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2011 1040 Ez

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2011 1040 Ez

2011 1040 ez 1. 2011 1040 ez   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. 2011 1040 ez At-risk limits. 2011 1040 ez Passive activities. 2011 1040 ez Net operating loss. 2011 1040 ez When Can I Deduct an Expense?Economic performance. 2011 1040 ez Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. 2011 1040 ez  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. 2011 1040 ez See Optional safe harbor method under Business use of your home , later. 2011 1040 ez Introduction This chapter covers the general rules for deducting business expenses. 2011 1040 ez 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. 2011 1040 ez 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. 2011 1040 ez What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. 2011 1040 ez An ordinary expense is one that is common and accepted in your industry. 2011 1040 ez A necessary expense is one that is helpful and appropriate for your trade or business. 2011 1040 ez An expense does not have to be indispensable to be considered necessary. 2011 1040 ez 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. 2011 1040 ez In some cases you may not be allowed to deduct the expense at all. 2011 1040 ez Therefore, it is important to distinguish usual business expenses from expenses that include the following. 2011 1040 ez The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. 2011 1040 ez 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. 2011 1040 ez Some of your business expenses may be included in figuring cost of goods sold. 2011 1040 ez Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. 2011 1040 ez If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. 2011 1040 ez The following are types of expenses that go into figuring cost of goods sold. 2011 1040 ez The cost of products or raw materials, including freight. 2011 1040 ez Storage. 2011 1040 ez Direct labor (including contributions to pension or annuity plans) for workers who produce the products. 2011 1040 ez Factory overhead. 2011 1040 ez Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. 2011 1040 ez Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. 2011 1040 ez 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. 2011 1040 ez For more information, see the following sources. 2011 1040 ez Cost of goods sold—chapter 6 of Publication 334. 2011 1040 ez Inventories—Publication 538. 2011 1040 ez Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. 2011 1040 ez Capital Expenses You must capitalize, rather than deduct, some costs. 2011 1040 ez These costs are a part of your investment in your business and are called “capital expenses. 2011 1040 ez ” Capital expenses are considered assets in your business. 2011 1040 ez In general, you capitalize three types of costs. 2011 1040 ez Business start-up costs (See Tip below). 2011 1040 ez Business assets. 2011 1040 ez Improvements. 2011 1040 ez You can elect to deduct or amortize certain business start-up costs. 2011 1040 ez See chapters 7 and 8. 2011 1040 ez Cost recovery. 2011 1040 ez   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. 2011 1040 ez These recovery methods allow you to deduct part of your cost each year. 2011 1040 ez In this way, you are able to recover your capital expense. 2011 1040 ez See Amortization (chapter 8) and Depletion (chapter 9) in this publication. 2011 1040 ez A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. 2011 1040 ez A greater portion of these costs can be deducted if the property is qualified disaster assistance property. 2011 1040 ez See Publication 946 for details. 2011 1040 ez Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. 2011 1040 ez These costs may include expenses for advertising, travel, or wages for training employees. 2011 1040 ez If you go into business. 2011 1040 ez   When you go into business, treat all costs you had to get your business started as capital expenses. 2011 1040 ez   Usually you recover costs for a particular asset through depreciation. 2011 1040 ez Generally, you cannot recover other costs until you sell the business or otherwise go out of business. 2011 1040 ez However, you can choose to amortize certain costs for setting up your business. 2011 1040 ez See Starting a Business in chapter 8 for more information on business start-up costs. 2011 1040 ez If your attempt to go into business is unsuccessful. 2011 1040 ez   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. 2011 1040 ez The costs you had before making a decision to acquire or begin a specific business. 2011 1040 ez These costs are personal and nondeductible. 2011 1040 ez They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. 2011 1040 ez The costs you had in your attempt to acquire or begin a specific business. 2011 1040 ez These costs are capital expenses and you can deduct them as a capital loss. 2011 1040 ez   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. 2011 1040 ez   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. 2011 1040 ez You cannot take a deduction for these costs. 2011 1040 ez You will recover the costs of these assets when you dispose of them. 2011 1040 ez Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. 2011 1040 ez You must fully capitalize the cost of these assets, including freight and installation charges. 2011 1040 ez Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. 2011 1040 ez See Regulations section 1. 2011 1040 ez 263A-2 for information on these rules. 2011 1040 ez Improvements Improvements are generally major expenditures. 2011 1040 ez Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. 2011 1040 ez 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. 2011 1040 ez 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. 2011 1040 ez Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. 2011 1040 ez However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. 2011 1040 ez Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. 2011 1040 ez Restoration plan. 2011 1040 ez   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. 2011 1040 ez This applies even if some of the work would by itself be classified as repairs. 2011 1040 ez Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. 2011 1040 ez Motor vehicles. 2011 1040 ez   You usually capitalize the cost of a motor vehicle you use in your business. 2011 1040 ez You can recover its cost through annual deductions for depreciation. 2011 1040 ez   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. 2011 1040 ez See Publication 463. 2011 1040 ez   Generally, repairs you make to your business vehicle are currently deductible. 2011 1040 ez However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. 2011 1040 ez Roads and driveways. 2011 1040 ez    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. 2011 1040 ez The cost of maintaining a private road on your business property is a deductible expense. 2011 1040 ez Tools. 2011 1040 ez   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. 2011 1040 ez Machinery parts. 2011 1040 ez   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. 2011 1040 ez Heating equipment. 2011 1040 ez   The cost of changing from one heating system to another is a capital expense. 2011 1040 ez Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. 2011 1040 ez 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. 2011 1040 ez You can deduct the business part. 2011 1040 ez 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. 2011 1040 ez The remaining 30% is personal interest and generally is not deductible. 2011 1040 ez See chapter 4 for information on deducting interest and the allocation rules. 2011 1040 ez Business use of your home. 2011 1040 ez   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. 2011 1040 ez These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. 2011 1040 ez   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. 2011 1040 ez The business part of your home must be used exclusively and regularly for your trade or business. 2011 1040 ez 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. 2011 1040 ez   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. 2011 1040 ez   Your home office qualifies as your principal place of business if you meet the following requirements. 2011 1040 ez You use the office exclusively and regularly for administrative or management activities of your trade or business. 2011 1040 ez You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 2011 1040 ez   If you have more than one business location, determine your principal place of business based on the following factors. 2011 1040 ez The relative importance of the activities performed at each location. 2011 1040 ez If the relative importance factor does not determine your principal place of business, consider the time spent at each location. 2011 1040 ez Optional safe harbor method. 2011 1040 ez   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. 2011 1040 ez This method is an alternative to the calculation, allocation, and substantiation of actual expenses. 2011 1040 ez   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. 2011 1040 ez 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). 2011 1040 ez You are not required to allocate these deductions between personal and business use, as is required under the regular method. 2011 1040 ez If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. 2011 1040 ez   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. 2011 1040 ez All of the requirements discussed earlier under Business use of your home still apply. 2011 1040 ez   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. 2011 1040 ez    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. 2011 1040 ez Business use of your car. 2011 1040 ez   If you use your car exclusively in your business, you can deduct car expenses. 2011 1040 ez If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. 2011 1040 ez Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. 2011 1040 ez   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. 2011 1040 ez 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. 2011 1040 ez Beginning in 2013, the standard mileage rate is 56. 2011 1040 ez 5 cents per mile. 2011 1040 ez   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. 2011 1040 ez   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. 2011 1040 ez 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. 2011 1040 ez Recovery of amount deducted (tax benefit rule). 2011 1040 ez   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. 2011 1040 ez If you have a recovery in a later year, include the recovered amount in income in that year. 2011 1040 ez 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. 2011 1040 ez   For more information on recoveries and the tax benefit rule, see Publication 525. 2011 1040 ez Payments in kind. 2011 1040 ez   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. 2011 1040 ez You cannot deduct the cost of your own labor. 2011 1040 ez   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. 2011 1040 ez If these costs are included in the cost of goods sold, do not deduct them again as a business expense. 2011 1040 ez Limits on losses. 2011 1040 ez   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. 2011 1040 ez There may be limits on how much of the loss you can deduct. 2011 1040 ez Not-for-profit limits. 2011 1040 ez   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. 2011 1040 ez See Not-for-Profit Activities , later. 2011 1040 ez At-risk limits. 2011 1040 ez   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. 2011 1040 ez You are at risk in any activity for the following. 2011 1040 ez The money and adjusted basis of property you contribute to the activity. 2011 1040 ez 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. 2011 1040 ez For more information, see Publication 925. 2011 1040 ez Passive activities. 2011 1040 ez   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. 2011 1040 ez In general, deductions for losses from passive activities only offset income from passive activities. 2011 1040 ez You cannot use any excess deductions to offset other income. 2011 1040 ez In addition, passive activity credits can only offset the tax on net passive income. 2011 1040 ez Any excess loss or credits are carried over to later years. 2011 1040 ez Suspended passive losses are fully deductible in the year you completely dispose of the activity. 2011 1040 ez For more information, see Publication 925. 2011 1040 ez Net operating loss. 2011 1040 ez   If your deductions are more than your income for the year, you may have a “net operating loss. 2011 1040 ez ” You can use a net operating loss to lower your taxes in other years. 2011 1040 ez See Publication 536 for more information. 2011 1040 ez   See Publication 542 for information about net operating losses of corporations. 2011 1040 ez When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. 2011 1040 ez An accounting method is a set of rules used to determine when and how income and expenses are reported. 2011 1040 ez The two basic methods are the cash method and the accrual method. 2011 1040 ez Whichever method you choose must clearly reflect income. 2011 1040 ez For more information on accounting methods, see Publication 538. 2011 1040 ez Cash method. 2011 1040 ez   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. 2011 1040 ez Accrual method. 2011 1040 ez   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. 2011 1040 ez The all-events test has been met. 2011 1040 ez The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. 2011 1040 ez Economic performance has occurred. 2011 1040 ez Economic performance. 2011 1040 ez   You generally cannot deduct or capitalize a business expense until economic performance occurs. 2011 1040 ez 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. 2011 1040 ez If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 2011 1040 ez Example. 2011 1040 ez Your tax year is the calendar year. 2011 1040 ez In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. 2011 1040 ez You paid it by check in January 2014. 2011 1040 ez 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. 2011 1040 ez If you use the cash method of accounting, deduct the expense on your 2014 return. 2011 1040 ez Prepayment. 2011 1040 ez   You generally cannot deduct expenses in advance, even if you pay them in advance. 2011 1040 ez This rule applies to both the cash and accrual methods. 2011 1040 ez 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. 2011 1040 ez Example. 2011 1040 ez In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. 2011 1040 ez Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. 2011 1040 ez You can deduct the rent for 2014 and 2015 on your tax returns for those years. 2011 1040 ez Contested liability. 2011 1040 ez   Under the cash method, you can deduct a contested liability only in the year you pay the liability. 2011 1040 ez Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. 2011 1040 ez S. 2011 1040 ez 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. 2011 1040 ez However, to take the deduction in the year of payment or transfer, you must meet certain conditions. 2011 1040 ez See Regulations section 1. 2011 1040 ez 461-2. 2011 1040 ez Related person. 2011 1040 ez   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. 2011 1040 ez 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. 2011 1040 ez Your deduction is allowed when the amount is includible in income by the related cash method payee. 2011 1040 ez See Related Persons in Publication 538. 2011 1040 ez 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. 2011 1040 ez Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. 2011 1040 ez The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. 2011 1040 ez It does not apply to corporations other than S corporations. 2011 1040 ez In determining whether you are carrying on an activity for profit, several factors are taken into account. 2011 1040 ez No one factor alone is decisive. 2011 1040 ez 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. 2011 1040 ez Presumption of profit. 2011 1040 ez   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. 2011 1040 ez 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. 2011 1040 ez The activity must be substantially the same for each year within this period. 2011 1040 ez You have a profit when the gross income from an activity exceeds the deductions. 2011 1040 ez   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. 2011 1040 ez   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. 2011 1040 ez This means the limits discussed here will not apply. 2011 1040 ez You can take all your business deductions from the activity, even for the years that you have a loss. 2011 1040 ez You can rely on this presumption unless the IRS later shows it to be invalid. 2011 1040 ez Using the presumption later. 2011 1040 ez   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. 2011 1040 ez   You can elect to do this by filing Form 5213. 2011 1040 ez 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. 2011 1040 ez   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. 2011 1040 ez Accordingly, it will not restrict your deductions. 2011 1040 ez Rather, you will gain time to earn a profit in the required number of years. 2011 1040 ez If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. 2011 1040 ez 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. 2011 1040 ez   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. 2011 1040 ez The period is extended only for deductions of the activity and any related deductions that might be affected. 2011 1040 ez    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. 2011 1040 ez 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. 2011 1040 ez 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. 2011 1040 ez You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. 2011 1040 ez 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. 2011 1040 ez 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. 2011 1040 ez If you are an individual, these deductions may be taken only if you itemize. 2011 1040 ez These deductions may be taken on Schedule A (Form 1040). 2011 1040 ez Category 1. 2011 1040 ez   Deductions you can take for personal as well as for business activities are allowed in full. 2011 1040 ez For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. 2011 1040 ez Deduct them on the appropriate lines of Schedule A (Form 1040). 2011 1040 ez 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). 2011 1040 ez 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. 2011 1040 ez The reduction amount returns to $100 for tax years beginning after December 31, 2009. 2011 1040 ez See Publication 547 for more information on casualty losses. 2011 1040 ez For the limits that apply to home mortgage interest, see Publication 936. 2011 1040 ez Category 2. 2011 1040 ez   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. 2011 1040 ez Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. 2011 1040 ez Category 3. 2011 1040 ez   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. 2011 1040 ez Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. 2011 1040 ez Where more than one asset is involved, allocate depreciation and these other deductions proportionally. 2011 1040 ez    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). 2011 1040 ez They are subject to the 2%-of-adjusted-gross-income limit. 2011 1040 ez See Publication 529 for information on this limit. 2011 1040 ez Example. 2011 1040 ez Adriana is engaged in a not-for-profit activity. 2011 1040 ez The income and expenses of the activity are as follows. 2011 1040 ez 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. 2011 1040 ez The limit is reached in category (3), as follows. 2011 1040 ez 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. 2011 1040 ez $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. 2011 1040 ez Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. 2011 1040 ez The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). 2011 1040 ez 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. 2011 1040 ez Partnerships and S corporations. 2011 1040 ez   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. 2011 1040 ez They are reflected in the individual shareholder's or partner's distributive shares. 2011 1040 ez More than one activity. 2011 1040 ez   If you have several undertakings, each may be a separate activity or several undertakings may be combined. 2011 1040 ez The following are the most significant facts and circumstances in making this determination. 2011 1040 ez The degree of organizational and economic interrelationship of various undertakings. 2011 1040 ez The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. 2011 1040 ez The similarity of the undertakings. 2011 1040 ez   The IRS will generally accept your characterization if it is supported by facts and circumstances. 2011 1040 ez    If you are carrying on two or more different activities, keep the deductions and income from each one separate. 2011 1040 ez Figure separately whether each is a not-for-profit activity. 2011 1040 ez Then figure the limit on deductions and losses separately for each activity that is not for profit. 2011 1040 ez Prev  Up  Next   Home   More Online Publications
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Understanding Your CP563 Notice

We reviewed your Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, and we need additional information in order to process it.


What you need to do

  • Complete the CP563 response card and provide the requested information as described in your notice.

You may want to

  • Call the IRS at 1-512-460-7898 or 1-267-941-1000 (for international calls), if you have additional questions.

 

Page Last Reviewed or Updated: 27-Jan-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The 2011 1040 Ez

2011 1040 ez There are three ways you can request an automatic extension of time to file a U.S. individual income tax return: (1) you can electronically file Form 4868 (PDF), Application For Automatic Extension of Time To File U.S. Individual Tax Return; (2) you can pay all or part of your estimated income tax due using a credit or debit card or by using the Electronic Federal Tax Payment System (EFTPS); or (3) you can file a paper Form 4868 by mail. 2011 1040 ez 2011 1040 ez If you file your Form 4868 electronically you will receive an acknowledgement or confirmation number for your records and you do not need to mail in Form 4868. If you need to pay additional taxes when filing Form 4868 electronically, you may do so through the outside service provider or through e-file. You can refer to your tax software or tax professional for ways to file electronically using e-file services. Several companies offer free filing of Form 4868 through the Free File program that you can access on the IRS.gov website. If you wish to file electronically, be sure to have a copy of last year's tax return. You will be asked to provide the adjusted gross income (AGI) from the return for taxpayer verification. 2011 1040 ez 2011 1040 ez A second way of requesting an automatic extension of time to file your individual income tax return is to pay part or your entire estimated income tax due by credit card or debit card or by using EFTPS. You may pay by phone or Internet through one of the service providers listed on Form 4868. Each service provider will charge a convenience fee based on the amount of the tax payment. At the completion of the transaction, you will receive a confirmation number for your records. 2011 1040 ez 2011 1040 ez Finally, you can request an automatic extension of time to file your individual income tax return by completing paper Form 4868 and mailing it to the appropriate address provided on the form. 2011 1040 ez 2011 1040 ez Please be aware that an extension of time to file is NOT an extension of time to pay.