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26 Cards in this Set

  • Front
  • Back
employers may deduct wages if they are ordinary business expenses; factor direct labor (and perhaps indirect labor under UNICAP) is capitalized
Exception: cash compensation > $1,000,000 to a top-4 officer is not deductible unless it is performance bases (per person)
Accrual-basis employers can deduct accrued compensation expense only if the compensation is paid within two and one-half months after the close of the year
5 factors relevant to "reasonableness" of employee compensation
1. Shareholder/employee's role in the business
2. External comparisons with other companies
3. Financial condition of the corporate employer
4. Employee's degree of control over dividen policy in capacity as shareholder
5. Internal consistency of corp's compensation system throughout employee ranks
S corporations
have an incentive to pay unreasonably low salaries n order to minimize payroll taxes
if the corporation pays the owner a salary as compensation for services rendered as an employee, the corporation's income decreases by the salary deduction, but the owner's income from the business (salary plus corporate income) is unchanged
are U.S. citizens (or permanent residents) who reside and work overseas on an extended basis
can exclude $92,900 (2011) from taxation in the U.S>
cannot claim foreign tax credit on excluded income
Taxes paid to foreign jurisdiction are normally credited against U.S. tax liability (if you were taxed on that income, you can't include that tax in your credit)
if foreign tax>U.S. tax (you are done)
if foreign tax<U.S. tax (you have to pay the difference, pay enough to get yourself up to U.S. tax)
credit can carry forward indefinitely
Employee Fringe Benefits
Provide a social welfare benefit (medical, dental, visual, health, daycare facility)
Non-discriminatory, or
Necessary for job (printer, paper)
Health and accident insurance or coverage is not taxable if nondiscriminatory
only cost of premiums to provide group term life insurance> $50,000 is taxable
Dependent care assistance up to $5,000 is excluded
Self-employed persons can deduct 100% of medical insurance costs (FOR AGI deductions)
are deductible to the company
Employee Expenses
Misc. (hobby, safe deposit box, tax prep fees, unreimbursed expenses) - for unreimbursed (2%)
When employers reimburse employees for employment-related expenses:
reimbursement is not income to employee
expense is not deductible by employee
employer may deduct reimbursement
Fringe Benefits and Self-Employed Individuals
a self-employed person pays $750 to purchase a $50,000 life insurance policy to protect her family, the payment is a nondeductible personal expense. Same applies to individual partners and shareholders in S corporations. If a partnership has a group term life insurance plan covering both employees and partners, the cost of a partner's insurance is a guaranteed payment that the partner must recognize as taxable income. If an S corporation has a groupd term life insurance plan, the cost of a shareholder/employee's insurance is taxable compensation instead of a nontaxable fringe benefit.

Self-employed individuals, partners, and S corporation shareholders do receive consideration with respect to medical and insurance for themselves and their families. These taxpayers are allowed an above-the-line deduction for the cost of insurance.
Moving Expenses
unreimbursed moving expenses are deducted in computing AGE (for-AGE deduction, not an itemized deduction) unreimbursed
old house to job
new house to job
old house to job has to be 50> new house to job

costs to transport household goods and personal belongings including automobiles
travel costs except meals

hotel while your stuff isn't there
Retirement Planning
Qualified plans provide deferral (sometimes exemption) of tax on earnings. The compounding effect of this deferral is big
Withdrawal cannot begin before 59 1/2 (w/out 10% penalty) but must begin after 70 1/2
Qualified Plans
Plans cannot be discriminatory
salary contributed to plan is not currently taxed (traditional IRA, 401k, defined contributions plans)
employer generally gets a deduction for contribution to plan (funding the plan is what gives the employer the deduction)
the plan itself is tax exempt, so earnings are not taxed as they accumulate
Early Withdrawals
Premature withdrawals of all amounts
Premature withdrawals are subject to a 10% excise tax.
owner becomes disabled
owner reaches age 55 and becomes unemployed
amounts withdrawn upon owner's death
Tax advantages of typical qualified plan
contributions made with pre-tax dollars
earnings accumulate tax free within the plan
withdrawals taxed to beneficiary upon retirement, often at a lower tax rat than would have applied in year of contribution
Defined Benefit Plan
promises "known" $ of benefits, contribution $ uncertain (defined benefit pension)

employer assumes risk and promises a certain retirement income stream

annual pension limited to the lesser of 100% of average three highest years' wages $195,000

these contributions are deductible payroll expenses, even though the employees do not recognize the contributions as income (these contributions are not subject to FICA payroll tax)

firms must comply with a minimum funding standard for their qualified pension plans (may be required to make contributions to the retirement trust in years in which it operates at a loss or experiences cash flow difficulties)
Defined Contribution Plan
contribution $ "known", benefit $ uncertain (defined contribution pension, profit-sharing plan, 401(k) plan, Employee Stock Option Plans (ESOPs), Keogh Plan, IRA Plans, both traditional and ROTH)

The employer sets aside a certain defined amount each year. THe employee bears the risk fo what return the investment provides

Yearly employer contribution limited to the lesser of
100% of annual compensation or
50,000 (in 2011)

may deduct their yearly contributions even though these contributions are not taxable to the employees
Life Insurance
paid by employer (paying premiums)
if proceeds are 50,000 < (the cost of the premiums they paid are not taxable )
if proceeds are >50,000 (then some of the cost of the premiums are taxable to you)
premiums are not deductible to the firm because the proceeds are not deductible
the corporation still gets a deduction for life insurance for you (they are providing for you, by paying those premiums)
401 (K)
maximum contribution is 16,500, employers often agree to make additional contributions or even match their employees' elective contributions
1. Tax-fre beginnings
2. tax on withdrawal
3. tax-free end
(vesting period - how long you have to stay for it to be really yours)
maximum 25% of compensation
total $50,000

deductible by employer
Self-Employes Plans - Keogh
Contribute up to the lesser of
20% of earned income from self-employment
$50,000 in 2011
must no discriminate; if owner has employees then he/se must provide retirements benefits to them

business earnings invested in keogh plans are not taxable to employee and earnings are tax-exempt

the earnings by the financial assets held in the plan are tax exempt. Accordingly, sole proprietors and partners can take advantage of Keogh plans to accumulate tax-deferred savings in the same way the employees take advantage of their employer-provided plans
employer is always going to be a deduction for this
your portion is after-tax dollars
non-qualified deferred-compensation plans
employers can deduct contributions made to the plans on their employees' behalf, while employees defer income recognition until they receive distributions from the plans at retirement

employer accrues a liability but does not set aside any cash or property
IRA Deductibility
If AGIs is below a phaseout threshold, contributions are fully deductible. The 2011 phaseout threshold is $90,000 for married individuals filing jointly and $56,000 for unmarried individuals.

If AGI exceeds the phaseout threshold, the deduction is reduced by a percentage equal to the excess AGI divided by a phaseout range
Individual Retirement Accounts
Individuals contribute the lesser of $5,000 (in 2011( or 100% of compensation (but each spouse may contribute $5,000 if combined earned income = $10,000)

A taxpayer reaching age 50 by year`
IRA Withdrawals
any portion of the withdrawal attributable to the owner's nondeductible contribution is a nontaxable return of investment. The remainder of the withdrawal (the portion attributable to deductible contributions and accumulated earnings) is ordinary income.

The nontaxable portion of an annual withdrawal is based on the ratio of the owner's unrecovered investment at the beginning for the year to the current year of the IRA.

The current year value is defined as the year-end IRA balance plus current year withdrawals.

unrecovered investment / current year IRA value

early withdrawals are subject to 10% penalty, except

$10,00 w/d for "first-time homebuyer"
and funds to pay higher eduction expenses
NO deduction when contributed, but NO tax when distributed

You expect tax rates to increase

not available for high-income individuals e.g. MFJ AGI>$169,000

A withdrawal is qualified only if it occurs after the owner reaches age 59 1/2 and after the five-year period beginning with the first year in which the owner contributed to the account
Employee Stock Options
The right to buy stock in the future for a set price (called the exercise or strike price) for a given period of time

form of compensation that requires no cash outlay

in the money (trading at 12 and option is 10)

out of the money (trading 6 and option is 10)

employer will have compensation expense (equal to FMV of option at grant date

no tax is owed by anyone at time of grant
Incentive Stock options (ISOs)
granted by an employer to employee

exercise price must be >= FMV at grant (in the money)

life of option <= 10 years

value exercised in any year <= $100K (if you go over this amount the only amount that is unqualified is the amount more than $100K)

option must be held 2 years from grant; stock must be held 1 year from purchase

employee - no taxable income at grant or at exercise
employer - compensation expense but no salary deduction ever
exception - early disposition of stock (w/in 2 years of grant or 1 year of exercise) = NQSQ

Employee basis in stock = exercise price

Employee generates cap gain/(loss) on sale
Nonqualified Stock Option (NQSQ)
Employee - no income at grant; salary income equal to difference in FMV of stock and exercise price at date of exercise

Employee's basis in stock = FMV at exercise date

Employer - compensation expense at grant, deduction equal to employee income at date of exercise

Employee generates capital gain on sale