If you travel often for work, chances are you’ve racked up quite a number of business-related expenses. Ideally, your employer would reimburse you for any expense related to your work, but that’s not always the case. If your employer falls into the latter category, fear not; you’re not totally upside-down on these expenses.
While the IRS does offer various standard deductions based on your filing status, frequent business travelers may find that their expenses far exceed these deductions. The IRS recognizes that you shouldn’t be penalized for excessive work-related expenses, and therefore allows them to be deducted as a part of your “Miscellaneous Itemized Deductions” on income taxes. Enter: IRS Form 2106.
What is Form 2106?
Form 2106 is an IRS form that is used to itemize and tally “ordinary and necessary” business expenses that aren’t reimbursed by your employer. The IRS defines such expenses as follows: “An ordinary expense is one that is common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate for your business. An expense doesn’t have to be required to be considered necessary.” This may include a variety of day-to-day expenses including:
- Work-related meals
Even things such as cash tips for valet services are deductible through Form 2106, as long as you qualify.
Who Qualifies for Deductions from IRS Form 2106?
The most important qualification for deductions from IRS Form 2106 is that your employer will not reimburse these expenses for you. These deductions don’t apply if you simply missed your employers filing date for reimbursement. Furthermore, the total from all Miscellaneous Itemized Deductions, including the deductions on IRS Form 2106, must be at least 2% of your adjusted gross income. Further qualifications include full-time employment. While those who are self-employed or independent contractors do qualify for deductions, IRS form 2106 is not the appropriate form.
How Do I Complete Form 2106?
As far as IRS forms go, Form 2106 is fairly straight forward. You simply tally your expenses by category in Step 1, enter reimbursements, if any, received from your employer for any items listed in Step 2, and tally the two steps to calculate your deduction in Step 3.
That said, as with all other IRS forms, it is imperative that you are 100% accurate when completing Form 2106, or you may be putting yourself at risk of litigation for false or excessive claims. As such, let’s go through each item, line by line.
Step 1: Enter Your Expenses
The most important thing to remember when entering your expenses is that you must be able to provide evidence for any expense detailed in Step 1. You must provide receipts for all expenses of $75 or more, including lodging expenses, as well as providing location, purpose, and specific date of any travel and travel-related meals. This applies to both expenses you have and have not been reimbursed for by your employer.
Line 1: To calculate Line 1, skip down to Part II. You’ll use this worksheet to calculate any vehicle expenses. Simply go through each item line by line and answer them accurately (remember that you’ll need evidence for everything claimed here, as well). Enter the total(s) on line 22 and 29 in box 1.
Line 2: This is for all transportation expenses that don’t involve overnight travel or your commute to and from work. This may include day trips on public transportation to see clients, parking expenses for business-related drives, or toll road expenses.
Line 3: Enter all travel expenses for overnight travel, including lodging, airplane, car rentals, and more. Be sure not to enter any meals or entertainment here.
Line 4: Here, you’ll tally any other job-related expenses that don’t fall into the other categories on this form. “Include expenses for business gifts, education (tuition, fees, and books), home office, trade publications, etc.” Again, do not list any meals or entertainment.
Line 5: This is the spot for meals and entertainment expenses. Generally, 50% of business-related meal and entertainment expenses are allowed to be expensed.
- To calculate meal expense, you have two options.
- Enter the actual amount of each meal related to business (plus provide evidence for each meal including location, purpose, and specific date)
- Claim the standard meal allowance, calculated depending on where you travel. For small locations in the US, this is $51/day, but may be greater in other cities. You can find rate calculators online to determine your expensable amount.
- To calculate entertainment expenses, you must “prove the business purpose and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained.”
Line 6: Tally all the above expenses. Enter the total of lines 1-4 in Column A and the total from line 5 in Column B.
Step 2: Enter Reimbursements Received From Your Employer
Under Step 2, enter a tally of all “reimbursements received from your employer (or third party) for expenses shown in Step 1 that weren’t reported to you in box 1 of your W-2.” If your employer didn’t reimburse you for any items listed in Step 1, skip this section.
Step 3: Figure Expenses to Deduct
Now, it’s time to calculate your actual deduction. Follow the instructions on each line to calculate your exact deductible amount. While you won’t be able to deduct the entire total of your expensable items, it’s better than nothing.
Have You Incorrectly Completed IRS Form 2106?
If you’ve come to the conclusion that you may have made an error on your Form 2106, you may be at risk for fines and/or litigation by the IRS. Contact a tax services professional for tax relief help. They’ll work with you to identify if any errors have been made, and create a relief plan if needed. Additionally, they’ll act as an intermediary between you and the IRS in order to iron out any issues as soon as possible.
Completing your IRS Form 2106 may be a pain, but it isn’t impossible. Remember to take each step line by line, double check all your totals, and provide evidence for each, and get professional help when needed.