EA2 Study Unit 5.2 5.4 PDF

4 SU 5: Other Deductions 5.2 TRAVEL EXPENSES While away from home overnight on business, ordinary and necessary travel expenses, including meals (subject to the 50% limit), are deductible. 1. No deduction is allowed for the following: a. Travel that is primarily personal...

4 SU 5: Other Deductions 5.2 TRAVEL EXPENSES While away from home overnight on business, ordinary and necessary travel expenses, including meals (subject to the 50% limit), are deductible. 1. No deduction is allowed for the following: a. Travel that is primarily personal in nature (if more days are spent for personal purposes than for business purposes) except for 1) Directly related business expenses while at the destination b. The travel expenses of a taxpayer’s spouse unless there is a bona fide business purpose for the spouse’s presence, the spouse is an employee, and the expenses would be otherwise deductible c. Commuting between home and work 1) A taxpayer’s “home” is considered to be a) The taxpayer’s regular or principal (if there is more than one regular) place of business or b) If the taxpayer has no regular or principal place of business because of the nature of the work, the taxpayer’s regular place of abode in a real and substantial sense. 2) If the period of work in a new location is or becomes indefinite, travel expenses are not deductible because the individual is treated as though (s)he changed the location of his or her tax homes to his or her work location. d. Travel for attending investment meetings e. Travel as a form of education (e.g., a Spanish teacher traveling to Spain to improve her Spanish) 2. For individuals subject to Department of Transportation hours of service rules, the deductible meals percentage is 80%. Automobile Expenses 3. Actual expenses for automobile use are deductible (e.g., services, repairs, gasoline, etc.). Alternatively, the taxpayer may deduct the standard mileage rate of $0.655 per mile for 2023, plus expenses, such as parking fees and tolls, that are not actual automobile expenses. Domestic Travel 4. For travel within the U.S., expenses other than transportation (e.g., airfare) are allocated based on personal or business purpose. Transportation expenses are a. 100% deductible if the primary purpose is business or b. 0% deductible if the primary purpose is personal (i.e., no proportional allocation for transportation costs when traveling within the U.S.). Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 5: Other Deductions 5 Foreign Travel 5. Generally, traveling expenses (including meals and lodging) of a taxpayer who travels outside of the United States and away from home must be allocated between time spent on the trip for business and time spent for pleasure. However, no allocation is required for transportation, such as costs of getting to and from the destination, when one of the following three exceptions for a trip considered entirely for business applies. a. A trip is considered entirely for business if the traveler did not have substantial control over arranging the trip. b. When the trip is for not more than 1 week (7 consecutive days counting the day of return but not the day of departure) and a personal vacation was not the major consideration, the trip is considered entirely for business. c. When the foreign trip is longer than a week and less than 25% of the total time away from home outside the United States is spent for nonbusiness activities, the trip is considered entirely for business. For this purpose, include both the day the trip began and the day it ended. EXAMPLE 5-3 Deductible Foreign Travel Expenses Scott’s foreign trip is for more than a week, and he spends 35% of his time as a personal vacation. However, he spends the other 65% providing business-related services. Only 65% of the expenses related to the time providing business services, including transportation, lodging, local travel, etc., may be deducted. Convention Expenses 6. Deductible travel expenses include those incurred when attending a convention related to the taxpayer’s business. a. The fact that an attending individual uses vacation or leave time or that attendance at the convention is voluntary will not necessarily negate the deduction. b. Expenses for a convention or meeting in connection with investments, financial planning, or other income-producing property are not deductible. c. A taxpayer can show that his or her attendance at a convention benefits his or her trade or business by comparing the convention agenda with the official duties and responsibilities of his or her position. The fact that the convention agenda does deal with his or her specific duties lends support for the travel being ordinary and necessary in the conduct of a trade or business. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 6 SU 5: Other Deductions 7. The following chart summarizes expenses that can be deducted when traveling away from home for business purposes: IF there are expenses for... THEN the taxpayer can deduct the cost of... transportation travel by airplane, train, bus, or car between the home and the business destination. If the taxpayer was provided with a free ticket or the taxpayer was riding free as a result of a frequent traveler or similar program, the cost is zero. Travel by ship (e.g., cruise ships) for conventions has additional rules and limits. taxi, commuter bus, and fares for these and other types of transportation that take the taxpayer airport limousine between The airport or station and the hotel, and The hotel and the work location of the customers or clients, the business meeting place, or the temporary work location. baggage and shipping sending baggage and sample or display material between the regular and temporary work locations. car operating and maintaining the car when traveling away from home on business. The taxpayer can deduct the actual expenses or the standard mileage rate, as well as business-related tolls and parking. If the taxpayer rents a car while away from home on business, (s)he can deduct only the business-use portion of the expenses. lodging and meals lodging and meals if the business trip is overnight or long enough to require a stop for sleep or rest to properly perform duties. Meals include amounts spent for food, beverages, taxes, and related tips and have additional rules and limits. cleaning dry cleaning and laundry. telephone business calls while on the business trip. This includes business communication by fax machine or other communication devices. tips tips paid for any expenses in this chart. other other similar ordinary and necessary expenses related to the business travel. These expenses might include transportation to or from a business meal, public stenographer’s fees, computer rental fees, and operating and maintaining a house trailer. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 5: Other Deductions 7 Reimbursed Employee Expenses 8. If reimbursements equal expenses and the employee makes an accounting of expenses to the employer, the reimbursements are excluded from the employee’s gross income (i.e., excluded from employee’s W-2), and the employer may deduct the expenses (accountable plan). a. This rule also applies if reimbursements exceeding expenses are returned to the employer and the employee substantiates the expenses. b. If excess reimbursements are not returned or if the employee does not substantiate them, the reimbursements are included in the employee’s gross income, and none of the expenses are deductible by the employee (nonaccountable plan). Unreimbursed Employee Expenses 9. Unreimbursed employee expenses are not deductible. Recordkeeping 10. Taxpayers generally must have documentary evidence, such as receipts, canceled checks, or bills, to support their expenses. Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. A canceled check, together with a bill from the payee, ordinarily establishes the cost. a. However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose. Documentary evidence is not needed for expenses, other than lodging, of less than $75. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].  SU 5: Other Deductions 9 5.4 BAD DEBTS Bad Debt Deduction 1. A bad debt deduction is allowed only for a bona fide debt arising from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. a. Worthless debt is deductible only to the extent of adjusted basis in the debt. b. Money lent to a relative or friend with the understanding the relative or friend may not repay it must be considered a gift by the taxpayer, not as a loan, and it may not be deducted as a bad debt. c. A cash-basis taxpayer has no basis in accounts receivable and generally has no deduction for bad debts. Business Bad Debt 2. A business bad debt is one incurred or acquired in connection with or closely related to the taxpayer’s trade or business. a. A debt is closely related if the primary motive for incurring the debt is business related. 1) If a taxpayer makes a loan to a client, supplier, employee, or distributor for a business reason and it becomes worthless, it becomes a business bad debt. b. The bad debts of corporations are always business bad debts. c. Partially worthless business debts may be deducted to the extent they are worthless and specifically written off. d. A business bad debt is treated as an ordinary loss. e. A bad debt written off in a previous tax year but recovered in the current tax year should be reported as other income. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected]. 10 SU 5: Other Deductions Nonbusiness Bad Debt 3. A nonbusiness bad debt is a debt other than one incurred or acquired in connection with the taxpayer’s trade or business. a. Investments are not treated as a trade or business. b. A shareholder loan to protect his or her investment in the corporation is not treated as a business loan. c. A partially worthless nonbusiness bad debt is not deductible. d. A wholly worthless nonbusiness debt is deducted in the year it becomes worthless, and it is then treated as a short-term capital loss. 4. Taxpayers cannot take a bad debt deduction for a loan made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. a. Worthless corporate securities are not considered bad debts. They are generally treated as a capital loss. 5. Taxpayers can take a bad debt deduction only if the amount owed was previously included in gross income. This applies to amounts owed from all sources of taxable income, including sales, services, rents, and interest. a. If a taxpayer uses the cash method of accounting, (s)he generally reports income when payment is received. A taxpayer cannot take a bad debt deduction for amounts owed because those amounts were never included in income. Specific Write-Off Method 6. The specific write-off method generally must be used for tax purposes. The reserve method is used for financial accounting purposes. a. If the specific write-off method is used, taxpayer can deduct specific bad debts that become either partly or totally worthless during the tax year. b. Taxpayers can deduct specific bad debts that become partly uncollectible. c. The tax deduction is limited to the amount charged off on the books during the year. Copyright © 2024 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].