Chapter 9 - Chapter 9: DeductionsEmployee and Self-Employed...

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Chapter 9: Deductions—Employee and Self-Employed Related Expenses In certain situations, employee expenses are treated as expenses incurred in trade or business— deductions for AGI Most employee business expenses are deductible from AGI—itemized deductions (with the exception of reimbursement under an accountable plan) EMPLOYEE VS. SELF-EMPLOYED Major problem in taxation is to determine if an employer-employee relationship exists or if the individual is self-employed o Self- Employed— independent contractor— do not have to be included in fringe benefit programs (huge advantage for employers so they try to classify employees as this to get around costs Employer-employee relationship: exists when employer has the right to specify the result and the ways and means by which that result will be attained. Factors indicating this include the following by the employer: o Furnishing of tools or equipment and a place to work o Providing support services including the hiring of assistants o Making training available o Allowing participation in workplace fringe benefits Self-Employed—file a Schedule C. Deductions incurred are deductions for AGI. Statutory Employees —NOT common law employees but are treated as employees for tax purposes— includes certain drivers, home workers, life insurance agents and certain salespersons o These employees are allowed to claim their business-related expenses as deductions for AGI on schedule C EMPLOYEE EXPENSES—IN GENERAL Once employment relationship is established, employee expenses fall into one of the following categories: o Transportation o Travel o Moving o Education o Entertainment o Other TRANSPORTATION EXPENSES Qualified Expenditures— an employee can deduct unreimbursed, employment-related transportation expenses as an itemized deduction Transportation Expenses: include only the cost of transporting the employee from one place to another in the course of employment when the employee is not away from home in travel status (includes taxi fares, auto expenses, tolls, parking) o Example would be expenses incurred by employee commuting to a second job from a first job, transporting heavy tools, and going from home/job to temporary work station o The cost of commuting home to work and back is NOT deductible— personal, non-deductible expense Computation of Automobile Expenses A taxpayer has 2 choices to compute automobile expenses: automatic mileage method and actual cost method If automobile is used for personal use and business, only expenses attributable to business are deductible Automatic Mileage Method: taxpayer multiplies the automatic mileage rate by the miles driven to compute the deduction for business transporation o For 2009, rate = 55 cents per mile for business miles o Parking fees and tolls are allowed in addition to deduction computed from automatic mileage rate
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Actual Cost Method: actual cost of operating the automobile is used to compute the deduction. This
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Chapter 9 - Chapter 9: DeductionsEmployee and Self-Employed...

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