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1040ez Mailing Address

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1040ez Mailing Address

1040ez mailing address 4. 1040ez mailing address   Special Situations Table of Contents Condominiums CooperativesDepreciation Property Changed to Rental UseBasis of Property Changed to Rental Use Figuring the Depreciation Deduction Renting Part of Property Not Rented for ProfitPostponing decision. 1040ez mailing address Example—Property Changed to Rental Use This chapter discusses some rental real estate activities that are subject to additional rules. 1040ez mailing address Condominiums A condominium is most often a dwelling unit in a multi-unit building, but can also take other forms, such as a townhouse or garden apartment. 1040ez mailing address If you own a condominium, you also own a share of the common elements, such as land, lobbies, elevators, and service areas. 1040ez mailing address You and the other condominium owners may pay dues or assessments to a special corporation that is organized to take care of the common elements. 1040ez mailing address Special rules apply if you rent your condominium to others. 1040ez mailing address You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. 1040ez mailing address In addition, you can deduct any dues or assessments paid for maintenance of the common elements. 1040ez mailing address You cannot deduct special assessments you pay to a condominium management corporation for improvements. 1040ez mailing address However, you may be able to recover your share of the cost of any improvement by taking depreciation. 1040ez mailing address Cooperatives If you live in a cooperative, you do not own your apartment. 1040ez mailing address Instead, a corporation owns the apartments and you are a tenant-stockholder in the cooperative housing corporation. 1040ez mailing address If you rent your apartment to others, you usually can deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation. 1040ez mailing address In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs, upkeep, and other rental expenses, including interest paid on a loan used to buy your stock in the corporation. 1040ez mailing address Depreciation You will be depreciating your stock in the corporation rather than the apartment itself. 1040ez mailing address Figure your depreciation deduction as follows. 1040ez mailing address Figure the depreciation for all the depreciable real property owned by the corporation. 1040ez mailing address (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. 1040ez mailing address ) If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. 1040ez mailing address Multiply your cost per share by the total number of outstanding shares. 1040ez mailing address Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. 1040ez mailing address Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. 1040ez mailing address Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. 1040ez mailing address Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. 1040ez mailing address Multiply the result of (2) by the percentage you figured in (3). 1040ez mailing address This is your depreciation on the stock. 1040ez mailing address Your depreciation deduction for the year cannot be more than the part of your adjusted basis (defined in chapter 2) in the stock of the corporation that is allocable to your rental property. 1040ez mailing address Payments added to capital account. 1040ez mailing address   Payments earmarked for a capital asset or improvement, or otherwise charged to the corporation's capital account are added to the basis of your stock in the corporation. 1040ez mailing address For example, you cannot deduct a payment used to pave a community parking lot, install a new roof, or pay the principal of the corporation's mortgage. 1040ez mailing address   Treat as a capital cost the amount you were assessed for capital items. 1040ez mailing address This cannot be more than the amount by which your payments to the corporation exceeded your share of the corporation's mortgage interest and real estate taxes. 1040ez mailing address   Your share of interest and taxes is the amount the corporation elected to allocate to you, if it reasonably reflects those expenses for your apartment. 1040ez mailing address Otherwise, figure your share in the following manner. 1040ez mailing address Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. 1040ez mailing address Multiply the corporation's deductible interest by the number you figured in (1). 1040ez mailing address This is your share of the interest. 1040ez mailing address Multiply the corporation's deductible taxes by the number you figured in (1). 1040ez mailing address This is your share of the taxes. 1040ez mailing address Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. 1040ez mailing address You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. 1040ez mailing address You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. 1040ez mailing address However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). 1040ez mailing address Example. 1040ez mailing address Your tax year is the calendar year. 1040ez mailing address You moved from your home in May and started renting it out on June 1. 1040ez mailing address You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. 1040ez mailing address Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. 1040ez mailing address When figuring depreciation, treat the property as placed in service on June 1. 1040ez mailing address Basis of Property Changed to Rental Use When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. 1040ez mailing address Fair market value. 1040ez mailing address   This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. 1040ez mailing address Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property. 1040ez mailing address Figuring the basis. 1040ez mailing address   The basis for depreciation is the lesser of: The fair market value of the property on the date you changed it to rental use, or Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. 1040ez mailing address For other increases and decreases to basis, see Adjusted Basis in chapter 2. 1040ez mailing address Example. 1040ez mailing address Several years ago you built your home for $140,000 on a lot that cost you $14,000. 1040ez mailing address Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. 1040ez mailing address Part of the improvements qualified for a $500 residential energy credit, which you claimed on your 2010 tax return. 1040ez mailing address Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation. 1040ez mailing address The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500). 1040ez mailing address On the date of the change in use, your property had a fair market value of $168,000, of which $21,000 was for the land and $147,000 was for the house. 1040ez mailing address The basis for depreciation on the house is the fair market value on the date of the change ($147,000), because it is less than your adjusted basis ($164,000). 1040ez mailing address Cooperatives If you change your cooperative apartment to rental use, figure your allowable depreciation as explained earlier. 1040ez mailing address (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. 1040ez mailing address ) The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. 1040ez mailing address The fair market value of the property on the date you change your apartment to rental use. 1040ez mailing address This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. 1040ez mailing address The corporation's adjusted basis in the property on that date. 1040ez mailing address Do not subtract depreciation when figuring the corporation's adjusted basis. 1040ez mailing address If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1) under Depreciation (under Cooperatives, near the beginning of this chapter). 1040ez mailing address The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. 1040ez mailing address Figuring the Depreciation Deduction To figure the deduction, use the depreciation system in effect when you convert your residence to rental use. 1040ez mailing address Generally, that will be MACRS for any conversion after 1986. 1040ez mailing address Treat the property as placed in service on the conversion date. 1040ez mailing address Example. 1040ez mailing address Your converted residence (see previous example under Figuring the basis) was available for rent on August 1. 1040ez mailing address Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1. 1040ez mailing address 364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × . 1040ez mailing address 01364). 1040ez mailing address Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. 1040ez mailing address You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). 1040ez mailing address You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity, or painting the outside of the house. 1040ez mailing address There is no change in the types of expenses deductible for the personal-use part of your property. 1040ez mailing address Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). 1040ez mailing address You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. 1040ez mailing address You do not have to divide the expenses that belong only to the rental part of your property. 1040ez mailing address For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. 1040ez mailing address If you install a second phone line strictly for your tenant's use, all of the cost of the second line is deductible as a rental expense. 1040ez mailing address You can deduct depreciation on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. 1040ez mailing address How to divide expenses. 1040ez mailing address   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. 1040ez mailing address You can use any reasonable method for dividing the expense. 1040ez mailing address It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. 1040ez mailing address The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home. 1040ez mailing address Example. 1040ez mailing address You rent a room in your house. 1040ez mailing address The room is 12 × 15 feet, or 180 square feet. 1040ez mailing address Your entire house has 1,800 square feet of floor space. 1040ez mailing address You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. 1040ez mailing address If your heating bill for the year for the entire house was $600, $60 ($600 × . 1040ez mailing address 10) is a rental expense. 1040ez mailing address The balance, $540, is a personal expense that you cannot deduct. 1040ez mailing address Duplex. 1040ez mailing address   A common situation is the duplex where you live in one unit and rent out the other. 1040ez mailing address Certain expenses apply to the entire property, such as mortgage interest and real estate taxes, and must be split to determine rental and personal expenses. 1040ez mailing address Example. 1040ez mailing address You own a duplex and live in one half, renting the other half. 1040ez mailing address Both units are approximately the same size. 1040ez mailing address Last year, you paid a total of $10,000 mortgage interest and $2,000 real estate taxes for the entire property. 1040ez mailing address You can deduct $5,000 mortgage interest and $1,000 real estate taxes on Schedule E (Form 1040), and if you itemize your deductions, you can deduct the other $5,000 mortgage interest and $1,000 real estate taxes on Schedule A (Form 1040). 1040ez mailing address Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. 1040ez mailing address You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. 1040ez mailing address Where to report. 1040ez mailing address   Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. 1040ez mailing address For example, if you are filing Form 1040, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. 1040ez mailing address   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. 1040ez mailing address You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. 1040ez mailing address Presumption of profit. 1040ez mailing address   If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. 1040ez mailing address Postponing decision. 1040ez mailing address   If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. 1040ez mailing address You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. 1040ez mailing address You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. 1040ez mailing address More information. 1040ez mailing address   For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. 1040ez mailing address Example—Property Changed to Rental Use In January, Eileen Johnson bought a condominium apartment to live in. 1040ez mailing address Instead of selling the house she had been living in, she decided to change it to rental property. 1040ez mailing address Eileen selected a tenant and started renting the house on February 1. 1040ez mailing address Eileen charges $750 a month for rent and collects it herself. 1040ez mailing address Eileen also received a $750 security deposit from her tenant. 1040ez mailing address Because she plans to return it to her tenant at the end of the lease, she does not include it in her income. 1040ez mailing address Her rental expenses for the year are as follows. 1040ez mailing address   Mortgage interest $1,800     Fire insurance (1-year policy) 100     Miscellaneous repairs (after renting) 297     Real estate taxes imposed and paid 1,200   Eileen must divide the real estate taxes, mortgage interest, and fire insurance between the personal use of the property and the rental use of the property. 1040ez mailing address She can deduct eleven-twelfths of these expenses as rental expenses. 1040ez mailing address She can include the balance of the allowable taxes and mortgage interest on Schedule A (Form 1040) if she itemizes. 1040ez mailing address She cannot deduct the balance of the fire insurance because it is a personal expense. 1040ez mailing address Eileen bought this house in 1984 for $35,000. 1040ez mailing address Her property tax was based on assessed values of $10,000 for the land and $25,000 for the house. 1040ez mailing address Before changing it to rental property, Eileen added several improvements to the house. 1040ez mailing address She figures her adjusted basis as follows:   Improvements Cost     House $25,000     Remodeled kitchen 4,200     Recreation room 5,800     New roof 1,600     Patio and deck 2,400     Adjusted basis $39,000   On February 1, when Eileen changed her house to rental property, the property had a fair market value of $152,000. 1040ez mailing address Of this amount, $35,000 was for the land and $117,000 was for the house. 1040ez mailing address Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation. 1040ez mailing address As specified for residential rental property, Eileen must use the straight line method of depreciation over the GDS or ADS recovery period. 1040ez mailing address She chooses the GDS recovery period of 27. 1040ez mailing address 5 years. 1040ez mailing address She uses Table 2-2d to find her depreciation percentage. 1040ez mailing address Since she placed the property in service in February, the percentage is 3. 1040ez mailing address 182%. 1040ez mailing address On April 1, Eileen bought a new dishwasher for the rental property at a cost of $425. 1040ez mailing address The dishwasher is personal property used in a rental real estate activity, which has a 5-year recovery period. 1040ez mailing address She uses Table 2-2a to find the percentage for Year 1 under “Half-year convention” (20%) to figure her depreciation deduction. 1040ez mailing address On May 1, Eileen paid $4,000 to have a furnace installed in the house. 1040ez mailing address The furnace is residential rental property. 1040ez mailing address Because she placed the property in service in May, the percentage from Table 2-2d is 2. 1040ez mailing address 273%. 1040ez mailing address Eileen figures her net rental income or loss for the house as follows: Total rental income received  ($750 × 11) $8,250 Minus: Expenses     Mortgage interest ($1,800 × 11/12) $1,650   Fire insurance ($100 × 11/12) 92   Miscellaneous repairs 297   Real estate taxes ($1,200 × 11/12) 1,100   Total expenses 3,139 Balance $5,111 Minus: Depreciation     House ($39,000 × . 1040ez mailing address 03182) $1,241   Dishwasher ($425 × . 1040ez mailing address 20) 85   Furnace ($4,000 × . 1040ez mailing address 02273) 91   Total depreciation 1,417 Net rental income for house   $3,694       Eileen uses Schedule E, Part I, to report her rental income and expenses. 1040ez mailing address She enters her income, expenses, and depreciation for the house in the column for Property A. 1040ez mailing address Since all property was placed in service this year, Eileen must use Form 4562 to figure the depreciation. 1040ez mailing address See the Instructions for Form 4562 for more information on preparing the form. 1040ez mailing address Prev  Up  Next   Home   More Online Publications
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The 1040ez Mailing Address

1040ez mailing address 1. 1040ez mailing address   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. 1040ez mailing address At-risk limits. 1040ez mailing address Passive activities. 1040ez mailing address Net operating loss. 1040ez mailing address When Can I Deduct an Expense?Economic performance. 1040ez mailing address Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. 1040ez mailing address  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. 1040ez mailing address See Optional safe harbor method under Business use of your home , later. 1040ez mailing address Introduction This chapter covers the general rules for deducting business expenses. 1040ez mailing address Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. 1040ez mailing address Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. 1040ez mailing address What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. 1040ez mailing address An ordinary expense is one that is common and accepted in your industry. 1040ez mailing address A necessary expense is one that is helpful and appropriate for your trade or business. 1040ez mailing address An expense does not have to be indispensable to be considered necessary. 1040ez mailing address Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. 1040ez mailing address In some cases you may not be allowed to deduct the expense at all. 1040ez mailing address Therefore, it is important to distinguish usual business expenses from expenses that include the following. 1040ez mailing address The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. 1040ez mailing address Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. 1040ez mailing address Some of your business expenses may be included in figuring cost of goods sold. 1040ez mailing address Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. 1040ez mailing address If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. 1040ez mailing address The following are types of expenses that go into figuring cost of goods sold. 1040ez mailing address The cost of products or raw materials, including freight. 1040ez mailing address Storage. 1040ez mailing address Direct labor (including contributions to pension or annuity plans) for workers who produce the products. 1040ez mailing address Factory overhead. 1040ez mailing address Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. 1040ez mailing address Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. 1040ez mailing address This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. 1040ez mailing address For more information, see the following sources. 1040ez mailing address Cost of goods sold—chapter 6 of Publication 334. 1040ez mailing address Inventories—Publication 538. 1040ez mailing address Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. 1040ez mailing address Capital Expenses You must capitalize, rather than deduct, some costs. 1040ez mailing address These costs are a part of your investment in your business and are called “capital expenses. 1040ez mailing address ” Capital expenses are considered assets in your business. 1040ez mailing address In general, you capitalize three types of costs. 1040ez mailing address Business start-up costs (See Tip below). 1040ez mailing address Business assets. 1040ez mailing address Improvements. 1040ez mailing address You can elect to deduct or amortize certain business start-up costs. 1040ez mailing address See chapters 7 and 8. 1040ez mailing address Cost recovery. 1040ez mailing address   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. 1040ez mailing address These recovery methods allow you to deduct part of your cost each year. 1040ez mailing address In this way, you are able to recover your capital expense. 1040ez mailing address See Amortization (chapter 8) and Depletion (chapter 9) in this publication. 1040ez mailing address A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. 1040ez mailing address A greater portion of these costs can be deducted if the property is qualified disaster assistance property. 1040ez mailing address See Publication 946 for details. 1040ez mailing address Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. 1040ez mailing address These costs may include expenses for advertising, travel, or wages for training employees. 1040ez mailing address If you go into business. 1040ez mailing address   When you go into business, treat all costs you had to get your business started as capital expenses. 1040ez mailing address   Usually you recover costs for a particular asset through depreciation. 1040ez mailing address Generally, you cannot recover other costs until you sell the business or otherwise go out of business. 1040ez mailing address However, you can choose to amortize certain costs for setting up your business. 1040ez mailing address See Starting a Business in chapter 8 for more information on business start-up costs. 1040ez mailing address If your attempt to go into business is unsuccessful. 1040ez mailing address   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. 1040ez mailing address The costs you had before making a decision to acquire or begin a specific business. 1040ez mailing address These costs are personal and nondeductible. 1040ez mailing address They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. 1040ez mailing address The costs you had in your attempt to acquire or begin a specific business. 1040ez mailing address These costs are capital expenses and you can deduct them as a capital loss. 1040ez mailing address   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. 1040ez mailing address   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. 1040ez mailing address You cannot take a deduction for these costs. 1040ez mailing address You will recover the costs of these assets when you dispose of them. 1040ez mailing address Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. 1040ez mailing address You must fully capitalize the cost of these assets, including freight and installation charges. 1040ez mailing address Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. 1040ez mailing address See Regulations section 1. 1040ez mailing address 263A-2 for information on these rules. 1040ez mailing address Improvements Improvements are generally major expenditures. 1040ez mailing address Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. 1040ez mailing address The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. 1040ez mailing address Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. 1040ez mailing address Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. 1040ez mailing address However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. 1040ez mailing address Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. 1040ez mailing address Restoration plan. 1040ez mailing address   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. 1040ez mailing address This applies even if some of the work would by itself be classified as repairs. 1040ez mailing address Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. 1040ez mailing address Motor vehicles. 1040ez mailing address   You usually capitalize the cost of a motor vehicle you use in your business. 1040ez mailing address You can recover its cost through annual deductions for depreciation. 1040ez mailing address   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. 1040ez mailing address See Publication 463. 1040ez mailing address   Generally, repairs you make to your business vehicle are currently deductible. 1040ez mailing address However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. 1040ez mailing address Roads and driveways. 1040ez mailing address    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. 1040ez mailing address The cost of maintaining a private road on your business property is a deductible expense. 1040ez mailing address Tools. 1040ez mailing address   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. 1040ez mailing address Machinery parts. 1040ez mailing address   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. 1040ez mailing address Heating equipment. 1040ez mailing address   The cost of changing from one heating system to another is a capital expense. 1040ez mailing address Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. 1040ez mailing address However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. 1040ez mailing address You can deduct the business part. 1040ez mailing address For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. 1040ez mailing address The remaining 30% is personal interest and generally is not deductible. 1040ez mailing address See chapter 4 for information on deducting interest and the allocation rules. 1040ez mailing address Business use of your home. 1040ez mailing address   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. 1040ez mailing address These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. 1040ez mailing address   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. 1040ez mailing address The business part of your home must be used exclusively and regularly for your trade or business. 1040ez mailing address The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. 1040ez mailing address   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. 1040ez mailing address   Your home office qualifies as your principal place of business if you meet the following requirements. 1040ez mailing address You use the office exclusively and regularly for administrative or management activities of your trade or business. 1040ez mailing address You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 1040ez mailing address   If you have more than one business location, determine your principal place of business based on the following factors. 1040ez mailing address The relative importance of the activities performed at each location. 1040ez mailing address If the relative importance factor does not determine your principal place of business, consider the time spent at each location. 1040ez mailing address Optional safe harbor method. 1040ez mailing address   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. 1040ez mailing address This method is an alternative to the calculation, allocation, and substantiation of actual expenses. 1040ez mailing address   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. 1040ez mailing address Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). 1040ez mailing address You are not required to allocate these deductions between personal and business use, as is required under the regular method. 1040ez mailing address If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. 1040ez mailing address   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. 1040ez mailing address All of the requirements discussed earlier under Business use of your home still apply. 1040ez mailing address   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. 1040ez mailing address    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. 1040ez mailing address Business use of your car. 1040ez mailing address   If you use your car exclusively in your business, you can deduct car expenses. 1040ez mailing address If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. 1040ez mailing address Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. 1040ez mailing address   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. 1040ez mailing address Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. 1040ez mailing address Beginning in 2013, the standard mileage rate is 56. 1040ez mailing address 5 cents per mile. 1040ez mailing address   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. 1040ez mailing address   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. 1040ez mailing address How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. 1040ez mailing address Recovery of amount deducted (tax benefit rule). 1040ez mailing address   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. 1040ez mailing address If you have a recovery in a later year, include the recovered amount in income in that year. 1040ez mailing address However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. 1040ez mailing address   For more information on recoveries and the tax benefit rule, see Publication 525. 1040ez mailing address Payments in kind. 1040ez mailing address   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. 1040ez mailing address You cannot deduct the cost of your own labor. 1040ez mailing address   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. 1040ez mailing address If these costs are included in the cost of goods sold, do not deduct them again as a business expense. 1040ez mailing address Limits on losses. 1040ez mailing address   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. 1040ez mailing address There may be limits on how much of the loss you can deduct. 1040ez mailing address Not-for-profit limits. 1040ez mailing address   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. 1040ez mailing address See Not-for-Profit Activities , later. 1040ez mailing address At-risk limits. 1040ez mailing address   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. 1040ez mailing address You are at risk in any activity for the following. 1040ez mailing address The money and adjusted basis of property you contribute to the activity. 1040ez mailing address Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. 1040ez mailing address For more information, see Publication 925. 1040ez mailing address Passive activities. 1040ez mailing address   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. 1040ez mailing address In general, deductions for losses from passive activities only offset income from passive activities. 1040ez mailing address You cannot use any excess deductions to offset other income. 1040ez mailing address In addition, passive activity credits can only offset the tax on net passive income. 1040ez mailing address Any excess loss or credits are carried over to later years. 1040ez mailing address Suspended passive losses are fully deductible in the year you completely dispose of the activity. 1040ez mailing address For more information, see Publication 925. 1040ez mailing address Net operating loss. 1040ez mailing address   If your deductions are more than your income for the year, you may have a “net operating loss. 1040ez mailing address ” You can use a net operating loss to lower your taxes in other years. 1040ez mailing address See Publication 536 for more information. 1040ez mailing address   See Publication 542 for information about net operating losses of corporations. 1040ez mailing address When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. 1040ez mailing address An accounting method is a set of rules used to determine when and how income and expenses are reported. 1040ez mailing address The two basic methods are the cash method and the accrual method. 1040ez mailing address Whichever method you choose must clearly reflect income. 1040ez mailing address For more information on accounting methods, see Publication 538. 1040ez mailing address Cash method. 1040ez mailing address   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. 1040ez mailing address Accrual method. 1040ez mailing address   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. 1040ez mailing address The all-events test has been met. 1040ez mailing address The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. 1040ez mailing address Economic performance has occurred. 1040ez mailing address Economic performance. 1040ez mailing address   You generally cannot deduct or capitalize a business expense until economic performance occurs. 1040ez mailing address If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. 1040ez mailing address If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 1040ez mailing address Example. 1040ez mailing address Your tax year is the calendar year. 1040ez mailing address In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. 1040ez mailing address You paid it by check in January 2014. 1040ez mailing address If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. 1040ez mailing address If you use the cash method of accounting, deduct the expense on your 2014 return. 1040ez mailing address Prepayment. 1040ez mailing address   You generally cannot deduct expenses in advance, even if you pay them in advance. 1040ez mailing address This rule applies to both the cash and accrual methods. 1040ez mailing address It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 1040ez mailing address Example. 1040ez mailing address In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. 1040ez mailing address Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. 1040ez mailing address You can deduct the rent for 2014 and 2015 on your tax returns for those years. 1040ez mailing address Contested liability. 1040ez mailing address   Under the cash method, you can deduct a contested liability only in the year you pay the liability. 1040ez mailing address Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. 1040ez mailing address S. 1040ez mailing address possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. 1040ez mailing address However, to take the deduction in the year of payment or transfer, you must meet certain conditions. 1040ez mailing address See Regulations section 1. 1040ez mailing address 461-2. 1040ez mailing address Related person. 1040ez mailing address   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. 1040ez mailing address However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. 1040ez mailing address Your deduction is allowed when the amount is includible in income by the related cash method payee. 1040ez mailing address See Related Persons in Publication 538. 1040ez mailing address Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. 1040ez mailing address Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. 1040ez mailing address The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. 1040ez mailing address It does not apply to corporations other than S corporations. 1040ez mailing address In determining whether you are carrying on an activity for profit, several factors are taken into account. 1040ez mailing address No one factor alone is decisive. 1040ez mailing address Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. 1040ez mailing address Presumption of profit. 1040ez mailing address   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. 1040ez mailing address Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. 1040ez mailing address The activity must be substantially the same for each year within this period. 1040ez mailing address You have a profit when the gross income from an activity exceeds the deductions. 1040ez mailing address   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. 1040ez mailing address   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. 1040ez mailing address This means the limits discussed here will not apply. 1040ez mailing address You can take all your business deductions from the activity, even for the years that you have a loss. 1040ez mailing address You can rely on this presumption unless the IRS later shows it to be invalid. 1040ez mailing address Using the presumption later. 1040ez mailing address   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. 1040ez mailing address   You can elect to do this by filing Form 5213. 1040ez mailing address Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. 1040ez mailing address   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. 1040ez mailing address Accordingly, it will not restrict your deductions. 1040ez mailing address Rather, you will gain time to earn a profit in the required number of years. 1040ez mailing address If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. 1040ez mailing address If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. 1040ez mailing address   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. 1040ez mailing address The period is extended only for deductions of the activity and any related deductions that might be affected. 1040ez mailing address    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. 1040ez mailing address Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. 1040ez mailing address Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. 1040ez mailing address You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. 1040ez mailing address However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. 1040ez mailing address Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. 1040ez mailing address If you are an individual, these deductions may be taken only if you itemize. 1040ez mailing address These deductions may be taken on Schedule A (Form 1040). 1040ez mailing address Category 1. 1040ez mailing address   Deductions you can take for personal as well as for business activities are allowed in full. 1040ez mailing address For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. 1040ez mailing address Deduct them on the appropriate lines of Schedule A (Form 1040). 1040ez mailing address For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). 1040ez mailing address The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. 1040ez mailing address The reduction amount returns to $100 for tax years beginning after December 31, 2009. 1040ez mailing address See Publication 547 for more information on casualty losses. 1040ez mailing address For the limits that apply to home mortgage interest, see Publication 936. 1040ez mailing address Category 2. 1040ez mailing address   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. 1040ez mailing address Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. 1040ez mailing address Category 3. 1040ez mailing address   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. 1040ez mailing address Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. 1040ez mailing address Where more than one asset is involved, allocate depreciation and these other deductions proportionally. 1040ez mailing address    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). 1040ez mailing address They are subject to the 2%-of-adjusted-gross-income limit. 1040ez mailing address See Publication 529 for information on this limit. 1040ez mailing address Example. 1040ez mailing address Adriana is engaged in a not-for-profit activity. 1040ez mailing address The income and expenses of the activity are as follows. 1040ez mailing address Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. 1040ez mailing address The limit is reached in category (3), as follows. 1040ez mailing address Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. 1040ez mailing address $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. 1040ez mailing address Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. 1040ez mailing address The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). 1040ez mailing address Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. 1040ez mailing address Partnerships and S corporations. 1040ez mailing address   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. 1040ez mailing address They are reflected in the individual shareholder's or partner's distributive shares. 1040ez mailing address More than one activity. 1040ez mailing address   If you have several undertakings, each may be a separate activity or several undertakings may be combined. 1040ez mailing address The following are the most significant facts and circumstances in making this determination. 1040ez mailing address The degree of organizational and economic interrelationship of various undertakings. 1040ez mailing address The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. 1040ez mailing address The similarity of the undertakings. 1040ez mailing address   The IRS will generally accept your characterization if it is supported by facts and circumstances. 1040ez mailing address    If you are carrying on two or more different activities, keep the deductions and income from each one separate. 1040ez mailing address Figure separately whether each is a not-for-profit activity. 1040ez mailing address Then figure the limit on deductions and losses separately for each activity that is not for profit. 1040ez mailing address Prev  Up  Next   Home   More Online Publications