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7/25/2019 Ch9 - 2015
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2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.
Comprehensive Volume
1
Chapter !
"eductions# $%ployee and
&el'($%ployed(Related$)penses
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2
*he +ig icture -slide 1 o' 2
/ Morgan, a recent college graduate ho %aored in'inance, has accepted a ob ith ite Corporation. *he ob is in sales and ill re3uire travel and so%e
entertain%ent -i.e., business lunches.
/ &he ill be based in a %aor %etropolitan area inanother state. ite has no available space in the locale, so she ill have
to %aintain her on or4 'acility.
n addition to her salary, Morgan ill receive a travelalloance./ 6oever, ite has %ade it clear that the alloance ill not cover
all o' her travel e)penses.
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3
*he +ig icture -slide 2 o' 2
/ Morgan is delighted ith the ne ob since itill enable her to %aintain a 'le)ible or4schedule.
7urther%ore, or4ing out o' her on apart%entavoids a ti%e(consu%ing and costly co%%ute.
/ 8hat are so%e o' the inco%e ta) proble%s
presented by this situation9Read the chapter and 'or%ulate your response.
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4
$%ployee vs. &el'($%ployed-slide 1 o' 2
/ +usiness e)penses 'or sel'(e%ployed persons
are deductibleforA:
Reported on &chedule C
/ ;nrei%bursed business e)penses 'or
e%ployees are generally deductiblefromA:
subect to 2< o' A: 'loor
Reported on 7or% 210= -$%ployee +usiness
$)penses and &chedule A -te%i>ed "eductions
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$%ployee vs. &el'($%ployed-slide 2 o' 2
/ erson is classi'ied as an e%ployee i'#
&ubect to ill and control o' another ith respect
to hat shall be done and ho it shall be done
Another 'urnishes tools or the place o' or4
nco%e based on ti%e spent rather than tas4
per'or%ed
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6
$%ployee $)penses
/ 7all into one o' the 'olloing categories#
*ransportation
*ravel
Moving
$ducation
$ntertain%ent
?ther
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*ransportation $)penses-slide 1 o' 2
/ *ransportation e)pense de'ined
@ery li%ited, only 'ro% ob site to ob site and
co%%uting to'ro% te%porary or4 place
Co%%uting 'ro% ho%e to or4 and bac4 is
nondeductible
/ $)ceptions#
Additional costs incurred to transport heavy tools
$%ployees ith %ore than one ob
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*ransportation $)penses-slide 2 o' 2
/ A%ount deductible
Actual e)penses
/ Must 4eep ade3uate records o' all e)penses and
depreciation is li%ited, or
Auto%atic %ileage %ethod
/ 5= cents per %ile 'or business %iles 'or 201B
Adust%ent to basis o' auto is re3uired 'or depreciation
considered alloed
/ lus par4ing, tolls, etc.
/ Ade3uate docu%entation o' %ileage re3uired
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*he +ig icture ( $)a%ple !
Co%%uting $)pense
/ Return to the 'acts o' *he +ig icture on p. !(1.
/ +ecause Morgan ill have an o''ice in her
ho%e, the apart%ent ill be her principal placeo' business.
*hus, any transportation 'ro% her ho%e to
business sites ill not be disalloed as a
commuting expense
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*he +ig icture ( $)a%ple 11
Auto%atic Mileage Method
/ Return to the 'acts o' *he +ig icture on p. !(1.
/ "uring Morgans senior year in college, her parentsgave her one o' the 'a%ily carsDa 200! Chevrolet
%pala. Morgan has no idea as to the cars original cost or the
odo%eter reading at the ti%e the car as registered in herna%e.
&he has, hoever, 4ept trac4 o' the %iles driven 'orbusiness since she accepted her ne ob.
/ Morgan should use the automatic mileage methodinclai%ing business use o' the car.
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*ravel $)penses-slide 1 o' 2
/ *ravel e)pense de'ined
$)penses hile Eaay 'ro% ta) ho%eF overnight
on business
ncludes transportation, lodging, %eals, and
%iscellaneous e)penses
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*ravel $)penses-slide 2 o' 2
/ EAay 'ro% ho%eF re3uire%ent
Geed not be a 2B(hour period but %ust be longer
than ordinary or4 day and ta)payer ill need to
rest during release ti%e
+eing EaayF should be a te%porary situation -not
in e)cess o' 1 year
E*a) 6o%eF generally %eans business location,post, or station o' the ta)payer
&o%e e)ceptions are alloed under ne
Regulations
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Restrictions on *ravel $)penses-slide 1 o' 2
/ Convention travel e)pensesGo deduction 'or travel unless directly related to
ta)payers trade or business
/ $)a%ple# "octor attending out(o'(ton se%inar onestate planning ould not have deductible travele)penses
Restrictions apply to the deductibility o' travel
e)penses o' the ta)payers spouse or dependent/ :enerally, acco%pani%ent by the spouse or dependent
%ust serve a bona 'ide business purpose, and
/ *he e)penses %ust be otherise deductible
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14
Restrictions on *ravel $)penses-slide 2 o' 2
/ $ducation travel e)penses
*ravel as a 'or% o' education is not deductible
/ $)a%ple# &panish language pro'essor traveling to &pain
to or4 on the language ould not have deductibletravel e)penses
/ $)a%ple# &panish history pro'essor traveling to &pain
to study historical docu%ents available only in &panish
%useu%s ould have deductible travel e)penses
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Co%bined +usinessleasure *ravel-slide 1 o' B
/ ?nly actual e)penses 'or business are
deductible
Meals, lodging and other e)penses %ust be
allocated beteen business and personal days
/ "eductibility o' transportation costs depends
on hether the trip is do%estic or 'oreign
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Co%bined +usinessleasure *ravel-slide 2 o' B
/ 7or do%estic travel
' pri%ary purpose o' trip is business,
transportation is deductible in 'ull
' pri%ary purpose is pleasure, no deduction 'or
transportation alloed, but other e)penses -e.g.,
lodging associated ith business days are
deductible
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Co%bined +usinessleasure *ravel-slide H o' B
/ 7or 'oreign travel
*ransportation e)penses %ust be allocated beteen
business and personal unless#
/ *rip is I days or less,
/ Less than 25< o' ti%e as 'or personal purposes, or
/ *a)payer had no substantial control over arrange%ents
'or the trip
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Co%bined +usinessleasure *ravel-slide B o' B
/ *ravel days are considered business days
/ 8ee4ends, legal holidays and intervening days
are business days i' both the preceding and
succeeding days are business days
/ ' trip is pri%arily 'or pleasure, no
transportation e)penses are deductible
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Moving $)penses
/ "eductible 'or %oves in connection ith the
co%%ence%ent o' or4 at a ne principal
place o' or4
/ *o tests %ust be %et 'or %oving e)penses to
be deductible
"istance test
*i%e test
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Moving $)penses ( "istance *est
/ "istance 'ro% old ho%e to ne ob %ust be at
least 50 %iles 'arther than 'ro% old ho%e to
old ob
/ Ge ho%e location not relevant 'or decision
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$)a%ple o' "istance *est
/ :ail lived 20 %iles
'ro% her old ob
/ :ails ne ob is I5
%iles 'ro% her old
ho%e
/ :ail %eets the
distance test
?ld
Job
Ge
Job
?ld
Residence
20 mi.20 mi.
75 mi.75 mi.
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Moving $)penses ( *i%e *est-slide 1 o' 2
/ *a)payer %ust be 'ull(ti%e e%ployee 'or H!ee4s in the 12(%onth period 'olloing the%ove, or
/ &el'(e%ployed %ust or4 in ne location 'orIK ee4s during the ne)t to years 'olloingthe %ove
H! o' the ee4s %ust be in the 'irst 12 %onths/ *est aived i' die, disabled, discharged, or
trans'erred
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Moving $)penses ( *i%e *est-slide 2 o' 2
/ ' ti%e test not %et during ta)able year, to
alternatives#
*a4e the deduction in year %oved. ' test is not
%et in 'olloing year, either#
/ nclude the a%ount deducted in gross inco%e in the
'olloing year, or
/ 7ile a%ended return 'or year o' %ove
Alternatively, ait until ti%e test is %et and then
'ile a%ended return 'or year o' %ove
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"eductible Moving $)penses
/ uali'ied %oving e)penses includereasonable e)penses o'#Moving household goods and personal e''ects to
ne location$)penses o' travel 'or ta)payer and 'a%ily to ne
location/ Lodging
/ Actual auto costs -not depreciation or %ileage rate o'N.2H5 per %ile 'or each car in 201B
Meals are not deductible as %oving e)pense
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*a) *reat%ent o'
Moving $)penses
/ ;nrei%bursed %oving e)penses are deductible
forA:
/ Rei%burse%ent or pay%ent by e%ployer#
7or 3uali'ied %oving e)penses, a%ount is
e)cluded 'ro% gross inco%e, but no deduction 'or
related e)penses
7or non3uali'ied %oving e)penses, a%ount isincluded in gross inco%e and no deduction is
alloed
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*he +ig icture ( $)a%ple 2!
Moving $)penses/ Return to the 'acts o' *he +ig icture on p. !(1.
/ $ven though this is her 'irst ob, Morgan ill
be entitled to a moving expense deduction.
*his presu%es that she is not rei%bursed by ite
Corporation 'or these e)penses.
*he %ileage on her car also is alloed.
/ 6er deduction isforA: and can be clai%ed
even i' she chooses the standard deduction
option.
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$ducation $)penses-slide 1 o' H
/ $ducation e)penses o' an e%ployee are
deductible i' they are incurred#
*o %aintain or i%prove e)isting s4ills, or
*o %eet e)press re3uire%ents o' the e%ployer or
re3uire%ents i%posed by la to retain
e%ploy%ent status
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$ducation $)penses-slide 2 o' H
/ $ducation e)penses o' an e%ployee are not
deductible i' they are incurred#
*o %eet %ini%u% educational standards 'or
e)isting ob, or
*o 3uali'y ta)payer 'or ne trade or business
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$ducation $)penses-slide H o' H
/ $ducation e)penses include#
*uition
+oo4s
&upplies
*ransportation
*ravel -including lodging and 50< %eals
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"eduction 7or uali'ied *uition and
Related $)penses -slide 1 o' H
/ A deduction is alloedforA: 'or 3uali'ied
tuition and related e)penses involving higher
education -i.e., postsecondary
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"eduction 7or uali'ied *uition and
Related $)penses -slide 2 o' H
/ *he %a)i%u% deduction depends on 'ilingstatus and Modi'ied A:
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"eduction 7or uali'ied *uition and
Related $)penses -slide H o' H
/ uali'ied tuition and related e)penses include
hatever is re3uired 'or enroll%ent
;sually, student activity 'ees, boo4s, roo% and
board are not included
/ $)penses need not be or4 related
/ "eduction is not available 'or %arried persons
'iling separately
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*he +ig icture ( $)a%ple H2
$ducation $)penses/ Return to the 'acts o' *he +ig icture on p. !(1.
/ A'ter starting her ne ob, Morgan enrolls in
the night progra% o' a local la school.
Although Morgan does not plan to practice la,
she 'eels that a la degree ould advance her
career.
/ $)cept 'or the tuition she pays -see thediscussion o' O 222, none o' her e)penses
relating to the education ill be deductible.
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$ntertain%ent $)penses-slide 1 o' H
/ "eductions are very restricted due to abusepossibilities"eductible a%ount alloed#
/ 50< o' %eals and entertain%ent costs including relatedta)es, tips, cover charges, par4ing 'ees, and roo% rental'ees
/ 100< o' transportation costs
A%ounts cannot be lavish or e)travagantn certain situations, the 50< cutbac4 'or %eals is
eased 'or certain, very li%ited, types o' e%ployees
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$ntertain%ent $)penses-slide 2 o' H
/ *he 50< cutbac4 rule has a nu%ber o'e)ceptions, such as#&ituations here 'ull value o' %eals or
entertain%ent is included in inco%eMeals and entertain%ent are provided in a
subsidi>ed eating 'acility or here the de %ini%is'ringe bene'it rule is %et
$%ployer(paid recreational activities 'ore%ployees
/ e.g., the annual Christ%as party or spring picnic
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$ntertain%ent $)penses-slide H o' H
/ $ntertain%ent e)penses are classi'ied as
either#
Directly relatedto business
/ Actual business %eeting or discussion occurs during
%eal or entertain%ent
Associated withbusiness
/ Meal or entertain%ent that directly precedes or 'ollosbusiness %eeting or discussion
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Restrictions on $ntertain%ent
$)penses -slide 1 o' H
/ Club dues
:enerally not deductible
/ $)ception# Clubs 'or%ed 'or public service and
co%%unity volunteeris% -e.g., ianis, Rotary
+usiness entertain%ent e)penses incurred at club
are still deductible -50
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Restrictions on $ntertain%ent
$)penses -slide 2 o' H
/ *ic4et purchases 'or entertain%ent
A%ounts paid in e)cess o' 'ace value o' tic4et are
not deductible
Li%itation on deductibility o' lu)ury s4ybo)
e)penditures
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Restrictions on $ntertain%ent
$)penses -slide H o' H
/ +usiness gi'ts
+usiness gi'ts o' tangible personalty ith a value
o' N25 or less per person per year are deductible
/ ncidental costs -e.g., gi't(rapping are not included inthe cost o' the gi't in applying the li%it
' the value is NB or less -e.g., pen ith co%pany
na%e then not subect to N25 li%it
/ :i'ts to e%ployers or superiors are not
deductible
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?''ice in the 6o%e-slide 1 o' 2
/ "eductibility is very restricted due to abuse
possibilities
?''ice %ust be used e)clusively and on a regular
basis as#/ *he principal place o' business, or
/ A place o' business used by clients, patients, or
custo%ers
7or e%ployees, o''ice %ust also be 'or the
convenience o' the e%ployer
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?''ice in the 6o%e-slide 2 o' 2
/ 8hat constitutes Eprincipal place o'
businessF9
6o%e o''ice 3uali'ies as a principal place o'
business i'#/ *a)payer conducts ad%in. and %g%t. activities in the
ho%e o''ice, and
/ *here is no other 'i)ed location here ta)payer
conducts these activities
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?''ice in the 6o%e "eduction-slide 1 o' 5
/ "eduction can be deter%ined in either o' to
ays#
*he regular -actual e)pense %ethod, or
*he si%pli'ied -sa'e harbor %ethod
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?''ice in the 6o%e "eduction-slide 2 o' 5
/ Regular %ethod
Relevant e)penses are categori>ed as direct or
indirect
/ "irect e)penses bene'it only the business part o' theho%e -e.g., the o''ice is repainted
"educted in 'ull
/ ndirect e)penses are 'or %aintaining and operating the
ho%e Allocate beteen business and personal
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?''ice in the 6o%e "eduction-slide H o' 5
/ Regular %ethod
Alloable ho%e o''ice e)penses cannot create a
loss
/ A%ounts alloed as ite%i>ed deductions anyay
%ust be deducted 'irst
e.g., %ortgage interest P real estate ta)es
Any disalloed a%ounts are carried 'orard and
used in 'uture years subect to the sa%e li%itations
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?''ice in the 6o%e "eduction-slide B o' 5
/ Regular %ethod
All ho%e o''ice e)penses o' an e%ployee are %isc.
ite%i>ed deductions, e)cept those -such as interest
and ta)es that 3uali'y as other personal ite%i>eddeductions
6o%e o''ice e)penses o' a sel'(e%ployed
individual are trade or business e)penses and are
deductiblefor A:
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?''ice in the 6o%e "eduction-slide 5 o' 5
/ &i%pli'ied %ethod
A ho%e o''ice e)pense deduction o' N5 per s3uare
'oot is alloed
/ &ince no %ore than H00 s3uare 'eet can be counted, the%a)i%u% deduction is li%ited to N1,500
Go deduction is alloed 'or depreciation or other
actual e)penses o' operating the ho%e
/ ?therise deductible a%ounts 'or interest and ta)es %ay
still be deducted in 'ull
Go carryover o' unused a%ounts is alloed
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?ther $%ployee $)penses
/ A partial list o' other e%ployee e)penses that
are deductible includes#
&pecial clothing -uni'or%s
;nion dues
ro'essional e)penses
Job hunting in sa%e pro'ession
$ducator e)penses -deductiblefor A:/ Li%ited to N250 per year 'or supplies, etc. o' ele%entary
and secondary school teachers
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*he +ig icture ( $)a%ple BI
Job 6unting $)penses
/ Return to the 'acts o' *he +ig icture on p. !(1.
/ Recall that Morgan conducted an e)tensive ob
search be'ore obtaining her position ith ite
Corporation.
+ecause this is her 'irst ob, the e)penses she
incurred in the search are not deductible.
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Contributions to Retire%ent Accounts-slide 1 o' 2
/ Retire%ent plans 'all into to %aorclassi'ications depending on ho is covered7or e%ployees usually 'ollo one o' to inco%e
ta) approaches/ Most plans allo an exclusion'ro% inco%e 'or the
contributions the e%ployee %a4es to the pension plan
/ Alternatively, using the approach 'olloed by a
traditional RA, a contributing e%ployee is alloed adeductionforA: Ma)i%u% deduction is N5,500 'or 201B
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Contributions to Retire%ent Accounts-slide 2 o' 2
/ Retire%ent plans 'or sel'(e%ployed ta)payers
Called eogh -or 6.R. 10 plans
/ 7ollo the deduction approach o' traditional RAs
/ A%ounts contributed under a plan are deductibleforA:
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Classi'ication o' $%ployee $)penses-slide 1 o' 2
/ "epends on hether they are rei%bursed and,
i' rei%bursed, under hat type o' plan
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Classi'ication o' $%ployee $)penses-slide 2 o' 2
/ $%ployers can have three types o'
rei%burse%ent plans
Accountable
Gonaccountable
Go rei%burse%ent is given
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Accountable lan-slide 1 o' 2
/ lan %ust re3uire adequate accountingto the
e%ployer 'or e)pense rei%bursed, and
/ Any e)cess rei%burse%ents %ust be returned
to the e%ployer
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Accountable lan-slide 2 o' 2
/ Ade3uate accounting is
&ub%itting a record, ith receipts, to the
e%ployer, or
;sing a per die% alloance that is not %ore thanthe 7ederal per die% rate
/ $%ployee reports no inco%e and ta4es no
deduction to the e)tent o' the rei%bursede)penses
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&ubstantiation 'or $)penditures-slide 1 o' 2
/ Go deduction alloed 'or an e)pense i' the
ta)payer does not have ade3uate records 'or
the e)pense
*here'ore, ta)payers need to have good records 'or
e%ployee or sel'(e%ployed e)penses
/ n so%e cases, use o' per die% alloance ill be
dee%ed substantiation
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&ubstantiation 'or $)penditures-slide 2 o' 2
/ Records should include#
*he a%ount o' the e)pense
*he ti%e and place o' travel or entertain%ent -or
date o' gi't
*he business purpose o' the e)pense
*he business relationship o' the ta)payer to the
person entertained -or receiving the gi't
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Gonaccountable lan
/ lan that does not re3uire ade3uate accounting
or return o' e)cess rei%burse%ent or both
Rei%bursed a%ounts received under this plan are
included in gross inco%e
$)penses are deductiblefromA: as
%iscellaneous ite%i>ed deductions subect to the
2< o' A: li%itation
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;nrei%bursed $%ployee $)penses
/ $)penses are deductiblefromA: as
%iscellaneous ite%i>ed deductions subect to
the 2< o' A: li%itation
' e%ployee could have received, but did not see4,rei%burse%ent 'or hatever reason, none o' the
e%ploy%ent(related e)penses are deductible
Mi ll t i d
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Miscellaneous te%i>ed
"eductions
/ Miscellaneous ite%i>ed deductions subect to
the 2< o' A: li%itation
Certain %iscellaneous e)penses %ust be added
together and the a%ount in e)cess o' 2< o'ta)payers A: is deductiblefromA: -i.e.,
ite%i>ed deduction reported on &ch. A
$ l ' Mi ll t i d
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$)a%ples o' Miscellaneous te%i>ed
"eductions &ubect to 2< 7loor
/ Most rei%bursed e)penses under a nonaccountable
plan
/ ;nrei%bursed e%ployee e)penses
/ &ection 212 e)penses not related to rents androyalties
/ *a) return preparation 'ee
/ 6obby e)penses/ nvest%ent e)penses -e)cept interest and ta)es
$ l ' Mi ll t i d
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$)a%ples o' Miscellaneous te%i>ed
"eductions Got &ubect to 2< 7loor
/ %pair%ent(related or4 e)penses o'
handicapped individuals
/ :a%bling losses to the e)tent o' innings
/ Certain ter%inated annuity pay%ents
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Co%puting 2< o' A: Li%itation-slide 1 o' 2
/ $)a%ple
*a)payer, a single individual, provides the 'olloing
in'or%ation 'or 201B
/ NH0,000 A:/ N =,500 deductible interest e)pense and ta)es paid
/ N 1,500 e%ployee business e)penses, and
/ N 500 ta) return preparation 'ee
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Co%puting 2< o' A: Li%itation-slide 2 o' 2
/ $)a%ple -contd
nterest and ta)es N=,500
Misc. e)penses#$%ployee bus. e)p. N1,500
*a) return prep. 500
*otal N2,000
Less 2< A: ( =00 1,B00
te%i>ed deductions NI,!00
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Re'ocus ?n *he +ig icture -slide 1 o' 5
/ &everal ta) issues %ight arise as a result o' Morgansne ob. *he 'irst ta) issue relates to the dependency e)e%ption.
/ ' Morgan as living at ho%e and accepted the ob late in the year,
she could 3uali'y as a dependent o' her parents. ' so, they %ight also be able to clai% the 3uali'ied tuition deduction
-or the li'eti%e learning credit.
', hoever, her e%ploy%ent began early in the year, it%ay not be possible 'or her parents to clai% her as a
dependent either because/ &he is not a 3uali'ying child due to the sel'(supporting li%itation,
or
/ &he is not a 3uali'ying relative due to the gross inco%e li%itationDsee Chapter H.
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Re'ocus ?n *he +ig icture-slide 2 o' 5
/ ?ther ta) issues ould include the 'olloing./ Job hunting e)penses ( Morgans e)tensive search 'or e%ploy%ent
suggests that she %ay have incurred ob hunting e)penses &uch e)penses are not deductible in a 'irst ob setting.
/ Moving $)penses ( 6er 3uali'ied %oving e)penses are not so restricted.
Moving e)penses are deductionsforA:./ ?''ice in the ho%e deduction ( ;nder the circu%stances, Morgan isusti'ied in clai%ing an o''ice in the ho%e deduction using either theregular %ethod or the si%pli'ied %ethod. ;nder the regular %ethod, the deduction ould include a portion o' the rent
and utilities paid and related %aintenance costs.
*he sa'e harbor %ethod ould allo Morgan N5 per s3uare 'oot 'or businessspace, but not %ore than H00 s3uare 'eet, or N1,500. ;nder either %ethod, she ould also be alloed depreciation -or e)pensing o'
o''ice e3uip%ent and 'urnishings -e.g., co%puter, copier, des4, 'ile cabinet. &he %ust be care'ul not to violate the e)clusive use restriction.
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Re'ocus ?n *he +ig icture-slide H o' 5
/ *ravel Morgan is re3uired to travel as part o' her ob and soill use her car 'or business. *hus, she ill need to %a4e a choice beteen the auto%atic %ileage
%ethod and the actual cost %ethod. &ince her ta) ho%e is in her apart%ent, she ill have no nondeductible
co%%uting e)penses.
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Re'ocus ?n *he +ig icture-slide B o' 5
/ *ravel Alloance *a) treat%ent depends on hether it is anaccountable plan ' she renders an ade3uate accounting -and has to return any e)cess to
ite Corporation, then her alloance need not be reported on her7ederal inco%e ta) return.
/ Gonrei%bursed a%ounts, hoever, %ust be allocated beteen %eals andentertain%ent -subect to the 50< cutbac4 and other e%ploy%ent(relatede)penses.
/ *he balance is an ite%i>ed deduction subect to the 2 percent(o'(A: 'loor.
' she does not render an ade3uate accounting, the 'ull alloance isincluded in her gross inco%e.
/ All o' the %eals and entertain%ent e)penses are subect to the 50e herdeductions. nstead, she ill clai% the standard deduction e''ectively
eli%inating her ability to deduct any e%ploy%ent(relatede)penses.
/ Morgan %ust %aintain ade3uate substantiationregarding all o' these e%ploy%ent related
transactions. "etailed records are particularly i%portant in arriving at
the o''ice in the ho%e deduction and the business use o' anauto%obile under the actual cost %ethod.
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