Chapter 4

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  • “ 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.
  • Animation - Have to click twice in order to get to next slide.
  • 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.
  • Chapter 4

    1. 1. Income Tax Fundamentals 2010 edition Gerald E. Whittenburg Martha Altus-Buller 2010 Cengage Learning
    2. 2. <ul><li>Deduction from AGI are itemized deductions </li></ul><ul><ul><li>Subtracted after AGI is calculated such as employee expenses – reflected as itemized deductions on Schedule A </li></ul></ul><ul><ul><ul><ul><li>or </li></ul></ul></ul></ul><ul><ul><li>Subtracted before AGI such as </li></ul></ul><ul><ul><ul><li>Self-employed taxpayer’s business expenses - engaged in trade or business - Schedule C </li></ul></ul></ul><ul><ul><ul><li>Expenses associated with rental/royalty income - Schedule E </li></ul></ul></ul><ul><li>There are also deduction for AGI </li></ul>2010 Cengage Learning First part of the chapter Second part of the chapter
    3. 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. 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
    5. 5. <ul><li>Expenses include lodging, taxis, laundry, tips, and meals </li></ul><ul><ul><li>Meals are only 50% deductible </li></ul></ul><ul><li>To deduct, travel expenses must result from a documented business reason </li></ul><ul><ul><li>Ordinary and necessary </li></ul></ul><ul><ul><li>Substantiated and not lavish </li></ul></ul>2010 Cengage Learning
    6. 6. <ul><li>Travel status requires being away from home overnight </li></ul><ul><ul><li>‘ Overnight’ defined as long enough to need relief from work </li></ul></ul><ul><ul><li>Tax home is defined as primary place of business </li></ul></ul><ul><ul><ul><li>Not necessarily the same as family residence </li></ul></ul></ul><ul><li>Expenses of temporary assignments are deductible </li></ul><ul><ul><li>If not practical to return home each night </li></ul></ul><ul><li>Long-term temporary assignments may require reclassification of a new tax home for taxpayer </li></ul><ul><ul><li>If gone over a year </li></ul></ul>2010 Cengage Learning
    7. 7. <ul><li>Deductibility dependent on (a) where travel occurred and (b) was it business, pleasure or combination </li></ul><ul><li>If primarily business trip in US </li></ul><ul><ul><li>All travel costs (to/from) are deductible </li></ul></ul><ul><ul><li>Travel expenses split between business and personal </li></ul></ul><ul><li>If primarily pleasure trip (in or outside US) </li></ul><ul><ul><li>Travel costs (to/from) are not deductible </li></ul></ul><ul><ul><li>Meals, lodging, local transportation and incidental expenses are split between personal and business </li></ul></ul><ul><li>If primarily business trip outside USA </li></ul><ul><ul><li>Travel costs (to/from) split between business and personal based on number of days </li></ul></ul><ul><ul><li>Other travel costs deductible, if associated with business </li></ul></ul>2010 Cengage Learning
    8. 8. <ul><li>Per diem eliminates necessity of keeping copious records </li></ul><ul><li>3 methods of calculating per diem </li></ul><ul><ul><li>- Regular Federal Rate Method (lodging, meals & incidentals) </li></ul></ul><ul><ul><ul><li>A standard base rate of $109 per day </li></ul></ul></ul><ul><ul><ul><li>Per diem is higher in specified “high cost areas” </li></ul></ul></ul><ul><ul><ul><li>Per diem amounts for each part of country updated regularly at www.irs.gov – Publication 1542 </li></ul></ul></ul><ul><ul><li>- High-Low Method (for lodging, meals & incidentals) </li></ul></ul><ul><ul><ul><li>Easier to use if employees travel extensively </li></ul></ul></ul><ul><ul><ul><li>A few high areas are specified by IRS ($256/day) and the rest are low areas [$158/day]) </li></ul></ul></ul><ul><ul><ul><li>If chose this method, must continue throughout the year </li></ul></ul></ul>2010 Cengage Learning
    9. 9. <ul><ul><li>- Meals and Incidental Expenses (M&IE) Method </li></ul></ul><ul><ul><ul><li>Allows a per diem for M&IE, plus actual lodging receipts </li></ul></ul></ul><ul><ul><ul><li>Use either high-low M&IE rates ($58 and $45) </li></ul></ul></ul><ul><ul><ul><li>If taxpayer is self employed and elects a per diem method, he/she must choose this one </li></ul></ul></ul><ul><ul><ul><li>Note: sometimes rates revised more often than annually </li></ul></ul></ul>2010 Cengage Learning
    10. 10. <ul><li>Example </li></ul><ul><li>Gretchen, a Sustainability Director, travels from Idaho to New Mexico for business, paying $380 for airfare. She then spends $330 on lodging and $150 on meals, for the business portion of the trip. While there, she goes on a personal sightseeing tour of the Turquoise Trail and spends $400 on car rental and lodging and $85 on meals. What may she deduct for business travel? </li></ul>2010 Cengage Learning
    11. 11. <ul><li>Example </li></ul><ul><li>Gretchen, a Sustainability Director, travels from Idaho to New Mexico for business, paying $380 for airfare. She then spends $330 on lodging and $150 on meals, for the business portion of the trip. While there, she goes on a personal sightseeing tour of the Turquoise Trail and spends $400 on car rental and lodging and $85 on meals. What may she deduct for business travel? </li></ul><ul><li>Solution </li></ul><ul><li>Since the trip was primarily business and in the U.S., all the airfare is deductible; the lodging of $330 and 50% of the $150 business meals are also deductible. None of the personal expenses are deductible. Total deduction = $785. </li></ul>2010 Cengage Learning
    12. 12. <ul><li>Certain transportation expenses for business purposes are deductible by taxpayers </li></ul><ul><li>Taxpayer doesn’t have to be away from tax home to get transportation deduction </li></ul><ul><ul><li>Commuting is never deductible, except if: </li></ul></ul><ul><ul><ul><li>Traveling between home and work locations outside the metro area where taxpayer has regular place of business </li></ul></ul></ul><ul><ul><ul><li>Traveling between home and temporary work when taxpayer has regular place of business </li></ul></ul></ul><ul><ul><ul><li>Travel when taxpayer’s principal place of business is home </li></ul></ul></ul><ul><ul><ul><li> </li></ul></ul></ul><ul><ul><ul><li>plus can deduct additional cost of hauling tools/instruments </li></ul></ul></ul>2010 Cengage Learning
    13. 13. <ul><li>Cost of plane, rail, bus and auto (actual or standard) potentially deductible </li></ul><ul><li>May choose standard mileage deduction </li></ul><ul><ul><li>$.55 per mile </li></ul></ul><ul><ul><li>Plus business portion of </li></ul></ul><ul><ul><ul><li>Parking, tolls and personal property taxes </li></ul></ul></ul><ul><ul><ul><li>Auto loan interest (if self-employed) </li></ul></ul></ul><ul><ul><li>To use standard mileage deduction, taxpayer must </li></ul></ul><ul><ul><ul><li>Own or lease car </li></ul></ul></ul><ul><ul><ul><li>Not rent out </li></ul></ul></ul><ul><ul><ul><li>Not own fleet using 4+ autos simultaneously </li></ul></ul></ul><ul><ul><ul><li>Not have taken depreciation other than straight line </li></ul></ul></ul><ul><ul><ul><li>Not have taken Section 179 depreciation on auto </li></ul></ul></ul>2010 Cengage Learning
    14. 14. <ul><li>May choose to take actual expenses </li></ul><ul><ul><li>If choose actual expenses - cannot change to standard </li></ul></ul><ul><ul><li>If choose standard - may change to actual, but then must use straight line depreciation </li></ul></ul><ul><li>Must keep adequate cost records </li></ul><ul><ul><li>To calculate deduction, multiply actual expenses by business-use percentage </li></ul></ul><ul><li>Business use % = Business miles/Total miles </li></ul>2010 Cengage Learning
    15. 15. <ul><li>Actual expenses include </li></ul><ul><ul><li>Gas, oil, repairs and maintenance </li></ul></ul><ul><ul><li>Depreciation </li></ul></ul><ul><ul><li>Personal property taxes </li></ul></ul><ul><ul><li>Interest on car if self-employed </li></ul></ul><ul><li>Business-related parking/tolls fully deductible </li></ul><ul><ul><li>Not multiplied by business use percentage </li></ul></ul><ul><li>Reporting </li></ul><ul><ul><li>Taxpayers other than self-employed, report on 2106 which carries to Schedule A </li></ul></ul>2010 Cengage Learning
    16. 16. <ul><li>Deduction for business use of a home is allowed only by exception , including </li></ul><ul><ul><li>Home used regularly and exclusively as principal place of business or required for the “convenience of employer” when regular office not provided </li></ul></ul><ul><ul><ul><li>or </li></ul></ul></ul><ul><ul><li>The regular place to manage business or meet with clients/patients </li></ul></ul><ul><ul><ul><li>or </li></ul></ul></ul><ul><ul><li>Office is separate structure and used exclusively for business </li></ul></ul><ul><ul><ul><ul><ul><li>or </li></ul></ul></ul></ul></ul><ul><ul><li>Dwelling unit is used for inventory storage and home is taxpayer’s sole place of business </li></ul></ul>2010 Cengage Learning
    17. 17. <ul><li>OIH deduction cannot be used to create a net loss for the business </li></ul><ul><ul><li>Other than allocable portion of mortgage interest and property taxes </li></ul></ul><ul><li>Therefore, OIH is deducted using a tier system </li></ul><ul><li>Gross income </li></ul><ul><ul><li>Less : Interest/taxes allocable to OIH (balance to A) </li></ul></ul><ul><ul><li>Less : Other business deductions </li></ul></ul><ul><ul><li>Less : Maintenance, depreciation, rent, utilities* (only deductible if gross income remaining) </li></ul></ul><ul><li>*These items cannot put taxpayer into a loss; must carry forward excess to future years </li></ul>2010 Cengage Learning
    18. 18. <ul><li>Example </li></ul><ul><li>Kitty, a part time cartographer, maintains an office in her home where she reads electronic maps and keeps client records. She allocates $12,000 in mortgage interest and taxes to her OIH and collects $11,000 in fees. Assuming no other business expenses, what is her current year OIH deduction? How would this change if she also allocated $2,500 in maintenance and utilities? Will she have an OIH carry forward in the first scenario? </li></ul>2010 Cengage Learning
    19. 19. <ul><li>Example </li></ul><ul><li>Kitty, a part time cartographer, maintains an office in her home where she reads electronic maps and keeps client records. She allocates $12,000 in mortgage interest and taxes to her OIH and collects $11,000 in fees. Assuming no other business expenses, what is her current year OIH deduction? How would this change if she also allocated $2,500 in maintenance and utilities? Will she have an OIH carry forward in the first scenario? </li></ul><ul><li>Solution </li></ul><ul><li>In the first example, she may deduct the entire $12,000 with no loss carry forward. In the second scenario, she would not be able to deduct the additional $2,500 as she is limited to the gross income derived from the trade or business, resulting in a $2,500 OIH carry forward. </li></ul>2010 Cengage Learning
    20. 20. <ul><li>Compute on Form 8829 – “Expenses for Business Use of Your Home” </li></ul><ul><ul><li>If taxpayer is self employed </li></ul></ul><ul><ul><ul><li>Allowable deduction carries from 8829 to bottom of Schedule C </li></ul></ul></ul><ul><ul><li>If taken as an employee business expense </li></ul></ul><ul><ul><ul><li>Allowable deduction carries to Schedule A </li></ul></ul></ul><ul><ul><ul><ul><li>But can only take if necessary for employer convenience and employer does not provide a regular office </li></ul></ul></ul></ul>2010 Cengage Learning OIH – Form 8829
    21. 21. <ul><li>Allocation % done on basis of square footage </li></ul><ul><li>Home office square footage/Total home square footage </li></ul><ul><li>Two columns on 8829 for OIH expenses </li></ul><ul><ul><li>Direct expenses </li></ul></ul><ul><ul><ul><li>Work done directly on home office - for example new cabinetry in home office </li></ul></ul></ul><ul><ul><li>Indirect expenses </li></ul></ul><ul><ul><ul><li>Applicable to entire home and allocable to OIH – for example cleaning service </li></ul></ul></ul><ul><ul><ul><li>These costs are multiplied by OIH allocation % </li></ul></ul></ul>2010 Cengage Learning OIH Allocation
    22. 22. <ul><li>Deduction for 50% of cost of entertainment connected with a trade or business </li></ul><ul><li>Entertainment must be either directly related to, or associated with active conduct of business </li></ul><ul><ul><li>“ Directly related” costs are those related to an actual business meeting , such as a business lunch </li></ul></ul><ul><ul><li>“ Associated with” costs serve a specific business purpose </li></ul></ul><ul><ul><ul><li>Must occur immediately before or after a business discussion </li></ul></ul></ul><ul><li>Deduction for the cost (depreciation, maintenance, etc) of entertainment facilities such as clubs, yachts, hunting camps, etc. is severely limited </li></ul>2010 Cengage Learning
    23. 23. <ul><li>Example </li></ul><ul><li>Manuel is a pharmaceutical representative who travels extensively. He entertains clients regularly and on a recent trip to St. Louis, he takes his boat to entertain clients. While there he spends $286 on business meals, pays green fees of $80 to discuss business over a golf game, pays $350 to license the boat before the trip and incurs a $250 repair charge on his boat after the trip. How much is Manuel’s meals & entertainment deduction (before the 2% AGI limitation)? </li></ul>2010 Cengage Learning
    24. 24. <ul><li>Example </li></ul><ul><li>Manuel is a pharmaceutical representative who travels extensively. He entertains clients regularly and on a recent trip to St. Louis, he takes his boat to entertain clients. While there he spends $286 on business meals, pays green fees of $80 to discuss business over golf, pays $350 to license the boat before the trip and incurs a $250 repair charge on his boat after the trip. How much is Manuel’s meals & entertainment deduction (before the 2% AGI limitation)? </li></ul><ul><li>Solution </li></ul><ul><li>Manuel may take ($286 + $80) x 50% = $183; the licensing and the boat maintenance are nondeductible expenses. </li></ul>2010 Cengage Learning
    25. 25. <ul><li>In this chapter, ‘deductible education’ is identified as continuing education for employed and self-employed taxpayers </li></ul><ul><ul><li>Allowed if needed to meet requirements of taxpayer’s current employer or regulations </li></ul></ul><ul><ul><li>Allowed if maintains or improves existing skills in taxpayer’s current employment </li></ul></ul><ul><li>Cannot deduct if </li></ul><ul><ul><li>Required to meet minimum requirements of job </li></ul></ul><ul><ul><li>Qualifies taxpayer for new trade/business </li></ul></ul>2010 Cengage Learning
    26. 26. <ul><li>What’s deductible? </li></ul><ul><ul><li>Cost of courses, lodging costs, 50% meals/entertainment and travel if primarily to obtain qualifying education </li></ul></ul><ul><ul><li>However, travel as a form of education is nondeductible </li></ul></ul><ul><li>Eligible educators can deduct up to $250 for classroom materials </li></ul><ul><ul><li>K-12 teacher, counselor or principal working at least 900 hours during school year </li></ul></ul>2010 Cengage Learning
    27. 27. <ul><li>Example </li></ul><ul><li>Roberta is a paralegal who goes to law school at night. Are her educational expenses deductible? What if Roberta flew from her home in El Paso to a continuing education conference for paralegals in Dallas (if 30 hours per year of continuing education is required for paralegals to maintain certification in Texas)? </li></ul>2010 Cengage Learning
    28. 28. <ul><li>Example </li></ul><ul><li>Roberta is a paralegal who goes to law school at night. Are her educational expenses deductible? What if Roberta flew from her home in El Paso to a continuing education conference for paralegals in Dallas (if 30 hours per year of continuing education is required for paralegals to maintain certification in Texas)? </li></ul><ul><li>Solution </li></ul><ul><li>In the first scenario, the costs of attending law school are nondeductible because the education would qualify her for a new trade/business as an attorney. In the second scenario, her expenses at the conference would be deductible [meals & entertainment at 50% only] since she is complying with minimum requirements to maintain her existing job. </li></ul>2010 Cengage Learning
    29. 29. <ul><li>Professionals engaged in practice or employed may deduct the cost of dues, subscriptions and publications related to their profession </li></ul><ul><li>Prepaid amounts must be allocated over useful life </li></ul><ul><ul><li>Expected useful life of a library, for example, exceeds one year, so would be allocated over useful life of library </li></ul></ul><ul><ul><li>Short-lived publications (like annual tax service) immediately deductible </li></ul></ul>2010 Cengage Learning
    30. 30. <ul><li>Uniforms and special clothes are deductible if </li></ul><ul><ul><li>Required as condition of employment </li></ul></ul><ul><ul><ul><ul><ul><li>and </li></ul></ul></ul></ul></ul><ul><ul><li>Can’t be worn outside of work </li></ul></ul><ul><li>Protective wear always deductible </li></ul><ul><ul><li>Items such as safety shoes, hard hats, etc. </li></ul></ul><ul><li>Laundering of uniforms is deductible </li></ul>2010 Cengage Learning
    31. 31. <ul><li>May deduct gifts up to $25 per donee per year </li></ul><ul><ul><li>Plus cost of wrapping/shipping </li></ul></ul><ul><ul><li>Husband and wife = one donee </li></ul></ul><ul><ul><li>No limitation for small business gifts up to $4 each if taxpayer’s or company’s name imprinted on item </li></ul></ul><ul><li>Deduction for tangible non-cash personal property up to $400 is allowable </li></ul><ul><ul><li>If given to employees for safety or length of service awards </li></ul></ul><ul><ul><li>Or up to $1,600 is allowable if in conjunction with a ‘qualified plan’ </li></ul></ul><ul><li>Gifts to taxpayer’s supervisor are not deductible </li></ul>2010 Cengage Learning
    32. 32. <ul><li>Taxpayers must have written proof of expenses for entertainment (E) and gifts (G) </li></ul><ul><ul><li>Amount (E & G) </li></ul></ul><ul><ul><li>Time and place (E) </li></ul></ul><ul><ul><li>Date and description (G) </li></ul></ul><ul><ul><li>Business purpose (E & G) </li></ul></ul><ul><ul><li>Business relationship (E & G) </li></ul></ul>2010 Cengage Learning
    33. 33. <ul><li>Taxpayer who operates business as a sole proprietorship must file Schedule C (long form) or Schedule C - EZ (short form) or Schedule F (farm) </li></ul><ul><li>Can use C - EZ if </li></ul><ul><ul><li>Business expenses are <=$5,000 per year </li></ul></ul><ul><ul><li>Business does not carry inventory </li></ul></ul><ul><ul><li>Business does not have net loss for the year </li></ul></ul><ul><ul><li>Taxpayer only has one business as a sole proprietor </li></ul></ul><ul><ul><li>Business does not have employees </li></ul></ul><ul><ul><li>Taxpayer not required to file a Form 4562 </li></ul></ul><ul><ul><li>Business must not include an OIH deduction </li></ul></ul><ul><ul><li>Business must not have had disallowed passive losses in prior years </li></ul></ul><ul><ul><li>Business uses cash method of accounting </li></ul></ul>2010 Cengage Learning
    34. 34. <ul><li>Taxpayers with net earnings of $400 or more required to pay self-employment tax </li></ul><ul><ul><li>File Schedule SE with Form 1040 </li></ul></ul><ul><li>Tax equals </li></ul><ul><ul><li>Social security tax (12.4% of first $106,800) </li></ul></ul><ul><ul><ul><li> plus </li></ul></ul></ul><ul><ul><li>Medicare tax (2.9% of all net earnings) </li></ul></ul><ul><li>Taxpayer gets a deduction for AGI equal to half of the self-employment tax </li></ul>2010 Cengage Learning
    35. 35. 2010 Cengage Learning

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