General Rules and Qualifications
For federal purposes, taxpayers can deduct trade, business, and certain other expenses as allowed under IRC (Code) Section 162, namely expenses that exceed 2% of federal AGI.
Massachusetts uses this as a starting point for calculating its own deduction.
The Massachusetts deduction is limited to the deductions allowed by Part VI of the Internal Revenue Code which:
- For an employee, include unreimbursed expenses of travel, meals, and lodging while away from the tax home over a sleep period or expenses of transportation paid or incurred by the employee in connection with the performance of services as an employee; or
- For a salesperson, are federally deductible unreimbursed employee expenses if they are attributable to a trade or business in which the employee is a salesperson who solicits business for an employer away from the employer's place of business.
50% of qualified business meals and entertainment expenses may be claimed as a deduction. This limited deduction is also subject to the Massachusetts restriction that the
- Business meal expenses and
must be incurred while away from home.
To qualify for the Massachusetts employee business expense deduction, the following 3 conditions must be met:
- The taxpayer must itemize deductions on the federal return;
- If filing a joint U.S. return, a joint return must be filed in Massachusetts; and
- Unreimbursed business expenses combined with the other miscellaneous itemized deductions (reported on U.S. Form 1040, Schedule A, lines 20 - 22) must exceed 2% of the federal adjusted gross income reported on U.S. Form 1040, Schedule A, line 25.
- Unreimbursed travel and transportation expenses of a handicapped employee which are also impairment related business expenses are not subject to the 2% floor.
Unreimbursed expenses in item 3 above are limited to:
- Travel and transportation expenses for work;
- Expenses for lodging and meals that are incurred on overnight business travel;
- Transportation from a first job to a second job;
- Job-seeking expenses if travel related and only if incurred seeking employment in the same field;
- Expenses of a qualified performing artist as defined under the Code;
- Impairment-related expenses of a handicapped person;
- Operating expenses incurred for automobiles used in a trade or business such as:
- Expenses for gasoline
- Parking fees and tolls
- Garage rent, and
- Travel/transportation cost necessary for allowable education expenses.
Outside salespeople may claim other unreimbursed expenses in addition to the items listed above. An outside salesperson may also claim non-travel expenses such as an office in:
- The home,
- A home computer,
- Telephone expenses and
- Non-travel meals.
- The federal treatment for Employee Business expenses, under the Code, as amended and in effect on January 1, 2005, and
- Automatically adopts any future changes to the Federal provisions for these expenses.
Qualification for Employee Business Expenses Deduction is determined by completing the following worksheets:
- For residents, the Schedule Y, Line 1 - Massachusetts Employee Business Expense Deduction Worksheet;
- For nonresidents and part-year residents, the Schedule Y, Line 1 - Massachusetts Employee Business Expense Deduction Worksheet.
The amount to be reported on this worksheet is for only those expenses that are directly related to taxable income reported on Form 1 NR/PY.
No Tax Status and Limited Income Credit Calculation
This deduction impacts the calculation of
- No Tax Status and
- the Limited Income Credit
as it is treated as an adjustment to arrive at Massachusetts adjusted gross income on the:
- Massachusetts AGI Worksheet and
- Schedule NTS-L-NR/PY.
Disallowance of Travel, Meals, and Entertainment Expenses
Massachusetts follows the current federal limitations on the following nondeductible expenses:
Travel expenses can’t be claimed as business deductions for a
- Dependent or
- Other individual
who accompanies the taxpayer on a business trip unless the following 3 conditions are met:
- Such person is an employee of the person who is paying for such expenses;
- The travel of such person serves a bona fide business purpose; and
- The expenses of such person are otherwise deductible.
Meals and Entertainment Expenses:
- 50% of qualified business meals and entertainment expenses can’t be claimed as a deduction.
- This limited deduction is also subject to the Massachusetts restriction that the business meal expenses (and entertainment) must be incurred while away from home.
Reporting Expenses on Your Original Tax Return
Residents must complete the Schedule Y, Line 1 - Massachusetts Employee Business Expense Deduction Worksheet, Form 1 Instructions.
- If qualified, enter the amount from Line 8 of the worksheet on Form 1, Schedule Y, Line 1.
Nonresidents and part-year residents must complete the Schedule Y, Line 1 - Massachusetts Employee Business Expense Deduction Worksheet, Form 1-NR/PY Instructions.
- The amount to be reported on this worksheet is for only those expenses that are directly related to taxable income reported on Form 1 NR/PY. If qualified, enter the amount from Line 8 of the worksheet on Form 1-NR/PY, Schedule Y, Line 1.
Submitting an Abatement or Amended Tax Return
If you're submitting an abatement or amended tax return, you'll need to include the following:
- Copy of U.S. Form 2106 - Employee Business Expenses, or U.S. Form 2106 EZ - Unreimbursed Employee Business Expenses with U.S. 1040, Schedule A if the deduction was taken federally;
- Amended U.S. Form 2106 or 2106 EZ with U.S. 1040, Schedule A if the deduction was not taken federally;
- Massachusetts Form 1 or 1-NR/PY, Schedule Y, Line 1 - Employee Business Expense Deduction Worksheet.
- M.G.L. Chapter 62, Sections 1(c) as amended by St. 1998, c. 175, s. 6
- M.G.L. Chapter 62, Sections 2(d)(1), 2(d)(2)
- TIR 05-16: The Effect of the Adoption of the Updated Internal Revenue Code on the Massachusetts Personal Income Tax ("Code Update")
- TIR 98-8: Massachusetts 1998 Reducing Income Taxes Act
- DD 86-14: Employee Job Seeking Expenses
- I.R.C. §§ 62(a)(2); 162(p); 274(m), (n)
- Military Family Relief Act of 2003 (Public Law 108-121).