Don’t throw away your receipts yet! Employee business expenses are still tax deductible on your California income tax return.
The new federal tax law eliminated the deduction for out-of-pocket employee business expenses. But state law still allows the deduction. The deduction can be sizable if you are in a high tax bracket. The highest state tax rate is 13.3% which includes the mental health services tax. For example, assuming you can deduct $10,000 for business expenses, your state taxes would be $930 less if you are in the 9.3% tax bracket.
Did you get a letter from the Franchise Tax Board? The FTB is mailing letters to taxpayers who have deducted employee business expenses. The mailing reminds taxpayers of their responsibility to file accurate tax returns, deduct only allowed out-of-pocket costs, and maintain adequate receipts. If you get a letter, the FTB believes you are deducting amounts higher than they expect to see on your tax return. They are not auditing your tax return. But receiving this letter could be a warning of a possible audit. Shown below is a list of common problems with this deduction.
- Your employer may have a reimbursement policy. Tax rules will not allow you to deduct expenses that are reimbursable by your employer regardless of whether or not you file an expense report requesting reimbursement. If you are audited, the auditor will request a copy of your employer’s policy and may contact your employer to verify the policy is valid.
- Driving to and from your office and home are commuting miles which are not tax deductible. Special rules apply to taxpayers who qualify for the home office deduction.
- Clothes and uniforms not required by your employer are not tax deductible.
- No receipts or mileage logs to prove your deductions.
Remember to keep your receipts, ask your employer for a copy of the reimbursement policy, and maintain a log that records your business miles that were driven and the purpose of your trip.