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

Reimbursed Employee Business Expenses

• Accountable Plan

• Non-Accountable Plan

• Per Diem Allowances for Meals and Lodging

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

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 $3,000 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 $3,000 for themselves and $3,000 for the non-working spouse

Roth IRA• Referred to as “Back Loaded IRA”• Nondeductible• Maximum contribution is $3,000 – If qualify for both Traditional and Roth

maximum contribution for both is $3,000

• 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 IRACoverdell Education savings

Account

• Nondeductible contribution • Maximum contribution = $2,000 year until

the age of 18• Elementary, Secondary and higher

education expenses• Distributions are excluded from gross

income if they do not exceed qualified 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 $8,000 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