Chapter 9
Employee Expenses and
Deferred Compensation
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
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
Classification Of Employee
Expenses
? Nature of
employment
relationship
? Limitations on
Unreimbursed
employee
expenses
Nature Of Employment
Relationship
? Significant tax
consequences flow from
the characterization of a
taxpayer as an employee
Vs,
Self-employed
(independent contractor)
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
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
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
Definition Of Travel
Expenses
? Includes transportation,meals,
and lodging related to a trade,
business,or employee status
incurred while away from the
taxpayer’s tax home
? Deductible amount of travel
expenses may be reduced if
actual expenses are lavish or
extravagant
Transportation Expenses
? Definition and classification
? Treatment of automobile expenses
? Reimbursed expenses
? Reporting considerations
? Requirement to allocate expenses
? Reimbursement of automobile
expenses
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 employee’s 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
Entertainment
Expenses
? Partial disallowance for
meal & entertainment
expenses (50%)
? Classification of expenses
? Business meals
? Entertainment facilities &
club dues
? Business gifts
? Limitations on
entertainment tickets
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
taxpayer’s 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
Education Expenses
? Classification of
education
expenses
? General
requirements for
a deduction
? Other tax
changes
Office In Home Expenses
? General
requirement for a
deduction
? Deduction and
limitations
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
Individual Retirement
Accounts (IRAs)
? Traditional IRA
– Fully deductible IRA contributions
(lesser of $2,000 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)
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 $2,000 for themselves and
$2,000 for the non-working
spouse
Roth IRA
? Referred to as,Back Loaded IRA”
? Nondeductible
? Maximum contribution is $2,000
– If qualify for both Traditional and Roth
maximum contribution for both is
$2,000
? Subject to AGI phase-out limitations
– $95,000 & $110,000 for Single
– $150,000 & $160,000 for MFJ
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
Education IRA
? Nondeductible contribution
? Maximum contribution = $500 year
until the age of 18
? Distributions are excluded from
gross income if they do not exceed
qualified higher education expenses
Simple Retirement Plans
? Savings incentive match plan for
employees
? For employers with < 100 employees
who received at least $5,000 in
compensation
? Elective contributions up to $6,000
per year and requires employer to
make matching contributions
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
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
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
Employee Expenses and
Deferred Compensation
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
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
Classification Of Employee
Expenses
? Nature of
employment
relationship
? Limitations on
Unreimbursed
employee
expenses
Nature Of Employment
Relationship
? Significant tax
consequences flow from
the characterization of a
taxpayer as an employee
Vs,
Self-employed
(independent contractor)
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
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
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
Definition Of Travel
Expenses
? Includes transportation,meals,
and lodging related to a trade,
business,or employee status
incurred while away from the
taxpayer’s tax home
? Deductible amount of travel
expenses may be reduced if
actual expenses are lavish or
extravagant
Transportation Expenses
? Definition and classification
? Treatment of automobile expenses
? Reimbursed expenses
? Reporting considerations
? Requirement to allocate expenses
? Reimbursement of automobile
expenses
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 employee’s 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
Entertainment
Expenses
? Partial disallowance for
meal & entertainment
expenses (50%)
? Classification of expenses
? Business meals
? Entertainment facilities &
club dues
? Business gifts
? Limitations on
entertainment tickets
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
taxpayer’s 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
Education Expenses
? Classification of
education
expenses
? General
requirements for
a deduction
? Other tax
changes
Office In Home Expenses
? General
requirement for a
deduction
? Deduction and
limitations
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
Individual Retirement
Accounts (IRAs)
? Traditional IRA
– Fully deductible IRA contributions
(lesser of $2,000 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)
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 $2,000 for themselves and
$2,000 for the non-working
spouse
Roth IRA
? Referred to as,Back Loaded IRA”
? Nondeductible
? Maximum contribution is $2,000
– If qualify for both Traditional and Roth
maximum contribution for both is
$2,000
? Subject to AGI phase-out limitations
– $95,000 & $110,000 for Single
– $150,000 & $160,000 for MFJ
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
Education IRA
? Nondeductible contribution
? Maximum contribution = $500 year
until the age of 18
? Distributions are excluded from
gross income if they do not exceed
qualified higher education expenses
Simple Retirement Plans
? Savings incentive match plan for
employees
? For employers with < 100 employees
who received at least $5,000 in
compensation
? Elective contributions up to $6,000
per year and requires employer to
make matching contributions
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
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
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
