Ch. 9 Employee Expenses and Deferred Compensation

I. Classification and Limitations of Employee Expenses
A. Nature of the Employment Relationships
1.) Significant tax consequences flow from the characterization of a taxpayer as an employee vs. self-employed (independent contractors)

Ex : A self-employed individual will be responsible for self-employment tax which is much higher than an employee’s hare of social security tax.
2.) A taxpayer is considered an employee where the employer has the right to direct and control both the end result and the way the result is accomplished.
B. Limitations on Un-reimbursed employee expenses.
1.) Un-reimbursed employee expenses are classified as misc: Itemized deductions. The total of miscellaneous itemized deductions is reduced by 2%, of AGI before any tax benefit is reached.
2.) Therefore, un-reimbursed employee business expenses may provide not tax benefit if total misc. itemized deductions do not exceed 2% of AGI, or if total itemized deductions do not exceed the standard deduction. These expenses may also be affected by the phase-out of itemized deductions for certain high-income taxpayers.
III. Travel Expenses
A. Deductibility of travel expenses : Dependent on the nature of the expenditure and whether the employee is reimbursed.
1.) Travel expenses for self-employed individuals and fully-reimbursed employee travel expenses are deducted for AGI
2.) Un-reimbursed employee travel expenses (whether insufficient reimbursement or no reimbursement occurs) are deducted as a misc. itemized deduction subject to the 2% non-deductible floor.
B. Definition of Travel Expenses
1.) Includes transportation, meals and lodging related to a trade, business, or employee status incurred while away from the taxpayer’s tax home.
2.) The deductible amount of travel expenses may be reduced if actual expenses are lavish or extravagant.
C. General Qualification Requirements
1.) Travel expenses related to a trade, business, or employee status are deductible if incurred while away from the taxpayer’s home.
2.) Transportation costs for day trips are deductible, even if the taxpayer does not stay away from home overnight.
D. Business versus Pleasure
1.) Travel expenses in combination business/ personal trips will be only partially deductible
2.) If a domestic trip is primarily business, travel expenses to and from the business destination are deductible even though there is some personal time during the trip. Expenses for personal days will not be deductible.
3.) No deduction is allowed for the travel expenses of a companion unless the companion is also an employee and the travel is business-related and otherwise deductible.
E. Foreign Travel
1.) Even more stringent allocation rules apply to the deductibility of travel expenses on foreign business/personal trips.
2.) Deductions for foreign conventions are only allowed for “directly related” activities for which the taxpayers can proved that a meeting held outside North American is reasonable.
F. Additional Limitations on Travel Expenses
1.) Additional limitations on deductions for travel expenses exist for educational travel, certain conventions and seminars, luxury water travel and charitable travel.
III. Transportation Expenses
A. Commuting cost are generally non-deductible personal expenses.
B. Commuting expenses between multiple jobs for the same taxpayers will be deductible
C. Transportation costs from an employee’s regular place of work to a temporary work site are deductible.
D. If a taxpayer has a regular place of business, commuting costs between home and temporary work sites are deductible.
E. Treatment of Automobile Expenses.
1.) Actual business auto expenses can be deducted or a standard can mileage rate (48.5 cents/mile – effective 1/1/2007)
2.) For newer cars, the deduction for actual expenses will generally exceed the standard mileage deduction.
IV. Entertainment Expenses
A. 50% disallowance for meal and entertainment expenses
1.) Deductions for business-related meals and entertainment are limited to 50% of incurred cost.
2.) Self-employed individuals and employees who are fully reimbursed may deduct entertainment expenses for AGI.