Post on 19-Jan-2016
9-1©2008 Prentice Hall, Inc.
©2008 Prentice Hall, Inc. 9-2
EMPLOYEE EXPENSES & EMPLOYEE EXPENSES & DEFERRED DEFERRED
COMPENSATIONCOMPENSATION (1 of 2) (1 of 2)
Classification and limitations of employee expenses
Travel expensesTransportation expensesEntertainment expensesReimbursed employee business
expenses
©2008 Prentice Hall, Inc. 9-3
EMPLOYEE EXPENSES & EMPLOYEE EXPENSES & DEFERRED DEFERRED
COMPENSATIONCOMPENSATION (2 of 2) (2 of 2)
Moving expensesEducation expensesOffice in home expensesDeferred compensationTax planning considerationsCompliance and procedural
considerations
©2008 Prentice Hall, Inc. 9-4
Classification and Classification and Limitations of Employee Limitations of Employee
ExpensesExpenses (1 of 3) (1 of 3)
Nature of employment relationshipEmployer has right to control end result
of work and means accomplishedIf employee, employer pays ½ FICA and
MedicareIf self-employed, taxpayer pays all FICA
and Medicare
©2008 Prentice Hall, Inc. 9-5
Classification and Classification and Limitations of Employee Limitations of Employee
ExpensesExpenses (2 of 3) (2 of 3)
Limitations on unreimbursed employee expenses2% of AGI floor applies to
Unreimbursed employee business expenses
Investment expenses other than interestTax return preparation fees and other
deductions
©2008 Prentice Hall, Inc. 9-6
Classification and Classification and Limitations of Employee Limitations of Employee
ExpensesExpenses (3 of 3) (3 of 3)
Limitations (continued)If total misc itemized deductions ≤ 2%
of AGI or if total allowable itemized deductions do not exceed std deductionUnreimbursed employee expenses provide
no tax benefitReduced benefit for high-income taxpayers
from 3% scale down of itemized deductions
©2008 Prentice Hall, Inc. 9-7
Travel ExpensesTravel Expenses
Deductibility of travel expensesDefinition of travel expensesGeneral qualification requirementsBusiness vs. pleasureForeign travelAdditional limitations on travel
expenses
©2008 Prentice Hall, Inc. 9-8
Deductibility of Travel Expenses
Depends on nature of expenditure and if employee reimbursed
Taxpayers engaged in ToB or production of rents or royaltiesTravel expenses deductible for AGI
EmployeeDeduction for AGI if reimbursed
2% misc deduction if not reimbursed
©2008 Prentice Hall, Inc. 9-9
Definition of Travel Expenses
Includes Transportation, meals, & lodging related
to a ToB, or employee status incurred while away from taxpayer’s tax home
Requires overnight stayDeductible amount of travel
expenses may be reduced if actual expenses lavish or extravagant
©2008 Prentice Hall, Inc. 9-10
General Qualification Requirements
(1 of 2)
Away-from-tax-home requirementTax home is work location
Assignment must be temporaryAssignment not temporary if
Assignment indefinite OR Expected to last > 12 months
©2008 Prentice Hall, Inc. 9-11
General Qualification Requirements
(2 of 2)
Overnight requirementMust be reasonable for taxpayer to
be away overnightShort rest stops on long day-trip
not considered overnight
©2008 Prentice Hall, Inc. 9-12
Business vs. Pleasure
Travel to and from destinationIf trip primarily personal, no
deductionIf trip primarily business, all travel to
and from destination deductibleOther travel-related expenses
Allocated to business and personal activities
©2008 Prentice Hall, Inc. 9-13
Foreign Travel
Generally disallowedAllowed only if taxpayer shows
activity directly related to business, AND
Reasonable for meeting to be held outside north America
©2008 Prentice Hall, Inc. 9-14
Additional Limitations on Travel Expenses
Travel expenses disallowed actual travel is for educationE.g., French student traveling
through FranceLuxury water travel limitedTravel to conventions, seminars
not deductible if activity for production of income
©2008 Prentice Hall, Inc. 9-15
Transportation ExpensesTransportation Expenses
Definition and classificationTreatment of automobile expensesReimbursement of automobile
expensesExcess expenses over
reimbursement deductible as 2% misc itemized deductions
©2008 Prentice Hall, Inc. 9-16
Definition and Classification(1 of 2)
Commuting costs generally nondeductible personal expenses
Commuting costs between multiple jobs for same taxpayer deductible
Transportation costs from employee’s regular work site to temporary one deductible
©2008 Prentice Hall, Inc. 9-17
Definition and Classification(2 of 2)
Commuting costs between home and temporary work site deductible if taxpayer has regular place of business
©2008 Prentice Hall, Inc. 9-18
Treatment of Automobile Expenses
Standard mileage rate $0.485/mileCannot use std rate if use ≥ 2 vehiclesDoes not include parking and tolls
Actual expensesIncludes gas, oil, maintenance and
repairs, insurance, and depreciationBased on ratio of business miles to
total miles driven
©2008 Prentice Hall, Inc. 9-19
Entertainment ExpensesEntertainment Expenses
50% disallowance for meal and entertainment expenses
Classification of expensesBusiness mealsEntertainment facilities and club duesBusiness giftsLimitations on entertainment tickets
©2008 Prentice Hall, Inc. 9-20
Classification of Expenses
Criteria for deductionDirectly related expense
Benefit must be for other than goodwill and be in a clear business setting
Associated with expenseMust establish clear business purpose and
activity must directly precede or follow bona fide business discussion
Need proper substantiation
©2008 Prentice Hall, Inc. 9-21
Business Meals
Business meals must meet “directly related to” or “associated with” tests
Cannot be lavish or extravagant for circumstances
©2008 Prentice Hall, Inc. 9-22
Entertainment Facilities and
Club Dues
No deduction permitted costs related to maintenance of entertainment, amusement, or recreation facilities
No deduction for club dues
©2008 Prentice Hall, Inc. 9-23
Business Gifts
Generally annual ceiling of $25/donee
Exceptions includeEmployee achievement awards <
$400Gift from employer to employee’s
survivor
©2008 Prentice Hall, Inc. 9-24
Limitations on Entertainment Tickets
50% limitation applies to face value of ticket
Further restrictions on skyboxes
©2008 Prentice Hall, Inc. 9-25
Reimbursed Employee Reimbursed Employee Business ExpensesBusiness Expenses (1 of 2) (1 of 2)
SubstantiationEmployee must make adequate
accounting of expenses to employerEmployee required to return excess
reimbursementAccountable Plan
Reimbursements and deductions not reported by employee if no excess deductions
©2008 Prentice Hall, Inc. 9-26
Reimbursed Employee Reimbursed Employee Business ExpensesBusiness Expenses (2 of 2) (2 of 2)
Non-Accountable PlanReimbursement taxableDeductions miscellaneous subject to
2% of AGI floorPer Diem Allowances for Meals and
LodgingIRS has special tablesSubstantiation less burdensome
©2008 Prentice Hall, Inc. 9-27
Moving ExpensesMoving ExpensesDistance and Duration RequirementsDistance and Duration Requirements
New job at least 50 miles farther from taxpayer’s old residence
New employee must be employed full-time at new location for 39 weeks out of year following the move78 weeks for self-employed individuals
©2008 Prentice Hall, Inc. 9-28
Moving ExpensesMoving ExpensesDefinition of Moving ExpensesDefinition of Moving Expenses
For AGI deductionQualified expenses
Cost of moving household good and personal effects from old to new homeIncludes storage if < 30 days
Cost of traveling from old to new homeIncludes lodging, but not meals$0.20/mile or actual expenses allowed for car
©2008 Prentice Hall, Inc. 9-29
Education ExpensesEducation Expenses(1 of 3)(1 of 3)
Classification of education expensesSee Table I9-3
Deduction for higher ed expenses$4,000 for AGI deduction in 2007If AGI between $65K-$80K ($130K-$160K
for MFJ), $2,000 deductionNo deduction if AGI > $80K ($160K for
MFJ)
©2008 Prentice Hall, Inc. 9-30
Education ExpensesEducation Expenses(2 of 3)(2 of 3)
General requirements for a deductionMaintain or improve skills required
for employmentMeet requirements imposed by law
or by employer for retention of employment, rank, or compensation rate
©2008 Prentice Hall, Inc. 9-31
Education ExpensesEducation Expenses(3 of 3)(3 of 3)
Nondeductible ifMeet minimum educational
requirements for qualifications in taxpayer’s employment
Qualifies taxpayer for new trade or business
©2008 Prentice Hall, Inc. 9-32
Office in Home ExpensesOffice in Home ExpensesGeneral RequirementsGeneral Requirements
Must meet one of requirements and be used on exclusive and regular basisOffice used as principal place of business
for any ToBIncludes doing administrative work if no other
fixed location availablePlace for meeting clients in normal course
of businessLocated in separate structure
©2008 Prentice Hall, Inc. 9-33
Office in Home ExpensesOffice in Home ExpensesDeduction and Limitations (1 of 2)Deduction and Limitations (1 of 2)
Categories of expensesExpenses directly related to officeExpenses indirectly related to
officeExpenses related to whole homeProrate based on square footage or
other methodTotal expenses cannot create loss
©2008 Prentice Hall, Inc. 9-34
Office in Home ExpensesOffice in Home ExpensesDeduction and Limitations (2 of 2)Deduction and Limitations (2 of 2)
Order of expense deductions1. Expenses not related to home office2. Expenses directly related to home office3. Pro-rata portion of indirect expenses
E.g, mortgage, interest, utilities, insurance Disallowed expenses carried forward
to future year
©2008 Prentice Hall, Inc. 9-35
Deferred CompensationDeferred Compensation(1 of 3)(1 of 3)
Qualified pension and profit-sharing plans
Qualification requirements for a qualified plan
Tax treatment to employees and employers
Nonqualified plans
©2008 Prentice Hall, Inc. 9-36
Deferred CompensationDeferred Compensation(2 of 3)(2 of 3)
Employee stock optionsPlans for self-employed individualsTraditional Individual Retirement
Account (IRA)Roth IRACoverdell education savings
account
©2008 Prentice Hall, Inc. 9-37
Deferred CompensationDeferred Compensation(3 of 3)(3 of 3)
Health savings accountsSimplified plans
©2008 Prentice Hall, Inc. 9-38
Qualified Pension and Profit-Sharing Plans
Pension plansDefined benefitDefined contribution
Profit-sharing plansInclude 401(k) plans
Stock bonus plansDC plan where investments invested
in company stock
©2008 Prentice Hall, Inc. 9-39
Qualification Requirements for a Qualified Plan
Must be for employees’ exclusive benefit
Does not discriminate in favor or highly compensated employees>5% owners or comp >$100K
Contributions proportionate to compCoverage requirementsVesting requirement
©2008 Prentice Hall, Inc. 9-40
Tax Treatment to Employees and Employers
Employer contributions immediately deductible
Employee contributions may come from pre-tax or after-tax earnings
Benefits generally taxed to employees if contributions from pre-tax earningsUse exclusion ratio if contributions
from after-tax earnings
©2008 Prentice Hall, Inc. 9-41
Nonqualified Plans
Often used to provide incentives or supplementary retirement to execs
No nondiscrimination or vesting rulesEmployer does not receive deduction
until benefits available to employeeUnfunded compensation plans
©2008 Prentice Hall, Inc. 9-42
Employee Stock OptionsIncentive Stock Options (ISOs)
No tax to employee on exercise date
LTCG treatment when employee sells stock (amount realized – exercise price)
Employer receives no deduction
©2008 Prentice Hall, Inc. 9-43
Employee Stock OptionsNonqualified Stock Options (NSOs)
Nonqualified stock options (NSOs)Employee recognizes
compensation income on exercise date (FMV – exercise price)
Employer receives deduction on exercise date
©2008 Prentice Hall, Inc. 9-44
Traditional IRA(1 of 2)
Fully deductible IRA contributions Lesser of $4,000 or earned income
$5,000 if over age 50Available only for following taxpayers
Taxpayers who are not active participants in a qualified employer retirement plan
Taxpayers who are active, but AGI ≤ $52K (or ≤ $83K for MFJ)
Spouse active participant, but AGI ≤ $156K
©2008 Prentice Hall, Inc. 9-45
Traditional IRA(2 of 2)
Phase out for active participantsAGI $52K - $62K
$83K - $93K for MFJ$156K - $166K for MFJ if spouse active
Deduction for non-working spouse$4,000 or $5,000 if ≥ age 50
All distributions taxableUnless some contributions
nondeductible
©2008 Prentice Hall, Inc. 9-46
Roth IRA(1 of 2)
NondeductibleMax contribution $4,000
If qualify for both Traditional and Roth maximum contribution for both is $4,000
Max contribution $5,000 if ≥ age 50
©2008 Prentice Hall, Inc. 9-47
Roth IRA(2 of 2)
Contribution phase-out AGI limitations$99,000 - $114,000 for Single$156,000 - $166,000 for MFJ
Qualified distributions nontaxable
©2008 Prentice Hall, Inc. 9-48
Coverdell Education Savings Account
Nondeductible contribution Maximum contribution $2,000/year
until beneficiary reaches age of 18Elementary, secondary & higher ed
expDistributions excluded from gross
income if ≤ qualified ed expensesMay be used in same year as Hope &
Lifetime learning credits
©2008 Prentice Hall, Inc. 9-49
Health Savings Accounts
Purpose to enable eligible individuals to accumulate funds on tax free basis to pay qualified medical expenses currently or in the futureNo employer-provided insuranceMust use high-deductible policy
©2008 Prentice Hall, Inc. 9-50
Simplified Plans
Simplified employee pensionsReduced administrative complexity
Simple retirement plansSavings incentive match plan for
employeesFor employers with < 100 employees
who received at least $5,000 in compensation
©2008 Prentice Hall, Inc. 9-51
Tax Planning Tax Planning ConsiderationsConsiderations
(1 of 2)(1 of 2)
Moving expenses only deductible ifEmployee must secure full-time work
before incurring moving expenses, orSelf-employeds must carry on ToB
prior to incurring moving expensesExcess reimbursements are taxable
compensation
©2008 Prentice Hall, Inc. 9-52
Tax Planning Tax Planning ConsiderationsConsiderations
(2 of 2)(2 of 2)
Rollover from Traditional to Roth IRAConsiderations include marginal tax rate, age of taxpayer and payment of taxes from rollover from post-tax funds
Rollover included in gross income$100K AGI limit removed after 2009
©2008 Prentice Hall, Inc. 9-53
Compliance and Compliance and Procedural Procedural
ConsiderationsConsiderations (1 of 2) (1 of 2)
Travel and entertainment expenses may be disallowed if taxpayer does not maintain adequate records
Employee business expenses reported on Form 2106
Moving expenses reported on Form 3903
©2008 Prentice Hall, Inc. 9-54
Compliance and Compliance and Procedural Procedural
ConsiderationsConsiderations (2 of 2) (2 of 2)
Home office expenses reported on Form 8829
Reports for qualified retirement plans required to be filed with IRS and, sometimes, with Dept. of Labor
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9-55©2008 Prentice Hall, Inc.