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Chapter 8 Employee Business Expense Current Requirements for Educational Deductions Educational expenses are deductible if undertaken to maintain or improve skills Note: no deduction for meeting minimum job requirements general education (nonspecific to job)

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current requirements for educational deductions
Current Requirements for Educational Deductions
  • Educational expenses are deductible if undertaken to
    • maintain or improve skills
      • Note: no deduction for
      • meeting minimum job requirements
      • general education (nonspecific to job)
      • education that qualifies TP for new job
    • or meet express requirement of employer or applicable law in order to keep job or rate of pay
    • Examples 1, 2, 3
current requirements for educational deductions3
Current Requirements for Educational Deductions
  • General denial of travel as a form of education
  • Leave of absence for one year is OK
  • Deductible costs
  • Reimbursed expenses--deduct for AGI
  • From AGI--tuition, fees, typing, books, supplies, and qualifying travel and/or transportation
  • Page 3
transportation expenses
Transportation: Expenses
  • What are transportation expenses?
    • Business related expenses such as:
      • Oil, gas and repairs
      • Auto taxes, licenses, insurance, interest, and depreciation
      • Parking and tolls
      • Public transportation
  • Deductibility
    • Reimbursed employee transportation expense are deductible for AGI
    • Unreimbursed expenses are deductible from AGI, as misc. itemized deductions (subject to 2% floor)
    • Commuting expenses are generally disallowed
transportation problem areas
Transportation:Problem Areas
  • Commuting is generally not deductible, but what if:
    • Carrying tools, ect.
    • There is no permanent job location
    • Commuting away from normal job area
    • Commuting directly to client
    • Commuting directly between different job sites, or job site and school
    • Examples 10 through 23
    • Exhibit 8-1
transportation computing the deduction
Transportation:Computing the Deduction
  • Two methods for deducting auto expenses:
    • Actual expense method
    • Standard mileage rate
  • Actual expense method:
    • Separate expenses into
      • General expenses- gas, repairs, ins., dep., interest, taxes, etc.
      • Specific business expenses- parking, tolls
    • General expenses must be apportioned between business and personal use according to mileage.
transportation computing the deduction7
Transportation:Computing the Deduction
  • Standard mileage rate
    • 2000- 32.5¢ per mile
    • Rate includes amounts for gas, oil, repairs, depreciation, insurance, etc.
    • Rate does not include amounts for interest (if self employed), taxes, parking, or tolls--the business-related portion of these expenses may be added
    • Who may use?
      • Not available for “fleet” vehicles or cars for hire
      • May use only if used in 1st year car placed in service
      • No accel. dep/Sec.179 expensing may have been claimed in a prior yr
transportation computing the deduction8
Transportation:Computing the Deduction

Actual expense method example:

An employee, paid the following amounts for his car during 2000. He drove 7,500 miles for business and 15,000 miles in total. What is his automobile expense deduction?

Gas & Oil $2,000

Repairs 350

Car Insurance 700

Car Loan Interest 1,200

Parking at Client’s 50

transportation computing the deduction9
Transportation:Computing the Deduction

Answer using the actual expense method:

Gas & Oil $2,000

Repairs 350

Car Insurance 700

Total $2,050

* If self-employed, employee would be able to deduct the $600 business portion of the interest. Total ded. = $1,675

transportation computing the deduction10
Transportation:Computing the Deduction

Answer using the standard mileage rate method:

7,500 business miles x 32.5¢ per mile = $2,437.50

If the employee IS NOT self-employed:

$2,437.50 + $50 parking = $2,487.50 deduction

If the employee IS self-employed:

$2,437.50 + ($1,200 interest x 7,500 miles) + $50 parking

15,000 miles

= $3,087.50

slide11

Old Job

New Job

  • Moving Expenses: Eligibility

Distance Test

X = distance

  • Time Test
  • If an employee, TP must work full-time for at least 39 weeks out of next 52
  • If self-employed, TP must work full-time for at least 78 of next 104 weeks, including 39 weeks of 1st 52 weeks
  • Exceptions:
    • TP dies or becomes disabled
    • TP involuntarily terminates or is transferred by employer

X

Old Residence

> X + 50

slide12
Moving Expenses

Deductible Moving Expenses

“Direct” moving expenses - unlimited deduction for:

Cost of moving household goods

TP’s & family’s travel expenses (transportation costs of 10 cents/mile, or actual gas, oil, tolls, parking), lodging, but no meals

Classification of the deduction

Deductible for AGI

If reimbursed, exclude qualifying expenses

Reimbursement of nonqualifying expenses included in income

moving expenses example
Moving Expenses Example
  • TP & family moves 2,200 miles to new job. TP & family drove personal car to new city. Moving costs included:
    • Transportation of household goods $2,500
    • Meals while enroute to new job $200
    • Lodging while enroute to new job $250
    • Pre-move house hunting $1,400
    • Temporary living expenses in new city $1,800
    • Selling costs of old residence $7,500
    • Reimbursement from employer $6,348
moving expenses example14
Moving Expenses Example
  • Actual
  • Expenses Deductible
  • Transp. of house-hold goods 2,500 2,500
  • Transp. ($.10/mi)(2,200mi) 220 220
  • Travel:
  • Meals 200 0
  • Lodging 250 250
  • Pre-move house hunt 1,400 0
  • Temporary living expenses 1,800 0
  • Selling house expenses 7,500 0
  • $13,870 $2,970
  • Notes:
    • Employee claims moving expense on Form 3903
    • The $7,500 selling expense will lower the amount realized on the sale of the house
    • The $2,970 of eligible expenses are excluded from income as a fringe benefit
    • The remainder of $3,400 ($6,370 - 2,970) appears on the W-2 as “other income”
    • Examples 4, 5, 6
business use of a home section 280a
Business Use of a Home Section 280A
  • General Rule: No deductions
  • Exceptions: Deduction allowed for portion of dwelling used exclusively on a regular basis as a:

Principal place of business for any T/B or

Place for conducting administrative or management activities of a business if there is no other fixed location where the TP conducts a substantial amount of these activities or

Place where the TP meets clients, patients, or customers on a regular basis or

In case of a structure not attached to the dwelling, used in connection with a TP’s T/B and

If the TP is an employee, deduction is allowed only if exclusive use is for “convenience of the employer”

Examples 7, 8, 9

business use of a home section 280a16
Business Use of a HomeSection 280A
  • Certain storage use of the house

Exceptions: Deduction allowed for portion of dwelling used exclusively on a regular basis for:

Day Care Use of Home

Allocated expenses X (No. hours day care per week/No. hours available: 168)

EXAMPLE

$4,000 qualifying home expenses

25% of home (floor space) used for day care

Step 1: $4,000 qualifying expenses X 25% = $1,000 allocated expenses

Step 2: $1,000 X (50/168 hrs.) = $297.62 allowable deduction

business use of a home limitations on deductions
Business Use of a Home Limitations on Deductions
  • Expenses which are deductible
  • Business use of home deductions limited to gross income reduced by “otherwise allowable deductions”
    • Three-tiered order of deductions
    • (1) interest and taxes = “otherwise allowable”
    • (2) utilities and maintenance
    • (3) depreciation
example of home office deductions
Example of Home Office Deductions
  • A has an office in the home that qualifies for deductions under Sec. 280A. A has a separate business phone and occasional secretarial assistance. A also has a gardener for care of the lawn around the home. A determines that 10% of the dwelling’s expenses are allocable to the office.
  • A’s gross income from the related business activity 1900
  • Less:
    • expense for secretary 500
    • business phone 150
    • supplies 200
  • Total expenditures not allocable to use of the office (850)
  • Business inc. from the unit $1050
example of home office deductions19
Example of Home Office Deductions
  • Income from Business (carry forward) 1,050
  • Deductions allowed first:
  • Allocable
  • Totalto Office
  • Mortgage interest 5,000 500
  • Real estate taxes 2,000 200
  • Amount allowable (700)
  • Limit on further deductions 350
example of home office deductions20
Example of Home Office Deductions
  • Allocable
  • Total to office
  • Carry forward 350
  • Deductions allowed next:
  • Insurance 600 60
  • Utilities (except personal phone) 900 90
  • Lawn care 500 0
  • Amount allowable (150)
  • Limit on further deductions 200
  • Depreciation deduction:
  • Depreciation 3,200 320
  • Amount allowable (200)
  • Carryover of $120 to offset future home office earnings 0
example of home office deductions21
Example of Home Office Deductions
  • If A’s home office expenses are related to his/her work as an employee, deduct interest and taxes in full on Schedule A, and the other expenses as a Misc. Itemized Deduction subject to the 2% limitation.
  • If A is a proprietor deduct Interest, taxes and other expenses on Schedule C.
reimbursement of expenses

Reimbursed

Not Reimbursed

YES

NO

Reimbursement is:

1. Excluded from gross income (not reported on W-2), i.e. automatically deducted for AGI

2. Exempt from employment taxes

Reimbursement is:

1. Included in gross income (appears of W-2)

2. Subject to employment taxes

3. Deduct as a Misc. Item ded., (subject to 2% floor)

Reimbursement of Expenses

SELF-EMPLOYED

Report Business Expenses on Schedule C, Form 1040

EMPLOYED

Accountable plan?

Report as misc. itemized ded., subject to 2% floor

reimbursement of expenses23
Reimbursement of Expenses
  • Expenses greater than reimbursements: Report on Form 2106. TP must document all travel expenses to IRS for the year
  • “Accountable Plans” require that the:
    • Employee properly account (substantiate) for expenses to employer, (i.e., employer steps into IRS’s shoes)
    • Employee must return any reimbursements in excess of business-related expenses
    • Pages 42 - 45