Chapter 17- employee and proprietors

other specific employee fringe benefits

1. finance and make available child care facilities 2. provide athletic facilities for employees 3. finance certain education expenses of employees 4. assist employees who adopt children

retirement plans for self-employed individuals

IRAs, Keogh plans and SIMPLE plans

Roth IRAs

a nondeductible alternative to traditional deductible IRA. earnings inside a ROTH IRA are not taxable, and all qualified distributions from a Roth IRA are tax-free. Maximum allowable annual contribution for 2011 is the same as traditional IRA.

the proprietorship as a business entity

a sole proprietorship is NOT a taxable entity separate from the individual who owns the proprietorship.

classification of employee expenses

accountable plan requires employees to adequately account for their expenses and return any excess reimbursement or allowance. nonaccountable plans is one in which an adequate accounting or return of excess amounts, or both, is not required. unreimbursed expenses are treated in a straightforward manner. Meals and expenses subject to 50% limit. these are reported as miscellaneous itemized deductions subject to the 2% of AGI floor.

medical reimbursement plans

alternative is to have a plan that is not funded with insurance. Under a self-insured plan, the employer reimburses employees directly for any medical expenses. MSAs provided an an alternative means of accomplishing a medical reimbursement plan. HSA also broadened the concept of MSAs and extended it to a larger set of taxpayers.

qualified employee discounts

can be excluded from gross income of the employee if 1. exclusion is not available for discounted sales of real property 2. property or services must be from the same line of business 3. case of property, exclusion can't exceed the gross profit component 4. case of services, exclusion is limited to 20% of the customer price.

group term life insurance

code section 79 created a limited exclusion of premiums on the first $50,000 of group term life insurance protection.

employer-sponsored accident and health plans

congress encourages employers to provide employees, retired former employees, and their dependents with accident and health benefits, disability insurance, and long-term care plans. The premiums are deductible by the employer and are excluded from the employees gross income.

foreign earned income exclusion

consists of the earnings from the individual's personal services rendered in a foreign country. to qualify taxpayer must be one of the following 1.a bona fide resident of the foreign country 2. present in a foreign country for at least 330 days during any 12 consecutive months

moving expenses

deductible for moves in connection with the commencement of work at a new principal place of work. both employees and self-employed individuals can deduct these expense. to be eligible must meet 2 basic tests: distance and time

proprietor/independent contractor

describes a self-employed individual

employee expenses

employee expenses fall into one of the following categories: 1. transportation 2. travel 3. moving 4. education 5. entertainment 6. other

transportation expenses

employee may deduct unreimbursed employment-related transportation expenses as an itemized deduction from AGI. include only the cost of transporting the employee from one place to another when the employee is not away from home in travel status.

time test

employee must be employed on a full-time basis at the new location for 39 weeks in the 12 month period following the move.

education expenses

employees and self-employed individuals can deduct expenses incurred for education as ordinary and necessary business expenses, provided the expenses are incurred to maintain or improve existing skills required in the present job. Not deductible if the education is for either of the following: 1. to meet the minimum educational standards for qualification in the taxpayer's existing job 2. to qualify the taxpayer for a new trade or business

traditional IRA

employees not covered by another qualified plan can establish their own tax-deductible IRAs. 2010/2011, contribution ceiling is the smaller of $5,000 or $10,000 for spousal IRAs or 100% of compensation. $200 floor on the IRA deduction limitation for individuals whose AGI is not above the phaseout range.

SIMPLE plan

employees w/ 100 or fewer employees who do not maintain another qualified retirement plan may establish this. plan can be in the form of a 401K or IRA.

exclusions available to employees

exclusions available only to employees are generally referred to as qualified fringe benefits. deductible by the employers and excludable by employees.

cafeteria plans

if an employee is offered a choice b/t cash and some other form of compensation, the employee is deemed to have constructively received the cash even when the noncash option is elected. Cafeteria plans provide flexibility in tailoring the employee pay package to fit individual needs.

hobby losses

if an individual can show that an activity has been conducted with the intent to earn a profit, losses from the activity are fully deductible. The hobby loss rules apply only if the activity is not engaged in for profit. Hobby expenses are deductible only to the extent of hobby income.

nondeductible contributions

if ineligible to make a deductible contribution to an IRA, nondeductible contributions can be made to separate accounts. Same ceiling limits as an IRA. Income in the account accumulates tax-free until distribution.

meals/lodging for the convenience of the employer

income can take any form. code section 119 excludes from gross income the value of meals and lodging provided to the employee if 1. meals/lodging are furnished by the employer, on employer's business premises, for the convenience of the employer. 2. case of lodging, the employee is required to accept the lodging as a condition of employment.

factors considered in classification

issue is whether an employer-employee relationship exists. IRS has created the 20-factor test for determining whether a worker is an employee or an independent contractor. 1. has the right to specify the end result and how the result may be attained. 2.can exert will and control over the person 3. has the right to discharge the person performing the service 4. furnishes tools and a place to work and 5. base payment on time spent rather than the task performed *each case tested on its own merits, the right to control the means and methods of accomplishment is the definitive test.

travel expenses

itemized deduction is allowed for unreimbursed travel expenses related to a taxpayers employment.

flexible spending plans

like cafeteria plans. employee accepts lower cash compensation in return for the employer's agreement to pay certain costs that the employer can pay w/o the employee recognizing gross income. Plans are offered as use or lose plans.

other employee expenses

not allowed a deduction for office in the home expenses unless a portion of the residence is used exclusively and on a regular basis as either: the principal place of business for any trade/business of the taxpayer, or a place of business used by clients, patients, or customers. also. an additional test of the convenience of the employer rather than merely being "appropriate and helpful"

entertainment expenses

only 50% of meal and entertainment expenses is deductible

deductions related to a proprietorship

ordinary and necessary business expenses- general, and not entity specific. Health insurance premiums- may deduct 100% of insurance premiums paid for medical coverage as a deduction for AGI. self-employment tax- levied to provide social security and medicare benefits.

nontaxable employee benefits

sec. 132 1. no-additional-cost-services 2. qualified employee discounts 3. working condition fringes 4. de minimis fringes 5. qualified transportation fringes

Keogh Plans

self-employed individuals who establish this plan for themselves are also required to cover their employees under the plan. when an individual decides to make all investment decisions, a self-directed retirement plan is established. A Keogh plan may be either a defined contribution plan or a defined benefit plan.

determination of employment status

tax deficiencies as well as interest and penalties can result in the event of misclassification.

distance test

the taxpayers new job location must be at least 50 miles farther from the taxpayers old residence than the old residence was from the former place of employment.

foreign earned income

u.s. tax on income regardless of income's geographic origin. Income may also be subject to tax in the foreign country, and thus the taxpayer would carry a double tax burden. taxpayer can elect either 1. to include the foreign income in his taxable income and then claim a credit for foreign taxes paid or 2. to exclude the foreign earnings from his U.S. gross income (foreign earned income exclusion).