Important Reminders

Limit on itemized deductions.   For 2002, if your adjusted gross income is more than $137,300 ($68,650 if married filing separately), you may have to reduce the amount of certain itemized deductions, including most miscellaneous deductions. For more information and a worksheet, see the instructions for line 28 of Schedule A (Form 1040).

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication explains which expenses you can claim as miscellaneous itemized deductions on Schedule A (Form 1040). You must reduce the total of most miscellaneous itemized deductions by 2% of your adjusted gross income. This publication covers the following topics.

• Deductions subject to the 2% limit.
• Deductions not subject to the 2% limit.
• Expenses you cannot deduct.
• How to report your deductions.

You must keep records to verify your deductions. You should keep receipts, canceled checks, financial account statements, and other documentary evidence. For more information on recordkeeping, get Publication 552, Recordkeeping for Individuals.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

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Internal Revenue Service
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We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Useful Items You may want to see:

Publication

• 463   Travel, Entertainment, Gift, and Car Expenses
• 525   Taxable and Nontaxable Income
• 535   Business Expenses
• 587   Business Use of Your Home (Including Use by Day-Care Providers)
• 946   How To Depreciate Property

Form (and Instructions)

• 2106   Employee Business Expenses
• 2106-EZ   Unreimbursed Employee Business Expenses

See How To Get Tax Help near the end of this publication for information about getting these publications and forms.

Deductions Subject to the 2% Limit

You can deduct certain expenses as miscellaneous itemized deductions on Schedule A (Form 1040). You can claim the amount of expenses that is more than 2% of your adjusted gross income. You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. Your adjusted gross income is the amount on Form 1040, line 36.

Generally, you apply the 2% limit after you apply any other deduction limit. For example, you apply the 50% (or 65%) limit on business-related meals and entertainment (discussed later under Travel, Transportation, Meal, Entertainment, and Gift Expenses) before you apply the 2% limit.

Deductions subject to the 2% limit are discussed in the three categories in which you report them on Schedule A: unreimbursed employee expenses (line 20), tax preparation fees (line 21), and other expenses (line 22).

Impairment-related work expenses.   If you have a physical or mental disability, certain expenses you incur that allow you to work may not be subject to the 2% limit. See Impairment-Related Work Expenses under Deductions Not Subject to the 2% Limit, later.

Performing artists.   If you are a qualified performing artist, you may be able to deduct your employee business expenses as an adjustment to income rather than as a miscellaneous itemized deduction. See Performing Artists under Deductions Not Subject to the 2% Limit, later.

State and local government officials paid on a fee basis.   If you performed services as an employee of a state or local government and you were paid in whole or in part on a fee basis, you can claim your trade or business expenses in performing those services as an adjustment to income, rather than as a miscellaneous deduction. See Officials Paid on a Fee Basis under Deductions Not Subject to the 2% Limit, later.

Unreimbursed Employee Expenses

You can deduct only unreimbursed employee expenses that are:

1. Paid or incurred during your tax year,
2. For carrying on your trade or business of being an employee, and
3. Ordinary and necessary.

An expense is ordinary if it is common and accepted in your type of trade or business. An expense is necessary if it is appropriate and helpful to your trade or business.

You may be able to deduct the following items as unreimbursed employee expenses.

• Business bad debt of an employee.
• Business liability insurance premiums.
• Damages paid to a former employer for breach of an employment contract.
• Depreciation on a computer or cellular telephone your employer requires you to use in your work.
• Dues to a chamber of commerce if membership helps you do your job.
• Dues to professional societies.
• Education that is work related.
• Home office or part of your home used regularly and exclusively in your work.
• Job search expenses in your present occupation.
• Laboratory breakage fees.
• Legal fees related to your job.
• Licenses and regulatory fees.
• Malpractice insurance premiums.
• Medical examinations required by an employer.
• Occupational taxes.
• Passport for a business trip.
• Repayment of an income aid payment received under an employer's plan.
• Research expenses of a college professor.
• Subscriptions to professional journals and trade magazines related to your work.
• Tools and supplies used in your work.
• Travel, transportation, entertainment, and gift expenses related to your work.
• Union dues and expenses.
• Work clothes and uniforms if required and not suitable for everyday use.

Business Bad Debt

A business bad debt is a loss from a debt created or acquired in your trade or business. Any other worthless debt is a business bad debt only if there is a very close relationship between the debt and your trade or business when the debt becomes worthless.

A debt has a very close relationship to your trade or business of being an employee if your main motive for incurring the debt is a business reason.

Example.   You make a bona fide loan to the corporation you work for. It fails to pay you back. You had to make the loan in order to keep your job. You have a business bad debt as an employee.

More information.   For more information on business bad debts, see chapter 11 in Publication 535. For information on nonbusiness bad debts, see chapter 4 in Publication 550, Investment Income and Expenses.

Business Liability Insurance

You can deduct insurance premiums you paid for protection against personal liability for wrongful acts on the job.

Damages for Breach of Employment Contract

If you break an employment contract, you can deduct damages you pay your former employer if the damages are attributable to the pay you received from that employer.

Depreciation on Computers or Cellular Telephones

You can claim a depreciation deduction for a computer or cellular telephone that you use in your work as an employee if its use is:

1. For the convenience of your employer, and
2. Required as a condition of your employment.

For the convenience of your employer.   This means that your use of the computer or cellular telephone is for a substantial business reason of your employer. You must consider all facts in making this determination. Use of your computer or cellular phone during your regular working hours to carry on your employer's business is generally for the convenience of your employer.

Required as a condition of your employment.   This means that you cannot properly perform your duties without the computer or cellular telephone. Whether you can properly perform your duties without it depends on all the facts and circumstances. It is not necessary that your employer explicitly requires you to use your computer or cellular telephone. But neither is it enough that your employer merely states that your use of the item is a condition of your employment.

Example.   You are an engineer with an engineering firm. You occasionally take work home at night rather than work late at the office. You own and use a computer that is similar to the one you use at the office to complete your work at home. Since your use of the computer is not for the convenience of your employer and is not required as a condition of your employment, you cannot claim a depreciation deduction for it.

Which depreciation method to use.   You generally must depreciate your computer or cellular telephone using the straight line method over the Alternative Depreciation System (ADS) recovery period. Unless you meet the more-than-50%-use test, you cannot claim an accelerated depreciation deduction using the General Depreciation System (GDS) and cannot take a section 179 deduction or a 30% special depreciation allowance for that item. (But if you use your computer in a home office, see the exception below.) The section 179 deduction, 30% special depreciation allowance, and depreciation deductions using ADS and GDS are explained in Publication 946.

More-than-50%-use test.   You meet this test if you use the computer or cellular telephone more than 50% in your work. If you meet this test, you can claim accelerated depreciation using GDS. In addition, you may be able to take a section 179 deduction and 30% special depreciation allowance for the year you place the item in service.

Your use of a computer or cellular telephone in connection with investments (described later under Other Expenses) does not count as use in your work. However, you can combine your investment use with your work use in figuring your depreciation deduction.

For more information, see Do the Business-Use Limits Apply? in chapter 4 of Publication 946.

Exception for computer used in a home office.   The more-than-50%-use test does not apply to a computer used only in a part of your home that meets the requirements described later under Home Office. You can claim accelerated depreciation using GDS for a computer used in a qualifying home office, even if you do not use it more than 50% in your work. You also may be able to take a section 179 deduction and 30% special depreciation allowance for the year you place the computer in service.

For more information on depreciation and section 179 deductions for computers and other items used in a home office, see Business Furniture and Equipment in Publication 587.

Reporting your depreciation deduction.   Use Part V of Form 4562, Depreciation and Amortization, to claim the depreciation deduction for a cellular telephone or for a computer that you did not use only in your home office. Complete Part I of Form 4562 if you are claiming a section 179 deduction.

Computer used in a home office.   Use Part III of Form 4562 to claim the depreciation deduction for a computer you placed in service during 2002 and used only in your home office. Complete Part I of Form 4562 if you are claiming a section 179 deduction. Complete Part II of the form if you are claiming the special depreciation allowance.

Do not use Form 4562 to claim the depreciation deduction for a computer you placed in service before 2002 and used only in your home office, unless you are otherwise required to file Form 4562. Instead, report the depreciation directly on the appropriate form. (See How To Report, later.) But if you are otherwise required to file Form 4562, report the depreciation on line 17 in Part III.

You must keep records to prove your percentage of business and investment use.

Dues to Chambers of Commerce and Professional Societies

You may be able to deduct dues paid to professional organizations (such as bar associations and medical associations) and to chambers of commerce and similar organizations, if membership helps you carry out the duties of your job. Similar organizations include:

1. Boards of trade,
2. Business leagues,
3. Civic or public service organizations,
4. Real estate boards, and
5. Trade associations.

You cannot deduct dues paid to an organization if one of its main purposes is to:

1. Conduct entertainment activities for members or their guests, or
2. Provide members or their guests with access to entertainment facilities.

Dues paid to airline, hotel, and luncheon clubs are not deductible. See Club Dues under Nondeductible Expenses, later.

Lobbying and political activities.   You may not be able to deduct that part of your dues that is for certain lobbying and political activities. See Lobbying Expenses under Nondeductible Expenses, later.

Education That Is Work Related

You can deduct expenses you have for education, even if the education may lead to a degree, if the education meets at least one of the following two tests.

1. It maintains or improves skills required in your present work.
2. It is required by your employer or the law to keep your salary, status, or job, and the requirement serves a business purpose of your employer.

If your education meets either of these tests, you can deduct expenses for tuition, books, supplies, laboratory fees, and similar items, and certain transportation costs.

Any work-related education expenses you deduct cannot also be used to determine the amount of an education tax credit or any other tax benefit for education. See Publication 970, Tax Benefits for Education.

Nondeductible educational expenses.   You cannot deduct expenses you have for education, even though one or both of the preceding tests are met, if the education:

1. Is needed to meet the minimum educational requirements to qualify you in your work or business, or
2. Will lead to qualifying you in a new trade or business.

If the education qualifies you for a new trade or business, you cannot deduct the educational expenses even if you do not intend to enter that trade or business.

Travel as education.   You cannot deduct the cost of travel that in itself constitutes a form of education. For example, a French teacher who travels to France to maintain general familiarity with the French language and culture cannot deduct the cost of the trip as an educational expense.

More information.   Get Publication 508, Tax Benefits for Work-Related Education, for a complete discussion of the deduction for work-related educational expenses.

Home Office

If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home.

You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively:

1. As your principal place of business for any trade or business,
2. As a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business, or
3. In the case of a separate structure not attached to your home, in connection with your trade or business.

The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job.

Principal place of business.   If you have more than one place of business, the business part of your home is your principal place of business if:

1. You use it regularly and exclusively for administrative or management activities of your trade or business, and
2. You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

Otherwise, the location of your principal place of business generally depends on the relative importance of the activities performed at each location and the time spent at each location.

You should keep records that will give the information needed to figure the deduction according to these rules. Also keep canceled checks or account statements and receipts of the expenses paid to prove the deductions you claim.

More information.   Get Publication 587 for more detailed information and a worksheet for figuring the deduction.

Job Search Expenses

You can deduct certain expenses you have in looking for a new job in your present occupation, even if you do not get a new job. You cannot deduct these expenses if:

1. You are looking for a job in a new occupation,
2. There was a substantial break between the ending of your last job and your looking for a new one, or
3. You are looking for a job for the first time.

Employment and outplacement agency fees.   You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation.

Employer pays you back.   If, in a later year, your employer pays you back for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year. See Recoveries in Publication 525.

Employer pays the employment agency.   If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income.

Résumé.   You can deduct amounts you spend for typing, printing, and mailing copies of a résumé to prospective employers if you are looking for a new job in your present occupation.

Travel and transportation expenses.   If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.

Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area.

You may choose to use the standard mileage rate to figure your car expenses. The standard mileage rate for 2002 is 36½ cents per mile. See Publication 463 for more information on travel and car expenses.

Legal Fees

You can deduct legal fees related to doing or keeping your job.

Licenses and Regulatory Fees

You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession.

Occupational Taxes

You can deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. If you are an employee, you can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit; you cannot claim them as a deduction for taxes elsewhere on your return.

Repayment of Income Aid Payment

An income aid payment is one that is received under an employer's plan to aid employees who lose their jobs because of lack of work. If you repay a lump-sum income aid payment that you received and included in income in an earlier year, you can deduct the repayment.

Research Expenses of a College Professor

If you are a college professor, you can deduct your research expenses, including travel expenses, for teaching, lecturing, or writing and publishing on subjects that relate directly to the field of your teaching duties. You must have undertaken the research as a means of carrying out the duties expected of a professor and without expectation of profit apart from salary. However, you cannot deduct the cost of travel as a form of education.

Tools Used in Your Work

Generally, you can deduct amounts you spend for tools used in your work if the tools wear out and are thrown away within 1 year from the date of purchase. You can depreciate the cost of tools that have a useful life substantially beyond the tax year. For more information about depreciation, get Publication 946.

Travel, Transportation, Meal, Entertainment, and Gift Expenses

If you are an employee and have ordinary and necessary business-related expenses for travel away from home, local transportation, entertainment, and gifts, you may be able to deduct these expenses. Generally, you must file Form 2106 or 2106-EZ to claim these expenses.

Travel expenses.   Travel expenses are those incurred while traveling away from home for your employer. You can deduct travel expenses paid or incurred in connection with a temporary work assignment. Generally, you cannot deduct travel expenses paid or incurred in connection with an indefinite work assignment.

Travel expenses may include:

• The cost of getting to and from your business destination (air, rail, bus, car, etc.),
• Meals and lodging while away from home,
• Taxi fares,
• Baggage charges, and
• Cleaning and laundry expenses.

Travel expenses are discussed more fully in chapter 1 of Publication 463.

Temporary work assignment.   If your assignment or job away from home in a single location is realistically expected to last (and does in fact last) for 1 year or less, it is temporary, unless there are facts and circumstances that indicate it is not.

Indefinite work assignment.   If your assignment or job away from home in a single location is realistically expected to last for more than 1 year, it is indefinite, whether or not it actually lasts for more than 1 year.

Employment that is initially temporary may become indefinite due to changed circumstances.

Federal crime investigation and prosecution.   If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to the 1-year rule for deducting temporary travel expenses. This means that you may be able to deduct travel expenses even if you are away from your tax home for more than one year.

To qualify, the Attorney General must certify that you are traveling:

1. For the federal government,
2. In a temporary duty status, and
3. To investigate, prosecute, or provide support services for the investigation or prosecution of a federal crime.

Local transportation expenses.   Local transportation expenses are the expenses of getting from one workplace to another when you are not traveling away from home. They include the cost of transportation by air, rail, bus, taxi, and the cost of using your car.

You may choose to use the standard mileage rate to figure your car expenses. The standard mileage rate for 2002 is 36½ cents per mile.

Work at two places in a day.   If you work at two places in a day, whether or not for the same employer, you can generally deduct the expenses of getting from one workplace to the other.

Temporary workplace.   You can deduct expenses incurred in going between your home and a temporary workplace if at least one of the following applies.

1. The workplace is outside the metropolitan area where you live and normally work.
2. You have at least one regular workplace (other than your home) for the same trade or business. (If this applies, the distance between your home and the temporary workplace does not matter.)

For this purpose, a workplace is generally considered temporary if your work there is realistically expected to last (and does in fact last) for 1 year or less. It is not temporary if your work there is realistically expected to last for more than 1 year, even if it actually lasts for 1 year or less. If your work there initially is realistically expected to last for 1 year or less, but later is realistically expected to last for more than 1 year, the workplace is generally considered temporary until the date your realistic expectation changes and not temporary after that date. For more information, see chapter 4 of Publication 463.

Home office.   You can deduct expenses incurred in going between your home and a workplace if your home is your principal place of business for the same trade or business. (In this situation, whether the other workplace is temporary or regular and its distance from your home do not matter.) See Home Office, earlier, for a discussion on the use of your home as your principal place of business.

Meals and entertainment.   Generally, you can deduct entertainment expenses (including entertainment- related meals) only if they are directly related to the active conduct of your trade or business. However, the expense only needs to be associated with the active conduct of your trade or business if it directly precedes or follows a substantial and bona fide business-related discussion.

You can deduct only 50% of your business-related meal and entertainment expenses unless the expenses meet certain exceptions. You apply this 50% limit before you apply the 2%-of-adjusted-gross-income limit.

Meals when subject to hours of service limits.   You can deduct 65% of your business-related meal expenses if you consume the meals during or incident to any period subject to the Department of Transportation's hours of service limits. You apply this 65% limit before you apply the 2%-of-adjusted-gross-income limit.

This 65% limit is scheduled to increase to 70% in 2004, 75% in 2006, and 80% in 2008.

Gift expenses.   You can generally deduct up to $25 of business gifts you give to any one individual during the year. The following items do not count toward the $25 limit.

• Identical, widely distributed items costing $4 or less that have your name clearly and permanently imprinted.
• Signs, racks, and promotional materials to be displayed on the business premises of the recipient.

Additional information.   Get Publication 463 for more information on travel, transportation, meal, entertainment, and gift expenses, and reimbursements for these expenses.

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