This section presents information on employee business expenses that are incurred by an employee in performing services for his or her employer. The expenses are miscellaneous itemized deductions, subject to the 2% of AGI limitation. Note that the types of expenses and many of the tax rules and regulations are similar for a self-employed taxpayer’s business expenses deductible on Schedule C (for a trade or business activity other than farming) or Schedule F (for taxpayers in the farming business) to arrive at AGI. In addition, such expenses incurred in connection with rental or royalty income would be deductible in arriving at AGI on Schedule E.

Travel expenses include transportation expense, lodging costs, the cost for food, and miscellaneous items that are ordinary and necessary expenses incurred in traveling away from home in pursuit of the taxpayer’s trade or business. These expenses are deductible as long as they can be substantiated and are not lavish or extravagant.

Transportation expenses incurred while not away from home, business gifts, and business entertainment are not included as travel expenses; however, these items are separately deductible and subject to certain limitations. Expenses included as part of the travel deduction include the cost of items, such as meals, lodging, taxis, tips, and laundry. Most travel expenses are fully deductible, but Congress decided that a portion of the cost of meals is a personal expense. Therefore, only 50% of the cost of meals is deductible. If an employer reimburses an employee for the cost of business meals, then the 50% limitation applies to the employer so that the employer can deduct only 50% of the expense.

To deduct travel expenses, a taxpayer must be in travel status. The taxpayer must be away from home “overnight.” Overnight does not literally mean twenty-four hours; it is a period of time longer than an ordinary work day in which rest or relief from work is required. Also, the taxpayer must be away from his or her “tax home” to be on travel status. A tax home is the taxpayer’s principal place of business or employment, and not necessarily the same location as his or her family residence. If the taxpayer has two or more places of business, the taxpayer’s tax home is at the principal place of business. Factors that determine the principal place of business include total time spent in each location, the degree of business activity, and the relative amount of income from each location.

Expenses of a temporary assignment are deductible if it is not practical to return home at the end of the day. If the assignment is for a long period of time or indefinite (generally more than one year), the new location may be considered the taxpayer’s new tax home and he or she may lose the travel deduction. If the travel deduction is lost, the employee must include as income any reimbursements of travel expenses.

Taxpayers combining business with pleasure on a trip within the United States may deduct all of the costs incurred in traveling to and from the business destination if the trip is primarily for business. Once at the destination, only the business portion of the travel costs for meals, lodging, local transportation, and incidental expenses may be deducted; any costs not associated with the taxpayer’s business are not deductible. If a taxpayer makes a trip primarily for pleasure, the travel expenses to and from the destination are not deductible but if the taxpayer engages in some business activity while at the destination, any expenses incurred while at the destination that are related to the taxpayer’s business are deductible.

Special rules and limitations apply to combined business and pleasure travel outside the United States. Even though a trip is primarily for business, if the trip has an element of pleasure, the cost of traveling to and from the destination must be allocated between the business and personal portion of the trip. The travel expenses for transportation to and from the destination must be allocated based on the number of business days compared to the total number of days outside the United States. The rules for travel costs to and from the destination where the trip is primarily for pleasure are the same as the rules for travel within the United States; none of the travel costs are deductible. Once at the destination, the taxpayer’s expenses directly related to the taxpayer’s business are deductible. For a complete explanation of travel outside the United States, see IRS Publication 463.

Certain transportation expenses for business purposes are deductible by taxpayers. Deductible expenses include travel by airplane, rail, bus, and the cost of operating and maintaining an automobile. Meals and lodging are not included in the transportation expense deduction; those expenses may only be deducted as travel expenses. Transportation expenses may be deducted even if the taxpayer is not away from his or her tax home.

Deductible transportation costs do not include the normal costs of commuting to and from the taxpayer’s place of regular employment. Commuting includes the expense of buses, subways, taxis, and operating a private car between home and the taxpayer’s principal place of work, and is generally a nondeductible personal expense. The cost of transportation between the taxpayer’s home and a work location is generally not deductible, except in the following three of circumstances:

In all cases, the additional costs of hauling tools and instruments are deductible. For example, the cost of renting a trailer to haul tools to a job site is deductible.

A taxpayer may deduct the cost of going from one job to the other or from one business location to another if the taxpayer works at two or more jobs during the same day. The deductible expense is based on the cost of travel by the shortest, most normally traveled route, even if the taxpayer uses another route. If the taxpayer has a second job that is on a weekend or another nonwork day, the commuting expenses to the second job are not deductible.

Taxpayers may deduct the actual costs of transportation or may use the standard mileage ratestandard mileage rateWhen automobile costs are deductible, a taxpayer can use actual costs or a per mile standard rate that covers all costs except parking, tolls, interest (if deductible), and personal property tax; for 2008, the rate is $.505 for the first six months and $.585 for the last six months.. The standard mileage rate for 2008 is 50.5 cents per mile for travel from January 1, 2008, through June 30, 2008, and 58.5 cents per mile for travel from July 1, 2008, through December 31, 2008. The usual costs associated with operating an automobile—gas, oil, insurance, repairs and maintenance, and depreciation—are included in the standard mileage rate. Other expenses, when incurred as deductible transportation costs (not commuting), like parking and tolls, interest on an automobile loan, and personal property taxes are determined in addition to the standard mileage rate. Note that if the taxpayer is not eligible to deduct transportation costs, interest on an automobile loan is consumer interest and is not deductible.

To use the standard mileage rates, a taxpayer must

Not all publications can be deducted in the year they are purchased. The cost of books (libraries) that have long, useful lives may not be immediately deducted; these costs must be allocated over the useful lives of the publications. The costs of short-lived publications, such as a one-year tax publication, may be deducted in the year they are purchased, since they have no long-term value.

Uniforms are deductible if the uniform is not suitable for street wear. Uniforms worn by members of the armed forces are usually not deductible, as the member is usually required to wear his or her uniform during off-duty hours or the uniforms are suitable for off-duty wear. However, if local regulations prohibit wearing fatigues off-duty, the cost of uniforms is deductible to the extent the cost exceeds any uniform allowances.

Protective clothing costs, such as safety shoes, hard hats, and rubber boots, required on the job are also deductible. However, the cost of regular work clothing and standard shoes may not be deducted even if required by the employer or union rules, since the clothing is suitable for general wear. For example, a welder may not deduct the cost of work clothing that an employer requires him or her to wear.

Business gifts are allowed a deduction. Salespersons and other taxpayers may deduct up to $25 per year per donee. For purposes of this limitation, a husband and wife count as one donee. Thus, the maximum that a taxpayer could deduct for gifts to a client or potential client and his or her spouse is a total of $25 per year, unless the spouse is also a client, in which case the spouse may receive a separate $25 gift.

Incidental expenses, such as gift wrapping and shipping, may be excluded from the limitation and are fully deductible. There is no limitation for small business gifts costing up to $4 each that have the taxpayer’s name or company name imprinted on them, such as pencils and calendars, and no limitation on promotional materials, such as signs and display racks. Also, the cost of gifts of tangible personal property made to employees for length of service on the job and safety achievement may be deducted up to a limit of $400 per employee per year. If the gift is made in conjunction with a “qualified plan,” the limit is raised to $1,600. Gifts made to a taxpayer’s supervisor (or individuals at a higher employment level) are not deductible. Those gifts are considered nondeductible personal expenses.

Go to Publication 17 and read Chapter 26: Car Expenses and Other Employee Business Expenses.