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Page 1: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

©2003 South-Western College Publishing, Cincinnati, Ohio©2003 South-Western College Publishing, Cincinnati, Ohio©2003 South-Western College Publishing, Cincinnati, Ohio©2003 South-Western College Publishing, Cincinnati, Ohio

CHAPTER 4

Self-Employed and Self-Employed and

Employee ExpensesEmployee Expenses

Self-Employed and Self-Employed and

Employee ExpensesEmployee Expenses

Page 2: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-2

Objective

Understand the difference between deductions for AGI

and deductions from AGI

Page 3: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-3

For versus From DeductionsDeductions for are those taken to arrive at

adjusted gross income (AGI) Self-employment expenses Trade or business expenses, including some

rental or royalty expenses

Deduction from are itemized deductions subtracted from AGI Generally personal expenses, or Expenses incurred by employees

Page 4: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-4

Deduct For AGI

Deciding Classification of Business Expenses

Yes No

Schedule C or

Schedule F (if farm)

Deduct From AGI

Next Slide

Are expenses from Self-Employment?

Page 5: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-5

Are Expenses Reimbursed by employer?

No

If necessary for performance of job

then itemize deduction on

Schedule A (subject to 2% AGI)

Yes

Does firm have accountable plan?

Did employee

substantiate & return excess?

Reimbursement included in gross wages. Deduction only allowed on Schedule A as miscellaneous itemized subject to 2% AGI

Deciding Classification of Business Expenses

NoYes

Previous Slide

No tax effect

NoYes

Page 6: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-6

Objective

Know the requirements for deducting travel and

transportation expenses

Page 7: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-7

Travel ExpensesTo be deductible, travel expenses must result

from A business reason (needs to be documented) Overnight travel away from taxpayer’s tax home

(defined as primary place of business)

Meals and entertainment expenses are only 50% deductible

Page 8: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-8

Travel Expenses (continued) If primarily business trip in US:

Travel costs are deductible Expenses must be split between business and personal reason

If primarily business trip outside US: Travel expenses are allocated between personal and business

(based on number of days) Meals & entertainment (only 50% deductible) must be before or

after a business discussion and luxury items are not deductible

If primarily pleasure trip (in or outside US): Travel costs are not deductible Other costs directly related to business are deductible

Page 9: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-9

Travel Expenses (continued) Employees under nonaccountable plan must track actual

expenses Employees under accountable plan may either track actual

expenses or use per diem method (3 methods of calculating per diem)

Federal rate method (dependent on area) has a standard base rate of $85/day IRS publishes per diem rates for each geographical area in USCan access current rates at www.irs.gov

High-low method (a few “high” areas ($204/day) and the rest are low areas $125/day)Easier to use if employees travel extensively If employer uses high-low to reimburse employee, must continue throughout

the year

Page 10: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-10

Travel Expenses (continued)Meals and Incidental Expenses (M&IE) Method

Allows a per diem plus actual lodgingEither hi-low M&IE rates ($42 and $34) or federal rate

method (standard base rate is $30)If taxpayer is self employed and elects a per diem

method, must choose this one!

Page 11: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-11

TransportationTaxpayer doesn’t have to be away from tax

home to get transportation deduction Commuting is never deductible, except if:

traveling between home and temporary work and have regular place of business

taxpayer’s principal place of business is home - then transportation is deductible

working two jobs - cost of going from one job to another

Page 12: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-12

May take standard ($.365/mile) mileage rate plus parking/tolls (car loan interest and property taxes determined separately) or actual To use standard per mile deduction, taxpayer must

own or lease carnot rent outnot own fleetnot have depreciation other than straight line not have taken Section 179 depreciation on auto

Interest portion of car payment is only deductible if self employed

Transportation (continued)

Page 13: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-13

Transportation (continued) Actual expense is calculated by receipts as multiplied by business use

percent and includes: gas, oil, repair, and maintenance depreciation plus property taxes and interest on car ONLY if self-employed business-related parking/tolls FULLY deductible

Not multiplied by business use percentage

If choose actual expense - cannot change to standard If choose standard - may change to actual, but must use straight line

depreciation Reporting

If taxpayer is self-employed, vehicle expenses reported on Schedule C (and can take auto interest)

If an employee, report on 2106 which carries to Schedule A

Page 14: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-14

Objective

Understand when a Home Office deduction may be claimed and

how deduction is computed

Page 15: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-15

Office in Home (OIH)Generally may not take a deduction for business

use of a homeMay take home office deduction if

Home is used regularly and exclusively as the principal place of businessOr required for the “convenience of employer”

Office in home is used regularly and exclusively to manage business or meet with clients

Office is separate structure and used exclusively for business or storage of inventory (and home is taxpayer’s sole place of business)

Page 16: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-16

Home Office (continued) Compute using Form 8829

Allowable deduction carries to bottom of Schedule C if self employed Allowable deduction carries to bottom of Schedule A if an employee

business expense – but can only take if necessary for employer convenience when employer does not provide a regular office

Two columns on 8829 for OIH expenses Direct expenses

work done directly on home office (for example new cabinetry) and

indirect expensesapplicable to entire home and allocable to OIH (such as new furnace or lawn

maintenance)

Allocation done on basis of square footage

Page 17: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-17

Home Office (continued) OIH deduction cannot be used to create a Net Loss for

the business (other than allocable portion of mortgage interest and taxes)

Therefore, OIH is deducted using a tier system:Gross income

less: Interest/taxes allocable to OIH (balance to A)

less: Other business deductions

less*: Maintenance, depreciation, rent, utilities (only deductible if GI remaining)

*These items cannot put taxpayer into a loss Must carry forward excess to future years – “OIH Carry Forward”

Page 18: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-18

Objective

Know the special requirements for claiming other common

business expenses

Page 19: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-19

EntertainmentMay take a deduction for 50% of cost of entertainment

connected with a businessEntertainment must be either directly related to, or

associated with active conduct of business “Directly related” costs are those related to an actual business

meeting, such as a business lunch “Associated with” costs serve a specific business purpose and

must occur immediately before or after a business discussion

Deduction for the cost of entertainment facilities is severely limited Club dues are not deductible

Page 20: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-20

Educational ExpensesDeductible if the education:

Maintains or improves existing skills, or Is needed to meet requirements of taxpayer’s

current employment

Cost of courses and transportation, lodging and 50% meals (if travel is required to obtain education) Self-employed educational expenses are reported

on Schedule C Employee on Schedule A

Page 21: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-21

Dues, Subscriptions and PublicationsProfessionals may deduct the cost of

dues, subscriptions and publications related to their profession

Prepaid amounts must be allocated over useful life if > one year

Page 22: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-22

UniformsUniforms and special clothes are

deductible if: Can’t be worn outside of work and Are required by employer

Protective wear always deductible

Page 23: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-23

Business GiftsMay deduct the cost of gifts up to $25 per donee per

year Husband and wife = 1 donee No limitation for small business gifts (not cash) up to $4

each that have taxpayer’s name or company name on them

Tangible personal property (not cash) up to $400 is allowable if given to employees for safety or length of service awards ($1,600 in conjunction with a “qualified” plan)

Page 24: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-24

SubstantiationTaxpayers must have written proof of

expenses for entertainment (E) and gifts (G) Amount (E & G) Time and place (E) Date and description (G) Business purpose (E & G) Business relationship (E & G)

Page 25: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-25

Objective

Be able to complete a simple Form 2106 and Schedule C

Page 26: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-26

Schedule C vs. C-EZCan use C-EZ if:

Business expenses are $2,500 or less per year

Business does not carry inventory

Business uses cash method of accounting

Don’t need to file a Form 4562 for depreciation

Don’t have an office in home

Don’t have a net loss and have only one business

Don’t have employees

Page 27: ©2003 South-Western College Publishing, Cincinnati, Ohio CHAPTER 4 Self-Employed and Employee Expenses Self-Employed and Employee Expenses

© 2003 South-Western College Publishing Transparency 4-27

The End


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