Chapter 6

LO 9: Explain the requirements for the deduction of contributions to an Individual Retirement Account. Conventional IRA - One Spouse Covered Example Married taxpayers with AGI = $200,000 contribute $6,000 each to their IRAs. How much is deductible if Spouse 1 is covered by a qualified plan but Spouse 2 is not?

Spouse 1: at $200,000, Spouse 1 is fully phased out of a deductible IRA contribution Spouse 2: Their AGI is $200,000; Spouse 2 is $7,000 into our $10,000 phaseout window Calculation 1)$6,000 full deduction X [7,000 / 10,000 window] 2)= $6,000 X 70% 3)= $4,200 reduction to deduction 4) = $6,000 - $4,200 = $1,800 maximum deduction

Retirement Plan Contribution Deductions

Taxpayers who do not have access to an employer sponsored pension plan are allowed several options: -Keogh or H.R.10 plans (for self-employed taxpayers only) Individual Retirement Accounts (for all taxpayers) The effect of this arrangement is to reduce adjusted gross income (and ultimately taxable income) by the amount contributed to the plan, providing the same tax relief as an employer-sponsored plan. Self-employed taxpayers are allowed to establish their own separate retirement savings plan

Compensation of Employees Example: Tina is the sole shareholder of Staple Manufacturing Corporation. She is the president of the corporation and pays herself $200,000 a year. Her son, who is the operations officer, is paid $60,000 a year. Her son seldom visits the plant because he is a full-time student at State University. The next-highest-paid employee, the general manager, is unrelated to Tina and is paid $50,000 a year. During an audit, the IRS determines that based on comparable salaries in the area, a reasonable salary for Tina should be $90,000. Based on an examination of employee records, the IRS decides that Tina's son is not an employee. The salary paid Tina's son is a sham (an assignment of income from Tina). How much of the payments to Tina and her son is deductible by Staple?

The $110,000 = ($200,000 − $90,000) excess salary paid to Tina is not a deductible expense of the corporation Components The excess salary paid Tina is taxed as a dividend payment. The salary paid to her son is disallowed as a deduction for the corporation because it lacks a business purpose Under the assignment-of-income doctrine, the payment of the son's salary is taxed as dividend income to Tina. Tina is deemed to have made a gift to her son in the amount of the salary payments. The gift to the son is excluded from his income and is not deductible by Tina

LO 2: Describe the two methods a taxpayer can use to deduct auto expenses and explain how each method is used in calculating the deduction Brendan works weekdays as a nurse at a local hospital that is 14 miles from his home. He also works as a waiter at a restaurant 2 nights during the week and on weekends. The weeknights he works at the restaurant, he leaves directly from the hospital. The restaurant is 6 miles from the hospital and 8 miles from his home. What portion of Brendan's travel is considered business-related?

The 14 miles (28 miles round-trip) from Brendan's home to the hospital are commuting and considered personal. The 6 miles from the hospital to the restaurant are business, and the 8 miles from the restaurant to his home are personal. The mileage to and from the restaurant on the weekend is considered personal because Brendan did not work at his regular job. NOTE: If during the week, Brendan went home before going to the restaurant, his business miles would be limited to his normal travel distance (6 miles).

Chanda is 36, single, and an active participant in a qualified employee pension plan. Determine the maximum Roth IRA contribution that she can make in each of the following cases: b. Her adjusted gross income for the year is $125,000.

The amount of Chandra's Roth IRA contribution must be reduced because her adjusted gross income exceeds the $122,000 phase-out level.

LO 2: Describe the two methods a taxpayer can use to deduct auto expenses and explain how each method is used in calculating the deduction Auto Expenses

The cost of using an automobile for business is deductible

Chanda is 36, single, and an active participant in a qualified employee pension plan. Determine the maximum Roth IRA contribution that she can make in each of the following cases: d. Her adjusted gross income for the year is $65,000, and she makes a $4,500 contribution to a deductible IRA account.

The maximum amount that a taxpayer can contribute to all of his or her IRA accounts is $6,000. Because Chandra made a $4,500 contribution to another IRA account, the maximum amount that she can contribute to her Roth IRA is $1,500 ($6,000 - $4,500).

LO 10: Explain the requirements for contributing to a Roth Individual Retirement Account and a Coverdell Education Savings Account. IRA Limitations-EX Kathryn and Michael are married and both participate in their employers' qualified pension plans. Their adjusted gross income is $80,000, and each contributes $4,000 to a deductible IRA. What is the maximum amount they each may contribute to a Roth IRA?

The maximum amount they each can contribute to a Roth IRA is $2,000. Each must reduce her or his maximum Roth IRA contribution amount of $6,000 by the $4,000 contribution made to the deductible IRA account. $6,000 max contribution - $4,000 already contributed = $2,000

LO 10: Explain the requirements for contributing to a Roth Individual Retirement Account and a Coverdell Education Savings Account. IRA Limitations

$6,000 is total annual contribution limit to all IRAs in 2019 Total contributions to all types of IRAs may not exceed $6,000 in one year ($7,000 if over age 50)

LO1: Understand the requirements for deducting meal expenses 5 part test on deduction

1)The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when carrying on any trade or business; 2) The expense is not lavish or extravagant under the circumstances; 3) The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished; 4) The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and 5) For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts

Qualified Business Income Deduction Deduction is subject to limitations

1.Overall Limitation: -The §199A QBI deduction is limited to 20% of TAXPAYER'S taxable income 2. Wage Limitation*: Single: $160,700 - $210,700 MFJ : $321,450 - $421,450 -Taxpayers with TI below the applicable range are not subject to the wage limitation -Taxpayers with TI over the applicable range: the wage limit applies "in full"

LO3: Understand requirements for deducting travel expenses Using the facts in example 10, assume that Theresa spends 3 days visiting family in Houston and 7 days auditing her client's records. What is Theresa's deductible travel expense?

10 Days - 3 Personal days = 7 Business days

LO3: Understand requirements for deducting travel expenses Theresa, a CPA, travels to Houston for 10 days. The business purpose for making the trip is to audit a client's accounting records. The airplane ticket cost $195, the hotel cost $85 a night, and she spends $40 a day on meals and $15 a day for incidentals. She did not spend any time sightseeing or visiting friends. What is Theresa's deductible travel expense?

100% Business Trip All of Theresa's travel expenses are allowed as a deduction because they are related to business. However, she is still subject to the 50% limit on meals and entertainment costs. She can deduct:

Chanda is 36, single, and an active participant in a qualified employee pension plan. Determine the maximum Roth IRA contribution that she can make in each of the following cases: a. Her adjusted gross income for the year is $66,000.

A single taxpayer with an adjusted gross income of less than $122,000 is allowed to make a $6,000 nondeductible contribution to a Roth IRA. Chandra is allowed to contribute to her Roth IRA is $6,000. This assumes that she did not make any contributions to other IRA accounts during the year.

LO4: Understand the tax treatment of business expenses that have specific deduction requirements: gifts, education expenses, employee compensation, and qualified business income. Education Expenses for self employed

A taxpayer who is self-employed can deduct the cost of education expenses as an ordinary and necessary business expense. The effect is that the deduction for education expenses is for adjusted gross income.

A.J. is the vice president for Keane Products, a marketing consulting firm. On a business trip to New York City in 2019, he meets with three executives from Keane's top account. After the meeting, A.J. takes them to dinner and then to the theater. The theater tickets cost $350. The cost of the meal is $190, including sales tax of $17 and a tip of $34. Throughout the evening, A.J. pays $42 in cab fares. How much can A. J. deduct as a business expense?

A.J. can deduct $95 (50% x $190) for the meal. The entertainment, although related to a trade or business, is not deductible because the Tax Cut and Jobs Act disallows a deduction for entertainment expenses after December 31, 2017. The $42 cab fare is fully deductible as transportation and is not subject to the 50% rule because it is not considered to be an entertainment expense. Thus, A.J's total deduction for the evening is $137 (95 + $42).

LO 2: Describe the two methods a taxpayer can use to deduct auto expenses and explain how each method is used in calculating the deduction; Actual cost method

Actual cost of using the automobile may be deducted -Business percentage of depreciation, gas and oil, repairs, insurance, interest, license fees, etc. is deductible -Deduction amount is often larger than the standard rate

LO 2: Describe the two methods a taxpayer can use to deduct auto expenses and explain how each method is used in calculating the deduction Auto Expense Methods -Standard Mileage Method

Administrative convenience concept allows a deduction based on the number of business miles driven during the year -Rate is $0.58 per mile (2019) -Tolls, parking, interest and property taxes may be added Standard rate method is not allowed if multiple cars are used Interest is deductible only if individual is self employed -Standard mileage method is subject to several limitations and requirements that should be considered before used

LO 9: Explain the requirements for the deduction of contributions to an Individual Retirement Account. Individual retirement accounts (IRA) contributions:

All taxpayers may contribute a maximum of $6,000 (in 2019) of their earned income to any type of IRA. -Special "Catch-up" rule allows up to $7,000 if 50 or older -A married couple may contribute $12,000 in total ($14,000 if over 50), but not more than $6,000 ($12,000) to any one account

Qualified Business Income Deduction The Sec. 199A

Allows a deduction for up to 20% of QBI from partnerships, limited liability companies (LLCs), S corporations, trusts, estates, and sole proprietorships Deduction taken at the partner, S corporation shareholder, estate and trust, or sole proprietor level, effective for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026

Business Expenses-Documentation Requirements

Amount Time and place Date and description Business purpose Business relationship of other person(s)

Juanita is self employed and travels to San Francisco for 7 days. b. If she spends 2 days on business and 5 days sightseeing, what amount may she deduct as travel expense?

Based on the time spent on business and personal activities, the trip was primarily for personal reasons (i.e., fewer days spent on business than on personal). As a result, none of the transportation is deductible. Other expenses are allowed for business days as follows: Airfare - $0 Hotel ($175 x 2) -350 Meals ($40 x 2 x 50%) - 40 Incidentals ($25 x 2) - 50 Total Deduction $ 440 Only expenses related to the 2 days devoted to business can be deducted. Meals are further limited to 50% of the deductible amount. The deductibility of these expenses assumes that Juanita is self-employed.

Juanita is self employed and travels to San Francisco for 7 days. If she spends 4 days on business and 3 days sightseeing, what amount may she deduct as travel expense?

Based on time spent on business and personal activities, the trip was primarily for business. As a result, transportation is fully deductible. Other expenses are deducted as follows: Airfare - $475 Hotel ($175 x 4) -700 Meals ($40 x 4 x 50%) - 80 Incidentals ($25 x 4) - 100 Total deduction of 1,355 Only expenses related to the 4 days devoted to business can be deducted. Meals are further limited to 50% of the deductible amount. The deductibility of these expenses assumes that Juanita is self-employed.

LO3: Understand requirements for deducting travel expenses Using the facts in example 10, assume that Theresa spends 6 days visiting family in Houston and 4 days auditing her client's records. What is Theresa's deductible travel expense?

Because 60% (6 of 10 total days) of Theresa's time on the trip is related to personal activities, none of the transportation expense is deductible. She can deduct the other expenses to the extent related to business activities:

Abner is married (MFJ) and reports taxable income of $495,000. His flowthrough QBI from his non-service industry S-corporation is $310,000. The S-corporation pays wages to its employees, and based on his ownership percentage, Abner's allocable share of the business's W-2 wages is $90,000. What is Abner's §199A QBI deduction?

Because Abner's taxable income is over the phaseout range, he is allowed a §199A deduction but the wage limitation applies in full. Abner's §199A QBI deduction will be the lesser of: · 20% of QBI, or · 50% of allocable W-2 wages

Chanda is 36, single, and an active participant in a qualified employee pension plan. Determine the maximum Roth IRA contribution that she can make in each of the following cases: c. Her adjusted gross income for the year is $140,000.

Because Chandra's adjusted gross income exceeds $137,000, she is not allowed to make a contribution to a Roth IRA.

QBI Example 3- Over Range, Non Service Jake is married (MFJ) and reports taxable income of $475,000. His flowthrough QBI from his non-service industry S-corporation is $260,000. The S-corporation pays wages to its employees, and based on his ownership percentage, Jake's allocable share of the business's W-2 wages is $65,000.

Because Jake's taxable income is over the phaseout range, he is allowed a §199A QBI deduction but the wage limitation applies in full. Jake's §199A QBI deduction will be the lesser of: -20% of QBI, or -50% of allocable W-2 wages. Jake's maximum potential §199A QBI deduction is: 20% x $260,000 = $52,000 The wage limitation applies, so Jake's §199A QBI deduction is limited to: 50% x $65,000 = $32,500

QBI Example 1 - Under the Threshold (SINGLE) Lewis is single and operates a sole proprietorship. His business earns net income of $130,000. Before taking the §199A QBI deduction, Lewis's individual taxable income is $150,000.

Because Lewis's individual taxable income is below the phaseout range, his §199A QBI deduction is not limited, regardless of whether his business is in a service or non-service industry. Lewis's §199A QBI deduction is $130,000 x 20% = $26,000, to be deducted from his AGI to arrive at taxable income.

LO 7: Explain the tax treatment of reimbursed employee business expenses. 1) Reimbursements = expenses Accountable Plan Treatments Ex Santamaria Company requires its employees to adequately account for all reimbursed business expenses. Sarah, an account executive, submits for reimbursement the following valid business expenses: Transportation of $600, Meals of $600, Lodging of $800 = Total Costs of $2,000. What are the tax consequences if Santamaria reimburses Sarah the $2,000?

Because there has been an adequate accounting, Sarah has no tax effects. None of the reimbursement is included in her gross income, and she is allowed no deductions for the expenses.

Lois and Kam are married and file a joint return. Lois earns $64,500 and Kam earns $40,000. Their adjusted gross income is $116,000. Determine the maximum IRA contribution and deduction in each of the following cases: c) Assume that only Kam is covered by an employer-sponsored pension plan and that their adjusted gross income is $154,000.

Both Kam and Lois are allowed to contribute $6,000 to their IRA accounts. Because Kam is covered by an employer-sponsored pension plan and their adjusted gross income exceeds $123,000, he is not eligible to deduct his contribution. However, because Lois is not covered by an employer-sponsored pension plan, her contribution is fully deductible if their adjusted gross income is less than $193,000. Since their adjusted gross income is less than $193,000, Lois can take deduct the entire $6,000 contribution.

Lois and Kam are married and file a joint return. Lois earns $64,500 and Kam earns $40,000. Their adjusted gross income is $116,000. Determine the maximum IRA contribution and deduction in each of the following cases: a. Neither Lois nor Kam is covered by an employee-sponsored pension plan.

Both taxpayers have earned income. Because neither Lois nor Kam are covered by a pension plan, they each can contribute and deduct up to $6,000. Thus, they may contribute and deduct a total of $12,000 for adjusted gross income.

LO 2: Describe the two methods a taxpayer can use to deduct auto expenses and explain how each method is used in calculating the deduction On a typical day, Carla drives 10 miles round-trip between home and her office. In addition, she drives 75 miles to meet customers and take care of other business needs. How many of the 85 miles she drives each day count as business-related miles?

Carla can deduct the cost of driving the 75 business miles. The cost of transportation to work and back home is personal and not deductible.

QBI Example 2 - Under the Threshold Chris is an employee, but not an owner, of a qualified business. Chris receives a salary of $100,000.

Chris is not permitted a §199A QBI deduction against the wage income because his salary is not considered QBI (it is not flowthrough income).

QBI Example 2 - Under the Threshold Chris is an owner of an S corporation and receives a $45,000 salary. His share of passthrough income is $60,000. He has no other sources of income

Chris is permitted a §199A QBI deduction of $60,000 x 20% = $12,000, regardless of whether his business is in a service or non-service industry. -Below income thresholds, limits do not apply -Deduction is only allowed against passthrough income

LO 9: Explain the requirements for the deduction of contributions to an Individual Retirement Account. Conventional IRA

Contributions limited to lesser of $6,000 ($7,000 if > 50) or amount of earned income Fully deductible if not covered by an employer's plan

LO 10: Explain the requirements for contributing to a Roth Individual Retirement Account and a Coverdell Education Savings Account. Roth Individual Retirement Account

Contributions limited to lesser of $6,000 ($7,000 if > 50) or amount of earned income Qualified distributions from a Roth IRA, including the income earned on the IRA assets, are not included in the taxpayer's gross income. Contributions are not deductible Earnings distributions are tax-free if: -IRA has existed for 5 years, and -Taxpayer is >59 1/2 years old Contributions are Phased Out based on AGI, regardless of other plan coverage

LO4: Understand the tax treatment of business expenses that have specific deduction requirements: gifts, education expenses, employee compensation, and qualified business income.

Cost of a gift given to a business customer may not be fully deductible -There is an overall limitation of $25 per person, per year -Gifts are not subject to the 50% entertainment limits -Delivery, gift wrap, engraving, etc., do not count toward the $25 limitation

LO4: Understand the tax treatment of business expenses that have specific deduction requirements: gifts, education expenses, employee compensation, and qualified business income. Education Expenses

Costs of education are deductible if -Required by law to maintain employment, or -Maintains or improves current job skills Costs of education are not deductible if -Necessary to meet minimum job requirements, or -Qualifies taxpayer for new trade or business Unreimbursed allowable costs are deductible for AGI as business expenses by self employed taxpayers only

Qualified Business Income Deduction in Tax Form

Deduction is a "from AGI" deduction, but taxpayers are not required to itemize in order to take it. Considered an "artificial deduction," as it is not based on business expenses

LO4: Understand the tax treatment of business expenses that have specific deduction requirements: gifts, education expenses, employee compensation, and qualified business income. Compensation of Employees To determine if compensation is reasonable, consider:

Duties, responsibilities and pay history of the employee Volume and complexity of the business Time required to do the work Ability and accomplishments of the employee Company pay policy

LO 7: Explain the tax treatment of reimbursed employee business expenses. Accountable Plan Treatments 1) Reimbursements = expenses

Effect on the employee's income is a net change of zero. Nothing is reported (income = deductions)

LO 7: Explain the tax treatment of reimbursed employee business expenses. Accountable Plan Treatments 2) Reimbursements < expenses

Employee may be in a net deduction situation Reimbursement is reported as income on employee's gross income Excess expenses are not deductible

LO 7: Explain the tax treatment of reimbursed employee business expenses. Reimbursed Employee Business Expenses - Nonaccountable Plan

Employees are not required to make an adequate accounting of their expenses All reimbursements are included in income Expenses are not deductible

LO 7: Explain the tax treatment of reimbursed employee business expenses. Accountable Plan

Employees are required to make an adequate accounting of their expenses

LO 7: Explain the tax treatment of reimbursed employee business expenses. Accountable Plan Treatments 3)Reimbursements > expenses and excess is not returned

Excess reimbursement is reported as income; included in the employee's gross income.

Business Expenses

Expenses related to Meals, Automobile Usage, Travel, and Business Gifts are deductible, subject to limitations and strict documentation requirements

LO1: Understand the requirements for deducting meal expenses Meals Deduction: Limitations-Exceptions to the 50% limitation

Expenses treated as compensation to an employee and subject to income tax withholding. This arises when the employer has a nonaccountable plan for reimbursing employees' expenses. Expenses incurred while performing services for another person who reimburses the expenses when the taxpayer specifically accounts for them. Note that the person who reimburses the expense is subject to the 50-percent limit. Recreational, social, or similar expenses primarily for the benefit of employees. The value of the entertainment is not income to employees under the de minimis fringe-benefit rule. Expenses for goods, services, and facilities that are taxable income to a recipient who is not an employee because the meal or entertainment expense represents a payment of compensation for services or a prize or an award. For goods, services, and facilities made available to the general public.

All expenses must first meet the basic tests for deductibility:

Have a business purpose Be ordinary, necessary, and reasonable Be allowed under the legislative grace concept

LO 2: Describe the two methods a taxpayer can use to deduct auto expenses and explain how each method is used in calculating the deduction; actual cost method? Nancy uses her car in her business of selling real estate. In 2019, she buys a new car and drives it 18,700 miles for business and 3,800 miles for commuting to and from the office and for other personal use. Depreciation, insurance, license, gas, repairs, and other operating expenses total $14,000. She can document that she paid $125 in tolls and parking while on business, and the interest expense on her car loan is $250. What is her deduction using the standard mileage rate method and the actual cost method?

Her car expense deduction is determined by allocating the costs of operating the car between business and personal use: Tolls and parking incurred while on business do not have to be allocated. The interest expense is allocated according to the business use percentage. If Nancy is willing to keep the records necessary to support the actual cost method, she can obtain a larger car expense deduction than under the standard mileage method.

Pablo is a computer sales representative and spends only 4 days a month in the office. His office is 18 miles from home. Pablo spends 3 nights a month traveling to his out-of-town clients. The company reimburses Pablo for all his lodging, meals, and entertainment while he is on the road. If he used the standard mileage rate, what amount can he deduct as a business expense?

Home to local clients to home is deductible o $0.58 x 10,630 = $6165.4 o $0.58 x 2,650 miles = $1537 o Total deductible is $7702.4 for the miles driven as a business expense

LO 2: Describe the two methods a taxpayer can use to deduct auto expenses and explain how each method is used in calculating the deduction; Standard Rate Method Nancy uses her car in her business of selling real estate. In 2019, she buys a new car and drives it 18,700 miles for business and 3,800 miles for commuting to and from the office and for other personal use. Depreciation, insurance, license, gas, repairs, and other operating expenses total $14,000. She can document that she paid $125 in tolls and parking while on business, and the interest expense on her car loan is $250. What is her deduction using the standard mileage rate method and the actual cost method?

If Nancy chooses to use the standard rate method, her car expense deduction is equal to 58 cents for each business-related mile driven plus any tolls and parking Because the tolls and parking were incurred while on business, they do not have to be allocated. The interest expense is based on the ratio of business-related miles to total miles.

LO 9: Explain the requirements for the deduction of contributions to an Individual Retirement Account. Conventional IRA- One Spouse Covered

If only one spouse participates in a qualified pension plan, the other spouse can still receive a deduction for his or her contribution to an individual retirement account (IRA). Covered spouse subject to MFJ limits, non-covered spouse subject to higher limit

LO 7: Explain the tax treatment of reimbursed employee business expenses. Accountable Plan Treatments Ex 1) Reimbursements = expenses Santamaria Company requires its employees to adequately account for all reimbursed business expenses. Sarah, an account executive, submits for reimbursement the following valid business expenses: Transportation of $600, Meals of $600, Lodging of $800 = Total Costs of $2,000. What are the tax consequences if Santamaria reimburses Sarah the $2,000? -Santamaria Deduction?

In this case, the employer is the taxpayer who effectively gets the deduction for the business expenses. Therefore, the employer is subject to the 50% limitation on meals.

QBI Example 4- Over Range, Service Business Jake is married (MFJ) and reports taxable income of $475,000. His flowthrough QBI from his service industry S-corporation is $260,000.

Jake cannot take a §199A QBI deduction, because his taxable income is over the phaseout range and his QBI comes from a service business.

QBI Example 3- Over Range, Non Service pJake is married (MFJ) and reports taxable income of $475,000. His flowthrough QBI from his non-service industry S-corporation is $260,000. The S-corporation does not pay wages, and based on his ownership percentage, Jake's allocable share of the business's W-2 wages is $ -0-.

Jake's maximum potential §199A QBI deduction is: 20% x $260,000 = $52,000 The wage limitation applies, so Jake's §199A QBI deduction is limited to: 50% x $ -0- = $ -0-

LO4: Understand the tax treatment of business expenses that have specific deduction requirements: gifts, education expenses, employee compensation, and qualified business income. Compensation of Employees Payments to a related party may be examined closely for

Lack of a business purpose An arms-length transaction Reality of compensation in a closely-held business

LO 6: Discuss the criteria for deducting business expenses that may have to be capitalized rather than deducted in the current period: insurance, taxes, and legal fees. legal fees.

Legal fees are deductible if they were paid to defend business income, reputation, or goodwill If fees are related to property ownership, they are capitalized with the cost of the property -not deductible. These costs must be added to the affected asset's basis.

LO 11: Discuss the requirements for expenses Congress has allowed individuals to deduct for AGI: higher education and interest on student loans. Interest on Education Loans

May deduct up to $2,500 for interest paid on education loans -Taken as a for AGI deduction -Only for payments made during first 60 months of the loan -Deduction phased-out when AGI exceeds --Married, $135,000; Single, $65,000

Mona works for Leonardo Corporation as a sales representative. Leonardo gives her a travel allowance of $350 per month. During the current year, she spends the following amounts on valid travel expenses: Transportation $ 2,700 Meals 1,500 Lodging 1,800 How should Mona treat the $350 per month travel allowance and the travel costs she incurs if: a) a. Leonardo's reimbursement plan is an accountable plan?

Mona receives $4,200 = ($350 x 12) of reimbursement for $6,000 of expenses, putting her in a net deduction situation. Mona must include the $4,200 in her gross income. With an accountable plan, Mona is allowed a deduction for adjusted gross income for the $4,200 of reimbursed expenses. The $1,800 of unreimbursed expenses is not deductible

LO 6: Discuss the criteria for deducting business expenses that may have to be capitalized rather than deducted in the current period: insurance, taxes, and legal fees. taxes

Most business-related taxes are deductible unless paid to the federal government

LO1: Understand the requirements for deducting meal expenses Meals Deduction: Limitations

Only 50% of the allowable costs may be deducted Airline crew, train conductors, bus drivers, truck drivers etc have an 80% deduction limit for meals on the road

LO3: Understand requirements for deducting travel expenses Travel expenses-Limitations

Over 50% of the activity requiring travel must have a business purpose --Personal activity costs on a business trip are not deductible --Incidental business expenses on a personal trip are deductible --Travel for general educational purposes or for investment related meetings is not deductible

Pablo is a computer sales representative and spends only 4 days a month in the office. His office is 18 miles from home. Pablo spends 3 nights a month traveling to his out-of-town clients.

Pablo can deduct the cost of traveling from home to his business clients and back he can also deduct the cost of traveling from his office to his clients and back to his office Finally, any out-of-town traveling he incurs is fully deductible The cost of traveling to his office and then home, as he does 4 days a month, is considered commuting and is a nondeductible personal expense.

LO 10: Explain the requirements for contributing to a Roth Individual Retirement Account and a Coverdell Education Savings Account. Roth IRA Example- Single Single taxpayer with AGI = $130,000 wants to contribute to a Roth IRA. How much is he allowed to contribute?

Phase him out between $122,000 and $137,000 of AGI His AGI is $130,000; he's $8,000 into our $15,000 phaseout window Calculation 1)$6,000 full contribution X [8,000 / 15,000 window] 2)= $6,000 X 53.33% 3)= $3,200 reduction to contribution 4)= $6,000 - $3,200 = $2,800 maximum contribution

LO 9: Explain the requirements for the deduction of contributions to an Individual Retirement Account. Conventional IRA Example- Single Single taxpayer with AGI of $65,000 contributes $6,000 to an IRA. How much is deductible if he is covered by a qualified plan?

Phase him out between $64,000 and $74,000 of AGI His AGI is $65,000; he's $1,000 into our $10,000 phaseout window Calculations 1) $6,000 full deduction X [1,000 / 10,000 window] 2)= $6,000 X 10% 3) = $600 reduction to deduction 4)= $6,000 - $600 = $5,400 maximum deduction

Qualified Business Income Deduction: Limitation on Certain Service Business

Qualified trades and businesses include all trades and businesses except the trade or business of performing services as an employee and "specified service" trades or businesses involving the performance of services in law, accounting, financial services, and several other enumerated fields, or where the business's principal asset is the reputation or skill of one or more owners or employees. high income taxpayers in service fields are subject to phaseout so NO DEDUCTION

Dan and Katlyn are married and operate a pizza restaurant as an S corporation. In 2019, the store has qualified business income of $300,000. Their itemized deductions are $22,000 and they have other ordinary income of $29,000. What is their §199A QBI deduction for 2019? What is their taxable income?

Regardless of the type of pass-through business in which a taxpayer is engaged, when the taxpayer's taxable income is less than $160,700 (if single) or $321,450 (if married) the taxpayer's §199A QBI deduction is the lesser of: (1) 20% of their QBI OR 20% of their taxable income not including capital gains but before the QBI deduction.

Other Business Expenses allowed as a Deduction are:

Rent on business property Business insurance Payroll taxes Property taxes Interest on business debt Utilities Professional dues and subscriptions Supplies

LO 6: Discuss the criteria for deducting business expenses that may have to be capitalized rather than deducted in the current period: insurance, taxes, and legal fees. taxes-EXCEPTION(non deductible taxes)

Sales taxes related to long-lived assets must be capitalized -must be added to the asset's basis. The sales tax is then deducted as a capital recovery through depreciation of the asset's basis. Property taxes related to real estate bought or sold during the year must be allocated between buyer and seller Assessments are not taxes, but payments for local benefits; thus they are added to the property's basis -The tax imposed for local benefits is deemed to increase the value of the taxpayer's property and is considered a capital expenditure. -As a result, the tax is added to the improved asset's basi

LO 7: Explain the tax treatment of reimbursed employee business expenses. Accountable Plan Treatments Ex 3)Reimbursements > expenses and excess is not returned Santamaria Company requires its employees to adequately account for all reimbursed business expenses. Sarah, an account executive, submits for reimbursement the following valid business expenses: Transportation of $600, Meals of $600, Lodging of $800 = Total Costs of $2,000. Assume that Santamaria reimburses Sarah in the amount of $2,200 for the $2,000 in actual expenses. Although Santamaria's plan requires employees to return excess reimbursements, Sarah does not return the excess.

Sarah is deemed to have made an adequate accounting of the $2,000 in actual expenses. The excess reimbursement, $200, must be included in her gross income.

LO 7: Explain the tax treatment of reimbursed employee business expenses. 2) Reimbursements < expenses Accountable Plan Treatments Ex Santamaria Company requires its employees to adequately account for all reimbursed business expenses. Sarah, an account executive, submits for reimbursement the following valid business expenses: Transportation of $600, Meals of $600, Lodging of $800 = Total Costs of $2,000. What are the tax consequences if Santamaria reimburses Sarah for $1,500 instead of $2,000?

Sarah is in a net deduction situation. The amount of the reimbursement, $1,500, is included in her gross income, and $1,500 of the expenses is deducted for AGI.

LO 10: Explain the requirements for contributing to a Roth Individual Retirement Account and a Coverdell Education Savings Account. Coverdell Education Savings Account.

Set up as a trust for the benefit of any person under age 18 $2,000 nondeductible contribution per student per year Phased-out for AGI greater than -Married, from $190,000 -Others, from $95,000 Tax-free growth in the trust No tax at time of withdrawal if used for qualified expenses --Tuition and fees of student

Qualified Business Income Deduction The Sec. 199A purpose

The purpose of this QBI deduction is to have the average tax rate paid by those who report income from pass-through businesses to be more in line with the flat corporate tax rate of 21 percent. To help achieve this goal, the QBI deduction is permitted regardless of whether the taxpayer itemizes their deductions or takes the standard deduction. Allows these business owners to keep pace with the significant corporate tax cut also put into effect after Dec. 31, 2017

LO4: Understand the tax treatment of business expenses that have specific deduction requirements: gifts, education expenses, employee compensation, and qualified business income. Substantiation Requirements

The tax law requires the taxpayer to keep records that will show: -The amount of the expense -The time and place of travel or meal, or date and description of a gift -The business purpose of the travel, meal, or gift -The business relationship to the person entertained or receiving the gift

Lois and Kam are married and file a joint return. Lois earns $64,500 and Kam earns $40,000. Their adjusted gross income is $116,000. Determine the maximum IRA contribution and deduction in each of the following cases: b) Both Kam and Lois are covered by an employee-sponsored pension plan.

They both can contribute $6,000 to an IRA account. Because both are covered by an employer-sponsored pension plan, the amount of the IRA deduction is reduced when their adjusted gross income reaches the phaseout range. The maximum contribution amount is not affected by this limitation, only the deductible amount of the contribution.

LO 2: Describe the two methods a taxpayer can use to deduct auto expenses and explain how each method is used in calculating the deduction Auto Expenses - Deductibility Requirements

Use of the automobile must be for travel -Out of town -From home to a temporary workplace -From the regular to a temporary workplace -From the workplace to a second job The cost of commuting is never deductible

LO4: Understand the tax treatment of business expenses that have specific deduction requirements: gifts, education expenses, employee compensation, and qualified business income. Compensation of Employees

Wages, salaries, bonuses and other compensation paid to employees is deductible if two basic tests are met: Employees must perform actual service Payment must be reasonable in amount

Mona works for Leonardo Corporation as a sales representative. Leonardo gives her a travel allowance of $350 per month. During the current year, she spends the following amounts on valid travel expenses: Transportation $ 2,700 Meals 1,500 Lodging 1,800 How should Mona treat the $350 per month travel allowance and the travel costs she incurs if: b. Leonardo's reimbursement plan is a nonaccountable plan?

With a nonaccountable reimbursement plan, the $4,200 reimbursement must be included in Mona's gross income. Mona is not allowed to deduct any of her expense.

LO3: Understand requirements for deducting travel expenses Is the trip mostly business?

You can deduct 100% of travel costs, but only the business portion of all other costs

LO3: Understand requirements for deducting travel expenses Is the trip mostly personal?

You cannot deduct any travel costs, but may still deduct the business portion of all other costs

LO 5: Understand the different tax treatment for business and nonbusiness bad debts. Bad Debts-Non business

are deductible if the debt is bona fide Debt cannot be deducted if the debt is voluntarily forgiven or the forgiveness of the debt is intended as a gift Report as a short-term capital loss deduction may be limited to $3,000 each year until the loss is fully used.

LO 5: Understand the different tax treatment for business and nonbusiness bad debts. Bad Debts

are generally deductible under the capital recovery concept To be deductible, must be related to a transaction that had a business purpose. Business bad debts are deductible only under the accrual method If the debt arose from a transaction in the taxpayer's trade or business, then its deductible

LO3: Understand requirements for deducting travel expenses Travel expenses

incurred while on business away from the tax home overnight are deductible -Tax home is the principal area in which business is conducted -Overnight means longer than a regular workday

Qualified Business Income Deduction

is the net amount of qualified items of income, gain, deduction, and loss with respect to a qualified trade or business that are effectively connected with the conduct of a business in the United States

LO4: Understand the tax treatment of business expenses that have specific deduction requirements: gifts, education expenses, employee compensation, and qualified business income. Compensation of Employees Size of deduction for salary

paid to a covered employee is limited for corporations Covered employees= CEO, CFO and the three next highest paid officers -$1,000,000 limit on compensation deduction per employee Some amounts are exempt from the limit -Pension plan contributions -Fringe benefits

LO 9: Explain the requirements for the deduction of contributions to an Individual Retirement Account. Conventional IRA Example- Married Married taxpayers with AGI = $115,000 contribute $6,000 each to their IRAs. How much is deductible if they are both covered by a qualified plan?

phase them out between $103,000 and $123,000 of AGI $115,000 as AGI; they're $12,000 into our $20,000 phaseout window $12,000 full deduction X [12,000 / 20,000 window] Calculations 1) $12,000 X 60% 2) = $7,200 reduction to deduction 3)= $12,000 - $7,200 = $4,800 maximum deduction

LO 6: Discuss the criteria for deducting business expenses that may have to be capitalized rather than deducted in the current period: insurance, taxes, and legal fees. insurance

premiums paid to protect a business from the following losses are deductible. TYPES Fire, theft, casualty or liability Group medical, term-life and worker's compensation Performance and fidelity bonds Business interruption

LO 7: Explain the tax treatment of reimbursed employee business expenses. Nonaccountable Plan Santamaria Company requires its employees to adequately account for all reimbursed business expenses. Sarah, an account executive, submits for reimbursement the following valid business expenses: Transportation of $600, Meals of $600, Lodging of $800 = Total Costs of $2,000. Assume the same facts as in example 51, except that Sarah either does not have to make an adequate accounting or does not have to return any excess reimbursement. That is, Santamaria's plan is a nonaccountable plan.

the employee must include the reimbursement (if any) in gross income. No deductions for adjusted gross income are allowed. Sarah must pick up the entire $2,200 reimbursement in her taxable income.

LO 8: Discuss the tax treatment for deducting expenses specifically attributable to self-employed individuals. Deductions for Self-Employed Taxpayers

they are allowed to deduct: 1)The cost of health insurance premiums paid for themselves -lets self-employed individuals deduct the cost of their health insurance premiums as a deduction for adjusted gross income 2)50% of the amount of self-employment tax paid -deduction of one-half of the self-employment tax equalizes the treatment for employees and self-employed individuals 3) 50% of the amount of the hospital insurance tax imposed on self-employed income over the threshold amount

LO1: Understand the requirements for deducting meal expenses To be deductible a meal must be directly related to or associated with the active conduct of a business activity:

§There is more than a general expectation of business benefit §A bona fide business activity takes place during the meal or entertainment §The principal reason for the meal is business §The expenses are related to the taxpayer and people involved in the business activity Expenses must be reasonable under the circumstances Deduction includes cost of food, beverage, tax, and tips

Juanita is self employed and travels to San Francisco for 7 days. a. Assume the same facts as in part a, except that Juanita's husband Jorge accompanied her on the trip and the hotel's single occupancy rate is $150. Jorge went sightseeing every day and attended business receptions with Juanita at night. Assume that Jorge's expenses are identical to Juanita's. What amount may Juanita and Jorge deduct as travel expense?

· Since all of Jorge's expenses are personal, they are not business related so not DEDUCTIBLE Because the hotel rate is the greater for a double occupancy than for a single, Juanita can only deduct $150 per night for lodging. The $25 difference is considered a personal expense and allocated to Jorge. Juanita can deduct the following amount. Airfare - $475 Hotel ($150 x 4) 600 Meals ($40 x 4 x 50%) 80 Incidentals ($25 x 4) 100 Total Deduction $ 1,255 The deductibility of these expenses assumes that Juanita is self-employed.