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Chapter 4
- 1. Income Tax Fundamentals 2010 edition Gerald E. Whittenburg Martha Altus-Buller 2010 Cengage Learning
- 3. 2010 Cengage Learning Deduct For AGI Yes No Schedule C or Schedule F Deduct From AGI Are expenses from self-employment? Next Slide
- 4. 2010 Cengage Learning Are expenses reimbursed by employer? No If necessary for performance of job, itemize deductions on Schedule A (subject to 2% AGI) Yes Does firm have accountable plan? Did employee substantiate & return excess funds? - Reimbursement included in gross wages - Deduction on Schedule A - miscellaneous itemized (2% AGI) No Yes From prior No tax effect No Yes
Notes de l'éditeur
- “ Away from home” requirement 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 Convention travel expenses No deduction for travel unless directly related to taxpayer’s trade or business Example: Doctor attending out-of-town seminar on estate planning would not have deductible travel expenses Restrictions apply to the deductibility of travel expenses of the taxpayer’s spouse or dependent Generally, accompaniment by the spouse or dependent must serve a bona fide business purpose, and The expenses must be otherwise deductible A temporary work location is defined using a one-year standard similar to that used for determining the deductibility of expenses for travel away from home to a temporary work site. Rev. Rul. 99-7, 1999-1 CB 361. Under this standard, if the employment is realistically expected to last a year or less and in fact does last for one year or less, it is temporary. For example, a taxpayer's four month transfer to a different work location due to a conflict with his general manager was held to be temporary in nature because his employer's personnel manager told the taxpayer that he would be able to return to his original workplace soon when the general manager left.. If it is realistically expected to last for more than one year, it is not temporary, regardless of whether it in fact lasts for more than one year. The Tax Court permitted a taxpayer to deduct daily transportation expenses incurred in going between the taxpayer's residence and numerous temporary work sites, notwithstanding that the taxpayer's recurring work at the residence was not sufficient to qualify the residence as a principal place of business IRS has stated that it will not follow this decision because a deduction for daily transportation expenses incurred in going between a taxpayer's residence and a temporary place of business is only allowed where the taxpayer also has a regular place of business that is not located at the taxpayer's residence. 10
- Only actual expenses for business are deductible Meals, lodging and other expenses must be allocated between business and personal days Deductibility of transportation costs depends on whether the trip is domestic or foreign For domestic travel 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 For foreign travel 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
- The IRS updates the rules and rates on an annual basis, effective October 1. The rates effective as of October 1, 2009, are found in Rev. Proc. 2009-47, 2009-42 IRB 524. However, taxpayers can continue to use the rates in effect for the first nine months of a year for the rest of calendar year, as long as this is done consistently for all travel. Thus, taxpayers can continue to use the rates found in Rev. Proc. 2008-59, 2008-41 IRB 857, which are applicable for October 1, 2008, through September 30, 2009, for all expenses paid or incurred during 2009. Although per diem rates may be used to substantiate deductions for lodging, meals, and incidental expenses, or for meal expenses and/or incidental expenses only, they may not be used to substantiate deductions for lodging expenses only. Self-employed individuals are not entitled to use the federal per diem rates to substantiate lodging expenses under any circumstances. Starr v. Commissioner, Dec. 54,064(M), TC Memo. 2000-305.
- Incidental expenses include: fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and hotel servants in foreign countries; transportation between places of lodging or business and places where meals are taken, if suitable meals can be obtained at the temporary duty site; and the mailing cost associated with filing travel vouchers and payment of employer-sponsored charge card billings. Rev. Proc. 2009-47, 2009-42 IRB 524, Section 3.02(3).
- Beginning Jan. 1, 2009, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be: 50.5 cents per mile for business miles driven; 19 cents per mile driven for medical or moving purposes; and 14 cents per mile driven in service of charitable organizations The IRS has released the 2010 optional standard mileage rates that employees, self-employed individuals and other taxpayers can use to compute deductible costs of operating automobiles (including vans, pickups and panel trucks) for business, medical, moving and charitable purposes. The standard mileage rate for business mileage in 2010 will be 50 cents per mile. The standard mileage rate for medical and moving expenses will be 16.5 cents per mile. The standard mileage rate for charitable volunteers remains 14 cents per mile. The updated rates are effective for deductible transportation expenses paid or incurred on or after January 1, 2010; and for mileage allowances or reimbursements paid to, or transportation expenses paid or incurred by, an employee or a charitable volunteer on or after January 1, 2010.
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- The "office-in-home" tax deduction is valuable because it converts a portion of otherwise nondeductible expenses (for example, utilities and homeowners insurance) into a deduction. The treatment of home offices for income tax purposes is one of the more controversial provisions in the tax law. An individual is not entitled to deduct any expenses of using his/her home for business purposes unless the space is used exclusively on a regular basis as the "principal place of business." The IRS applies a 2-part test to determine if the home office is the principal place of business. Do you spend more business-related time in your home office than anywhere else? Are the most significant revenue-generating activities performed in your home office? If the answer to either of these questions is no, the home office will not be considered the principal place of business, and the deduction will not be available.
- Business use of the home by an employee must also be for the convenience of the employer . These rules make it very difficult for an employee to qualify for the deduction. If these three tests are met, the deduction is limited to the gross income from the business activity. Furthermore, a deduction for home-office expenses cannot create or increase a net loss from the business. Any disallowed deduction may be carried over to future years. Taxpayers taking a deduction for business use of their home must complete Form 8829. Some tax experts believe that taking a deduction for home-office expenses, whether clearly allowable or not, increases the likelihood of an IRS audit
- Deductions are very restricted due to abuse 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 Beginning in 1998, the 50% cutback for meals is eased for certain, very limited, types of employees The 50% cutback rule has a number of exceptions, such as: Situations where full value of meals or entertainment is included in income Meals and entertainment are provided in a subsidized eating facility or where the de minimis fringe benefit rule is met Employer-paid recreational activities for employees e.g., the annual Christmas party or spring picnic
- Entertainment expenses are classified as either: Directly related to business Actual business meeting or discussion occurs during meal or entertainment Associated with business Meal or entertainment that directly precedes or follows business meeting or discussion Club dues Generally not deductible Exception: Clubs formed for public service and community volunteerism (e.g., Kiwanis, Rotary) Business entertainment expenses incurred at club are still deductible (50%) Ticket purchases for entertainment Amounts paid in excess of face value of ticket are not deductible Limitation on deductibility of luxury skybox expenditures
- Education expenses of an employee are deductible 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 The cost of obtaining a law degree is not deductible because this course of study would qualify the taxpayer for a new trade or business. This rule applies even for a taxpayer who is employed in a non-legal profession whose employer requires him to obtain a law degree and who intends to continue practicing his non-legal profession as an employee of the same employer. . A number of cases decided before the issuance of these regulations allowed the taxpayer to deduct the cost of law school, but since then, no case has permitted a deduction. ]
- Education expenses include: Tuition Books Supplies Transportation Travel (including lodging and 50% meals) Education travel expenses Travel as a form of education is not deductible Example: Spanish language professor traveling to Spain to work on the language would not have deductible travel expenses Example: Spanish history professor traveling to Spain to study historical documents available only in Spanish museums would have deductible travel expenses
- See previous comments regarding “example”
- If the cost of a uniform is deductible, the cleaning and maintenance costs are also deductible. The cost and maintenance of fatigue uniforms are deductible by service members on active duty where local military regulations prohibit their off-duty wear
- Business gifts for which a deduction is allowed frequently include flowers, [33] fruit baskets and other gourmet food items, [34] bottles of wine and liquor, [35] and small electronics and other consumer goods Business gifts 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 Gifts to employers or superiors are not deductible
- A tax is imposed on self-employment income of self-employed individuals for social security (old-age, survivors and disability insurance—OASDI) and hospital insurance (HI) purposes. The OASDI component of the self -employment tax is 12.4% of self-employment income, up to a maximum of $102,000 for 2008 ($106,800 for 2009), plus 2.9% of self-employment income, with no maximum. If a self-employed individual also has wages subject to social security taxes, the wages are deducted from the maximum earnings base subject to the self-employment tax.