South-Western Federal Taxation, 2009 Edition
Comprehensive Volume
ISBN: 0324660529
Chapter 9
Deductions: Employee and Self-Employed-Related Expenses
Accountable plan. An accountable plan is a type of expense reimbursement plan that requires an employee to render an adequate accounting to the employer and return any excess reimbursement or allowance. If the expense qualifies, it will be treated as a deduction for AGI.
Automatic mileage method. Automobile expenses are generally deductible only to the extent the automobile is used in business or for the production of income. Personal commuting expenses are not deductible. The taxpayer may deduct actual expenses (including depreciation and insurance), or the standard (automatic) mileage rate may be used (48.5 cents per mile for 2007 and 44.5 cents per mile for 2006 ). Automobile expenses incurred for medical purposes or in connection with job-related moving expenses are deductible to the extent of actual out-of-pocket expenses or at the rate of 20 cents per mile in 2007 (18 cents per mile in 2006). For charitable activities, the rate is 14 cents per mile.
Deduction for qualified tuition and related expenses. Tax-payers are allowed a deduction of up to $4,000 for higher education expenses. Certain taxpayers are not eligible for the deduction: those whose gross AGI exceeds a specified amount and those who can be claimed as a dependent by another taxpayer. These expenses are classified as a deduction for AGI, and they need not be employment related. § 222.
Education expenses. Employees may deduct education expenses that are incurred either (1) to maintain or improve existing job-related skills or (2) to meet the express requirements of the employer or the requirements imposed by law to retain employment status. The expenses are not deductible if the education is required to meet the minimum educational standards for the taxpayer’s job or if the education qualifies the individual for a new trade or business. Reg. § 1.162–5.
Entertainment expenses. These expenses are deductible only if they are directly related to or associated with a trade or business. Various restrictions and documentation requirements have been imposed upon the deductibility of entertainment expenses to prevent abuses by taxpayers. See, for example, the provision contained in § 274(n) that disallows 50 percent (20 percent prior to 1994) of entertainment expenses. § 274.
Independent contractor. A self-employed person as distinguished from one who is employed as an employee.
Individual retirement account (IRA).A type of retirement plan to which an individual with earned income can contribute a maximum of $3,000 ($3,000 each in the case of a married couple with a spousal IRA) per tax year for 2002– 2004. The maximum amount increases to $4,000 in 2005 and to $5,000 in 2008. IRAs can be classified as traditional IRAs or Roth IRAs. With a traditional IRA, an individual can contribute and deduct a maximum of $5,000 per tax year in 2008. The deduction is a deduction for AGI. However, if the individual is an active participant in another qualified retirement plan, the deduction is phased out proportionally between certain AGI ranges (note that the phaseout limits the amount of the deduction and not the amount of the contribution). With a Roth IRA, an individual can contribute a maximum of $5,000 per tax year in 2008. No deduction is permitted. However, if a five-year holding period requirement is satisfied and if the distribution is a qualified distribution, the taxpayer can make tax- free withdrawals from a Roth IRA. The maximum annual contribution is phased out proportionally between certain AGI ranges. §§ 219 and 408A.
Keogh plans. Retirement plans available to self-employed taxpayers. They are also referred to as H.R. 10 plans. Under such plans, in 2008, a taxpayer may deduct each year up to either 100 percent of net earnings from self-employment or $46,000, whichever is less. If the plan is a profit sharing plan, the percentage is 25 percent.
Moving expenses. A deduction for AGI is permitted to employees and self-employed individuals provided certain tests are met. The taxpayer’s new job must be at least 50 miles farther from the old residence than the old residence was from the former place of work. In addition, an employee must be employed on a full-time basis at the new location for 39 weeks in the 12-month period following the move. Deductible moving expenses include the cost of moving the household and personal effects, transportation, and lodging expenses during the move. The cost of meals during the move is not deductible. Qualified moving expenses that are paid (or reimbursed) by the employer can be excluded from the employee’s gross income. In this case, the related deduction by the employee is not permitted. §§ 62(a)(15), 132(a)(6), and 217.
Nonaccountable plan. An expense reimbursement plan that does not have an accountability feature. The result is that employee expenses must be claimed as deductions from AGI. An exception is moving expenses that are deductions for AGI.
Office in the home expenses. Employment and business-related expenses attributable to the use of a residence (e.g., den or office) are allowed only if the portion of the residence is exclusively used on a regular basis as a principal place of business of the taxpayer or as a place of business that is used by patients, clients, or customers. If the expenses are incurred by an employee, the use must be for the convenience of the employer as opposed to being merely appropriate and helpful. § 280A.
Roth IRAs. See individual retirement account (IRA).
Section 401(k) plans. A § 401(k) plan allows participants to elect either to receive up to $15,500 (in 2008) in cash (taxed currently) or to have a contribution made on their behalf to a profit sharing or stock bonus plan. The plan may also be in the form of a salary-reduction agreement between an eligible participant and an employer under which a contribution will be made only if the participant elects to reduce his or her compensation or to forgo an increase in compensation.
Statutory employee. Statutory employees are considered self-employed independent contractors for purposes of reporting income and expenses on their tax returns. Generally, a statutory employee must meet three tests:
· It is understood from a service contract that the services will be performed by the person.
· The person does not have a substantial investment in facilities (other than transportation used to perform the services).
· The services involve a continuing relationship with the person for whom they are performed.
For further information on statutory employees, see Circular E Employer’s Tax Guide IRS Publication 15.
Transportation expenses. Transportation expenses for an employee include only the cost of transportation (taxi fares, automobile expenses, etc.) in the course of employment when the employee is not away from home in travel status. Commuting expenses are not deductible.
Travel expenses. Travel expenses include meals (generally subject to a 50 percent disallowance) and lodging and transportation expenses while away from home in the pursuit of a trade or business (including that of an employee).