1. Employee Expenses and Deferred Compensation
Chapter 9
Employee Expenses and Deferred Compensation 1

2. 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 2

3. 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 2

4. Classification Of Employee Expenses
Nature of employment relationship
Limitations on Unreimbursed employee expenses 3

5. Nature Of Employment Relationship
Significant tax consequences flow from the characterization of a taxpayer as an employee
Vs.
Self-employed (independent contractor) 4

6. 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 5

7. 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 6

8. 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 7

9. 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 8

10. Transportation Expenses
Definition and classification
Treatment of automobile expenses
Reimbursed expenses
Reporting considerations
Requirement to allocate expenses
Reimbursement of automobile expenses 9

11. 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 10

12. Entertainment Expenses
Partial disallowance for meal & entertainment expenses (50%)
Classification of expenses
Business meals
Entertainment facilities & club dues
Business gifts
Limitations on entertainment tickets 12

13. Reimbursed Employee Business Expenses
Accountable Plan
Non-Accountable Plan
Per Diem Allowances for Meals and Lodging

14. 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 11

15. Education Expenses Classification of education expenses
General requirements for a deduction 13

16. Office In Home Expenses
General requirement for a deduction
Deduction and limitations 14

17. 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 15

18. 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) 16

19. 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 17

20. 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 18

21. 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 19

22. Education IRA Coverdell 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 20

23. 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 21

24. 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 22

25. 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 23

26. 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 23