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We here at paystubmakr.com are happy to help you understand NonReibursed Expenses, payroll, and online paystubs.
Deductions for Unreimbursed Employee Expenses
You can no longer claim any miscellaneous itemized deductions that are subject to the 2%-of-AGI limitation, including unreimbursed employee expenses. However, you may be able to deduct certain unreimbursed employee business expenses if you fall into one of the following categories of employment listed under Unreimbursed Employee Expenses next, or are an eligible educator as defined under Educator Expenses , later.
Without Adequate Accounting:
Expenses Related to the Business of Contractors: If the independent contractor
does not account to the client, the contractor must include any reimbursements or allowances in income and may only deduct entertainment
expenses that are directly related to or associated with his business.
Contractor Gets Deduction: If the expenses are related to the contractor’s business, the contractor and not the client will be entitled to a deduction.
Expenses Related to Client’s Business: If the reimbursed entertainment
expenses related to the client’s business and not the contractor’s, the contractor still has income but is denied a deduction for reimbursed entertainment expenses since:
(1) Section 274(a) provides no deduction for entertainment shall be allowed
unless directly related to or associated with the taxpayer’s (i.e., the
contractor) trade or business.
(2) The exception to Section 274(e)(3)(B) does not apply because there was no adequate accounting to the client.
Client Gets Deduction: In this a case, the client would be entitled to a
deduction for the reimbursement, provided only that he prove the reimbursed entertainment expenses directly related to or were associated
with the client’s business (Section 162). The client would not have to substantiate each element of any expenditure since the independent contractor did not adequately account (Temp. Reg. Section 1.274-5T(h)(4)).
Entertainment Expense Example
Client Bambi agrees to reimburse lawyer Dan for all entertainment expenses that Dan incurs on Bambi’s behalf while representing her in business litigation. Dan is required to account for Bambi adequately. On Bambi’s behalf, Dan spends
$200 on entertainment. Dan substantiates this expense by adequate records and adequately accounts to Bambi by submitting those records to Bambi who reimburses Dan the $200. Dan excludes the $200 reimbursement form income
and is not entitled to a deduction. Bambi may deduct the reimbursement and will use Dan’s submitted records as the substantiation required by Temp. Reg. Section 1.274-5T(h)(4). As a result, Bambi does not have to satisfy either the “directly re-
Related to” or “associated with” tests. If Dan had not adequately accounted to Bambi, she would still be able to claim a $200 deduction provided she proves the expense was either “directly related to” or “associated with” her business. She would not, however, have to substantiate the underlying entertainment expense.
Non-Entertainment Expense Deduction
If a client reimburses a contractor for non-entertainment expenses covered
by Section 274(d), then:
(1) To the extent the contractor does substantiate the reimbursed expenses, the reimbursement is not included in his income, and he may not take a deduction; or
(2) To the extent the contractor does not substantiate the reimbursed expenses, the reimbursement is included in income, and he may not take a
deduction because he failed to substantiate as required by Section 274(d)).
In neither case does the contractor get a deduction. However, the client may
claim a deduction for the reimbursement without substantiation (Temp. Reg.
Section 1.274-5T(h)(4)) but must prove the expense was either “directly related to”
or “associated with” his business.
We here at paystubmakr.com are happy to help answer questions about your payroll and also about other business questions!