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Federal Income Tax Form

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Federal Income Tax Form

Federal income tax form 2. Federal income tax form   Electing the Section 179 Deduction Table of Contents Introduction Useful Items - You may want to see: What Property Qualifies?Eligible Property Property Acquired for Business Use Property Acquired by Purchase What Property Does Not Qualify?Land and Improvements Excepted Property How Much Can You Deduct?Dollar Limits Business Income Limit Partnerships and Partners S Corporations Other Corporations How Do You Elect the Deduction? When Must You Recapture the Deduction? Introduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Federal income tax form This is the section 179 deduction. Federal income tax form You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. Federal income tax form Estates and trusts cannot elect the section 179 deduction. Federal income tax form This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special rules for partnerships and corporations), and how to elect it. Federal income tax form It also explains when and how to recapture the deduction. Federal income tax form Useful Items - You may want to see: Publication 537 Installment Sales 544 Sales and Other Dispositions of Assets 954 Tax Incentives for Distressed Communities Form (and Instructions) 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. Federal income tax form What Property Qualifies? To qualify for the section 179 deduction, your property must meet all the following requirements. Federal income tax form It must be eligible property. Federal income tax form It must be acquired for business use. Federal income tax form It must have been acquired by purchase. Federal income tax form It must not be property described later under What Property Does Not Qualify . Federal income tax form The following discussions provide information about these requirements and exceptions. Federal income tax form Eligible Property To qualify for the section 179 deduction, your property must be one of the following types of depreciable property. Federal income tax form Tangible personal property. Federal income tax form Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services, A research facility used in connection with any of the activities in (a) above, or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Federal income tax form Single purpose agricultural (livestock) or horticultural structures. Federal income tax form See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures. Federal income tax form Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Federal income tax form Off-the-shelf computer software. Federal income tax form Qualified real property (described below). Federal income tax form Tangible personal property. Federal income tax form   Tangible personal property is any tangible property that is not real property. Federal income tax form It includes the following property. Federal income tax form Machinery and equipment. Federal income tax form Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs. Federal income tax form Gasoline storage tanks and pumps at retail service stations. Federal income tax form Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals. Federal income tax form   The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. Federal income tax form For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law. Federal income tax form Off-the-shelf computer software. Federal income tax form   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. Federal income tax form This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. Federal income tax form It includes any program designed to cause a computer to perform a desired function. Federal income tax form However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software. Federal income tax form Qualified real property. Federal income tax form   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. Federal income tax form If this election is made, the term “section 179 property” will include any qualified real property that is: Qualified leasehold improvement property, Qualified restaurant property, or Qualified retail improvement property. Federal income tax form The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 in 2013. Federal income tax form For more information, see Special rules for qualified section 179 real property, later. Federal income tax form Also, see Election for certain qualified section 179 real property, later, for information on how to make this election. Federal income tax form Qualified leasehold improvement property. Federal income tax form   Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. Federal income tax form   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Federal income tax form A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Federal income tax form Examples include the following. Federal income tax form A complete liquidation of a subsidiary. Federal income tax form A transfer to a corporation controlled by the transferor. Federal income tax form An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Federal income tax form Qualified restaurant property. Federal income tax form   Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2014. Federal income tax form Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals. Federal income tax form Qualified retail improvement property. Federal income tax form   Generally, this is any improvement (placed in service after December 31, 2008, and before January 1, 2014) to an interior portion of nonresidential real property if it meets the following requirements. Federal income tax form The portion is open to the general public and is used in the retail trade or business of selling tangible property to the general public. Federal income tax form The improvement is placed in service more than 3 years after the date the building was first placed in service. Federal income tax form The expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building. Federal income tax form In addition, an improvement made by the lessor does not qualify as qualified retail improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Federal income tax form A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Federal income tax form Examples include the following. Federal income tax form A complete liquidation of a subsidiary. Federal income tax form A transfer to a corporation controlled by the transferor. Federal income tax form An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Federal income tax form Property Acquired for Business Use To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Federal income tax form Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify. Federal income tax form Partial business use. Federal income tax form   When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. Federal income tax form If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. Federal income tax form Use the resulting business cost to figure your section 179 deduction. Federal income tax form Example. Federal income tax form May Oak bought and placed in service an item of section 179 property costing $11,000. Federal income tax form She used the property 80% for her business and 20% for personal purposes. Federal income tax form The business part of the cost of the property is $8,800 (80% × $11,000). Federal income tax form Property Acquired by Purchase To qualify for the section 179 deduction, your property must have been acquired by purchase. Federal income tax form For example, property acquired by gift or inheritance does not qualify. Federal income tax form Property is not considered acquired by purchase in the following situations. Federal income tax form It is acquired by one component member of a controlled group from another component member of the same group. Federal income tax form Its basis is determined either— In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or Under the stepped-up basis rules for property acquired from a decedent. Federal income tax form It is acquired from a related person. Federal income tax form Related persons. Federal income tax form   Related persons are described under Related persons earlier. Federal income tax form However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears. Federal income tax form Example. Federal income tax form Ken Larch is a tailor. Federal income tax form He bought two industrial sewing machines from his father. Federal income tax form He placed both machines in service in the same year he bought them. Federal income tax form They do not qualify as section 179 property because Ken and his father are related persons. Federal income tax form He cannot claim a section 179 deduction for the cost of these machines. Federal income tax form What Property Does Not Qualify? Certain property does not qualify for the section 179 deduction. Federal income tax form This includes the following. Federal income tax form Land and Improvements Land and land improvements do not qualify as section 179 property. Federal income tax form Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences. Federal income tax form Excepted Property Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property. Federal income tax form Certain property you lease to others (if you are a noncorporate lessor). Federal income tax form Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Federal income tax form Air conditioning or heating units. Federal income tax form Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code. Federal income tax form Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income. Federal income tax form Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months. Federal income tax form Leased property. Federal income tax form   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. Federal income tax form This rule does not apply to corporations. Federal income tax form However, you can claim a section 179 deduction for the cost of the following property. Federal income tax form Property you manufacture or produce and lease to others. Federal income tax form Property you purchase and lease to others if both the following tests are met. Federal income tax form The term of the lease (including options to renew) is less than 50% of the property's class life. Federal income tax form For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property. Federal income tax form Property used for lodging. Federal income tax form   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. Federal income tax form However, this does not apply to the following types of property. Federal income tax form Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to those using the lodging facilities. Federal income tax form Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients. Federal income tax form Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures. Federal income tax form Any energy property. Federal income tax form Energy property. Federal income tax form   Energy property is property that meets the following requirements. Federal income tax form It is one of the following types of property. Federal income tax form Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat, except for equipment used to generate energy to heat a swimming pool. Federal income tax form Equipment placed in service after December 31, 2005, and before January 1, 2017, that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. Federal income tax form Equipment used to produce, distribute, or use energy derived from a geothermal deposit. Federal income tax form For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage. Federal income tax form Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017. Federal income tax form The construction, reconstruction, or erection of the property must be completed by you. Federal income tax form For property you acquire, the original use of the property must begin with you. Federal income tax form The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property. Federal income tax form   For periods before February 14, 2008, energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990). Federal income tax form How Much Can You Deduct? Your section 179 deduction is generally the cost of the qualifying property. Federal income tax form However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Federal income tax form These limits apply to each taxpayer, not to each business. Federal income tax form However, see Married Individuals under Dollar Limits , later. Federal income tax form For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. Federal income tax form See Do the Passenger Automobile Limits Apply in chapter 5 . Federal income tax form If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. Federal income tax form Trade-in of other property. Federal income tax form   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid. Federal income tax form Example. Federal income tax form Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. Federal income tax form They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. Federal income tax form The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. Federal income tax form They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van. Federal income tax form Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Federal income tax form Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200). Federal income tax form Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 generally cannot be more than $500,000. Federal income tax form If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. Federal income tax form You do not have to claim the full $500,000. Federal income tax form Qualified real property (described earlier) that you elected to treat as section 179 real property is limited to $250,000 of the maximum deduction of $500,000 for 2013. Federal income tax form The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property in service for only a part of a 12-month tax year. Federal income tax form After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your actual section 179 deduction. Federal income tax form Example. Federal income tax form In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. Federal income tax form You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. Federal income tax form This is the maximum amount you can deduct. Federal income tax form Your $25,000 deduction for the saw completely recovered its cost. Federal income tax form Your basis for depreciation is zero. Federal income tax form The basis for depreciation of your machinery is $25,000. Federal income tax form You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery. Federal income tax form Situations affecting dollar limit. Federal income tax form   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. Federal income tax form The general dollar limit is affected by any of the following situations. Federal income tax form The cost of your section 179 property placed in service exceeds $2,000,000. Federal income tax form Your business is an enterprise zone business. Federal income tax form You placed in service a sport utility or certain other vehicles. Federal income tax form You are married filing a joint or separate return. Federal income tax form Costs exceeding $2,000,000 If the cost of your qualifying section 179 property placed in service in a year is more than $2,000,000, you generally must reduce the dollar limit (but not below zero) by the amount of cost over $2,000,000. Federal income tax form If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. Federal income tax form Example. Federal income tax form In 2013, Jane Ash placed in service machinery costing $2,100,000. Federal income tax form This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000). Federal income tax form Enterprise Zone Businesses An increased section 179 deduction is available to enterprise zone businesses for qualified zone property placed in service during the tax year, in an empowerment zone. Federal income tax form For more information including the definitions of “enterprise zone business” and “qualified zone property,” see sections 1397A, 1397C, and 1397D of the Internal Revenue Code. Federal income tax form The dollar limit on the section 179 deduction is increased by the smaller of: $35,000, or The cost of section 179 property that is also qualified zone property placed in service before January 1, 2014 (including such property placed in service by your spouse, even if you are filing a separate return). Federal income tax form Note. Federal income tax form   You take into account only 50% (instead of 100%) of the cost of qualified zone property placed in service in a year when figuring the reduced dollar limit for costs exceeding $2,000,000 (explained earlier). Federal income tax form Sport Utility and Certain Other Vehicles You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year. Federal income tax form This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Federal income tax form However, the $25,000 limit does not apply to any vehicle: Designed to seat more than nine passengers behind the driver's seat, Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from the passenger compartment, or That has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. Federal income tax form Married Individuals If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. Federal income tax form If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Federal income tax form If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2,000,000. Federal income tax form You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. Federal income tax form If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Federal income tax form Example. Federal income tax form Jack Elm is married. Federal income tax form He and his wife file separate returns. Federal income tax form Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. Federal income tax form His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. Federal income tax form Their combined dollar limit is $470,000. Federal income tax form This is because they must figure the limit as if they were one taxpayer. Federal income tax form They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000. Federal income tax form They elect to allocate the $470,000 dollar limit as follows. Federal income tax form $446,500 ($470,000 x 95%) to Mr. Federal income tax form Elm's machinery. Federal income tax form $23,500 ($470,000 x 5%) to Mrs. Federal income tax form Elm's equipment. Federal income tax form If they did not make an election to allocate their costs in this way, they would have to allocate $235,000 ($470,000 × 50%) to each of them. Federal income tax form Joint return after filing separate returns. Federal income tax form   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Federal income tax form The dollar limit (after reduction for any cost of section 179 property over $2,000,000). Federal income tax form The total cost of section 179 property you and your spouse elected to expense on your separate returns. Federal income tax form Example. Federal income tax form The facts are the same as in the previous example except that Jack elected to deduct $30,000 of the cost of section 179 property on his separate return and his wife elected to deduct $2,000. Federal income tax form After the due date of their returns, they file a joint return. Federal income tax form Their dollar limit for the section 179 deduction is $32,000. Federal income tax form This is the lesser of the following amounts. Federal income tax form $470,000—The dollar limit less the cost of section 179 property over $2,000,000. Federal income tax form $32,000—The total they elected to expense on their separate returns. Federal income tax form Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Federal income tax form Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Federal income tax form Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Federal income tax form Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. Federal income tax form See Special rules for qualified section 179 property under Carryover of disallowed deduction, later. Federal income tax form Taxable income. Federal income tax form   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Federal income tax form Net income or loss from a trade or business includes the following items. Federal income tax form Section 1231 gains (or losses). Federal income tax form Interest from working capital of your trade or business. Federal income tax form Wages, salaries, tips, or other pay earned as an employee. Federal income tax form For information about section 1231 gains and losses, see chapter 3 in Publication 544. Federal income tax form   In addition, figure taxable income without regard to any of the following. Federal income tax form The section 179 deduction. Federal income tax form The self-employment tax deduction. Federal income tax form Any net operating loss carryback or carryforward. Federal income tax form Any unreimbursed employee business expenses. Federal income tax form Two different taxable income limits. Federal income tax form   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. Federal income tax form You may have to figure the limit for this other deduction taking into account the section 179 deduction. Federal income tax form If so, complete the following steps. Federal income tax form Step Action 1 Figure taxable income without the section 179 deduction or the other deduction. Federal income tax form 2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. Federal income tax form 3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. Federal income tax form 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Federal income tax form 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. Federal income tax form 6 Figure your actual section 179 deduction using the taxable income figured in Step 5. Federal income tax form 7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. Federal income tax form 8 Figure your actual other deduction using the taxable income figured in Step 7. Federal income tax form Example. Federal income tax form On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. Federal income tax form It elects to expense the entire $500,000 cost under section 179. Federal income tax form In June, the corporation gave a charitable contribution of $10,000. Federal income tax form A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. Federal income tax form The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. Federal income tax form XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. Federal income tax form XYZ figures its section 179 deduction and its deduction for charitable contributions as follows. Federal income tax form Step 1– Taxable income figured without either deduction is $520,000. Federal income tax form Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000. Federal income tax form Step 3– $20,000 ($520,000 − $500,000). Federal income tax form Step 4– Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Federal income tax form Step 5– $518,000 ($520,000 − $2,000). Federal income tax form Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Federal income tax form Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction. Federal income tax form Step 7– $20,000 ($520,000 − $500,000). Federal income tax form Step 8– Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Federal income tax form Carryover of disallowed deduction. Federal income tax form   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Federal income tax form This disallowed deduction amount is shown on line 13 of Form 4562. Federal income tax form You use the amount you carry over to determine your section 179 deduction in the next year. Federal income tax form Enter that amount on line 10 of your Form 4562 for the next year. Federal income tax form   If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried forward. Federal income tax form Your selections must be shown in your books and records. Federal income tax form For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. Federal income tax form If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year. Federal income tax form   If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must deduct the costs being carried forward from the earliest year first. Federal income tax form Special rules for qualified section 179 real property. Federal income tax form   You can carry over to 2013 a 2012 deduction attributable to qualified section 179 real property that you elected to expense but were unable to take because of the business income limitation. Federal income tax form Any such 2012 carryover amounts that are not deducted in 2013, plus any 2013 disallowed section 179 expense deductions attributable to qualified real property, are not carried over to 2014. Federal income tax form Instead these amounts are treated as property placed in service on the first day of 2013 for purposes of computing depreciation (including the special depreciation allowance, if applicable). Federal income tax form See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information. Federal income tax form If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. Federal income tax form Instead, you must add it back to the property's basis. Federal income tax form Partnerships and Partners The section 179 deduction limits apply both to the partnership and to each partner. Federal income tax form The partnership determines its section 179 deduction subject to the limits. Federal income tax form It then allocates the deduction among its partners. Federal income tax form Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Federal income tax form ) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. Federal income tax form To determine any reduction in the dollar limit for costs over $2,000,000, the partner does not include any of the cost of section 179 property placed in service by the partnership. Federal income tax form After the dollar limit (reduced for any nonpartnership section 179 costs over $2,000,000) is applied, any remaining cost of the partnership and nonpartnership section 179 property is subject to the business income limit. Federal income tax form Partnership's taxable income. Federal income tax form   For purposes of the business income limit, figure the partnership's taxable income by adding together the net income and losses from all trades or businesses actively conducted by the partnership during the year. Federal income tax form See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). Federal income tax form However, figure taxable income without regard to credits, tax-exempt income, the section 179 deduction, and guaranteed payments under section 707(c) of the Internal Revenue Code. Federal income tax form Partner's share of partnership's taxable income. Federal income tax form   For purposes of the business income limit, the taxable income of a partner engaged in the active conduct of one or more of a partnership's trades or businesses includes his or her allocable share of taxable income derived from the partnership's active conduct of any trade or business. Federal income tax form Example. Federal income tax form In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. Federal income tax form The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). Federal income tax form Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. Federal income tax form The partnership's taxable income from the active conduct of all its trades or businesses for the year was $600,000, so it can deduct the full $475,000. Federal income tax form It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners. Federal income tax form In addition to being a partner in Beech Partnership, Dean is also a partner in the Cedar Partnership, which allocated to him a $30,000 section 179 deduction and $35,000 of its taxable income from the active conduct of its business. Federal income tax form He also conducts a business as a sole proprietor and, in 2013, placed in service in that business qualifying section 179 property costing $55,000. Federal income tax form He had a net loss of $5,000 from that business for the year. Federal income tax form Dean does not have to include section 179 partnership costs to figure any reduction in his dollar limit, so his total section 179 costs for the year are not more than $2,000,000 and his dollar limit is not reduced. Federal income tax form His maximum section 179 deduction is $500,000. Federal income tax form He elects to expense all of the $70,000 in section 179 deductions allocated from the partnerships ($40,000 from Beech Partnership plus $30,000 from Cedar Partnership), plus $55,000 of his sole proprietorship's section 179 costs, and notes that information in his books and records. Federal income tax form However, his deduction is limited to his business taxable income of $80,000 ($50,000 from Beech Partnership, plus $35,000 from Cedar Partnership minus $5,000 loss from his sole proprietorship). Federal income tax form He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. Federal income tax form He allocates the carryover amount to the cost of section 179 property placed in service in his sole proprietorship, and notes that allocation in his books and records. Federal income tax form Different tax years. Federal income tax form   For purposes of the business income limit, if the partner's tax year and that of the partnership differ, the partner's share of the partnership's taxable income for a tax year is generally the partner's distributive share for the partnership tax year that ends with or within the partner's tax year. Federal income tax form Example. Federal income tax form John and James Oak are equal partners in Oak Partnership. Federal income tax form Oak Partnership uses a tax year ending January 31. Federal income tax form John and James both use a tax year ending December 31. Federal income tax form For its tax year ending January 31, 2013, Oak Partnership's taxable income from the active conduct of its business is $80,000, of which $70,000 was earned during 2012. Federal income tax form John and James each include $40,000 (each partner's entire share) of partnership taxable income in computing their business income limit for the 2013 tax year. Federal income tax form Adjustment of partner's basis in partnership. Federal income tax form   A partner must reduce the basis of his or her partnership interest by the total amount of section 179 expenses allocated from the partnership even if the partner cannot currently deduct the total amount. Federal income tax form If the partner disposes of his or her partnership interest, the partner's basis for determining gain or loss is increased by any outstanding carryover of disallowed section 179 expenses allocated from the partnership. Federal income tax form Adjustment of partnership's basis in section 179 property. Federal income tax form   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. Federal income tax form This reduction of basis must be made even if a partner cannot deduct all or part of the section 179 deduction allocated to that partner by the partnership because of the limits. Federal income tax form S Corporations Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. Federal income tax form The deduction limits apply to an S corporation and to each shareholder. Federal income tax form The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits. Federal income tax form Figuring taxable income for an S corporation. Federal income tax form   To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you total the net income and losses from all trades or businesses actively conducted by the S corporation during the year. Federal income tax form   To figure the net income (or loss) from a trade or business actively conducted by an S corporation, you take into account the items from that trade or business that are passed through to the shareholders and used in determining each shareholder's tax liability. Federal income tax form However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. Federal income tax form For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. Federal income tax form In figuring the taxable income of an S corporation, disregard any limits on the amount of an S corporation item that must be taken into account when figuring a shareholder's taxable income. Federal income tax form Other Corporations A corporation's taxable income from its active conduct of any trade or business is its taxable income figured with the following changes. Federal income tax form It is figured before deducting the section 179 deduction, any net operating loss deduction, and special deductions (as reported on the corporation's income tax return). Federal income tax form It is adjusted for items of income or deduction included in the amount figured in 1, above, not derived from a trade or business actively conducted by the corporation during the tax year. Federal income tax form How Do You Elect the Deduction? You elect to take the section 179 deduction by completing Part I of Form 4562. Federal income tax form If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I. Federal income tax form For property placed in service in 2013, file Form 4562 with either of the following. Federal income tax form Your original 2013 tax return, whether or not you file it timely. Federal income tax form An amended return for 2013 filed within the time prescribed by law. Federal income tax form An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Federal income tax form The amended return must also include any resulting adjustments to taxable income. Federal income tax form You must keep records that show the specific identification of each piece of qualifying section 179 property. Federal income tax form These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Federal income tax form Election for certain qualified section 179 real property. Federal income tax form   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. Federal income tax form If you elect to treat this property as section 179 property, you must elect the application of the special rules for qualified real property described in section 179(f) of the Internal Revenue Code. Federal income tax form   To make the election, attach a statement indicating you are “electing the application of section 179(f) of the Internal Revenue Code” with either of the following. Federal income tax form Your original 2013 tax return, whether or not you file it timely. Federal income tax form An amended return for 2013 filed within the time prescribed by law. Federal income tax form The amended return must also include any adjustments to taxable income. Federal income tax form   The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. Federal income tax form It must specify one or more of the three types of qualified property (described under Qualified real property ) to which the election applies, the cost of each such type, and the portion of the cost of each such property to be taken into account. Federal income tax form Also, report this on line 6 of Form 4562. Federal income tax form    The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000. Federal income tax form Revoking an election. Federal income tax form   An election (or any specification made in the election) to take a section 179 deduction for 2013 can be revoked without IRS approval by filing an amended return. Federal income tax form The amended return must be filed within the time prescribed by law. Federal income tax form The amended return must also include any resulting adjustments to taxable income. Federal income tax form Once made, the revocation is irrevocable. Federal income tax form When Must You Recapture the Deduction? You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Federal income tax form In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797. Federal income tax form You also increase the basis of the property by the recapture amount. Federal income tax form Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 . Federal income tax form If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Federal income tax form Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. Federal income tax form For qualified real property (described earlier), see Notice 2013-59 for determining the portion of the gain that is attributable to section 1245 property upon the sale or other disposition of qualified real property. Federal income tax form If the property is listed property (described in chapter 5 ), do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Federal income tax form Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement. Federal income tax form Figuring the recapture amount. Federal income tax form   To figure the amount to recapture, take the following steps. Federal income tax form Figure the depreciation that would have been allowable on the section 179 deduction you claimed. Federal income tax form Begin with the year you placed the property in service and include the year of recapture. Federal income tax form Subtract the depreciation figured in (1) from the section 179 deduction you claimed. Federal income tax form The result is the amount you must recapture. Federal income tax form Example. Federal income tax form In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Federal income tax form The property is not listed property. Federal income tax form The property is 3-year property. Federal income tax form He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. Federal income tax form He used the property only for business in 2011 and 2012. Federal income tax form In 2013, he used the property 40% for business and 60% for personal use. Federal income tax form He figures his recapture amount as follows. Federal income tax form Section 179 deduction claimed (2011) $5,000. Federal income tax form 00 Minus: Allowable depreciation using Table A-1 (instead of section 179 deduction):   2011 $1,666. Federal income tax form 50   2012 2,222. Federal income tax form 50   2013 ($740. Federal income tax form 50 × 40% (business)) 296. Federal income tax form 20 4,185. Federal income tax form 20 2013 — Recapture amount $ 814. Federal income tax form 80 Paul must include $814. Federal income tax form 80 in income for 2013. Federal income tax form If any qualified zone property placed in service during the year ceases to be used in an empowerment zone by an enterprise zone business in a later year, the benefit of the increased section 179 deduction must be reported as other income on your return. Federal income tax form Prev  Up  Next   Home   More Online Publications
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The Federal Income Tax Form

Federal income tax form 11. Federal income tax form   Other Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Reimbursement of Travel, Meals, and EntertainmentReimbursements Miscellaneous ExpensesMeaning of generally enforced. Federal income tax form Kickbacks. Federal income tax form Form 1099-MISC. Federal income tax form Exception. Federal income tax form Tax preparation fees. Federal income tax form Covered executive branch official. Federal income tax form Exceptions to denial of deduction. Federal income tax form Indirect political contributions. Federal income tax form Type of deduction. Federal income tax form Repayment—$3,000 or less. Federal income tax form Repayment—over $3,000. Federal income tax form Method 1. Federal income tax form Method 2. Federal income tax form Repayment does not apply. Federal income tax form Year of deduction (or credit). Federal income tax form Telephone. Federal income tax form What's New Standard mileage rate. Federal income tax form  Beginning in 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use is 56. Federal income tax form 5 cents per mile. Federal income tax form For more information, see Car and truck expenses under Miscellaneous Expenses. Federal income tax form Introduction This chapter covers business expenses that may not have been explained to you, as a business owner, in previous chapters of this publication. Federal income tax form Topics - This chapter discusses: Travel, meals, and entertainment Bribes and kickbacks Charitable contributions Education expenses Lobbying expenses Penalties and fines Repayments (claim of right) Other miscellaneous expenses Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 463 Travel, Entertainment, Gift, and Car Expenses 526 Charitable Contributions 529 Miscellaneous Deductions 544 Sales and Other Dispositions of Assets 970 Tax Benefits for Education 1542 Per Diem Rates See chapter 12 for information about getting publications and forms. Federal income tax form Reimbursement of Travel, Meals, and Entertainment The following discussion explains how to handle any reimbursements or allowances you may provide to your employees under a reimbursement or allowance arrangement for travel, meals, and entertainment expenses. Federal income tax form If you are self-employed and report your income and expenses on Schedule C or C-EZ (Form 1040), see Publication 463. Federal income tax form To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. Federal income tax form Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business. Federal income tax form For more information on travel, meals, and entertainment, including deductibility, see Publication 463. Federal income tax form Reimbursements A “reimbursement or allowance arrangement” provides for payment of advances, reimbursements, and allowances for travel, meals, and entertainment expenses incurred by your employees during the ordinary course of business. Federal income tax form If the expenses are substantiated, you can deduct the allowable amount on your tax return. Federal income tax form Because of differences between accounting methods and tax law, the amount you can deduct for tax purposes may not be the same as the amount you deduct on your business books and records. Federal income tax form For example, you can deduct 100% of the cost of meals on your business books and records. Federal income tax form However, only 50% of these costs are allowed by law as a tax deduction. Federal income tax form How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: An accountable plan, or A nonaccountable plan. Federal income tax form If you reimburse these expenses under an accountable plan, deduct them as travel, meals, or entertainment expenses. Federal income tax form If you reimburse these expenses under a nonaccountable plan, report the reimbursements as wages on Form W-2, Wage and Tax Statement, and deduct them as wages on the appropriate line of your tax return. Federal income tax form If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement and report it accordingly. Federal income tax form See Table 11-1 , Reporting Reimbursements. Federal income tax form Accountable Plans An accountable plan requires your employees to meet all of the following requirements. Federal income tax form Each employee must: Have paid or incurred deductible expenses while performing services as your employee, Adequately account to you for these expenses within a reasonable period of time, and Return any excess reimbursement or allowance within a reasonable period of time. Federal income tax form An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. Federal income tax form The advance is reasonably calculated not to exceed the amount of anticipated expenses. Federal income tax form You make the advance within a reasonable period of time of your employee paying or incurring the expense. Federal income tax form If any expenses reimbursed under this arrangement are not substantiated, or an excess reimbursement is not returned within a reasonable period of time by an employee, you cannot treat these expenses as reimbursed under an accountable plan. Federal income tax form Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later. Federal income tax form Adequate accounting. Federal income tax form   Your employees must adequately account to you for their travel, meals, and entertainment expenses. Federal income tax form They must give you documentary evidence of their travel, mileage, and other employee business expenses. Federal income tax form This evidence should include items such as receipts, along with either a statement of expenses, an account book, a day-planner, or similar record in which the employee entered each expense at or near the time the expense was incurred. Federal income tax form Excess reimbursement or allowance. Federal income tax form   An excess reimbursement or allowance is any amount you pay to an employee that is more than the business-related expenses for which the employee adequately accounted. Federal income tax form The employee must return any excess reimbursement or other expense allowance to you within a reasonable period of time. Federal income tax form Reasonable period of time. Federal income tax form   A reasonable period of time depends on the facts and circumstances. Federal income tax form Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. Federal income tax form You give an advance within 30 days of the time the employee pays or incurs the expense. Federal income tax form Your employees adequately account for their expenses within 60 days after the expenses were paid or incurred. Federal income tax form Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred. Federal income tax form You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately account for outstanding advances and they comply within 120 days of the date of the statement. Federal income tax form How to deduct. Federal income tax form   You can claim a deduction for travel, meals, and entertainment expenses if you reimburse your employees for these expenses under an accountable plan. Federal income tax form Generally, the amount you can deduct for meals and entertainment is subject to a 50% limit, discussed later. Federal income tax form If you are a sole proprietor, or are filing as a single member limited liability company, deduct the travel reimbursement on line 24a and the deductible part of the meals and entertainment reimbursement on line 24b, Schedule C (Form 1040) or line 2, Schedule C-EZ (Form 1040). Federal income tax form   If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120, U. Federal income tax form S. Federal income tax form Corporation Income Tax Return. Federal income tax form If you are filing any other business income tax return, such as a partnership or S corporation return, deduct the reimbursement on the appropriate line of the return as provided in the instructions for that return. Federal income tax form Table 11-1. Federal income tax form Reporting Reimbursements IF the type of reimbursement (or other expense allowance) arrangement is under THEN the employer reports on Form W-2 An accountable plan with: Actual expense reimbursement:  Adequate accounting made and excess returned No amount. Federal income tax form Actual expense reimbursement:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Federal income tax form Per diem or mileage allowance up to the federal rate:  Adequate accounting made and excess returned No amount. Federal income tax form Per diem or mileage allowance up to the federal rate:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Federal income tax form The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Federal income tax form Per diem or mileage allowance exceeds the federal rate:  Adequate accounting made up to the federal rate only and excess not returned The excess amount as wages in box 1. Federal income tax form The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Federal income tax form A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan The entire amount as wages in box 1. Federal income tax form No reimbursement plan The entire amount as wages in box 1. Federal income tax form Per Diem and Car Allowances You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. Federal income tax form In these cases, your employee is considered to have accounted to you for the amount of the expense that does not exceed the rates established by the federal government. Federal income tax form Your employee must actually substantiate to you the other elements of the expense, such as time, place, and business purpose. Federal income tax form Federal rate. Federal income tax form   The federal rate can be figured using any one of the following methods. Federal income tax form For car expenses: The standard mileage rate. Federal income tax form A fixed and variable rate (FAVR). Federal income tax form For per diem amounts: The regular federal per diem rate. Federal income tax form The standard meal allowance. Federal income tax form The high-low rate. Federal income tax form Car allowance. Federal income tax form   Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. Federal income tax form Beginning in 2013, the standard business mileage rate is 56. Federal income tax form 5 cents per mile. Federal income tax form   You can choose to reimburse your employees using a fixed and variable rate (FAVR) allowance. Federal income tax form This is an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your employees' variable operating costs (such as gas, oil, etc. Federal income tax form ) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc. Federal income tax form ). Federal income tax form For information on using a FAVR allowance, see Revenue Procedure 2010-51, available at www. Federal income tax form irs. Federal income tax form gov/irb/2010-51_IRB/ar14. Federal income tax form html and Notice 2012-72, available at www. Federal income tax form irs. Federal income tax form gov/irb/2012-50_IRB/ar10. Federal income tax form html. Federal income tax form Per diem allowance. Federal income tax form   If your employee actually substantiates to you the other elements (discussed earlier) of the expenses reimbursed using the per diem allowance, how you report and deduct the allowance depends on whether the allowance is for lodging and meal expenses or for meal expenses only and whether the allowance is more than the federal rate. Federal income tax form Regular federal per diem rate. Federal income tax form   The regular federal per diem rate is the highest amount the federal government will pay to its employees while away from home on travel. Federal income tax form It has two components: Lodging expense, and Meal and incidental expense (M&IE). Federal income tax form The rates are different for different locations. Federal income tax form Publication 1542 lists the rates in the continental United States. Federal income tax form Standard meal allowance. Federal income tax form   The federal rate for meal and incidental expenses (M&IE) is the standard meal allowance. Federal income tax form You can pay only an M&IE allowance to employees who travel away from home if: You pay the employee for actual expenses for lodging based on receipts submitted to you, You provide for the lodging, You pay for the actual expense of the lodging directly to the provider, You do not have a reasonable belief that lodging expenses were incurred by the employee, or The allowance is computed on a basis similar to that used in computing the employee's wages (that is, number of hours worked or miles traveled). Federal income tax form Internet access. Federal income tax form    Per diem rates are available on the Internet. Federal income tax form You can access per diem rates at www. Federal income tax form gsa. Federal income tax form gov/perdiemrates. Federal income tax form High-low method. Federal income tax form   This is a simplified method of computing the federal per diem rate for travel within the continental United States. Federal income tax form It eliminates the need to keep a current list of the per diem rate for each city. Federal income tax form   Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 ($65 for M&IE) for certain high-cost locations. Federal income tax form All other areas have a per diem amount of $163 ($52 for M&IE). Federal income tax form The high-cost locations eligible for the higher per diem amount under the high-low method are listed in Publication 1542. Federal income tax form   Effective October 1, 2013, the per diem rate for high-cost locations increased to $251 ($65 for M&IE). Federal income tax form The rate for all other locations increased to $170 ($52 for M&IE). Federal income tax form For October, November, and December 2013, you can either continue to use the rates described in the preceding paragraph or change to the new rates. Federal income tax form However, you must use the same rate for all employees reimbursed under the high-low method. Federal income tax form   For more information about the high-low method, see Notice 2013-65, available at www. Federal income tax form irs. Federal income tax form gov/irb/2013-44_IRB/ar13. Federal income tax form html. Federal income tax form See Publication 1542 (available on the Internet at IRS. Federal income tax form gov) for the current per diem rates for all locations. Federal income tax form Reporting per diem and car allowances. Federal income tax form   The following discussion explains how to report per diem and car allowances. Federal income tax form The manner in which you report them depends on how the allowance compares to the federal rate. Federal income tax form See Table 11-1. Federal income tax form Allowance less than or equal to the federal rate. Federal income tax form   If your allowance for the employee is less than or equal to the appropriate federal rate, that allowance is not included as part of the employee's pay in box 1 of the employee's Form W-2. Federal income tax form Deduct the allowance as travel expenses (including meals that may be subject to the 50% limit, discussed later). Federal income tax form See How to deduct under Accountable Plans, earlier. Federal income tax form Allowance more than the federal rate. Federal income tax form   If your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items. Federal income tax form   Include the allowance amount up to the federal rate in box 12 (code L) of the employee's Form W-2. Federal income tax form Deduct it as travel expenses (as explained above). Federal income tax form This part of the allowance is treated as reimbursed under an accountable plan. Federal income tax form   Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. Federal income tax form Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Federal income tax form This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans. Federal income tax form Meals and Entertainment Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment expenses you reimburse your employees. Federal income tax form The deduction limit applies even if you reimburse them for 100% of the expenses. Federal income tax form Application of the 50% limit. Federal income tax form   The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant, or another location. Federal income tax form It applies to expenses incurred at a business convention or reception, business meeting, or business luncheon at a club. Federal income tax form The deduction limit may also apply to meals you furnish on your premises to your employees. Federal income tax form Related expenses. Federal income tax form   Taxes and tips relating to a meal or entertainment activity you reimburse to your employee under an accountable plan are included in the amount subject to the 50% limit. Federal income tax form Reimbursements you make for expenses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. Federal income tax form However, the cost of transportation to and from an otherwise allowable business meal or a business-related entertainment activity is not subject to the 50% limit. Federal income tax form Amount subject to 50% limit. Federal income tax form   If you provide your employees with a per diem allowance only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of the following. Federal income tax form The per diem allowance. Federal income tax form The federal rate for M&IE. Federal income tax form   If you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages. Federal income tax form If the per diem allowance you provide is less than the federal per diem rate for the area of travel, you can treat 40% of the per diem allowance as the amount for food and beverages. Federal income tax form Meal expenses when subject to “hours of service” limits. Federal income tax form   You can deduct 80% of the cost of reimbursed meals your employees consume while away from their tax home on business during, or incident to, any period subject to the Department of Transportation's “hours of service” limits. Federal income tax form   See Publication 463 for a detailed discussion of individuals subject to the Department of Transportation's “hours of service” limits. Federal income tax form De minimis (minimal) fringe benefit. Federal income tax form   The 50% limit does not apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit. Federal income tax form See Publication 15-B for additional information on de minimis fringe benefits. Federal income tax form Company cafeteria or executive dining room. Federal income tax form   The cost of food and beverages you provide primarily to your employees on your business premises is deductible. Federal income tax form This includes the cost of maintaining the facilities for providing the food and beverages. Federal income tax form These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit, as just discussed, or unless they are compensation to your employees (explained later). Federal income tax form Employee activities. Federal income tax form   The expense of providing recreational, social, or similar activities (including the use of a facility) for your employees is deductible and is not subject to the 50% limit. Federal income tax form The benefit must be primarily for your employees who are not highly compensated. Federal income tax form   For this purpose, a highly compensated employee is an employee who meets either of the following requirements. Federal income tax form Owned a 10% or more interest in the business during the year or the preceding year. Federal income tax form An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal descendants. Federal income tax form Received more than $115,000 in pay for the preceding year. Federal income tax form You can choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year. Federal income tax form   For example, the expenses for food, beverages, and entertainment for a company-wide picnic are not subject to the 50% limit. Federal income tax form Meals or entertainment treated as compensation. Federal income tax form   The 50% limit does not apply to either of the following. Federal income tax form Expenses for meals or entertainment that you treat as: Compensation to an employee who was the recipient of the meals or entertainment, and Wages subject to withholding of federal income tax. Federal income tax form Expenses for meals or entertainment if: A recipient of the meals or entertainment who is not your employee has to include the expenses in gross income as compensation for services or as a prize or award, and You include that amount on a Form 1099 issued to the recipient, if a Form 1099 is required. Federal income tax form Sales of meals or entertainment. Federal income tax form   You can deduct the cost of meals or entertainment (including the use of facilities) you sell to the public. Federal income tax form For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is a business expense that is fully deductible. Federal income tax form The 50% limit does not apply to this expense. Federal income tax form Providing meals or entertainment to general public to promote goodwill. Federal income tax form   You can deduct the cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Federal income tax form The 50% limit does not apply to this expense. Federal income tax form Director, stockholder, or employee meetings. Federal income tax form   You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. Federal income tax form You can provide some minor social activities, but the main purpose of the meeting must be your company's business. Federal income tax form These expenses are subject to the 50% limit. Federal income tax form Trade association meetings. Federal income tax form   You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. Federal income tax form These organizations include business leagues, chambers of commerce, real estate boards, and trade and professional associations. Federal income tax form Nonaccountable Plans A nonaccountable plan is an arrangement that does not meet the requirements for an accountable plan. Federal income tax form All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. Federal income tax form The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Federal income tax form You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. Federal income tax form Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions. Federal income tax form Miscellaneous Expenses In addition to travel, meal, and entertainment expenses, there are other expenses you can deduct. Federal income tax form Advertising expenses. Federal income tax form   You generally can deduct reasonable advertising expenses that are directly related to your business activities. Federal income tax form Generally, you cannot deduct amounts paid to influence legislation (i. Federal income tax form e. Federal income tax form , lobbying). Federal income tax form See Lobbying expenses , later. Federal income tax form   You can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it relates to business you reasonably expect to gain in the future. Federal income tax form For example, the cost of advertising that encourages people to contribute to the Red Cross, to buy U. Federal income tax form S. Federal income tax form Savings Bonds, or to participate in similar causes is usually deductible. Federal income tax form Anticipated liabilities. Federal income tax form   Anticipated liabilities or reserves for anticipated liabilities are not deductible. Federal income tax form For example, assume you sold 1-year TV service contracts this year totaling $50,000. Federal income tax form From experience, you know you will have expenses of about $15,000 in the coming year for these contracts. Federal income tax form You cannot deduct any of the $15,000 this year by charging expenses to a reserve or liability account. Federal income tax form You can deduct your expenses only when you actually pay or accrue them, depending on your accounting method. Federal income tax form Bribes and kickbacks. Federal income tax form   Engaging in the payment of bribes or kickbacks is a serious criminal matter. Federal income tax form Such activity could result in criminal prosecution. Federal income tax form Any payments that appear to have been made, either directly or indirectly, to an official or employee of any government or an agency or instrumentality of any government are not deductible for tax purposes and are in violation of the law. Federal income tax form   Payments paid directly or indirectly to a person in violation of any federal or state law (but only if that state law is generally enforced, defined below) that provides for a criminal penalty or for the loss of a license or privilege to engage in a trade or business are also not allowed as a deduction for tax purposes. Federal income tax form Meaning of “generally enforced. Federal income tax form ”   A state law is considered generally enforced unless it is never enforced or enforced only for infamous persons or persons whose violations are extraordinarily flagrant. Federal income tax form For example, a state law is generally enforced unless proper reporting of a violation of the law results in enforcement only under unusual circumstances. Federal income tax form Kickbacks. Federal income tax form   A kickback is a payment for referring a client, patient, or customer. Federal income tax form The common kickback situation occurs when money or property is given to someone as payment for influencing a third party to purchase from, use the services of, or otherwise deal with the person who pays the kickback. Federal income tax form In many cases, the person whose business is being sought or enjoyed by the person who pays the kickback is not aware of the payment. Federal income tax form   For example, the Yard Corporation is in the business of repairing ships. Federal income tax form It returns 10% of the repair bills as kickbacks to the captains and chief officers of the vessels it repairs. Federal income tax form Although this practice is considered an ordinary and necessary expense of getting business, it is clearly a violation of a state law that is generally enforced. Federal income tax form These expenditures are not deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted. Federal income tax form Form 1099-MISC. Federal income tax form   It does not matter whether any kickbacks paid during the tax year are deductible on your income tax return in regards to information reporting. Federal income tax form See Form 1099-MISC for more information. Federal income tax form Car and truck expenses. Federal income tax form   The costs of operating a car, truck, or other vehicle in your business are deductible. Federal income tax form For more information on how to figure your deduction, see Publication 463. Federal income tax form Charitable contributions. Federal income tax form   Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Federal income tax form If the payments are charitable contributions or gifts, you cannot deduct them as business expenses. Federal income tax form However, corporations (other than S corporations) can deduct charitable contributions on their income tax returns, subject to limitations. Federal income tax form See the Instructions for Form 1120 for more information. Federal income tax form Sole proprietors, partners in a partnership, or shareholders in an S corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Federal income tax form Example. Federal income tax form You paid $15 to a local church for a half-page ad in a program for a concert it is sponsoring. Federal income tax form The purpose of the ad was to encourage readers to buy your products. Federal income tax form Your payment is not a charitable contribution. Federal income tax form You can deduct it as an advertising expense. Federal income tax form Example. Federal income tax form You made a $100,000 donation to a committee organized by the local Chamber of Commerce to bring a convention to your city, intended to increase business activity, including yours. Federal income tax form Your payment is not a charitable contribution. Federal income tax form You can deduct it as a business expense. Federal income tax form See Publication 526 for a discussion of donated inventory, including capital gain property. Federal income tax form Club dues and membership fees. Federal income tax form   Generally, you cannot deduct amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or any other social purpose. Federal income tax form This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Federal income tax form Exception. Federal income tax form   The following organizations are not treated as clubs organized for business, pleasure, recreation, or other social purpose unless one of the main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. Federal income tax form Boards of trade. Federal income tax form Business leagues. Federal income tax form Chambers of commerce. Federal income tax form Civic or public service organizations. Federal income tax form Professional organizations such as bar associations and medical associations. Federal income tax form Real estate boards. Federal income tax form Trade associations. Federal income tax form Credit card convenience fees. Federal income tax form   Credit card companies charge a fee to businesses who accept their cards. Federal income tax form This fee when paid or incurred by the business can be deducted as a business expense. Federal income tax form Damages recovered. Federal income tax form   Special rules apply to compensation you receive for damages sustained as a result of patent infringement, breach of contract or fiduciary duty, or antitrust violations. Federal income tax form You must include this compensation in your income. Federal income tax form However, you may be able to take a special deduction. Federal income tax form The deduction applies only to amounts recovered for actual economic injury, not any additional amount. Federal income tax form The deduction is the smaller of the following. Federal income tax form The amount you received or accrued for damages in the tax year reduced by the amount you paid or incurred in the year to recover that amount. Federal income tax form Your losses from the injury you have not deducted. Federal income tax form Demolition expenses or losses. Federal income tax form   Amounts paid or incurred to demolish a structure are not deductible. Federal income tax form These amounts are added to the basis of the land where the demolished structure was located. Federal income tax form Any loss for the remaining undepreciated basis of a demolished structure would not be recognized until the property is disposed of. Federal income tax form Education expenses. Federal income tax form   Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible. Federal income tax form See Education Expenses in chapter 2. Federal income tax form   You can also deduct the cost of your own education (including certain related travel) related to your trade or business. Federal income tax form You must be able to show the education maintains or improves skills required in your trade or business, or that it is required by law or regulations, for keeping your license to practice, status, or job. Federal income tax form For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law. Federal income tax form   Education expenses you incur to meet the minimum requirements of your present trade or business, or those that qualify you for a new trade or business, are not deductible. Federal income tax form This is true even if the education maintains or improves skills presently required in your business. Federal income tax form For more information on education expenses, see Publication 970. Federal income tax form Franchise, trademark, trade name. Federal income tax form   If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense only if your payments are part of a series of payments that are: Contingent on productivity, use, or disposition of the item, Payable at least annually for the entire term of the transfer agreement, and Substantially equal in amount (or payable under a fixed formula). Federal income tax form   When determining the term of the transfer agreement, include all renewal options and any other period for which you and the transferrer reasonably expect the agreement to be renewed. Federal income tax form   A franchise includes an agreement that gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities within a specified area. Federal income tax form Impairment-related expenses. Federal income tax form   If you are disabled, you can deduct expenses necessary for you to be able to work (impairment-related expenses) as a business expense, rather than as a medical expense. Federal income tax form   You are disabled if you have either of the following. Federal income tax form A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed. Federal income tax form A physical or mental impairment that substantially limits one or more of your major life activities. Federal income tax form   The expense qualifies as a business expense if all the following apply. Federal income tax form Your work clearly requires the expense for you to satisfactorily perform that work. Federal income tax form The goods or services purchased are clearly not needed or used, other than incidentally, in your personal activities. Federal income tax form Their treatment is not specifically provided for under other tax law provisions. Federal income tax form Example. Federal income tax form You are blind. Federal income tax form You must use a reader to do your work, both at and away from your place of work. Federal income tax form The reader's services are only for your work. Federal income tax form You can deduct your expenses for the reader as a business expense. Federal income tax form Internet-related expenses. Federal income tax form   Generally, you can deduct internet-related expenses including domain registrations fees and webmaster consulting costs. Federal income tax form If you are starting a business you may have to amortize these expenses as start-up costs. Federal income tax form For more information about amortizing start-up and organizational costs, see chapter 8. Federal income tax form Interview expense allowances. Federal income tax form   Reimbursements you make to job candidates for transportation or other expenses related to interviews for possible employment are not wages. Federal income tax form You can deduct the reimbursements as a business expense. Federal income tax form However, expenses for food, beverages, and entertainment are subject to the 50% limit discussed earlier under Meals and Entertainment. Federal income tax form Legal and professional fees. Federal income tax form   Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. Federal income tax form However, usually legal fees you pay to acquire business assets are not deductible. Federal income tax form These costs are added to the basis of the property. Federal income tax form   Fees that include payments for work of a personal nature (such as drafting a will, or damages arising from a personal injury) are not allowed as a business deduction on Schedule C or C-EZ. Federal income tax form If the invoice includes both business and personal charges, compute the business portion as follows: multiply the total amount of the bill by a fraction, the numerator of which is the amount attributable to business matters, the denominator of which is the total amount paid. Federal income tax form The result is the portion of the invoice attributable to business expenses. Federal income tax form The portion attributable to personal matters is the difference between the total amount and the business portion (computed above). Federal income tax form   Legal fees relating to personal tax advice may be deductible on Schedule A (Form 1040), if you itemize deductions. Federal income tax form However, the deduction is subject to the 2% limitation on miscellaneous itemized deductions. Federal income tax form See Publication 529, Miscellaneous Deductions. Federal income tax form Tax preparation fees. Federal income tax form   The cost of hiring a tax professional, such as a C. Federal income tax form P. Federal income tax form A. Federal income tax form , to prepare that part of your tax return relating to your business as a sole proprietor is deductible on Schedule C or Schedule C-EZ. Federal income tax form Any remaining cost may be deductible on Schedule A (Form 1040) if you itemize deductions. Federal income tax form   You can also claim a business deduction for amounts paid or incurred in resolving asserted tax deficiencies for your business operated as a sole proprietor. Federal income tax form Licenses and regulatory fees. Federal income tax form   Licenses and regulatory fees for your trade or business paid annually to state or local governments generally are deductible. Federal income tax form Some licenses and fees may have to be amortized. Federal income tax form See chapter 8 for more information. Federal income tax form Lobbying expenses. Federal income tax form   Generally, lobbying expenses are not deductible. Federal income tax form Lobbying expenses include amounts paid or incurred for any of the following activities. Federal income tax form Influencing legislation. Federal income tax form Participating in or intervening in any political campaign for, or against, any candidate for public office. Federal income tax form Attempting to influence the general public, or segments of the public, about elections, legislative matters, or referendums. Federal income tax form Communicating directly with covered executive branch officials (defined later) in any attempt to influence the official actions or positions of those officials. Federal income tax form Researching, preparing, planning, or coordinating any of the preceding activities. Federal income tax form   Your expenses for influencing legislation and communicating directly with a covered executive branch official include a portion of your labor costs and general and administrative costs of your business. Federal income tax form For information on making this allocation, see section 1. Federal income tax form 162-28 of the regulations. Federal income tax form   You cannot claim a charitable or business expense deduction for amounts paid to an organization if both of the following apply. Federal income tax form The organization conducts lobbying activities on matters of direct financial interest to your business. Federal income tax form A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses. Federal income tax form   If a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues. Federal income tax form Covered executive branch official. Federal income tax form   For purposes of this discussion, a covered executive branch official is any of the following. Federal income tax form The President. Federal income tax form The Vice President. Federal income tax form Any officer or employee of the White House Office of the Executive Office of the President and the two most senior level officers of each of the other agencies in the Executive Office. Federal income tax form Any individual who: Is serving in a position in Level I of the Executive Schedule under section 5312 of title 5, United States Code, Has been designated by the President as having Cabinet-level status, or Is an immediate deputy of an individual listed in item (a) or (b). Federal income tax form Exceptions to denial of deduction. Federal income tax form   The general denial of the deduction does not apply to the following. Federal income tax form Expenses of appearing before, or communicating with, any committee or member of any local council or similar governing body concerning its legislation (local legislation) if the legislation is of direct interest to you or to you and an organization of which you are a member. Federal income tax form An Indian tribal government is treated as a local council or similar governing body. Federal income tax form Any in-house expenses for influencing legislation and communicating directly with a covered executive branch official if those expenses for the tax year do not exceed $2,000 (excluding overhead expenses). Federal income tax form Expenses incurred by taxpayers engaged in the trade or business of lobbying (professional lobbyists) on behalf of another person (but does apply to payments by the other person to the lobbyist for lobbying activities). Federal income tax form Moving machinery. Federal income tax form   Generally, the cost of moving machinery from one city to another is a deductible expense. Federal income tax form So is the cost of moving machinery from one plant to another, or from one part of your plant to another. Federal income tax form You can deduct the cost of installing the machinery in the new location. Federal income tax form However, you must capitalize the costs of installing or moving newly purchased machinery. Federal income tax form Outplacement services. Federal income tax form   The costs of outplacement services you provide to your employees to help them find new employment, such as career counseling, résumé assistance, skills assessment, etc. Federal income tax form are deductible. Federal income tax form   The costs of outplacement services may cover more than one deduction category. Federal income tax form For example, deduct as a utilities expense the cost of telephone calls made under this service and deduct as rental expense the cost of renting machinery and equipment for this service. Federal income tax form   For information on whether the value of outplacement services is includable in your employees' income, see Publication 15-B. Federal income tax form Penalties and fines. Federal income tax form   Penalties paid for late performance or nonperformance of a contract are generally deductible. Federal income tax form For instance, you own and operate a construction company. Federal income tax form Under a contract, you are to finish construction of a building by a certain date. Federal income tax form Due to construction delays, the building is not completed and ready for occupancy on the date stipulated in the contract. Federal income tax form You are now required to pay an additional amount for each day that completion is delayed beyond the completion date stipulated in the contract. Federal income tax form These additional costs are deductible business expenses. Federal income tax form   On the other hand, penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible. Federal income tax form These fines or penalties include the following amounts. Federal income tax form Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding. Federal income tax form Paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and additional amounts and assessable penalties imposed by the Internal Revenue Code. Federal income tax form Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal. Federal income tax form Forfeited as collateral posted for a proceeding that could result in a fine or penalty. Federal income tax form   Examples of nondeductible penalties and fines include the following. Federal income tax form Fines for violating city housing codes. Federal income tax form Fines paid by truckers for violating state maximum highway weight laws. Federal income tax form Fines for violating air quality laws. Federal income tax form Civil penalties for violating federal laws regarding mining safety standards and discharges into navigable waters. Federal income tax form   A fine or penalty does not include any of the following. Federal income tax form Legal fees and related expenses to defend yourself in a prosecution or civil action for a violation of the law imposing the fine or civil penalty. Federal income tax form Court costs or stenographic and printing charges. Federal income tax form Compensatory damages paid to a government. Federal income tax form Political contributions. Federal income tax form   Contributions or gifts paid to political parties or candidates are not deductible. Federal income tax form In addition, expenses paid or incurred to take part in any political campaign of a candidate for public office are not deductible. Federal income tax form Indirect political contributions. Federal income tax form   You cannot deduct indirect political contributions and costs of taking part in political activities as business expenses. Federal income tax form Examples of nondeductible expenses include the following. Federal income tax form Advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate. Federal income tax form Admission to a dinner or program (including, but not limited to, galas, dances, film presentations, parties, and sporting events) if any of the proceeds from the function are for, or intended for, the use of a political party or candidate. Federal income tax form Admission to an inaugural ball, gala, parade, concert, or similar event if identified with a political party or candidate. Federal income tax form Repairs. Federal income tax form   The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. Federal income tax form Routine maintenance that keeps your property in a normal efficient operating condition, but that does not materially increase the value or substantially prolong the useful life of the property, is deductible in the year that it is incurred. Federal income tax form Otherwise, the cost must be capitalized and depreciated. Federal income tax form See Form 4562 and its instructions for how to compute and claim the depreciation deduction. Federal income tax form   The cost of repairs includes the costs of labor, supplies, and certain other items. Federal income tax form The value of your own labor is not deductible. Federal income tax form Examples of repairs include: Reconditioning floors (but not replacement), Repainting the interior and exterior walls of a building, Cleaning and repairing roofs and gutters, and Fixing plumbing leaks (but not replacement of fixtures). Federal income tax form Repayments. Federal income tax form   If you had to repay an amount you included in your income in an earlier year, you may be able to deduct the amount repaid for the year in which you repaid it. Federal income tax form Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. Federal income tax form Type of deduction. Federal income tax form   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. Federal income tax form For instance, if you repay an amount you previously reported as a capital gain, deduct the repayment as a capital loss on Form 8949. Federal income tax form If you reported it as self-employment income, deduct it as a business deduction on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). Federal income tax form   If you reported the amount as wages, unemployment compensation, or other nonbusiness ordinary income, enter it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is subject to the 2% limitation. Federal income tax form However, if the repayment is over $3,000 and Method 1 (discussed later) applies, deduct it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is not subject to the 2% limitation. Federal income tax form Repayment—$3,000 or less. Federal income tax form   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Federal income tax form Repayment—over $3,000. Federal income tax form   If the amount you repaid was more than $3,000, you can deduct the repayment, as described earlier. Federal income tax form However, you can instead choose to take a tax credit for the year of repayment if you included the income under a “claim of right. Federal income tax form ” This means that at the time you included the income, it appeared that you had an unrestricted right to it. Federal income tax form If you qualify for this choice, figure your tax under both methods and use the method that results in less tax. Federal income tax form Method 1. Federal income tax form   Figure your tax for 2013 claiming a deduction for the repaid amount. Federal income tax form Method 2. Federal income tax form   Figure your tax for 2013 claiming a credit for the repaid amount. Federal income tax form Follow these steps. Federal income tax form Figure your tax for 2013 without deducting the repaid amount. Federal income tax form Refigure your tax from the earlier year without including in income the amount you repaid in 2013. Federal income tax form Subtract the tax in (2) from the tax shown on your return for the earlier year. Federal income tax form This is the amount of your credit. Federal income tax form Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1). Federal income tax form   If Method 1 results in less tax, deduct the amount repaid as discussed earlier under Type of deduction. Federal income tax form   If Method 2 results in less tax, claim the credit on line 71 of Form 1040, and write “I. Federal income tax form R. Federal income tax form C. Federal income tax form 1341” next to line 71. Federal income tax form Example. Federal income tax form For 2012, you filed a return and reported your income on the cash method. Federal income tax form In 2013, you repaid $5,000 included in your 2012 gross income under a claim of right. Federal income tax form Your filing status in 2013 and 2012 is single. Federal income tax form Your income and tax for both years are as follows:   2012  With Income 2012  Without Income Taxable Income $15,000 $10,000 Tax $ 1,819 $ 1,069   2013  Without Deduction 2013  With Deduction Taxable Income $49,950 $44,950 Tax $8,423 $7,173 Your tax under Method 1 is $7,173. Federal income tax form Your tax under Method 2 is $7,673, figured as follows: Tax previously determined for 2012 $ 1,819 Less: Tax as refigured − 1,069 Decrease in 2012 tax $ 750 Regular tax liability for 2013 $8,423 Less: Decrease in 2012 tax − 750 Refigured tax for 2013 $ 7,673 Because you pay less tax under Method 1, you should take a deduction for the repayment in 2013. Federal income tax form Repayment does not apply. Federal income tax form   This discussion does not apply to the following. Federal income tax form Deductions for bad debts. Federal income tax form Deductions from sales to customers, such as returns and allowances, and similar items. Federal income tax form Deductions for legal and other expenses of contesting the repayment. Federal income tax form Year of deduction (or credit). Federal income tax form   If you use the cash method of accounting, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. Federal income tax form If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper deduction under your accounting method. Federal income tax form For example, if you use the accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment accrues. Federal income tax form Subscriptions. Federal income tax form   Subscriptions to professional, technical, and trade journals that deal with your business field are deductible. Federal income tax form Supplies and materials. Federal income tax form   Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the tax year. Federal income tax form   If you keep incidental materials and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if all the following requirements are met. Federal income tax form You do not keep a record of when they are used. Federal income tax form You do not take an inventory of the amount on hand at the beginning and end of the tax year. Federal income tax form This method does not distort your income. Federal income tax form   You can also deduct the cost of books, professional instruments, equipment, etc. Federal income tax form , if you normally use them within a year. Federal income tax form However, if the usefulness of these items extends substantially beyond the year they are placed in service, you generally must recover their costs through depreciation. Federal income tax form For more information regarding depreciation see Publication 946, How To Depreciate Property. Federal income tax form Utilities. Federal income tax form   Business expenses for heat, lights, power, telephone service, and water and sewerage are deductible. Federal income tax form However, any part due to personal use is not deductible. Federal income tax form Telephone. Federal income tax form   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. Federal income tax form However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses. 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