2 0 1 1

Advanced Employee
Business Expense
Instructor’s Guide

Product # H108395
Advanced Employee Business Expense (2011) Product # H108395
Advanced Employee Business
Expense (2011)
A Publication of
H&R Block Services, Inc.
Kansas City, Missouri

Debbie Schott, EA

This publication was written and produced at

Field Support Organization-KC.

Disclaimer
The following training was developed by FSO-KC for use by both company-owned and franchise-
owned offices. Although some aspects of this training may not apply to employees of a
franchise-owned office, training issues regarding customer service, client experience, tax law, or IRS
rules and regulations apply to all company and franchise associates. If your franchise-office training
policies differ from those presented, please bring them to the attention of your respective franchisee.
 Contributors

Team Lead ........................................................................................................Debbie Schott

Tax Proofreader ................................................................................................Laura Arruda
Editor............................................................................................................Kimber Grainger
Production Associate ............................................................................................Mike Young

© HRB Tax Group, Inc. 2011

Copyright is not claimed in any material secured from official U.S. government sources.

All Rights Reserved

No part of this book may be reproduced or transmitted in any form or by any means, electronic or
mechanical, including photocopying, recording, or by any storage or retrieval system, without
permission in writing from HRB Tax Group, Inc.

Printed in the U.S.A. June 2011

The information in this textbook is for general use in teaching an income tax course and is not for the
purpose of rendering legal or other professional services or advice. The information is as timely and
accurate as possible as of the publication date, but because of legislative changes and administrative
interpretations subsequent to that date, caution must be used in the application of any information
contained herein.
 Table of Contents

Preface ....................................................................................................iii

UNREIMBURSED EMPLOYEE EXPENSES

Classroom Supplies ........................................................................IG1.1
Getting Acquainted ........................................................................IG1.1
Session Objectives ..........................................................................IG1.1
Introductory Statement ..................................................................IG1.2
Introductory Exercise......................................................................IG1.2
Theory ..............................................................................................IG1.3
Three Tests ......................................................................................IG1.3
Expenses Not Requiring Form 2106..............................................IG1.4
Class Exercise 1B ............................................................................IG1.4
Requirements ..................................................................................IG1.5
Exercise 1D ......................................................................................IG1.6
Tax Home ........................................................................................IG1.7
Travel................................................................................................IG1.8
Qualified Transportation ................................................................IG1.9
Entertainment ................................................................................IG1.9
Meals During Travel ......................................................................IG1.9
Mastery Check TPS Class Exercise 1..........................................IG1.10
Debrief ............................................................................................IG1.11
Conclusion......................................................................................IG1.11
Transition ......................................................................................IG1.11

USE OF HOME AND REIMBURSEMENTS

Classroom Supplies ........................................................................IG2.1
Welcome............................................................................................IG2.1
Research Homework ......................................................................IG2.1
Session Objectives ..........................................................................IG2.2
Introductory Statement ..................................................................IG2.2
Theory ..............................................................................................IG2.2
Substantiation ................................................................................IG2.3
Reimbursement ..............................................................................IG2.4
Business Use of Home ....................................................................IG2.8
Mastery Check TPS Class Exercises 2A, 2B, and 2C ................IG2.10
Debrief ............................................................................................IG2.11
Conclusion......................................................................................IG2.11
Transition ......................................................................................IG2.11

LEASING AND TRADING VEHICLES

Answer Course Questions ..............................................................IG3.1
Session Objectives ..........................................................................IG3.1
Introductory Statement ..................................................................IG3.2
Review of Vehicle Expenses............................................................IG3.2
Leased Passenger Vehicles ............................................................IG3.4
i
Trading Vehicles ..............................................................................IG3.5
Demonstration ................................................................................IG3.6
Continuing Education ..................................................................IG3.11
TPS Class Exercises 3A, and 3B..................................................IG3.12
Mastery Check, TPS Class Exercise 3C ......................................IG3.12
Debrief ............................................................................................IG3.13
Conclusion......................................................................................IG3.13
Solution, Situation 1 ....................................................................IG3.14

ii
 Preface
Purpose
The purpose of Advanced Employee Business Expense (2011) is to cover all
the decisions that need to be made to complete Form 2106. Topics include:
• Travel and transportation
• Leased vehicles
• Business use of home
• Temporary assignment
• Work-related education expenses

Prerequisites
This course was written with the assumption that the participants have good
working knowledge of depreciation and vehicle expense deductions.
Completion of Intermediate Depreciation and Intermediate Vehicle Expense,
while not required, is recommended.
As the course instructor, you should have completed the H&R Block
Instructor Training. It is preferable that you have knowledge regarding
Form 2106 entry in TPS.

Classroom Time
This course requires a total of three 3-hour classroom sessions.

Continuing Professional Education (CPE) Credit

If all the requirements of the CPE Program* are met:
• You, as the instructor, are eligible to receive up to nine CPE credits for
teaching all sessions and passing the exam for this course.
• Participants are eligible to receive nine CPE credits for completing this
course, including passing the course exam.
* For complete rules of the Continuing Professional Education Programs,
refer to the 2011 Tax Professional Continuing Professional Education
Handbook posted on the Knowledge Development Web site, accessed from
myBlockSM for the Tax Office (MBTO).

IRS and NASBA Continuing Professional Education Credit

H&R Block is an authorized sponsor of CPE with the IRS. Therefore, TTS
courses that focus primarily on tax theory qualify for Enrolled Agent (EA)
credit. This course qualifies for nine CPE hours for EAs.

iii
 H&R Block is not currently an authorized sponsor of CPE with the National
Association of State Boards of Accountancy (NASBA). If you are a CPA, con-
tact your state Board of Accountancy to determine if this course qualifies for
CPE.

Participant Materials
Each participant should receive the participant’s guide, which contains the
textbook and workbook.

Classroom Supplies
The following supplies are suggested for the delivery of this course.

□ LCD projector connected to TPS 2010

□ Course supplement files

□ Dry erase pens

□ White board

□ Flip chart

□ Easel

□ Permanent markers

□ Computers with the most current version of TPS 2010

Course Supplement Files

This course does not use course supplement files.

TPS
This course uses TPS returns as teaching material. Additionally, this course
uses shell returns as teaching material. To use the shell returns, participants
must access computers loaded with the most recent version of TPS. For the
shell returns to function properly, each participant must log in to TPS with
a unique User ID.

iv
Instructor’s Guide Layout
The following table explains the sections generally found in each chapter of
this instructor’s guide.

Section Description
Classroom Supplies List of supplies required for the session

Session Objectives List of participant objectives for the session

Introductory Statement Introduction to the chapter topics

Background or historical information explain-

Theory
ing why the topic is being discussed

Mastery Check Check for participant understanding

Meaning and value of the session material or

Debrief
activity
Move to the next subject or introduce the next
Transition
topic

Conclusion Bring the lesson to a close

Suggested time allotments are given throughout each session. Please adjust
the times to meet participant needs.

v
Visual Cues
Throughout this instructor’s guide, you will find visual cues designed to help
you quickly identify important actions or concepts. The following table pro-
vides explanations of these visual cues.

vi
Instructor Role
As the instructor, it is your responsibility to familiarize yourself with the
course content, prepare for each class session, deliver the classes, facilitate
learning, and complete any administrative duties (including those detailed
in the Recordkeeping and Evaluations sections which follow).
The following are preparation steps to be completed before each class ses-
sion:
• Review any corrections and clarifications for the chapter.
• Read the textbook chapter.
• Complete the chapter workbook exercises.
• Study the instructor’s guide lesson plan.
• Prepare any supplemental information, as applicable.
• Ensure all required supplies are available.
• Set up the classroom, as appropriate.

Class Schedule
A class schedule is included at the end of this preface. Complete the heading
with the information for your class, make copies of the schedule for the par-
ticipants, and distribute the copies at the first session.

Corrections and Clarifications

We are committed to ensuring course materials are complete, accurate, and
easy to understand. However, sometimes corrections and clarifications must
be made to course materials. Please check the latest course corrections and
clarifications posted on the Advanced Employee Business Expense course
page of the Knowledge Development Web site, accessed from MBTO. Inform
participants of any corrections so they may update their materials.
Please submit any questions or comments about this course through the
Feedback Center on myBlock. Select Training as the category, Upper level
courses as the topic, and Advanced Employee Business Expense as the
subject. Make sure to note any applicable page numbers in the
comments/questions section. Your question will be submitted to the Tax
Training Department, and your question will be answered as quickly as pos-
sible.

Recordkeeping
Enrolled Agents
Each enrolled agent is required to retain records verifying continuing educa-
tion hours through H&R Block. Either the Certificate of Credit or the
Certificate of Attendance serves this purpose.
Additionally, records are required to be maintained by H&R Block. Form
2495, Continuing Professional Education for Enrolled Agents Class Session
Record, allows H&R Block to meet these recordkeeping requirements. Three

vii
 copies of Form 2495 are included at the end of this preface; one form must be
completed for each course session.
You, the instructor, should complete the form heading. If you are an enrolled
agent and want to receive credit for your teaching hours, be sure to enter
your enrolled agent ID on the appropriate line.
At each session, every enrolled agent requesting credit for the session must
enter their employee ID, name, signature, and enrolled agent ID in ink on
the Form 2495.
Please submit all completed Forms 2495 to your District Office or your
Franchise District Manager.

Class Attendance Record

Note that a blank Form 2801, Enrollment, Attendance & Achievement
Record, is no longer included in this preface. Please use the copies of this
form that are computer-generated from your class list. At course conclusion,
please submit the completed Forms 2801 to your District Office or Franchise
District Manager.

Participant Attendance Record

The textbook preface contains a Participant Attendance Record each partic-
ipant may maintain for his or her own records. There are places for you, the
instructor, to initial as sessions are completed and to sign when the course is
finished. The Participant Attendance Record is provided for the participant’s
records but is not valid without your signature.

Course Completion
To improve the Tax Professional’s learning experience, we have moved exams
to an online environment. In this environment, Tax Professionals are no
longer required to take exams in the tax office.
This new method for taking exams allows Tax Professionals to complete the
Instructor Course Evaluation and online exam and to print the Certificate of
Credit from the appropriate myBlock for the Tax Office site.
Once they have entered the appropriate myBlock site, Tax Professionals
complete the steps below to access the online exam.
1. Select the myCareer tab at the top of the page.
2. Select the myCertification link. Result: A list of all courses you are enrolled
in will be displayed.
3. Click the Take Exam link for the appropriate course. Result: The exam dis-
plays and is ready to be completed.
The Certificate of Credit is available for their records. Once they have com-
pleted the online exam, the certificate link will be enabled. Click the link to
print the Certificate of Credit.

viii
Evaluations
Course Evaluation Form
Our goal is to develop training to meet the participants’ needs. Your com-
ments are most beneficial in helping us meet our goal. Therefore, we have
posted an online instructor survey at:
<http://vovici.com/wsb.dll/s/1308cg461fd>
Please complete this survey as often as you wish and include specific refer-
ences in your comments. We will use the information gathered from these
forms to identify any needed changes to this course.
To send attachments or any additional information, you may also contact the
writers at: InstructorComments@hrblock.com.

IRS Preparer Regulation Initiative

H&R Block has been in support of stronger regulation of the tax preparation
industry for some time and has played a leadership role in helping formulate
many elements of this program. We believe the initiative raises industry
standards and helps further define tax preparation as a professional and
respected occupation—one that requires strong training, ethics, and expert-
ise to practice.

Our Commitment to Tax Professionals

The IRS regulations support our current training discipline. In fact, our cur-
rent requirements for becoming a Tax Professional (and continuing educa-
tion programs) meet and/or exceed many of the IRS-mandated requirements.
H&R Block Tax Professionals are required to earn 24 hours of CPE to be eli-
gible for rehire in the subsequent tax year. Within the 24-hour CPE require-
ment, Tax Professionals must complete 15 hours of CPE in the following for-
mat:
• 2 hours CPE from a qualifying ethics course
• 10 hours CPE of federal tax courses
• 3 hours CPE of Tax Update (H&R Block’s Tax Update course qualifies)
The remaining 9 hours of CPE may be taken towards courses that either
help achieve a certification level or grow your book of business. Tax
Professionals are not required to take H&R Block’s courses to obtain any or
all the 24 hours of CPE. Taking H&R Block’s courses also is not a guarantee
of employment or rehire.
The Advanced Employee Business Expense course provides nine hours of
credit towards the federal requirement.

The Importance of Privacy and Data Security

Privacy and Data Security are important elements to the success of H&R
Block. It is important that all H&R Block associates, Franchisees, and
Franchise associates understand that the appropriate collection, use, and
ix
disclosure of client and associate personal information is our responsibility.
We must ensure that adequate safeguards are in place to protect and main-
tain the confidentiality of client and associate data in both paper and elec-
tronic format.
To learn more about Privacy and Data Security, access The Value of Privacy
WBT/CBT through the Skills Learning Center or visit the Compliance,
Performance Integrity & Privacy Web site through the myCompany tab on
myBlock.

x
 Advanced Employee Business Expense (2011) Class Schedule

Location ______________________________________________________________________________

Class Time ______________________________________________________________________________

Instructor ________________________________________________________________________

Session Details Following is a list of assignments for each class session:

Session Date To Do Before Class To Do During Class

Read Chapter 1 of textbook.

Complete Chapter 1 workbook exer-
1
cises. Complete Chapter 1 TPS Class
Exercises.

Read Chapter 2. Discuss Chapter 2 of textbook.

Discuss Chapter 2 workbook exercis-
2 Complete Chapter 2 workbook es. Complete Chapter 2 TPS Class
exercises. Exercises.

Discuss Chapter 3 of textbook.

Read Chapter 3. Complete Chapter Discuss Chapter 3 workbook exercis-
3
3 workbook exercises. es. Complete Chapter 3 TPS Class
Exercises.

xi
H&R Block Continuing Professional Education for Enrolled Agents
Class Session Record Form 2495
District ID: ________________________ Course Name: ________________________________________
Class Date: ________________________ Session/Chapter Name: ________________________________
Class Time: ________________________ Class Address: ________________________________________
Credit Hours: ______________________ City, State, ZIP: ________________________________________
Name of Instructor __________________________________________________________________________
Employee ID: ______________ Enrolled Agent: ________________________________
Complete this form in ink.

Employee Enrolled
Name of Participant Signature
ID Agent ID

Form 2495 — Page 1

Employee Enrolled
Name of Participant Signature
ID Agent ID

Form 2495 — Page 2

H&R Block Continuing Professional Education for Enrolled Agents
Class Session Record Form 2495
District ID: ________________________ Course Name: ________________________________________
Class Date: ________________________ Session/Chapter Name: ________________________________
Class Time: ________________________ Class Address: ________________________________________
Credit Hours: ______________________ City, State, ZIP: ________________________________________
Name of Instructor __________________________________________________________________________
Employee ID: ______________ Enrolled Agent: ________________________________
Complete this form in ink.

Employee Enrolled
Name of Participant Signature
ID Agent ID

Form 2495 — Page 1

Employee Enrolled
Name of Participant Signature
ID Agent ID

Form 2495 — Page 2

H&R Block Continuing Professional Education for Enrolled Agents
Class Session Record Form 2495
District ID: ________________________ Course Name: ________________________________________
Class Date: ________________________ Session/Chapter Name: ________________________________
Class Time: ________________________ Class Address: ________________________________________
Credit Hours: ______________________ City, State, ZIP: ________________________________________
Name of Instructor __________________________________________________________________________
Employee ID: ______________ Enrolled Agent: ________________________________
Complete this form in ink.

Employee Enrolled
Name of Participant Signature
ID Agent ID

Form 2495 — Page 1

Employee Enrolled
Name of Participant Signature
ID Agent ID

Form 2495 — Page 2

 Unreimbursed Employee Expenses
1
Classroom Supplies
Following is a list of supplies needed to conduct this session:

□ LCD projector attached to computer with TPS10

□ Workstation with TPS10 for each participant

Getting Acquainted
10 minutes
Welcome the participants and introduce yourself. Ask the participants to
introduce themselves by describing how they encourage their clients with
employee business expenses to keep good records. Use the introductions as
an opportunity to find out about the participants’ interests and previous
experience with employee business expenses. Then, adapt the course mate-
rial to best meet their needs. This advanced course assumes participants
have had prior exposure to Form 2106. Feedback has shown that those who
have benefited most from this course have had prior experience with content
from the courses Intermediate Itemized Deductions, Intermediate
Depreciation, and Intermediate Vehicle Expense.

Session Objectives
Terminal objective: Given a taxpayer profile, participants will be able to
enter employee business expenses into TPS and pass the diagnostic check.
By the end of the chapter, the participants will be able to:
• Apply three tests to determine valid employee business expenses.
• Determine the employee business expense deduction for expenses likely to
be encountered on an individual income tax return.
• Determine an employee’s tax home.
• Determine travel expenses.
• Determine transportation expenses.
• Apply limits to meal and entertainment expenses.

IG1.1
IG1.2 H&R Block Advanced Employee Business Expense (2011)

Introductory Statement
5 minutes
Say: The H&R Block Income Tax Course introduces Schedule A. Then,
Intermediate Itemized Deductions and Intermediate Vehicle Expense examine
Schedule A in greater detail. Now, in Advanced Employee Business Expense,
you will learn everything else you need to know about arriving at the best
Schedule A, line 21 amount for your client.
This course is presented in the expanded workbook style format. This means
that the workbook contains more information than is usual in other instruc-
tor-led courses. The textbook, especially Chapter 1, is a reference. It contains
too much information to study each fact in depth. It is more important for the
participant to be able to find the information when needed than for them to
memorize every detail.
What is so amazing about this course is the feedback from it. Many instruc-
tors write to the author with testimonials of how the IRS responded to their
clients’ claims of employee business expenses. They want this particular
topic to be emphasized even more than it is already. So you can benefit from
it, here is a partial list of their concerns:
• Completion of Intermediate Depreciation should be a requirement, not a
recommendation.
• Per diems for DOT workers are frequently misunderstood due to the issue
that the work base is not the same as home (tax home versus domicile).
• The IRS often audits returns for employee business expenses and disal-
lows any expenses that, under their employer’s reimbursement policy,
would have been reimbursed if the employee had submitted them to their
employer.
• In an audit for employee business expenses, the IRS agent wants to see a
document regarding the employer’s qualified reimbursement plan.
Take notes throughout the course so that you can add your feedback at the
end of the course.

Introductory Exercise
W1.1–W1.3 10 minutes
Say: Think back to the tax office by visualizing where employee business
expenses are entered in TPS. Does anyone remember? Yes, on the Schedule
A screen or the 2106 screen. Turn to page W1.1 for a visual reminder of the
employee business expenses entry on the A screen.
As the participants find the page, explain that TPS designers have tried to
make the workflow more logical for Tax Professionals, which is better for
clients.
 Unreimbursed Employee Expenses IG1.3

Look over the TPS screen shot on page W1.1, and ask for two volunteers to
read the dialog between Walter and Ken, the Tax Professional. Then, direct
the class to answer the discussion questions.
Q. What other questions could you ask Walter at this point?
A. The purpose of this question is to encourage discussion among the partic-
ipants, not to elicit specific answers. They might ask questions about other
potential employee business expense deductions or might even ask about
other items subject to 2% of AGI, such as tax preparation fees or safety
deposit box rental.
Q. How do you respond when your clients ask if last year’s tax prepa-
ration fees are deductible?
A. Once again, this question has no specific correct answer. Some partici-
pants might say they just enter the information, and others might advise
their clients that the deductibility of tax preparation fees depends on the
taxpayer’s other expenses subject to the 2%-of-AGI limit. They may con-
tinue to state that the deduction also depends on whether the taxpayer’s
itemized deductions exceed the standard deduction. The point is to
encourage the participants to use tax terms to discuss issues with their
clients.

Theory
5 minutes
Say: As you can see from the answers to the question about deducting tax
preparation fees, sometimes taxpayers benefit greatly from miscellaneous
deductions subject to 2% of AGI, and sometimes they don’t. One hallmark of
H&R Block is establishing a client’s lowest tax liability. This requires digging
into their financial life deeply enough to see if they have deductible employ-
ee business expenses in excess of 2% of their AGI.
Let’s see how we can help our clients deduct every employee business
expense they incur!

Three Tests
1.1–1.2 10 minutes
Give the participants a few minutes to read this section in the textbook.
Then, use Exercise 1A on page W1.4 to clarify the three tests:
• Paid or incurred during the tax year
• Incurred because of being an employee
• Determined to be ordinary and necessary
Answer any questions about applying these tests.
IG1.4 H&R Block Advanced Employee Business Expense (2011)

Expenses Not Requiring Form 2106

1.2–1.4 10 minutes
Ask the participants to look over the next section and then discuss it with
them by asking the following questions.
Q. When is a taxpayer allowed to report employee business expens-
es directly on Schedule A, line 21?
A. This method is allowed when two conditions are met:
• Any reimbursements received are included in box 1 of the taxpayer’s
Form W-2.
• The taxpayer is not claiming travel, transportation, meal, or enter-
tainment expenses.
Tip: To decide whether Form 2106 is required, some Tax Professionals rely
on the acronym MMR—Miles, Meals/entertainment, and employer
Reimbursement.
Q. Why is it good practice to go over the 2106 screens with your
client?
A. You might find additional items which the client has overlooked. Also, you
teach the client what items may be deductible for next year. Read the fol-
lowing example.
䡵Example: John’s employer sends him to a trade show every year. Although
his employer pays for the hotel and for the plane ticket, John has to pay for
any extra hotel services, such as having his suits pressed. This year, he has
no idea how much he paid for these services. You review the 2106 screens to
teach him what receipts he should keep for next year.䡵

Class Exercise 1B
W1.5–W1.9 5 minutes
Ask the participants to look over the Forms 2106-EZ and 2106. Lead the
class in a discussion of what entries are reported directly on Schedule A, line
21, what entries require Form 2106-EZ, and when the longer Form 2106 is
required. Then ask:
Q. Why is it important to know which form is required?
A. One of the best methods for catching errors on a return is to view the
return with the client. For example, if you chose actual vehicle expense
instead of the standard mileage rate, you should see Form 2106 instead of
Form 2106-EZ. If the Form 2106-EZ appears, you may need to go back into
TPS and edit the method for vehicle expense.
 Unreimbursed Employee Expenses IG1.5

Requirements
1.4–1.7 10 minutes
Say: All the items discussed in this section could possibly be entered on
Schedule A without utilizing Form 2106. In the future, it is possible that TPS
may channel all employee business expenses through the 2106 screen, and
then TPS would place entries where needed (in a method similar to the treat-
ment of interest earned on the INT screen). But that enhancement has yet
to come.
Use Exercise 1C to extract the requirements for each expense. Assign par-
ticipants to research one of 10 questions. Ask them to include the page ref-
erence in their answer. After all have finished, instruct each to read their
question and give their answer and the reference for it. Note: Please follow
the stated times for each section so that you work at a steady pace and com-
plete the entire lesson.

Topic Exercise 1C question

Pages 1.4–1.5, Job Search Expenses 1, 2
Page 1.5, Telecommunication Services 3, 4
Pages 1.5–1.6, Gifts 5
Page 1.6, Clothing 6
Page 1.6, Dues 7
Page 1.7, Education 8, 9, 10

Answer any questions the participants have about Exercise 1C, questions
1–10. Explain that the general rule of deducting business expenses is a com-
bination of the test of ordinary and necessary, with the added provision that
the item may not be extravagant. For employees, another limitation is that
the item is used for the employer’s convenience and is required as a condi-
tion of employment. The courts have used those rules to determine deduc-
tions for many items.
Following is a partial list of the kinds of employee business expense ques-
tions that have been addressed. This list has been taken from Tax Research
articles published by The Tax Institute at H&R Block, accessed through
MBTO. Notice that many of them are important for a specific occupational
group. Remind the participants that if they have a client with a particular
question, The Tax Institute is a good place to look for the solution. These arti-
cles also include reference to IRS source material.
• May firefighters deduct meals they are required to eat at the station?
• May merchant mariners deduct the meals and incidental expenses
allowance?
• What expenses can airline personnel deduct as unreimbursed employee
expenses?
IG1.6 H&R Block Advanced Employee Business Expense (2011)

• Can police deduct the cost of meals eaten while on duty?

• Can traveling nurses deduct expenses for travel away from home?
• Are military officers allowed to deduct officers’ club dues, entertainment
expenses for a change-of-command ceremony, and other expenses as
employee businesses?
• May a member of the armed forces use the standard meal allowance to
determine their deduction for employee business expenses?
Encourage participants to become familiar with The Tax Institute and its
knowledge base.

Exercise 1D
W1.11–W1.14 15 minutes
Discuss the 2106 screens by projecting the first 2106 screen in TPS. (You
may use the 2106 screens in the TPS shell return, 842-01-1001.) Point out
that several of the 2106 screens require you to scroll to the end of each screen
to view all the fields. Use this shell return to demonstrate using the
screens. Follow these steps:
• Choose whether the expenses are for (T)axpayer or (S)pouse.
• Verify the occupation is accurate. Show the participants the five boxes in
the center of the screen (circled on the workbook copy). State that this
space is designed as a shortcut to make entries only on a tax return com-
pleted by someone else, such as a third-party prepared return being filed
electronically or a third-party prepared return being amended for a rea-
son other than Form 2106 changes.
• Access the Form 2106 Computation Worksheet, Illustration 1.2 on page
W1.14, by entering Y when questioned.
Have the class answer questions 1–8 on page W1.12. The questions and pos-
sible solutions are included here for your convenience.
1. When would a Tax Professional print a Form 2106 for documenta-
tion purposes only?
A client who does not benefit from employee business expense this year
may wish to look over the information to help with form completion next
year.
2. Does TPS charge the client extra if you use this form when it is
not needed?
At the time the course was written, it appears TPS does charge if you force
the form. If you use the screens to educate your client, be sure you remove
the form before you complete the billing.
3. What happens if you select one of the special codes?
 Unreimbursed Employee Expenses IG1.7

TPS allows benefits that apply to each of these situations. The legend at
the bottom of Illustration 1.1, on page W1.13, gives a short explanation of
these codes.
4. What problems are caused by the length of these screens?
Tax Professionals forget to report information on lines only visible by
scrolling.
5. Why is the entry for parking, tolls, and local transportation so far
from the vehicle expense screens?
Perhaps this is because parking, tolls, and other local transportation are
deductible even when vehicle expenses are not.
6. Where are travel-related meals entered?
Travel-related meals are entered on the same line as any business meals,
near the end of the Form 2106 Computation Worksheet.
7. How must the education questions be answered for the education
expense to be deductible?
Does the taxpayer need this education to meet the basic requirements of
business or profession? No. Will this study program qualify the taxpayer
for a new business or profession? No.
8. How do you interview your client using these screens?
It is important to follow this logical progression so you do not skip items
or add items twice. It is difficult to keep the numbers straight if you are
trying simultaneously to enter amounts for both taxpayer and spouse.

Break 10 minutes

Tax Home
1.8–1.9 10 minutes
Say: A Tax Professional has to be sure a client has a tax home and has to
know the location of that tax home before asking any questions about travel
expenses. The Tax Institute at H&R Block reports that many Tax
Professionals do not understand this topic.
Ask the participants to read the Tax Home section, and then ask them the
following questions.
Q. How is tax home defined?
A. A taxpayer’s tax home is the entire city or general area where the princi-
pal place of business, employment, or post of duty is located, regardless of
where their family residence is located. A taxpayer with no place of busi-
ness may use the place they regularly live. If a taxpayer has no place of
business and no place of regular residence, they have no tax home.
IG1.8 H&R Block Advanced Employee Business Expense (2011)

Q. When a taxpayer has more than one place of business or employ-

ment, what factors influence the determination of tax home?
A. When there is more than one place of business, the tax home can be deter-
mined with these factors:
• The amount of income earned in each area
• The total time ordinarily spent in performing duties in each area
• The level of business activity in each area
Direct the participants to Workbook Exercise 1E on page W1.15 and, togeth-
er with the class, answer these four questions, highlighting the factors
used to make the determination.

Travel
1.9–1.13 10 minutes
Discuss the reading material by asking the following questions.
Q. What is the rationale for being able to deduct travel expenses?
A. Taxpayers need rest when they are away from their tax homes on business
for a period of time substantially longer than an ordinary day’s work.
Because of the demands of working, many expenses are deductible. The
list on pages 1.9–1.10 includes a broad range of deductible travel expens-
es.
Q. What is a temporary assignment?
A. A temporary assignment is work at a location different from an employ-
ee’s regular workplace. To be temporary, the assignment must be expected
to last for a period of one year or less.
Q. What kinds of expenses may a worker on temporary assignment
deduct?
A. A worker on temporary assignment may deduct reasonable expenses for
meals and lodging and also daily, round-trip transportation.
Q. What is an indefinite assignment?
A. An indefinite assignment is work at a location different from an employ-
ee’s regular workplace. To be indefinite, the assignment must be expected
to last more than a year.
Pause for a moment to go over the examples on pages 1.10–1.11. Explain
that the deduction for business expenses for travel outside the U.S. is the
same as the deduction for domestic travel if any of the following conditions
are met:
• The taxpayer is an employee who is not related to the employer and not a
managing executive, and who was reimbursed or received a travel expense
allowance.
 Unreimbursed Employee Expenses IG1.9

• The period of time outside the U.S., combining business and pleasure, was
a week or less (for this condition, do not count the day of departure from
the U.S., but do count the day of return).
• Less than 25% of the time spent outside the U.S. was devoted to non-busi-
ness activities, even if the trip lasted more than a week (for this condition,
count both the day the trip began and the day it ended).
• The taxpayer can establish that a personal vacation was not a major con-
sideration, even if they are related to the employer or the taxpayer is a
managing executive and they had substantial control over arranging the
trip.
Say: If the taxpayer does not meet any of these tests, they must prorate
expenses between business and nonbusiness activities.

Qualified Transportation
1.13–1.17 10 minutes
Begin the discussion by asking:
Q. What is the difference between travel expenses and transporta-
tion expenses?
A. Travel expenses are incurred outside the taxpayer’s tax home.
Transportation expenses are incurred within the area of the taxpayer’s
tax home.
Ask participants to work together to complete Exercise 1F on pages W1.16–
W1.17. Answer any questions they may have.

Entertainment
1.17–1.19 15 minutes
Have the participants use the content in this section to complete Exercise
1G on pages W1.18–W1.19 to illustrate the information in the section.
Remind them that meals and entertainment are figured separately and are
added together before the 50% reduction is applied. Tell the participants
that part of their homework will be to reread portions of Chapter 1, which
they only skimmed in class.

Meals During Travel

1.20–1.22 15 minutes
Give the participants a few minutes to look over the topic and then ask the
following questions.
IG1.10 H&R Block Advanced Employee Business Expense (2011)

Q. Are there any restrictions to claiming meals during travel?

A. An employee’s meals away from home are deemed to have met the direct-
ly related test. The only restriction would be the luxury or extravagance
test. Of course, all meals and entertainment are generally subject to the
50% of expense limitation.
Q. What is the standard meal allowance?
A. It is a rate, also known as the federal per diem rate, which may be used to
claim meals and incidental expenses (M&IE) instead of using the actual
expenses incurred. The 2010 rate for most small localities is $46 per day
through September 30, and $46 per day for the period October 1 through
December 31.
Direct the participants to Exercise 1H in the workbook, and ask them to
complete it individually. Point out the table, FY2011 Domestic Per Diem
Rates - Effective October 1, 2010, on pages W1.27–W1.38. Encourage them
to keep it to use in the tax office next season.
Continue with the following question:
Q. What is the benefit of using the standard meal allowance?
A. The standard meal allowance releases the employee from collecting
receipts or keeping a record of the amount spent. It also benefits an
employee who spent less than the M&IE amount.
Go over Tammy’s example on page 1.21 to show how the standard meal
allowance is computed for full and partial days. Point out that although we
are using 2010 returns for this course, the per diem rate table for dates
before October 1, 2010, is not copied for you. The FY2011 rates are much
more useful to you in the coming tax season.
Q. What extra benefit is given to transportation workers?
A. Workers subject to the U.S. Department of Transportation’s “hours of serv-
ice limits” are permitted to claim 80% of either their actual meal expens-
es or the standard rate of $59 per day for travel at any time in 2010.
Go over John’s example on page 1.22 to show how the standard meal
allowance is computed for full and partial days and then multiplied by the
special rate for transportation workers. Point out that this is where the per
diem for DOT workers can be misunderstood. This misunderstanding is due
to the issue that the work base may be the DOT worker’s tax home, not the
family home.

Mastery Check TPS Class Exercise 1

W1.21–W1.26 20 minutes
Direct the participants to TPS Class Exercise 1. Ask them to read the exer-
cise and enter Marilyn’s employee business expense information into the
TPS shell return. Encourage the participants to work alone and have them
compare their 2106 summary screen with that shown on page W1.26. Be
 Unreimbursed Employee Expenses IG1.11

sure they make all the entries now because in Chapter 2 they will add to
this return.

Debrief
5 minutes
Say: Chapter 1 brought to your attention the requirements for deducting
unreimbursed employee business expenses and showed you how to begin the
process of recording these expenses in TPS. Chapter 2 will go back to the
main 2106 screen to deal with the next two issues on that screen: business
use of the home and reimbursement.

Conclusion
5 minutes
Say: In this chapter, we explored unreimbursed employee business expens-
es. Now you can use your knowledge of these deductions to help your clients
benefit from the employee expenses they incur. Your expertise in this area
will encourage your clients to come back to complete their tax returns with
you again next year.
Give participants the assignment to be completed before the next session.
Say: Before the next class session, please reread Chapter 1 and complete any
remaining workbook exercises. Then read Chapter 2 and complete the work-
book exercises up to TPS Class Exercise 2A. As time permits, query the Tax
Research tool through The Tax Institute for information on employee busi-
ness expenses.

Transition

Say: The term “double dipping” brings up negative connotations of graft and
greed. Next time we will learn how to deal with employer reimbursements to
be sure your clients get credit for expenses they incur, but do not claim the
same expenses twice.
 Use of Home and Reimbursements
2
Classroom Supplies
Following is a list of supplies you will need for this chapter.

□ LCD projector attached to computer with TPS10

□ Workstation with TPS10 for each participant

Welcome
15 minutes
Welcome the participants back to class for Chapter 2. Since Chapter 1 was
so full of tax facts and procedures, ask them for their questions about
Chapter 1. Review any questions that remain after they finished reading
the chapter and working any workbook problems they didn’t have time to
finish in class.
Point out the totals from Marilyn’s partially completed Form 2106 work-
sheet carried to the screen shown in Illustration 1.6 on page W1.26. Remind
the participants to access the Form 2106 Computation Worksheet by enter-
ing Y to the “Access Form 2106 Computation Worksheet?” question on the
2106 screen. TPS then adds all the items and inserts one amount on the sum-
mary screen for each line on Form 2106, Step 1. Point out that the Chapter
1 totals will change in the Chapter 2 TPS class exercise.

Research Homework
W2.1 10 minutes
Ask: What did you learn from the Tax Research – Tax Institute articles that
you didn’t know before you completed your research?
Pause a few minutes for responses. Encourage everyone to share the ideas
they jotted down in their workbooks. If no one looked at the Web site, build
up interest in it, and encourage participants to look at it before the next
class. Mastery of online reference sites is a key tool for Tax Professionals. At
H&R Block, we are moving ahead at a smart pace, giving users—both Tax
Professionals and clients—many choices to access our products, improving
their tax preparation experience.

IG2.1
IG2.2 H&R Block Advanced Employee Business Expense (2011)

Go to the Tax Research–Tax Institute tab on MBTO/MBFTO and ask: May

air traffic controllers deduct the cost of their meals when they are on duty
and required to stay on-the-job? Demonstrate how to enter “air traffic con-
troller,” and search for the article on airline dispatchers.
Generate interest in the myTraining tab on MBTO/MBFTO, Tax in the
News, The Tax Institute knowledge base, and the external Web site located
at <www.hrblock.com/taxes>. These areas can be a great help to clients and
to Tax Professionals.

Session Objectives
Terminal objective: Given a taxpayer profile, at the end of this chapter par-
ticipants will be able to enter business-use-of-home expenses and employer
reimbursements into TPS and pass the diagnostic check.
By the end of the chapter, the participants will be able to:
• Explain how to substantiate employee business deductions.
• Identify accountable and nonaccountable reimbursement plans.
• Explain how employer reimbursement affects business expense reporting.
• Apply the tests for business use of home.
• Determine direct and indirect office-in-home expenses.

Introductory Statement
5 minutes
Ask: Have you ever filed an expense report? What items did you report? Did
you eventually get paid for your expenses? Did you have trouble getting the
report approved? How did you learn to complete it successfully? Your clients
who report business expenses on Form 2106 have similar reporting require-
ments. The main difference is who presents the documentation to the IRS.

Theory
5 minutes
Ask the participants to turn to page W2.3 and, together, look at the expense
reporting form presented there. Then, ask them to identify the portions of
the form that provide information to document:
• The amount of the expense
• The time and place of the travel or entertainment or the date and descrip-
tion of the gift
• The business purpose of the expense
 Use of Home and Reimbursements IG2.3

• The business relationship between the employee and the recipient of the
gift or entertainment
While they are looking at the form, say: To be deductible, even the most nec-
essary expense must be substantiated.

Substantiation
2.1–2.3 20 minutes
Discuss the reading material by asking the following questions.
Q. What facts must be substantiated?
A. To substantiate an expense, the taxpayer must provide evidence of the
amount, date and description, business purpose, and business relation-
ship.
Q. What additional substantiation is required for meals and enter-
tainment?
A. For directly related meals and entertainment, the business purpose must
be identified for each separate expenditure as well as the amount and
description, time and place, and business relationship of the attendees. For
meals and entertainment associated with the business activity, additional
substantiation is needed to show a substantial business discussion preced-
ing or following the meal or entertainment.
Q. What documentation is adequate?
A. Adequate documentation can be in the form of a log book, diary, or similar
item. Such documentation should be complete and written near the time
of the event. Detailed receipts should be retained. Include the employee’s
own explanation whenever records are confusing or incomplete.
Q. Why is it prudent for taxpayers to keep receipts for items less
than $75 or for the cost of meals when the taxpayer intends to use
the per diem method?
A. Even if the dollar amount of an expense is not required, the receipt sub-
stantiates the date of the event. In addition, the actual cost of meals may
be more beneficial than the per diem method.
Point out that it is always good practice for an employee to keep receipts.
Many employers do not pay expenses that are not documented.
Answer any questions the participants have about Exercise 2A, pages
W2.2–W2.3.
Say: Let’s pause to talk about how we interview clients.
Note: The purpose here is to facilitate a discussion of interview technique,
not for the instructor to proclaim their own personal strategy.
Ask the following questions:
Q. How do you interview your client who brings in stacks of meal
receipts?
IG2.4 H&R Block Advanced Employee Business Expense (2011)

A. It is the Tax Professional’s responsibility to explain tax law regarding

travel meals, entertainment meals, and substantiation. Therefore, part of
the interview is giving tax information. Doing so also gives your client a
framework to organize the information they bring you next year.
Q. What next?
A. After figuring out that the employee has records and could not be reim-
bursed by their employer, the next step might be to separate the receipts
into meals out of town and meals in town.
Q. The employee’s meal expenses while away from home on business,
even if dining alone or with persons who have no connection to
the business, meet which test?
A. The taxpayer’s own meals during travel meet the test of being directly
related to the business.
Q How would you interview them to help them plan for next year?
A. Encourage your client to keep good records of who they entertained for
lunch and the business purpose of the meeting (direct or associated with).
Remind them that their own meals are only deductible when they are
directly related to the business.
It’s also good practice to go through all of the 2106 screens to make your
clients aware of the kinds of expenses they might be able to deduct.
Q. Would you share with the class your standard speech that you
give to your clients regarding next year’s employee business
expense deductions?
A. Select several participants to give this portion of their interview.

Reimbursement
2.4–2.8 20 minutes
Ask the following questions to discuss how Tax Professionals interview a
client regarding reimbursement of an employee’s business expenses.
Q. How do you ask your clients about business expenses and employ-
er reimbursement?
A. (Class answers may vary.)
Sample: Determining potential employee business expenses begins early
in the interview when I ask the occupation question. I start thinking about
what expenses that client might have. If my client has few itemized deduc-
tions, I usually mention something like, “I know you probably have some
expenses for your job, but I haven’t said too much about this, because it
appears the standard deduction will be much better for you than itemiz-
ing your expenses. However, if your employee expenses and other items,
such as medical expenses over 7.5% of AGI, state that taxes paid, mort-
gage interest, property tax, and charitable contributions are more than
the standard deduction amount, you might benefit from itemizing. Do you
 Use of Home and Reimbursements IG2.5

have high employee business expenses and other itemized deductions?” If

my client shows any interest in continuing, I complete Schedule A and
then the Form 2106, if necessary.
If I know my client is a likely Schedule A filer, I complete the 2106 before
completing Schedule A.
With either method, even if my client cannot itemize, I have offered a list
of many items to track for next year.
If I hear that an employee paid business expenses but was reimbursed by
their employer, I ask whether the reimbursement was included in income
on the Form W-2. If my client is unsure whether the reimbursement is
being taxed as wages, I ask questions about an accountable plan.
Direct the participants to page 2.4 in their textbook and ask them to circle
the second paragraph from the end of the page, especially the second sen-
tence, “If an employee could be reimbursed for expenses but chooses not to
submit a claim to the employer, the expenses are not deductible.”
Say: Let’s pause for a moment and see how important it is to follow this
requirement. One Tax Professional gave the following account after attend-
ing an IRS audit:
Our last audit turned out to be rather interesting from the standpoint that
it highlights several questions we should be asking when we deal with
unreimbursed employee expenses. This audit involved a salesperson
whose employers had accountable reimbursement plans and the employ-
ee elected to only submit some of his expenses for reimbursement, not all
of them. With accountable reimbursement plans, the employee is
“required to substantiate all of his or her job related expenses to the
employer,” because these expenses are considered the employer’s, not the
employee’s. Only when the employer does not approve the expense, or only
partially pays the expense, is the expense eligible for potential inclusion
on the employee’s tax return as an itemized deduction, normally via Form
2106. . . . As far as the IRS is concerned, this is a clear-cut issue and they
have won several tax court cases on it.
The same Tax Professional states that the first question to ask an employee
is:
Does your employer have an accountable reimbursement plan?

We know that we must explain questions we ask our clients and that to do
so, we must understand the terms ourselves.
Say: How will your client know if their employer has an accountable plan?
Select a participant to answer each of the following questions from a tax
perspective. Then, call on another volunteer from the class to translate the
answer into a statement that would be pertinent and make sense to their
client.
IG2.6 H&R Block Advanced Employee Business Expense (2011)

Q. What are the conditions of an accountable plan?

A. An accountable plan meets three conditions:
• The plan provides reimbursements for business expenses paid by the
employee in connection with the performance of business services for
the employer.
• The employee is required to account adequately to the employer for
business expenses within a reasonable period of time.
• The employee must return any excess reimbursements or allowances
to the employer within a reasonable period of time.
What your client needs to know about an accountable plan: To find
out if my client has an accountable plan, I ask them if they are reimbursed
for business expenses they pay. Then, I ask them if they have to give their
employer receipts or other proof of the expense. Finally, I ask them if they
have to give back to their employer any excess reimbursements or
allowances they received. Once I believe my client’s business expenses
were reimbursed under an accountable plan, I usually explain that
because they followed the terms of the plan, none of the reimbursement is
shown as taxable income on their W-2, and they probably have no employ-
ee business expenses to report. To follow up on this statement, I add one
more question, asking them if they had any other employee business
expenses that were not covered by their employer’s reimbursement plan.
(This could be items such as education expenses or additional vehicle
expenses beyond the rate that was reimbursed.)
Q. Define a nonaccountable plan?
A. A nonaccountable plan does not require an employee to report back to the
person providing reimbursement and does not require the employee to
return any excess reimbursement. In fact, the employee’s Form W-2, box 1,
amount includes any allowance or reimbursement paid under a nonac-
countable plan.
Note: Even if an employer’s plan is accountable, it will be treated as
nonaccountable for an individual employee who fails either the adequate
accounting or return of excess reimbursement requirements.
What your client needs to know about a nonaccountable plan: I
generally ask my clients who are sales representatives or who work on
commission if their employer gives them extra money to cover car expens-
es or to cover meals or entertainment for their customers. I explain to
them that when their employer gives them extra money but does not ask
them to account for it, this means that their employer is including this
income as taxable income on their Forms W-2. I explain that they are also
paying social security and medicare taxes on this income and that they
need to keep good records for their taxes to be able to deduct the amount
they paid. Then, I interview them for their employee business expenses.
Q. Does every employer have a reimbursement plan?
A. No. Some employees receive wages or commissions with the understand-
ing that they are responsible for all their employee business expenses.
 Use of Home and Reimbursements IG2.7

What your client needs to know about their employee business

expenses when their employer has no reimbursement plan: I
explain to them that, although they have considerable income reported on
their Forms W-2, they do not have use of all this income because some of
it is used to pay expenses they incur because of their employment. I
explain that they are also paying social security and medicare taxes on
this income and that they need to keep good records for their taxes to be
able to deduct the amount they paid as expenses. Then, I interview them
for their employee business expenses.
Say: Let’s pause again to think about opportunities we have here to help our
clients and to show them our expertise. Here is where we can make the fol-
lowing statement and then explain it to our clients:
It is almost always more advantageous to have your employer pay
for an expense rather than for you to pay for it. Why?
• Right off the top you will lose a deduction equal to 2% of your AGI.
• If your employer gives you an allowance in a nonaccountable plan, you are
paying social security and medicare taxes on that amount.
Here’s a story about one of my clients from this past tax season. Ben is a
sales rep for a company that sells equipment to hospitals. He’s 27 years old
and earned $80,000 in 2010. I asked him all about his work and compliment-
ed him on his success. He expressed pride in his work and felt like he was
one of the company’s best salesmen. He said that he used to pay for meals
with clients out of his own pocket; but, since he became so successful, the
company has picked up this expense for him. He said he gets a taxable
allowance to cover his car expenses.
Here was my chance to suggest that if he could negotiate for the company to
pay for his meals with clients, he could try to negotiate for them to provide
him with a vehicle. I explained that he might even suggest this the next time
he was up for a raise, and I explained that he would save 5.65% in social
security and Medicare taxes (for 2011). I don’t know if he will take these
actions, or if he will be successful in his negotiation, but we are partners in
his success now, and I look forward to hearing his story next tax season. Does
that make sense to you?
Ask for responses from the participants. Let them tell their own stories.
Then, as time permits, continue with the following question:
Q. How are the business expenses reported for the following employ-
ees?
1. Ingrid is a home health nurse who receives a salary and 60¢ per
mile car allowance for 2010. She reports to the main office each
morning and then makes her rounds to patients to whom she is
assigned. All other expenses are paid by her employer.
2. Nici is a high school teacher who teaches night classes at anoth-
er location. None of her expenses are reimbursed.
IG2.8 H&R Block Advanced Employee Business Expense (2011)

3. Turner works for a company that reimburses 100% of his expens-

es. However, he took out an advance and did not account for his
expenses.
A. The expenses are reported as follows:
1. Ingrid’s reimbursement is under an accountable plan. If she is
satisfied with the reimbursement per mile, she has no need to
complete Form 2106. She will be taxed on the excess over the
standard mileage rate. If she has actual auto expenses greater
than the standard mileage rate, she will need to complete Form
2106. Her Form W-2 will include in box 12 the amount not includ-
ed in box 1. It is coded L.
2. Nici has no reimbursement plan, and she will need to complete
Form 2106 (or Schedule A) to report any expenses she may have.
3. Although Turner’s employer has an accountable plan, the plan is
treated as nonaccountable for Turner because he failed to docu-
ment his expenses.
Review the Robert Arndt example shown on page 2.8 in the textbook.
Q. How could you interview Robert to find out if any of his employ-
ee business expenses are deductible?
A. Ask the following questions in the following order.
Does your employer have an accountable plan?
If “Yes,” then: Did you submit all your job-related expenses to your employ-
er?
If “Yes,” then: Were the expenses you are presenting today denied for reim-
bursement or only partially reimbursed? If Robert answers “Yes” to this
final question, then he can potentially claim the expense.
Pay special attention to this exercise to be sure the participants under-
stand the concept of allocating a reimbursement for meals as a proportion of
total business expense. They will use this information later in TPS Class
Exercise 2A.
Answer any questions the participants have concerning Exercise 2B, that
begins on page W2.4.

Break 10 minutes

Business Use of Home

2.9–2.14 20 minutes
Say: You might notice the terms business use of home, home office, and office
in home (OIH) are sometimes used interchangeably. Let’s talk about the cir-
 Use of Home and Reimbursements IG2.9

cumstances in which our clients may take a business deduction for use of a
portion of their own homes.
Discuss the reading material by asking the following questions.
Q. What are the circumstances necessary for a taxpayer to be able to
deduct business use of home?
A. The home office must be used regularly and exclusively for business, and
the use must be for the employer’s convenience.
Q. What are the exceptions to the exclusive-use test?
A. The two exceptions are:
• A specific area used for storage of inventory or product samples by a
salesperson. The home must be the only fixed location of the trade or
business, but the storage space need not be used exclusively for busi-
ness.
• A home day care center for children, handicapped people, or people
over age 65. The home is not required to meet the exclusive-use test
if all state licensing or certification requirements have been met.
Q. How is regular use determined?
A. Regular use is not well defined. It is based on facts and circumstances.
Incidental or occasional use is not regular use.
Q. For an employee, how much is the office-in-home expense deduc-
tion?
A. The office-in-home deduction is a combination of:
• 100% of items used only in the business.
• The business-use percentage of expenses, which benefit both the
business and the personal-use portions of the home.
These expenses are then limited by the income related to these expenses.
Q. For employees who rent or own their own homes, how is the
office-in-home expense deduction claimed on a tax return?
A. For a renter, all of the expenses of OIH are entered on the business-use of
home worksheet and carried to Form 2106 (when otherwise necessary) or
to Schedule A, line 21.
For a homeowner, mortgage interest and real estate taxes are both entered
on Schedule A in the taxes and interest sections. Although all OIH expens-
es are entered on the business-use-of-home worksheet, only the non-mort-
gage and non-real estate tax expenses are carried to Form 2106 (when oth-
erwise necessary) or to Schedule A, line 21.
The business income limits apply to both renters and homeowners.
Q. What are the limits for deducting business use of home?
A. Three categories of expenses are considered in a prescribed order to deter-
mine how much of the business-use-of-home expense is deductible:
1. Expenses deductible even without business use of the home
IG2.10 H&R Block Advanced Employee Business Expense (2011)

2. Operating expenses deductible only because of business use of the

home
3. Depreciation on the home
Any amount not allowed because of these three limitations may be carried
over and used in the first year that expenses are not limited by income.
Answer any questions the participants have on Exercise 2C.

Mastery Check TPS Class Exercises 2A, 2B, and 2C

W2.9–W2.23 60 minutes
Direct the participants to open Robert Arndt’s shell return and enter his
employee business information. Encourage each participant to work alone,
but provide ample assistance for anyone who needs it. This exercise is a
demonstration to reinforce the textbook example. Emphasize the impor-
tance of looking over the entire 2106 screen and paying attention to the two
separate columns: one for items other than meals and entertainment, and
one for meals and entertainment. The completed Robert Arndt return is
located on pages W2.11–W2.19.
After all the participants understand the Robert Arndt problem, say: Now
you have two more problems to complete. First, you will open your own copy
of Daryl and Marilyn Murdock’s return, which you began in Chapter 1. New
information has been presented for both Daryl and Marilyn in TPS Class
Exercise 2B. Enter this new information in TPS, check your answer with the
instructor’s guide, and adjust it as needed. The completed Forms 2106 and
worksheets are located on pages W2.24–W2.29.
Point out to the participants that Daryl’s employer maintains a separate
accountable plan for out-of-town travel expenses. For these travel expenses,
Daryl’s employer reports no payment on Daryl’s Form W-2, and Daryl reports
no expenses on his Form 2106.
Contrast Daryl’s gross income attributable to the business use of the home
with that of Robert Arndt. Robert had so little income attributable to the
business that his business-use-of-home deduction was limited. Daryl had
more than enough income to be able to deduct his business-use-of-home
expenses.
After participants have completed the Murdock return, direct them to con-
tinue with TPS Class Exercise 2C, Faith M. Rupp.
Faith Rupp’s completed return is located on pages W2.30–W2.38. Notice her
reimbursements are entered on Form 2106, line 7, in column A. If she had
been reimbursed for meals or entertainment, the reimbursement would have
been entered in column B. Remind the participants to make entries in the
appropriate column.
The computations made to figure her meal and incidental expenses are given
in the following two tables:
 Use of Home and Reimbursements IG2.11

10 full days away from home ⳯ $46 daily M&IE = $460

8 partial days away from home ⳯ $46 daily M&IE ⳯ .75 = $276

Standard meal allowance expense $736

Debrief
5 minutes
Say: The exercises you completed allowed you to enter business use of home
and reimbursements into TPS. Remember to use the 2106 worksheet, rather
than manually trying to add expenses yourself and entering only the total on
the 2106 summary screen. Do you have any suggestions for Faith Rupp for
next year? What kind of advice would you give her?

Conclusion
5 minutes
Say: The topic of deductible business expenses is rich with opinions, some
more valid than others. Even as you take this course, positions are being
challenged and changes may occur. A wise Tax Professional will be alert to
signs of change in this area. One reference source, Tax in the News, is a week-
ly flyer produced by the Tax Institute at H&R Block. These newsletters often
contain examples to illustrate timely issues in tax law. They are also
archived and provide you with an index to look for past articles. One endur-
ing topic is the importance of substantiating and explaining any claims made
on an income tax return.

Transition
5 minutes
Say: Before the next class session, read Chapter 3, the final chapter, and
complete the workbook exercises up to the TPS Class Exercises. Chapter 3
adds leased vehicles and trading vehicles to the information you already
mastered when you took the Intermediate Vehicle Expense course.
 Leasing and Trading Vehicles
3
Following is a list of the visual aids and supplies you will need for this chap-
ter:

□ LCD projector attached to computer with TPS10

□ Workstation with TPS10 for each participant

Answer Course Questions

5 minutes
Say: This is our last session. Does anyone have any questions that have not
yet been answered?
Answer any questions remaining from prior sessions and those that the
participants ask now. If you defer answering any questions on today’s mate-
rial, write the questions on the board to remind you to answer them before
the end of the session.

Session Objectives
Terminal objective: Given a taxpayer profile, at the end of this chapter, par-
ticipants will be able to enter leased vehicles, prior-year vehicle mileage, and
prior-year depreciation information on the 2106 screens in TPS and pass the
diagnostic check.
At the conclusion of this chapter, participants will be able to:
• Compute the inclusion amount for a leased vehicle.
• Explain the tax results of trading in a vehicle used for business.
• Report in TPS the trade of one vehicle for another.
• Report a leased vehicle in TPS.
• Identify resources for further study.

IG3.1
IG3.2 H&R Block Advanced Employee Business Expense (2011)

Introductory Statement
5 minutes
Say: This course emphasizes practical application of tax topics. It avoids
computations that TPS makes for you. For example, to figure depreciation on
a passenger vehicle under 6,000 pounds, you have to discriminate between a
passenger car and a light truck, because each has a different annual limit for
depreciation. However, you do not need to be able to find the appropriate line
and column on the depreciation table, because TPS is programmed to com-
plete that step for you. Today’s lesson is a compilation of “need to know” top-
ics related to vehicles and includes one worksheet, Statement of Inclusion
Amounts, which you must complete by hand.

Review of Vehicle Expenses

3.1–3.4 5 minutes
Say: In the first two chapters, the basic concepts of employee business
expenses were introduced. This chapter elaborates on vehicles, covering leas-
ing and trading them. But first, let’s see what you have already learned
about claiming vehicle expenses.
Q. Which of the following taxpayers CANNOT claim the standard
mileage rate?
A. Al bought two new cars this year. He usually uses his Jetta
when running errands for his employer. Occasionally, he
trades cars with his wife and uses her Jeep.
B. Brad leased a new Mustang this year. He uses it to travel
between his two jobs.
C. Meg borrows her sister's car while her own car is in the shop.
During the time that she has her sister's car, she drives each
day to her second job.
D. Molly has a Camry that she purchased in 2008. In 2008, she
claimed the standard mileage rate. Since then, she has
claimed actual expenses.
A. Meg (C) cannot claim the standard mileage rate because she does not own
the vehicle. She is not entitled to claim any depreciation as part of her
actual expenses. All of the others listed may use the standard mileage
rate. If Al uses two cars (which either he or his wife own), he must report
business use for each car separately. Brad may claim the standard mileage
rate for his leased car. Molly used the standard mileage rate in the first
year of business use of her Camry. Therefore, she may go back to the stan-
dard mileage rate, even though she used the actual expense method in
interim years.
 Leasing and Trading Vehicles IG3.3

Q. Which of the following is NOT a deductible expense under the

actual expenses method for automobiles?
A. Fuel
B. Depreciation
C. Fines and legal fees for parking or moving violations
D. Lease payments
A. Fines and legal fees for parking or moving violations are never deductible
vehicle expenses.
Q. Ed purchased and put his heavy SUV into service in 2010. The
basis of his SUV is $45,000. He wants as much §179 expense deduc-
tion as possible. He used the SUV 80% for business. How much
§179 expense deduction may he claim?
$0, $3,160, $20,000, or $25,000?
A. $25,000. There’s a reminder on page 3.4 about this overall limit, not
reduced by business-use percentage. Let’s see how this heavy SUV limit
contrasts with the limit for a light truck.
Q. Felix placed his light truck into service when he purchased it on
March 15, 2008. His basis for depreciation was $30,000. He did not
claim any kind of §179 expense or bonus depreciation. In 2010, he
used the vehicle 75% for business. What is the depreciation for it
in 2010?
A. $2,288. [$3,050 ⳯ 75% = $2,288] Find the limit by using the 2008 column
and the line for third-year depreciation for trucks and vans on the table
shown in Illustration 3.1.
Q. What is bonus depreciation, and when do you use bonus depreci-
ation on 2010 returns?
A. For new property put into service in 2010, bonus depreciation is standard.
You use it whenever the property is eligible for it, unless the client has a
reason not to use it, such as if they wish to carry as much depreciation to
2011 as possible. Vehicles might not be the greatest candidates for bonus
depreciation, since they are generally listed property. If the taxpayer does
not expect to use the vehicle at least 50% for business in future years of
ownership, accelerated depreciation, including bonus depreciation, could
be subject to recapture. For such limited business use, the taxpayer might
elect straight-line depreciation or choose the standard mileage rate.
Remind the participants that for 2010, the bonus depreciation percentage
is 50% before September 9, 2010, and 100% after September 8, 2010, and
before January 1, 2012.
Encourage those participants who need extra practice determining vehicle
expenses to take the H&R Block course, Intermediate Vehicle Expense.
IG3.4 H&R Block Advanced Employee Business Expense (2011)

Leased Passenger Vehicles

3.5–3.8 20 minutes
Discuss the reading material by asking the following questions.
Q. Why can’t a taxpayer claim depreciation on a leased vehicle?
A. The taxpayer who leases a vehicle does not own it. A person generally has
to own property in order to depreciate it.
Q. What is a lease inclusion amount?
A. An inclusion amount is a reduction in vehicle rental costs a taxpayer may
claim when using the actual expense method for a leased vehicle.
Q. What is the procedure in TPS to compute the inclusion amount?
A. The inclusion amount is not automatically computed by TPS. The Tax
Knowledge Base contains instructions on how to do so, and a worksheet is
included in the textbook.
Project IRS Publication 463, and show the inclusion amount tables. Use
the 2010 statement for Robert Arndt found in Illustration 3.6 to show the
participants how to enter the inclusion amount onto Form 2106 in TPS. Use
your Robert Arndt return, 842-02-2XXX, from Chapter 2 and the additional
information given on page 3.6 and modeled in the following screen shots.
 Leasing and Trading Vehicles IG3.5

Answer any questions the participants may have on Exercise 3A.

Trading Vehicles
3.9 15 minutes
Say: The next topic, trading vehicles, is one small piece of the larger topic of
disposition of business-use assets. The purpose of this discussion is limited
to the practical application of learning how to enter such trades into TPS.
IG3.6 H&R Block Advanced Employee Business Expense (2011)

Before we move to the TPS Class Exercises, let’s answer a few questions.
Ask:
Q. What is the current-year tax implication of trading one vehicle for
another if the vehicles were used 100% for business?
A. Generally, this is a nontaxable exchange, with the basis of the newly
acquired vehicle being the adjusted basis of the old vehicle plus cash paid.
Q. What is the current-year tax implication of trading one vehicle for
another if the vehicles were used less than 100% for business?
A. If you computed the adjusted basis for the newly acquired vehicle by sub-
tracting the depreciation claimed or allowed from the original basis, you
would have a larger basis for depreciation on the new vehicle. But, some
of the decrease in the value of the old vehicle is allocated to the personal-
use portion of the old vehicle. That decrease in value is called a trade-in
adjustment.
Answer any questions the participants may have on Exercise 3B.

Demonstration
W3.6–W3.7 15 minutes
Have the participants turn to TPS Class Exercise 3B, Situation 1. Review
the problem.
The Situation 1 format mirrors the format used in Example 2 from
Publication 463, page 20. Some Tax Professionals who want to see how TPS
treats a certain issue will find an IRS example and enter it into TPS. Others
apply a demonstration example to their own problem. TPS also contains an
embedded Forms Guide to help Tax Professionals complete the screens for
most forms and issues. As the Instructor, you are combining all three meth-
ods of investigation:
• Tax explanation
• Demonstration
• TPS helps
Review with the class the information on page W3.6.
Then, select Case Studies mode in TPS, and enter 842-03-4004 to access
your shell return for Marcia Connor. The return has been completed up to
the 2010 vehicle information. Enter the information for both vehicles. Show
that you may go to Field Help to find the TPS Forms Guide, Form Trade-In
Worksheet instructions, copied here in Illustrations 3.1–3.3. The completed
return is also copied for you on pages IG3.15–IG3.22.
Point out that the TPS output version of the Basis of Vehicle Acquired by
Trade worksheet (for example, on page IG3.20) posts some incorrect column
A amounts and also posts 2009 information on the 2010 row. However, all
totals are correct.
 Leasing and Trading Vehicles IG3.7

Illustration 3.1

Illustration 3.2
IG3.8 H&R Block Advanced Employee Business Expense (2011)

Illustration 3.3
 Leasing and Trading Vehicles IG3.9

Below is the depreciation screen for the old vehicle.

Following is a series of screens accessed by stating the old vehicle was dis-
posed of and the new vehicle was acquired through a trade.
IG3.10 H&R Block Advanced Employee Business Expense (2011)

Next is the completed screen for the basis of the new asset when the busi-
ness use is 100%.

Finally, even though the standard mileage rate method is used to claim
expenses on the new vehicle, the unadjusted basis of the new asset for depre-
ciation is carried forward.

Q. What pieces of information did we need to know to make TPS

entries?
A. To make the TPS entries, we needed to know:
• Total miles and business miles.
• Depreciation history.
• To state No to the Form 4797 question, because the trade-in is a like-
kind exchange.
 Leasing and Trading Vehicles IG3.11

Q. What is the basis for depreciation of the new vehicle?

A. The basis of the newly acquired vehicle is $26,317, computed as follows:
$26,000 original basis – $13,883 depreciation claimed = $12,117 remain-
ing basis
$12,117 remaining basis + $14,200 cash paid for new vehicle = $26,317
basis for depreciation for the new vehicle
Q. Why, after the fifth year of business use, is the depreciation
claimed only $13,883 on a $26,000 car?
A. There’s only half a year in the year of disposition, and also the deprecia-
tion taken was limited by the annual vehicle limits. If depreciation contin-
ued after 2010 at 100% business use, it would still take longer than six
years to depreciate the vehicle.
Compare Situation 1 with Situation 2 on page W3.8, in which the same
vehicle was only used 80% for business. Ask:
Q. How much was the depreciation allowed or allowable in this sec-
ond situation, page W3.8?
A. In Situation 2, the depreciation allowed is $11,106.
Explain: If the same method was used for a car used only 80% for business,
the basis for depreciation on the newly acquired vehicle would be almost
$26,000. But, it is not logical that the basis in the newly acquired car would
be greater, because the taxpayer used the old car less for business. Therefore,
a trade-in adjustment must be made to reduce the basis in the old car (but
not below zero) for the purpose of figuring the depreciation deduction for the
new car.
Say: After the break, you will have a chance to enter this second situation
into TPS.

Break 10 minutes

Continuing Education
3.10–3.11 10 minutes
The foundation of the H&R Block One to Win Plan is the Tax Professional at
the tax desk. We Tax Professionals are charged to be tax experts, master
interviewers, and accountable problem-solvers for each of our clients. Field
Support Organization-KC (FSO-KC) releases a broad array of instructor-led
courses, CBTs, and online tools to help our clients. Ask: How do you contin-
ue your education to best help your specific clientele? List on the white board
the suggestions from the participants.
IG3.12 H&R Block Advanced Employee Business Expense (2011)

Encourage the participants to do all they can to increase their skills before
tax season begins. Also, remind them to become familiar with MBTO so that
they will be able to locate new information quickly during tax season when
they have clients at their desk.

TPS Class Exercises 3A, and 3B

W3.5–W3.11 45 minutes
Refer the participants to page W3.5 of their workbooks. First, they will enter
a lease vehicle into TPS. Using the standard rounding convention, the inclu-
sion amount is $38. [$114 ⳯ (122 days ⳰ 365 days) = $38]
Then, they will use the shell return for Marcia Connor to create their own
return for Situation 2 and for Gib Hobarts to create their own return for
Situation 3. They will be exploring:
• Actual expenses, less than 100% business use
• Standard mileage rate, less than 100% business use
The purpose of these situations is to view and make entries on the 2106
screens for vehicle expenses.
Page W3.9 gives tips for TPS entry. Pages W3.18–W3.32 include complete
copies of the returns for Situations 2 and 3. The participants are encouraged
to use these pages as a guide to help them if they have difficulty making the
entries. Then, they may refer back to these pages as a guide when they
encounter similar situations with their clients.
Let participants work individually and at their own pace on this exercise
and be sure they understand this exercise before moving on to the next one.
After you check their work, give permission to each one to go on to the final
exercise. Remind the participants that, to arrive at the correct computa-
tions, they must enter through every field on each screen.

Mastery Check, TPS Class Exercise 3C

W3.12–W3.17 40 minutes
Be sure each participant accesses the shell correctly and records the SSN
for their own return. Screen shots are included in the workbook to help the
participants work through the tax return. Be sure to let them try to figure
out the problem on their own before providing the solution. The completed
return is copied for you on pages W3.33–W3.46. Encourage them to run
diagnostics before they check their answers. Remind them that the Basis of
Vehicle Acquired by Trade worksheets have been corrected from the line and
column problems in the TPS output version. Assure them that the compu-
tations are correct.
 Leasing and Trading Vehicles IG3.13

Point out that the completed returns are posted in the workbook so that
they can be accessed even without the aid of an instructor. Not all partici-
pants will have adequate time to complete all of the TPS problems, but all of
the tax returns have a purpose, and some participants will be able to com-
plete all of them.

Debrief
5 minutes
Say: The TPS class exercises you completed allowed you to practice entering
traded vehicles into TPS. Take this exercise with you to the tax office next
tax season to practice making vehicle entries for TPS11.

Conclusion
5 minutes
Say: In this course, we explored several new terms and topics related to busi-
ness expenses for employees. Use your knowledge of these expenses to help
your clients achieve their tax and financial objectives.
H&R Block Tax Professionals have access to more than 100 CBT courses to
augment and supplement the instructor-led courses. These courses may be
accessed through MBTO. Several of these courses relate directly to our top-
ics. Keep in mind that they often mingle employee business expenses with
the business expenses of self-employed taxpayers. As you have learned,
employees bear additional requirements related to their employers.
Encourage participants to take the certification exam now while informa-
tion from the course is fresh in their minds, and thank them for their atten-
dance and participation.
IG3.14 H&R Block Advanced Employee Business Expense (2011)

Solution, Situation 1
 Leasing and Trading Vehicles IG3.15

Solution, Situation 1
IG3.16 H&R Block Advanced Employee Business Expense (2011)

Solution, Situation 1
 Leasing and Trading Vehicles IG3.17

Solution, Situation 1
IG3.18 H&R Block Advanced Employee Business Expense (2011)

Solution, Situation 1
 Leasing and Trading Vehicles IG3.19

Solution, Situation 1
IG3.20 H&R Block Advanced Employee Business Expense (2011)

Solution, Situation 1, with column A corrections from the TPS output version
 Leasing and Trading Vehicles IG3.21

Solution, Situation 1