Welcome back, in this set of videos will examine various business related deductions. In this first video, I'll introduce you to these topics and then we'll discuss transportation expenses. You'll recall from previous lessons that business expenses for self-employed individuals are deductible as a for AGI deduction or above the line. However, if you are an employee as a result of the tax cuts and jobs act. None of your unreimbursed employee expenses will be deductible from tax year 2018 through tax year 2025. Prior to 2018 and after 2025, unreimbursed employee expenses are deductible as an itemized deduction subject to a 2% of AGI for. But in the current timeframe no deduction for unreimbursed employee expenses is available. So we'll be looking at these expenses in the context of a self employed individual that's operating a trade or business. So for a sole proprietor, these expenses will generally appear on the taxpayers schedule C of form 1040. Then it will be rolled up into the main part of form 1040. And again, because these expenses are deducted before arriving at AGI, these are for AGI deductions. So what differentiates an employee from a self employed individual known in this context as an independent contractor? Well, this is a highly factual question, but it makes a big difference. We just talked about one big difference related to whether these business expenses are even deductible. But beyond that, if a worker is an employee then the business must withhold payroll taxes and pay the employer's share of those payroll taxes. The employer must also pay unemployment insurance tax. And the employer may be required to provide the worker with certain fringe benefits, such as health care coverage. On the other hand, those obligations don't apply when you're worker providing services is an independent contractor. Here Generally the only obligation of the business is to provide the worker and the IRS with a form 1099 NEC. Which reports that workers non employee compensation earned during the tax year. And instead of the payroll taxes being split equally between the employer and the employee and totally withheld by the employer. The self employed individual is going to be responsible for all payroll taxes associated with their earnings. And this is the self employed individual paying self-employment tax on their form 1040. So what are some of the criteria to look for in determining whether someone is an employee or an independent contractor? Well, if a person is subject to the will and control of another with respect to what job shall be done and how it shall be done. Then that person is more likely to be considered an employee rather than a self-employed individual. However, if the worker has just given assignments or projects and the worker controls the means by which those assignments or projects will be completed. Then they are more likely to be an independent contractor. If another person or entity furnishes the tools or place of work, then again the person is more likely to be considered an employee. If the worker furnishes their own tools, their own equipment, then they're more likely to be an independent contractor. And the final common factor will discuss is how payments are made. If payments to the workers are based on time spent rather than the task or project performed, that is maybe they're paid a salary or they're paid by the hour. Well, that person is more likely to be considered an employee. However, if the worker is paid by the project or by the assignment. Then they are more likely to be considered an independent contractor. So think about someone in the consulting profession. If the consultant works for a firm that directs her how to do her job provides her with a place of work, furnishes the tools to do the job and pays her a fixed salary. Then the consultant in that case is going to be an employee. However, if the consultant is hired by a firm to work on a particular project and she determines how the work will be performed. She provides her own workspace, her own tools and gets paid by the project. Then in that situation the consultant looks more like an independent contractor rather than an employee. And again this distinction makes a big difference for tax. A self-employed person or independent contractor gets to deduct their business expenses as a for AGI deduction. However, an employee that incurs business related expenses and is not reimbursed by their employer. Cannot deduct these expenses from tax year 2018 through tax year 2025. So let's take a look at some business related deductions. And the first one we're going to talk about is local transportation expenses. Local transportation expenses are the ordinary and necessary costs of traveling from one workplace to another within the taxpayers tax home. A tax home is the general area in which a taxpayer conducts their business. Examples of attacks home, depending on your business, could be an entire city, a county or metro area. We'll talk about expenses occurred while away from your tax home in the next lesson. So what's the transportation expense? Here, expenses incurred from taxi fares Uber fares, auto expenses, tolls and parking. Would be transportation expenses eligible for deduction if they are incurred In the course of a trade or business. But there's one big exception and that's for commuting expenses. Commuting from your home to a permanent workplace and back is not a deductible expense. So for example, a self-employed individual cannot deduct the cost of driving from his home to his workplace. However, once he is at his workplace he can deduct any transportation costs while there other than the cost of returning home. So for example, if a self employed individual drives from his home to his regular place of work, that's not deductible. But if the self employed individual then drives to a client's office, that's a deductible transportation expense. Or if the office runs out of paper and the self employed individual makes a trip to the local office supply store to buy paper. That's a deductible transportation expense. Now, there are a few exceptions to the idea that there is no deduction for commuting. And these generally all Rrelate to temporary work locations. So first, a self-employed individual can deduct the cost of commuting to a temporary work site that is located outside of the metropolitan area where the taxpayer lives and normally works. So, for example, if a self employed person normally works in Chicago Illinois, but must travel to Indianapolis Indiana daily for several weeks for business. Then those daily travel costs from the taxpayers home in Chicago to the temporary work site in Indianapolis would be deductible. Second, if a self-employed taxpayer has one or more regular work locations away from the taxpayers residents. The taxpayer can deduct the daily transportation expenses for traveling to a temporary work location in the same trade or business, regardless of location. So, for example, if a self-employed architect regularly works out of his office. But occasionally visits the construction sites of ongoing projects. Here, the cost of commuting from his home to his office would still be nondeductible. However, he would be able to deduct the cost of traveling from his home to any of the work sites that he visited. And this would be deductible because he has a regular work location and his temporary site visits are related to the same trade or business. And under this exception, it doesn't matter whether those construction sites are inside or outside of his metro area. Third, if a self employed taxpayer has two or more business locations. The cost of traveling between those business locations would be deductible. So, for example, a self employed individual owns a restaurant and It has two locations. The cost of traveling between location one and location two for business purposes would be deductible. And finally, if a self-employed taxpayers, regular place of business is their home. Then any transportation costs they incur related to the trader business will be deductible. So if a self-employed taxpayer operates their business out of their home, the costs of traveling away from their home for business are deductible. So now that we discuss when transportation expenses are deductible, how do we know how much is deductible? Especially if, for example, the self-employed taxpayer uses his or her own car. Well, here taxpayers have a choice on how to calculate their deduction. Their first option is to use actual expenses of the vehicle plus depreciation. So this would be the cost of gas, insurance, maintenance, plus the allowance for depreciation. If the taxpayer uses the car for both business and personal use. Then the portion of the expenses related to personal use would be non deductible. As an alternative to the actual expense method. A taxpayer can select an easier simplified method, which is the automatic mileage method, or the standard mileage rate. With this method, the taxpayer simply multiplies the number of business miles driven by a flat rate set by the IRS every year. This rate is supposed to account for the cost of gas, maintenance, and depreciation. And in addition to the automatic mileage rate, you can still deduct any parking fees or tolls paid. But regardless of which method the taxpayer chooses. The taxpayer must keep adequate records regarding the business usage of the vehicle. For example, taxpayers should keep a travel log, noting the business purpose and mileage driven for each trip. And if actual expenses are used, the taxpayer needs to keep track of their receipts. Once you elect a method for an automobile, that will usually be the same method you use for as long as you own the vehicle. However, it is possible, although somewhat complicated to switch from the standard mileage deduction to the actual operating cost method,. But it's generally not possible to switch from the actual cost method to the automatic mileage method. [MUSIC]
