9
Deductions: Chapter Employee and SelfEmployedRelated Expenses Comprehensive Volume
Copyright 2010 Cengage Learning Comprehensive Volume C9-1
Employee vs. Self-Employed
(slide 1 of 2)
Business expenses for self-employed persons are deductible for AGI
Reported on Schedule C
Unreimbursed business expenses for employees are generally deductible from AGI subject to 2% of AGI floor
Reported on Form 2106 (Employee Business Expenses) and Schedule A (Itemized Deductions)
Comprehensive Volume C9-2
Employee vs. Self-Employed
(slide 2 of 2)
Person is classified as an employee if:
Subject to will and control of another with respect to what shall be done and how it shall be done Another furnishes tools or the place of work Income based on time spent rather than task performed
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Employee Expenses
Fall into one of the following categories:
Transportation Travel Moving Education Entertainment Other
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Transportation Expenses
(slide 1 of 2)
Transportation expense defined
Very limited, only from job site to job site and commuting to/from temporary work place Commuting from home to work and back is nondeductible
Exceptions:
Additional costs incurred to transport heavy tools Employees with more than one job
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Transportation Expenses
(slide 2 of 2)
Amount deductible
Actual expenses
Must keep adequate records of all expenses and depreciation is limited, or
Automatic mileage method
55 cents per mile for business miles for 2009
Adjustment to basis of auto is required for depreciation considered allowed
Plus parking, tolls, etc. Adequate documentation of mileage required
Comprehensive Volume C9-6
Travel Expenses
(slide 1 of 2)
Travel expense defined
Expenses while "away from tax home" overnight on business Includes transportation, lodging, 50% meals, and miscellaneous expenses
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Travel Expenses
(slide 2 of 2)
"Away from home" requirement
Need not be a 24-hour period but must be longer than ordinary work day and taxpayer will need to rest during release time Being "away" should be a temporary situation (not in excess of 1 year) "Tax Home" generally means business location, post, or station of the taxpayer
Comprehensive Volume C9-8
Restrictions on Travel Expenses
(slide 1 of 2)
Convention travel expenses
No deduction for travel unless directly related to taxpayer's trade or business
Example: Doctor attending out-of-town seminar on estate planning would not have deductible travel expenses
Restrictions apply to the deductibility of travel expenses of the taxpayer's spouse or dependent
Generally, accompaniment by the spouse or dependent must serve a bona fide business purpose, and The expenses must be otherwise deductible
C9-9
Comprehensive Volume
Restrictions on Travel Expenses
(slide 2 of 2)
Education travel expenses
Travel as a form of education is not deductible
Example: Spanish language professor traveling to Spain to work on the language would not have deductible travel expenses Example: Spanish history professor traveling to Spain to study historical documents available only in Spanish museums would have deductible travel expenses
C9-10
Comprehensive Volume
Combined Business/Pleasure Travel
(slide 1 of 4)
Only actual expenses for business are deductible
Meals, lodging and other expenses must be allocated between business and personal days
Deductibility of transportation costs depends on whether the trip is domestic or foreign
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C9-11
Combined Business/Pleasure Travel
(slide 2 of 4)
For domestic travel
If primary purpose of trip is business, transportation is deductible in full If primary purpose is pleasure, no deduction for transportation allowed, but other expenses (e.g., lodging) associated with business days are deductible
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C9-12
Combined Business/Pleasure Travel
(slide 3 of 4)
For foreign travel
Transportation expenses must be allocated between business and personal unless:
Trip is 7 days or less, Less than 25% of time was for personal purposes, or Taxpayer had no substantial control over arrangements for the trip
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C9-13
Combined Business/Pleasure Travel
(slide 4 of 4)
Travel days are considered business days Weekends, legal holidays and intervening days are business days if both the preceding and succeeding days are business days If trip is primarily for pleasure, no transportation expenses are deductible
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Moving Expenses
Deductible for moves in connection with the commencement of work at a new principal place of work Two tests must be met for moving expenses to be deductible
Distance test Time test
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Moving Expenses - Distance Test
Distance from old home to new job must be at least 50 miles farther than from old home to old job New home location not relevant for decision
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Example of Distance Test
Gail lived 20 miles from her old job Gail's new job is 75 miles from her old home Gail meets the distance test
20 mi.
Old Job
Old Residence
75 mi.
New Job
Comprehensive Volume C9-17
Moving Expenses - Time Test
(slide 1 of 2)
Taxpayer must be full-time employee for 39 weeks in the 12-month period following the move, or Self-employed must work in new location for 78 weeks during the next two years following the move
39 of the weeks must be in the first 12 months
Test waived if die, disabled, discharged, or transferred
Comprehensive Volume C9-18
Moving Expenses - Time Test
(slide 2 of 2)
If time test not met during taxable year, two alternatives: Take the deduction in year moved. If test is not met in following year, either:
Include the amount deducted in gross income in the following year, or File amended return for year of move
Alternatively, wait until time test is met and then file amended return for year of move
Comprehensive Volume C9-19
Deductible Moving Expenses
``Qualified'' moving expenses include reasonable expenses of:
Moving household goods and personal effects to new location Expenses of travel for taxpayer and family to new location
Lodging Actual auto costs (not depreciation) or mileage rate of $.24 per mile for each car in 2009
Meals are not deductible as moving expense
Comprehensive Volume C9-20
Tax Treatment of Moving Expenses
Unreimbursed moving expenses are deductible for AGI Reimbursement or payment by employer:
For qualified moving expenses, amount is excluded from gross income, but no deduction for related expenses For nonqualified moving expenses, amount is included in gross income and no deduction is allowed
Comprehensive Volume C9-21
Education Expenses
(slide 1 of 3)
Education expenses of an employee are deductible if they are incurred:
To maintain or improve existing skills, or To meet express requirements of the employer or requirements imposed by law to retain employment status
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Education Expenses
(slide 2 of 3)
Education expenses of an employee are not deductible if they are incurred:
To meet minimum educational standards for existing job, or To qualify taxpayer for new trade or business
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Education Expenses
(slide 3 of 3)
Education expenses include:
Tuition Books Supplies Transportation Travel (including lodging and 50% meals)
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Deduction For Qualified Tuition and Related Expenses (slide 1 of 3)
A deduction is allowed for AGI for qualified tuition and related expenses involving higher education (i.e., postsecondary)
This provision expired at the end of 2007, but has been extended through 2009
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C9-25
Deduction For Qualified Tuition and Related Expenses (slide 2 of 3)
For 2004 - 2009, the maximum deduction depends on filing status and AGI
Filing Status Single Married Single Married AGI Limit $65,000 $130,000 $65,001 to $80,000* $130,001 to $160,000* Max Deduction $4,000 $4,000 $2,000 $2,000
*No deduction is allowed if MAGI exceeds this amount
Comprehensive Volume C9-26
Deduction For Qualified Tuition and Related Expenses (slide 3 of 3)
Qualified tuition and related expenses include whatever is required for enrollment
Usually, student activity fees, books, room and board are not included
Expenses need not be work related Deduction is not available for married persons filing separately
Comprehensive Volume C9-27
Entertainment 1 Expenses
(slide of 3)
Deductions are very restricted due to abuse possibilities
Deductible amount allowed:
50% of meals and entertainment costs including related taxes, tips, cover charges, parking fees, and room rental fees 100% of transportation costs
Amounts cannot be lavish or extravagant Beginning in 1998, the 50% cutback for meals is eased for certain, very limited, types of employees
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C9-28
Entertainment Expenses
(slide 2 of 3)
The 50% cutback rule has a number of exceptions, such as:
Situations where full value of meals or entertainment is included in income Meals and entertainment are provided in a subsidized eating facility or where the de minimis fringe benefit rule is met Employer-paid recreational activities for employees
e.g., the annual Christmas party or spring picnic
Comprehensive Volume C9-29
Entertainment Expenses
(slide 3 of 3)
Entertainment expenses are classified as either:
Directly related to business
Actual business meeting or discussion occurs during meal or entertainment
Associated with business
Meal or entertainment that directly precedes or follows business meeting or discussion
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Restrictions on Entertainment Expenses (slide 1 of 3)
Club dues
Generally not deductible
Exception: Clubs formed for public service and community volunteerism (e.g., Kiwanis, Rotary)
Business entertainment expenses incurred at club are still deductible (50%)
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Restrictions on Entertainment Expenses (slide 2 of 3)
Ticket purchases for entertainment
Amounts paid in excess of face value of ticket are not deductible Limitation on deductibility of luxury skybox expenditures
Comprehensive Volume
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Restrictions on Entertainment Expenses (slide 3 of 3)
Business gifts
Business gifts of tangible personalty with a value of $25 or less per person per year are deductible
Incidental costs (e.g., gift-wrapping) are not included in the cost of the gift in applying the limit
If the value is $4 or less (e.g., pen with company name) then not subject to $25 limit
Gifts to employers or superiors are not deductible
Comprehensive Volume C9-33
Office in the Home
(slide 1 of 3)
Deductibility is very restricted due to abuse possibilities
Office must be used exclusively and on a regular basis as:
The principal place of business, or A place of business used by clients, patients, or customers
For employees, office must also be for the convenience of the employer
Comprehensive Volume C9-34
Office in the Home
(slide 2 of 3)
What constitutes "principal place of business"?
Home office qualifies as a principal place of business if:
Taxpayer conducts admin. and mgmt. activities in the home office, and There is no other fixed location where taxpayer conducts these activities
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C9-35
Office in the Home
(slide 3 of 3)
Office in the home expenses cannot cause net loss from the business activity
Office in home deduction limited to business gross income in excess of other business expenses (ordering rules apply) Excess is carried forward (subject to limit) Form 8829 is used to report office in home expenses
Comprehensive Volume C9-36
Other Employee Expenses
A partial list of other employee expenses that are deductible includes:
Special clothing (uniforms) Union dues Professional expenses Job hunting in same profession Educator expenses (deductible for AGI)
Limited to $250 per year for supplies, etc. of elementary and secondary school teachers
Comprehensive Volume C9-37
Contributions to Retirement Accounts (slide 1 of 2)
Retirement plans fall into two major classifications depending on who is covered
For employees usually follow one of two income tax approaches
Most plans allow an exclusion from income for the contributions the employee makes to the pension plan Alternatively, using a traditional IRA, a contributing employee is allowed a deduction for AGI
Maximum deduction is $5,000 for 2009
Comprehensive Volume C9-38
Contributions to Retirement Accounts (slide 2 of 2)
Retirement plans for self-employed taxpayers
Called Keogh (or H.R. 10) plans
Follow the deduction approach of traditional IRAs Amounts contributed under a plan are deductible for AGI
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Classification of Employee Expenses (slide 1 of 2)
Depends on whether they are reimbursed and, if reimbursed, under what type of plan
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Classification of Employee Expenses (slide 2 of 2)
Employers can have three types of reimbursement plans
Accountable Nonaccountable No reimbursement is given
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Accountable Plan
(slide 1 of 2)
Plan must require adequate accounting to the employer for expense reimbursed, and Any excess reimbursements must be returned to the employer
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Accountable Plan
(slide 2 of 2)
Adequate accounting is
Submitting a record, with receipts, to the employer, or Using a per diem allowance that is not more than the Federal per diem rate
Employee reports no income and takes no deduction to the extent of the reimbursed expenses
Comprehensive Volume C9-43
Substantiation for Expenditures
(slide 1 of 2)
No deduction allowed for an expense if the taxpayer does not have adequate records for the expense
Therefore, taxpayers need to have good records for employee or self-employed expenses
In some cases, use of per diem allowance will be deemed substantiation
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Substantiation for Expenditures
(slide 2 of 2)
Records should include:
The amount of the expense The time and place of travel or entertainment (or date of gift) The business purpose of the expense The business relationship of the taxpayer to the person entertained (or receiving the gift)
Comprehensive Volume
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Nonaccountable Plan
Plan that does not require adequate accounting or return of excess reimbursement or both
Reimbursed amounts received under this plan are included in gross income Expenses are deductible from AGI as miscellaneous itemized deductions subject to the 2% of AGI limitation
Comprehensive Volume C9-46
Unreimbursed Employee Expenses
Expenses are deductible from AGI as miscellaneous itemized deductions subject to the 2% of AGI limitation
If employee could have received, but did not seek, reimbursement for whatever reason, none of the employment-related expenses are deductible
C9-47
Comprehensive Volume
Miscellaneous Itemized Deductions
Miscellaneous itemized deductions subject to the 2% of AGI limitation
Certain miscellaneous expenses must be added together and the amount in excess of 2% of taxpayer's AGI is deductible from AGI (i.e., itemized deduction reported on Sch. A)
Comprehensive Volume
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Examples of Miscellaneous Itemized Deductions Subject to 2% Floor
Most reimbursed expenses under a nonaccountable plan Unreimbursed employee expenses Section 212 expenses not related to rents and royalties Tax return preparation fee Hobby expenses Investment expenses (except interest and taxes)
Comprehensive Volume C9-49
Examples of Miscellaneous Itemized Deductions Not Subject to 2% Floor
Impairment-related work expenses of handicapped individuals Gambling losses to the extent of winnings Certain terminated annuity payments
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Computing 2% of AGI Limitation (slide 1 of 4)
Example 1 Taxpayer, a single individual, provides the following information for 2009: $30,000 AGI $ 4,500 deductible interest expense and taxes paid $ 1,500 employee business expenses, and
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Computing 2% of AGI Limitation (slide 2 of 4)
Example 1 (cont'd) Interest and taxes $4,500 Misc. expenses: Employee bus. exp. $1,500 Tax return prep. 500 Total $2,000 Less 2% AGI 600 1,400
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Computing 2% of AGI Limitation (slide 3 of 4)
Example 2 Assume the same facts as in Example 1, except that the taxpayer has only $200 of employee business expenses
Comprehensive Volume
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Computing 2% of AGI Limitation (slide 4 of 4)
Example 2 (cont'd)
Interest and taxes
$ 4,500
Misc. expenses: Employee bus. exp. $200 Tax return prep. . 500 Total $700 Less 2% AGI . 600 . 100 Itemized deductions $ 4,600
Comprehensive Volume
C9-54
If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr. Donald R. Trippeer, CPA [e-mail] SUNY Oneonta
Comprehensive Volume
C9-55