Ch9 PPT * – Flashcards

• Person is classified as an employee if: -- Subject to will and control of another with respect to what shall be done and how it shall be done -- Another furnishes tools or the place of work -- Income based on time spent rather than task performed • Classification is a hot issue with the IRS • Business expenses for self-employed persons are deductible for AGI on Schedule C • Unreimbursed business expenses for employees are generally deductible from AGI on Schedule A and subject to 2% of AGI floor

• Fall into one of the following categories: -- Transportation -- Travel -- Moving -- Education -- Entertainment -- Other • Independent contractors will also have these types expenses but the tax treatment differs

• Transportation expense: -- Limited to travel from job site to job site and commuting to/from a temporary work place -- Commuting from home to work and back is nondeductible -- Exceptions - second job, hauling heavy tools • Amount deductible: -- Actual expenses taxpayer must keep adequate records -- Automatic mileage method - 57.5 cents per mile for business miles for 2015 >>> Plus parking, tolls, etc. >>> Adequate documentation of mileage required

• Expenses while "away from tax home" overnight on business Includes transportation, lodging, meals, and miscellaneous expenses • "Away from home" requirement -- Tax home is typically the taxpayer's "main office" -- Need not be away 24-hour period but must be longer than ordinary work day -- Being "away" should be a temporary defined as less than 12 months • Meals and lodging expenses on same day trips are not deductible

• Convention travel expenses -- No deduction for travel unless directly related to taxpayer's trade or business - See Examples 16 & 17, page 9-10 -- Restrictions apply to the deductibility of travel expenses of the taxpayer's spouse or dependent -- The spouse serve a bona fide business purpose for qualified his / her expenses to be deductible • Education travel expenses -- Travel as a form of education is not deductible -- If the education qualifies as a deduction the travel is deductible -- See Examples - 20 & 21, page 9-10

• Deductibility of transportation costs depends on whether the trip is domestic or foreign • Domestic travel - See Example 22, page 9-11 -- If primary purpose of trip is business, transportation is deductible in full -- If primary purpose is pleasure, no deduction for transportation allowed, but other expenses associated with business days are deductible • Foreign travel - See Example 24, page 9-11 -- Transportation expenses must be allocated between business and personal. Exceptions - 7 days or less, < 25% personal

• Deductible "for AGI" for moves in connection with the commencement of work at a new principal place of work • Two tests must be met for moving expenses to be deductible -- 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 -- Time test - must be employed full -time at new job for 39 weeks in a 12 month period -- Self employed test - for 78 weeks in a 24 month period

• Gail lived 20 miles from her old job • Gail's new job is 75 miles from her old home • Gail meets the distance test Old job -- 20 mi. -- Old residence -- 75 mi. -- New job

''Qualified'' moving expenses include reasonable expenses of: • Moving household goods and personal effects to new location • Expenses of travel for taxpayer and family to new location -- Lodging -- Actual auto costs (not depreciation) or mileage rate of $.23 per mile for each car in 2015 • Meals are not deductible as moving expense

• Unreimbursed moving expenses are deductible for AGI • Reimbursement or payment by employer: -- For qualified moving expenses, amount is excluded from gross income, but no deduction for related expenses -- For nonqualified moving expenses, amount is included in gross income and no deduction is allowed

• Education expenses of an employee are deductible if they are incurred: -- To maintain or improve existing skills, or -- To meet express requirements of the employer or requirements imposed by law to retain employment status • Education expenses of an employee are not deductible if they are incurred: -- To meet minimum educational standards for existing job e.g., Bachelor's degree, or -- To qualify taxpayer for new trade or business e.g., CPA Exam review course or Lawyer

• Education expenses include: -- Tuition -- Books -- Supplies -- Transportation -- Travel (including lodging and 50% meals) • Deductible "from AGI" as miscellaneous itemized deductions subject to 2% floor, unless reimbursed by employer or incurred by self employed person.

• Tax Act of 2001 created IRC § 222, providing a deduction is allowed "for AGI" for qualified tuition and related expenses involving higher education • The deduction is phased out based on MAGI - See Exhibit 9.1. page 9-18 • Qualified tuition and related expenses include whatever is required for enrollment • Expenses need not be work related • Deduction is available for taxpayer's spouse and dependents

• T&E tax deductions are restricted due to abuse possibilities -- Deductible amount allowed: >>> 50% of meals and entertainment costs >>> 100% of transportation costs -- Amounts cannot be lavish or extravagant -- Ticket purchases limited to face value -- In certain situations, the 50% cutback for meals is eased for certain, very limited, types of employees • Dues for social clubs are not deductible, Exception for service clubs e.g., Rotary, Kiwanis

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

A partial list of other employee expenses that are deductible includes: • Special clothing - uniforms, safety gear • Union dues • Professional expenses - dues, publications • Job hunting in same profession - not 1st job • Educator expenses (deductible for AGI) -- Limited to $250 per year for supplies, etc. of elementary and secondary school teachers

• Time is your friend - start saving early and often • Pensions are either: -- Defined benefit plans - far less common today -- Defined contribution - 401(k), IRA, etc • The tax code provides generous incentives to motivate employees and employers to save for retirement • Chapter 9 explores defined contribution plans

• 401(k) Plans -- For 2015, up to $18,000 in pre tax $ per year can be contributed, $24,000 if 50 years of age -- Many employers offer matching funds • IRAs -- Employees not covered by another qualified plan can contribute to an IRA with a deduction for AGI -- Maximum deduction is $5,500 for 2014 and 2015, an additional $1,000 contribution permitted if 50 years of age >>> Contribution is limited to 100% of compensation >>> IRA deduction is phased out if an active participant in another qualified plan. See Exhibit 9.2; page 9-29 >>> Roth IRA - Non deductible, provides other benefits

• An IRA may be the recipient of a rollover from another qualified plan e.g. 401(k) • Must transfer with 60 days of receipt to IRA • Failure to rollover can result in tax and penalties on previously tax deferred funds • Rollover can go directly to a Roth IRA but income tax must be paid. No penalty will be incurred

• In addition to traditional IRAs numerous options exist e.g. Keogh, Solo 401(k), SEPs • Complexity and contributions limits vary • Some plans are required to cover full time employees