Ch 9 Flashcards
Deferred compensation
Methods of compensating employees based on their current
Service, but actual payments deferred to future period
How does tax law consider employee expenses?
Deductible in connection with trade or business
2 types of deferred compensation methods
Qualified plans and nonqualified plans
Qualified plans
Tax advantageous but strict eligibility and coverage
requirements
Non qualified plans
Not as tax advantageous as qualified plans
Very useful for highly compensated employees
2 classifications of employee expenses
1 Reimbursed employee expenses
2 unreimbursed employee expenses
Reimbursed employee expenses
Deducted for AGI
Unreimbursed employee expenses
Deducted from AGI
6 most frequently encountered employee expenses
1 travel 2 transportation 3 moving 4 entertainment 5 education 6 office in home
Expenses for self employed
Deductible for AGI
reported on schedule c
When does the employer-employee relationship exist?
Employer has right to control and direct individual who
Provides services w/regard to end result being accomplished
Social security and Medicare tax: employee
If classified as employee, employer must match SS and
Medicare taxes paid by employee
Social security and Medicare tax: self employed
Self employed most pay both employee and employer
portions of social security and Medicare tax
3 factors in determining whether person is an employee or independent contractor
1 behavioral control
2 financial control
3 relationship of parties
Behavioral control
Entails whether payor has right to control how individual
Does work
Also Accounts for training provided
Financial control
Independent contractor has significant investment in work,
Is not reimbursed for expenses, has opportunity for profit/loss
Relationship of parties
Looks at employee benefits and explicit written contracts
Limitations on unreimbursed employee expenses: 2% nondeductible floor, 4 items
1 unreimbursed employee business expenses
2 investment expenses
3 fees for tax advice/prep
4 expenses for hobby activity
3 general groups of miscellaneous itemized deductions
1 professional journals, professional dues, union dues,
Small tools and supplies
2 job hunting expenses in same trade/business
3 cost/maintenance of special clothing (uniforms)
Miscellaneous itemized deduction not subject to 2% floor
Gambling losses
Deductibility of travel expenses: For AGI, 3
1Tax payer engaged in trade or business as self employed
2 engaged in production of rent/royalty
3 employee reimbursed for expenses by employer
Deductibility of travel expenses: from AGI
Employee incurs travel expenses related to job and isn’t
Reimbursed, subject to 2% AGI Floor
Deductibility of travel expenses: not deductible
Personal travel expenses
Travel expenses
Include transportation, meals, lodging and other necessary
Expenses while away from home
Transportation expenses
Individual not away from home
Related to local transportation
Meals during transportation expenses
Not deductible
2 rules to qualify as travel expense
1 trip must be connected to trade or business
2 taxpayer must be away from home overnight for
Sufficient duration to require sleep+ rest before returning
Taxpayers home
Place closest to taxpayers principle place of business
Indefinite work assignments
Work assignments for over 1 year away from home
Or expected to be over 1 year
Not deductible
Temporary work assignments
Work away from home less than 1 year
Deductible
Business vs. personal travel
Deduct all expenses if primarily business, with 50% on meals
If primarily personal only deduct items allocated to business
And may not deduct travel expenses
3 transportation expenses deductible for AGI
1 trade or business
2 production of rent/royalty
3 reimbursed transportation exp.
Transportation expense deductible from AGI
Unreimbursed transportation
Non deductible transportation expenses
Commuting and personal expenses
Classification of transportation expenses
Included items as taxi fairs, automobile expenses,
Airfares, tolls and parking fees of trade/business
2 treatments for auto expenses
1 actual auto expenses
2 standard mileage rate
Who can use the actual auto expense deduction
Self employed
Actual (auto) expense method
What is included in automobile expenses?
Based on ratio of business expense to personal
2) gas, oil, repairs, depreciation, interest, property taxes,
License fees, insurance
Standard mileage method
Available to tax payers
Deduct 56.5 cents per mile for 2013
Meal and entertainment deduction
Limited to 50% (includes meals and tickets for entertainment)
Anything considered lavish isn’t deductible
Directly related business entertainment expense
Business benefit comes from the entertainment expense
Associated with entertainment expense
Taxpayer must show clear business purpose
Ex. Obtaining new business or encouraging existence of
business relationship
An accountable plan is a reimbursement arrangement that meets both of the following 2 tests
1 substantiation
2 return of excess reimbursement
Substantiation
Employee must make adequate accounting of expenses
To his employer
Return of excess reimbursement
Within reasonable time, employee required to return any
Portion of reimbursement in excess of substantiated expenses
Accountable plan deduction
For AGI
Non accountable plan, is it deductible
Yes as from AGI subject to 2% AGI Floor
Intention of per diem allowances
To simplify the burden of keeping detailed records for
Taxpayers that incur significant travel expenses
Derived from special tables
Moving expense deductions
Limited deduction form moving expenses for employees
And self employed people
Deductible for AGI for both employees and self employed
2 conditions must be met for moving expenses to be deductible
1 distance requirement
2 time requirement
Moving expenses: Distance requirement
Must be 50 miles farther from taxpayer’s old residence
Than old residence was from former place of employment
Moving expenses: time requirement
Must be employed for 39 weeks in 12 month period following
Move for employee
Self employed must work 78 weeks in following 2 year period
Definition of moving expenses
Traveling to new residence
Moving household goods from former residence to new
Residence
Non deductible indirect moving expenses, 3
1 house hunting trips, meals, lodging, transport
2 temporary living exp. new job location
3 qualified expenses related to sale, purchase or lease of
Residence
An employee may deduct education expenses if either of the 2 requirements are met
1 expenditure made to improve skills for trade/business
2 expenditure incurred to meet requirements imposed by
Law or employer for retention of employment, rank or
Compensation rate
Education expenses are not deductible if 2 things
1 Education required to meet minimal education requirements
For taxpayer’s employment
2 education qualifies taxpayer for new trade or business
Office in home 3 requirements for deduction
1 principal place of business
2 used for clients, patients, customers
3 located in separate structure away from dwelling area
Deductible expenses for home office
Any expenses solely for home office
