Employee Expenses and Deferred Compensation

1
Chapter 9

• Employee Expenses and Deferred Compensation

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Learning Objectives

• Determine the proper classification and
  deductibility of travel and transportation
  expenses
• Determine the proper deductible amount for
  entertainment expenses under the 50 disallowance
  rule
• Identify deductible moving expenses and determine
  the amount and year of deductibility

3
Learning Objectives

• Describe the requirements for deducting education
  expenses
• Determine whether the expenses of an office in
  the home meet requirements for deductibility and
  apply the gross income limitations
• Discuss the tax treatment requirements for
  various deferred compensation arrangements

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Classification Of Employee Expenses

• Nature of employment relationship
• Limitations on Unreimbursed employee expenses

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Nature Of Employment Relationship

• Significant tax consequences flow from the
  characterization of a taxpayer as an employee
• Vs.
• Self-employed (independent contractor)

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Limitations On Unreimbursed Employees

• Unreimbursed employee expenses are classified as
  miscellaneous itemized deductions. Total of
  miscellaneous itemized deductions are reduced by
  2 of AGI before any tax benefit realized
• If total miscellaneous itemized deductions do not
  exceed 2 of AGI or if total allowable itemized
  deductions do not exceed standard deduction,
  Unreimbursed employee expenses may provide no tax
  benefit also may affect high-income taxpayers
  who have 3 scale down of itemized deductions

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Travel Expenses

• Deductibility of travel expenses
• Definition of travel expenses
• 50 disallowance of business meals
• General qualification requirements
• Business versus pleasure
• Foreign travel
• Additional limitations

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Nature Of Expenditure

• Travel expenses for self-employed individuals and
  fully reimbursed employee travel expenses are
  deducted for AGI
• Unreimbursed employee travel expenses (whether
  insufficient or no reimbursement occurs) are
  deducted as a miscellaneous itemized deduction
  subject to the 2 nondeductible floor

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Definition Of Travel Expenses

• Includes transportation, meals, and lodging
  related to a trade, business, or employee status
  incurred while away from the taxpayers tax home
• Deductible amount of travel expenses may be
  reduced if actual expenses are lavish or
  extravagant

10
Transportation Expenses

• Definition and classification
• Treatment of automobile expenses
• Reimbursed expenses
• Reporting considerations
• Requirement to allocate expenses
• Reimbursement of automobile expenses

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Definition And Classification

• Commuting costs are generally nondeductible
  personal expenses
• Commuting costs between multiple jobs for the
  same taxpayer will be deductible
• Transportation costs from employees regular work
  site to temporary one are deductible
• Commuting costs between home and a temporary work
  site are deductible if taxpayer has regular place
  of business

12
Entertainment Expenses

• Partial disallowance for meal entertainment
  expenses (50)
• Classification of expenses
• Business meals
• Entertainment facilities club dues
• Business gifts
• Limitations on entertainment tickets

13
Reimbursed Employee Business Expenses

• Accountable Plan
• Non-Accountable Plan
• Per Diem Allowances for Meals and Lodging

14
Moving Expenses

• Must meet certain distance requirements and
  certain employment duration requirements in order
  to be deductible
• New job at least 50 miles farther from taxpayers
  old residence
• New employee must be employed full-time at new
  location for 39 weeks out of year following the
  move
• Self-employed must remain employed for double the
  employee standard

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Education Expenses

• Classification of education expenses
• General requirements for a deduction

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Office In Home Expenses

• General requirement for a deduction
• Deduction and limitations

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Deferred Compensation

• Qualified pension and profit-sharing plans
• Qualification requirements for a qualified plan
• Tax treatment to employees and employers
• Non qualified plans
• Employee stock options
• Plans for Self-employed individuals

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Individual Retirement Accounts (IRAs)

• Traditional IRA
• Fully deductible IRA contributions (lesser of
  3,000 or earned income) are available only to
  two groups of taxpayers
• Taxpayers who are not active participants in a
  qualified employer retirement plan
• Taxpayers who are active, but their AGI is
  33,000 or less (single) or 53,000 or less
  (married filing jointly)

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Traditional IRA

• Partial deductions are available to active
  participants with AGI less than 43,000 (single)
  or 63,000 (married/filing jointly) deduction is
  phased out ratably over the 10,000 AGI range
• A working spouse may deduct up to 3,000 for
  themselves and 3,000 for the non-working spouse
  

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Roth IRA

• Referred to as Back Loaded IRA
• Nondeductible
• Maximum contribution is 3,000
• If qualify for both Traditional and Roth maximum
  contribution for both is 3,000
• Subject to AGI phase-out limitations
• 95,000 110,000 for Single
• 150,000 160,000 for MFJ

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Roth IRA

• Special ordering rules for withdrawals
• Rollover funds from an existing deductible IRA
  into Roth IRA
• Not subject to 10 penalty
• If the rollover was made before January 1, 1999,
  amounts included in gross income would be spread
  over 4 years

22
Education IRACoverdell Education savings Account

• Nondeductible contribution
• Maximum contribution 2,000 year until the age
  of 18
• Elementary, Secondary and higher education
  expenses
• Distributions are excluded from gross income if
  they do not exceed qualified education expenses

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Simple Retirement Plans

• Savings incentive match plan for employees
• For employers with lt 100 employees who received
  at least 5,000 in compensation
• Elective contributions up to 8,000 per year and
  requires employer to make matching contributions

24
Tax Planning Considerations

• Employees may want to negotiate tax protection
  from employer in situations where moving
  reimbursements will exceed deductible moving
  expenses
• Traditional Vs Roth IRA
• Rollover from Traditional to Roth
• Considerations include marginal tax rate, age of
  taxpayer and payment of taxes from rollover from
  post-tax funds

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Compliance And Procedural Considerations

• Travel and entertainment expenses may be
  disallowed if the taxpayer does not maintain
  adequate records
• Employee business expenses are reported on Form
  2106

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Compliance And Procedural Considerations

• Moving expenses reported on Form 3903
• Home office expenses reported on Form 8829
• Reports for qualified retirement plans are
  required to be filed with the IRS and, sometimes,
  with the Dept. of Labor