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3 income tax questions: US/NY resident. 1. My wife is a

university professor, on loan for...
3 income tax questions: US/NY resident. 1. My wife is a university professor, on loan for the year to a federal agency in DC. She is paid by her university but receives a per diem from the federal government for time spent in DC. We bought a condo in DC. How do I account for the per diem and the mortgage interest in our taxes? Is it one or the other? ie either take the deduction for the mortgage interest and claim the per diem as income, or vice versa? It strikes me that doing both may be double counting deductions. 2. I am a W-2 employee but my income is 100% commissions (no salary) and I pay my own expenses. In 2016 I bought part of a colleague's business for cash. The income from that business will be part of W-2 income. How do I account for the expense of buying his business? Is it expensed as a cash outlay or is it an investment? 3. I received stock in a foreign company in 2016 as payment for a consulting assignment that I did 7 years ago. Do I recognize this as 2016 income or do I recognize it only when I sell the shares (as LT gain)? If income in 2016, how do I show it in the forms?
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Answered in 24 minutes by:
3/26/2017
ABC Accounting Group
ABC Accounting Group, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 889
Experience: Business Consultant/Accounting Manager
Verified

Hi. Great Questions.

1. On the per diem, here are the rules:

You can deduct per diem or actual job related expenses, like meals, lodging, air fare, cabs, dry cleaning, etc., if your assignment away from your main workplace is temporary (expected to last, and does last, for one year or less). If your assignment is indefinite (expected to last for more than one year) then your new workplace becomes your tax home and you cannot deduct your job related expenses. However, the mortgage interest and property taxes - you would deduct on your Schedule A.

The amount claimed must be reduced by any amount that is reimbursed by the employer.

If you are an employee, your allowable travel expenses are figured on Form 2106 or Form 2106-EZ. Your allowable unreimbursed expenses are carried from Form 2106 or Form 2106-EZ to Form 1040, Schedule A (PDF), and are subject to a limit based on 2% of adjusted gross income. Refer to Topic 508 for information on the 2% limit. If you do not itemize your deductions, you cannot deduct these expenses.

2. Is the business a sole-proprietorship or an S-Corp?

3. Hi. You recognize the income when you sell, since it is not worth any income, until you sell it.

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Customer reply replied 1 year ago
1. Travel expenses: My wife runs a lab at her university in NY. So does that mean that every time she takes an unreimbursed trip back to NY from DC to supervise her lab, the cost of the trip is an allowable travel expense, even if her tax home is NY?
2. Neither. I am a W-2 employee. I am employed as an investment manager/advisor so my compensation is 100% commission. No salary. I bought a future cash flow from another investment advisor.
3. With all due respect, that makes no sense to me: I received, say $25K in public stock in 2016. I assumed that this would be a business income when received. If I sell the stock in 2 years, for say, $30K, then the difference would be $5K in capital gains in year 2018. How is this interpretation incorrect? Why would the IRS allow me to receive a current income benefit of $25K and defer taxation on it until an indefinite future date?

1. Yes - from her lab to DC. As long it is not from her home - then, it would be considered commuting expenses.

2. Ok - not taxed until start receiving revenues, if applicable, or sell.

3. It appeared that you stated Stock options, which are not vested. Because there was actual stock received for services, this income is subject to the self-employment tax. When you sell it, you have to claim a capital gain.

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Customer reply replied 1 year ago
I'm sorry -- Where did I say stock options and that it was unvested?
Customer reply replied 1 year ago
On Q .2., my question isn't how I account for the revenue. That is handled by the fact that I am a W-2 employee. My question was, how do I handle the expense?

#2 - sounds like a capital investment - at some interval, whether it is monthly, quarterly, semi-annually or annually, you will receive regular cash distributions from your investment. It would be considered a "dividend" when you receive the distributions.

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Customer reply replied 1 year ago
I'll be more specific with actual figures: I am a W-2 employee. So is the other guy. We are both paid entirely on the basis of fees and commissions qwith zero salary. I paid him $60K in 2016 for a piece of business. There are no guarantees whether that business will generate commissions, how much or for how long. However, my pricing was based on the assumption that it will generate approx. $25K per year pre-tax. Whether it actually does that or not, only time will tell. That $25K -- if it actually pays -- will come to me as W-2 commission income.
Customer reply replied 1 year ago
I hope it is clear from my description that the payments cannot be characterized as a dividend because they are paid as W-2 regular income. They are also not distributions.
Commissions on W2 go on line 1 of your 1040
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Customer reply replied 1 year ago
Once again, you appear to be answering a question I didn't ask. I already know what happens to the revenue side. My question was and remains, how do I characterize and report the $60K that I paid for the business???? Sorry. I'm getting frustrated because this is the third time that I am trying to get you to address my actual question.

Sometimes what is written can be interpreted differently by the receiver - sorry for any confusion.

Before we get to the characterization of the amount - I will need to know the type of business (is it a sole proprietorship, an s-corp, or a c-corp?).

Thank you.

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Customer reply replied 1 year ago
None of the above. I am a W-2 employee of a global corporation with offices in 40 countries. My direct employer is the US subsidiary. As I indicated previously I am an investment advisor/portfolio manager. I am an employee but draw no salary.
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,652
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified

Hi. My name's Lane. your previous expert opted out of the question.

...

It looks as if all questions have been answered (tell me if I'm wrong, the convoluted nature of the conversation makes it a little hard to follow - not your fault) except how to treat the $60K you paid someone for what you called "a piece of business."

...

When one purchases a business, that's an investment (It's either treated as a purchase of stock in the business or as purchasing the assets of a business) but, either way, it's not an expense. It's an investment.

...

Just as with the stocks you buy and sell for your customers, (although this is a private transaction) buying the investments is not taxable. The tax comes when it's sold (if sold for a gain) and with any income generated by it.

...

Please let me know if you have more questions

...

Lane

I hold a law degree, concentrating in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice on three continents, since 1986

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Customer reply replied 1 year ago
Thanks Lane. I think this is closer to what I was looking for. Let me draw two (I think) plausible interpretations of the facts and ask you which, if either, is consistent with how IRS would view the situation: 1. Cost of buying a stream of W-2 income could be construed as an unreimbursed employee expense and therefore deducted in the year of the expenditure, or 2. Cost is treated as an investment, in which case it is depreciated over time. Its resale value is nil so at some point it is likely to end, worthless. I assume that means it would generate a capital loss at some point in the future. (Because the income in the meantime comes as W-2 income and is taxed as such, I don't think you can treat it as a an investment that depreciates by the amount of the income it generates each year.) This second treatment strikes me as extraordinarily complicated and as something where it is nearly impossible to accurately fit the tax treatment to the facts.
Customer reply replied 1 year ago
Lane -- To draw my example out further: If I buy an airline ticket for $2K to visit a client and end up with an order than increases my W-2 income by say $500/yr, I believe it is pretty clear that the $2K can be claimed as an unreimbursed employee expense, right? By comparison, if I write a check for $2K to another vendor in return for a $500/yr boost in my W-2 income, why would that $2K expense not be treated the same way?

One cannot buy w-2 income. W-2 income denotes (IS) controlled by the employer...who can (in the absence of an employment contract) and where the IS an employment contract, in most cases BECAUSE of the contract, fire at will.

...

Employment is something that is controlled by the employer. See this: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

...

Said differently, W-2 income is not the seller's to sell.

...

Your last point is spot on. Employee business expenses need only be helpful in generating income. See this: https://www.irs.gov/uac/employee-business-expenses-1

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As I'm sure you'll get, I'd really appreciate your rating me positively, using those stars on your screen. JustAnswer will not credit me for the work unless you do.

...

This is analogous to something that I'm sure you understand; asking for the check.

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Customer reply replied 1 year ago
Hi Lane -- I'm happy to rate you well and you have been very responsive unlike the previous person. However, as a point of accuracy, you are wrong when you say that one cannot buy W-2 income: I am a financial advisor/portfolio manager. 100% of my income is derived from fees paid on assets under management. If my UAM fees increase, my W-2 income increases and conversely. Under my contract my employer has no discretion to set my compensation. Therefore, when I arrange with another FA to transfer AUM from him, to me, I am effectively buying W-2 income. Now, one can quibble with whether this is legitimately classified as a employee/employer relationship and I wish it were not. However, that's beyond the scope of this discussion. For our purposes, the question remains, if I am purchasing W-2 income (via transfer of AUM), is it legitimate to classifiy the cost as unreimbursed employee expense? Yes or no?
Customer reply replied 1 year ago
34;AUM", not UAM -- sorry

No, what you're missing here is the property law issue. You can't buy something that is not owned.

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Customer reply replied 1 year ago
Once again, it is in my contract explicitly, and the other person's that we own the clients and AUM. Indeed, while the company can fire us, that would have virtually no impact on my compensation, since I can take my clients and AUM with me when I leave. How is that not a legal right to the property?

It just isn't. You can ask the client to move with you to a new custodian, B/D, insurance company, but you cannot control the client. You can make any arrangement you like but you're an employee.

...

You have no legal title (as your customers do, for example to the assets in their accounts).

...

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,652
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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