Deductible Business Expenses

Deductions that may be of special interest to you are discussed here. They include travel expenses, transportation expenses, and other expenses connected to your employment.

Travel Expenses

Subject to certain limits, you can deduct your unreimbursed ordinary and necessary expenses of traveling away from home in connection with the performance of your official duties. These expenses include such items as travel costs, meals, lodging, baggage charges, local transportation costs (such as taxi fares), tips, and dry cleaning and laundry fees.

Your home for tax purposes (tax home) is your regular post of duty regardless of where you maintain your family home. Your tax home is not limited to the Embassy, consulate, or duty station. It includes the entire city or general area in which your principal place of employment is located.

Traveling away from home. You are traveling away from home if you meet both of the following requirements.

1. Your duties require you to be away from the general area of your tax home substantially longer than an ordinary day's work.
2. You need to get sleep or rest to meet the demands of your work while away from home. This requirement is not satisfied by merely napping in your car.

You do not have to be away from your tax home for a whole day or from dusk to dawn as long as your relief from duty is long enough to get necessary sleep or rest.

Temporary assignment. If your assignment or job away from your tax home is temporary, your tax home does not change. You are considered to be away from home for the whole period, and your travel expenses are deductible. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for one year or less.

However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than one year, whether or not it actually lasts for more than one year.

You must determine whether your assignment is temporary or indefinite when you start work. If you expect employment to last for one year or less, it is temporary unless there are facts and circumstances that indicate otherwise. Employment that is initially temporary may become indefinite due to changed circumstances. A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment.

Exception for federal crime investigations or prosecutions. If you are a federal employee participating in a federal crime investigation or prosecution, you may be able to deduct travel expenses even if you are away from your tax home for more than one year. This exception to the one-year rule applies if the Attorney General certifies that you are traveling for the federal government in a temporary duty status to prosecute, or provide support services for the investigation or prosecution of a federal crime.

Limit on meals and entertainment. You can generally deduct only 50% of the cost of your unreimbursed business-related meals and entertainment. However, the limit does not apply to expenses reimbursed under a U.S. Government expense allowance arrangement.

Individuals subject to hours of service limits. You can deduct a higher percentage of your unreimbursed business-related meal expenses if the meals take place during or incident to any period subject to the Department of Transportation's hours of service limits. The percentage increases to 80% by the year 2008, as shown in the following table.

Individuals subject to the Department of Transportation's "hours of service" limits include the following persons.

1. Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations.
2. Interstate truck operators and bus drivers who are under Department of Transportation regulations.
3. Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations.
4. Certain merchant mariners who are under Coast Guard regulations.

Primary purpose of trip must be for business. If your trip was entirely for business, your unreimbursed travel expenses are generally deductible. However, if you spend some of your time on nonbusiness activities, part of your expenses may not be deductible.

If your trip was mainly personal, you cannot deduct your travel expenses to and from your destination. This applies even if you engage in business activities while there. However, you can deduct any expenses while at your destination that are directly related to your business.

Expenses paid for others. You generally cannot deduct travel expenses of your spouse, dependents, or other individuals who go with you on a trip.

Home leave. The Foreign Service Act requires U.S. citizens who are members of the foreign service to take a leave of absence after completing 3 years of continuous service abroad. This period is called "home leave" and can be used to take care of certain personal matters such as medical and dental checkups, buying a new wardrobe, and visiting relatives.

The amounts paid for travel, meals, and lodging while on home leave are deductible as travel or business expenses subject to the rules and limits discussed earlier. You must be able to verify these amounts in order to claim them. Amounts paid on behalf of your family while on home leave are personal living expenses and are not deductible.

More information. See chapter 1 of Publication 463 for more information on travel expenses.

Transportation Expenses

You can deduct allowable transportation expenses that are directly related to your official duties. Transportation expenses include the cost of transportation by air, rail, bus, or taxi, and the cost of driving and maintaining your car. They do not include expenses you have when traveling away from home overnight. Those expenses are deductible as travel expenses and are discussed earlier.

Use of your car. Whether you own or lease your car, you generally can use either of two methods to figure your business car expenses: actual expenses or the standard mileage rate.

If you use your car for both personal and business purposes, you must divide your expenses between business and personal use. To determine the business percentage, divide the business miles driven by the total miles the car was driven for the year.

Actual expenses. Under this method, you figure deductible car expenses using the business percentage of your actual operating costs. These include depreciation or lease payments (subject to certain limits), gasoline, repairs, and similar expenses.

Standard mileage rate. Under this method, you use a set rate per mile for each business mile you drive. The rate is adjusted periodically for inflation. See your tax form instructions to find the rate for the year you claim the deduction.

If you want to use the standard mileage rate for a car, you must choose to use it in the first year the car is available for use in your business. Then in later years, you can choose to use the standard mileage rate or actual expenses.

You cannot use the standard mileage rate if you:

1. Use the car for hire (such as a taxi),
2. Operate two or more cars at the same time (as in fleet operations),
3. Claimed a depreciation deduction for the car in an earlier year using ACRS or MACRS,
4. Claimed a section 179 deduction for the car, or
5. Claimed actual car expenses after 1997 for a car you leased.

Commuting. You cannot deduct your transportation costs of going between your home and your regular business location. These costs are personal commuting expenses.

If you have one or more regular business locations but must work at a temporary location, you can deduct the costs of commuting to that temporary place of work.

If your employment at a work location is realistically expected to last (and does in fact last) for one year or less, the employment is temporary unless there are facts and circumstances that would indicate otherwise. If your employment at a work location is realistically expected to last for more than one year or if there is no realistic expectation that the employment will last for one year or less, the employment is not temporary, regardless of whether it actually lasts for more than one year. If employment at a work location initially is realistically expected to last for one year or less, but at some later date the employment is realistically expected to last more than one year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes. It will not be treated as temporary after the date you determine it will last more than one year.

If you work at two or more places in the same day, you can deduct your expenses of getting from one place of work to the other.

More information. For more information on transportation expenses, see chapter 4 of Publication 463.

Other Employee Business Expenses

You may be able to deduct other unreimbursed expenses that are connected with your employment.

Membership dues. Membership dues you pay to professional societies that relate to your business or profession are deductible.

Subscriptions. Subscriptions to professional publications that relate to your business or profession are deductible.

Educational expenses. Generally, educational expenses are considered to be personal expenses and are not deductible. However, under some circumstances, educational expenses are deductible as business expenses.

You can deduct educational expenses as business expenses if the education:

1. Maintains or improves skills needed in your present position, or
2. Meets the express requirements of your agency to keep your present position, salary, or status.

You cannot deduct educational expenses as business expenses if the education:

1. Is needed to enable you to meet minimum educational requirements for qualification in your present position,
2. Is a part of a program of study that can qualify you for a new position, or
3. Is for travel as a form of education.

These rules apply even if the education is required by your agency or it maintains or improves skills required in your work.

See Publication 508, Tax Benefits for Work-Related Education, for more information on educational expenses.

Educational expenses that are not work related, such as costs of sending children to college, are personal expenses that you cannot deduct. However, you may be eligible for other tax benefits such as the higher education tax credits, contributions to an education IRA or state tuition program, penalty-free withdrawals from traditional or Roth IRAs, deduction for student loan interest, and exclusion from income of certain savings bond interest. These benefits are explained in Publication 970, Tax Benefits for Higher Education.

Foreign service representation expenses. If you are an employee of the U.S. Foreign Service and your position requires you to establish and maintain favorable relations in foreign countries, you may receive a nontaxable allowance for representation expenses. If your expenses are more than the allowance you receive, you can deduct the excess expenses as an itemized deduction on Schedule A (Form 1040) if you meet one of the following conditions.

1. You have a certificate from the Secretary of State attesting that the expenses were incurred for the benefit of the United States, and would be reimbursable under appropriate legislation if the agency had sufficient funds for these reimbursements.
2. You do not have a certificate described in (1) because the expenses are specifically not reimbursable under State Department regulations. However, the expenses do qualify as ordinary and necessary business expenses in performing your official duties.

To deduct any expenses for travel, entertainment, and gifts, including those certified by the Secretary of State, you must meet the rules for recordkeeping and accounting to your employer. These rules are explained in Publication 463.

Representation expenses. These are expenses that further the interest of the United States abroad. They include certain entertainment, gifts, costs of official functions, and rental of ceremonial dress. They generally do not include costs of passenger vehicles (such as cars or aircraft), printing or engraving, membership fees, or amounts a principal representative must pay personally to cover the usual costs of operating and maintaining an official residence.

Chapters 300 and 400 of the Standardized Regulations (Government Civilians, Foreign Area) provide more detail on what expenses are allowable as representation expenses. These regulations are available at U.S. Embassies and consular offices. You can also find them on the internet at www.state.gov/ m/a/als. Click on "Section 920". Publication 463 and Publication 529, Miscellaneous Deductions, provide more detail on what expenses are allowable as ordinary and necessary business expenses.

Impairment-related work expenses. If you are an employee with a physical or mental disability, you can deduct attendant-care services at your place of work and other expenses in connection with work that are necessary for you to be able to work. Attendant care includes a reader for a blind person and a helper for a person with a physical disability. These expenses are reported on Form 2106 or 2106-EZ and carried to Schedule A (Form 1040). They are not subject to the 2%-of- adjusted-gross-income limit on miscellaneous itemized deductions.

Loss on conversion of U.S. dollars into foreign currency. The conversion of U.S. dollars into foreign currency at an official rate of exchange that is not as favorable as the free market rate does not result in a deductible loss.

Recordkeeping Rules

If you claim a deduction for unreimbursed business expenses, you must keep timely and adequate records of all your business expenses.

For example, you must keep records and supporting evidence to prove the following elements about deductions for travel expenses (including meals and lodging while away from home).

1. The amount of each separate expense for travel away from home, such as the cost of your transportation, lodging, or meals. You may total your incidental expenses if you list them in reasonable categories such as daily meals, gasoline and oil, and taxi fares.
2. For each trip away from home, the dates you left and returned and the number of days spent on business.
3. The destination or area of your travel, described by the name of the city, town, or similar designation.
4. The business reason for your travel or the business benefit gained or expected to be gained from your travel.

How to record your expenses. Records for proof of your expenses should be kept in an account book, diary, statement of expense, or similar record. They should be supported by other records, such as receipts or canceled checks, in sufficient detail to establish the elements for these expenses. You do not need to duplicate information in an account book or diary that is shown on a receipt as long as your records and receipts complement each other in an orderly manner.

Each expense should be recorded separately in your records. However, some items can be totaled in reasonable categories. You can make one daily entry for categories such as taxi fares, telephone calls, meals while away from home, gas and oil, and other incidental costs of travel. You may record tips separately or with the cost of the service.

Documentary evidence generally is required to support all lodging expenses while traveling away from home. It is also required for any other expense of $75 or more, except transportation charges if the evidence is not readily available. Documentary evidence is a receipt, paid bill, or similar proof sufficient to support an expense. It ordinarily will be considered adequate if it shows the amount, date, place, and essential business character of the expense.

A canceled check by itself does not prove a business cost. You must have other evidence to show that the check was used for a business purpose.

Your records must be timely. Record the elements for the expense in your account book or other record at or near the time of the expense. A timely-kept record has more value than statements prepared later when, generally, there is a lack of accurate recall.

Confidential information. You do not need to put confidential information relating to an element of a deductible expense (such as the place, business purpose, or business relationship) in your account book, diary, or other record. However, you do have to record the information elsewhere at or near the time of the expense and have it available to fully prove that element of the expense.

How To Report Business Expenses

As a U.S. Government employee, your business expense reimbursements are generally paid under an accountable plan and are not included in your wages on your Form W-2. If your expenses are not more than the reimbursements, you do not need to show your expenses or reimbursements on your return.

However, if you do not account to your employer for a travel advance or if you do not return any excess advance within a reasonable period of time, the advance (or excess) will be included in your wages on your Form W-2.

If you are entitled to a reimbursement from your employer but you do not claim it, you cannot deduct the expenses to which that unclaimed reimbursement applies.

Form 2106 or Form 2106-EZ. You must complete Form 2106 or 2106-EZ to deduct your expenses. Also, if your actual expenses are more than your reimbursements, you can complete Form 2106 or 2106-EZ to deduct your excess expenses. You must generally include all of your expenses and reimbursements on Form 2106 or 2106-EZ and carry your allowable expense to Schedule A (Form 1040). Your allowable expense is then generally subject to the 2%-of-adjusted-gross- income limit.

Form 2106-EZ. You may be able to use Form 2106-EZ instead of the more complex Form 2106 for reporting unreimbursed employee business expenses. You can use Form 2106-EZ if you meet both of the following conditions.

• You are not reimbursed by your employer for any expenses. (Amounts your employer included in your wages on your Form W-2 are not considered reimbursements.)
• If you claim car expenses, you use the standard mileage rate.