Key takeaways
The Tax Cuts and Jobs Act (TCJA) suspended most unreimbursed employee business expense deductions for W-2 employees for tax years beginning after 2017, with no current end date under existing law.
Only specific expenses that are both "ordinary and necessary" can still be deducted.
Businesses should implement an IRS-compliant accountable plan to provide tax-free reimbursement.
Some states, like California, New York, and Pennsylvania, still allow unreimbursed employee expenses deductions on state tax returns, even though they're not deductible on federal returns.
Rho simplifies expense management by providing corporate cards, automated tracking, and real-time visibility, helping businesses enforce accountable plans and reduce out-of-pocket employee costs.
As a founder, you're no stranger to wearing multiple hats. In the early days, you're not just the CEO; you're the head of sales, marketing, product, and, yes, even finance.
The rules around unreimbursed employee business expenses have tightened since the Tax Cuts and Jobs Act (TCJA) of 2017. Many deductions that were once common are now limited, making it critical for founders and their teams to know what qualifies. Understanding these rules helps you avoid mistakes and maximize your tax benefits.
In this article, we'll break down everything you need to know about what the IRS considers a deductible expense, who can still claim these tax deductions, and how to navigate the complexities of your federal tax return.
What counts as an unreimbursed employee expense?
First, let's define our terms. Unreimbursed employee expenses are costs you pay out-of-pocket for your job that your employer does not pay you back for.
These are expenses that are considered both "ordinary and necessary" for your line of work. An ordinary expense is common and accepted in your industry, while a necessary expense is helpful and appropriate for your business.
Think of expenses like business travel, tools required for your job, or professional development courses. Before 2018, if your company didn't have a formal reimbursement policy, you could often deduct these costs on your personal tax return.
However, the TCJA dramatically changed the landscape for most taxpayers.
How did the Tax Cuts and Jobs Act change everything?
The Tax Cuts and Jobs Act (TCJA) suspended the deduction for most miscellaneous itemized deductions for individuals for tax years beginning after 2017, with no current end date under existing law. This category included the vast majority of unreimbursed employee business expenses.
Before the TCJA, employees could deduct unreimbursed business expenses that exceeded 2% of adjusted gross income (AGI) by itemizing on Schedule A of Form 1040. Now, for most W-2 employees, that option is off the table.
This change was significant because it shifted the responsibility for covering business expenses more firmly onto employers. If a company doesn't reimburse necessary business costs, the employee is often left to bear the full price without any federal tax relief.
This makes a transparent, efficient expense management system, like the one offered by Rho, more important than ever. With tools for corporate cards and automated bill pay, you can ensure your team isn't left with out-of-pocket expenses that they can no longer deduct.
Who can still deduct unreimbursed employee expenses?
While the TCJA eliminated the deduction for most, it left the door open for a few specific categories of taxpayers. If you fall into one of these groups, you can still deduct your unreimbursed employee business expenses as an adjustment to your income.
This is even better than an itemized deduction because you don't have to itemize to claim it. These deductions are reported on Form 2106, Employee Business Expenses, and then carried to Schedule 1 of your Form 1040.
Here are the specific groups who still qualify:
Category | Key requirements | Form to use |
|---|---|---|
Armed Forces Reservists | Traveling more than 100 miles from home for service. | Form 2106 |
Qualified Performing Artists | Must meet specific income and employer criteria. | Form 2106 |
Fee-Basis State or Local Government Officials | Compensated on a fee basis rather than a salary. | Form 2106 |
Employees with Impairment-Related Work Expenses | Have a physical or mental disability that requires work-related expenses. | Form 2106 |
Eligible Educators | K-12 educators working at least 900 hours a year. | Schedule 1 (Form 1040) |
Let's take a closer look at each of these categories.
Armed forces reservists
If you are a member of the National Guard or a reserve component of the Armed Forces, you can deduct your unreimbursed travel expenses for trips that take you more than 100 miles away from home in connection with your service. This deduction is limited to the federal per diem rate for lodging, meals, and incidentals, and the standard mileage rate for car expenses.
You can also include parking, ferry, and toll fees. This recognition of the unique expenses faced by reservists helps offset the costs of serving your country.
Qualified performing artists
This category is for performing artists who work as employees. To qualify, you must meet four specific criteria that the IRS has established.
You must have performed services in the performing arts as an employee for at least two employers during the tax year. You must have received at least $200 in wages from at least two of those employers.
Your allowable business expenses related to the performing arts must be more than 10% of your gross income from this work, and your adjusted gross income (AGI) must be $16,000 or less before deducting these expenses. If you meet these requirements, you can deduct expenses like work clothes (costumes not suitable for everyday wear), professional instruments, and other job-related expenses.
Fee-basis state or local government officials
If you are a local government official who is compensated on a fee basis, you can deduct your necessary business expenses. This is a narrow category, but it provides relief for public servants who incur costs in the course of their duties.
Employees with impairment-related work expenses
Individuals with physical or mental disabilities can deduct impairment-related work expenses. These are costs for attendant care or other workplace accommodations that are necessary for you to be able to work.
These expense deductions recognize the additional costs individuals with disabilities may face in the workplace. The IRS understands that these expenses are essential for equal employment opportunities.
The educator expense deduction
While not technically an "unreimbursed employee expense" in the same category as the others, the educator expense deduction is another necessary above-the-line deduction. Eligible educators—K-12 teachers, counselors, principals, or aides who work at least 900 hours in a school year—can deduct up to $300 of qualified expenses.
This includes the cost of books, supplies, and other classroom materials. This is a small but essential acknowledgment of the out-of-pocket spending that so many teachers do to support their students.
What types of expenses can you actually deduct?
For those who qualify, the next question is what exactly can be deducted. The expenses must be both ordinary and necessary for your work.
Here are some of the most common categories of deductible business expense deductions:
Business travel: If you travel away from your tax home for your job, you can deduct the costs of transportation, lodging, and 50% of the cost of meals. This includes airfare, rental cars, and hotel stays. Keeping meticulous records is key here, which is why a platform that manages travel and expenses is so valuable.
Car expenses: If you use your personal vehicle for work, you can deduct either the actual costs of operating the car or take the standard mileage rate. In 2025, the rate is 70 cents per mile for business use. This does not include commuting to and from your regular workplace.
Tools and supplies: You can deduct the cost of tools and supplies used for your work, provided they are not reimbursed. This is particularly relevant for tradespeople and technicians.
Uniforms and work clothes: You can deduct the cost of uniforms and work clothes if they are required for your job and not suitable for everyday wear. The key test is whether you could reasonably wear these items outside of work.
Union dues and professional fees: You can deduct dues paid to unions and fees for professional licenses or certifications. These are common expenses for many professions.
How do you actually claim these deductions?
If you fall into one of the qualifying categories, you will need to file Form 2106 with your income tax return. This form is used to calculate your total deductible expenses.
The result is then transferred to Schedule 1 of your Form 1040, where it is subtracted from your gross income to arrive at your AGI. This is why it's called an "above-the-line" deduction—it reduces your taxable income regardless of whether you take the standard deduction or itemize.
For self-employed individuals, the process is different. You don't use Form 2106. Instead, you report your income and expenses on Schedule C, Profit or Loss from Business, where you'll claim all your business expense deductions, which will then be used to calculate your self-employment tax.
Why every business needs an accountable plan
For most businesses, the best way to handle employee expenses is through an accountable plan. This is the IRS-compliant method for providing employer reimbursement for business expenses.
An accountable plan must meet three requirements. First, the expenses must have a clear business purpose. Second, employees must adequately account for their expenses within a reasonable time, which means providing receipts and documenting the who, what, when, where, and why of the cost.
Third, employees must return any excess reimbursement or allowance within a reasonable time. When you have an accountable plan, reimbursements are not treated as income to the employee and are not subject to payroll taxes.
This is a win-win for both the company and the employee. The employee is made whole for their out-of-pocket expenses, and the company gets a business tax deduction for the reimbursement.
What was the 2% AGI floor, and why does it matter?
Before the Tax Cuts and Jobs Act changed the rules, employees who wanted to deduct unreimbursed employee business expenses faced the "2% floor". This meant that you could only deduct the amount of your miscellaneous itemized deductions that exceeded 2% of your adjusted gross income (AGI).
For example, if your AGI was $100,000, you could only deduct expenses that exceeded $2,000. This threshold made it difficult for many employees to benefit from the deduction, especially those with lower incomes or fewer expenses.
The 2% floor applies to a wide range of expenses beyond just unreimbursed employee business expenses, including investment expenses, tax preparation fees, and specific legal fees. The TCJA eliminated all of these miscellaneous itemized deductions, not just the employee expense ones.
What's the deal with the $2,500 expense rule?
You may have heard about a "$2,500 expense rule" in the context of business expenses. This is not a rule about unreimbursed employee expenses for individuals.
It refers to the de minimis safe harbor election under Treasury Regulation § 1.263(a)-1(f). If you have the required accounting policy in place and make the election, you can generally deduct amounts paid for tangible property up to $2,500 per invoice (or per item as substantiated by the invoice) for taxpayers without an AFS, instead of capitalizing and depreciating them.
How much documentation do you really need? The $75 rule explained
The IRS has specific rules about what kind of documentation you need to keep for your business expenses. One important rule is the "$75 rule".
This rule states that you generally need to keep a receipt for any expense that is $75 or more. For expenses under $75, you can rely on other documentation, such as a credit card statement or a canceled check, as long as you also have a record of the business purpose of the expense.
However, there are some exceptions to the $75 rule. For lodging expenses, you must always have a receipt, regardless of the amount.
And for travel expenses, you should keep a detailed log of your trips, including the dates, destinations, business purpose, and the people you met with. Good recordkeeping is essential if you want to claim expense deductions and avoid problems with the IRS during an audit.
Can you still deduct these expenses on your state tax return?
It's important to remember that this discussion has focused on the federal tax implications of unreimbursed employee expenses. Some states have not conformed to the TCJA changes, meaning you may still be able to deduct these expenses on your state tax return.
States like California, New York, and Pennsylvania have their own rules, so it's crucial to check with your state's tax agency or a qualified tax professional. For example, California allows employees to deduct unreimbursed employee business expenses on their state income tax return, even though they cannot do so on their federal tax return.
How to build a compliant expense reimbursement system
As a founder, navigating the complexities of the tax law is just one of the many challenges you face. The rules around unreimbursed employee business expenses can be confusing, but they don't have to be a headache.
By understanding who can and cannot claim these tax deductions, and by implementing a robust, accountable plan for your business, you can ensure that you and your team are managing expenses in the most efficient and tax-advantaged way possible. Ultimately, the goal is to create a system in which your employees do not bear the financial burden of legitimate business costs.
Take control of unreimbursed employee expenses with Rho
Managing employee expenses doesn’t have to be complicated. With Rho’s all-in-one platform, you get corporate cards, automated bill pay, and real-time expense tracking that makes it easy to enforce reimbursement policies, stay IRS-compliant, and eliminate the chaos of receipts and spreadsheets.
Set spending limits, automate approvals, and gain full visibility into every transaction, whether you’re a lean startup or a growing business. Rho gives founders the financial infrastructure to streamline expense management, save time, and focus on what matters most: building and scaling your company.
Get started with Rho today and see how we help thousands of founders take control of their business spending.
Frequently asked questions
What are unreimbursed employee expenses?
Unreimbursed employee expenses are job-related costs an employee pays out of pocket that are not reimbursed by their employer. These must be "ordinary and necessary" to be considered for a tax deduction.
Can I deduct unreimbursed employee expenses on my 2024 tax return?
For most taxpayers, the answer is no. The Tax Cuts and Jobs Act suspended the deduction for unreimbursed employee business expenses from 2018 to 2025. Only specific categories of employees, such as Armed Forces reservists, qualified performing artists, and fee-basis government officials, can still claim this deduction.
What is the $2,500 expense rule?
The $2,500 rule is not about individual employee deductions. It refers to the IRS safe harbor rule for businesses regarding capitalization of tangible property. Companies can elect to deduct the cost of tangible property that costs $2,500 or less per item rather than capitalizing and depreciating it over time.
How do I prove my business expenses to the IRS?
You must have records to prove your expenses. This includes receipts, canceled checks, and credit card statements. For travel expenses, you should also keep a log of your mileage and the purpose of your trips. The IRS.gov website provides detailed information on recordkeeping requirements.
What if my employer has a non-accountable reimbursement plan?
If your employer's reimbursement plan does not meet the IRS requirements for an accountable plan, all reimbursements are treated as taxable wages. This means they will be included on your Form W-2 and are subject to income and payroll taxes. You cannot deduct any of your expenses.