Chapter 8 Employee Business Expense

1
Chapter 8Employee Business Expense
2
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

3
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

4
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

5
TransportationProblem 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

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TransportationComputing 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.

7
TransportationComputing 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

8
TransportationComputing 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 2,000 Repairs 350 Car
Insurance 700 Car Loan Interest 1,200 Parking at
Clients 50
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TransportationComputing the Deduction
Answer using the actual expense method
Gas Oil 2,000 Repairs 350 Car Insurance
700 Total 2,050
If self-employed, employee would be able to
deduct the 600 business portion of the interest.
Total ded. 1,675
10
TransportationComputing 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
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• Moving Expenses Eligibility

Distance Test X distance

• Time Test
• If an employee, TP must work full-time for at
  least 39 weeks out of next 52
• If self-employed, TP must work full-time 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

X
Old Residence
gt X 50
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• Moving Expenses
• Deductible Moving Expenses
• Direct moving expenses - unlimited deduction
  for
• Cost of moving household goods
• TPs familys 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

13
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 2,500
• Meals while enroute to new job 200
• Lodging while enroute to new job 250
• Pre-move house hunting 1,400
• Temporary living expenses in new city 1,800
• Selling costs of old residence 7,500
• Reimbursement from employer 6,348

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Moving Expenses Example

• Actual
• Expenses Deductible

Transp. of house-hold goods 2,500 2,500 Transp.
(.10/mi)(2,200mi) 220 220 Travel Meals 200 0
Lodging 250 250 Pre-move house
hunt 1,400 0 Temporary living expenses 1,800 0 S
elling house expenses 7,500
0 13,870 2,970 Notes 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
15
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 TPs 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
16
Business Use of a HomeSection 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 4,000
qualifying expenses X 25 1,000 allocated
expenses Step 2 1,000 X (50/168 hrs.) 297.62
allowable deduction
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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

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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 dwellings expenses are allocable to the
  office.
• As gross income from the related business
  activity 1900
• Less
• expense for secretary 500
• business phone 150
• supplies 200
• Total expenditures not allocable to use of the
  office (850)
• Business inc. from the unit 1050

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Example of Home Office Deductions

• Income from Business (carry forward) 1,050
• Deductions allowed first
• Allocable
• Total to Office
• Mortgage interest 5,000 500
• Real estate taxes 2,000 200
• Amount allowable (700)
• Limit on further deductions 350

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Example of Home Office Deductions

• Allocable
• Total to office
• Carry forward 350
• Deductions allowed next
• Insurance 600 60
• Utilities (except personal phone) 900 90
• Lawn care 500 0
• Amount allowable (150)
• Limit on further deductions 200
• Depreciation deduction
• Depreciation 3,200 320
• Amount allowable (200)
• Carryover of 120 to offset future home office
  earnings 0

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Example of Home Office Deductions

• If As 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.

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Reimbursement of Expenses
SELF-EMPLOYED Report Business Expenses on
Schedule C, Form 1040
EMPLOYED
Report as misc. itemized ded., subject to 2 floor
Accountable plan?
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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
  IRSs shoes)
• Employee must return any reimbursements in excess
  of business-related expenses
• Pages 42 - 45