or 2106-EZ and itemize her deductions.
Example 2.
Kevin is paid $2,000 a month by his employer. On days that he travels away from home on business, his employer designates $50 a day of his salary as paid to reimburse his travel expenses. Because his employer would pay Kevin his monthly salary whether or not he was traveling away from home, the arrangement is a nonaccountable plan. No part of the $50 a day designated by his employer is treated as paid under an accountable plan.
This section provides rules for independent contractors who incur expenses on behalf of a client or customer. The rules cover the reporting and substantiation of certain expenses discussed in this publication, and they affect both independent contractors and their clients or customers.
You are considered an independent contractor if you are self-employed and you perform services for a customer or client.
If you received a reimbursement or an allowance for travel, entertainment, or gift expenses that you incurred on behalf of a client, you should provide an adequate accounting of these expenses to your client. If you do not account to your client for these expenses, you must include any reimbursements or allowances in income. You must keep adequate records of these expenses whether or not you account to your client for these expenses.
If you do not separately account for and seek reimbursement for meals and entertainment in connection with providing services for a client, you are subject to the 50% limit on those expenses. See 50% Limit in chapter 2.
If you are a client or customer, you generally do not have to keep records to prove the reimbursements or allowances you give, in the course of your business, to an independent contractor for travel or gift expenses incurred on your behalf. However, you must keep records if:
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You reimburse the contractor for entertainment expenses incurred on your behalf, and
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The contractor adequately accounts to you for these expenses.
This section briefly describes how employees complete Forms 2106 and 2106-EZ. Table 6-1 explains what the employer reports on Form W-2 and what the employee reports on Form 2106. The instructions for the forms have more information on completing them.
If you are self-employed, do not file Form 2106 or 2106-EZ. Report your expenses on Schedule C, C-EZ, or F (Form 1040). See the instructions for the form that you must file.
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You are an employee deducting expenses attributable to your job.
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You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements).
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If you are claiming car expenses, you are using the standard mileage rate.
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Mileage (total, business, commuting, and other personal mileage).
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Percentage of business use.
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Date placed in service.
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Use of other vehicles.
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After-work use.
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Whether you have evidence to support the deduction.
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Whether or not the evidence is written.
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Compute the inclusion amount without taking into account your business use percentage for the tax year.
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Report the inclusion amount from (1) on Form 2106, Part II, line 24b.
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Report on line 24c the net amount of car rental expenses (total car rental expenses minus the inclusion amount computed in (1)).
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Pays you a single amount that covers meals and/or entertainment, as well as other business expenses, and
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Does not clearly identify how much is for deductible meals and/or entertainment.
Example.
Rob's employer paid him an expense allowance of $12,000 this year under an accountable plan. The $12,000 payment consisted of $5,000 for airfare and $7,000 for entertainment and car expenses. The employer did not clearly show how much of the $7,000 was for the cost of deductible entertainment. Rob actually spent $14,000 during the year ($5,500 for airfare, $4,500 for entertainment, and $4,000 for car expenses).
Since the airfare allowance was clearly identified, Rob knows that $5,000 of the payment goes in Column A, line 7, of Form 2106. To allocate the remaining $7,000, Rob uses the worksheet from the instructions for Form 2106. His completed worksheet follows.
1. | Enter the total amount of reimbursements your employer gave you that were not reported to you in box 1 of Form W-2 | $7,000 | |
2. | Enter the total amount of your expenses for the periods covered by this reimbursement | 8,500 | |
3. | Of the amount on line 2, enter your total expense for meals and entertainment | 4,500 | |
4. | Divide line 3 by line 2. Enter the result as a decimal (rounded to at least three places) | .529 | |
5. | Multiply line 1 by line 4. Enter the result here and in Column B, line 7 | 3,703 | |
6. | Subtract line 5 from line 1. Enter the result here and in Column A, line 7 | $3,297 |
On line 7 of Form 2106, Rob enters $8,297 ($5,000 airfare and $3,297 of the $7,000) in Column A and $3,703 (of the $7,000) in Column B.
This section discusses special rules that apply only to Armed Forces reservists, government officials who are paid on a fee basis, performing artists, and disabled employees with impairment-related work expenses.
If you are a member of a reserve component of the Armed Forces of the United States and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct your travel expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. The amount of expenses you can deduct as an adjustment to gross income is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. See Per Diem and Car Allowances earlier for more information. Any expenses in excess of these amounts can be claimed only as a miscellaneous itemized deduction subject to the 2% limit.
Certain fee-basis officials can claim their employee business expenses whether or not they itemize their other deductions on Schedule A (Form 1040).
Fee-basis officials are persons who are employed by a state or local government and who are paid in whole or in part on a fee basis. They can deduct their business expenses in performing services in that job as an adjustment to gross income rather than as a miscellaneous itemized deduction.
If you are a fee-basis official, include your employee business expenses from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24.
If you are a performing artist, you may qualify to deduct your employee business expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. To qualify, you must meet all of the following requirements.
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During the tax year, you perform services in the performing arts as an employee for at least two employers.
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You receive at least $200 each from any two of these employers.
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Your related performing-arts business expenses are more than 10% of your gross income from the performance of those services.
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Your adjusted gross income is not more than $16,000 before deducting these business expenses.
If you are an employee with a physical or mental disability, your impairment-related work expenses are not subject to the 2%-of-adjusted-gross-income limit that applies to most other employee business expenses. After you complete Form 2106 or 2106-EZ, enter your impairment-related work expenses from Form 2106, line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 28, and identify the type and amount of this expense on the dotted line next to line 28. Enter your employee business expenses that are unrelated to your disability from Form 2106, line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 21.
Impairment-related work expenses are your allowable expenses for attendant care at your workplace and other expenses in connection with your workplace that are necessary for you to be able to work.
You are disabled if you have:
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A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed, or
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A physical or mental impairment (for example, a sight or hearing impairment) that substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, or working.
You can deduct impairment-related expenses as business expenses if they are:
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Necessary for you to do your work satisfactorily,
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For goods and services not required or used, other than incidentally, in your personal activities, and
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Not specifically covered under other income tax laws.
Example 1.
You are blind. You must use a reader to do your work. You use the reader both during your regular working hours at your place of work and outside your regular working hours away from your place of work. The reader's services are only for your work. You can deduct your expenses for the reader as business expenses.
The following examples illustrate the reporting of travel, entertainment, gift, and transportation expenses on Forms 2106 and 2106-EZ. Business use of a car is shown using actual car expenses in Example 1 and the standard mileage rate in Example 2. Sample records that prove some of the claimed expenses are also shown.
Example 1.
David Pine purchased a new car for $24,500 (including sales tax) on January 5, 2007. In 2007, he used the car 70% for business purposes. A sample page from David's logbook is illustrated in Table 6-2. He records his business mileage (but not his personal miles) and expenses daily.
David uses Form 2106 to claim actual car expenses. He completes Part II, Section A, as shown later on his illustrated form. He does not claim the section 179 deduction. He uses the MACRS double declining balance method (200% DB) to determine his depreciation deduction.
David's total depreciation deduction would normally be $3,430 ($24,500 (unadjusted basis) × 70% (business use) × 20% (from table 4-1)). However, it is limited in the first year to $2,142 ($3,060 (from the Maximum Depreciation Deduction for Cars table shown in chapter 4) × 70%). He enters these amounts in Part II, Section D.
His other car expenses included $5,150 for gas, oil, repairs, and insurance. He enters this amount in Part II, Section C, and multiplies it by the 70% business use. He adds this amount ($3,605) to the depreciation deduction ($2,142) and reports the total ($5,747) on Part I, line 1.
His other transportation expenses for parking fees, tolls, and taxis were $1,320. He enters this amount on Part I, line 2. David's employer reimbursed him a total of $4,800 for his car and transportation expenses. This amount was paid from an accountable plan and was not shown on David's Form W-2. However, since he is claiming expenses that are more than his reimbursements, he must show the entire reimbursement amount on Part I, Column A, line 7. Since David had no meal or entertainment expenses, he enters his excess deductible expenses ($2,267) on Part I, line 10. He can deduct these expenses (subject to the 2%-of-adjusted-gross-income limit) on Schedule A (Form 1040), line 21, if he itemizes his deductions.
Example 2.
Bill Wilson is an employee of Fashion Clothing Co. in Manhattan, NY. In a typical travel week, Bill leaves his home on Long Island on Monday morning and drives to Albany to exhibit the Fashion line for 3 days to prospective customers. Then he drives to Troy to show Fashion's new line of merchandise to Town Department Store, an old customer. While in Troy, he talks with Tom Brown, purchasing agent for Town Department Store, to discuss the new line. He later takes John Smith of Attire Co. out to dinner to discuss Attire Co.'s buying Fashion's new line of clothing.
Bill purchased his car on January 3, 2004. He uses the standard mileage rate for car expense purposes. He records his total mileage, business mileage, parking fees, and tolls for the year. Bill records his expenses and other pertinent information in his Weekly Traveling Expense and Entertainment Record, shown in Table 6-3. He obtains receipts for his expenses for lodging and for any other expenses of $75 or more.
During the year, Bill drove a total of 25,000 miles of which 20,000 miles were for business. Following the instructions for Form 2106-EZ, Part II, he answers all the questions and figures his car expense to be $9,700 (20,000 × 48½ cents per mile).
His total employee business expenses are shown in the following table.
Type of Expense | Amount | |
Parking fees and tolls | $ 520 | |
Car expenses | 9,700 | |
Meals | 3,861 | |
Lodging, laundry, dry cleaning | 18,318 | |
Entertainment | 3,250 | |
Gifts, education, etc. | 650 | |
Total | $36,299 |
Bill received an allowance of $33,000 ($2,750 per month) to help offset his expenses. Bill did not have to account to his employer for the reimbursement and the $33,000 was included as income in box 1 of his Form W-2.
Because Bill's reimbursement was included in his income and he is using the standard mileage rate for his car expenses, he files Form 2106-EZ with his tax return.
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