1. ©2007 Prentice Hall, Inc.

2. EMPLOYEE EXPENSES & DEFERRED COMPENSATION (1 of 2)
Classification and limitations of employee expenses
Travel expenses
Transportation expenses
Entertainment expenses
Reimbursed employee business expenses
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

4. Classification and Limitations of Employee Expenses (1 of 3)
Nature of the employment relationship
Employer-employee relationship exists where employer has right to control the end result of work and means by which result is accomplished
If employee, employer pays ½ FICA and Medicare
If self-employed, taxpayer pays all FICA and Medicare
©2007 Prentice Hall, Inc.

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 return preparation fees and other deductions
©2007 Prentice Hall, Inc.

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
High-income taxpayers will have reduced benefit if have 3% scale down of itemized deductions
©2007 Prentice Hall, Inc.

7. Travel Expenses Deductibility of travel expenses
Definition of travel expenses
General qualification requirements
Business vs. pleasure
Foreign travel
Additional limitations on travel expenses
©2007 Prentice Hall, Inc.

8. Deductibility of Travel Expenses
Depend 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
©2007 Prentice Hall, Inc.

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 are lavish or extravagant
©2007 Prentice Hall, Inc.

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
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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
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

14. Additional Limitations on Travel Expenses
Travel expenses disallowed actual travel is for education
E.g., French student traveling through France
Luxury water travel limited
Travel to conventions, seminars not deductible if for production of income activity
©2007 Prentice Hall, Inc.

15. Transportation Expenses
Definition and classification
Treatment of automobile expenses
Reimbursement of automobile expenses
Excess expenses over reimbursement deductible as 2% misc itemized deductions
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

17. Definition and Classification (2 of 2)
Commuting costs between home and temporary work site deductible if taxpayer has regular place of business
©2007 Prentice Hall, Inc.

18. Treatment of Automobile Expenses
Standard mileage rate $0.44/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 of business miles to total miles driven
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

21. Business Meals
Business meals must meet “directly related to” or “associated with” tests
Cannot be lavish or extravagant for circumstances
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22. Entertainment Facilities and Club Dues
No deduction permitted costs related to maintenance of entertainment, amusement, or recreation facilities
No deduction for club dues
©2007 Prentice Hall, Inc.

23. Business Gifts Generally annual ceiling of $25/donee
Exceptions include
Employee achievement awards < $400
Gift from employer to employee’s survivor
©2007 Prentice Hall, Inc.

24. Limitations on Entertainment Tickets
50% limitation applies to face value of ticket
Further restrictions on skyboxes
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

26. Reimbursed Employee Business Expenses (2 of 2)
Non-Accountable Plan
Reimbursement taxable
Deductions miscellaneous subject to 2% of AGI floor
Per Diem Allowances for Meals and Lodging
IRS has special tables
Substantiation less burdensome
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

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
$0.15/mile or actual expenses allowed for car
©2007 Prentice Hall, Inc.

29. Education Expenses (1 of 3)
Classification of education expenses
See Table I9-3
Deduction for higher ed expenses
$4,000 for AGI deduction in 2006
If AGI between $65K-$80K ($130K-$160K for MFJ), $2,000 deduction
No deduction if AGI > $80K ($160K for MFJ)
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

34. Office in Home Expenses Deduction and Limitations (2 of 2)
Order of expense deductions
Expenses not related to home office
Expenses directly related to home office
Pro-rata portion of indirect expenses
Disallowed expenses carried forward to future year
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

37. Deferred Compensation (3 of 3)
Health savings accounts
Simplified plans
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

39. Qualification Requirements for a Qualified Plan
Must be for employees’ exclusive benefit
Does not discriminate in favor or highly compensated employees
Contributions proportionate to compensation
Coverage requirements
Vesting requirement
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

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
©2007 Prentice Hall, Inc.

43. Employee Stock Options Nonqualified Stock Options (NSOs)
Employee recognizes compensation income on exercise date
(FMV – exercise price)
Employer receives deduction on exercise date
©2007 Prentice Hall, Inc.

44. Traditional IRA (1 of 2) Fully deductible IRA contributions
Lesser of $4,000 or earned income
Available only to two groups of taxpayers
Taxpayers who are not active participants in a qualified employer retirement plan
Taxpayers who are active, but AGI ≤ $50K (or ≤ $75K for MFJ)
©2007 Prentice Hall, Inc.

45. Traditional IRA (2 of 2) Phase out for active participants
AGI $50K - $60K
$75K - $80K for MFJ
Deduction phased out ratably over the $10,000 AGI range
May also deduct $4,000 for non-working spouse
All distributions taxable
Unless some contributions nondeductible
©2007 Prentice Hall, Inc.

46. Roth IRA Nondeductible Maximum contribution $4,000
If qualify for both Traditional and Roth maximum contribution for both is $4,000
Contribution phase-out AGI limitations
$95,000 - $110,000 for Single
$150,000 - $160,000 for MFJ
Qualified distributions nontaxable
©2007 Prentice Hall, Inc.

47. Coverdell Education Savings Account
Nondeductible contribution
Maximum contribution $2,000/year until beneficiary reaches age of 18
May be used for elementary, secondary and higher education expenses
Distributions excluded from gross income if they do not exceed qualified education expenses
©2007 Prentice Hall, Inc.

48. Health Savings Accounts
Purpose is 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
©2007 Prentice Hall, Inc.

49. Simplified Plans Simplified employee pensions Simple retirement plans
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
©2007 Prentice Hall, Inc.

50. 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
©2007 Prentice Hall, Inc.

51. 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
©2007 Prentice Hall, Inc.

52. 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
©2007 Prentice Hall, Inc.

53. 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
©2007 Prentice Hall, Inc.

54. ©2007 Prentice Hall, Inc.