2010 Pearson Education Inc Publishing as Prentice Hall
© 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -1
EMPLOYEE EXPENSES & DEFERRED COMPENSATION (1 of 2) ® Classification and limitations of employee expenses ® Travel expenses ® Transportation expenses ® Entertainment expenses ® Reimbursed employee business expenses © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -2
EMPLOYEE EXPENSES & DEFERRED COMPENSATION (2 of 2) ® Moving expenses ® Education expenses ® Office in home expenses ® Deferred compensation ® Tax planning considerations ® Compliance and procedural considerations © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -3
Classification and Limitations of Employee Expenses (1 of 3) ® Employee vs. self-employed – factors Behavioral control Financial Control Relationship of parties ® If employee, employer pays ½ FICA and Medicare ® If self-employed, taxpayer pays all FICA and Medicare © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -4
Classification and Limitations of Employee Expenses (2 of 3) ® Limitations on unreimbursed employee expenses 2% of AGI floor applies to ¬Unreimbursed employee business expenses ¬Investment expenses other than interest ¬Tax advice and return preparation fees, and other deductions © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -5
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 deduction ¬Unreimbursed employee expenses provide no tax benefit ¬Reduced benefit for high-income taxpayers due to 1% scale down of itemized deductions © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -6
Travel Expenses ® Deductibility of travel expenses ® Definition of travel expenses ® General qualification requirements ® Business vs. pleasure ® Foreign travel ® Additional limitations on travel expenses © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -7
Deductibility of Travel Expenses ® Depends on nature of expenditure and if employee reimbursed ® Taxpayers engaged in To. B or production of rents or royalties Travel expenses deductible for AGI ® Employee Deduction ¬ 2% for AGI if reimbursed misc. deduction if not reimbursed © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -8
Definition of Travel Expenses ® Includes Transportation, meals, & lodging related to a To. B, or employee status incurred while away from taxpayer’s tax home ® Requires overnight stay ® Deductible amount of travel expenses may be reduced if actual expenses lavish or extravagant © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -9
General Qualification Requirements (1 of 2) ® Away-from-tax-home Tax requirement home is work location ® Assignment must be temporary Assignment not temporary if ¬Assignment indefinite OR ¬Expected to last > 12 months © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -10
General Qualification Requirements (2 of 2) ® Overnight requirement Must be reasonable for taxpayer to be away overnight Short rest stops on long day-trip not considered overnight © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -11
Business vs. Pleasure ® Travel to and from destination If trip primarily personal, no deduction If trip primarily business, all travel to and from destination deductible ® Other travel-related expenses Allocated to business and personal activities © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -12
Foreign Travel ® Generally disallowed Allowed only if taxpayer shows activity directly related to business, AND Reasonable for meeting to be held outside North America ® Complex allocation for allowabe expenses © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -13
Additional Limitations on Travel Expenses ® Travel expenses disallowed if actual travel is for education E. g. , French student traveling through France ® Luxury water travel expense limited ® Travel to conventions, seminars not deductible if activity for production of income © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -14
Transportation Expenses ® Definition and classification ® Treatment of automobile expenses ® Reimbursement of automobile expenses Excess expenses over reimbursement deductible as 2% misc itemized deductions © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -15
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 © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -16
Definition and Classification (2 of 2) ® Commuting costs between home and temporary work site deductible if taxpayer has regular place of business © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -17
Treatment of Automobile Expenses ® Standard mileage rate $0. 55/mile Cannot use std. rate if use ≥ 2 vehicles Does not include parking and tolls ® Actual expenses Includes gas, oil, maintenance and repairs, insurance, and depreciation Based on ratio [bus. Miles]/[total miles] © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -18
Entertainment Expenses ® 50% disallowance for meal and entertainment expenses ® Classification of expenses ® Business meals ® Entertainment facilities and club dues ® Business gifts © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -19
Classification of Expenses ® Criteria for deduction Directly related expense ¬Benefit must be for other than goodwill and be in a clear business setting Associated with expense ¬Must establish clear business purpose and activity must directly precede or follow bona fide business discussion Need proper substantiation © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -20
Business Meals ® Business meals must meet “directly related to” or “associated with” tests ® Cannot be lavish or extravagant for circumstances © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -21
Entertainment Facilities and Club Dues ® No deduction permitted for costs related to maintenance of entertainment, amusement, or recreation facilities ® No deduction for club dues © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -22
Business Gifts ® Generally annual ceiling of $25/donee ® Exceptions include Employee achievement awards < $400 Gift from employer to employee’s survivor © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -23
Limitations on Entertainment Tickets ® 50% limitation applies to face value of ticket ® Further restrictions on skyboxes © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -24
Reimbursed Employee Business Expenses (1 of 2) ® Substantiation Employee must make adequate accounting of expenses to employer ® Employee required to return excess reimbursement ® Accountable Plan Reimbursements and deductions not reported by employee if no excess deductions © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -25
Reimbursed Employee Business Expenses (2 of 2) ® Non-Accountable Plan Reimbursement taxable Deductions miscellaneous subject to 2% of AGI floor ¬Employee ® Per subject to 50% M&E limitation diem allow. for Meals & Lodging IRS has special tables Substantiation less burdensome © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -26
Moving Expenses Distance and Duration Requirements ® New job at least 50 miles farther from taxpayer’s old residence ® New employee must be employed fulltime at new location for 39 weeks out of year following the move 78 weeks for self-employed individuals © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -27
Moving Expenses Definition of Moving Expenses ® For AGI deduction ® Qualified expenses Cost of moving household good and personal effects from old to new home ¬Includes Cost storage if < 30 days of traveling from old to new home ¬Includes lodging, but not meals ¬$0. 24/mile or actual expenses allowed for car 9 -28 © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Education Expenses (1 of 3) ® Classification See of education expenses Table 3 ® Deduction for higher ed expenses $4, 000 for AGI deduction in 2009 If AGI between $65 K-$80 K ($130 K$160 K for MFJ), $2, 000 deduction No ded. if AGI > $80 K ($160 K for MFJ) © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -29
Education Expenses (2 of 3) ® General requirements for a deduction Maintain or improve skills required for employment Meet requirements imposed by law or by employer for retention of employment, rank, or compensation rate © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -30
Education Expenses (3 of 3) ® Nondeductible if Meet minimum educational requirements for qualifications in taxpayer’s employment Qualifies taxpayer for new trade or business ® Deduction scheduled to expire 12/31/2009 © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -31
Office in Home Expenses General Requirements ® Must meet one of requirements and be used on exclusive and regular basis Office used as principal place of business for any To. B ¬Includes doing administrative work if no other fixed location available Place for meeting clients in normal course of business © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -32
Office in Home Expenses Deduction and Limitations (1 of 2) ® Categories of expenses Expenses directly related to office Expenses indirectly related to office ¬Expenses related to whole home ¬Prorate based on square footage or other method Total expenses cannot create loss © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -33
Office in Home Expenses Deduction and Limitations (2 of 2) ® Order of expense deductions Expenses not related to home office 2. Expenses directly related to home office 3. Pro-rata portion of indirect expenses 1. ® ® E. g, mortgage, interest, utilities, insurance Disallowed expenses carried forward to future year © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -34
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 © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -35
Deferred Compensation (2 of 3) ® Employee stock options ® Plans for self-employed individuals ® Traditional Individual Retirement Account (IRA) ® Roth IRA ® Coverdell education savings account © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -36
Deferred Compensation (3 of 3) ® Health savings accounts ® Simplified plans © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -37
Qualified Pension and Profit-Sharing Plans ® Pension plans Defined benefit Defined contribution ® Profit-sharing Include ® Stock plans 401(k) plans bonus plans DC plan where investments invested in company stock © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -38
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 >$110 K ® Contributions proportionate ® Coverage requirements ® Vesting requirement to comp © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -39
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 pretax earnings Use exclusion ratio if contributions from © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -40
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 plans ® Restricted property plans © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -41
Employee Stock Options Incentive Stock Options (ISOs) ® No tax to employee on exercise date ® LTCG treatment when employee sells stock (amount realized – exercise price) ® Employer receives no deduction © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -42
Employee Stock Options Nonqualified Stock Options (NQSOs) ® Nonqualified stock options (NQSOs) ® Employee recognizes compensation income on exercise date (FMV – exercise price) ® Employer receives deduction on exercise date © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -43
Plans for Self-employed Individuals ® H. R. 10 plans Also called Keogh plans ® Generally same contribution and benefit limits as other qualified plans © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -44
Traditional IRA (1 of 2) ® Fully deductible IRA contributions Lesser of $5, 000 or earned income ¬$6, 000 if over age 50 Available only for following taxpayers ¬Taxpayers who are not active participants in a qualified employer retirement plan ¬Taxpayers who are active, but AGI ≤ $55 K (or ≤ $89 K for MFJ) ¬Spouse active participant, but AGI ≤ 9 -45 $166 K© 2010 Pearson Education, Inc. Publishing as Prentice Hall
Traditional IRA (2 of 2) ® Phase AGI out for active participants $55 K - $65 K ¬$89 K - $99 K for MFJ ¬$166 K - $176 K for MFJ ® Deduction $5, 000 ® All if spouse active for non-working spouse (or $6, 000 if ≥ age 50 distributions taxable Unless some contributions nondeductible © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -46
Roth IRA (1 of 2) ® Nondeductible ® Max contribution $5, 000 If qualify for both Traditional and Roth maximum contribution for both is $5, 000 Max contribution $6, 000 if ≥ age 50 © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -47
Roth IRA (2 of 2) ® Contribution phase-out AGI limitations $105, 000 - $120, 000 for Single $166, 000 - $ 176, 000 for MFJ ® Qualified distributions nontaxable © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -48
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 & © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -49
Health Savings Accounts ® Purpose to enable eligible individuals to accumulate funds on tax free basis to pay qualified medical expenses currently or in the future No employer-provided insurance Must use high-deductible policy © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -50
Simplified Plans ® Simplified Reduced ® Simple employee pensions administrative complexity retirement plans Savings incentive match plan for employees For employers with < 100 employees who received at least $5, 000 in compensation © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -51
Tax Planning Considerations (1 of 2) ® Moving expenses only deductible if Employee must secure full-time work before incurring moving expenses, or Self-employeds must carry on To. B prior to incurring moving expenses Excess reimbursements are taxable compensation © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -52
Tax Planning Considerations (2 of 2) ® Rollover from Traditional to Roth IRA Considerations include marginal tax rate, age of taxpayer and payment of taxes from rollover from post-tax funds Rollover included in gross income $100 K AGI limit removed after 2009 © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -53
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 © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -54
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 © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -55
Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard. newmark@Ph. Duh. com © 2010 Pearson Education, Inc. Publishing as Prentice Hall 9 -56
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