Chapter I9Employee Expenses and Deferred CompensationDiscussion QuestionsI9-1 It is important to distinguish whether an individual is an employee or an independentcontractor (self-employed) because some expenses are only partially deductible by employees ornot deductible at all. A self-employed individual who incurs a business-related expenditure maydeduct the expense for AGI on Schedule C, Form 1040 under Section 162. In addition,employers pay certain payroll taxes in behalf of their employees. On the other hand, anindividual's employment related activities such as travel and transportation are deductible fromAGI and are subject to different tax rules and regulations. Individuals may prefer to be classifiedas employees because the employee portion of the social security tax rate in 1998 of 7.65% is lessthan the self-employment tax rate of 15.3%. This difference is mitigated somewhat because self-employed individuals receive an income tax deduction equal to 50% of their self-employment taxpayments. Consideration should also be given to the hospital insurance portion of the FICA taxwhich continues to apply without limit at a 1.45% rate for both employees and employers and at a2.9% rate for self-employed individuals. p. I9-3.I9-2 The deductibility and classification of Matt's transportation and unreimbursed travelexpenses depends upon the nature of the expenditure. The transportation and unreimbursed travelexpenses incurred in Matt's employment are deductible from AGI as an itemized deduction subjectto the 2% nondeductible floor for miscellaneous itemized deductions. The 3% scale down of totalitemized deductions for upper-income taxpayers under Sec. 68 may also apply to reduce thedeductible amount of unreimbursed employee expenses. The transportation and travel expensesincurred in his own business are deductible for AGI and are not subject to specific limitations. pp.I9-2 and I9-3.I9-3ForAGIFrom AGI Nondeductible2%Limit50%Deductiblea. Reimbursed business mealsb. Auto expenses going to and from workc. Legal expenses in preparation of the taxpayer's tax returnd. Unreimbursed employee travel and transportation expensese. Unreimbursed entertainment expensesf. Qualified moving expense of an employeeg. Education-related expenses involving tuition and booksXXXXXXXXXXXXaX aBusiness meals are subject to the 50% deduction limit.I9-1pp. I9-3 through I9-24.I9-4Are subject to2% nondeductible floorNot subject to2% nondeductible floora. Investment counseling feesb. Tax return preparation feesc. Unreimbursed professional dues for an employeed. Gambling losses (to extent of winnings)e. Interest on personal residencef. Unreimbursed employee travel expenseg. Reimbursed employee travel expensesh. Safe deposit box rental expenses for an investorXXXXXXXX pp. I9-3 and I9-4.I9-5 a. Marilyn may deduct the travel expenses including air fare, lodging and meals forAGI. (Note: the business meal portion of this expense is reduced by 50%.)b. Reimbursed travel expenses are generally deductible for AGI. However, since thereimbursements are made pursuant to an accountable plan, Marc will not report thereimbursement in his gross income and cannot deduct the expenses. c. Marc may deduct unreimbursed expenses from AGI subject to the 2%nondeductible floor.d. Kay may deduct travel expenses for AGI. Any business meals are reduced by 50%.pp. I9-4 through I9-8, I9-15 through I9-17.I9-6 Kelly may deduct $750 before applying the 2% nondeductible floor. The deduction iscomputed as follows:Total business meals expenses $2,000 Minus: lavish and extravagant expenses ( 500) $1,500 x 0.50 Deductible amount $ 750 p. I9-6I9-2I9-7 a. All expenses except personal clothing (e.g., transportation, meals and lodging) aredeductible from AGI and are subject to the 2% nondeductible floor. The meal costs of $1,000must be reduced by 50%. Thus, the total deductible amount is $8,500 ($9,000 - $500) (subject tothe 2% nondeductible floor). Note that the 3% scaledown of total itemized deductions for upper-income individuals may also apply if her AGI is in excess of $124,500 (1998).b. None would be deductible. Note that the airfare en route to the new job locationmay be deductible as a moving expense if the requirements of Sec. 217 are met.c. The travel expenses would continue to be nondeductible because the employmentis treated as indefinite if the position of the IRS in Rev. Rul. 93-86 is upheld by the courts. pp.I9-5 through I9-8.I9-8 The travel expenses related to attending the seminars are not deductible for AGI since theyare related to the production of rental income under Sec. 212. The registration fees are deductiblefor AGI since they are not travel expenses and are related to the rental activity under Sec. 212. p.I9-8.I9-9 It is necessary to allocate a portion of the total reimbursement to each expense categorybecause the various unreimbursed amounts would be subject to various limitations such as the 2%floor and 50% business meal rule. Reimbursed expenses are fully includible in gross income andare deductible for AGI subject to the accountable plan rules. pp. I9-15 through I9-17.I9-10 An employee may deduct the difference between the standard mileage rate and thereimbursed rate as a miscellaneous itemized deduction subject to the 2% nondeductible floor. Analternative way of claiming the deduction would be for the employee to record actual automobileexpenses and deduct those in excess of reimbursed expenses. pp. I9-10 through I9-12.I9-11 The actual expense method may be used in subsequent years. However, MACRS underthe regular method may not be used for computing depreciation (straight-line method is required)and the basis of the automobile must be reduced by 12 cents per mile for years 1994-1997 (11.5cents per mile for years 1992 and 1993) of business usage. p. I9-10.I9-12 The employee should have adequate records substantiating expenses incurred inconnection with his/her employment. In other words the employee must keep a record includingreceipts of amounts, dates, places of expenditure, business purpose, to support the amountsclaimed on the tax return. The expenses are treated as miscellaneous itemized deductions, subjectto the 2% of AGI floor, and are reported on