Essentials of taxation 2016 cengage chapter 11

Meals and Lodging– Furnished by employer • On employer’s business premises • For convenience of employer – In the case of lodging, employee is required to accept lodging as a condition

Chapter 11

Individuals as Employees

and Proprietors

The Big Picture (slide 1 of 3)

• Mark and Mary Herman come to you for tax advice.

• Mark Herman is a self-employed consultant.

– Last year, Mark’s business generated revenue of $165,000

and incurred expenses of $18,000 for rent and utilities

– Mark also spent $8,000 purchasing depreciable equipment – He paid a part-time secretary $12,000 for administrative

work

– He hired an assistant and paid her $40,000

–

The Big Picture (slide 2 of 3)

• Mary (Mark’s wife) also works as a consultant but for

a large firm

– Her salary last year was $85,000

– Mary’s employer paid $3,000 of premiums for her health

insurance and provided $50,000 of group term life

insurance.

– Mary is not covered by a qualified retirement plan.

• She contributed $5,500 to a traditional IRA

– Mary routinely travels for her job.

• She was reimbursed by her employer for all travel expenses

– In addition, Mary spent $500 on other unreimbursed

The Big Picture (slide 3 of 3)

items?

they incurred?

that the couple may be missing or tax issues

of which they should be aware?

Employee vs Self-Employed

(slide 1 of 2)

are deductible for AGI

– Reported on Schedule C

employees are generally deductible from AGI

subject to 2% of AGI floor

– Reported on Form 2106 (Employee Business

Expenses) and Schedule A (Itemized Deductions)

Employee vs Self-Employed

(slide 2 of 2)

– Subject to will and control of another with respect

to what shall be done and how it shall be done

– Another furnishes tools or the place of work

– Income based on time spent rather than task

performed

– Other factors

The Big Picture – Example 1 Self-employed Individual

• Return to the facts of The Big Picture on p 11-1

• Mark is a consultant whose major client accounts for

60% of his billings

– He does the routine consulting work at the client’s request.– He is paid a monthly retainer in addition to amounts

charged for extra work.

• Mark is a self-employed individual

– Even though most of his income comes from one client, he

still has the right to determine how the end result of his

work is attained.

The Big Picture – Example 2 Employee Vs Self-employed

• Return to the facts of The Big Picture on p 11-1

to assist him in the performance of services for the client mentioned in Example 1

her work and pays her an hourly fee

Advantages of Qualified

Fringe Benefits

by employer

from employee’s gross income

Employer-Sponsored Accident and Health

Plans (slide 1 of 2)

coverage of employee, spouse, and

dependents are not taxable to employee

taxable when received for medical care or for permanent loss of body part or

Employer-Sponsored Accident and Health

Plans (slide 2 of 2)

Code’s definition of medical care must be

included in gross income

deducted on a prior return must be included in

gross income

Long-Term Care Insurance (slide 1 of 2)

• Employer paid insurance premiums for employee’s long-term

care are excludible subject to annual limits as follows:

Long-Term Care Insurance (slide 2 of 2)

limited to the greater of:

• $330 in 2014 for each day patient receives long-term

care (indexed amount for 2013 is $320)

• The actual cost of the care

– Reduced by any amounts received from other third

parties (e.g., damages received)

Meals and Lodging

– Furnished by employer

• On employer’s business premises

• For convenience of employer

– In the case of lodging, employee is required to

accept lodging as a condition of employment

Meals and Lodging

– Furnished by employer

• On employer’s business premises

• For convenience of employer

– In the case of lodging, employee is required to

accept lodging as a condition of employment

Meals and Lodging

– Furnished by employer

• On employer’s business premises

• For convenience of employer

– In the case of lodging, employee is required to

accept lodging as a condition of employment

Meals and Lodging

– Furnished by employer

• On employer’s business premises

• For convenience of employer

– In the case of lodging, employee is required to

accept lodging as a condition of employment

Group Term Life Insurance

life insurance are excluded from gross income

– For each $1,000 of coverage in excess of $50,000, the

employee must include the amounts calculated using the

IRS tables

• If plan discriminates in favor of certain key

employees (e.g., officers), they are not eligible

for the exclusion

Group Term Life Insurance

Other Fringe Benefits

– Value of use of athletic facilities located on

employer premises can be excluded

Other Fringe Benefits

(slide 2 of 3)

– Employer-provided educational assistance for

undergraduate and graduate education is excludible

• Exclusion limited to $5,250 per year

• Includes tuition, fees, books, and supplies

Other Fringe Benefits

(slide 3 of 3)

– Employee adoption expenses paid or reimbursed

by employer are excludible

• Exclusion limited to $13,400

• Exclusion phases-out as AGI increases from $201,010

to $241,010

Cafeteria Plans

certain nontaxable benefits

– If cash is chosen, the amount received is taxable

– If a nontaxable benefit is chosen, the benefit

remains nontaxable

employee pay package to fit individual needs

Flexible Spending Plans

compensation in return for employer agreeing

to pay certain costs without the employee

recognizing income

– Called a use or lose plan since reduction in pay

cannot be recovered if covered expenses are less

than expected

Classes of Nontaxable Employee Benefits

• De minimis fringes

No Additional Cost Services

– Employee receives services (not property)

– Employer incurs no substantial additional cost in

providing the services

– Services offered are within line of business in

which employee works

– Benefit is offered on nondiscriminatory basis

Qualified Employee Discounts

– Discount is not on realty or investment property

– Item discounted is from same line of business in

which employee works

– Discount cannot exceed gross profit on property or

20% of the customer price on services

– Benefit is offered on nondiscriminatory basis

Working Condition Fringes

cost of item if they had actually paid for them

– Includes personal use of auto by full-time auto

salespeople and employee business expenses that

would be eliminated by the 2% floor on

miscellaneous deductions

De Minimis Fringes (slide 1 of 2)

accounting for them is impractical

• Supper money

• Occasional personal use of company copying

machine

• Company cocktail parties

• Picnics for employees

De Minimis Fringes (slide 2 of 2)

employer are excluded if:

– Located on or near employer’s premises

– Revenue equals or exceeds direct operating costs

– Nondiscrimination requirements are met

Qualified Transportation Fringes

• This fringe benefit is designed to encourage the use of

mass transit for commuting to work

– Includes:

• Transportation in commuter highway vehicle and transit passes

– Limit on the exclusion for 2014 is $130 per month

• Qualified parking

– Limit on the exclusion for 2014 is $250 per month

• Qualified bicycle commuting reimbursement

– Can exclude up to $20 per month received from an employer as

reimbursement for the cost of commuting by bicycle

» i.e., Bicycle purchase, improvement, repair, and storage

Qualified Transportation Fringes

• This fringe benefit is designed to encourage the use of

mass transit for commuting to work

– Includes:

• Transportation in commuter highway vehicle and transit passes

– Limit on the exclusion for 2015 is $130 per month

• Qualified parking

– Limit on the exclusion for 2015 is $250 per month

• Qualified bicycle commuting reimbursement

– Can exclude up to $20 per month received from an employer as

Qualified Transportation Fringes

• This fringe benefit is designed to encourage the use of

mass transit for commuting to work

– Includes:

• Transportation in commuter highway vehicle and transit passes

– Limit on the exclusion for 2015 is $130 per month

• Qualified parking

– Limit on the exclusion for 2015 is $250 per month

• Qualified bicycle commuting reimbursement

– Can exclude up to $20 per month received from an employer as

reimbursement for the cost of commuting by bicycle

» i.e., Bicycle purchase, improvement, repair, and storage

Moving Expenses

employee’s qualified moving expenses is

excludible

– No deduction by employee is allowed for

reimbursed moving expenses

Qualified Retirement Planning Services

information provided by employer who

maintains a qualified retirement plan is

excluded from income

– Designed to motivate more employers to provide

retirement planning services

Nondiscrimination Provisions

employee discounts, and qualified retirement

planning services

– If the plan is discriminatory in favor of highly

compensated employees, these key employees are

denied exclusion treatment

– Non-highly compensated employees can still

Foreign Earned Income

(slide 1 of 2)

country can be excluded from income

– A bona fide resident of foreign country, or

– Present in foreign country at least 330 days during

any 12 consecutive months

Foreign Earned Income

(slide 2 of 2)

2015

– For married persons, both of whom have foreign

earned income, the exclusion is computed

separately for each spouse

Transportation Expenses

(slide 1 of 2)

and commuting to/from temporary work

place

nondeductible

– Automatic mileage method

• 57.5 cents per mile for business miles for 2015

– Adjustment to basis of auto is required for depreciation

considered allowed

• Plus parking, tolls, etc.

• Adequate documentation of mileage required

Travel Expenses

(slide 1 of 2)

– Expenses while “away from tax home” overnight

on business

– Includes transportation, lodging, 50% meals, and

miscellaneous expenses

Travel Expenses

(slide 2 of 2)

– Need not be a 24-hour period but must be longer

than ordinary work day and taxpayer will need to

rest during release time

– Being “away” should be a temporary situation (not

in excess of 1 year)

– “Tax Home” generally means business location,

post, or station of the taxpayer

Combined Business/Pleasure Travel

(slide 1 of 4)

deductible

– Meals, lodging and other expenses must be

allocated between business and personal days

on whether the trip is domestic or foreign

Combined Business/Pleasure Travel

(slide 2 of 4)

– If primary purpose of trip is business,

transportation is deductible in full

– If primary purpose is pleasure, no deduction for

transportation allowed, but other expenses (e.g.,

lodging) associated with business days are

deductible

Combined Business/Pleasure Travel

(slide 3 of 4)

– Transportation expenses must be allocated between

business and personal unless:

• Trip is 7 days or less,

• Less than 25% of time was for personal purposes, or

• Taxpayer had no substantial control over arrangements

for the trip

Combined Business/Pleasure Travel

(slide 4 of 4)

are business days if both the preceding and

succeeding days are business days

transportation expenses are deductible

Moving Expenses

commencement of work at a new principal

Moving Expenses - Distance Test

least 50 miles farther than from old home to

old job

Example of Distance Test

from her old job

miles from her old

home

distance test

Old Job

Old Job

Old Residence

Old Residence

20 mi.

Moving Expenses - Time Test

(slide 1 of 2)

weeks in the 12-month period following the

move, or

78 weeks during the next two years following

the move

– 39 of the weeks must be in the first 12 months

transferred

Moving Expenses - Time Test

(slide 2 of 2)

alternatives:

– Take the deduction in year moved If test is not met

in following year, either:

• Include the amount deducted in gross income in the

following year, or

• File amended return for year of move

Deductible Moving Expenses

reasonable expenses of:

– Moving household goods and personal effects to

new location

– Expenses of travel for taxpayer and family to new

location

• Lodging

• Actual auto costs (not depreciation) or mileage rate of

23 cents per mile for each car in 2015

– Meals are not deductible as moving expense

Tax Treatment of Moving Expenses

for AGI

– For qualified moving expenses, amount is

excluded from gross income, but no deduction for

related expenses

– For nonqualified moving expenses, amount is

Education Expenses

(slide 1 of 3)

self-employed individual are deductible as business expenses if they are incurred:

– To maintain or improve existing skills, or

– To meet express requirements of the employer or

requirements imposed by law to retain

employment status

Education Expenses

(slide 2 of 3)

business expense if they are incurred:

– To meet minimum educational standards for

existing job, or

– To qualify taxpayer for new trade or business

Deduction For Qualified Tuition and

Related Expenses (slide 1 of 3)

tuition and related expenses involving higher

education (i.e., postsecondary)

Deduction For Qualified Tuition and

Related Expenses (slide 2 of 3)

status and AGI

Filing Status AGI Limit Max Deduction

Deduction For Qualified Tuition and

Related Expenses (slide 3 of 3)

whatever is required for enrollment

– Usually, student activity fees, books, room and

board are not included

filing separately

Entertainment Expenses

(slide 1 of 2)

possibilities

– Deductible amount allowed:

• 50% of meals and entertainment costs including related

taxes, tips, cover charges, parking fees, and room rental fees

• 100% of transportation costs

– Amounts cannot be lavish or extravagant

Entertainment Expenses

(slide 2 of 2)

either:

– Directly related to business

• Actual business meeting or discussion occurs

during meal or entertainment

– Associated with business

Restrictions on Entertainment Expenses

(slide 1 of 2)

• Exception: Clubs formed for public service and

community volunteerism (e.g., Kiwanis, Rotary)

club are still deductible (50%)

Restrictions on Entertainment Expenses

(slide 2 of 2)

– Business gifts of tangible personalty with a value

of $25 or less per person per year are deductible

• Incidental costs (e.g., gift-wrapping) are not included in

the cost of the gift in applying the limit

– If the value is $4 or less (e.g., pen with company

name) then not subject to $25 limit

Office in the Home

• The principal place of business, or

• A place of business used by clients, patients, or

customers

– For employees, office must also be for the

convenience of the employer

Office in the Home

(slide 2 of 3)

– Home office qualifies as a principal place of

business if:

• Taxpayer conducts admin and mgmt activities in the

home office, and

• There is no other fixed location where taxpayer

conducts these activities

Office in the Home

(slide 3 of 3)

loss from the business activity

– Office in home deduction limited to business gross

income in excess of other business expenses

(ordering rules apply)

– Excess is carried forward (subject to limit)

– Form 8829 is used to report office in home

expenses

Other Employee Expenses

are deductible includes:

– Special clothing (uniforms)

– Union dues

– Professional expenses

– Job hunting in same profession

– Educator expenses (deductible for AGI)

Other Employee Expenses

are deductible includes:

– Special clothing (uniforms)

– Union dues

– Professional expenses

– Job hunting in same profession

– Educator expenses (deductible for AGI)

• Limited to $250 per year for supplies, etc of