CARL WATTS & ASSOCIATES

June 29, 2015

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
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Many of you are familiar either with job-related expenses, or with business expenses and how they can be deducted on your tax returns.

And what you know is that, if you have your own business, then it’s Schedule C, Profit or Loss From Business, that you’re going to use to account for your income and the ordinary and necessary expenses related to running your business.

The final amount you come to after filling out Schedule C is then recorded on your Form 1040 and used to calculate your total income before any adjustments to income.

If you are an employee, you may be able to deduct your out-of-pocket work-related expenses as a miscellaneous itemized deduction on Schedule A, Itemized Deductions. Generally, you must use Form 2106 or Form 2106-EZ to figure your deduction for employee business expenses and attach it to your Form 1040. As an itemized deduction, your unreimbursed job-related expenses are deductible only to the extent that they exceed a 2% limit of your adjusted gross income.

It is a less known fact that certain professionals may be entitled to deduct their out-of-pocket job-related expenses as an adjustment to income, provided they meet certain conditions. This deduction has no special chapter of itself in the vast library of tax laws and regulations, nevertheless it is there on your 1040 Form among other above-the-line deductions, it is referred to mostly in the Instructions to Forms 2106 and 2106-EZ, Employee Business Expenses, as well as in the IRS regulations for miscellaneous deductions, those for travel, entertainment, gift and car expenses, and other publications.

And now let us see who are the professionals that may qualify to take advantage of this deduction.

Armed Forces reservists (members of a reserve component).

You are a member of a reserve component of the Armed Forces of the United States if you are in the Army, Navy, Marine Corps, Air Force, or Coast Guard Reserve; the Army National Guard of the United States; the Air National Guard of the United States; or the Reserve Corps of the Public Health Service.

If you qualify, you must complete Form 2106 or Form 2106-EZ, then include expenses for travel more than 100 miles away from home in connection with your performance of services as a member of the reserves from line 10 of Form 2106 or line 6 of Form 2106-EZ in the total on line 33 of Form 1040.

The amount of expenses you can deduct is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses), plus any parking fees, ferry fees, and tolls.

These reserve-related travel expenses are deductible whether or not you itemize deductions. If you itemize, you could very well enter the remaining expenses from line 6 on Schedule A.

Fee-basis state or local government officials.

Fee-basis officials are persons who are employed by a state or local government and who are paid in whole or in part on a fee basis. These professionals too can deduct their business expenses in performing services in that job as an adjustment to gross income rather than as a miscellaneous itemized deduction.



Adjustements to Income -
Business Expenses of Reservists, Performing Artists,
and Fee-Basis Government Officials
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If you are a fee-basis government official, you can follow the same steps mentioned above for the reservists to deduct your business expenses in your tax return.


Qualified performing artists.

If you are a performing artist, you may qualify to deduct your employee business expenses as an adjustment to gross income rather than a miscellaneous itemized deduction, too. To qualify, you must meet all of the following requirements:

  • Performed services in the performing arts as an employee for at least two employers during the tax year,

  • Received at least $200 each from any two of these employers,
  • Had allowable business expenses attributable to the performing arts of more than 10% of gross income from the performing arts, and
  • Had adjusted gross income of $16,000 or less before deducting expenses as a performing artist.


In addition, if you are married, you must file a joint return unless you lived apart from your spouse for all of the tax year. If you file a joint return, you must figure the first three requirements separately for both you and your spouse. However, the fourth requirement applies to the combined adjusted gross income of both you and your spouse.


If you meet all of the above requirements, you can deduct your expenses following the same steps as the reservists and the fee-based government officials.

If you do not meet all of the above requirements, you do not qualify to deduct your expenses as an adjustment to gross income. Instead, you can complete Form 2106 or 2106-EZ and deduct your employee business expenses as an itemized deduction on line 20 of Schedule A (Form 1040).

In all honesty, it may not seem too much of an advantage, especially with such a low income level required, but it may allow you, if you are a performing artist, to take advantage of the standard deduction on your return rather than itemizing them, which may significantly increase the deductions you may take on the federal income tax return.

It may also be the starting point for one or more of the state or local income taxes you have to pay, so it is important to take into account not just the impact on the federal return but also the impact on those state/local returns, too.

It is, ultimately, a matter of knowing what tax break better fits all your specific personal circumstances. And this is the main reason we always advise you to enroll help from a tax professional.