1 Individual Chapter 09 Solutions

1 Individual Chapter 09 Solutions - Chapter I:9 Employee...

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Chapter I:9 Employee Expenses and Deferred Compensation Discussion Questions I:9-1 It is important to distinguish whether an individual is an employee or an independent contractor (self-employed) because some expenses are only partially deductible by employees or not deductible at all. A self-employed individual who incurs a business-related expenditure may deduct the expense for determining AGI on Schedule C, Form 1040 under Section 162. In addition, employers pay certain payroll taxes on behalf of their employees. On the other hand, an individual's employment related activities such as travel and transportation are deductible from AGI and are subject to different tax rules and regulations. Individuals may prefer to be classified as employees because the employee portion of the social security tax rate in 2007 of 7.65% is less than the self-employment tax rate of 15.3%. This difference is mitigated somewhat because self-employed individuals receive an income tax deduction equal to 50% of their self-employment tax. Consideration should also be given to the hospital insurance portion of the FICA tax, which continues to apply without limit at a 1.45% rate for both employees and employers and at a 2.90% rate for self-employed individuals. p. I:9-3. I:9-2 The deductibility and classification of Matt's transportation and unreimbursed travel expenses depends upon the nature of the expenditure. The transportation and unreimbursed travel expenses incurred in Matt's employment are deductible from AGI as an itemized deduction subject to the 2% nondeductible floor for miscellaneous itemized deductions. The 2% (reduced from 3% for 2006 and 2007) scale down of total itemized deductions for upper-income taxpayers under Sec. 68 may also apply to reduce the deductible amount of unreimbursed employee expenses. The transportation and travel expenses incurred in his CPA practice are business-related and are deductible for AGI and are not subject to the aforementioned limitations. pp. I:9-2 through I:9-4. I:9-3 Deductible For From AGI AGI Non- Deductible 2% Nondeductible Floor 50% Deductible a. Reimbursed business meals b. Auto expenses going to and from work c. Legal expenses in preparation of the taxpayer's tax return d. Unreimbursed employee travel and transportation expenses e. Unreimbursed entertainment expenses f. Qualified moving expense of an employee g. Education-related expenses involving tuition and books X a X X X X X X X X X X X b X I:9-1
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a Since pursuant to an accountable plan, the reimbursement is not included in gross income and the expense is not deductible. The 50% reduction is applied at the employer level. b Business meals are subject to the 50% deduction limit. pp. I:9-2 through I:9-23. I:9-4
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1 Individual Chapter 09 Solutions - Chapter I:9 Employee...

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