19.7 Expenses of Looking for a New Job

Subject to the 2% AGI floor, you may deduct expenses of looking for a new job in the same line of work, whether or not a new job is found. If you are unemployed when seeking a new job, and the period of unemployment has been substantial, the IRS may disallow the deduction.

EXAMPLE
The IRS disallowed the driving expenses of an unemployed secretary on the ground that she was not currently employed. The Tax Court disagreed and held that for purposes of deducting job-hunting expenses, she could still be considered in the business of being a secretary. She had worked as an administrative secretary with Toyota in San Francisco. The firm relocated, resulting in a 100-mile-per-day commute. She quit her job at the end of January 1984. From February to November 1984, she drove her Cadillac El Dorado over 4,600 miles looking for a new job. The Tax Court allowed her a depreciation deduction of $2,880 and $981 for car operating costs.

Expenses of seeking your first job are not deductible, even if a job is obtained. Also, expenses of looking for a job in a different line of work are not deductible, even if you get the job.

The IRS may also dispute the deduction of search expenses of a previously employed professional who forms a partnership.

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image Caution
First Job
You may not deduct the expenses of seeking your first job.
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EXAMPLE
A CPA working for a firm decided to go out on his own. After a period of investigation, he formed a partnership with another CPA. The IRS disallowed his deduction of search expenses, claiming his expenses were incurred in a new business. As an employee he was in a different business from that of a self-employed practitioner. Thus, the expenses should be capitalized as a cost of setting up or organizing the partnership. The Tax Court disagreed, allowing the deduction. The travel expenses were incurred to seek work as a CPA, whether as a self-employed or employed CPA.

Travel expenses.

If you travel “away from home” (20.3) to find a new job in the same line of work, such as an interview in a distant city, you may deduct travel expenses, including meals and lodging. If, during the trip, you also do personal visiting, you may deduct the travel expenses to and from the area if the trip was primarily related to your job search. Time spent on personal activity is compared with time spent looking for a job to determine the primary purpose of the trip. If the travel expenses to and from the destination are not deductible because the trip was primarily personal, you may still deduct the expenses of seeking a new job in the same line of work while you are away.

Local transportation expenses (not away from home) incurred while looking for a new job in the same line of work are deductible. If you use your own car, the IRS standard mileage allowance (43.1) can be used to figure your driving costs.

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image Filing Tip
Employment Agency Fee
If your new employer pays the fee under an agreement with an agency, you may disregard the payment for tax purposes. However, if you pay the fee and deduct it as a job search expense and in a later year you are reimbursed by your employer, you must report the reimbursement as taxable income to the extent you received a tax benefit from the earlier deduction (11.6).
A company interested in your services may invite you to a job interview and agree to pay all of the trip expenses to its office, even if you are not hired. The company payment is tax free up to your actual expenses.
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Are you between jobs?

If you are between jobs and you continue to see and entertain your former customers, the IRS holds that you may not deduct the cost of entertainment and other business expenses during this period on the ground that you are not in business and earning income. However, the Tax Court in the following case allowed the deduction.

EXAMPLE
Haft was a successful jewelry salesman earning as much as $60,000 a year. In the fall of one year, he left his employer and started to look for a new connection. During the following year, he continued to maintain contacts with his former customers by entertaining buyers and their representatives. He deducted the expenses of entertaining and other business costs. The IRS disallowed the deduction, claiming he was not in business. The Tax Court disagreed. His lack of business income was temporary and resulted from a period of transition that lasted a reasonable time.
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