9-1 ©2009 Pearson Education, Inc. Publishing as Prentice Hall.

9-1©2009 Pearson Education, Inc. Publishing as Prentice Hall

9-2

EMPLOYEE EXPENSES & EMPLOYEE EXPENSES & DEFERRED COMPENSATIONDEFERRED COMPENSATION (1 of (1 of

2)2)

Classification and limitations of employee expenses

Travel expensesTransportation expensesEntertainment expensesReimbursed employee business

expenses

©2009 Pearson Education, Inc. Publishing as Prentice Hall

9-3

EMPLOYEE EXPENSES & EMPLOYEE EXPENSES & DEFERRED COMPENSATIONDEFERRED COMPENSATION (2 of (2 of

2)2)

Moving expensesEducation expensesOffice in home expensesDeferred compensationTax planning considerationsCompliance and procedural

considerations


9-4

Classification and Classification and Limitations of Employee Limitations of Employee

ExpensesExpenses (1 of 3) (1 of 3)

Employee vs. self-employed factorsBehavioral controlFinancial controlRelationship of parties

If employee, employer pays ½ FICA and Medicare

If self-employed, taxpayer pays all FICA and Medicare


9-5



Limitations on unreimbursed employee expenses2% of AGI floor applies to

Unreimbursed employee business expenses

Investment expenses other than interestTax advice and return preparation fees,

and other deductions


9-6



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 1% scale down of itemized deductions


9-7

Travel ExpensesTravel Expenses

Deductibility of travel expensesDefinition of travel expensesGeneral qualification requirementsBusiness vs. pleasureForeign travelAdditional limitations on travel

expenses


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


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


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


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


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


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


9-14

Additional Limitations on Travel Expenses

Travel expenses disallowed if actual travel is for educationE.g., French student traveling through

FranceLuxury water travel expense limitedTravel to conventions, seminars not

deductible if activity for production of income


9-15

Transportation ExpensesTransportation Expenses

Definition and classificationTreatment of automobile expensesReimbursement of automobile

expensesExcess expenses over

reimbursement deductible as 2% misc itemized deductions


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


9-17

Definition and Classification(2 of 2)

Commuting costs between home and temporary work site deductible if taxpayer has regular place of business


9-18

Treatment of Automobile Expenses

Standard mileage rate $0.505/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


9-19

Entertainment ExpensesEntertainment Expenses

50% disallowance for meal and entertainment expenses

Classification of expensesBusiness mealsEntertainment facilities and club duesBusiness giftsLimitations on entertainment tickets


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


9-21

Business Meals

Business meals must meet “directly related to” or “associated with” tests

Cannot be lavish or extravagant for circumstances


9-22

Entertainment Facilities and

Club Dues

No deduction permitted for costs related to maintenance of entertainment, amusement, or recreation facilities

No deduction for club dues


9-23

Business Gifts

Generally annual ceiling of $25/donee

Exceptions includeEmployee achievement awards <

$400Gift from employer to employee’s

survivor


9-24

Limitations on Entertainment Tickets

50% limitation applies to face value of ticket

Further restrictions on skyboxes


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


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 floorEmployee subject to 50% M&E limitation

Per diem allow. for M&LIRS has special tablesSubstantiation less burdensome


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


9-28

Moving ExpensesMoving ExpensesDefinition of Moving ExpensesDefinition of Moving Expenses

For AGI deductionQualified expenses

Cost of moving household goods and personal effects from old to new homeIncludes storage if < 30 days

Cost of traveling from old to new homeIncludes lodging, but not meals$0.19/mile or actual expenses allowed for car


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)


9-30


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


9-31


Nondeductible ifMeet minimum educational

requirements for qualifications in taxpayer’s employment

Qualifies taxpayer for new trade or business


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


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


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


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©2009 Pearson Education, Inc. Publishing as Prentice

Hall

9-36


Employee stock optionsPlans for self-employed individualsTraditional Individual Retirement

Account (IRA)Roth IRACoverdell education savings

account


9-37


Health savings accountsSimplified plans


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


9-39

Qualification Requirements for a Qualified Plan

Must be for employees’ exclusive benefit

Does not discriminate in favor of highly compensated employees> 5% owners or comp > $105K

Contributions proportionate to compCoverage requirementsVesting requirement


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


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 plansRestricted property plans


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


9-43

Employee Stock OptionsNonqualified Stock Options (NQSOs)

Nonqualified stock options (NQSOs)Employee recognizes compensation

income on exercise date (FMV – exercise price)

Employer receives deduction on exercise date


9-44

Plans for Self-Employed Individuals

H.R. 10 plansAlso called Keogh plans

Generally same contribution and benefit limits as other qualified plans


9-45

Traditional IRA(1 of 2)

Fully deductible IRA contributions Lesser of $5,000 or earned income

$6,000 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 ≤ $53K (or ≤ $85K for MFJ)

Spouse active participant, but AGI ≤ $159K


9-46

Traditional IRA(2 of 2)

Phase out for active participantsAGI $53K - $63K

$85K - $95K for MFJ$159K - $169K for MFJ if spouse active

Deduction for non-working spouse$5,000 (or $6,000 if ≥ age 50)

All distributions taxableUnless some contributions

nondeductible


9-47

Roth IRA(1 of 2)

NondeductibleMax contribution $5,000

If qualify for both Traditional and Roth maximum contribution for both is $5,000

Max contribution $6,000 if ≥ age 50


9-48

Roth IRA(2 of 2)

Contribution phase-out AGI limitations$101,000 - $116,000 for Single$159,000 - $169,000 for MFJ

Qualified distributions nontaxable


9-49

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


9-50

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


9-51

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


9-52

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


9-53

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


9-54

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


9-55

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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