9-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall
Dec 24, 2015
9-2
EMPLOYEE EXPENSES & DEFERRED COMPENSATION
(1 of 2)
Classification and limitations of employee expenses
Travel expensesTransportation expensesEntertainment expensesReimbursed employee business
expenses©2011 Pearson Education, Inc. Publishing as Prentice
Hall
9-3
EMPLOYEE EXPENSES & DEFERRED COMPENSATION
(2 of 2)
Moving expensesEducation expensesOffice in home expensesDeferred compensationTax planning considerationsCompliance 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 – factorsBehavioral controlFinancial ControlRelationship 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 expenses2% 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 deductionUnreimbursed employee expenses
provide no tax benefit
©2011 Pearson Education, Inc. Publishing as Prentice Hall
9-7
Travel Expenses
Deductibility of travel expensesDefinition of travel expensesGeneral qualification
requirementsBusiness vs. pleasureForeign travelAdditional 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 royaltiesTravel expenses deductible for AGI
EmployeeDeduction 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 stayDeductible 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 requirementTax home is work location
Assignment must be temporaryAssignment 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 requirementMust be reasonable for taxpayer to
be away overnightShort 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 destinationIf trip primarily personal, no
deductionIf trip primarily business, all travel
to and from destination deductibleOther travel-related expenses
Allocated to business and personal activities
©2011 Pearson Education, Inc. Publishing as Prentice Hall
9-13
Foreign Travel
Generally disallowedAllowed 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 onTravel Expenses
Travel expenses disallowed if actual travel is for educationE.g., French student traveling
through FranceLuxury water travel expense
limitedTravel 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 classificationTreatment of automobile
expensesReimbursement of automobile
expensesExcess 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/mileCannot use std. rate if use ≥ 2
vehiclesDoes not include parking and tolls
Actual expensesIncludes 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 expensesBusiness mealsEntertainment facilities and club
duesBusiness giftsLimitations on entertainment
tickets©2011 Pearson Education, Inc. Publishing as Prentice
Hall
9-20
Classification of Expenses
Criteria for deductionDirectly related expense
Benefit must be for other than goodwill and be in a clear business setting
Associated with expenseMust 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 includeEmployee achievement awards <
$400Gift 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)
SubstantiationEmployee must make adequate
accounting of expenses to employer
Employee required to return excess reimbursement
Accountable PlanReimbursements 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 PlanReimbursement taxableDeductions miscellaneous subject
to 2% of AGI floorEmployee subject to 50% M&E
limitationPer diem allow. for Meals &
LodgingIRS has special tablesSubstantiation less burdensome
©2011 Pearson Education, Inc. Publishing as Prentice Hall
9-27
Moving ExpensesDistance 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 move78 weeks for self-employed
individuals©2011 Pearson Education, Inc. Publishing as Prentice
Hall
9-28
Moving ExpensesDefinition of Moving Expenses
For AGI deductionQualified expenses
Cost of moving household good and personal effects from old to new homeIncludes storage if < 30 days
Cost of traveling from old to new homeIncludes 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 expensesSee Table 3
Deduction for higher ed expenses$4,000 for AGI deduction in 2010If AGI between $65K-$80K ($130K-
$160K for MFJ), $2,000 deductionNo 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 deductionMaintain or improve skills required
for employmentMeet 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 ifMeet 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 ExpensesGeneral Requirements
Must meet one of requirements and be used on exclusive and regular basisOffice used as principal place of
business for any ToBIncludes doing administrative work if
no other fixed location availablePlace for meeting clients in normal
course of businessLocated in separate structure©2011 Pearson Education, Inc. Publishing as Prentice
Hall
9-33
Office in Home ExpensesDeduction and Limitations (1 of 2)
Categories of expensesExpenses directly related to officeExpenses indirectly related to
officeExpenses related to whole homeProrate based on square footage or
other methodTotal expenses cannot create loss
©2011 Pearson Education, Inc. Publishing as Prentice Hall
9-34
Office in Home ExpensesDeduction and Limitations (2 of 2)
Order of expense deductions1. Expenses not related to home
office2. Expenses directly related to home
office3. 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 optionsPlans for self-employed
individualsTraditional Individual Retirement
Account (IRA)Roth IRACoverdell education savings
account©2011 Pearson Education, Inc. Publishing as Prentice Hall
9-37
Deferred Compensation(3 of 3)
Health savings accountsSimplified plans
©2011 Pearson Education, Inc. Publishing as Prentice Hall
9-38
Qualified Pension and Profit-Sharing Plans
Pension plansDefined benefitDefined contribution
Profit-sharing plansInclude 401(k) plans
Stock bonus plansDC 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 requirementsVesting 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 earningsUse 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 plansRestricted property plans
©2011 Pearson Education, Inc. Publishing as Prentice Hall
9-42
Employee Stock OptionsIncentive 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 OptionsNonqualified 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 plansAlso 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 50Available only for following
taxpayersTaxpayers 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 participantsAGI $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 taxableUnless some contributions
nondeductible©2011 Pearson Education, Inc. Publishing as Prentice
Hall
9-47
Roth IRA(1 of 2)
NondeductibleMax 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 futureNo employer-provided insuranceMust use high-deductible policy
©2011 Pearson Education, Inc. Publishing as Prentice Hall
9-51
Simplified Plans
Simplified employee pensionsReduced administrative
complexitySimple 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 ifEmployee 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 IRAConsiderations include marginal tax rate, age of taxpayer and payment of taxes from rollover from post-tax funds
Rollover included in gross incomeFor 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 [email protected]
9-56©2011 Pearson Education, Inc. Publishing as Prentice Hall