Chapter 8 Employee Business Expense

Chapter 8 Employee Business Expense 1 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 2 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 3 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 4 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 5 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. 6 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 7 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 Repairs Car Insurance Car Loan Interest Parking at Client’s $2,000 350 700 1,200 50 8 Transportation: Computing the Deduction Answer using the actual expense method: Gas & Oil Repairs Car Insurance Total $2,000 350 700 $2,050 7,500 business miles   $2,050  $50 parking 15,000 totalmiles  $1,075deduction * * If self-employed, employee would be able to deduct the $600 business portion of the interest. Total ded. = $1,675 9 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 10 Moving Expenses: Eligibility Distance Test X = distance Time Test  If an employee, TP must work fulltime for at least 39 weeks out of next 52  If self-employed, TP must work fulltime 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 Old Job X Old Residence > X + 50 New Job 11 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 12 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 Meals while enroute to new job Lodging while enroute to new job Pre-move house hunting Temporary living expenses in new city Selling costs of old residence $2,500 $200 $250 $1,400 $1,800 $7,500 Reimbursement from employer $6,348 13 Moving Expenses Example Actual Expenses Transp. of house-hold goods Transp. ($.10/mi)(2,200mi) Travel: Meals Lodging Pre-move house hunt Temporary living expenses Selling house expenses Notes: Deductible 2,500 220 0 250 0 0 0 $2,970 2,500 220 200 250 1,400 1,800 7,500 $13,870 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 14 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 15 Business Use of a Home Section 280A Exceptions: Deduction allowed for portion of dwelling used exclusively on a regular basis for: Certain storage use of the house 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: Step 2: $4,000 qualifying expenses X 25% = $1,000 allocated expenses $1,000 X (50/168 hrs.) = $297.62 allowable deduction 16 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 17 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 business phone supplies Total expenditures not allocable to use of the office Business inc. from the unit 500 150 200 (850) $1050 18 Example of Home Office Deductions Income from Business (carry forward) Deductions allowed first: Total 5,000 2,000 1,050 Allocable to Office 500 200 (700) 350 Mortgage interest Real estate taxes Amount allowable Limit on further deductions 19 Example of Home Office Deductions Allocable Total to office Carry forward Deductions allowed next: Insurance Utilities (except personal phone) Lawn care Amount allowable Limit on further deductions Depreciation deduction: Depreciation Amount allowable Carryover of $120 to offset future home office earnings 350 600 900 500 60 90 0 (150) 200 3,200 320 (200) 0 20 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. 21 Reimbursement of Expenses SELF-EMPLOYED Report Business Expenses on Schedule C, Form 1040 EMPLOYED Reimbursed Accountable plan? YES Reimbursement is: 1. Excluded from gross income (not reported on W-2), i.e. automatically deducted for AGI 2. Exempt from employment taxes Not Reimbursed Report as misc. itemized ded., subject to 2% floor NO 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 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 businessrelated expenses Pages 42 - 45 23