Intro Federal Taxation
Intro Federal Taxation ACTG 470
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This 21 page Class Notes was uploaded by Julien Weber on Tuesday September 8, 2015. The Class Notes belongs to ACTG 470 at University of Oregon taught by Linda Krull in Fall. Since its upload, it has received 45 views. For similar materials see /class/187271/actg-470-university-of-oregon in Accounting at University of Oregon.
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Date Created: 09/08/15
Chapter 4 Employee Approach 1 Exclusions Payments made on behalf of employees Fringe Benefits a Employee Reimbursements Transportation Travel Moving o Stock Options and Deferred compensation Deferred Compensation Exclusions for Employees Payments made on Behalf of an Employee Employersponsored accident amp health plans Mealsamp lodging Misc qualified fringes General Fringe Benefits Working Condition fringes De minimus fringes Employerpaid accident and health plans I Premiums o Tax treatment deductible to employer payor and excludable to employee beneficiary I Benefits Excludable I Payments received from insurance to reimburse for tax deductible medical expenses I Payments for permanent loss or loss of use of bodily part or permanent disfigurement o Exampleloss of an eye hand toe o Taxable I Payments received from insurance to reimburse for non deductible medical expenses Meals amp Lodging Provided by the Employer You are now an employee of a CPA firm where you are in the midst of your first busy season You have been working until 8pm at the office for several days The CPA firm provides a meal allowance for employees when you work more than 10 hours a day Is the meal allowance excludable W II II Il Conceptually MEALS The value of meals provided to an employee free of charge may be excluded from the employee s income if the meals are d provided by employer 3 furnished on the business premises and 3 Provided quotfor the employer s convenience LODGING To exclude employerprovided lodging the lodging must meet an additional requirement Acceptance of Iodqinq must be a condition of employment Meals and Lodging Examples Ann is a registered nurse working in a community hospital She is not required to take her lunch on the hospital premises but she can eat in the cafeteria at no charge The hospital adopted this policy to encourage employees to stay on the premises and be available in case of emergencies During the year Ann ate most of her meals on the premises The total value of those meals was 750 Does Ann recognize gross income related to the employerprovided mealS lra is the manager of a hotel His employer will allow him to live in one of the rooms rentfree or receive a 600 per month cash allowance for rent Ira elected to live in the hotel Does Ira recognize gross income for the value of the lodging Yes Other Qualified Fringe Bene ts Child and dependent care services a Excludable to a maximum of 5000 a year Athletic facilities a Value of the use of athletic facilities on the employer s premises is excluded from gross income Educational assistance Employerpaid tuition fees books and supplies for undergraduate study is excludable to a max of 5250 a year Working Condition Fringes amp Dc Minimjs Fringes Working Condition Fringes Exclusion for cost of property or services provided by employer IF employee could have deducted the items if heshe had paid for them employee business expenses Examples o Subscriptions dues uniforms use of company car for business De Minimis Fringes Items for which benefit is so small that it is impractical to account for them Examples u Personal use of copy machine employee picnic occasional taxi fare for employee working late personal local phone calls qualified parking 245 per month Fringe Bene t Example Sally and Bill are married and file joint returns In 2013 Bill an accountant has a salary of 75000 and Sally receives a salary of 25000 as an apartment manager Calculate Sally and Bill s AGI for 2013 assuming they have no other sources of income and that they receive the following benefits from their employers a Bill receives a reimbursement of 5000 for child care expenses Sally and Bill have three children who are not yet school age b Bill and Sally are provided a free membership at a local fitness and exercise club that allows them to attend three aerobic exercise sessions per week The value of this type of membership is 1600 per year c Bill is provided free parking at work The value of the parking is 1800 peryear d Sally is provided with a free apartment Living in this apartment is a condition of her employment Similar apartments rent for 1200 per month AGI 100000 1600 101600 Deferred Compensation Stock Options Stock options can be classified into one of two types for tax purposes a Incentive stock options lSOs are not deductible to the corporation and do not generate taxable income to the shareholderemployee a Nonqualified stock options generate a tax deduction to the corporation calculated using the intrinsic value method and taxable income to the shareholderemployee in an equal amount ISOs Neither the grant of the option nor the exercise of the option generate taxable income to the employee or a tax deduction to the employer When the employee subsequently sells the stock a long term capital gain is recognized to the extent the sales price exceeds the exercise price ISOs In order to receive preferential treatment the following requirements among others must be met Q The option must be exercisable only within 10 years of the date of grant The exercise price must equal or exceed the market value of the stock at the date of grant The option holder must be an employee of the corporation from the date of grant until 3 months before the date of exercise The option must be nontransferable other than at death and must be exercisable during the employee s lifetime only by the employee The employee must not dispose of the stock within two years after the date of grant and one year after exercise Stock Options Example 1 Wren Corporation granted an ISO to purchase 100 shares of stock to Rocky an employee on March 18 2009 The exercise price is 100 and the FMV is 100 at the date of grant Rocky exercised the option on April 1 2011 when the FMV of the stock was 200 per share He sells the stock on April 6 2012 for 300 per share What are the tax consequences to Wren and Rocky In 2012 when Rocky sells the stock he recognizes a gain of 300100 100100 20000 LTCG I NQOS Stock options that do not qualify as lSOs are NQOs NQOs generate a tax deduction for the firm at the date of exercise equal to the difference between the market value of the stock at exercise and the exercise price I FMV at Exercise Exercise Price I The employee has taxable compensation income date of exercise equal to the difference between the market value of the stock at exercise and the exercise price I FMV at Exercise Exercise Price I The employee s basis in stock acquired from exercise equals the exercise price plus the income recognized at exercise The great majority of stock options issued are NQOs Stock Options Example 2 Assume the same facts in Example 1 except the options are NQOs and that there is no readily ascertainable FMV for the options at the date of grant What are the tax consequences to Wren and Rocky In 2011 Rocky has compensation income of 10000 and Wren has a 10000 deduction In 2012 Rocky has LTCG of 10000 401k Plans Employee defers compensation by contributing pretax earnings to the plan 1 Equivalent to a deduction for AGI Employer can deduct deferred compensation currently Earnings on investment accrue tax free Limitations a Maximum deduction by employer for matching contribution is 25 of compensation 0 Maximum pretax income that can be deferred by employee is 17500 plus additional 5500 if age 50 or older Individual Retirement Accounts IRAs I What are IRAs I IRAs are a means of saving for retirement years Technically they are a trust set up for a tps retirement Several kinds a Conventional traditional Contributions may or may not be deductible Earnings build taxfree until withdrawal Withdrawals are taxable in part or in full Ll Contributions are NOT deductible I Earnings build up taxfree Withdrawals do NOT constitute gross income Conventional IRAS How much may a taxpayer contribute to an IRA o The lesser of 5500 or earned income I Married couples may contribute 11000 5500 x 2 to two separate IRA accounts as long as their combined earned income exceeds 11000 How much of the contribution may be deducted by the taxpayer It depends on d Whether the taxpayer is a participant in a pension pbnAND D The taxpayer s level of AGI Conventional IRAs If the taxpayer is covered by a qualified plan IRA deduction is phased out ratany over range of AGI o MFJ bt 95k and 115k Single bt 59k and 69k Q But IF any deduction is available maximum deduction does not go lower than 200 If taxpayer were MFJ calculation for deduction would be as follows IRA reduction AGI 9500020000 x max contribution Maximum IRA deduction Max contribution IRA reduction If the taxpayer is not c0vered by a qualified plan the COntribution to a traditional IRA is fully deductible IRA Examples 1 Tina single has no retirement plan other than a traditional IRA Tina s AGI is 85000 Tina can deduct 5500 2 Tom single also participates in a qualified retirement plan at work and has AGI of 64000 Tom can deduct 2750 3 Terry single also participates in a qualified retirement plan at work and has AGI of 67800 Terry can deduct 660 Roth IRAS What is so great about Roth IRAs a Chance to get taxfree distributions when you retire What does it cost a Give up tax deduction now I What are the requirements a Eligibility ability to contribute is phased out for Tps w high AGl Single Bt 112k and 127k AGI 15k range MFJ Bt 178k and 188k 10k range a Money must have been put into the Roth IRA for least 5 years and the taxpayer must be 5912 before money can be withdrawn tax free Bev and Trey are married and file ajoint return Their AGI is 182000 How much can they contribute to a Roth IRA 400010000 x 5500 2200 reduction They can each contribute 3300
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