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EMPLOYEE EXPENSES & DEFERRED COMPENSATION (1 of 2)

EMPLOYEE EXPENSES & DEFERRED COMPENSATION (1 of 2). Classification and limitations of employee expenses Travel expenses Transportation expenses Entertainment expenses Reimbursed employee business expenses. EMPLOYEE EXPENSES & DEFERRED COMPENSATION (2 of 2). Moving expenses

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EMPLOYEE EXPENSES & DEFERRED COMPENSATION (1 of 2)

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  1. ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  2. EMPLOYEE EXPENSES & DEFERRED COMPENSATION (1 of 2) • Classification and limitations of employee expenses • Travel expenses • Transportation expenses • Entertainment expenses • Reimbursed employee business expenses ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  3. EMPLOYEE EXPENSES & DEFERRED COMPENSATION (2 of 2) • Moving expenses • Education expenses • Office in home expenses • Deferred compensation • Tax planning considerations • Compliance and procedural considerations ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  4. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  5. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  6. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  7. Travel Expenses • Deductibility of travel expenses • Definition of travel expenses • General qualification requirements • Business vs. pleasure • Foreign travel • Additional limitations on travel expenses ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  8. Deductibility of Travel Expenses • Depends on nature of expenditure and if employee reimbursed • Taxpayers engaged in ToB or production of rents or royalties • Travel expenses deductible for AGI • Employee • Deduction for AGI if reimbursed • 2% misc. deduction if not reimbursed ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  9. Definition of Travel Expenses • Includes • Transportation, meals, & lodging related to a ToB, 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  10. General Qualification Requirements (1 of 2) • Away-from-tax-home requirement • Tax home is work location • Assignment must be temporary • Assignment not temporary if • Assignment indefinite OR • Expected to last > 12 months ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  11. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  12. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  13. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  14. Additional Limitations onTravel 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  15. Transportation Expenses • Definition and classification • Treatment of automobile expenses • Reimbursement of automobile expenses • Excess expenses over reimbursement deductible as 2% misc itemized deductions ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  16. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  17. Definition and Classification(2 of 2) • Commuting costs between home and temporary work site deductible if taxpayer has regular place of business ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  18. Treatment of Automobile Expenses • Standard mileage rate $0.50/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] ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  19. Entertainment Expenses • 50% disallowance for meal and entertainment expenses • Classification of expenses • Business meals • Entertainment facilities and club dues • Business gifts • Limitations on entertainment tickets ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  20. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  21. Business Meals • Business meals must meet “directly related to” or “associated with” tests • Cannot be lavish or extravagant for circumstances ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  22. Entertainment Facilities and Club Dues • No deduction permitted for costs related to maintenance of entertainment, amusement, or recreation facilities • No deduction for club dues ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  23. Business Gifts • Generally annual ceiling of $25/donee • Exceptions include • Employee achievement awards < $400 • Gift from employer to employee’s survivor ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  24. Limitations on Entertainment Tickets • 50% limitation applies to face value of ticket • Further restrictions on skyboxes ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  25. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  26. Reimbursed Employee Business Expenses (2 of 2) • Non-Accountable Plan • Reimbursement taxable • Deductions miscellaneous subject to 2% of AGI floor • Employee subject to 50% M&E limitation • Per diem allow. for Meals & Lodging • IRS has special tables • Substantiation less burdensome ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  27. Moving ExpensesDistance and Duration Requirements • New job at least 50 miles farther from taxpayer’s old residence • New employee must be employed full-time at new location for 39 weeks out of year following the move • 78 weeks for self-employed individuals ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  28. Moving ExpensesDefinition of Moving Expenses • For AGI deduction • Qualified expenses • Cost of moving household good and personal effects from old to new home • Includes storage if < 30 days • Cost of traveling from old to new home • Includes lodging, but not meals • $0.24/mile or actual expenses allowed for car ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  29. Education Expenses(1 of 3) • Classification of education expenses • See Table 3 • Deduction for higher ed expenses • $4,000 for AGI deduction in 2010 • If AGI between $65K-$80K ($130K-$160K for MFJ), $2,000 deduction • No ded. if AGI > $80K ($160K for MFJ) ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  30. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  31. 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 12/31/2010 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  32. Office in Home ExpensesGeneral Requirements • Must meet one of requirements and be used on exclusive and regular basis • Office used as principal place of business for any ToB • Includes doing administrative work if no other fixed location available • Place for meeting clients in normal course of business • Located in separate structure ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  33. Office in Home ExpensesDeduction 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  34. Office in Home ExpensesDeduction and Limitations (2 of 2) • Order of expense deductions • Expenses not related to home office • Expenses directly related to home office • Pro-rata portion of indirect expenses • E.g, mortgage, interest, utilities, insurance • Disallowed expenses carried forward to future year ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  35. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  36. Deferred Compensation(2 of 3) • Employee stock options • Plans for self-employed individuals • Traditional Individual Retirement Account (IRA) • Roth IRA • Coverdell education savings account ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  37. Deferred Compensation(3 of 3) • Health savings accounts • Simplified plans ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  38. Qualified Pension and Profit-Sharing Plans • Pension plans • Defined benefit • Defined contribution • Profit-sharing plans • Include 401(k) plans • Stock bonus plans • DC plan where investments invested in company stock ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  39. 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 >$110K • Contributions proportionate to comp • Coverage requirements • Vesting requirement ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  40. 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 pre-tax earnings • Use exclusion ratio if contributions from after-tax earnings ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  41. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  42. Employee Stock OptionsIncentive Stock Options (ISOs) • No tax to employee on exercise date • LTCG treatment when employee sells stock • (amount realized – exercise price) • Employer receives no deduction ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  43. Employee Stock OptionsNonqualified Stock Options (NQSOs) • Nonqualified stock options (NQSOs) • Employee recognizes compensation income on exercise date • (FMV – exercise price) • Employer receives deduction on exercise date ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  44. Plans for Self-employed Individuals • H.R. 10 plans • Also called Keogh plans • Generally same contribution and benefit limits as other qualified plans ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  45. 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 ≤ $56K (or ≤ $89K for MFJ) • Spouse active participant, but AGI ≤ $167K ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  46. Traditional IRA(2 of 2) • Phase out for active participants • AGI $55K - $65K • $89K - $99K for MFJ • $167K - $177K for MFJ if spouse active • Deduction for non-working spouse • $5,000 (or $6,000 if ≥ age 50 • All distributions taxable • Unless some contributions nondeductible ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  47. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  48. Roth IRA(2 of 2) • Contribution phase-out AGI limitations • $105,000 - $120,000 for Single • $167,000 - $ 177,000 for MFJ • Qualified distributions nontaxable ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  49. 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 & Lifetime learning credits ©2011 Pearson Education, Inc. Publishing as Prentice Hall

  50. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

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