A Guide to Form 2106 Employee Business Expenses
If work has you using your own cash, car, or resources for business purposes the IRS allows you to deduct those expenses. In the past folks have taken advantage of the system, so the IRS has made it tough to exaggerate these expenses and get away with it. As always, the key to getting back all you deserve (and stay out of trouble) is to keep good detailed records.
Because of the way this Form is set up we’re going to tackle it a bit differently. The reason for that is you need to fill out a good portion of Part 2 before you can even think about Part 1. This is one of those IRS Forms that needs an overhaul.
You’ll notice Part 2 has two columns for 2 separate vehicles. The 2nd column is only applicable if you used a 2nd vehicle for work. If your wheels didn’t fulfill this purpose disregard the column.
Begin by skipping ahead to Line 11 where you’re asked to enter the date your vehicle was placed in service. By date of service, it means the date on which you started using the car for work. On Line 12, you need to enter the total miles the vehicle was driven during the tax year. On Line 13 record how many miles you used your car for business. Now divide Line 13 by Line 12 to get the percentage of miles you used your car for work and enter it on Line 14.
On Line 15 log your average daily roundtrip commuting distance. Line 16 is for all the commuting miles that were included on Line 12. Now add lines 13 and 16 and subtract the total from the Line 12 to yield other miles. Remember, commuting miles don’t count.
Lines 18 -21 is a quick Q & A designed to determine how often you used your car for personal use. If at all possible make your life easier and get a vehicle for personal use only. You’ll be glad you did. Now multiply line 13 by $0.50 (the standard mileage rate for business use), entering the total on Line 22 and Line 1.
Section C is where you would itemize your expenses if you felt they would add up to more than $0.50 per business mile. You should get used to Section C because you’ll have to use it for the second tax year that you put your vehicle in service. Generally, it’s a good idea to itemize because you’ll probably get a larger deduction.
On Line 23 add up all your gas, maintenance, insurance, and oil expenses. If you needed to rent a car, spend some time with Line 24. If your employer leased the vehicle (and reported the amount on your W-2), enter it on Line 25. Now add Lines 23, 24c, and 25 and enter the total on Line 26. Then multiply Line 26 by the percent amount on Line 14. Once we figure depreciation in Section D, you can enter that number on Line 28 and add it to Line 27 to get Line 29. When you get Line 29, you can enter it on Line 1.
Depreciation is a mechanism that allows you to get back the cost of property (in this case a vehicle) over a number of years. So start this section by entering the cost of the car on Line 30. If you put the car into service last year (and the percentage on Line 14 is more than 50%), you can choose to deduct a part of the cost of the car. To do it multiply the part of the cost you want to expense by the percentage on Line 14. Enter the total on Line 31. This is called the 179 deduction.
Multiply Line 30 by Line 14 and enter the total on Line 32. On Line 33 enter your depreciation method (from the percentage chart in the instruction booklet or the straight line method). Then multiply Line 32 by Line 33 and enter it on Line 34. Now add Lines 31 and 34 and enter it on Line 35.
Depending on the kind of car you use, you have a limit that you’ll need to enter on Line 36. Just check the booklet for your special condition. Now multiply that limit by the percentage on Line 14. Then enter the smaller of Line 35 or Line 37. If you passed by Lines 36 and 37, carry forward the amount from Line 35 to Line 38. And since this is your final depreciation amount, you’ll also enter it on Line 28.
On Line 1 enter your vehicle expenses from Line 22 or (if you filled it out) Line 29. On Line 2 enter any tolls, parking fees, and other transportation (that doesn’t include commuting to work). Remember, you’re not allowed to deduct any to and from work commuting expenses
Line 3 is for travel expenses you incurred while you were away from your house. This includes car rentals, airfare, and a hotel room. Remember you’re not including any meals or entertainment expenses—you’re putting those in a doggy bag for later. Now add Lines 1 through 4 and enter the total on Line 6. Keep your meal and entertainment totals in Column b Line 5.
If your employer reimbursed you under code L in box 12 of your W-2 enter it on Line 7. Now subtract Line 7 from Line 6 and enter it on Line 8. Just know if Line 7 is bigger than Line 6 you’ll have to report it as income on your 1040 Form.
Enter the amount from Line 8 on Line 9. Then multiply Line 8 by 50% and enter it in Column B. Now add the amounts of both columns on Line 9 and enter the total on Line 10. You’ll also have to enter this total on Schedule A Line 21.
Ticket to Ride
Form 2106 teaches us three things.
1. You’ll want to keep ultra good records—you don’t want to miss a deduction because you can’t find some expense.
2. If at all possible, get separate vehicles for personal and business use. Remember the record keeping gets really messy when you mix business with pleasure.
3. Figuring the depreciation of a business vehicle is a real, real pain.
Ultimately, if you use a car for business and you’re organized, working through this form can save you bundle. You’ve spent the money (and on work no less) so why not get the deductions you deserve?
