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Denied reimbursements by employers could mean a tax benefit

3 min read

3 min read

November 14, 2017

H&R Block

Employees might pay qualified work expenses out of their own pocket for a number of reasons. Maybe they want to get points on their personal credit card before submitting the expense to their employer for reimbursement. They might be trying to expedite the purchase even if it means they have to wait to be reimbursed. Or, they might know that they won’t be reimbursed but still need whatever it is they purchase to perform their job.

Even if an employee thinks they won’t be reimbursed, they must submit the expense to their employer for reimbursement before they can deduct the expense.

“You may be able to deduct your unreimbursed employee expenses on your return and get a tax benefit,” Catherine Martin, senior tax research analyst at The Tax Institute at H&R Block, said. “However, your employer has the right to reimburse you, and then to claim the deduction if the expense is an ordinary and necessary business expense. If the expense is ordinary and necessary, you can deduct it only after your employer waives that right by not reimbursing you.”

Martin also notes that taxpayers can deduct only those unreimbursed employee expenses, along with all their other miscellaneous itemized deductions, that exceed 2 percent of their adjusted gross income (AGI).

Teaching just one occupation that could benefit from denied reimbursements

One occupation that pays a lot of out-of-pocket expenses is teaching. While certain teachers get a separate, above-the-line deduction of up to $250 for classroom expenses, they often spend more than $250. According to one recent survey, teachers spent an average of $468 on out-of-pocket classroom expenses. If the excess over the $250 limit, along with whatever other miscellaneous itemized deductions they’re able to take, is more than 2 percent of their AGI, these teachers should submit their excess employee expenses to their employer for reimbursement even if they know they will be denied.

Aside from supplies or tools needed to do a job, professional licenses and continuing education expenses could qualify as unreimbursed employee expenses for teachers.

Small businesses should consider tax implications of reimbursement policies

At the same time, if a taxpayer is self-employed with employees of their own, they have a right to deduct the business-related expenses paid by their employees.

“A self-employed taxpayer or small business owner with employees will generally be able to deduct the full amount of their business expenses, including the expenses they reimbursed their employees for making,” Martin said. “The tax benefit is potentially greater for the employer than the employee – something the small business owner should consider when designing their reimbursement policies.”

While going through the trouble of submitting a reimbursement claim they know could get denied might seem like an exercise in futility, Martin has a more optimistic look at the outcome.

“What’s the worst that could happen? They’ll say ‘no’ – and then you may be able to deduct the expense,” Martin said.

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