Cars, Meals, Travel, Home Offices, and Gifts

The most commonly deducted employee business expense is undoubtedly the cost of a car. The IRS has a large number of very specific rules about deductible costs of operating a vehicle. The rules for employees are basically the same as the rules for self-employed people.

One departure from the ordinary rules that employees should be aware of is that an employee using the actual cost method cannot deduct any part of the interest payments on a car loan (while a self-employed person can).

In order to claim the deduction for car expenses, you'll have to keep records that satisfy the IRS. The best way to be sure you'll get to claim all your deductions is to keep a written record of your business mileage whenever you drive, and also keep a record of all car expenses as you pay them. It's a good idea to save all your receipts for expenses as well.

Warning This is an area that the IRS scrutinizes very carefully. Make absolutely sure that you have all the information necessary to substantiate every penny claimed on your Form 2106.

If your employer pays you a mileage allowance, you can simplify your recordkeeping a bit. Generally, if the mileage allowance is no higher than the government's standard mileage rate, you will only be required to prove to the employer the time, number of miles, and business purpose of your car trips, and this will be enough to satisfy the IRS. (For 2013, the business mileage rate is 56.5 cents per mile.) If, however, your employer pays you more than the standard mileage rate (SMR), the SMR amount will be shown in Box 12 of your W-2 Form with Code L, and the excess will be reported as taxable income to you in Box 1 of the W-2 Form.

Form 2106-EZ. For employees, car expenses can be reported on Form 2106-EZ if you own your car and use the standard mileage rate for 2012, and if you are not required to file Form 2106 for any other reason. Otherwise, you must use Form 2106 to report car expenses.

Meals, entertainment, travel, gifts, and home offices. Most other types of employee business expenses follow the same rules that apply to small business owners. See our discussions of meals and entertainment, deductible travel expenses, business gifts, and home offices. Note that for an employee to claim a home office expense, he or she must be using the office for the convenience of the employer (not just his or her own convenience), in addition to meeting all the other requirements for the home office deduction.