Completing Forms 2106 and 2106-EZ

This section briefly describes how employees complete Forms 2106 and 2106-EZ. Table 5 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.

Form 2106-EZ. You may be able to use the shorter Form 2106-EZ to claim your employee business expenses. You can use this form if you meet all 3 of the following conditions.

1. You are an employee deducting expenses attributable to your job.
2. You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements).
3. If you claim car expenses, you use the standard mileage rate.

Car expenses. If you used a car to perform your job as an employee, you may be able to deduct certain car expenses. These are generally figured in Part II of Form 2106, and then claimed on line 1, Column A, of Part I of Form 2106. Car expenses using the standard mileage rate can also be figured on Form 2106-EZ by completing Part II and line 1 of Part I.

Information on use of cars. If you claim any deduction for the business use of a car, you must answer certain questions and provide information about the use of the car. The information relates to the following items.

• Mileage (total, business, commuting, and other personal mileage).
• Percentage of business use.
• Date placed in service.
• Use of other vehicles.
• After-work use.
• Whether you have evidence to support the deduction.
• Whether or not the evidence is written.

Employees must complete Section A, Part II, Form 2106, or Part II, Form 2106-EZ, to provide this information.

Standard mileage rate. If you claim a deduction based on the standard mileage rate instead of your actual expenses, you must complete Section B, Part II, Form 2106. The amount on line 22 (Section B) is carried to line 1, Part I, Form 2106. In addition, on line 2, Part I, Form 2106, you can deduct parking fees and tolls that apply to the business use of the car. If you file Form 2106-EZ, complete line 1, Part I, for the standard mileage rate and line 2 for parking fees and tolls. See Standard Mileage Rate in chapter 4 for information on using this rate.

Actual expenses. If you claim a deduction based on actual expenses, you cannot use Form 2106-EZ. You must complete Section C, Part II, Form 2106. In addition, unless you lease your car, you must complete Section D to show your depreciation deduction and any section 179 deduction you can claim.

If you are still using a car that is fully depreciated, continue to complete Section C. Since you have no depreciation deduction, enter zero on line 28. In this case, do not complete Section D.

Car rentals. If you claim car rental expenses on line 24a of Form 2106, you may have to reduce that expense by an inclusion amount as described in chapter 4. If so, you can show your car expenses and any inclusion amount as follows.

1. Compute the inclusion amount without taking into account your business use percentage for the tax year.
2. Report the inclusion amount from (1) on line 24b, Part II, Form 2106.
3. Report on line 24c the net amount of car rental expenses [total car rental expenses minus the inclusion amount computed in (1)].

The net amount of car rental expenses will be adjusted on line 27, Part II, of Form 2106, to reflect the percentage of business use for the tax year.

Transportation expenses. Show your transportation expenses that did not involve overnight travel on line 2, Column A, of Form 2106 or on line 2, Part I, of Form 2106-EZ. Also include on this line business expenses you have for parking fees and tolls. Do not include expenses of operating your car or expenses of commuting between your home and work.

Employee business expenses other than meals and entertainment. Show your other employee business expenses on lines 3 and 4, Column A, of Form 2106 or on lines 3 and 4 of Form 2106-EZ. Do not include expenses for meals and entertainment on those lines. Line 4 is for expenses such as gifts, educational expenses (tuition and books), office-in-the-home expenses, and trade and professional publications.

If line 4 expenses are the only ones you are claiming, you received no reimbursements (or the reimbursements were all included in box 1 of your Form W-2), and the Special Rules discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. Claim these amounts directly on line 20 of Schedule A (Form 1040). List the type and amount of each expense on the dotted lines and include the total on line 20.

Meal and entertainment expenses. Show the full amount of your expenses for business-related meals and entertainment on line 5, Column B, of Form 2106. Include meals while away from your tax home overnight and other business meals and entertainment. Enter 50% of the line 8, Column B, meal and entertainment expenses on line 9, Column B, of Form 2106.

If you file Form 2106-EZ, enter the full amount of your meals and entertainment on the line to the left of line 5 and multiply the total by 50%. Enter the result on line 5.

Hours of service limits. If you are subject to the Department of Transportation's "hours of service" limits (as explained earlier under Individuals subject to "hours of service" limits in chapter 2), use 60% instead of 50%.

Reimbursements. Enter on line 7 of Form 2106 (You cannot use Form 2106-EZ.) the amounts your employer (or third party) reimbursed you that were not reported to you in box 1 of your Form W-2. This includes any amount reported under code L in box 12 of Form W-2.

Allocating your reimbursement. If you were reimbursed under an accountable plan and want to deduct excess expenses that were not reimbursed, you may have to allocate your reimbursement. This is necessary when your employer pays your reimbursement in the following manner:

1. Pays you a single amount that covers meals and/or entertainment, as well as other business expenses, and
2. Does not clearly identify how much is for deductible meals and/or entertainment.

You must allocate that single payment so that you know how much to enter in Column A and Column B of line 7 of Form 2106.

Example. Rob's employer paid him an expense allowance of $5,000 this year under an accountable plan. The $5,000 payment consisted of $2,000 for airfare and $3,000 for entertainment and car expenses. The employer did not clearly show how much of the $3,000 was for the cost of deductible entertainment. Rob actually spent $6,500 during the year ($2,000 for airfare, $2,000 for entertainment, and $2,500 for car expenses).

Since the airfare allowance was clearly identified, Rob knows that $2,000 of the payment goes in Column A, line 7, of Form 2106. To allocate the remaining $3,000, Rob uses the worksheet from the instructions for Form 2106. His completed worksheet follows.

On line 7 of Form 2106, Rob enters $3,668 ($2,000 airfare and $1,668 of the $3,000) in Column A and $1,332 (of the $3,000) in Column B.

After you complete the form. After you have completed your Form 2106 or 2106-EZ, follow the directions on that form to deduct your expenses on the appropriate line of your tax return. For most taxpayers, this is line 20 of Schedule A (Form 1040). However, if you are a government official paid on a fee basis, a performing artist, or a disabled employee with impairment-related work expenses, see Special Rules, later.

Limits on employee business expenses. Your employee business expenses may be subject to any of the three limits described next. They are figured in the following order on the specified form.

1. Limit on meals and entertainment. Certain meal and entertainment expenses are subject to a 50% limit. If you are an employee, you figure this limit on line 9 of Form 2106 or line 5 of Form 2106-EZ. (See 50% Limit in chapter 2.)

2. Limit on miscellaneous itemized deductions. If you are an employee, deduct your employee business expenses (as figured on Form 2106 or 2106-EZ) on line 20 of Schedule A (Form 1040). Most miscellaneous itemized deductions, including employee business expenses, are subject to a 2%-of- adjusted-gross-income limit. This limit is figured on line 25 of Schedule A (Form 1040).

3. Limit on total itemized deductions. If your adjusted gross income ( line 34 of Form 1040) is more than $132,950 ($66,475 if you are married filing separately), the total of certain itemized deductions, including employee business expenses, may be limited. See your form instructions for information on how to figure this limit.

Special Rules

This section discusses special rules that apply only to government officials who are paid on a fee basis, performing artists, and disabled employees with impairment-related work expenses.

Officials Paid on a Fee Basis

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 line 10 of Form 2106 or line 6 of Form 2106-EZ in the total on line 32 of Form 1040. Print "FBO" and the amount of your employee business expenses in the space to the left of line 32 of Form 1040.

Expenses of Certain Performing Artists

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.

1. During the tax year, you perform services in the performing arts for at least two employers.
2. You receive at least $200 each from any two of these employers.
3. Your related performing-arts business expenses are more than 10% of your gross income from the performance of those services.
4. Your adjusted gross income is not more than $16,000 before deducting these business expenses.

Special rules for married persons. If you are married, you must file a joint return unless you lived apart from your spouse at all times during the tax year. If you file a joint return, you must figure requirements (1), (2), and (3) separately for both you and your spouse. However, requirement (4) applies to your and your spouse's combined adjusted gross income.

Where to report. If you meet all of the above requirements, you should first complete Form 2106 or 2106-EZ. Then you include your performing-arts-related expenses from line 10 of Form 2106 or line 6 of Form 2106-EZ in the total on line 32 of Form 1040. Write "QPA" and the amount of your performing-arts-related expenses in the space to the left of line 32 of Form 1040.

If you do not meet all of the above requirements, you do not qualify to deduct your expenses as an adjustment to gross income. Instead, you must complete Form 2106 or 2106-EZ and deduct your employee business expenses as an itemized deduction on line 20 of Schedule A (Form 1040).

Impairment-Related Work Expenses of Disabled Employees

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 line 10 of Form 2106 or line 6 of Form 2106-EZ on line 27 of Schedule A (Form 1040), and identify the type and amount of this expense on the dotted line next to line 27. Enter your employee business expenses that are unrelated to your disability from line 10 of Form 2106 or line 6 of Form 2106-EZ on line 20 of Schedule A (Form 1040).

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:

• A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed, or
• 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:

• Necessary for you to do your work satisfactorily,
• For goods and services not required or used, other than incidentally, in your personal activities, and
• Not specifically covered under other income tax laws.

Example. 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.

Illustrated Examples

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.

Table 6. Daily Business Mileage and expense Log

Form 2106, Page 1, for David Pine

Form 2106, Page 2, for David Pine

Table 7. Weekly Traveling Expense and Entertainment Record

Form 2106-EZ for Bill Wilson

Example 1. David Pine purchased a car for $18,500 (including sales tax) on January 6, 2001. In 2001, he used the car 70% for business purposes. A sample page from David's logbook is illustrated in Table 6. 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.

His depreciation deduction normally would be $2,590 [$18,500 (unadjusted basis) × 70% (business use) × 20% (from Table 3 )]. 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 $3,080 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 ($2,156) to the depreciation deduction ($2,142) and reports the total ($4,298) on line 1, Part I.

His other transportation expenses for parking fees, tolls, and taxis were $1,190. He enters this amount on line 2, Part I. David's employer reimbursed him a total of $2,940 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 line 7, Column A, Part I. Since David had no meal or entertainment expenses, he enters his excess deductible expenses ($2,548) on line 10, Part I. He can deduct these expenses (subject to the 2%-of-adjusted-gross-income limit) on line 20 of Schedule A (Form 1040) if he itemizes his deductions.

Example 2. Bill Wilson is an employee of Fashion Clothing Co. in Manhattan, NY. In a typical 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, 1998. 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 7. 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 Part II of Form 2106, he answers all the questions and figures his car expense to be $6,900 (20,000 business miles × 34 1/2 cents standard mileage rate.

His total employee business expenses are shown in the following table.

Bill received an allowance of $3,600 ($300 per month) to help offset his expenses. Bill did not have to account to his employer for the reimbursement and the $3,600 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.