Liberty Tax Service Online Basic Income Tax Course. Lesson 13 1
Chapter 12 - Homework HOMEWORK 1: Find the total 2008 depreciation for each of the following problems. Use one depreciation worksheet to figure the depreciation for all of the problems. For prior and current year property, assume special depreciation was taken unless it is stated that the taxpayer elected out. The “depreciation prior year” column in the worksheet is for record keeping. Do not complete it for this exercise. All property was placed in service on the purchase date. 1. Office furniture (cost $800), a copier (cost $3, 500), and file cabinets (cost $300) all purchased April 2, 2006 and used 100% for business. In 2006, a $1, 000 section 179 deduction was taken for the copier. A computer (cost $2, 500) bought August 10, 2008 and used 75% for business (no section 179 deduction). 2
Chapter 12 - Homework 2. A house used as rental property (purchase price $109, 000, land value $9, 000, title insurance and transfer taxes $1, 000) purchased on July 12, 2000. Replacement of all the shrubbery surrounding the house (cost $3, 000) in June 2007. An addition to the house (cost $15, 000) completed in October 2008. 3. A passenger automobile purchased on August 11, 2006 for $32, 000 and driven 60% for business (26, 000 total miles including 15, 600 business miles) in 2008. 4. A safe bought in January 2005 (purchase price $3, 670, sales tax $300, shipping charges $30) used 100% for business and sold in September 2008. 5. An office building (purchase price $167, 000, land value $12, 000) purchased June 4, 1992. 3
Chapter 12 - Homework 6. A copier (cost $3, 000) purchased March 12, 2007 and office furniture (cost $5, 000) purchased November 20, 2007 all used 100% for business. A computer system (cost $22, 000), used 100% for business, purchased and placed in service on September 27, 2008 (no section 179 deduction). 4
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Chapter 12 - Homework HOMEWORK 2: Complete a depreciation worksheet and Form 4562 for the following: Al Katz (SSN 155 -22 -1221) owns a shoe store called “Al the Shoe Man”. His net income from shoe sales and repairs in 2008 was $280, 000. Al has been in business since 2005 when he made the following purchases: Building 8/15/2005 Shelving 9/18/2005 $150, 000 ($12, 000 land value) $25, 000 On 3/3/2006, Al purchased a mini-van for $10, 000. The van is used 100% to make deliveries for the business and is parked at the store when not in use. In 2008, Al drove the van 17, 000 miles making shoe deliveries(9, 100 miles from January 1 through June 30 and 7, 900 miles from July 1 through December 31). Al has a vintage Ford Fairlane he uses for personal purposes. 6
Chapter 12 - Homework On 7/20/2008, Al purchased a computer system for $3, 500 exclusively for business use. He wants to expense $1, 500 under section 179 and depreciate the remainder. Also in July, Al started a major store renovation project which was ready for use by 7/28/2008. It cost him $25, 000. On 8/15/2008, Al purchased a carpet for the entire store for $8, 000 and paid an additional $700 for delivery. He wants to take a section 179 deduction for this. Once the carpet was in place, Al had new store furniture brought in at a cost of $10, 000. It was purchased and delivered 8/25/2008. 7
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Chapter 13: Other Itemized Deductions Chapter Content ü Casualty and Theft Losses ü Job Expenses ü Travel Expenses ü Entertainment Expenses ü Gifts ü Local Transportation ü Car Expenses ü Job Related Education Expenses ü Most Other Miscellaneous Deductions ü Key Ideas Objectives ü Understand How to Figure and Report Casualty and Theft Losses on Schedule A ü Determine What Job Expenses an Employee Can Deduct on Schedule A ü Know How to Complete Form 2106 13
Other Itemized Deductions CASUALTY AND THEFT LOSSES are losses suffered because of damage to or loss of your nonbusiness property, such as your home. JOB EXPENSES AND MISCELLANEOUS DEDUCTIONS are deductions for ordinary and necessary business expenses you incur as an employee and for expenses related to producing or managing income or paying taxes. Only expenses that exceed 2% of your adjusted gross income are deductible. 14
Other Itemized Deductions Schedule A 15
CASUALTY AND THEFT LOSSES A. This is a limited deduction for expenses incurred from theft of or damage to personal property (your home, your personal car, or other non-business property). 1. Determine whether the loss results from a casualty or theft under IRS rules. 2. Complete Form 4684 to figure the amount of the loss and the amount you can deduct. 3. Enter the deduction on line 20 of Schedule A. 16
CASUALTY AND THEFT LOSSES Casualty Loss B. A casualty is damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual such as: 1. Car accidents 2. Earthquakes 3. Fires 4. Floods 5. Terrorist attacks 6. Storms 7. Hurricanes, tornadoes 8. Vandalism. ü A sudden event is one that is swift, not gradual or progressive. ü An unexpected event is one that is ordinarily unanticipated and unintended. ü An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which 17 you were engaged.
CASUALTY AND THEFT LOSSES C. Casualty losses do not include damage from progressive deterioration (e. g. , damage caused by termites) or damage caused by ordinary accidents or willful acts or negligence. All of Sue’s plants and shrubs were destroyed by an unusual and unexpected infestation of beetles. Because this loss was sudden, unexpected, and unusual it would qualify as a casualty loss. Damage to her plants over time by the usual insects and pests native to her area would not qualify as a casualty loss. 18
CASUALTY AND THEFT LOSSES D. To prove a casualty loss your records must show all the following: 1. 2. 3. 4. The type of casualty The date the casualty occurred The loss was a direct result of the casualty You owned the property, or were contractually liable for the loss for leased property. 19
CASUALTY AND THEFT LOSSES Theft Loss E. A theft is the illegal taking and removing of money or property with the intent to deprive the owner of it. Theft includes crimes such as: 1. 2. 3. 4. 5. Blackmail Burglary Embezzlement, extortion Kidnapping Robbery 20
CASUALTY AND THEFT LOSSES F. To prove a theft loss your records must show all the following: 1. The date you discovered the property was missing. 2. That your property was stolen. 3. That you were the owner of the property. The best record is a police report. Notify the police of any theft of your property. 21
AMOUNT OF LOSS A. The amount of your casualty or theft loss is the smaller of : 1. The adjusted basis of the property before the casualty or theft, or, 2. The decrease in the FMV of the property as a result of the casualty or theft minus any insurance or other reimbursements you receive or expect to receive. B. Adjusted basis is the basis increased or decreased by items such as improvements and previous casualty loss claimed. C. Decrease in FMV is the difference between the value of the property immediately before and immediately after the casualty or theft. 22
AMOUNT OF LOSS – Problem 1 Nick’s wallet containing $700 is stolen. He reported theft to the police. The decrease in the value of his property is $700. He can claim a loss of $700. Nick ran his car into a pole. Before the accident his car was worth $6, 200. After the accident the FMV was $2, 000. The decrease in the value of the car is $4, 200 ($6, 200 -$2, 000). If Nick had paid $12, 000 for the car, what is the amount of loss Nick can claim? a. $12, 000 b. $ 4, 200 c. $ 6, 200 23
AMOUNT OF LOSS – Problem 1 Nick ran his car into a pole. Before the accident his car was worth $6, 200. After the accident the FMV was $2, 000. The decrease in the value of the car is $4, 200 ($6, 200 -$2, 000). If Nick had paid $12, 000 for the car, what is the amount of loss Nick can claim? b. $ 4, 200 The amount of his loss would be $4, 200 which is the smaller of the adjusted basis or the decrease in FMV. 24
AMOUNT OF LOSS Figuring the Decrease in FMV D. To figure the decrease in fair market value, you generally need an appraisal. E. You can use the cost of clean up and repairs to measure the decrease in value if: 1. The repairs are necessary to bring the property back to its condition before the casualty. 2. The amount spent for the repairs is not excessive 3. The repairs are only to take care of the damage 4. The repairs do not increase the value of the property to more than its value before the casualty. 25
AMOUNT OF LOSS Gloria and Jim’s living room furniture was damaged in a fire. The furniture was worth $2, 300 immediately before the fire. They paid $800 to repair the damage. They can use the $800 figure as the decrease in the FMV as a result of the fire. Sandy’s deck was damaged in a tornado. The deck was worth $1, 400 immediately before the damage. Sandy decided to not only repair the damage but also to enlarge and improve the deck and she paid $1, 200 to do this. She cannot use $1, 200 to measure the decrease in FMV. 26
AMOUNT OF LOSS F. If your car is damaged or stolen, the books issued by automobile organizations that list your car may be used in figuring the value of your car. You can modify the book’s retail value by such factors as mileage and the condition of your car. 27
AMOUNT OF LOSS Reimbursements G. You must reduce the amount of your loss by any reimbursement you receive or expect to receive even if you will not receive it until a later tax year. 1. The most common type of reimbursement is an insurance payment 2. If your property is insured, you must file a claim in order to take the deduction. Eve’s car is damaged in an accident. Under her insurance policy, she is responsible for the first $500 of damages to her car. Eve can claim a casualty loss of $500 (subject to the deduction limits) on Schedule A even if she does not file an insurance claim. 28
AMOUNT OF LOSS H. If a single casualty or theft involves more than one item of personal property, you must figure the loss on each item separately. Then combine the losses to figure your total loss from that casualty or theft. To figure the loss on personal use real property, treat the entire property (buildings, trees, shrubs, improvements) as one item. 29
DEDUCTION LIMITS Once you have figured the amount of your loss, you must apply two limits to the loss to determine the amount you can deduct. The limits are referred to as the $100 rule and the 10% rule. These limits may prevent you from deducting any part of your loss. The $100 Rule A. Reduce each casualty or theft loss caused by a single event by $100 (the $100 rule), and The 10% Rule B. Reduce the total of all your losses (after reducing each by $100) by 10% of your AGI (the 10% rule). 30
DEDUCTION LIMITS A tornado damaged Rich’s home and car. The tornado is a single event, which causes damage to the two items. Rich figures the loss on the home and car separately and then combines the losses and reduces the combined amount by $100. Earlier in the year Rich’s wallet, containing $1, 000, was stolen. This is a loss from a separate event. Rich must also reduce the $1, 000 loss by $100. 31
DEDUCTION LIMITS Rich had an AGI of $32, 000. His total loss from the tornado event was $1, 000. He applies the deduction limit rules as follows: Tornado Theft Loss $10, 000 $1, 000 Minus $100 100 Loss after $100 rule $ 9, 900 $ 900 Total loss $10, 800 Minus 10% of AGI $ 3, 200 Amount of deduction $ 7, 600 32
FIGURING THE CASUALTY AND THEFT DEDUCTION C. Use Section A of the Form 4684 to figure your deduction for a casualty or theft loss of personal-use property. 1. Use a separate Form 4684 to figure the loss caused by each casualty or theft event 2. Apply the $100 limit to each loss 3. Combine the gains and losses on one Form 4684 and reduce the combined loss by 10% of your AGI 4. Complete Form 4684 with the combined totals and file all Forms 4684 with your return. 33
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FIGURING THE CASUALTY AND THEFT DEDUCTION When To Deduct A Loss D. Deduct a theft loss in the year you discover theft; deduct a casualty loss for the year the casualty occurs. E. Different rules apply to losses of personal use property attributable to federally declared disasters. 1. The net disaster loss is not subject to the 10% of adjusted gross income limit 2. You can deduct a net disaster loss even if you do not itemize your deductions. You do this by completing Form 4684 and entering the net disaster loss on line 6 of the Standard Deduction Worksheet – Line 40 in the Form 1040 instructions. 3. Your net disaster loss is the excess of – a. Your personal losses attributable to a Federally declared disaster area over b. Your personal casualty gains. 36
FIGURING THE CASUALTY AND THEFT DEDUCTION If you suffer a casualty in a Federally declared disaster area, you can deduct the loss for either the year the casualty occurred or for the immediately preceding year. In March of 2008, Mallory suffers a casualty loss from a flood. Her town is declared a federal disaster area as a result of the flood. Mallory can deduct the loss on her 2007 tax return due in April 2008 or on her 2008 tax return due in April 2009. If Mallory had already filed her 2007 tax return she could file an amended return. 37
JOB EXPENSES A. As an employee you can claim unreimbursed expenses that are: 1. Paid or incurred during the tax year 2. For carrying on your job as an employee 3. Ordinary (common and accepted) and necessary (appropriate and helpful) business expenses. B. These deductions are entered on line 21 of Schedule A and included in the total on line 27. 1. You can only deduct the amount that exceeds 2% of AGI 2. You must complete Form 2106 if you are claiming certain expenses. 38
JOB EXPENSES Travel Expenses A. May be deductible if you temporarily travel away from your tax home for your job. 1. Your tax home is your regular place of business or post of duty 2. You are away from your tax home if you are required to be away from the general area of your tax home longer than an ordinary work day and you need to get sleep or rest 3. A temporary assignment is one that is expected to last (and does last) for one year or less. 39
JOB EXPENSES Shawn’s regular place of business is in Derby, a 4 -hour drive from her home in Runyon. She chooses to rent a room in Derby and return to her family home on the weekends. Her tax home is in Derby. She cannot deduct any of her expenses related to travel between Derby and Runyon. Will drives a truck. He leaves the terminal and returns to it later the same day. He gets an hour off for lunch. Because the time off is not for necessary sleep or time for an adequate rest period, the trip is not travel away from home and his expenses are not deductible. Betty lives and works in Appleton, WI. Her employer requires that she attend a weeklong conference in Los Angeles. Because she will be gone longer than an ordinary workday and will have time off to get necessary sleep, her expenses are deductible. 40
JOB EXPENSES – Problem 1 Chris is a prison guard. His personal residence is in Rochester, NY. He is assigned to a prison located 300 miles from Rochester for two years. After the twoyear period, he will be able to choose a prison which is in commuting distance from Rochester. He chooses to keep his home and family in Rochester and come home weekends. Because his job assignment will last for more than one year, it is indefinite and the job location is Chris’ new tax home. Chris can deduct the expenses related to traveling to and living near his job as travel expenses. True or False? 41
JOB EXPENSES – Problem 1 Chris is a prison guard. His personal residence is in Rochester, NY. He is assigned to a prison located 300 miles from Rochester for two years. After the twoyear period, he will be able to choose a prison which is in commuting distance from Rochester. He chooses to keep his home and family in Rochester and come home weekends. Because his job assignment will last for more than one year, it is indefinite and the job location is Chris’ new tax home. Chris can deduct the expenses related to traveling to and living near his job as travel expenses. False, he cannot deduct the expenses. Because his job assignment will last for more than one year, it is indefinite and the job location is Chris’ new tax home. 42
JOB EXPENSES DEDUCTIBLE TRAVEL EXPENSES B. Ordinary and necessary traveling expenses are deductible. 1. Refer to Table 13 -1 for travel expenses you can deduct 2. To figure your meal expense you can use the actual cost or a standard meal allowance of $39 per day for 2008 for most small localities. There are higher rates for most major cities and some other localities in the continental United States. 3. Whichever method you use, you can deduct only 50% (unless subject to the “hours of service” limits of Department of transportation, then limit is 80%) of your unreimbursed meal expenses. 4. Transportation workers can claim a $52 standard meal allowance for most localities in the United States. The rate for areas outside the U. S. is $58. 43
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JOB EXPENSES Entertainment Expenses A. You can deduct ordinary and necessary entertainment expenses only if they are either directly related to your business or associated with your business. 1. Entertainment meets the directly related test if it: takes place in a clear business setting or the main purpose of the entertainment was the conduct of business; you did in fact engage in business; and you had more than a general expectation of getting income or some other business benefit. 2. Entertainment meets the associated test if it: is associated with the active conduct of your trade or business; and directly precedes or follows a substantial business discussion. 45
JOB EXPENSES Gordon works for Giant Foods. One of his customers is in town and Gordon takes him to theater. They discuss some business. Gordon cannot deduct the cost of theater tickets. If, in the above example, Gordon and the customer had come from a negotiation session at Gordon’s office, the cost of theater tickets would be a deductible entertainment expense for Gordon. The entertainment followed a substantial business discussion. 46
JOB EXPENSES THE 50% LIMIT B. In general, you can deduct only 50% of business related entertainment and meal expenses (including taxes, tips, etc. ) 1. If you have one bill for meals, lodging, transportation, etc. , you must allocate the expense between the cost of meals and entertainment and the cost of other services. C. Refer to Table 13 -2 for a summary of the rules for the 50% limit. 47
JOB EXPENSES – Problem 2 Gordon bought theater tickets through a ticket agent. His total cost was $170. The tickets were $75 each and the agent’s fee was $20. How much can Gordon deduct for entertainment expenses? a. $170 b. $150 c. $ 75 48
JOB EXPENSES – Problem 2 Gordon bought theater tickets through a ticket agent. His total cost was $170. The tickets were $75 each and the agent’s fee was $20. How much can Gordon deduct for entertainment expenses? c. $75 His deduction cannot be more than $75 (50% of $150). 49
JOB EXPENSES – Problem 3 Opal is attending a three-day out-of-town business meeting. Her hotel bill includes the cost of several meals she at the hotel. Does Opal have to separate the cost of the meals from the charge for lodging? Yes or No? 50
JOB EXPENSES – Problem 3 Opal is attending a three-day out-of-town business meeting. Her hotel bill includes the cost of several meals she at the hotel. Does Opal have to separate the cost of the meals from the charge for lodging? Yes Because the meals are subject to the 50% rule. 51
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JOB EXPENSES Gifts A. The cost of gifts given directly or indirectly to a customer is deductible up to a maximum of $25 per customer. 1. A gift to a member of a customer’s family is considered an indirect gift to the customer 2. If both spouses give gifts, they are treated as one taxpayer with one $25 limit per customer 3. Pens, key chains, coffee mugs, etc. costing less than $4, with your business name clearly imprinted, and used for promotional purposes are not included in the $25 limit. B. An item that could be either a gift or an entertainment expense is generally considered to be an entertainment expense. 53
JOB EXPENSES – Problem 4 Dick and Jane both work for the Crockett Co. They file MFJ. Dick gives his customer Mrs. Jones a gift basket costing $45. Mrs. Jones is also Jane’s customer for a different product the company sells. Jane gives her a radio costing $70. What amount can Dick and Jane deduct for gifts given to Mrs. Jones? a. $25 b. $75 c. $45 54
JOB EXPENSES – Problem 4 Dick and Jane both work for the Crockett Co. They file MFJ. Dick gives his customer Mrs. Jones a gift basket costing $45. Mrs. Jones is also Jane’s customer for a different product the company sells. Jane gives her a radio costing $70. What amount can Dick and Jane deduct for gifts given to Mrs. Jones? a. $25 55
JOB EXPENSES Local Transportation A. Deductible expenses include the ordinary and necessary costs of business related transportation within the area of your tax home. (See When are Local Transportation Expenses Deductible? on page 13 -18) 1. Going from one workplace to another 2. Visiting clients 3. Going to a business meeting away from your regular workplace 4. Going from home to a temporary workplace if you have one or more regular workplaces (a temporary workplace can be outside your tax home area). 56
JOB EXPENSES Beth’s employer sends her to a three-day training course in the same city as her regular workplace. Beth travels directly from her home to the training site and returns each day. Because the training course location is considered a temporary work site and she also has a regular worksite, she can deduct the cost of her daily round trip transportation between her home and her training location. 57
JOB EXPENSES B. Expenses include the cost of transportation by air, rail, bus, taxi, etc. and the cost of driving and maintaining your car. C. Commuting expenses are never deductible and include: 1. Travel between your home and your regular place of business. 2. Parking fees at your regular place of business 3. Car pool costs for using your car in a nonprofit car pool. 4. Travel from a union hall where you get your work assignment to your place of work. 58
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JOB EXPENSES Car Expenses A. The rules for deductibility of car expenses apply whether your car is used for local transportation or travel away from home. B. Car includes a van, pickup, or panel truck. C. You can figure your expenses using the standard mileage rate (50. 5 cents a mile from Jan 1 thru Jun 30 and 55. 5 cents a mile from Jul 1 thru Dec 31, 2008) or actual expenses. D. You cannot use the standard mileage rate if you: 1. Use the car for hire (a taxi) 2. Operate five or more cars at the same time 3. Claimed MACRS in an earlier year 4. Claimed a section 179 deduction 5. Claimed the special depreciation allowance on the car 6. Claimed actual expenses for a leased car after 1997 7. Are a rural mail carrier who received a qualified reimbursement 60
JOB EXPENSES E. Actual expenses include depreciation, and the cost of lease payments, tires, insurance, registration fees, licenses, gas and oil. F. You can claim business related parking fees and tolls whichever method you use. G. Divide expenses between personal and business use of the car based on miles driven for each purpose. H. Claim depreciation or section 179 deduction only if you own the car. 1. Only the percentage of the cost basis used for business is depreciable 2. To use MACRS GDS, your business use of the car must be more than 50% 3. There is a dollar limit to the amount you can depreciate every year (including the section 179 deduction). See 61 Table 12 -4 in Chapter 12.
JOB EXPENSES The first-year depreciation limitation for autos placed in service in 2008 is $10, 960 ($11, 160 for trucks and vans) if the 50% special depreciation allowance is claimed, and $2, 960 ($3, 160 for trucks and vans) if it is not. Your section 179 deduction plus your depreciation deduction cannot exceed this limit. Autos rated at more than 6, 000 pounds loaded gross vehicle weight are not subject to these limits. If your business use of the car is less than 100%, the limit is multiplied by the percentage of business use to determine the reduced limit. 62
JOB EXPENSES – Problem 5 Phil bought a new car in May of 2008 for $22, 000 and used it 75% for business. A car is 5 -year property, so the depreciation deduction computed using MACRS Table A-1 is $3, 300 (75% of $22, 000 = $16, 500 x 20% = $3, 300). However, the first year limit is $10, 960. What is the depreciation deduction that Phil can take in 2008? a. $3, 300 b. $10, 960 c. $8, 220 63
JOB EXPENSES – Problem 5 Phil bought a new car in May of 2008 for $22, 000 and used it 75% for business. A car is 5 -year property, so the depreciation deduction computed using MACRS Table A-1 is $3, 300 (75% of $22, 000 = $16, 500 x 20% = $3, 300). However, the first year limit is $10, 960. What is the depreciation deduction that Phil can take in 2008? c. $8, 220 Phil can take a depreciation deduction of 75% of $10, 960 is $8, 220. 64
JOB EXPENSES – Problem 6 Phil, in the previous example, had a car with a qualifying cost of $16, 500 for his section 179 deduction. However, Phil is limited to a total section 179 deduction plus depreciation deduction of $8, 220 ($10, 960 first year limit x 75%). If he uses the entire $8, 220 as a section 179 deduction, will he also be able to take a depreciation deduction in 2008? Yes or No? 65
JOB EXPENSES – Problem 6 Phil, in the previous example, had a car with a qualifying cost of $16, 500 for his section 179 deduction. However, Phil is limited to a total section 179 deduction plus depreciation deduction of $8, 220 ($10, 960 first year limit x 75%). If he uses the entire $8, 220 as a section 179 deduction, will he also be able to take a depreciation deduction in 2008? No And his depreciation basis for future years is $8, 280 ($16, 500 - $8, 220). 66
JOB EXPENSES Beverly bought a new car on September 21, 2008 for $20, 000 and placed it in service immediately, using it 80% for business. The car is qualified property for the special depreciation allowance. Beverly does not claim a section 179 deduction but she does want to claim the 50% special depreciation allowance. . She first figures the cars depreciable basis which is $16, 000 ($20, 000 x 80% business use). She then figures the special depreciation allowance before figuring the regular MACRS depreciation deduction. The special depreciation allowance is $8, 000 ($16, 000 x 50%). 67
JOB EXPENSES Beverly uses the remaining $8, 000 ($16, 000$8, 000) as the depreciable basis for the regular MACRS deduction resulting in a deduction of $1, 600 ($8, 000 x 20%). Her 2008 total deduction is $9, 600 ($8, 000+ $1, 600). However, under the maximum limit for 2008 she will be able to deduct only $8, 768 ($10, 960 maximum limit for 2008 x 80% business use). 68
JOB EXPENSES I. For a leased car: 1. Use standard mileage or actual expenses except for depreciation. 2. Deduct expenses only for business use of car 3. If you lease for 30 days or more, reduce the deduction by an inclusion amount. 69
JOB EXPENSES Recordkeeping A. You are required to keep records if you deduct travel, entertainment, gift, or local transportation expenses. 1. Records should be written 2. Keep bills, receipts, and canceled checks 3. If you are audited and do not have these records, the deduction will be disallowed 4. Table 13 -3 provides a summary of the records you need to prove each expense. 70
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JOB EXPENSES Job-Related Education Expenses A. Expenses deductible on Schedule A must be for jobrelated education that: 1. Is required by your employer or by law to keep your present salary, status, or job, or 2. Maintains or improves skills needed in your present work. Sumiko is an associate lawyer in a law firm. To keep up with the latest changes in the law, she takes courses in her field of law. These courses maintain and improve her skills at her present job and she can deduct the cost of the courses as an employee expense on Schedule A. 72
JOB EXPENSES B. Even if these requirements are met, no Schedule A deduction is allowed if the education is: 1. Needed to meet the minimum education requirements of your job, or 2. Part of a program of study that can qualify you for a new trade or business. a. Instead, you may be able to claim these education expenses as a tuition and fees adjustment (Chapter 16) or lifetime learning credit (but not for the same expenses). C. Refer to Table 13 -4 to determine if education expenses qualify for the deduction. 73
JOB EXPENSES When Sumiko was in law school, she worked part time for the same law firm for which she now works. Even though her courses improved her job skills, she had not met the minimum requirements to be an attorney. She could not deduct the expenses of the courses she took while employed at the firm as a job-related expense deduction on Schedule A. James is a legal secretary. He takes courses at the local community college that lead to a paralegal certificate. He cannot deduct the cost of these courses on Schedule A because they qualified him for a new trade. The cost of courses may be qualifying expenses for an education credit. 74
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JOB EXPENSES DEDUCTIBLE EDUCATION EXPENSES D. Deductible education expenses include costs for: 1. Tuition, books, lab fees, supplies and similar items 2. Transportation from work to school 3. Transportation from home to school if you are regularly employed and go to school on a temporary basis 4. Travel, meals, and lodging for overnight travel to obtain qualified education 5. Related expenses, such as the costs of research. E. You must keep records to prove your education deduction. 76
JOB EXPENSES Employer Reimbursements A. If your employer does not reimburse you for workrelated expenses, any allowable expense is fully deductible subject to the 2% and AGI limits. B. If your employer does reimburse you, deductibility depends on the type of reimbursement plan you have. C. Accountable plan. 1. Reimbursements not included in wages and are not taxed 2. Cannot claim a deduction for any amount for which reimbursed. 77
JOB EXPENSES D. Non-accountable plan. 1. The entire amount of the reimbursement is included as wages in box 1 of Form W-2 and is taxed 2. All eligible expenses are deductible on Schedule A 78
JOB EXPENSES Form 2106 A. You must use Form 2106 to figure and report: 1. Travel, car and other local transportation expenses whether or not you are reimbursed for them. 2. Depreciation and other information on vehicles. 3. All other expenses for which you are reimbursed under an accountable plan. 4. Table 13 -5 summarizes what the employer reports on your Form W-2 and what you report on Form 2106. 79
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JOB EXPENSES Al Flaherty is a representative of a shoe company. On January 14, 2008, he purchased a new car. In 2008, Al kept a log of his mileage which showed he drove a total of 25, 000 miles of which 20, 000 were for business. He logged 12, 000 business miles from January 1 to June 30, 2008. His round-trip commute to work is 5 miles resulting in a total of 1, 350 commuting miles. Al claims the standard mileage rate. His other business expenses were as follows: • Parking fees and tolls $325 • Transportation and lodging away from home $8, 975 • Meals and entertainment $4, 432 • Education, gifts, publications, etc. $750 Al received a $3, 600 reimbursement for his travel expenses and a $1, 200 reimbursement for his entertainment and meal expenses under his employer’s accountable plan. Al completed Form 2106 as follows: 81
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JOB EXPENSES Al first figured his car expenses in Part II of Form 2106. He then entered these expenses Part I, on line 1 of column A. Column A is for expenses other than meals and entertainment. On line 2, Al entered his local transportation expenses (parking and tolls). His expenses for travel away from home are entered on line 3 and his other expenses such as education, gift and publication expenses are entered on line 4. Column B is only for meal and entertainment expenses. The entire amount of Albert’s meal and entertainment expenses are entered on line 5 of Part I. The reimbursements received from his employer for meals and entertainment and other expenses are entered separately on line 7 in both column A and column B. After these reimbursements are subtracted from the expenses, the 50% limit is applied to the unreimbursed amount spent for meals and the result is entered on line 9. The total unreimbursed expenses from line 10 of Form 2106 are entered on line 21 of Schedule A. 86
JOB EXPENSES Other Unreimbursed Employee Expenses B. Unreimbursed expenses for items such as safety equipment, uniforms, protective clothing and dues can be entered directly on line 21 of Schedule A (do not have to use Form 2106). Computers and cellular phones. To claim a deduction for depreciation for computers or cellular telephones that you use in your work as an employee, you must be able to show that the use of the computer or phone is: • for the convenience of your employer, and • required as a condition of your employment. Home-office deduction. To claim a home-office deduction as an employee, the business use of your home must be for the convenience of your employer and not just appropriate and helpful to your employer. For the convenience of your employer generally means that your employer does not provide you with a place to work. 87
MOST OTHER MISCELLANEOUS DEDUCTIONS A. Line 22 of Schedule A is used to report tax preparation and related costs such as the cost of tax preparation software, tax publications and electronic filing fees. B. Line 23 of Schedule A is used to report certain other expenses you pay to: 1. Produce or collect income that must be included in your gross income, 2. Manage, conserve, or maintain property held for producing such income, or 3. Determine, contest, pay, or claim a refund of any tax. 88
MOST OTHER MISCELLANEOUS DEDUCTIONS C. These other expenses include fees for: safe deposit box rental to store investment documents; investment counseling; investment-related office supplies; legal fees related to paying or contesting taxes. D. On line 27 of Schedule A you deduct only those expenses that exceed 2% of AGI. 89
Other Itemized Deductions KEY IDEAS ♦ Only casualty and theft losses related to non-business property are deductible on line 20 of Schedule A. ♦ A deductible casualty loss results from an event that is sudden, unexpected, or unusual. Each casualty or theft loss must be reduced by $100. The total of all of your casualty or theft losses must be reduced by 10% of your AGI. ♦ Special rules apply losses of personal property in federally declared disaster areas and the Kansas and Midwestern disaster areas. ♦ Only business-related expenses for travel away from your tax home are deductible. Your tax home is your regular place of business or post of duty regardless of where your personal residence is. ♦ You can deduct only 50% of your business-related meal and entertainment expenses, 75% if Department of 90 Transportation “hours of service” rules apply.
Other Itemized Deductions KEY IDEAS ♦ You can deduct as a job-related expense only the cost of education that is required by your employer or that is required by law or that maintains or improves skills needed in your present work. ♦ The deduction for tax preparation fees includes the cost of tax preparation software and tax publications and any fee you paid for electronic filing of your tax return. ♦ To be deductible, expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing taxable income must be reasonable and closely related to these purposes. ♦ You can deduct on line 27 of Schedule A only those total job expenses and other miscellaneous deductions that exceed 2% of your AGI. 91
Other Itemized Deductions CLASSWORK 1: True or False. (1) Chauncy pays dues to the Greenwood Country Club. He uses the club exclusively to entertain his customers and to discuss business with them. Chauncy can deduct his dues as an entertainment expense. (2) In March 2008, Kate suffered a casualty loss from a flood. The President declared her town a disaster area. Kate can deduct the loss even if she does not itemize her deductions. (3) Each year you can choose to claim either actual car expenses or to use the standard mileage rate, regardless of which method was used in the first year the vehicle was placed in service. 92
Other Itemized Deductions CLASSWORK 1: True or False. (4) Danny is a welder. He is required to buy a blue work shirt and blue pants for his job. Danny can deduct the cost of buying and caring for these clothes. (5) After their house was damaged in November 2008, Mr. and Mrs. Paulson filed a claim with their insurance company for $37, 000. They must use the reimbursement amount of $37, 000 to figure their casualty loss even if they do not receive the insurance payment in 2008. (6) Gil lives in River City. He is assigned to work for 16 months at a branch plant in Margaretville which is 300 miles away. He keeps his home and family in River City and comes home on weekends. He can deduct his travel expenses from his home to his work place as employee expenses on Schedule A. 93
Other Itemized Deductions CLASSWORK 1: True or False. (7) Francine works as a sales rep for a software company. Her biggest client is in town and they meet at her office to discuss next month’s orders. Francine then takes her client to dinner and theater. The costs of dinner and theater tickets are deductible entertainment expenses. (8) Clyde is an accountant. In 2008, his business office was damaged by a tornado. The amount of his loss was $14, 000. He had no insurance. He can claim a casualty loss on line 20 of Schedule A. (9) If you are reimbursed by your employer for job-related expenses under an non-accountable plan, you cannot deduct your expenses on Schedule A. 94
Other Itemized Deductions CLASSWORK 1: True or False. (10) Alberto works in a bank. His employer requires him to wear a suit every day. Since this is a condition of his employment, he can deduct the cost of the suits. (11) Colleen is a medical technician. Every weekday she drives from her home to her employer’s main office. In the afternoon, she drives from the main office to a branch office in the suburbs. The cost of her transportation between the offices is deductible on Schedule A. (12) In May 2008, Arnie was away on business for 10 days. He chooses to use the standard meal allowance for his deduction for meals and incidentals. He is not a transportation worker. Arnie will be able to include $390 for meals on line 21 of Schedule A. 95
Other Itemized Deductions CLASSWORK 1: True or False. (13) Marva's house was broken into and her diamond necklace was stolen. She paid $6, 000 to replace the necklace. Marva can use $6, 000 as the amount of her loss. (14) Caroline is going to school for her accounting degree. She works part time for a firm that will hire her after she gets her degree. The firm requires a degree for all full time employees. Caroline can deduct the cost of the courses she takes while she is employed part time as a job-related education expense on Schedule A. (15) In April 2008, Wilson was in a car accident and had an Unreimbursed loss. In August, flooding damaged his garage. He must reduce each of these losses by $100. 96
Other Itemized Deductions CLASSWORK 1: True or False. (1) Chauncy pays dues to the Greenwood Country Club. He uses the club exclusively to entertain his customers and to discuss business with them. Chauncy can deduct his dues as an entertainment expense. F (2) In March 2008, Kate suffered a casualty loss from a flood. The President declared her town a disaster area. Kate can deduct the loss even if she does not itemize her deductions. T (3) Each year you can choose to claim either actual car expenses or to use the standard mileage rate, regardless of which method was used in the first year the vehicle was placed in service. F 97
Other Itemized Deductions CLASSWORK 1: True or False. (4) Danny is a welder. He is required to buy a blue work shirt and blue pants for his job. Danny can deduct the cost of buying and caring for these clothes. F (5) After their house was damaged in November 2008, Mr. and Mrs. Paulson filed a claim with their insurance company for $37, 000. They must use the reimbursement amount of $37, 000 to figure their casualty loss even if they do not receive the insurance payment in 2008. T (6) Gil lives in River City. He is assigned to work for 16 months at a branch plant in Margaretville which is 300 miles away. He keeps his home and family in River City and comes home on weekends. He can deduct his travel expenses from his home to his work place as employee expenses on Schedule A. F 98
Other Itemized Deductions CLASSWORK 1: True or False. (7) Francine works as a sales rep for a software company. Her biggest client is in town and they meet at her office to discuss next month’s orders. Francine then takes her client to dinner and theater. The costs of dinner and theater tickets are deductible entertainment expenses. T (8) Clyde is an accountant. In 2008, his business office was damaged by a tornado. The amount of his loss was $14, 000. He had no insurance. He can claim a casualty loss on line 20 of Schedule A. F (9) If you are reimbursed by your employer for job-related expenses under an non-accountable plan, you cannot deduct your expenses on Schedule A. F 99
Other Itemized Deductions CLASSWORK 1: True or False. (10) Alberto works in a bank. His employer requires him to wear a suit every day. Since this is a condition of his employment, he can deduct the cost of the suits. F (11) Colleen is a medical technician. Every weekday she drives from her home to her employer’s main office. In the afternoon, she drives from the main office to a branch office in the suburbs. The cost of her transportation between the offices is deductible on Schedule A. T (12) In May 2008, Arnie was away on business for 10 days. He chooses to use the standard meal allowance for his deduction for meals and incidentals. He is not a transportation worker. Arnie will be able to include $390 for meals on line 21 of Schedule A. F 100
Other Itemized Deductions CLASSWORK 1: True or False. (13) Marva's house was broken into and her diamond necklace was stolen. She paid $6, 000 to replace the necklace. Marva can use $6, 000 as the amount of her loss. F (14) Caroline is going to school for her accounting degree. She works part time for a firm that will hire her after she gets her degree. The firm requires a degree for all full time employees. Caroline can deduct the cost of the courses she takes while she is employed part time as a job-related education expense on Schedule A. F (15) In April 2008, Wilson was in a car accident and had an unreimbursed loss. In August, flooding damaged his garage. He must reduce each of these losses by $100. T 101
Other Itemized Deductions CLASSWORK 2: Multiple Choice. 1. 2. In 2008, Samantha and Sam had unreimbursed employee expenses of $3, 400, paid tax preparation fees of $600 and paid $200 for investment journals and a safe deposit box. Their adjusted gross income for 2008 is $53, 000. The deduction they will claim on line 27 of Schedule A is: a. $4, 200 b. $1, 060 c. $3, 140 d. $4, 000 You cannot use the standard mileage rate for the same vehicle if: a. you used actual expenses for the vehicle in the first year b. you leased a car c. you used the car partly for personal use d. you claimed a depreciation deduction using MACRS depreciation in an earlier year 102
Other Itemized Deductions CLASSWORK 2: Multiple Choice. 3. In 2008, Derrick had deductible travel, local transportation, entertainment, and education expenses. He also had expenses for dues to his professional society, his license fees, and for job-related education. The expenses he must include on Form 2106 are: a. the travel and local transportation expenses b. the travel, local transportation and entertainment expenses c. the travel and education expenses d. all of the work-related expenses 4. In 2001, Heather paid $2, 000 for a painting. In 2008, she was offered $3, 500 for it. The painting was damaged by vandals before she could sell it. The damaged painting was worth $1, 400. She had no insurance. The amount of Heather’s casualty loss on line 10 of her Form 4684 is: a. $3, 500 b. $2, 000 c. $2, 100 d. $1, 500 103
Other Itemized Deductions CLASSWORK 2: Multiple Choice. 5. Heather, from the above example, had an AGI of $15, 000 in 2008. The amount of the loss she can claim on line 20 of Schedule A is: a. $400 b. $1, 900 c. $500 d. $2, 000 6. A temporary assignment is a job: a. that is away from the taxpayer’s family b. that is out of the taxpayer’s hometown c. that is only for the taxpayer’s regular employer d. that is away from your main place of work and is expected to last (and in fact does last) for one year or less 104
Other Itemized Deductions CLASSWORK 2: Multiple Choice. 7. Which of the following is used to determine a taxpayer’s main place of business or work when work is regularly performed in two or more areas? a. total time spent working in each area b. degree of business activity in each area c. relative amount of income from each area d. all of the above 8. Qualified deductible employee education expenses include: a. refresher courses for a taxpayer coming out of retirement b. courses to improve present job skills c. required courses to meet minimum education requirements d. courses that qualify the taxpayer for a new occupation e. all of the above 105
Other Itemized Deductions CLASSWORK 2: Multiple Choice. 1. In 2008, Samantha and Sam had unreimbursed employee expenses of $3, 400, paid tax preparation fees of $600 and paid $200 for investment journals and a safe deposit box. Their adjusted gross income for 2008 is $53, 000. The deduction they will claim on line 27 of Schedule A is: c. $3, 140 (($3, 400 + $600 + $200) – (2% of $53, 000) 2. You cannot use the standard mileage rate for the same vehicle if: a. you used actual expenses for the vehicle in the first year, AND d. you claimed a depreciation deduction using MACRS depreciation in an earlier year 3. In 2008, Derrick had deductible travel, local transportation, entertainment, and education expenses. He also had expenses for dues to his professional society, his license fees, and for job-related education. The expenses he must include on Form 2106 are: d. all of the work-related expenses 106
Other Itemized Deductions CLASSWORK 2: Multiple Choice. 4. In 2001, Heather paid $2, 000 for a painting. In 2008, she was offered $3, 500 for it. The painting was damaged by vandals before she could sell it. The damaged painting was worth $1, 400. She had no insurance. The amount of Heather’s casualty loss on line 10 of her Form 4684 is: b. $2, 000 5. Heather, from the above example, had an AGI of $15, 000 in 2008. The amount of the loss she can claim on line 20 of Schedule A is: a. $400 6. A temporary assignment is a job: d. that is away from your main place of work and is expected to last (and in fact does last) one year or less 107
Other Itemized Deductions CLASSWORK 2: Multiple Choice. 7. Which of the following is used to determine a taxpayer’s main place of business or work when work is regularly performed in two or more areas? d. all of the above 8. Qualified deductible employee education expenses include: b. courses to improve present job skills 108
Other Itemized Deductions CLASSWORK 3: Determine which of the following expenses are deductible and which are not deductible. Circle D for deductible or N for nondeductible on Schedule A. (1) Meals while working late (2) Lodging and meals during an overnight business trip (3) Depreciation on a home computer used to manage investments (4) The cost of a safe deposit box to store jewelry (5) Entertaining a client at a nightclub after a negotiation session (6) Parking fees when using the standard mileage rate (7) Classes required by an employer to keep a current job (8) Buying and cleaning a nurse’s uniform (9) Union dues (10) Education to prepare for a new career 109
Other Itemized Deductions CLASSWORK 3: Determine which of the following expenses are deductible and which are not deductible. Circle D for deductible or N for nondeductible on Schedule A. (11) Travel expenses for a non-employee spouse (12) Transportation from a regular workplace to a second office (13) Legal expenses to collect taxable alimony (14) Work tools that wear out within one year from the date of purchase and safety equipment (15) A $25 gift basket to a customer’s spouse (16) Business cards (17) Financial books or magazines (18) Investment related seminars 110
Other Itemized Deductions CLASSWORK 3: Determine which of the following expenses are deductible and which are not deductible. Circle D for deductible or N for nondeductible on Schedule A. (1) Meals while working late N (2) Lodging and meals during an overnight business trip D (3) Depreciation on a home computer used to manage investments D (4) The cost of a safe deposit box to store jewelry N (5) Entertaining a client at a nightclub after a negotiation session D (6) Parking fees when using the standard mileage rate D (7) Classes required by an employer to keep a current job D (8) Buying and cleaning a nurse’s uniform D (9) Union dues D (10) Education to prepare for a new career N 111
Other Itemized Deductions CLASSWORK 3: Determine which of the following expenses are deductible and which are not deductible. Circle D for deductible or N for nondeductible on Schedule A. (11) Travel expenses for a non-employee spouse N (12) Transportation from a regular workplace to a second office D (13) Legal expenses to collect taxable alimony D (14) Work tools that wear out within one year from the date of purchase and safety equipment D (15) A $25 gift basket to a customer’s spouse D (16) Business cards D (17) Financial books or magazines D (18) Investment related seminars N 112
Questions & Answers 113
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