Identifying Proper Employment Status

Tax Write-Offs for the Bill Good Marketing System®—New Release Gorilla® 2.0

by N. La Var Harline, Ph.D., MBA, CPA

December 2000

IDENTIFYING PROPER EMPLOYMENT STATUS

To determine exactly how a registered representative (RR) or other individual can deduct any of the costs of a newly licensed Bill Good Marketing System, it is first necessary to determine whether the licensee is an employee or an independent contractor.

One of the main factors in making this determination involves employer versus worker job control (Rev. Rul. 87-41,1987-1 CB 296).

Employee Status

An RR is an employee when the employer has direct control of both the means and the end product or service of the RR’s work.

Independent Contractor Status

An RR is an independent contractor if the employer has control only over the RR’s end product or service and not the means by which s/he accomplishes his or her daily tasks.

TAX-DEDUCTIBLE COMPONENTS

There are three potentially tax-deductible components in licensing the Gorilla 2.0 software release:

1. The online training course via the Internet.
2. Consulting support during data adjustment & conversion.
3. The Gorilla 2.0 software release itself.

TAX CONSEQUENCES: INDEPENDENT CONTRACTORs

An independent contractor is deemed to be self-employed and hence has his or her own trade or business (e.g., proprietorship). Therefore, s/he can either deduct or amortize all costs of the new 2.0 release on Schedule C (proprietor’s business) of the 1040 tax return.

Online training course costs and consulting support during data adjustment and conversion can be deducted without limit on Schedule C as a bona fide trade or business expense in the year of purchase. (I.R.C. Section 162)

New Gorilla 2.0 software release costs should be amortized on a straight-line basis over a 36-month period beginning with the month of purchase. (I.R.C. Section 167 (f)(1); Tres.Reg. 1.167(a)-14(b)(1))

TAX CONSEQUENCES: EMPLOYEEs

Deducting Costs as Itemized Deductions

Employees deduct all costs as miscellaneous unreimbursed employee business expenses on Form 1040, Schedule A. All of the employee’s unreimbursed business expenses are added together in one aggregate pool. From this total is subtracted 2% of the taxpayer’s adjusted gross income (AGI) (I.R.C. Section 67(a)), and the excess of these miscellaneous expenses over the 2% amount is deductible as an itemized deduction.

In some cases, unreimbursed business expenses for certain high-income individuals are further reduced by the 3% reduction rule that applies to certain categories of itemized deductions (I.R.C. Section 68(a)).

Deducting Employee Educational Costs

The licensee deducts the price of the online training course and the consulting support of the Gorilla 2.0 release as a miscellaneous unreimbursed employee business expense (subject to the 2%-of-AGI floor noted above) as long as these expenses meet one of the following two tests (Treas. Reg. Section 1.162-5(a) and 1.162-5(b)(1)):

• The education maintains or improves skills required in the present job, or
• The education helps to meet the express requirements of the employer or the requirements imposed by law to retain his or her employment status.

However, even though educational expenses meet one or both of the above two tests, they are not deductible if the education is needed.

• To meet the minimum educational standards for qualification in the taxpayer’s existing job, or
• To qualify the taxpayer for a new trade or business.

RRs should have no trouble in deducting both the online training course and the consulting support costs, since they certainly do maintain and improve their skills as RRs, but do not qualify them for a new trade or business nor help them meet minimum employment requirements.

Deducting Employee Computer Software Costs

For an employee to deduct computer software costs (and incidentally computer hardware costs, as well), there is a different and more difficult standard to meet. Both of two tests have to be met. The computer software must be:

• Used by the employee for the convenience of his or her employer, and
• Required as a condition of employment. (I.R.C. Section 280F(d)(3)(A) and Treas. Reg. Section 1.280F-6T(a)(2)(ii))

Assuming that these two tests can be met, RRs can deduct the software costs on a straight-line basis over a 36-month period beginning with the month of purchase (I.R.C. Section 167(f)(1) and Treas. Reg. Section 1.167(a)-14(b)(1)).

The annual amortization expense would be a miscellaneous itemized deduction subject to the 2% AGI floor as explained above.

INCOME TAX SAVINGS GENERATED

Subject to the tests explained above being met, all of the training and consulting portion of the purchase price is deductible in the year of purchase and the software is amortizable over 36 months beginning in the month of purchase.

Example

Licensing Gorilla in December 2000 would then result in a total tax deduction of $1,848 ($1,830 + $665/36 mos.). Assuming that an employee has enough other miscellaneous unreimbursed employee business expenses to absorb the 2% AGI floor, the following tax savings would result for either an employee or an independent contractor, given various marginal tax rates.

Tax Deductionfor the Year 2000

Marginal Tax Rate+ 7% State Taxes

Tax Savingsfor 2000

After-TaxCost

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