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H&r block file online Publication 547 - Main Content Table of Contents CasualtyFamily pet. H&r block file online Progressive deterioration. H&r block file online Special Procedure for Damage From Corrosive Drywall Theft Loss on Deposits Proof of Loss Figuring a LossGain from reimbursement. H&r block file online Business or income-producing property. H&r block file online Loss of inventory. H&r block file online Leased property. H&r block file online Exception for personal-use real property. H&r block file online Decrease in Fair Market Value Adjusted Basis Insurance and Other Reimbursements Deduction Limits2% Rule $100 Rule 10% Rule Figuring the Deduction Figuring a GainPostponement of Gain When To Report Gains and LossesLoss on deposits. H&r block file online Lessee's loss. H&r block file online Disaster Area LossesDisaster loss to inventory. H&r block file online Main home in disaster area. H&r block file online Unsafe home. H&r block file online Time limit for making choice. H&r block file online Revoking your choice. H&r block file online Figuring the loss deduction. H&r block file online How to report the loss on Form 1040X. H&r block file online Records. H&r block file online Need a copy of your tax return for the preceding year? Postponed Tax Deadlines Contacting the Federal Emergency Management Agency (FEMA) How To Report Gains and LossesProperty held 1 year or less. H&r block file online Property held more than 1 year. H&r block file online Depreciable property. H&r block file online Adjustments to Basis If Deductions Are More Than Income How To Get Tax HelpLow Income Taxpayer Clinics Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. H&r block file online A sudden event is one that is swift, not gradual or progressive. H&r block file online An unexpected event is one that is ordinarily unanticipated and unintended. H&r block file online An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. H&r block file online Generally, casualty losses are deductible during the taxable year that the loss occurred. H&r block file online See Table 3, later. H&r block file online Deductible losses. H&r block file online   Deductible casualty losses can result from a number of different causes, including the following. H&r block file online Car accidents (but see Nondeductible losses , next, for exceptions). H&r block file online Earthquakes. H&r block file online Fires (but see Nondeductible losses , next, for exceptions). H&r block file online Floods. H&r block file online Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses , later. H&r block file online Mine cave-ins. H&r block file online Shipwrecks. H&r block file online Sonic booms. H&r block file online Storms, including hurricanes and tornadoes. H&r block file online Terrorist attacks. H&r block file online Vandalism. H&r block file online Volcanic eruptions. H&r block file online Nondeductible losses. H&r block file online   A casualty loss is not deductible if the damage or destruction is caused by the following. H&r block file online Accidentally breaking articles such as glassware or china under normal conditions. H&r block file online A family pet (explained below). H&r block file online A fire if you willfully set it, or pay someone else to set it. H&r block file online A car accident if your willful negligence or willful act caused it. H&r block file online The same is true if the willful act or willful negligence of someone acting for you caused the accident. H&r block file online Progressive deterioration (explained below). H&r block file online However, see Special Procedure for Damage From Corrosive Drywall , later. H&r block file online Family pet. H&r block file online   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met. H&r block file online Example. H&r block file online Your antique oriental rug was damaged by your new puppy before it was housebroken. H&r block file online Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss. H&r block file online Progressive deterioration. H&r block file online   Loss of property due to progressive deterioration is not deductible as a casualty loss. H&r block file online This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. H&r block file online The following are examples of damage due to progressive deterioration. H&r block file online The steady weakening of a building due to normal wind and weather conditions. H&r block file online The deterioration and damage to a water heater that bursts. H&r block file online However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty. H&r block file online Most losses of property caused by droughts. H&r block file online To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit. H&r block file online Termite or moth damage. H&r block file online The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. H&r block file online However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss. H&r block file online Special Procedure for Damage From Corrosive Drywall Under a special procedure, you can deduct the amounts you paid to repair damage to your home and household appliances due to corrosive drywall. H&r block file online Under this procedure, you treat the amounts paid for repairs as a casualty loss in the year of payment. H&r block file online For example, amounts you paid for repairs in 2013 are deductible on your 2013 tax return and amounts you paid for repairs in 2012 are deductible on your 2012 tax return. H&r block file online Note. H&r block file online If you paid for any repairs before 2013 and you choose to follow this special procedure, you can amend your return for the earlier year by filing Form 1040X, Amended U. H&r block file online S. H&r block file online Individual Income Tax Return, and attaching a completed Form 4684 for the appropriate year. H&r block file online Form 4684 for the appropriate year can be found at IRS. H&r block file online gov. H&r block file online Generally, Form 1040X must be filed within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. H&r block file online Corrosive drywall. H&r block file online   For purposes of this special procedure, “corrosive drywall” means drywall that is identified as problem drywall under the two-step identification method published by the Consumer Product Safety Commission (CPSC) and the Department of Housing and Urban Development (HUD) in their interim guidance dated January 28, 2010, as revised by the CPSC and HUD. H&r block file online The revised identification guidance and remediation guidelines are available at www. H&r block file online cpsc. H&r block file online gov/Safety-Education/Safety-Education-Centers/Drywall. H&r block file online Special instructions for completing Form 4684. H&r block file online   If you choose to follow this special procedure, complete Form 4684, Section A, according to the instructions below. H&r block file online The IRS will not challenge your treatment of damage resulting from corrosive drywall as a casualty loss if you determine and report the loss as explained below. H&r block file online Top margin of Form 4684. H&r block file online   Enter “Revenue Procedure 2010-36”. H&r block file online Line 1. H&r block file online   Enter the information required by the line 1 instructions. H&r block file online Line 2. H&r block file online   Skip this line. H&r block file online Line 3. H&r block file online   Enter the amount of insurance or other reimbursements you received (including through litigation). H&r block file online If none, enter -0-. H&r block file online Lines 4–7. H&r block file online   Skip these lines. H&r block file online Line 8. H&r block file online   Enter the amount you paid to repair the damage to your home and household appliances due to corrosive drywall. H&r block file online Enter only the amounts you paid to restore your home to the condition existing immediately before the damage. H&r block file online Do not enter any amounts you paid for improvements or additions that increased the value of your home above its pre-loss value. H&r block file online If you replaced a household appliance instead of repairing it, enter the lesser of: The current cost to replace the original appliance, or The basis of the original appliance (generally its cost). H&r block file online Line 9. H&r block file online   If line 8 is more than line 3, do one of the following. H&r block file online If you have a pending claim for reimbursement (or you intend to pursue reimbursement), enter 75% of the difference between lines 3 and 8. H&r block file online If item (1) does not apply to you, enter the full amount of the difference between lines 3 and 8. H&r block file online If line 8 is less than or equal to line 3, you cannot claim a casualty loss deduction using this special procedure. H&r block file online    If you have a pending claim for reimbursement (or you intend to pursue reimbursement), you may have income or an additional deduction in a later tax year depending on the actual amount of reimbursement received. H&r block file online See Reimbursement Received After Deducting Loss, later. H&r block file online Lines 10–18. H&r block file online   Complete these lines according to the Instructions for Form 4684. H&r block file online Choosing not to follow this special procedure. H&r block file online   If you choose not to follow this special procedure, you are subject to all of the provisions that apply to the deductibility of casualty losses, and you must complete lines 1–9 according to the Instructions for Form 4684. H&r block file online This means, for example, that you must establish that the damage, destruction, or loss of property resulted from an identifiable event as defined earlier under Casualty . H&r block file online Furthermore, you must have proof that shows the following. H&r block file online The loss is properly deductible in the tax year you claimed it and not in some other year. H&r block file online See When To Report Gains and Losses , later. H&r block file online The amount of the claimed loss. H&r block file online See Proof of Loss , later. H&r block file online No claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery. H&r block file online See When To Report Gains and Losses , later. H&r block file online Theft A theft is the taking and removing of money or property with the intent to deprive the owner of it. H&r block file online The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. H&r block file online You do not need to show a conviction for theft. H&r block file online Theft includes the taking of money or property by the following means. H&r block file online Blackmail. H&r block file online Burglary. H&r block file online Embezzlement. H&r block file online Extortion. H&r block file online Kidnapping for ransom. H&r block file online Larceny. H&r block file online Robbery. H&r block file online The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. H&r block file online Decline in market value of stock. H&r block file online   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. H&r block file online However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. H&r block file online You report a capital loss on Schedule D (Form 1040). H&r block file online For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. H&r block file online Mislaid or lost property. H&r block file online    The simple disappearance of money or property is not a theft. H&r block file online However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. H&r block file online Sudden, unexpected, and unusual events were defined earlier under Casualty . H&r block file online Example. H&r block file online A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. H&r block file online The diamond falls from the ring and is never found. H&r block file online The loss of the diamond is a casualty. H&r block file online Losses from Ponzi-type investment schemes. H&r block file online   The IRS has issued the following guidance to assist taxpayers who are victims of losses from Ponzi-type investment schemes: Revenue Ruling 2009-9, 2009-14 I. H&r block file online R. H&r block file online B. H&r block file online 735 (available at www. H&r block file online irs. H&r block file online gov/irb/2009-14_IRB/ar07. H&r block file online html). H&r block file online Revenue Procedure 2009-20, 2009-14 I. H&r block file online R. H&r block file online B. H&r block file online 749 (available at www. H&r block file online irs. H&r block file online gov/irb/2009-14_IRB/ar11. H&r block file online html). H&r block file online Revenue Procedure 2011-58, 2011-50 I. H&r block file online R. H&r block file online B. H&r block file online 847 (available at www. H&r block file online irs. H&r block file online gov/irb/2011-50_IRB/ar11. H&r block file online html). H&r block file online If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. H&r block file online Skip lines 19 to 27, but you must fill out Section B, lines 29 to 39, as appropriate. H&r block file online Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. H&r block file online You do not need to complete Appendix A. H&r block file online For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684. H&r block file online   If you choose not to use the procedures in Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate. H&r block file online Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. H&r block file online If you incurred this type of loss, you can choose one of the following ways to deduct the loss. H&r block file online As a casualty loss. H&r block file online As an ordinary loss. H&r block file online As a nonbusiness bad debt. H&r block file online Casualty loss or ordinary loss. H&r block file online   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. H&r block file online The choice generally is made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. H&r block file online If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. H&r block file online However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. H&r block file online Once you make the choice, you cannot change it without permission from the Internal Revenue Service. H&r block file online   If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. H&r block file online The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. H&r block file online Your loss is subject to the 2%-of-adjusted-gross-income limit. H&r block file online You cannot choose to claim an ordinary loss if any part of the deposit is federally insured. H&r block file online Nonbusiness bad debt. H&r block file online   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year. H&r block file online How to report. H&r block file online   The kind of deduction you choose for your loss on deposits determines how you report your loss. H&r block file online See Table 1. H&r block file online More information. H&r block file online   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684. H&r block file online Deducted loss recovered. H&r block file online   If you recover an amount you deducted as a loss in an earlier year, you may have to include the amount recovered in your income for the year of recovery. H&r block file online If any part of the original deduction did not reduce your tax in the earlier year, you do not have to include that part of the recovery in your income. H&r block file online For more information, see Recoveries in Publication 525. H&r block file online Proof of Loss To deduct a casualty or theft loss, you must be able to show that there was a casualty or theft. H&r block file online You also must be able to support the amount you take as a deduction. H&r block file online Casualty loss proof. H&r block file online   For a casualty loss, you should be able to show all of the following. H&r block file online The type of casualty (car accident, fire, storm, etc. H&r block file online ) and when it occurred. H&r block file online That the loss was a direct result of the casualty. H&r block file online That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage. H&r block file online Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. H&r block file online Theft loss proof. H&r block file online   For a theft loss, you should be able to show all of the following. H&r block file online When you discovered that your property was missing. H&r block file online That your property was stolen. H&r block file online That you were the owner of the property. H&r block file online Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. H&r block file online    It is important that you have records that will prove your deduction. H&r block file online If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it. H&r block file online Figuring a Loss To determine your deduction for a casualty or theft loss, you must first figure your loss. H&r block file online Table 1. H&r block file online Reporting Loss on Deposits IF you choose to report the loss as a(n). H&r block file online . H&r block file online . H&r block file online   THEN report it on. H&r block file online . H&r block file online . H&r block file online casualty loss   Form 4684 and Schedule A  (Form 1040). H&r block file online ordinary loss   Schedule A (Form 1040). H&r block file online nonbusiness bad debt   Form 8949 and Schedule D (Form 1040). H&r block file online Amount of loss. H&r block file online   Figure the amount of your loss using the following steps. H&r block file online Determine your adjusted basis in the property before the casualty or theft. H&r block file online Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. H&r block file online From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. H&r block file online For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss. H&r block file online Gain from reimbursement. H&r block file online   If your reimbursement is more than your adjusted basis in the property, you have a gain. H&r block file online This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. H&r block file online If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. H&r block file online See Figuring a Gain , later. H&r block file online Business or income-producing property. H&r block file online   If you have business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV is not considered. H&r block file online Your loss is figured as follows:   Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive   Loss of inventory. H&r block file online   There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers. H&r block file online   One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. H&r block file online Do not claim this loss again as a casualty or theft loss. H&r block file online If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income. H&r block file online   The other way is to deduct the loss separately. H&r block file online If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. H&r block file online Reduce the loss by the reimbursement you received. H&r block file online Do not include the reimbursement in gross income. H&r block file online If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery. H&r block file online Leased property. H&r block file online   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive. H&r block file online Separate computations. H&r block file online   Generally, if a single casualty or theft involves more than one item of property, you must figure the loss on each item separately. H&r block file online Then combine the losses to determine the total loss from that casualty or theft. H&r block file online Exception for personal-use real property. H&r block file online   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. H&r block file online Figure the loss using the smaller of the following. H&r block file online The decrease in FMV of the entire property. H&r block file online The adjusted basis of the entire property. H&r block file online   See Real property under Figuring the Deduction, later. H&r block file online Decrease in Fair Market Value Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts. H&r block file online The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. H&r block file online FMV of stolen property. H&r block file online   The FMV of property immediately after a theft is considered to be zero because you no longer have the property. H&r block file online Example. H&r block file online Several years ago, you purchased silver dollars at face value for $150. H&r block file online This is your adjusted basis in the property. H&r block file online Your silver dollars were stolen this year. H&r block file online The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. H&r block file online Your theft loss is $150. H&r block file online Recovered stolen property. H&r block file online   Recovered stolen property is your property that was stolen and later returned to you. H&r block file online If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. H&r block file online Use this amount to refigure your total loss for the year in which the loss was deducted. H&r block file online   If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. H&r block file online But report the difference only up to the amount of the loss that reduced your tax. H&r block file online For more information on the amount to report, see Recoveries in Publication 525. H&r block file online Figuring Decrease in FMV — Items To Consider To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. H&r block file online However, other measures also can be used to establish certain decreases. H&r block file online See Appraisal and Cost of cleaning up or making repairs , next. H&r block file online Appraisal. H&r block file online   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterwards should be made by a competent appraiser. H&r block file online The appraiser must recognize the effects of any general market decline that may occur along with the casualty. H&r block file online This information is needed to limit any deduction to the actual loss resulting from damage to the property. H&r block file online   Several factors are important in evaluating the accuracy of an appraisal, including the following. H&r block file online The appraiser's familiarity with your property before and after the casualty or theft. H&r block file online The appraiser's knowledge of sales of comparable property in the area. H&r block file online The appraiser's knowledge of conditions in the area of the casualty. H&r block file online The appraiser's method of appraisal. H&r block file online You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. H&r block file online For more information on disasters, see Disaster Area Losses, later. H&r block file online Cost of cleaning up or making repairs. H&r block file online   The cost of repairing damaged property is not part of a casualty loss. H&r block file online Neither is the cost of cleaning up after a casualty. H&r block file online But you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. H&r block file online The repairs are actually made. H&r block file online The repairs are necessary to bring the property back to its condition before the casualty. H&r block file online The amount spent for repairs is not excessive. H&r block file online The repairs take care of the damage only. H&r block file online The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. H&r block file online Landscaping. H&r block file online   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. H&r block file online You may be able to measure your loss by what you spend on the following. H&r block file online Removing destroyed or damaged trees and shrubs, minus any salvage you receive. H&r block file online Pruning and other measures taken to preserve damaged trees and shrubs. H&r block file online Replanting necessary to restore the property to its approximate value before the casualty. H&r block file online Car value. H&r block file online   Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. H&r block file online You can use the books' retail values and modify them by factors such as the mileage and condition of your car to figure its value. H&r block file online The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. H&r block file online If your car is not listed in the books, determine its value from other sources. H&r block file online A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value. H&r block file online Figuring Decrease in FMV — Items Not To Consider You generally should not consider the following items when attempting to establish the decrease in FMV of your property. H&r block file online Cost of protection. H&r block file online   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. H&r block file online The amount you spend on insurance or to board up your house against a storm is not part of your loss. H&r block file online If the property is business property, these expenses are deductible as business expenses. H&r block file online   If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. H&r block file online An example would be the cost of a dike to prevent flooding. H&r block file online Exception. H&r block file online   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments (discussed later under Disaster Area Losses ). H&r block file online Related expenses. H&r block file online   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. H&r block file online However, they may be deductible as business expenses if the damaged or stolen property is business property. H&r block file online Replacement cost. H&r block file online   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss. H&r block file online Example. H&r block file online You bought a new chair 4 years ago for $300. H&r block file online In April, a fire destroyed the chair. H&r block file online You estimate that it would cost $500 to replace it. H&r block file online If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. H&r block file online The chair was not insured. H&r block file online Your loss is $100, the FMV of the chair before the fire. H&r block file online It is not $500, the replacement cost. H&r block file online Sentimental value. H&r block file online   Do not consider sentimental value when determining your loss. H&r block file online If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property. H&r block file online Decline in market value of property in or near casualty area. H&r block file online   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. H&r block file online You have a loss only for actual casualty damage to your property. H&r block file online However, if your home is in a federally declared disaster area, see Disaster Area Losses , later. H&r block file online Costs of photographs and appraisals. H&r block file online   Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. H&r block file online Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful. H&r block file online   Appraisals are used to figure the decrease in FMV because of a casualty or theft. H&r block file online See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals. H&r block file online   The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. H&r block file online They are expenses in determining your tax liability. H&r block file online You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). H&r block file online Adjusted Basis The measure of your investment in the property you own is its basis. H&r block file online For property you buy, your basis is usually its cost to you. H&r block file online For property you acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in another way, as explained in Publication 551. H&r block file online If you inherited the property from someone who died in 2010 and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. H&r block file online Adjustments to basis. H&r block file online    While you own the property, various events may take place that change your basis. H&r block file online Some events, such as additions or permanent improvements to the property, increase basis. H&r block file online Others, such as earlier casualty losses and depreciation deductions, decrease basis. H&r block file online When you add the increases to the basis and subtract the decreases from the basis, the result is your adjusted basis. H&r block file online See Publication 551 for more information on figuring the basis of your property. H&r block file online Insurance and Other Reimbursements If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. H&r block file online You do not have a casualty or theft loss to the extent you are reimbursed. H&r block file online If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. H&r block file online You must reduce your loss even if you do not receive payment until a later tax year. H&r block file online See Reimbursement Received After Deducting Loss , later. H&r block file online Failure to file a claim for reimbursement. H&r block file online   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. H&r block file online Otherwise, you cannot deduct this loss as a casualty or theft. H&r block file online The portion of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule. H&r block file online Example. H&r block file online You have a car insurance policy with a $1,000 deductible. H&r block file online Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the $100 and 10% rules, discussed later). H&r block file online This is true, even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible. H&r block file online Types of Reimbursements The most common type of reimbursement is an insurance payment for your stolen or damaged property. H&r block file online Other types of reimbursements are discussed next. H&r block file online Also see the Instructions for Form 4684. H&r block file online Employer's emergency disaster fund. H&r block file online   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. H&r block file online Take into consideration only the amount you used to replace your destroyed or damaged property. H&r block file online Example. H&r block file online Your home was extensively damaged by a tornado. H&r block file online Your loss after reimbursement from your insurance company was $10,000. H&r block file online Your employer set up a disaster relief fund for its employees. H&r block file online Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. H&r block file online You received $4,000 from the fund and spent the entire amount on repairs to your home. H&r block file online In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. H&r block file online Your casualty loss before applying the deduction limits (discussed later) is $6,000. H&r block file online Cash gifts. H&r block file online   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. H&r block file online This applies even if you use the money to pay for repairs to property damaged in the disaster. H&r block file online Example. H&r block file online Your home was damaged by a hurricane. H&r block file online Relatives and neighbors made cash gifts to you that were excludable from your income. H&r block file online You used part of the cash gifts to pay for repairs to your home. H&r block file online There were no limits or restrictions on how you could use the cash gifts. H&r block file online It was an excludable gift, so the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home. H&r block file online Insurance payments for living expenses. H&r block file online   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations. H&r block file online You lose the use of your main home because of a casualty. H&r block file online Government authorities do not allow you access to your main home because of a casualty or threat of one. H&r block file online Inclusion in income. H&r block file online   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. H&r block file online Report this amount on Form 1040, line 21. H&r block file online However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. H&r block file online See Qualified disaster relief payments , later, under Disaster Area Losses. H&r block file online   A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. H&r block file online Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. H&r block file online Generally, these expenses include the amounts you pay for the following. H&r block file online Renting suitable housing. H&r block file online Transportation. H&r block file online Food. H&r block file online Utilities. H&r block file online Miscellaneous services. H&r block file online Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one. H&r block file online Example. H&r block file online As a result of a fire, you vacated your apartment for a month and moved to a motel. H&r block file online You normally pay $525 a month for rent. H&r block file online None was charged for the month the apartment was vacated. H&r block file online Your motel rent for this month was $1,200. H&r block file online You normally pay $200 a month for food. H&r block file online Your food expenses for the month you lived in the motel were $400. H&r block file online You received $1,100 from your insurance company to cover your living expenses. H&r block file online You determine the payment you must include in income as follows. H&r block file online 1. H&r block file online Insurance payment for living expenses $1,100 2. H&r block file online Actual expenses during the month you are unable to use your home because of the fire $1,600   3. H&r block file online Normal living expenses 725   4. H&r block file online Temporary increase in living expenses: Subtract line 3  from line 2 875 5. H&r block file online Amount of payment includible in income: Subtract line 4 from line 1 $ 225 Tax year of inclusion. H&r block file online   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment. H&r block file online Example. H&r block file online Your main home was destroyed by a tornado in August 2011. H&r block file online You regained use of your home in November 2012. H&r block file online The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. H&r block file online You include this amount in income on your 2012 Form 1040. H&r block file online If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040. H&r block file online Disaster relief. H&r block file online   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. H&r block file online Table 2. H&r block file online Deduction Limit Rules for Personal-Use and Employee Property       $100 Rule 10% Rule 2% Rule General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. H&r block file online Apply this rule to personal-use property after you have figured the amount of your loss. H&r block file online You must reduce your total casualty or theft loss by 10% of your adjusted gross income. H&r block file online Apply this rule to personal-use property after you reduce each loss by $100 (the $100 rule). H&r block file online You must reduce your total casualty or theft loss by 2% of your adjusted gross income. H&r block file online Apply this rule to property you used in performing services as an employee after you have figured the amount of your loss and added it to your job expenses and most other miscellaneous itemized deductions. H&r block file online Single Event Apply this rule only once, even if many pieces of property are affected. H&r block file online Apply this rule only once, even if many pieces of property are affected. H&r block file online Apply this rule only once, even if many pieces of property are affected. H&r block file online More Than One Event Apply to the loss from each event. H&r block file online Apply to the total of all your losses from all events. H&r block file online Apply to the total of all your losses from all events. H&r block file online More Than One Person— With Loss From the   Same Event  (other than a married couple  filing jointly) Apply separately to each person. H&r block file online Apply separately to each person. H&r block file online Apply separately to each person. H&r block file online Married Couple—  With Loss From the  Same Event Filing Joint Return Apply as if you were one person. H&r block file online Apply as if you were one person. H&r block file online Apply as if you were one person. H&r block file online Filing Separate Return Apply separately to each spouse. H&r block file online Apply separately to each spouse. H&r block file online Apply separately to each spouse. H&r block file online More Than One Owner (other than a married couple filing jointly) Apply separately to each owner of jointly owned property. H&r block file online Apply separately to each owner of jointly owned property. H&r block file online Apply separately to each owner of jointly owned property. H&r block file online    Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster, are not taxable income to you. H&r block file online For more information, see Qualified disaster relief payments under Disaster Area Losses, later. H&r block file online   Disaster unemployment assistance payments are unemployment benefits that are taxable. H&r block file online   Generally, disaster relief grants received under the Robert T. H&r block file online Stafford Disaster Relief and Emergency Assistance Act are not included in your income. H&r block file online See Federal disaster relief grants , later, under Disaster Area Losses. H&r block file online Loan proceeds. H&r block file online   Do not reduce your casualty loss by loan proceeds you use to rehabilitate or replace property on which you are claiming a casualty loss deduction. H&r block file online If you have a federal loan that is canceled (forgiven), see Federal loan canceled , later, under Disaster Area Losses. H&r block file online Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using the amount of your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. H&r block file online This section explains the adjustment you may have to make. H&r block file online Actual reimbursement less than expected. H&r block file online   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. H&r block file online Example. H&r block file online Your personal car had a FMV of $2,000 when it was destroyed in a collision with another car in 2012. H&r block file online The accident was due to the negligence of the other driver. H&r block file online At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. H&r block file online You did not have a deductible loss in 2012. H&r block file online In January 2013, the court awards you a judgment of $2,000. H&r block file online However, in July it becomes apparent that you will be unable to collect any amount from the other driver. H&r block file online Since this is your only casualty or theft loss, you can deduct the loss in 2013 that is figured by applying the Deduction Limits (discussed later). H&r block file online Actual reimbursement more than expected. H&r block file online   If you later receive more reimbursement than you expected, after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. H&r block file online However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. H&r block file online You do not refigure your tax for the year you claimed the deduction. H&r block file online See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. H&r block file online Example. H&r block file online In 2012, a hurricane destroyed your motorboat. H&r block file online Your loss was $3,000, and you estimated that your insurance would cover $2,500 of it. H&r block file online You did not itemize deductions on your 2012 return, so you could not deduct the loss. H&r block file online When the insurance company reimburses you for the loss, you do not report any of the reimbursement as income. H&r block file online This is true even if it is for the full $3,000 because you did not deduct the loss on your 2012 return. H&r block file online The loss did not reduce your tax. H&r block file online    If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. H&r block file online If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. H&r block file online Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. H&r block file online You may be able to postpone reporting any remaining gain as explained under Postponement of Gain, later. H&r block file online Actual reimbursement same as expected. H&r block file online   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. H&r block file online Example. H&r block file online In December 2013, you had a collision while driving your personal car. H&r block file online Repairs to the car cost $950. H&r block file online You had $100 deductible collision insurance. H&r block file online Your insurance company agreed to reimburse you for the rest of the damage. H&r block file online Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013. H&r block file online Due to the $100 rule, you cannot deduct the $100 you paid as the deductible. H&r block file online When you receive the $850 from the insurance company in 2014, do not report it as income. H&r block file online Deduction Limits After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. H&r block file online The deduction for casualty and theft losses of employee property and personal-use property is limited. H&r block file online A loss on employee property is subject to the 2% rule, discussed next. H&r block file online With certain exceptions, a loss on property you own for your personal use is subject to the $100 and 10% rules, discussed later. H&r block file online The 2%, $100, and 10% rules are also summarized in Table 2 . H&r block file online Losses on business property (other than employee property) and income-producing property are not subject to these rules. H&r block file online However, if your casualty or theft loss involved a home you used for business or rented out, your deductible loss may be limited. H&r block file online See the Instructions for Form 4684, Section B. H&r block file online If the casualty or theft loss involved property used in a passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions. H&r block file online 2% Rule The casualty and theft loss deduction for employee property, when added to your job expenses and most other miscellaneous itemized deductions on Schedule A (Form 1040) or Form 1040NR, Schedule A, must be reduced by 2% of your adjusted gross income. H&r block file online Employee property is property used in performing services as an employee. H&r block file online $100 Rule After you have figured your casualty or theft loss on personal-use property, as discussed earlier, you must reduce that loss by $100. H&r block file online This reduction applies to each total casualty or theft loss. H&r block file online It does not matter how many pieces of property are involved in an event. H&r block file online Only a single $100 reduction applies. H&r block file online Example. H&r block file online You have $750 deductible collision insurance on your car. H&r block file online The car is damaged in a collision. H&r block file online The insurance company pays you for the damage minus the $750 deductible. H&r block file online The amount of the casualty loss is based solely on the deductible. H&r block file online The casualty loss is $650 ($750 − $100) because the first $100 of a casualty loss on personal-use property is not deductible. H&r block file online Single event. H&r block file online   Generally, events closely related in origin cause a single casualty. H&r block file online It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm. H&r block file online A single casualty may also damage two or more pieces of property, such as a hailstorm that damages both your home and your car parked in your driveway. H&r block file online Example 1. H&r block file online A thunderstorm destroyed your pleasure boat. H&r block file online You also lost some boating equipment in the storm. H&r block file online Your loss was $5,000 on the boat and $1,200 on the equipment. H&r block file online Your insurance company reimbursed you $4,500 for the damage to your boat. H&r block file online You had no insurance coverage on the equipment. H&r block file online Your casualty loss is from a single event and the $100 rule applies once. H&r block file online Figure your loss before applying the 10% rule (discussed later) as follows. H&r block file online     Boat Equipment 1. H&r block file online Loss $5,000 $1,200 2. H&r block file online Subtract insurance 4,500 -0- 3. H&r block file online Loss after reimbursement $ 500 $1,200 4. H&r block file online Total loss $1,700 5. H&r block file online Subtract $100 100 6. H&r block file online Loss before 10% rule $1,600 Example 2. H&r block file online Thieves broke into your home in January and stole a ring and a fur coat. H&r block file online You had a loss of $200 on the ring and $700 on the coat. H&r block file online This is a single theft. H&r block file online The $100 rule applies to the total $900 loss. H&r block file online Example 3. H&r block file online In September, hurricane winds blew the roof off your home. H&r block file online Flood waters caused by the hurricane further damaged your home and destroyed your furniture and personal car. H&r block file online This is considered a single casualty. H&r block file online The $100 rule is applied to your total loss from the flood waters and the wind. H&r block file online More than one loss. H&r block file online   If you have more than one casualty or theft loss during your tax year, you must reduce each loss by $100. H&r block file online Example. H&r block file online Your family car was damaged in an accident in January. H&r block file online Your loss after the insurance reimbursement was $75. H&r block file online In February, your car was damaged in another accident. H&r block file online This time your loss after the insurance reimbursement was $90. H&r block file online Apply the $100 rule to each separate casualty loss. H&r block file online Since neither accident resulted in a loss of over $100, you are not entitled to any deduction for these accidents. H&r block file online More than one person. H&r block file online   If two or more individuals (other than a husband and wife filing a joint return) have losses from the same casualty or theft, the $100 rule applies separately to each individual. H&r block file online Example. H&r block file online A fire damaged your house and also damaged the personal property of your house guest. H&r block file online You must reduce your loss by $100. H&r block file online Your house guest must reduce his or her loss by $100. H&r block file online Married taxpayers. H&r block file online   If you and your spouse file a joint return, you are treated as one individual in applying the $100 rule. H&r block file online It does not matter whether you own the property jointly or separately. H&r block file online   If you and your spouse have a casualty or theft loss and you file separate returns, each of you must reduce your loss by $100. H&r block file online This is true even if you own the property jointly. H&r block file online If one spouse owns the property, only that spouse can figure a loss deduction on a separate return. H&r block file online   If the casualty or theft loss is on property you own as tenants by the entirety, each of you can figure your deduction on only one-half of the loss on separate returns. H&r block file online Neither of you can figure your deduction on the entire loss on a separate return. H&r block file online Each of you must reduce the loss by $100. H&r block file online More than one owner. H&r block file online   If two or more individuals (other than a husband and wife filing a joint return) have a loss on property jointly owned, the $100 rule applies separately to each. H&r block file online For example, if two sisters live together in a home they own jointly and they have a casualty loss on the home, the $100 rule applies separately to each sister. H&r block file online 10% Rule You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. H&r block file online Apply this rule after you reduce each loss by $100. H&r block file online For more information, see the Form 4684 instructions. H&r block file online If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion. H&r block file online Example. H&r block file online In June, you discovered that your house had been burglarized. H&r block file online Your loss after insurance reimbursement was $2,000. H&r block file online Your adjusted gross income for the year you discovered the theft is $29,500. H&r block file online Figure your theft loss as follows. H&r block file online 1. H&r block file online Loss after insurance $2,000 2. H&r block file online Subtract $100 100 3. H&r block file online Loss after $100 rule $1,900 4. H&r block file online Subtract 10% of $29,500 AGI $2,950 5. H&r block file online Theft loss deduction $-0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950). H&r block file online More than one loss. H&r block file online   If you have more than one casualty or theft loss during your tax year, reduce each loss by any reimbursement and by $100. H&r block file online Then you must reduce the total of all your losses by 10% of your adjusted gross income. H&r block file online Example. H&r block file online In March, you had a car accident that totally destroyed your car. H&r block file online You did not have collision insurance on your car, so you did not receive any insurance reimbursement. H&r block file online Your loss on the car was $1,800. H&r block file online In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items you had stored there. H&r block file online Your loss on the basement items after reimbursement was $2,100. H&r block file online Your adjusted gross income for the year that the accident and fire occurred is $25,000. H&r block file online You figure your casualty loss deduction as follows. H&r block file online     Car Basement 1. H&r block file online Loss $1,800 $2,100 2. H&r block file online Subtract $100 per incident 100 100 3. H&r block file online Loss after $100 rule $1,700 $2,000 4. H&r block file online Total loss $3,700 5. H&r block file online Subtract 10% of $25,000 AGI 2,500 6. H&r block file online Casualty loss deduction $1,200 Married taxpayers. H&r block file online   If you and your spouse file a joint return, you are treated as one individual in applying the 10% rule. H&r block file online It does not matter if you own the property jointly or separately. H&r block file online   If you file separate returns, the 10% rule applies to each return on which a loss is claimed. H&r block file online More than one owner. H&r block file online   If two or more individuals (other than husband and wife filing a joint return) have a loss on property that is owned jointly, the 10% rule applies separately to each. H&r block file online Gains and losses. H&r block file online   If you have casualty or theft gains as well as losses to personal-use property, you must compare your total gains to your total losses. H&r block file online Do this after you have reduced each loss by any reimbursements and by $100 but before you have reduced the losses by 10% of your adjusted gross income. H&r block file online Casualty or theft gains do not include gains you choose to postpone. H&r block file online See Postponement of Gain, later. H&r block file online Losses more than gains. H&r block file online   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. H&r block file online The rest, if any, is your deductible loss from personal-use property. H&r block file online Example. H&r block file online Your theft loss after reducing it by reimbursements and by $100 is $2,700. H&r block file online Your casualty gain is $700. H&r block file online Your loss is more than your gain, so you must reduce your $2,000 net loss ($2,700 − $700) by 10% of your adjusted gross income. H&r block file online Gains more than losses. H&r block file online   If your recognized gains are more than your losses, subtract your losses from your gains. H&r block file online The difference is treated as a capital gain and must be reported on Schedule D (Form 1040). H&r block file online The 10% rule does not apply to your gains. H&r block file online Example. H&r block file online Your theft loss is $600 after reducing it by reimbursements and by $100. H&r block file online Your casualty gain is $1,600. H&r block file online Because your gain is more than your loss, you must report the $1,000 net gain ($1,600 − $600) on Schedule D (Form 1040). H&r block file online More information. H&r block file online   For information on how to figure recognized gains, see Figuring a Gain , later. H&r block file online Figuring the Deduction Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. H&r block file online However, a special rule applies to real property you own for personal use. H&r block file online Real property. H&r block file online   In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the improvements) are considered together. H&r block file online Example 1. H&r block file online In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. H&r block file online (Your land was not damaged. H&r block file online ) This was your only casualty or theft loss for the year. H&r block file online The FMV of the property immediately before the fire was $180,000 ($145,000 for the cottage and $35,000 for the land). H&r block file online The FMV immediately after the fire was $35,000 (value of the land). H&r block file online You collected $130,000 from the insurance company. H&r block file online Your adjusted gross income for the year the fire occurred is $80,000. H&r block file online Your deduction for the casualty loss is $6,700, figured in the following manner. H&r block file online 1. H&r block file online Adjusted basis of the entire property (cost in this example) $144,800 2. H&r block file online FMV of entire property  before fire $180,000 3. H&r block file online FMV of entire property after fire 35,000 4. H&r block file online Decrease in FMV of entire property (line 2 − line 3) $145,000 5. H&r block file online Loss (smaller of line 1 or line 4) $144,800 6. H&r block file online Subtract insurance 130,000 7. H&r block file online Loss after reimbursement $14,800 8. H&r block file online Subtract $100 100 9. H&r block file online Loss after $100 rule $14,700 10. H&r block file online Subtract 10% of $80,000 AGI 8,000 11. H&r block file online Casualty loss deduction $ 6,700 Example 2. H&r block file online You bought your home a few years ago. H&r block file online You paid $150,000 ($10,000 for the land and $140,000 for the house). H&r block file online You also spent an additional $2,000 for landscaping. H&r block file online This year a fire destroyed your home. H&r block file online The fire also damaged the shrubbery and trees in your yard. H&r block file online The fire was your only casualty or theft loss this year. H&r block file online Competent appraisers valued the property as a whole at $175,000 before the fire, but only $50,000 after the fire. H&r block file online Shortly after the fire, the insurance company paid you $95,000 for the loss. H&r block file online Your adjusted gross income for this year is $70,000. H&r block file online You figure your casualty loss deduction as follows. H&r block file online 1. H&r block file online Adjusted basis of the entire property (cost of land, building, and landscaping) $152,000 2. H&r block file online FMV of entire property  before fire $175,000 3. H&r block file online FMV of entire property after fire 50,000 4. H&r block file online Decrease in FMV of entire property (line 2 − line 3) $125,000 5. H&r block file online Loss (smaller of line 1 or line 4) $125,000 6. H&r block file online Subtract insurance 95,000 7. H&r block file online Loss after reimbursement $30,000 8. H&r block file online Subtract $100 100 9. H&r block file online Loss after $100 rule $29,900 10. H&r block file online Subtract 10% of $70,000 AGI 7,000 11. H&r block file online Casualty loss deduction $ 22,900 Personal property. H&r block file online   Personal property is any property that is not real property. H&r block file online If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. H&r block file online Then combine these separate losses to figure the total loss. H&r block file online Reduce the total loss by $100 and 10% of your adjusted gross income to figure the loss deduction. H&r block file online Example 1. H&r block file online In August, a storm destroyed your pleasure boat, which cost $18,500. H&r block file online This was your only casualty or theft loss for the year. H&r block file online Its FMV immediately before the storm was $17,000. H&r block file online You had no insurance, but were able to salvage the motor of the boat and sell it for $200. H&r block file online Your adjusted gross income for the year the casualty occurred is $70,000. H&r block file online Although the motor was sold separately, it is part of the boat and not a separate item of property. H&r block file online You figure your casualty loss deduction as follows. H&r block file online 1. H&r block file online Adjusted basis (cost in this example) $18,500 2. H&r block file online FMV before storm $17,000 3. H&r block file online FMV after storm 200 4. H&r block file online Decrease in FMV  (line 2 − line 3) $16,800 5. H&r block file online Loss (smaller of line 1 or line 4) $16,800 6. H&r block file online Subtract insurance -0- 7. H&r block file online Loss after reimbursement $16,800 8. H&r block file online Subtract $100 100 9. H&r block file online Loss after $100 rule $16,700 10. H&r block file online Subtract 10% of $70,000 AGI 7,000 11. H&r block file online Casualty loss deduction $ 9,700 Example 2. H&r block file online In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. H&r block file online You had bought the car for $30,000. H&r block file online The FMV of the car just before the accident was $17,500. H&r block file online Its FMV just after the accident was $180 (scrap value). H&r block file online Your insurance company reimbursed you $16,000. H&r block file online Your watch was not insured. H&r block file online You had purchased it for $250. H&r block file online Its FMV just before the accident was $500. H&r block file online Your adjusted gross income for the year the accident occurred is $97,000. H&r block file online Your casualty loss deduction is zero, figured as follows. H&r block file online     Car Watch 1. H&r block file online Adjusted basis (cost) $30,000 $250 2. H&r block file online FMV before accident $17,500 $500 3. H&r block file online FMV after accident 180 -0- 4. H&r block file online Decrease in FMV (line 2 − line 3) $17,320 $500 5. H&r block file online Loss (smaller of line 1 or line 4) $17,320 $250 6. H&r block file online Subtract insurance 16,000 -0- 7. H&r block file online Loss after reimbursement $1,320 $250 8. H&r block file online Total loss $1,570 9. H&r block file online Subtract $100 100 10. H&r block file online Loss after $100 rule $1,470 11. H&r block file online Subtract 10% of $97,000 AGI 9,700 12. H&r block file online Casualty loss deduction $ -0- Both real and personal properties. H&r block file online   When a casualty involves both real and personal properties, you must figure the loss separately for each type of property. H&r block file online However, you apply a single $100 reduction to the total loss. H&r block file online Then, you apply the 10% rule to figure the casualty loss deduction. H&r block file online Example. H&r block file online In July, a hurricane damaged your home, which cost you $164,000 including land. H&r block file online The FMV of the property (both building and land) immediately before the storm was $170,000 and its FMV immediately after the storm was $100,000. H&r block file online Your household furnishings were also damaged. H&r block file online You separately figured the loss on each damaged household item and arrived at a total loss of $600. H&r block file online You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. H&r block file online Your adjusted gross income for the year the hurricane occurred is $65,000. H&r block file online You figure your casualty loss deduction from the hurricane in the following manner. H&r block file online 1. H&r block file online Adjusted basis of real property (cost in this example) $164,000 2. H&r block file online FMV of real property before hurricane $170,000 3. H&r block file online FMV of real property after hurricane 100,000 4. H&r block file online Decrease in FMV of real property (line 2 − line 3) $70,000 5. H&r block file online Loss on real property (smaller of line 1 or line 4) $70,000 6. H&r block file online Subtract insurance 50,000 7. H&r block file online Loss on real property after reimbursement $20,000 8. H&r block file online Loss on furnishings $600 9. H&r block file online Subtract insurance -0- 10. H&r block file online Loss on furnishings after reimbursement $600 11. H&r block file online Total loss (line 7 plus line 10) $20,600 12. H&r block file online Subtract $100 100 13. H&r block file online Loss after $100 rule $20,500 14. H&r block file online Subtract 10% of $65,000 AGI 6,500 15. H&r block file online Casualty loss deduction $14,000 Property used partly for business and partly for personal purposes. H&r block file online   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use portion and for the business or income-producing portion. H&r block file online You must figure each loss separately because the losses attributed to these two uses are figured in two different ways. H&r block file online When figuring each loss, allocate the total cost or basis, the FMV before and after the casualty or theft loss, and the insurance or other reimbursement between the business and personal use of the property. H&r block file online The $100 rule and the 10% rule apply only to the casualty or theft loss on the personal-use portion of the property. H&r block file online Example. H&r block file online You own a building that you constructed on leased land. H&r block file online You use half of the building for your business and you live in the other half. H&r block file online The cost of the building was $400,000. H&r block file online You made no further improvements or additions to it. H&r block file online A flood in March damaged the entire building. H&r block file online The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. H&r block file online Your insurance company reimbursed you $40,000 for the flood damage. H&r block file online Depreciation on the business part of the building before the flood totaled $24,000. H&r block file online Your adjusted gross income for the year the flood occurred is $125,000. H&r block file online You have a deductible business casualty loss of $10,000. H&r block file online You do not have a deductible personal casualty loss because of the 10% rule. H&r block file online You figure your loss as follows. H&r block file online     Business   Personal     Part   Part 1. H&r block file online Cost (total $400,000) $200,000   $200,000 2. H&r block file online Subtract depreciation 24,000   -0- 3. H&r block file online Adjusted basis $176,000   $200,000 4. H&r block file online FMV before flood (total $380,000) $190,000   $190,000 5. H&r block file online FMV after flood (total $320,000) 160,000   160,000 6. H&r block file online Decrease in FMV  (line 4 − line 5) $30,000   $30,000 7. H&r block file online Loss (smaller of line 3 or line 6) $30,000   $30,000 8. H&r block file online Subtract insurance 20,000   20,000 9. H&r block file online Loss after reimbursement $10,000   $10,000 10. H&r block file online Subtract $100 on personal-use property -0-   100 11. H&r block file online Loss after $100 rule $10,000   $9,900 12. H&r block file online Subtract 10% of $125,000 AGI on personal-use property -0-   12,500 13. H&r block file online Deductible business loss $10,000     14. H&r block file online Deductible personal loss $-0- Figuring a Gain If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. H&r block file online Your gain is figured as follows. H&r block file online The amount you receive (discussed next), minus Your adjusted basis in the property at the time of the casualty or theft. H&r block file online See Adjusted Basis , earlier, for information on adjusted basis. H&r block file online Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. H&r block file online Amount you receive. H&r block file online   The amount you receive includes any money plus the value of any property you receive minus any expenses you have in obtaining reimbursement. H&r block file online It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. H&r block file online Example. H&r block file online A hurricane destroyed your personal residence and the insurance company awarded you $145,000. H&r block file online You received $140,000 in cash. H&r block file online The remaining $5,000 was paid directly to the holder of a mortgage on the property. H&r block file online The amount you received includes the $5,000 reimbursement paid on the mortgage. H&r block file online Main home destroyed. H&r block file online   If you have a gain because your main home was destroyed, you generally can exclude the gain from your income as if you had sold or exchanged your home. H&r block file online You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). H&r block file online To exclude a gain, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date it was destroyed. H&r block file online For information on this exclusion, see Publication 523. H&r block file online If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. H&r block file online See Postponement of Gain , later. H&r block file online Reporting a gain. H&r block file online   You generally must report your gain as income in the year you receive the reimbursement. H&r block file online However, you do not have to report your gain if you meet certain requirements and choose to postpone reporting the gain according to the rules explained under Postponement of Gain, next. H&r block file online   For information on how to report a gain, see How To Report Gains and Losses , later. H&r block file online    If you have a casualty or theft gain on personal-use property that you choose to postpone reporting (as explained next) and you also have another casualty or theft loss on personal-use property, do not consider the gain you are postponing when figuring your casualty or theft loss deduction. H&r block file online See 10% Rule under Deduction Limits, earlier. H&r block file online Postponement of Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. H&r block file online Your basis in the new property is generally the same as your adjusted basis in the property it replaces. H&r block file online You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. H&r block file online However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. H&r block file online You also can choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. H&r block file online See Controlling interest in a corporation , later. H&r block file online If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. H&r block file online To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. H&r block file online If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. H&r block file online Example. H&r block file online In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. H&r block file online You made no further improvements or additions to it. H&r block file online When a storm destroyed the cottage this January, the cottage was worth $250,000. H&r block file online You received $146,000 from the insurance company in March. H&r block file online You had a gain of $128,000 ($146,000 − $18,000). H&r block file online You spent $144,000 to rebuild the cottage. H&r block file online Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. H&r block file online Buying replacement property from a related person. H&r block file online   You cannot postpone reporting a gain from a casualty or theft if you buy the replacement property from a related person (discussed later). H&r block file online This rule applies to the following taxpayers. H&r block file online C corporations. H&r block file online Partnerships in which more than 50% of the capital or profits interests is owned by C corporations. H&r block file online All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000. H&r block file online For casualties and thefts described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. H&r block file online If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. H&r block file online If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. H&r block file online Exception. H&r block file online   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the destroyed or stolen property. H&r block file online Related persons. H&r block file online   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. H&r block file online For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. H&r block file online Death of a taxpayer. H&r block file online   If a taxpayer dies after having a gain but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. H&r block file online The executor of the estate or the person succeeding to the funds from the casualty or theft cannot postpone reporting the gain by buying replacement property. H&r block file online Replacement Property You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. H&r block file online Property you acquire as a gift or inheritance does not qualify. H&r block file online You do not have to use the same funds you receive as
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The H&r Block File Online

H&r block file online 2. H&r block file online   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. H&r block file online 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. H&r block file online Deduction may depend on your type of business. H&r block file online Exception for events that benefit charitable organizations. H&r block file online Food and beverages in skybox seats. H&r block file online What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. H&r block file online You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. H&r block file online The rules and definitions are summarized in Table 2-1 . H&r block file online You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. H&r block file online Directly-related test. H&r block file online Associated test. H&r block file online Both of these tests are explained later. H&r block file online An ordinary expense is one that is common and accepted in your trade or business. H&r block file online A necessary expense is one that is helpful and appropriate for your business. H&r block file online An expense does not have to be required to be considered necessary. H&r block file online The amount you can deduct for entertainment expenses may be limited. H&r block file online Generally, you can deduct only 50% of your unreimbursed entertainment expenses. H&r block file online This limit is discussed later under 50% Limit. H&r block file online Directly-Related Test To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that: The main purpose of the combined business and entertainment was the active conduct of business, You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit at some future time. H&r block file online Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. H&r block file online Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. H&r block file online See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. H&r block file online You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. H&r block file online It is not necessary to devote more time to business than to entertainment. H&r block file online However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. H&r block file online Table 2-1. H&r block file online When Are Entertainment Expenses Deductible? General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. H&r block file online Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. H&r block file online An ordinary expense is one that is common and accepted in your trade or business. H&r block file online A necessary expense is one that is helpful and appropriate. H&r block file online Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. H&r block file online   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. H&r block file online Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. H&r block file online You cannot deduct expenses that are lavish or extravagant under the circumstances. H&r block file online You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). H&r block file online You do not have to show that business income or other business benefit actually resulted from each entertainment expense. H&r block file online Clear business setting. H&r block file online   If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. H&r block file online The following situations are examples of entertainment in a clear business setting. H&r block file online Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. H&r block file online Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer). H&r block file online Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. H&r block file online An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained. H&r block file online Expenses not considered directly related. H&r block file online   Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. H&r block file online The following are examples of situations where there are substantial distractions. H&r block file online A meeting or discussion at a nightclub, theater, or sporting event. H&r block file online A meeting or discussion during what is essentially a social gathering, such as a cocktail party. H&r block file online A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts. H&r block file online Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. H&r block file online To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and Directly before or after a substantial business discussion (defined later). H&r block file online Associated with trade or business. H&r block file online   Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. H&r block file online The purpose may be to get new business or to encourage the continuation of an existing business relationship. H&r block file online Substantial business discussion. H&r block file online   Whether a business discussion is substantial depends on the facts of each case. H&r block file online A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. H&r block file online   The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. H&r block file online It is not necessary that you devote more time to business than to entertainment. H&r block file online You do not have to discuss business during the meal or entertainment. H&r block file online Meetings at conventions. H&r block file online   You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. H&r block file online However, your reason for attending the convention or meeting must be to further your trade or business. H&r block file online The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting. H&r block file online Directly before or after business discussion. H&r block file online   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. H&r block file online   If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. H&r block file online Among the facts to consider are the place, date, and duration of the business discussion. H&r block file online If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day. H&r block file online Example. H&r block file online A group of business associates comes from out of town to your place of business to hold a substantial business discussion. H&r block file online If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. H&r block file online The expense meets the associated test. H&r block file online 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. H&r block file online (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. H&r block file online See Individuals subject to “hours of service” limits , later. H&r block file online ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. H&r block file online Figure A summarizes the general rules explained in this section. H&r block file online The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. H&r block file online Included expenses. H&r block file online   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. H&r block file online However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. H&r block file online Figure A. H&r block file online Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. H&r block file online See Exceptions to the 50% Limit . H&r block file online Please click here for the text description of the image. H&r block file online Figure A. H&r block file online Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. H&r block file online   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later. H&r block file online   The 50% limit also applies to certain meal and entertainment expenses that are not business related. H&r block file online It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. H&r block file online It also applies to the cost of meals included in deductible educational expenses. H&r block file online When to apply the 50% limit. H&r block file online   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. H&r block file online You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication. H&r block file online Example 1. H&r block file online You spend $200 for a business-related meal. H&r block file online If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. H&r block file online Your deduction cannot be more than $45 (50% × $90). H&r block file online Example 2. H&r block file online You purchase two tickets to a concert and give them to a client. H&r block file online You purchased the tickets through a ticket agent. H&r block file online You paid $200 for the two tickets, which had a face value of $80 each ($160 total). H&r block file online Your deduction cannot be more than $80 (50% × $160). H&r block file online Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. H&r block file online Figure A can help you determine if the 50% limit applies to you. H&r block file online Expenses not subject to 50% limit. H&r block file online   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. H&r block file online 1 - Employee's reimbursed expenses. H&r block file online   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. H&r block file online Accountable plans are discussed in chapter 6. H&r block file online 2 - Self-employed. H&r block file online   If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met. H&r block file online You have these expenses as an independent contractor. H&r block file online Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. H&r block file online You provide adequate records of these expenses to your customer or client. H&r block file online (See chapter 5 . H&r block file online )   In this case, your client or customer is subject to the 50% limit on the expenses. H&r block file online Example. H&r block file online You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. H&r block file online You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. H&r block file online If the client can deduct the expenses, the client is subject to the 50% limit. H&r block file online If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit. H&r block file online 3 - Advertising expenses. H&r block file online   You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. H&r block file online For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit. H&r block file online 4 - Sale of meals or entertainment. H&r block file online   You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. H&r block file online For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit. H&r block file online 5 - Charitable sports event. H&r block file online   You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. H&r block file online For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. H&r block file online Individuals subject to “hours of service” limits. H&r block file online   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. H&r block file online The percentage is 80%. H&r block file online   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. H&r block file online Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. H&r block file online Interstate truck operators and bus drivers who are under Department of Transportation regulations. H&r block file online Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. H&r block file online Certain merchant mariners who are under Coast Guard regulations. H&r block file online What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. H&r block file online Entertainment. H&r block file online   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. H&r block file online Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. H&r block file online   Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. H&r block file online A meal as a form of entertainment. H&r block file online   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. H&r block file online A meal expense includes the cost of food, beverages, taxes, and tips for the meal. H&r block file online To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. H&r block file online    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. H&r block file online    Meals sold in the normal course of your business are not considered entertainment. H&r block file online Deduction may depend on your type of business. H&r block file online   Your kind of business may determine if a particular activity is considered entertainment. H&r block file online For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered entertainment. H&r block file online This is because fashion shows are typical in your business. H&r block file online But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment. H&r block file online Separating costs. H&r block file online   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. H&r block file online You must have a reasonable basis for making this allocation. H&r block file online For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. H&r block file online Taking turns paying for meals or entertainment. H&r block file online   If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. H&r block file online Lavish or extravagant expenses. H&r block file online   You cannot deduct expenses for entertainment that are lavish or extravagant. H&r block file online An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. H&r block file online Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. H&r block file online Allocating between business and nonbusiness. H&r block file online   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. H&r block file online You can deduct only the business part. H&r block file online If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis. H&r block file online Example. H&r block file online You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. H&r block file online Only 4/11 of the expense qualifies as a business entertainment expense. H&r block file online You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. H&r block file online Trade association meetings. H&r block file online   You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. H&r block file online These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. H&r block file online Entertainment tickets. H&r block file online   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. H&r block file online For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. H&r block file online Exception for events that benefit charitable organizations. H&r block file online   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. H&r block file online You can take into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions apply. H&r block file online The event's main purpose is to benefit a qualified charitable organization. H&r block file online The entire net proceeds go to the charity. H&r block file online The event uses volunteers to perform substantially all the event's work. H&r block file online    The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable sports event. H&r block file online Example 1. H&r block file online You purchase tickets to a golf tournament organized by the local volunteer fire company. H&r block file online All net proceeds will be used to buy new fire equipment. H&r block file online The volunteers will run the tournament. H&r block file online You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. H&r block file online Example 2. H&r block file online You purchase tickets to a college football game through a ticket broker. H&r block file online After having a business discussion, you take a client to the game. H&r block file online Net proceeds from the game go to colleges that qualify as charitable organizations. H&r block file online However, since the colleges also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets in determining your business deduction. H&r block file online Skyboxes and other private luxury boxes. H&r block file online   If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket. H&r block file online   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. H&r block file online For example, renting a skybox for a series of playoff games is considered renting it for more than one event. H&r block file online All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. H&r block file online   Related parties include: Family members (spouses, ancestors, and lineal descendants), Parties who have made a reciprocal arrangement involving the sharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with common ownership. H&r block file online Example. H&r block file online You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. H&r block file online The cost of regular nonluxury box seats at each event is $30 a seat. H&r block file online You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). H&r block file online Food and beverages in skybox seats. H&r block file online   If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. H&r block file online The amounts separately stated for food and beverages must be reasonable. H&r block file online You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. H&r block file online What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. H&r block file online Club dues and membership fees. H&r block file online   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. H&r block file online This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities, discussed later. H&r block file online   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. H&r block file online You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. H&r block file online Entertainment facilities. H&r block file online   Generally, you cannot deduct any expense for the use of an entertainment facility. H&r block file online This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. H&r block file online   An entertainment facility is any property you own, rent, or use for entertainment. H&r block file online Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. H&r block file online Out-of-pocket expenses. H&r block file online   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. H&r block file online These are not expenses for the use of an entertainment facility. H&r block file online However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. H&r block file online Expenses for spouses. H&r block file online   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. H&r block file online However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. H&r block file online Example. H&r block file online You entertain a customer. H&r block file online The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. H&r block file online The customer's spouse joins you because it is impractical to entertain the customer without the spouse. H&r block file online You can deduct the cost of entertaining the customer's spouse. H&r block file online If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible. H&r block file online Gift or entertainment. H&r block file online   Any item that might be considered either a gift or entertainment generally will be considered entertainment. H&r block file online However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift. H&r block file online   If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. H&r block file online You can treat the tickets as either a gift or entertainment, whichever is to your advantage. H&r block file online   You can change your treatment of the tickets at a later date by filing an amended return. H&r block file online Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. H&r block file online   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. H&r block file online You cannot choose, in this case, to treat the tickets as a gift. H&r block file online Prev  Up  Next   Home   More Online Publications