CH9 outline

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Iowa State University *

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301

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Accounting

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Feb 20, 2024

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EMPLOYMENT EXPENSES CH 9 Briefly explain the difference in tax consequences for an employee versus an independent contractor in regard to work-related expenses. 1) Business expenses for self-employed persons are deductible for AGI. 2) Unreimbursed business expenses for employees are generally deductible from AGI subject to 2% of AGI floor. 3) A person is classified as an employee if: a) Subject to will and control of another with respect to what shall be done and how it shall be done b) Another furnishes tools or the place of work c) Income based on time spent rather than task performed Transportation expenses 1. What are transportation expenses? Transportation expenses for an employee include only the cost of transportation (e.g., taxi fares and automobile expenses) in the course of employment when the employee is not away from home in travel status 2. State the general rule for commuting expenses. Commuting expenses are not deductible. 3. Computing automobile expenses. a. Explain the automatic mileage method. Automatic mileage method The rate allowed per mile takes into account average operating expenses (such as gas and oil, repairs, and depreciation); taxpayer only has to multiply the automatic mileage rate by the business miles driven to compute the deduction 57.5 cents per mile for business miles for 2020 Plus parking fees, tolls, etc. Adequate documentation of mileage required b. Explain the actual cost method. The actual cost of operating the automobile is used to compute the deduction. Actual costs include the following expenses: 1. Gas and oil, lubrication. 2. Depreciation (or lease payments) - subject to limitations when mixed-use vehicles are involved. 3. Insurance. 4. Dues to auto clubs. 5. Repairs. 6. Tires and other parts. 7. Licenses and registration fees. 8. Parking and tolls Travel expenses 1. What are travel expenses? How are travel expenses different from transportation expenses? travel expenses include transportation expenses, meals, and lodging, and incidental expenses while working away from. The main difference is that transportation expenses are deductible even if the taxpayer is not away from home. 2. Explain the away-from-home requirement. Expenses while “away from tax home”. - Avoids duplication of expenses where the taxpayer incurs expenses while at home and while working away from home. Travel expenses are only deductible if the taxpayer is away from his or her tax home 3. Discuss rules related to conventions. No deduction for travel unless directly related to taxpayer’s trade or business.

Restrictions apply to the deductibility of travel expenses of the taxpayer’s spouse or dependent Generally, there must be a business reason for the spouse or dependent to attend The expenses must be otherwise deductible 4. Discuss rules related to education. Travel as a form of education is not deductible. If, however, the education qualifies as a deduction, the travel involved is allowed 5. Combined travel for business and pleasure a. What are the rules for domestic travel? If the business/pleasure trip is entirely within the United States, the transportation expenses are deductible only if the trip is primarily for business o Meals, lodging and other expenses are allocated between business and personal days o If the trip is primarily for pleasure, no transportation expenses qualify as a deduction b. What are the rules for foreign travel? Transportation expenses must be allocated between business and personal unless: The taxpayer is away from home for seven days or less, or Less than 25 percent of the time was for personal purposes Travel days are considered business days • Weekends, legal holidays and intervening days are business days if both the preceding and succeeding days are business days • If trip is primarily for pleasure, no transportation expenses are deductibl e Education expenses 1. For self-employed taxpayers, explain the following general requirements for deductibility of education expenses. a. Legal requirements to keep a job Taxpayers can deduct education expenses if the education is required by law. If, however, the required education is the minimum degree required for the job, no deduction is allowed. b. Maintaining or improving existing skills Business consultant may be permitted to deduct the cost of obtaining an advanced degree on the gorunds that the advanced management educations undertaken to maintain and improve existing management skills. They can also deduct the cost of specialized, nondegree management courses to maintain or improve existing skills 2. Education expenses, again for self-employed taxpayers, are not deductible in which cases? o To meet the minimum educational standards for qualification in the taxpayer’s existing job o To qualify the taxpayer for new trade or business 3. Also, for self-employed taxpayers, what types of expenses are allowable or non-allowable? Expenses allowed: Tuition o Books o Supplies o Transportation (e.g., from the office to school) o Travel (e.g., meals and lodging while away from home at an executive education training program) 4. Can employees deduct non-reimbursed education expenses? no 5. Deduction for AGI (§222) Educator expenses, interest on students loans, jib-related education expenses a. What types of expenses are allowable under §222? Qualified tuition and related expenses

b. Does the expense need to be employment related? no c. Who is allowed to take the §222 deduction? d. Review Table 9.1 (pg. 9-16) for limitations. Summarize. Home office 1. State the requirements for deducting home office expenses. The principal place of business for any trade or business of the taxpayer , or A place of business used by clients, patients, or customers 2. Define principal place of business. Home office qualifies as a principal place of business if: Taxpayer conducts administrative and management activities in the home office, and There is no other fixed location where taxpayer conducts these activities 3. Explain the exclusive use requirement. The part of the home must be used solely for business purposes. An exception allows mixed use (both business and personal) of the home if a licensed day- care business is involved 4. Regular method a. Distinguish between direct expenses and indirect expenses. Give examples of each. Direct expenses benefit only the business part of the home and are deducted in full (e.g.., repainting the office). Indirect expenses are for maintaining and operating the home (e.g., utilities and insurance) and it allowable for business and personal b. Explain the ordering of deductions. Allowable home office expenses cannot create a loss Amounts allowed as itemized deductions must be deducted first o For example, mortgage interest and real estate taxes c. What is the limit on deductibility? Since no more than 300 square feet can be counted, the maximum deduction is limited to $1,500 d. How are home expenses deducted on the tax return? Home office expenses of a self-employed individual are trade or business expenses and are deductible for AGI 5. Briefly explain the simplified method. A home office expense deduction of $5 per square foot is allowed o Since no more than 300 square feet can be counted, the maximum deduction is limited to $1,500 o Various rules governing the use of the simplified method are: No depreciation on the residence can be claimed Actual expenses of maintaining and operating the home are ignored Office in the home deduction in excess of the net income from the business cannot be carried over to a future year Discuss the rules for deductibility of moving expenses beginning in 2018. The TCJA of 2017 suspended the deduction for moving expenses from 2018 through 2025 o However, during this period, the moving expense deduction is retained for members of the Armed Forces (or their spouse or dependents) on active duty who move because of a military order that relates to a permanent change of station o The rules providing for exclusions of amounts attributable to in-kind moving and storage expenses (and reimbursements or allowances for these expenses) also remain in place for these individuals Entertainment and meal expenses

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1. Explain the types of business entertainment expenses that are not deductible. An activity generally considered to be entertainment, amusement, or recreation o Membership dues with respect to any club organized for business, pleasure, recreation, or other social purposes, or o A facility (or portion thereof) used in connection with any of the above items 2. Explain the 50% rule for food and beverage expenses. Taxpayers may still generally deduct 50% of the food and beverage expenses associated with operating their trade or business 3. What are the exceptions to the 50% rule? o Case where the full value of meals is included in the compensation of the employee o Expenses directly related to business meetings of employees o Employer-paid recreational or social activities for employees For example, the annual holiday party or spring picnic o Meals provided to participants at a business’s retreats and/or other off-site training events 4. Detail the requirements for deductibility of business meals. o Business meal is deductible only if all the following conditions are met: The meal is business-related The expense is reasonable (i.e., not lavish or extravagant) The taxpayer (or an employee) is present at the meal The food and beverages are provided to a current or potential business customer or client If combined with entertainment, the meal and beverages cost is separately itemized on the bill or receipt Discuss the rules regarding deductibility of business gifts, including limitations. o Business gifts are deductible only to the extent of $25 per done per year o If the value is $4 or less (e.g., pen with the employee’s or company’s name on them) or promotional materials, then not subject to $25 limit o Records must be maintained to substantiate business gifts Discuss the rules regarding deductibility of educator expenses. • Modest relief is provided for elementary and secondary school educators, allowing them to claim up to $250 of these expenses as a deduction for AGI o Eligible educators must work at least 900 hours during a school year as a teacher, an instructor, a counselor, a principal, or an aide o Covered costs include unreimbursed expenses for professional development courses, books, supplies, computer and other equipment, and supplementary materials used in the classroom 401(k) plans 1. What are 401(k) plans? Allows participants to elect to receive uo to $19500, in 2020 in cash (taxed currently or to have a contribution made to their behalf to a profit sharing or stock plan 2. Briefly describe how contributions, earnings, and distributions are taxed. Any employee-elected 401 (K) plan contribution are pretax amounts that are excluded from gross-income in the year of the deferral: they are 100% vested on behalf of the employee Individual retirement accounts (IRAs) 1. What is an IRA? Employees not covered by another qualified plan can establisch their own tax-deductible 2. For 2020, what is the contribution ceiling? Be sure to also briefly discuss the special rules that apply for a taxpayer who is an active participant in a qualified plan. Contribution ceiling for 2020 is the lesser of $6,000 ($12,000 for spousal IRAs) or 100% of compensation o Person age 50 or over by year end may make catch-up contributions

Max contribution limit is increased by $1,000 each year • Deductible IRA contribution may be reduced if taxpayer is an active participant in another qualified plan 3. Briefly describe how contributions, earnings, and distributions are taxed for a traditional IRA. Contribution ceiling for 2020 is the lesser of $6,000 ($12,000 for spousal IRAs) or 100% of compensation o Person age 50 or over by year end may make catch-up contributions Max contribution limit is increased by $1,000 each year 4. Briefly describe how contributions, earnings, and distributions are taxed for a Roth IRA. Contributions are nondeductible Other distributions may be taxable Distributions first treated as nontaxable return of capital to extent of contributions Remaining distribution treated as taxable payout of earning Miscellaneous itemized deductions 1. Review miscellaneous itemized deductions subject to 2% floor on pg. 9-35 and list those deductions you think are most common among taxpayers. Are these expenses deductible? Union dues and uniform works, all unreimbursed employee expenses of producing rent and royalties, professional dues and subscritptions. They are not deductible 2. Review miscellaneous itemized deductions not subject to 2% floor on pg. 9-35 and list those deductions you think are most common among taxpayers. Are these expenses deductible? Gambling losses to the extent of gamblings winnings, amortizable- premium on taxable bonds, yes they are deductible

CH9 outline

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