Pope Phft2015 Ind PP Stu 09

Chapter 9: Employee
Expenses and Deferred

Compensation
Prentice Halls Federal Taxation 2015:
Individuals
Types of Employee (EE)

Expenses
REIMBURSED
UNREIMBURSED
Expenses
incurred by EE.
Reimbursed by
Employer
(ER).
EE can deduct
For AGI if
amounts were
taken into
income.
Expenses
incurred by EE.
Not
reimbursed by
ER.
EE can deduct
From AGI
subject to 2%
AGI.
Copyright 2015 Pearson
Education, Inc.
9-2
Employer-Employee
Relationship
Definition of ER-EE
Properly
Classifying EEs
IRS Action
Education, Inc.
9-3
Unreimbursed Employee
Expenses
Unreimbursed
Investment
EE Business
Expenses
Expenses
Subject
to 2%
AGI
Expenses
Tax Advice &
Associated with
Return
Hobby Activity
Preparation
Education, Inc.
9-4
Exceptions to 2% AGI
Rule:
Gambling
Losses
Charitable Contributions
Mortgage Interest
Real Estate Taxes

Education, Inc.
9-5
Deductibility of Travel
Expenses

Education, Inc.
9-6
Definition of Travel
Expenses
Includes
transportation, meals,
lodging, and other reasonable
and necessary expenses.
Worker must be away from
home during course of business
activity.
Travel vs. Local Transportation
Expense.
Education, Inc.
9-7
Requirements for Travel

Deduction

Education, Inc.
9-8
Away From Home Requirement

- Issues

Education, Inc.
9-9
Location of Tax Home

Tax
Home = location of principal

place of business.
Where taxpayers family
residence is maintained is not
relevant.
If taxpayer works permanently or
for an indefinite time away from
his/her residence, the taxpayer is
not away from his tax home.
Education, Inc.
9-10
Temporary v. Indefinite
Indefinite
= assignments more
than 1 year.
If < 1 year, then need to look at
facts and circumstances whether
it is temporary or indefinite.

Education, Inc.
9-11

Education, Inc.
9-12
Defining Overnight
Needs
to be reasonable for worker to obtain

sleep or rest during release time in order to
meet demands of the job.
Meals on one-day trips are not deductible.
Example: Kim, a flight attendant, sometimes
leaves and returns to the airport on the same
day. Her meal allowance is not deductible
and is considered additional wages. If Kim is
required to stay overnight due to her flight
schedule, then the meal money would be
deductible From AGI.
Education, Inc.
9-13
Business v. Pleasure
Main
purpose of trip must be the pursuit

of trade or business activity.
If trip is primarily personal but a small
amount of business is transacted, then
only directly related expenses (e.g.,
business meals) are deductible. Taxpayer
cant pro rate other travel expenses.
If trip is primarily business, expenses are
generally deductible. However, expenses
related to personal part are
nondeductible.
Education, Inc.
9-14
Other Travel Expense Limitations

Education, Inc.
9-15
Transportation For vs. From

AGI
AGI = THE LINE

Education, Inc.
9-16
Transportation Costs
Transportation
is primarily local
travel.
Separate category than travel
which is usually away from tax
home overnight.
Commuting to job is considered
personal and is not deductible.

Education, Inc.
9-17
Transportation Costs
(contd)
Generally,
other local travel

engaged in is deductible as long
as for a business purpose.
If taxpayer has a regular work
location, he/she can deduct
transportation expenses from
home to a temporary work
location.
Education, Inc.
9-18
Example:
Taxpayer can deduct
transportation costs of 10
miles even if he goes
home between jobs.

Education, Inc.
9-19
Automobile Expenses
Taxpayer
can choose between actual vs.

standard mileage method for calculating
auto expenses.
Cant use standard method for taxis or
for five or more autos owned at the
same time by taxpayers.
If change from standard method to
actual, then basis of auto must be
reduced by 22 mile (2014) and ADS
(straight line) depreciation method must
be used.
Education, Inc.
9-20
Automobile Expenses
(contd)
Cannot
use standard method if

auto had been previously
depreciated under MACRS or
been subject to a 179 election.
If using actual expense method,
total expenses have to be
allocated between business v.
personal miles driven.
Unreimbursed expenses are
reported on Form 2106 and
Education, Inc.
9-21

Education, Inc.
9-22

Education, Inc.
9-23
Automobile Expenses
(contd)

Education, Inc.
9-24
Meal & Entertainment

Expenses
Deductible
Is the
expenditure
lavish or
extravagant?
NO
Does the
expenditure
meet the
requirements
under 212 or
162? NO
No deduction
permitted
unless other
code section
applies.
Portion considered
subject to 274
lavish,
not
YES
50% limitation.
NO
deductible, unless
treated as
Is the expenditure
compensation.
for a company
Remainder subject
picnic? YES
to 274 50%
limitation.
Expenditure
Is
the
expenditure
YES
100%
either directly
YES
deductible.
related or
YES Was the
associated with
expenditure
the active conduct
property
of business?
substantiated
NO
?
NO
Not deductible
Deduction can
unless treated as
be disallowed
compensation.
IRS.Pearson
Copyrightby
2015
Education, Inc.
9-25
Meals and Entertainment

(contd)
Taxpayer
must generally be
present when the meal or
entertainment takes place.
There cannot be substantial
distractions to interfere with any
business discussion.
Entertainment tickets deductible
only up to 50% of the face value
even if more than face value was
paid.
Education, Inc.
9-26
Entertainment Facilities and Club

Dues
No
deduction allowed for costs to

build or maintain entertainment
or recreation facilities (e.g.,
skyboxes, ski lodges).
No deduction allowed for club
dues (airline clubs, golf clubs,
social clubs).
Professional, civic, and public
service organizations (e.g.,
chambers of commerce, trade of
Education, Inc.
9-27
Business Gifts
Deductible
up to $25 per donee.

Amounts > $25 are disallowed.
Not subject to 50% reduction.
Employee achievement awards
that are under $400 per
individual are deductible.

Education, Inc.
9-28
Employee Business
Expenses

Education, Inc.
9-29
Accountable Plans
Accountable
plans reimbursements
are included in gross income and
expenses are deductible For AGI.
Can use per diem allowances for
meals and lodging expenses in lieu
of actual expenses.
Taxpayer need only substantiate the
time, place, and business purpose of
the trip. No other receipts of actual
costs are needed.
Education, Inc.
9-30
Moving Expenses - 217

Generally,
moving expenses are

personal and non-deductible.
Exception limited deduction
permitted for employees (EE)
and self-employed (SE) people.
Must meet Distance and Time
requirements.

Education, Inc.
9-31
Moving Expenses (contd)

Time
requirements excused if EE or SE
dies, becomes disabled, or is involuntarily
terminated.
Moving expenses are deductible For
AGI.
Moving expenses paid by employer are
excluded from EEs gross income as long
as they are deductible under 217.
Non-deductible moving expenses paid for
by ER must be included into EEs wages.
Education, Inc.
9-32
Requirements for Moving

Expenses

Education, Inc.
9-33
Definition of Moving
Expenses

Education, Inc.
9-34
Education Expenses
Generally,
considered personal
expenses and are not deductible.

Education, Inc.
9-35
Exceptions to GR of Non-Deductibility
of Educational Expenses

Education, Inc.
9-36
Requirements for Deductibility of

Educational Expenses

Education, Inc.
9-37
Home Office Expenses

Deduction
allowed part of home

used in a T or B.
EEs must also show that the
home office is for the
convenience of the ER, not the
EE.

Education, Inc.
9-38
Home Office Criteria

Education, Inc.
9-39
Home Office Expenses

(contd)
Principal
place of business =
where primary services were

performed; OR
TP uses office for administrative or
management activities AND there is
no other fixed location for the TPs
administrative activities.

Education, Inc.
9-40
Types of Home Office

Expenses

Education, Inc.
9-41
Calculating the Home Office

Deduction
Total
Home Office expenses = 100% of

direct expenses + pro rata share of
indirect expenses.
Safe Harbor - instead of deducting direct
+ indirect expenses, the TP can deduct
$5/square foot (max of 300 sq. ft.) for
home office expenses.
Total expenses cant exceed the TPs
gross income from the T or B.
Suspended losses can be carried
forward.
Education, Inc.
9-42
Deferred Compensation
Plans
Used
as a method for EEs and

ERs to fund retirement accounts.
Typically, the EEs and ERs
receive tax deduction for the
amount contributed.
Amounts grow tax-deferred. EE
pays tax when he/she withdraws
amounts in retirement.
Education, Inc.
9-43
Types of Deferred Compensation

Plans or Other Retirement Vehicles

Education, Inc.
9-44
Types of Qualified Plans

Education, Inc.
9-45
Qualified Pension Plans

ERs
make systematic payments

to plan based on formulas or
actuarial tables.
Plan can provide for disability,
death, or medical insurance.
Noncontributory plan payments
to plan made only by ER.
Contributory plan EE can make
voluntary payments in addition to
the ERs payments.
Education, Inc.
9-46
Qualified Pension Plans

(contd)
Defined
Benefit plan pays a

fixed benefit amount to EE based
on certain formulas. This is
sometimes called a traditional
pension plan.
Defined Contribution The ER
pays in a fixed amount for each
employee based on a formula.
The amount of retirement benefit
depends on how much the
investment grows in the interim.
Education, Inc.
9-47
Qualified Profit-Sharing
Plans
401(k) plans are the most common

type of profit-sharing plans.
There must be a definite formula to
allocate ER contributions.
EEs must have option to take
compensation in cash or contribute to
plan.
ER does not have to contribute
annually, but is required to make
substantial and recurring contributions.
Education, Inc.
9-48
Roth-Type Profit-Sharing
Plans
EEs
can contribute with after-tax

dollars.
Amounts in the plan are not
taxed.
Distributions are also tax-free as
long as account has been active
for 5 years or more, and EE is >
59.5 years old.
Education, Inc.
9-49
Qualified Stock Bonus Plan

Type
of defined contribution plan

where investments are the ER
company stock.
Common stock bonus program is
an employee stock option plan
(ESOP).
ESOPs are funded by both EE and
ER contributions.
ER can deduct dividends paid to
participants. Participants must
Education, Inc.
9-50
Qualified Plans Requirements

Plans
provisions cannot
discriminate in favor of highly
compensated EEs.
Highly compensated = 1) owns
> 5% of corps stock in current or
prior year; OR 2) received
compensation > $115K in prior
year.
ER and/or EE contribute to the
plan for the benefit of the EE.
Education, Inc.
9-51
Qualified Plans (contd)

ERs
contributions must be uniform

among all EEs (e.g., a fixed % of pay).
EE must vest in ERs contribution no later
than after 5 years of employment. EE
immediately vests in EEs contributions.
EE can elect to make pre- or after-tax
contributions to the plan. The after-tax
amounts are not taxable upon
withdrawal.
ER contributions deductible, earnings on
fund are tax-exempt to plan.
Education, Inc.
9-52
Limitations on ER
Contributions
Defined
Contribution limited to
lessor of: 1) $52,000; OR 2) 100%
of EEs compensation.
Defined Benefit limited to lessor
of: 1) $210,000 (2014); OR 2)
100% of participants highest
compensation for highest 3
years.
Education, Inc.
9-53
Nonqualified (NQ) Plans

Used
by ERs to provide
supplemental retirement income
to executives.
Common forms:
1. Executive supplemental deferred
compensation plans EE
contributes pre-tax salary to a
401(k)-like plan. Distributions are
taxable to EE.
2. Stock rights or transfers where
Copyright
2015
Pearson
there is a significant
risk
of
Education, Inc.
9-54

(contd)
Not
subject to the discrimination

rules under the Qualified plan
rules, so the NQ plan can favor
the highly compensated.
NQ plans have restrictions on
transfer of plans benefits to EE,
so EE can delay recognizing
income until monies are
distributed.
ER takes a deduction in same
Education, Inc.
9-55

(contd)
For
restricted property plans, EE

recognizes income only when it is
no longer subject to the
substantial risk of forfeiture or is
transferable.

Education, Inc.
9-56
Employee Stock Option

Plans

Education, Inc.
9-57
Qualified Incentive Stock Options

EE
cannot dispose of stock within 2

years of options grant date or within
one year after exercise date.
EE must still be employed by issuing
company on grant date and continue
until within 3 months before exercise
date.
EE does not have income at grant or
exercise date. ER does not have
deduction.
EE has L-T C G/L upon sale of stock.
Education, Inc.
9-58
Nonqualified Stock Option

Plans
If
any of the requirements for an

ISO is violated then it is treated
as a NQ plan.
ER takes a compensation
deduction the same year that EE
recognizes income.
EE recognizes income on grant
date = (FMV exercise price).
Education, Inc.
9-59
Plans for SE Individuals

Taxpayers
who are EEs can also

establish a Keogh account if they are
also SE.
Defined contribution plan maximum
contribution of the lesser of: $52,000 or
25% earned income.
After SE taxes and deduction itself is
taken into account, a TP can actually
contribute only 20%.
SEP-IRAs have same contribution
limitations as Keoghs.
Education, Inc.
9-60
Plans for SE Individuals

(contd)
SE
individuals can also select

instead of a Keogh a SIMPLE plan,
Solo 401(k) plan, or SEP IRA.
Other standard IRAs are available
to SE individuals as well as the
general public.
Solo 401(k) plans allow for a
$17,500 deferral plus a 25%
salary match. Total limit in 2014
is $52,000.
Education, Inc.
9-61
SIMPLE Retirement Plans

Requirements
Voluntary
EE contributions must
be matched by ER, or ER can
unilaterally make contributions;
EE must be fully vested; AND
SIMPLE plans are not subject to
the discrimination rules.
Business must have 100 EEs.

Education, Inc.
9-62
SIMPLE Retirement Plans

Requirements (contd)
EEs
with $5,000 in wages are

eligible to participate.
EEs are permitted to contribute
up to $12,000/year, and ER is
required to make matching
contributions.

Education, Inc.
9-63
Individual Retirement Accounts

(IRAs)
Traditional IRAs
Roth IRAs
Coverdell
Education IRA
Education, Inc.
9-64
Differences in IRAs
TYPE
MAXIMU
M
CONTRIBUTION
Traditional
N/D IRA
INCOME OR
OTHER
LIMITATIONS
?
CONTRIB
-UTION
DEDUCTIBLE?
WITHDRAWALS
TAXABLE
> BASIS?
Lessor of
No
$5,500/6,5
00 or
100%
income.
No
Yes
Traditional
Deductible
IRA
Lessor of
$5,500/6,5
00 or
100%
income.
Yes, income
phase-outs
and existence
of ER pension
plan.
Yes
Yes,
Basis = 0
Roth IRAs
Lessor of
$5,500/6,5
00 or
100%
Yes, but other No

No, unless
provisions
TP takes $
essentially
out early.
Education, Inc.
9-65
remove

(contd)
Taxpayers
who are 50 or older by

the end of the tax year can
contribute an extra $1,000 for a
maximum of $6,500 in 2014.
Taxpayer has until the original
tax filing deadline to set up
his/her IRA for that year.
Example: Joe has until April 15,
2015 to set up his IRA for the 2014
tax year.
Education, Inc.
9-66

(contd)
If
taxpayers elected MFJ status,

then both spouses can contribute
even if only one spouse has
earned income.
Example: John and Abigail are filing
a joint return. They can contribute
up to $5,500 each to an IRA as long
as at least one of them earns either
wages or self-employment income of
$11,000. If total wages are $8,000,
then Johns and Abigails
combined
Education, Inc.
9-67
IRA contribution cannot
exceed

(contd)
For
SEP-IRAs and Keogh

Accounts, the taxpayer must set
up the account by the last day of
the tax year.
Can wait until the due date of
return (including extensions) to
fund it.

Education, Inc.
9-68
Roth IRAs
Taxpayer
makes after-tax contributions.

Amounts grow tax-free.
Withdrawals are also tax-free under the
following circumstances:
The taxpayer is at least 59 and the account
has been established for at least 5 years.
The taxpayer has inherited the Roth IRA and
is now receiving distributions.
A first-time homebuyer can withdraw up to
$10,000.
The individual has become disabled.
Education, Inc.
9-69
Roth IRAs (contd)

If
taxpayer does not meet

conditions above, any
distributions are considered first
from after-tax contributions.
Any early distribution over
amount of contribution is
ordinary income subject to a 10%
penalty.
If taxpayers income above the
thresholds, then ability to
Education, Inc.
9-70
Roth IRAs (contd)

Phase-out
thresholds:
Single between $114,000 and

$129,000.
MFJ between $181,000 and
$191,000.
MFS - $0
However,
taxpayers are
permitted to roll-over traditional
IRAs and convert them into Roth
IRAs.
Education, Inc.
9-71
Roth IRAs (contd)

Taxpayers
will have to recognize

in income any conversion
amounts > after-tax
contributions.
No income limitations exist for
conversions, so essentially the
Roth IRA is available to all
taxpayers.
Education, Inc.
9-72
Coverdell Education Savings

Account
Maximum
after-tax contribution
$2,000 per year per child age
18.
Can be used for elementary,
secondary, or higher education
expenses.
Taxpayer can claim educational
credits the same year he/she
takes Coverdell distributions.
Education, Inc.
9-73
Coverdell Education IRAs (contd)

Must
reduce qualified expenses

by Coverdell distributions before
calculating credit.
Ability to make a Coverdell
contribution phases out between
following thresholds:
MFJ between $190,000-$220,000.
All other taxpayers between
$95,000-$110,000.
Education, Inc.
9-74
Health Savings Accounts (HSA)

Taxpayers
can contribute up to
XXX into a HSA (similar to an
IRA) to pay for medical expenses.
Contributions are deductible
For AGI, grow tax-free with
distributions to pay for expenses
also tax-free.

Education, Inc.
9-75
Health Savings Accounts

(contd)
Distributions
that are not used to

pay for qualified medical
expenses are includable in gross
income and subject to a 10%
penalty.
If taxpayer 65, then 10%
penalty is waived.

Education, Inc.
9-76
TP covered
TP not Medicare
under higheligible.
deductible plan.
HSA
TP not alsoEligibilityCannot be
claimed as a
covered under
dependent on
plan that is not
anothers tax
highreturn.
deductible.
Education, Inc.
9-77
Tax Planning
Considerations
Roth
Rollove
rs
NonTaxable
Fringe
Benefit
s
Moving
Expens
es

Education, Inc.
9-78
Compliance and Procedural

Considerations
Substantiating Travel and
Entertainment Expenses.
Reporting Moving Expenses.
Reporting Employee Business
Expenses.
Education, Inc.
9-79
END
Chapter 9
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Education, Inc.
9-80

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Chapter 9: Employee

Expenses and Deferred

Types of Employee (EE)

Copyright 2015 Pearson

Copyright 2015 Pearson

Requirements for Travel

Copyright 2015 Pearson

Away From Home Requirement

Copyright 2015 Pearson

Location of Tax Home

Home = location of principal

Copyright 2015 Pearson

Copyright 2015 Pearson

to be reasonable for worker to obtain

purpose of trip must be the pursuit

Other Travel Expense Limitations

Copyright 2015 Pearson

Transportation For vs. From

AGI = THE LINE

Copyright 2015 Pearson

Copyright 2015 Pearson

other local travel

Copyright 2015 Pearson

can choose between actual vs.

use standard method if

Copyright 2015 Pearson

Copyright 2015 Pearson

Copyright 2015 Pearson

Meal & Entertainment

Meals and Entertainment

Entertainment Facilities and Club

deduction allowed for costs to

up to $25 per donee.

Copyright 2015 Pearson

Copyright 2015 Pearson

Moving Expenses - 217

moving expenses are

Copyright 2015 Pearson

Moving Expenses (contd)

Requirements for Moving

Copyright 2015 Pearson

Copyright 2015 Pearson

Copyright 2015 Pearson

Copyright 2015 Pearson

Requirements for Deductibility of

Copyright 2015 Pearson

Home Office Expenses

allowed part of home

Copyright 2015 Pearson

Home Office Criteria

Copyright 2015 Pearson

Home Office Expenses

where primary services were

Copyright 2015 Pearson

Types of Home Office

Copyright 2015 Pearson

Calculating the Home Office

Home Office expenses = 100% of