Employee Expenses

1
Chapter 9

• Employee Expenses
• and Deferred Compensation

2
Employee vs Self-Employed

• Employee if
• Another controls details of how work is performed
• Can be discharged without creating legal
  liability to another
• Another furnishes tools or the place of work
• Income based on time spent rather than task
  performed

3
Transportation Expenses(slide 1 of 2)

• Transportation expense defined
• Very limited, only from job site to job site and
  commuting to temporary work place
• Commuting from home to work and back is
  nondeductible
• Commuting costs between multiple jobs for the
  same taxpayer are deductible

4
Transportation Expenses(slide 2 of 2)

• Amount deductible
• Actual expenses
• Must keep adequate records of all expenses or
• Automatic mileage method
• .325 per mile for all business miles driven in
  1998 and 1/1/99 - 3/31/99, .31 after, .325 in
  2000
• Plus parking, tolls, etc.
• Adequate documentation of mileage required

5
Travel Expenses (slide 1 of 5)

• Convention travel expenses
• No deduction for travel unless directly related
  to taxpayers trade or business
• Thus, no travel deduction under Sec. 212
  (production of income)
• Example Doctor attending out-of-town investment
  seminar would not have travel expenses deductible
  as investment related (Sec. 212)

6
Travel Expenses (slide 2 of 5)

• Travel expense defined
• Expenses while away from tax home on business
• Includes transportation, lodging, 50 meals, and
  miscellaneous expenses

7
Travel Expenses (slide 3 of 5)

• Travel expense defined
• Away means substantially longer than 1 business
  day and taxpayer will need to rest during release
  time
• Being away should be a temporary situation (not
  in excess of 1 year)
• Tax Home means principal place of work

8
Travel Expenses (slide 4 of 5)

• Business/pleasure travel
• Only actual expenses for business are deductible
• Transportation costs deductible in full if
  primary purpose of trip is business

9
Travel Expenses (slide 6 of 6)

• Business/pleasure travel
• If primary purpose is pleasure, no deduction for
  transportation allowed, but other expenses (e.g.,
  lodging) associated with business days are
  deductible
• Foreign travel has different limitations
• if primarily for pleasure, no transportation
  expense deduction is allowed
• If primarily business, complex expense allocation
  rules apply

10
Moving Expenses (slide 1 of 7)

• Two tests must be met for moving expenses to be
  deductible
• Distance test
• Time test

11
Moving Expenses (slide 2 of 7)

• Distance test
• Distance from old home to new job must be at
  least 50 miles farther than from old home to old
  job
• New home location not relevant for decision

12
Moving Expenses (slide 3 of 7)

• Example for distance test
• Gail lived 20 miles from her old job
• Gails new job is 75 miles from her old home
• Gail meets the distance test

13
Moving Expenses (slide 4 of 7)

• Time test
• Taxpayer must be full-time employee for 39/52
  weeks, or
• Self-employed or full-time employee for 39/first
  52 weeks and 78/104 weeks
• Test waived if die, disabled, discharged, or
  transferred

14
Moving Expenses (slide 5 of 7)

• Time test
• If time test not met during taxable year,
  taxpayer can
• Take the deduction in year moved (and, if test is
  not met in later year, amount deducted is
  included in gross income in such later year), or
• File amended return for year of move once time
  test is met

15
Moving Expenses (slide 6 of 7)

• Deductible moving expenses
• Expenses of moving household goods and personal
  effects to new location
• Expenses of travel for family to new location
• Actual auto costs (not depreciation) or mileage
  rate of .10
• Meals are not deductible as moving expense

16
Moving Expenses (slide 7 of 7)

• Deductible moving expenses
• Reimbursement for moving expenses is excluded
  from gross income, but no deduction for related
  expenses
• Unreimbursed moving expenses are deductible FOR
  AGI

17
Educational Expenses(slide 1 of 3)

• Educational expenses are deductible if they are
  incurred
• To maintain or improve existing skills, or
• To meet the requirements of employer, profession,
  licensing, or the state law

18
Educational Expenses(slide 2 of 3)

• Educational expenses are not deductible if they
  are incurred
• To meet minimum educational standards for
  existing job, or
• Will qualify taxpayer for new trade or business

19
Educational Expenses(slide 3 of 3)

• Educational expenses include
• Tuition
• Books
• Supplies
• Transportation
• Travel (including lodging and 50 meals)

20
Entertainment Expenses(slide 1 of 4)

• Deductions are very restricted due to abuse
  possibilities
• Amount allowed
• 50 meals and entertainment
• 100 of transportation costs
• Amounts cannot be lavish or extravagant

21
Entertainment Expenses(slide 2 of 4)

• Entertainment expenses are deductible if
  substantiated and directly related to or
  associated with taxpayers business
• Directly related to business
• Actual business meeting or discussion occurs
  during meal or entertainment
• Associated with business
• Meal or entertainment that directly precedes or
  follows business meeting or discussion
• includes the evening preceding business
  discussions and the evening of the day of
  business discussions

22
Entertainment Expenses(slide 3 of 4)

• Club dues
• Generally not deductible
• Exception Clubs formed for public services and
  community volunteerism (e.g., Kiwanis, Rotary)
• Business entertainment expenses incurred at club
  are still deductible (50)

23
Entertainment Expenses(slide 4 of 4)

• Ticket purchases for entertainment
• Amounts paid in excess of face value of ticket
  are not deductible
• Limitation on deductibility of luxury skybox
  expenditures to face value of nonluxury box seats
• e.g. skybox contains 30 seats and cost of highest
  priced nonluxury box seat is 40, the deduction
  is limited to 30 x 40 1,200

24
Classification and Limitations on Employee
Expenses (slide 1 of 8)

• Classification of employee expenses
• Depends on whether they are reimbursed and, if
  reimbursed, under what type of plan

25
Classification and Limitations on Employee
Expenses (slide 2 of 8)

• Employers can have three types of reimbursement
  plans
• Accountable
• Nonaccountable
• No reimbursement is given

26
Classification and Limitations on Employee
Expenses (slide 3 of 8)

• Accountable plan
• Plan must require adequate accounting to the
  employer for expense reimbursed, and
• Any excess reimbursements must be returned to the
  employer

27
Classification and Limitations on Employee
Expenses (slide 4 of 8)

• Adequate accounting is
• Submitting receipts to the employer, or
• Using a per diem allowance that is not more than
  the Federal per diem rate
• Employee reports no income and takes no deduction
  to the extent of the reimbursed expenses

28
Classification and Limitations on Employee
Expenses (slide 5 of 8)

• Substantiation for expenditures
• No deduction allowed for an expense if the
  taxpayer does not have adequate records for the
  expense
• Therefore, taxpayers need to have good records
  for employee or self-employed expenses
• In some cases, use of per diem allowance will be
  deemed substantiation

29
Classification and Limitations on Employee
Expenses (slide 6 of 8)

• Substantiation for Expenditures
• Records should include
• Business relationship with other persons involved
  (who)
• Type of expense (what)
• Time of expense (when)
• Place of expense (where)
• Purpose of expense (why)
• Amount of expense (how much)

30
Classification and Limitations on Employee
Expenses (slide 7 of 8)

• Nonaccountable plan
• Plan that does not require adequate accounting or
  return of excess reimbursement or both
• Reimbursed amounts received under this plan are
  included in gross income
• Expenses are deductible FROM AGI as miscellaneous
  subject to the 2 AGI limitation

31
Classification and Limitations on Employee
Expenses (slide 8 of 8)

• Unreimbursed expenses
• Expenses are deductible FROM AGI as miscellaneous
  subject to the 2 AGI limitation

32
Office in the Home(slide 1 of 2)

• Deductibility is very restricted due to abuse
  possibilities
• Office must be used exclusively and on a regular
  basis as
• The principal place of business, or
• A place of business used by clients, patients, or
  customers
• For employees, office must also be
• For the convenience of the employer

33
Office in the Home(slide 2 of 2)

• Office in the home expenses cannot cause net loss
  from the business activity
• Office in home deduction limited to business
  gross income in excess of other business expenses
• Excess is carried forward (subject to limit)
• Form 8829 used to report office in home expenses

34
Office in the Home - New Law(effective for years
beginning after 1998)

• Principal place of business
• includes home office used for administrative and
  management activities if taxpayer has no other
  fixed location for these activities
• can qualify even if the income-generating
  activities are performed elsewhere

35
Individual Retirement Accounts(slide 1 of 6)

• Contribution ceiling is lesser of 2,000 (4,000
  for spousal IRAs) or 100 of earned income
• Deductible IRA contribution may be reduced if
  taxpayer is covered by a qualified plan
• Nondeductible IRA may be made to extent of
  remaining ceiling
• Income accrues on account tax deferred

36
Individual Retirement Accounts(slide 2 of 6)

• If taxpayer is covered by a qualified plan, IRA
  deduction is phased out within the adjusted gross
  income ranges listed below
• Phase-out begins
  Phase-out ends
• Single HH 31,000 41,000
• MFJ 51,000 61,000
• MFS 0
  10,000

37
Individual Retirement Accounts(slide 3 of 6)

• Simplified employee pension (SEP) plans
• Employer contributes to employees IRA
• Contribution limited to 15 of compensation (up
  to a ceiling of 160,000)
• Subject to most restrictions of qualified plans

38
Individual Retirement Accounts(slide 3 of 6)

• SIMPLE (savings incentive match plan for
  employees)
• elective contributions must be matched (or
  employer can make nonelective contributions)
• all contributions to an employees account must
  be fully vested (nonforfeitable)
• not subject to nondiscrimination rules (all
  employees with 5,000 in compensation in previous
  year (and expected to in current year) must be
  eligible

39
Individual Retirement Accounts(slide 4 of 6)

• Spousal IRAs
• Both spouses have earned income, ceiling is
  4,000 or combined earned income
• One spouse has earned income, ceiling is 4,000
  or earned income of that spouse
• Contribution to individual spousal account may
  not exceed 2,000
• Must file jointly to use spousal IRA rules

40
Individual Retirement Accounts(slide 5 of 6)

• Excess contributions subject to 6 excise penalty
  tax
• Distributions before age 59 1/2 generally subject
  to 10 penalty tax
• Exceptions
• pay for medical expenses in excess of 7.5 AGI
  or pay for health insurance for unemployed
  individual and family members
• After 1997 pay for qualified higher education
  expenses of taxpayer, spouse, child, grandchild
• After 1997 up to 10,000 for first time home
  buyer distribution

41
Individual Retirement Accounts(slide 6 of 6)

• Rollovers
• Distribution from qualified plan transferred
  within 60 days to IRA (or another qualified plan)
  not includible in gross income
• One tax-free rollover from IRA within 12-month
  period
• Direct transfers not subject to this limitation
• Employers must withhold 20-percent of any
  lump-sum distribution that is not direct transfer

42
Individual Retirement Accounts - New Law
(beginning in 1998)

• For active participants (both spouses)
• Phase-out begins Phase-out ends
• Single HH 31,000 41,000
• MFJ 51,000 61,000
• MFS 0
  10,000
• With gradual increases to 50,000 - 60,000 in
  2005
• With gradual increases to 80,000 - 100,000
  in 2005
• A taxpayer who is not an active participant but
  whose spouse is will have a phase out range of
  150,000 - 160,000 after 1997

43
Roth IRA(for years beginning after 1997)

• Contributions are nondeductible
• Earnings accumulate tax-free
• Qualified distributions are tax-free
• Contributions are limited to a total of 2,000
  for regular(deductible) IRA, old nondeductible
  IRA and Roth IRA
• Max contribution is phased out
• Single 95,000 - 110,000
• MFJ 150,000 - 160,000

44
Roth IRA(for years beginning after 1997)

• Qualified distributions are
• after age 59 1/2
• on death or disability
• qualified first time home buyer 10,000 lifetime
  limit
• No qualified distributions can be made until
  taxpayer has had a Roth IRA for five years
• distributions need not start at 70 1/2

45
Restricted Property PlansSection 83

• Used to attract key executives
• Executive receives ownership interest (stock) in
  exchange for services
• Generally, not taxable until the stock is
  transferable and not subject to substantial risk
  of forfeiture
• Employee is treated as having received taxable
  compensation equal to FMV of stock
• Employer receives compensation deduction at same
  time income is taxed to employee