Hidden Deductions In Unreimbursed Business Expenses
If you have any out-of-pocket expenses in connection with your employment, and you don’t get reimbursed for them, you may be entitled to deduct them to the extent that they exceed 2% of your Adjusted Gross Income. These expenses include well-known deductible costs, such as those incurred for business entertainment or travel, and business use of your car or home computer. They also include other, not-so-obvious expenses, such as the costs of an attaché case, a special gold or sterling silver pen or pencil set, or pictures to decorate your office. Stationery, office supplies, business books, subscriptions to professional publications and business newspapers, and dues for professional associations, societies, or unions.
Business Use Of Your Home Computer
Do you have a personal computer in your home? In order to deduct accelerated (ACRS) depreciation of a home computer, you must use it at least 50% for business. Calculate the amount of your deduction by multiplying the percent of business use by the ACRS depreciation rate. Or you can use the Section 179 write-off, which is $17,500 in the first year, depending on several variables. (Check this out with your tax adviser.)
If you use your personal computer less than 50% for business, you can take only straight-line depreciation. Caution: Business use doesn’t include use for investment purposes.
If you claim a deduction for your home computer as a requirement of your employment, you must prove that you maintain it at the request of your employer.
Not To Be Overlooked
- Client pass-troughs. The party that pays a meal expense is subject to the 50% deduction limit. Thus, if a company pays for a meal on behalf of a client, and bills the client for the meal, the client may deduct only 50% of its cost. But if the client paid only a general fee for services, it could deduct the whole fee as a business expense, while the company would have to include the whole fee in income and be able to deduct only 50% of the meal costs it incurred. Here the billing of itemized meal costs to the client is the key, and this item should be considered when drafting client agreements.
- Company parties. Holiday parties, summer outings, and other traditional company gatherings that take place primarily for the benefit of the company’s employees are not subject to the 50% limit on meal deductions.
How To Audit-Proof Your Expense Diary
Audit-proofing your business-expense diary is a very simple matter. Just include answers to each of these questions. (An easy way to remember the questions-the four W’s and $):
- Who was with you?
- Where were you?
- Why were you there?
- When were you there?
- How much money did you spend?
Remember, you need a receipt for all expenses that exceed $25. Otherwise, no deduction will be allowed.