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 expenses  Transportation expenses  Entertainment expenses  Reimbursed employee business expenses ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-3 EMPLOYEE EXPENSES & DEFERRED COMPENSATION (2 of 2)  Moving expenses  Education expenses  Office in home expenses  Deferred compensation  Tax planning considerations  Compliance 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 – factors  Behavioral control  Financial Control  Relationship 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 Classification and Limitations of Employee Expenses (2 of 3)  Limitations on unreimbursed employee expenses  2% 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 Classification and Limitations of Employee Expenses (3 of 3)  Limitations (continued)  If total misc itemized deductions ≤ 2% of AGI or if total allowable itemized deductions do not exceed std deduction  Unreimbursed employee expenses provide no tax benefit ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-7 Travel Expenses  Deductibility of travel expenses  Definition of travel expenses  General qualification requirements  Business vs. pleasure  Foreign travel  Additional 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 royalties  Travel expenses deductible for AGI  Employee  Deduction for AGI if reimbursed  2% misc. deduction if not reimbursed ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 stay  Deductible amount of travel expenses may be reduced if actual expenses lavish or extravagant ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-10 General Qualification Requirements (1 of 2)  Away-from-tax-home requirement  Tax home is work location  Assignment must be temporary  Assignment not temporary if  Assignment indefinite OR  Expected to last > 12 months ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-11 General Qualification Requirements (2 of 2)  Overnight requirement  Must be reasonable for taxpayer to be away overnight  Short rest stops on long day-trip not considered overnight ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-12 Business vs. Pleasure  Travel to and from destination  If trip primarily personal, no deduction  If trip primarily business, all travel to and from destination deductible  Other travel-related expenses  Allocated to business and personal activities ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-13 Foreign Travel  Generally disallowed  Allowed only if taxpayer shows activity directly related to business, AND  Reasonable for meeting to be held outside North America  Complex allocation for allowabe expenses ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-14 Additional Limitations on Travel Expenses  Travel expenses disallowed if actual travel is for education  E.g., French student traveling through France  Luxury water travel expense limited  Travel 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 classification  Treatment of automobile expenses  Reimbursement of automobile expenses  Excess expenses over reimbursement deductible as 2% misc itemized deductions ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-17 Definition and Classification (2 of 2)  Commuting costs between home and temporary work site deductible if taxpayer has regular place of business ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-18 Treatment of Automobile Expenses  Standard mileage rate $0.50/mile  Cannot use std. rate if use ≥ 2 vehicles  Does not include parking and tolls  Actual expenses  Includes gas, oil, maintenance and repairs, insurance, and depreciation  Based on ratio [bus. Miles]/[total miles] ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-19 Entertainment Expenses  50% disallowance for meal and entertainment expenses  Classification of expenses  Business meals  Entertainment facilities and club dues  Business gifts  Limitations on entertainment tickets ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-20 Classification of Expenses  Criteria for deduction  Directly related expense  Benefit must be for other than goodwill and be in a clear business setting  Associated with expense  Must 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-23 Business Gifts  Generally annual ceiling of $25/donee  Exceptions include  Employee achievement awards < $400  Gift from employer to employee’s survivor ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-24 Limitations on Entertainment Tickets  50% limitation applies to face value of ticket  Further restrictions on skyboxes ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-25 Reimbursed Employee Business Expenses (1 of 2)  Substantiation  Employee must make adequate accounting of expenses to employer  Employee required to return excess reimbursement  Accountable Plan  Reimbursements and deductions not reported by employee if no excess deductions ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-26 Reimbursed Employee Business Expenses (2 of 2)  Non-Accountable Plan  Reimbursement taxable  Deductions miscellaneous subject to 2% of AGI floor  Employee subject to 50% M&E limitation  Per diem allow. for Meals & Lodging  IRS has special tables  Substantiation less burdensome ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-27 Moving Expenses Distance 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 move  78 weeks for self-employed individuals ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-28 Moving Expenses Definition of Moving Expenses  For AGI deduction  Qualified expenses  Cost of moving household good and personal effects from old to new home  Includes storage if < 30 days  Cost of traveling from old to new home  Includes lodging, but not meals  $0.24/mile or actual expenses allowed for car ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-29 Education Expenses (1 of 3)  Classification of education expenses  See Table 3  Deduction for higher ed expenses  $4,000 for AGI deduction in 2010  If AGI between $65K-$80K ($130K- $160K for MFJ), $2,000 deduction  No ded. if AGI > $80K ($160K for MFJ) ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-30 Education Expenses (2 of 3)  General requirements for a deduction  Maintain or improve skills required for employment  Meet requirements imposed by law or by employer for retention of employment, rank, or compensation rate ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-31 Education Expenses (3 of 3)  Nondeductible if  Meet minimum educational requirements for qualifications in taxpayer’s employment  Qualifies taxpayer for new trade or business  Deduction scheduled to expire 12/31/2010 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-32 Office in Home Expenses General Requirements  Must meet one of requirements and be used on exclusive and regular basis  Office used as principal place of business for any ToB  Includes doing administrative work if no other fixed location available  Place for meeting clients in normal course of business  Located in separate structure ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-33 Office in Home Expenses Deduction and Limitations (1 of 2)  Categories of expenses  Expenses directly related to office  Expenses indirectly related to office  Expenses related to whole home  Prorate based on square footage or other method  Total expenses cannot create loss ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-34 Office in Home Expenses Deduction and Limitations (2 of 2)  Order of expense deductions 1. Expenses not related to home office 2. Expenses directly related to home office 3. Pro-rata portion of indirect expenses  E.g, mortgage, interest, utilities, insurance  Disallowed expenses carried forward to future year ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-36 Deferred Compensation (2 of 3)  Employee stock options  Plans for self-employed individuals  Traditional Individual Retirement Account (IRA)  Roth IRA  Coverdell education savings account ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-37 Deferred Compensation (3 of 3)  Health savings accounts  Simplified plans ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-38 Qualified Pension and Profit-Sharing Plans  Pension plans  Defined benefit  Defined contribution  Profit-sharing plans  Include 401(k) plans  Stock bonus plans  DC 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 requirements  Vesting 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 earnings  Use exclusion ratio if contributions from after-tax earnings ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 plans  Restricted property plans ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-42 Employee Stock Options Incentive Stock Options (ISOs)  No tax to employee on exercise date  LTCG treatment when employee sells stock  (amount realized – exercise price)  Employer receives no deduction ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-43 Employee Stock Options Nonqualified Stock Options (NQSOs)  Nonqualified stock options (NQSOs)  Employee recognizes compensation income on exercise date  (FMV – exercise price)  Employer receives deduction on exercise date ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-44 Plans for Self-employed Individuals  H.R. 10 plans  Also called Keogh plans  Generally same contribution and benefit limits as other qualified plans ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-45 Traditional IRA (1 of 2)  Fully deductible IRA contributions  Lesser of $5,000 or earned income  $6,000 if over age 50  Available only for following taxpayers  Taxpayers 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-46 Traditional IRA (2 of 2)  Phase out for active participants  AGI $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 taxable  Unless some contributions nondeductible ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-47 Roth IRA (1 of 2)  Nondeductible  Max contribution $5,000  If qualify for both Traditional and Roth maximum contribution for both is $5,000  Max contribution $6,000 if ≥ age 50 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 future  No employer-provided insurance  Must use high-deductible policy ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9-51 Simplified Plans  Simplified employee pensions  Reduced administrative complexity  Simple 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 if  Employee 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 IRA  Considerations include marginal tax rate, age of taxpayer and payment of taxes from rollover from post-tax funds  Rollover included in gross income  For 2010 rollovers 2010 is paid in 2 equal installments in 2011 and 2012 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business 9-56 ©2011 Pearson Education, Inc. Publishing as Prentice Hall