9-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall.

9-1©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-2

EMPLOYEE EXPENSES & DEFERRED COMPENSATION

(1 of 2)

Classification and limitations of employee expenses

Travel expensesTransportation expensesEntertainment expensesReimbursed employee business

expenses©2011 Pearson Education, Inc. Publishing as Prentice

Hall

9-3

EMPLOYEE EXPENSES & DEFERRED COMPENSATION

(2 of 2)

Moving expensesEducation expensesOffice in home expensesDeferred compensationTax planning considerationsCompliance and procedural

considerations©2011 Pearson Education, Inc. Publishing as Prentice

Hall

9-4

Classification and Limitations

of Employee Expenses (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©2011 Pearson Education, Inc. Publishing as Prentice

Hall

9-5



Limitations on unreimbursed employee expenses2% of AGI floor applies to

Unreimbursed employee business expenses

Investment expenses other than interest

Tax advice and return preparation fees, and other deductions

©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 benefit


9-7

Travel Expenses

Deductibility of travel expensesDefinition of travel expensesGeneral qualification

requirementsBusiness vs. pleasureForeign travelAdditional limitations on travel

expenses©2011 Pearson Education, Inc. Publishing as Prentice Hall

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

Complex allocation for allowabe expenses


9-14

Additional Limitations onTravel 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©2011 Pearson Education, Inc. Publishing as Prentice

Hall

9-15

Transportation 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 $0.50/mileCannot use std. rate if use ≥ 2

vehiclesDoes not include parking and tolls

Actual expensesIncludes gas, oil, maintenance

and repairs, insurance, and depreciation

Based on ratio [bus. Miles]/[total miles]


9-19

Entertainment Expenses

50% disallowance for meal and entertainment expenses

Classification of expensesBusiness mealsEntertainment facilities and club

duesBusiness giftsLimitations on entertainment

tickets©2011 Pearson Education, Inc. Publishing as Prentice

Hall

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©2011 Pearson Education, Inc. Publishing as Prentice

Hall

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 Business Expenses (1 of 2)

SubstantiationEmployee must make adequate

accounting of expenses to employer

Employee required to return excess reimbursement

Accountable PlanReimbursements and deductions

not reported by employee if no excess deductions


9-26

Reimbursed Employee Business Expenses (2 of 2)

Non-Accountable PlanReimbursement taxableDeductions miscellaneous subject

to 2% of AGI floorEmployee subject to 50% M&E

limitationPer diem allow. for Meals &

LodgingIRS has special tablesSubstantiation less burdensome


9-27

Moving ExpensesDistance 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©2011 Pearson Education, Inc. Publishing as Prentice

Hall

9-28

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$0.24/mile or actual expenses allowed

for car


9-29

Education Expenses(1 of 3)

Classification of education expensesSee Table 3

Deduction for higher ed expenses$4,000 for AGI deduction in 2010If AGI between $65K-$80K ($130K-

$160K for MFJ), $2,000 deductionNo ded. if AGI > $80K ($160K for

MFJ) ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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

Deduction scheduled to expire 12/31/2010


9-32

Office in Home ExpensesGeneral 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©2011 Pearson Education, Inc. Publishing as Prentice

Hall

9-33

Office in Home ExpensesDeduction 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 ExpensesDeduction 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 Compensation(1 of 3)

Qualified pension and profit-sharing plans

Qualification requirements for a qualified plan

Tax treatment to employees and employers

Nonqualified plans


9-36


Employee stock optionsPlans for self-employed

individualsTraditional Individual Retirement

Account (IRA)Roth IRACoverdell education savings

account©2011 Pearson Education, Inc. Publishing as Prentice Hall

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©2011 Pearson Education, Inc. Publishing as Prentice

Hall

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 >$110K

Contributions proportionate to comp

Coverage requirementsVesting requirement©2011 Pearson Education, Inc. Publishing as Prentice

Hall

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 rules

Employer does not receive deduction until benefits available to employee

Unfunded 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

taxpayersTaxpayers who are not active

participants in a qualified employer retirement plan

Taxpayers who are active, but AGI ≤ $56K (or ≤ $89K for MFJ)

Spouse active participant, but AGI ≤ $167K


9-46

Traditional IRA(2 of 2)

Phase out for active participantsAGI $55K - $65K

$89K - $99K for MFJ$167K - $177K for MFJ if spouse active

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

All distributions taxableUnless some contributions

nondeductible©2011 Pearson Education, Inc. Publishing as Prentice

Hall

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$105,000 - $120,000 for Single$167,000 - $ 177,000 for MFJ

Qualified distributions nontaxable


9-49

Coverdell Education Savings Account

Nondeductible contribution Maximum contribution

$2,000/year until beneficiary reaches age of 18

Elementary, secondary & higher ed exp

Distributions excluded from gross income if ≤ qualified ed expenses

May 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

complexitySimple retirement plans

Savings incentive match plan for employees

For employers with < 100 employees who received at least $5,000 in compensation©2011 Pearson Education, Inc. Publishing as Prentice

Hall

9-52

Tax Planning Considerations

(1 of 2)

Moving expenses only deductible ifEmployee must secure full-time

work before incurring moving expenses, or

Self-employeds must carry on ToB prior to incurring moving expenses

Excess reimbursements are taxable compensation©2011 Pearson Education, Inc. Publishing as Prentice

Hall

9-53

Tax Planning Considerations

(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 incomeFor 2010 rollovers 2010 is paid in 2

equal installments in 2011 and 2012


9-54

Compliance and Procedural

Considerations (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 Procedural

Considerations (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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