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© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
1
Federal Income Tax
Business Related Deductions
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
2
Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses
• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
3
Automobile Expenses
• Choose larger of– Actual costs (business use)– Standard mileage rate allowed
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
4
Automobile Expenses
Business $.??
Moving
Medical
Charitable
Contribution
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
5
Automobile Expenses
Business $.555 pg 9 – 11
Moving
Medical
Charitable
Contribution
Note prev yrs’ amts: ’01 = $.345 ’02 = $.365 ’03 = $.36’04 = $.375
’05 = $.405 $.485’06 = $.445’07 = $.485’08 = $.505 $.585’09 = $.55’10 = $.50’11 = $.51 $.555
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
6
Automobile Expenses
• Choose larger of– Actual costs (business use)– Standard mileage rate allowed
• Problem 9 – 60
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
7
Automobile Expenses
• Choose larger of– Actual costs (business use)– Standard mileage rate allowed
• Problem 9 – 60
Standard Actual
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
8
Problem 9 - 60
StandardBusiness Miles 24,000
x Std Rate $ .555
Sub-total $13,320
Parking & Tolls 100
Total STD Mileage Allowance $13,420
Actual
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
9
Problem 9 - 60Actual
Gas & Oil$ 9,000Repairs1,400 Depreciation4,700Insurance & License 1,300Total to Apportion$16,400x Bus Use 60%Sub-total$ 9,840Exp NOT Apportioned 100Total ACTUAL Costs$ 9,940
Standard
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
10
Problem 9 - 60
Standard vs. Actual
Total STANDARD Costs $13,420
Total ACTUAL Costs $ 9,940
Choose Larger $13,420
Less: Reimbursement 9,600
Deductible Amount $ 3,820
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
11
Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses
• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
12
Entertainment Expenses
• “Directly Related”
• “Associated With”
• See page 9-14
• Substantiation
• Not lavish or extravagant
• 50%
• Problem 9 - 20
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
13
Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses
• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
14
Moving Expenses
• General Requirements– Must move 50 miles– Must stay in new location 39 weeks– Only “direct” expenses deductible
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
15
Moving Expenses
• Prior to 1981– expenses classified as “direct” and
“indirect”– “direct” costs fully deductible; limits on
“indirect” costs– costs (in excess of reimbursement)
deductible FOR A.G.I.
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
16
Moving Expenses
• 1981 – 1996– direct and indirect costs deductible FROM– reimbursement included in Gross Income
• Present Law– only DIRECT costs deductible– costs deductible FOR A.G.I.
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
17
Moving Expenses
• 1981 – 1996– direct and indirect costs deductible FROM– reimbursement included in Gross Income
• Present Law– only DIRECT costs deductible– costs deductible FOR A.G.I.
• Problem 9 – 64
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
18
Automobile Expenses
Business $.555 pg 9 – 11
Moving $.??
Medical
Charitable
Contribution
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
19
Automobile Expenses
Business $.555 pg 9 – 11
Moving $.23 pg 9 – 20
Medical
Charitable
Contribution
Note prev yrs:
$.12 in 2001 $.13 in 2002 $.12 in 2003$.14 in 2004$.15$.22 in 2005$.20 in 2007$.19 in 2008$.24 in 2009$.165 in 2010$.19 in 2011$.235
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
20
Automobile Expenses
Business $.555 pg 9 – 11
Moving $.23 pg 9 – 20
Medical
Charitable
Contribution
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
21
Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses
• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
22
Education Expenses
• Ways for education costs to be deductible:– Required by law– Required by employer– Maintain or improve skills
• Problem 9 – 26
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
23
Problem 9 - 26
CPA Review $ 400
Law School 4,000
Continuing Education 600
$5,000
$500
Deductible FROM – Tier 2
New trade or business
personal
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
24
Education Expenses
• Ways for education costs to be deductible:– Required by law– Required by employer– Maintain or improve skills
• Problem 9 – 26
• Problem 9 – 27
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
25
Problem 9 - 27
• Teachers generally allowed?– Sometimes required by law or employer– Maintain and improve skills
• New trade or business?– elementary to secondary?– biology to art?– classroom to counselor?– teacher to principal?
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
26
Education Expenses
• Ways for education costs to be deductible:– Required by law– Required by employer– Maintain or improve skills
• Problem 9 – 26• Problem 9 – 27• Problem 9 – 65
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
27
Problem 9 - 65a. Law school?
• Not deductible – new trade or bus
b. Self-employed accountant?• $1,800 FOR
c. MBA for executive?• $5,000 FROM, Tier 2
d. Graduate courses for teacher?• $1,000 FROM, Tier 2
e. Bar review for recent grad?• Not deductible – personal
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
28
Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses
• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
29
Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses
• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
30
Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses
• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
31
Home Office Expenses
• Controversial
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
32
Home Office Expenses
• Controversial• Requirements:
– “exclusive use”– principal place of business (1998)– meetings with customers/clients etc.– separate structure?– “convenience of the employer”
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
33
Home Office Expenses
• Qualifications?
• Problem 9 – 28 – (do b, a, then c)
• What’s deductible?
http://www.irs.gov/pub/irs-pdf/p587.pdf
Pub. 587page 7
Publication 587, page 7
http://www.irs.gov/pub/irs-pdf/p587.pdf
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
36
What’s Deductible?
Business Income xxxx
Less: Regular Business Expenses x
Sub-Total xxx
Home Office Exp Deductible Anyway x
Sub-Total xx
Less: Other Home Office Expenses x
Net Income x
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
37
See Sch C, page B-21
09
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
38
Form 8829
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
39
Home Office Expenses
• Qualifications?
• Problem 9 – 28 – (do b, a, then c)
• What’s deductible?
• Problem 9 – 67
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
40
Problem 9 – 67
• Studio deductible?
• Den deductible?
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
41
Problem 9 – 67
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
42
Problem 9 – 67
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
43
Problem 9 – 67
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
44
Problem 9 – 67
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
45
Problem 9 – 67
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
46
Problem 9 – 67 (a)Real Estate Taxes $2,000Mortgage Interest 5,000Insurance 500Depreciation 3,500Repairs and Utilities 1,000Total $12,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
47
Problem 9 – 67 (a)Real Estate Taxes $2,000Mortgage interest 5,000Insurance 500Depreciation 3,500Repairs and Utilities 1,000Total $12,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
48
Problem 9 – 67 (a)Real Estate Taxes $2,000Mortgage Interest 5,000Insurance 500Depreciation 3,500Repairs and Utilities 1,000Total $12,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
49
Problem 9 – 67
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
50
Problem 9 – 67
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
51
Problem 9 – 67
Now What?
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
53
Problem 9 – 67Real Estate Taxes $2,000Mortgage interest 5,000Insurance 500Depreciation 3,500Repairs and Utilities 1,000Total $12,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
54
Problem 9 – 67 (b)Real Estate Taxes $2,000Mortgage Interest 5,000Insurance 500Depreciation 3,500Repairs and Utilities 1,000Total $12,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
55
Problem 9 – 67
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
56
Problem 9 – 67 (a)Real Estate Taxes $2,000Mortgage Interest 5,000Insurance 500Depreciation 3,500Repairs and Utilities 1,000Total $12,000
Note: 90% of these deductible as itemized deductions.
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
57
Problem 9 – 67 (b)
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
58
Problem 9 – 67 (b)Income $2,500Exp of Business 2,000Sub-total $ 500Exp Ded AnywaySub-total
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
59
Problem 9 – 67 (b)Real Estate Taxes $2,000Mortgage Interest 5,000Insurance 500Depreciation 3,500Repairs and Utilities 1,000Total $12,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
60
Problem 9 – 67 (b)Real Estate Taxes $2,000Mortgage Interest 5,000Insurance 500Depreciation 3,500Repairs and Utilities 1,000Total $12,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
61
Problem 9 – 67 (b)Income $2,500Exp of Business 2,000Sub-total $ 500Exp Ded Anyway 700Sub-total ($ 200)Other Home Exp -0- Net Income (Loss) ($ 200)
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
65
Problem 9 – 67 (b)
Excess Direct Exp $200
10% of other Exp of Home ???
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
66
Problem 9 – 67 (b)Real Estate Taxes $2,000Mortgage Interest 5,000Insurance 500Depreciation 3,500Repairs and Utilities 1,000Total $12,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
67
Problem 9 – 67 (b)
Carryover
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
68
Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses
• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
69
Business Expenses
• Self-employed–“for”
• Employee–Reimbursed?
•Yes = “for”•No = “from”
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
70
Reimbursements
• References– Text Table 9 - 2, page 9 - 18
– Publication 17, YFIT, Table 26 - 3 195
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
71
Plans
•Accountable
•Non-Accountable
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
72
Plans
•Accountable
•Non-Accountable
Recommend
Problem 9 - 13
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
73
Reimbursements
• Problem 9 - 57
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
74
Problem 9 – 57
In Textbook
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75
Problem 9 – 57
Reimbursed
$3,000$5,000
60%
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
76
Problem 9 – 5760% 40%
Reimb NonProf dues & Subs 1,000Airfare & Lodging 2,000Local transportation 1,000Entertainment 1,000
5,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
77
Problem 9 – 5760% 40%
Reimb NonProf dues & Subs 1,000 600 400Airfare & Lodging 2,000Local transportation 1,000Entertainment 1,000
5,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
78
Problem 9 – 5760% 40%
Reimb NonProf dues & Subs 1,000 600 400Airfare & Lodging 2,000 1,200 800Local transportation 1,000Entertainment 1,000
5,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
79
Problem 9 – 5760% 40%
Reimb NonProf dues & Subs 1,000 600 400Airfare & Lodging 2,000 1,200 800Local transportation 1,000 600 400Entertainment 1,000
5,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
80
Problem 9 – 5760% 40%
Reimb NonProf dues & Subs 1,000 600 400Airfare & Lodging 2,000 1,200 800Local transportation 1,000 600 400Entertainment 1,000 600 400
5,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
81
Problem 9 – 5760% 40%
Reimb NonProf dues & Subs 1,000 600 400Airfare & Lodging 2,000 1,200 800Local transportation 1,000 600 400Entertainment 1,000 600 400
5,000 3,000 2,000
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
82
Problem 9 – 5760% 40%
Reimb NonProf dues & Subs 1,000 600 400Airfare & Lodging 2,000 1,200 800Local transportation 1,000 600 400Entertainment 1,000 600 400
5,000 3,000 2,000
$200
$1,800
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
83
Text Page 9 – 47
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
84
Another Approach
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85
4,000 1,000
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86
Another Approach
4/5 = 80% 1/5 = 20%
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
87
Another Approach
4/5 = 80% 1/5 = 20%
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
88
Another Approach
4/5 = 80% 1/5 = 20%
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
89
Another Approach
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
90
Another ApproachAll Except Meals &
Meals & Ent Ent
4,000 1,000Reimb 3,000 2,400 600
1,600 400Less: 50% 200
1,600 200
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
91
Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses
• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)
ItemizedDeductions
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
92
Chapter 9• Travel and Transportation• Automobile Expenses• Entertainment• Moving Expenses
• Education Expenses• Home Office• Reimbursements• Hobby losses (from Chap 6)
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
93
Hobby Losses
• Criteria• Consequences• Order of deductible expenses
– Tier 1: deductible anyway (itemized)– Tier 2: other exp (not reduce basis)– Tier 3: expenses that reduce basis
• Problems 6 - 54 and 6 - 55
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
94
Problem 6 – 54 Gross Income 1,100
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
95
Problem 6 – 54Gross Income 1,100Less: Property taxes 300
800Less: Feed & Vet fees 800
0
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
96
Problem 6 – 54Gross Income 1,100Less: Property taxes 300
800Less: Feed & Vet fees 800
0Less: Depreciation (limited) 0Net Income 0
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
97
Problem 6 – 54 Gross Income 1,500
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
98
Problem 6 – 54 Gross Income 1,500Less: Property taxes 300
1,200
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
99
Problem 6 – 54 Gross Income 1,500Less: Property taxes 300
1,200Less: Feed & Vet fees 1,100
100
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
100
Problem 6 – 55Gross Income 1,500Less: Property taxes 300
1,200Less: Feed & Vet fees 1,100
100Less: Depreciation (limited) 100Net Income 0
© Copyright 2001-2009 by M. Ray Gregg. All rights reserved.
101