Allowable Expenses for Employees: Tests, Records, Reimbursement

Allowable expenses for employees are the work-related costs that qualify for tax-free reimbursement under federal tax law because they meet the IRS standard of being “ordinary and necessary” to the job. For 2026, the common ones are business travel, mileage reimbursed at 72.5 cents per mile, business meals, required equipment and technology, and professional development. Getting the details right matters more than it used to, because since the One Big Beautiful Bill Act permanently killed the personal deduction for unreimbursed work expenses, your employer’s reimbursement plan is now the only practical way to recover these costs without paying tax on them.

The Ordinary and Necessary Test

Every allowable expense traces back to Section 162 of the Internal Revenue Code, which permits deductions for expenses that are both “ordinary” and “necessary” in carrying on a trade or business. Ordinary means common and accepted in your industry. Necessary means helpful and appropriate for the business, not unavoidable. Section 162 also disallows travel meals that are “lavish or extravagant under the circumstances.”¹

If a reasonable person in your industry would look at the expense and shrug, it’s probably ordinary. If it would raise eyebrows, it probably isn’t.

What Qualifies

Travel, Lodging, and Mileage

Flights, train tickets, rental cars, and hotel stays qualify when you’re traveling away from your tax home on work business. Lodging covers the actual room cost plus taxes at your destination, and incidental expenses like tips for hotel staff and baggage handling are reimbursable too.

When you drive your own car for work, the simplest method is the IRS standard mileage rate, which is 72.5 cents per mile for 2026. That rate covers fuel, insurance, depreciation, and maintenance in one figure. You can instead track actual vehicle costs, but you must choose one method in the first year a car is available for business use and stay with it for that vehicle.²

Business Meals

Meals with clients, customers, or business contacts are allowable when you or another employee is present and the meal has a clear business purpose. Your employer can only deduct 50 percent of the cost, a permanent cap set by Section 274 of the tax code.³ The 50 percent limit is on the employer’s deduction. You still get reimbursed the full amount under an accountable plan; the employer just writes off half.

Equipment, Technology, and Professional Development

Laptops, software licenses, mobile phone service needed for work, and other required tools qualify when the employer requires them. Professional development also qualifies: conference registration, continuing education, and licensing or certification fees. Office supplies like printer paper, postage, and ink used for business round out this category. For remote workers, the business portion of home internet or a personal phone plan can be reimbursable, though federal law provides no formula for calculating the split. The test is whether the expense directly serves the employer’s business needs.

Your Tax Home and the Commuting Rule

Travel expenses are only allowable when you’re away from your tax home, which the IRS defines as the entire city or general area where your main place of business is located, not where you live.⁴ If you live in Denver but your primary office is in Colorado Springs, Colorado Springs is your tax home, and weekend trips back to Denver are personal.

When you work in multiple locations, the IRS determines your main place of business by looking at how much time you spend at each location (the most important factor), the degree of business activity there, and the financial return from each area.⁴ You’re considered “away from home” only when your duties keep you away substantially longer than an ordinary workday and you need to sleep or rest before returning.

Temporary assignments get special treatment. If you’re sent to a different city and the assignment is expected to last one year or less, travel to and from that location is allowable. Once the expected duration crosses the one-year mark, the IRS treats the assignment as indefinite and the travel becomes nondeductible.⁵ The change can happen mid-assignment: if a six-month posting is extended past a year, expenses stop qualifying from the date the expectation changed.

Daily commuting never qualifies. The drive from your home to your regular workplace is personal no matter the distance, even if you make business calls during the trip.⁶

Accountable Plans Versus Non-Accountable Plans

Whether your reimbursements are tax-free depends entirely on how your employer structures the plan.

An accountable plan must meet three requirements under Treasury regulations: each expense must have a business connection, you must substantiate the expense to the employer, and any excess reimbursement must be returned within a reasonable period.⁷ The IRS provides safe harbor timelines: expenses substantiated within 60 days of being incurred and excess amounts returned within 120 days meet the “reasonable period” standard.⁸ If the plan clears all three, reimbursements are excluded from your gross income and don’t appear on your W-2.⁹

A non-accountable plan skips one or more of those requirements. Flat stipends, allowances paid without receipts, and arrangements that let you keep unspent funds all fall into this category. The employer adds a set amount to your pay and treats it as wages. The convenience costs you at tax time.

Records You Need to Keep

The IRS expects four elements for every business expense: the amount, the date, the place or destination, and the business purpose.⁶ For travel, record when you left and returned, how many days were business-related, and the city you traveled to. For meals, note who was present and what business was discussed.

You need a receipt or similar documentary evidence for all lodging expenses and for any other single expense of $75 or more, except transportation charges where receipts aren’t readily available.⁸ Many employers require receipts for everything, which is stricter than the IRS demands but easier to enforce.

Mileage logs need the odometer reading at the start and end of each business trip, the destination, and the reason for the drive. A vague entry like “client meetings” won’t hold up; name the client or describe the specific business purpose.

Digital copies of receipts are acceptable, but the IRS sets a high bar for electronic storage. Under Revenue Procedure 97-22, digital records must be legible, indexed, and reproducible, with controls in place to prevent unauthorized alteration or deletion.¹⁰ Most modern expense management platforms meet these requirements. If you’re keeping phone photos in a folder, make sure every image clearly shows the vendor name, date, items, and total amount. Records that can’t be read are treated as if they don’t exist.

How the Tax Treatment Actually Works

Under an accountable plan, reimbursements are tax-free. They’re excluded from your gross income, exempt from Social Security and Medicare withholding, and don’t appear in Box 1 of your W-2.⁸ You get the full dollar amount and owe nothing further on it. If you substantiated all expenses and returned any excess, you don’t even need to report the reimbursements on your tax return.¹¹

Non-accountable plan payments get no such break. The IRS treats them as taxable wages, and the employer must withhold Social Security tax at 6.2 percent on earnings up to $184,500 in 2026, Medicare tax at 1.45 percent, and federal income tax at your marginal rate.¹²¹³ These amounts land in Box 1 of your W-2 alongside your regular salary. A $500 monthly stipend under a non-accountable plan can easily cost you $100 or more per month in additional taxes, depending on your bracket.

There’s a trap here even if your employer says the plan is accountable. If the company fails to enforce its own rules by not collecting receipts, not demanding return of excess funds, or paying out without verifying business purpose, the IRS can reclassify the whole arrangement as non-accountable. That triggers back taxes, interest, and potential penalties for both the employer and affected employees.⁹

What If Your Employer Doesn’t Reimburse You

Before 2018, employees could deduct unreimbursed business expenses as miscellaneous itemized deductions, subject to a 2 percent adjusted gross income floor. The Tax Cuts and Jobs Act suspended that deduction, and the One Big Beautiful Bill Act, signed in July 2025, made the elimination permanent.¹⁴ For most employees, there is no federal write-off for unreimbursed work expenses.

A few narrow categories can still file Form 2106 to claim unreimbursed expenses:

Armed Forces reservists, for expenses connected to reserve duties
Qualified performing artists who meet specific income tests
Fee-basis state or local government officials, for expenses related to that service
Employees with disabilities, for impairment-related work expenses

The One Big Beautiful Bill added a new exception for K-12 teachers, instructors, counselors, principals, school aides, and coaches who work at least 900 hours during the school year, who can deduct expenses for books, supplies, and similar materials.¹⁴ Outside those groups, the practical route is to push your employer to adopt an accountable plan, because it’s now the only tax-efficient way to recover work costs.¹⁵

State Laws That May Force Reimbursement

Federal law doesn’t broadly require employers to reimburse business expenses. Under the Fair Labor Standards Act, an employer only violates the law if unreimbursed expenses drop an employee’s effective pay below the federal minimum wage for a given workweek.¹⁶ Most salaried employees will never hit that threshold.

Several states go much further. A handful have statutes requiring employers to reimburse all necessary business expenditures, covering mileage, office supplies, and the business portion of a remote worker’s internet bill and personal cell phone. Penalties for noncompliance can include recovery of unpaid expenses, interest, and attorney’s fees. In these states, the obligation exists regardless of whether the company has a formal expense policy. Check your state labor department’s website for the specific rules that apply where you work.

Expenses That Never Qualify

Some costs look like business expenses but aren’t. Commuting between your home and regular office is always personal, even if you work during the drive.⁶ Clothing that’s suitable for everyday wear, such as a business suit, doesn’t qualify even if your employer expects you to wear it. Entertainment expenses like sporting events, concerts, and theater tickets lost their deductibility entirely after the TCJA and remain nondeductible for employers even when they have a clear business connection.

Personal portions of mixed-use expenses don’t qualify either. Extend a three-day business trip by two vacation days, and the extra lodging, meals, and activities for those personal days come out of your own pocket. The same logic applies to a cell phone bill: only the portion attributable to business calls and data usage is allowable. Slipping personal costs into an expense report doesn’t just risk a denied claim; it can trigger the IRS reclassification described above, creating a tax problem for every employee on the plan.

1
Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses
2
Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents per Mile
3
Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses
4
Internal Revenue Service. Topic No. 511, Business Travel Expenses
5
Internal Revenue Service. Understanding Business Travel Deductions
6
Internal Revenue Service. Publication 463 – Travel, Gift, and Car Expenses
7
eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements
8
Internal Revenue Service. Revenue Ruling 2003-106
9
Internal Revenue Service. Publication 15 – Employer’s Tax Guide – Section: Employee Business Expense Reimbursements
10
Internal Revenue Service. Revenue Procedure 97-22
11
Internal Revenue Service. Publication 463 – Travel, Gift, and Car Expenses
12
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
13
Social Security Administration. Contribution and Benefit Base
14
Congress.gov. H.R.1 – 119th Congress – One Big Beautiful Bill Act
15
Internal Revenue Service. Instructions for Form 2106
16
U.S. Department of Labor. FLSA Opinion Letter 2020-12