Ch9 PPT *

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Employee vs. Self-Employed
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• 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
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Employee Expenses
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• 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
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Transportation Expense
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• 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
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Travel Expenses
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• 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
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Restrictions on Travel Expenses
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• 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
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Example 16 – – – – –
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Example 17 – – – – –
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Example 20 – – – – –
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Example 21 – – – – –
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Combined Business/Pleasure Travel
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• 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
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Example 22 – – – – –
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Example 24 – – – – –
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Moving Expenses
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• 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
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Example of Distance Test
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• 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
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Deductible Moving Expenses
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”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
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Tax Treatment of Moving Expenses
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• 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
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Education Expenses
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• 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
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Education Expenses
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• 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.
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Deduction For Qualified Tuition and Related Expenses
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• 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
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Exhibit 9.1 – – – – –
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Entertainment Expenses
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• 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
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Office in the Home
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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
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Other Employee Expenses
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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
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Retirement Planning 101
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• 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
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Contributions to Retirement Accounts
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• 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
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Exhibit 9.2 – – – – –
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Rollovers
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• 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
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Retirement Plans for Self-Employed Individuals
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• 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

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