Most people incur business expenses throughout the year that don’t get reimbursed, such as professional licenses, union dues, continuing education conferences, rent and utilities for your office or the costs associated with goods sold if you’re self-employed. Depending on your circumstances, you may be able to turn these extra expenses into income tax deductions when you file your return. You can deduct business expenses and still claim the self-employed standard deduction if you are self-employed, but not if you work only as an employee.
Beginning the 2018 tax year, many miscellaneous deductions are no longer allowed. Self-employed individuals, however, will be able to deduct eligible business expenses while still taking the standard deduction for their filing status.
Self-Employed Business Expenses
When you are self-employed, such as having your own business or working as an independent contractor, you are only taxed on your net income from self-employment. Your net income is calculated by subtracting your eligible business expenses from your profits. For example, if your customers pay you $100,000, but you have $5,000 in advertising costs, $3,000 in insurance and $12,000 in overhead, your net income is only $80,000 for tax purposes.
All of these calculations are computed with a Schedule C 1040 form, and only your net earnings show up on your tax return. This means that you still have the option to claim your standard deduction or, if your itemized deductions are higher, the sum of your itemized deductions. However, when you’re self-employed, the news isn’t all good: You’re on the hook for self-employment taxes on your net self-employment income, which includes the 12.4 percent Social Security tax and the 2.9 percent Medicare tax.
Employee Business Expenses
Through the 2017 tax year, employees were permitted to deduct business expenses paid out of pocket as part of the miscellaneous expenses deduction. However, this deduction was limited in two ways. First, you had to itemize to claim it, which means you could not claim the expenses and still have a standard deduction. Second, you could only deduct the portion of your itemized deductions for business expenses that, when combined with other miscellaneous deductions, exceeded 2 percent of your adjusted gross income. For example, if your adjusted gross income was $50,000 and you paid $1,500 in unreimbursed business expenses, your deduction would only be $500 and you would see a greater benefit from claiming the standard deduction.
Changes for 2018 Taxes
Under the tax changes effective beginning with the 2018 tax year, the miscellaneous deduction for employee expenses is disallowed through the 2025 tax year. This means that if you’re an employee, you can’t claim a deduction for your unreimbursed business expenses regardless of whether you itemize your deductions.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."