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Military Taxes

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Military Taxes

Military taxes Publication 4492-B - Main Content Table of Contents DefinitionsMidwestern Disaster Areas Applicable Disaster Date Charitable Giving IncentivesTemporary Suspension of Limits on Charitable Contributions Standard Mileage Rate for Charitable Use of Vehicles Mileage Reimbursements to Charitable Volunteers Casualty and Theft LossesTime limit for making election. Military taxes Replacement Period for Nonrecognition of Gain Net Operating Losses IRAs and Other Retirement PlansDefinitions Taxation of Qualified Disaster Recovery Assistance Distributions Repayment of Qualified Disaster Recovery Assistance Distributions Repayment of Qualified Distributions for the Purchase or Construction of a Main Home Loans From Qualified Plans Additional Tax Relief for IndividualsEarned Income Credit and Child Tax Credit Additional Exemption for Housing Individuals Displaced by the Severe Storms, Tornadoes, or Flooding Education Credits Recapture of Federal Mortgage Subsidy Exclusion of Certain Cancellations of Indebtedness by Reason of the Severe Storms, Tornadoes, or Flooding Tax Relief for Temporary Relocation Additional Tax Relief for BusinessesEmployee Retention Credit Employer Housing Credit and Exclusion Demolition and Clean-up Costs Increase in Rehabilitation Tax Credit Request for Copy or Transcript of Tax Return How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Military taxes Definitions The following definitions are used throughout this publication. Military taxes Midwestern Disaster Areas A Midwestern disaster area is an area for which a major disaster was declared by the President during the period beginning on May 20, 2008, and ending on July 31, 2008, in the state of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, or Wisconsin, as a result of severe storms, tornadoes, or flooding that occurred on the applicable disaster date. Military taxes See Tables 1 and 2 for a list of the counties included in the Midwestern disaster areas. Military taxes Applicable Disaster Date The term “applicable disaster date” as used in this publication, refers to the date on which the severe storms, tornadoes, or flooding occurred in the Midwestern disaster areas. Military taxes You will need to know this date when using this publication for the various tax provisions. Military taxes Table 1 The counties listed in Table 1 below are eligible for all tax provisions shown in this publication. Military taxes Applicable Disaster Dates* State Affected Counties—Midwestern Disaster Areas 05/02/2008through05/12/2008 Arkansas Arkansas, Benton, Cleburne, Conway, Crittenden, Grant, Lonoke, Mississippi, Phillips, Pulaski, Saline, and Van Buren. Military taxes 06/01/2008through07/22/2008 Illinois Adams, Calhoun, Clark, Coles, Crawford, Cumberland, Douglas, Edgar, Hancock, Henderson, Jasper, Jersey, Lake, Lawrence, Mercer, Rock Island, Whiteside, and Winnebago. Military taxes 05/30/2008through06/27/2008 Indiana Adams, Bartholomew, Brown, Clay, Daviess, Dearborn, Decatur, Gibson, Grant, Greene, Hamilton, Hancock, Hendricks, Henry, Huntington, Jackson, Jefferson, Jennings, Johnson, Knox, Lawrence, Madison, Marion, Monroe, Morgan, Owen, Parke, Pike, Posey, Putnam, Randolph, Ripley, Rush, Shelby, Sullivan, Tippecanoe, Vermillion, Vigo, Washington, and Wayne. Military taxes 05/25/2008through08/13/2008 Iowa Adair, Adams, Allamakee, Appanoose, Audubon, Benton, Black Hawk, Boone, Bremer, Buchanan, Butler, Cass, Cedar, Cerro Gordo, Chickasaw, Clarke, Clayton, Clinton, Crawford, Dallas, Davis, Decatur, Delaware, Des Moines, Dubuque, Fayette, Floyd, Franklin, Fremont, Greene, Grundy, Guthrie, Hamilton, Hancock, Hardin, Harrison, Henry, Howard, Humboldt, Iowa, Jackson, Jasper, Johnson, Jones, Keokuk, Kossuth, Lee, Linn, Louisa, Lucas, Madison, Mahaska, Marion, Marshall, Mills, Mitchell, Monona, Monroe, Montgomery, Muscatine, Page, Polk, Pottawattamie, Poweshiek, Ringgold, Scott, Story, Tama, Union, Van Buren, Wapello, Warren, Washington, Webster, Winnebago, Winneshiek, Worth, and Wright. Military taxes 05/10/2008through05/11/2008 Missouri Barry, Jasper, and Newton. Military taxes 06/01/2008through08/13/2008 Missouri Adair, Andrew, Callaway, Cass, Chariton, Clark, Gentry, Greene, Harrison, Holt, Johnson, Lewis, Lincoln, Linn, Livingston, Macon, Marion, Monroe, Nodaway, Pike, Putnam, Ralls, St. Military taxes Charles, Stone, Taney, Vernon, and Webster. Military taxes 05/22/2008through06/24/2008 Nebraska Buffalo, Butler, Colfax, Custer, Dawson, Douglas, Gage, Hamilton, Holt, Jefferson, Kearney, Lancaster, Platte, Richardson, Sarpy, and Saunders. Military taxes 06/05/2008through07/25/2008 Wisconsin Adams, Calumet, Crawford, Columbia, Dane, Dodge, Fond du Lac, Grant, Green, Green Lake, Iowa, Jefferson, Juneau, Kenosha, La Crosse, Manitowoc, Marquette, Milwaukee, Monroe, Ozaukee, Racine, Richland, Rock, Sauk, Sheboygan, Vernon, Walworth, Washington, Waukesha, and Winnebago. Military taxes *For more details, go to www. Military taxes fema. Military taxes gov Table 2 The counties listed in Table 2 below are eligible for all of the special tax provisions shown in this publication except the following. Military taxes Charitable Giving Incentives. Military taxes Net Operating Losses. Military taxes Education Credits. Military taxes Recapture of Federal Mortgage Subsidy. Military taxes Tax Relief for Temporary Relocation. Military taxes Employee Retention Credit. Military taxes Employer Housing Credit and Exclusion. Military taxes Demolition and Clean-up Costs. Military taxes Increase in Rehabilitation Credit. Military taxes Applicable Disaster Dates* State Affected Counties—Midwestern Disaster Areas 06/01/2008through07/22/2008 Illinois Greene, Madison, Monroe, Pike, Randolph, St. Military taxes Clair, and Scott. Military taxes 05/30/2008through06/27/2008 Indiana Benton, Boone, Fountain, Franklin, Jay, Montgomery, Ohio, Switzerland, Union, and Wabash. Military taxes 05/25/2008through08/13/2008 Iowa Carroll, Cherokee, Lyon, Palo Alto, Pocahontas, Taylor, and Wayne. Military taxes 05/22/2008through06/16/2008 Kansas Barber, Barton, Bourbon, Brown, Butler, Chautauqua, Cherokee, Clark, Clay, Comanche, Cowley, Crawford, Decatur, Dickinson, Edwards, Elk, Ellis, Ellsworth, Franklin, Gove, Graham, Harper, Haskell, Hodgeman, Jackson, Jewell, Kingman, Kiowa, Lane, Linn, Logan, Mitchell, Montgomery, Ness, Norton, Osborne, Pawnee, Phillips, Pratt, Reno, Republic, Riley, Rooks, Rush, Saline, Seward, Sheridan, Smith, Stafford, Sumner, Thomas, Trego, Wallace, and Wilson. Military taxes 06/06/2008through06/13/2008 Michigan Allegan, Barry, Eaton, Ingham, Lake, Manistee, Mason, Missaukee, Osceola, Ottawa, Saginaw, and Wexford. Military taxes 06/06/2008through06/12/2008 Minnesota Cook, Fillmore, Freeborn, Houston, Mower, and Nobles. Military taxes 06/01/2008through08/13/2008 Missouri Atchison, Audrain, Bates, Buchanan, Cape Girardeau, Carroll, Christian, Daviess, Grundy, Howard, Jefferson, Knox, Mercer, Miller, Mississippi, Morgan, New Madrid, Pemiscot, Perry, Pettis, Platte, Polk, Randolph, Ray, Saline, Schuyler, Scotland, Shelby, St. Military taxes Genevieve, St. Military taxes Louis, the Independent City of St. Military taxes Louis, Scott, Sullivan, and Worth. Military taxes 04/23/2008through04/26/2008 Nebraska Gage, Johnson, Morrill, Nemaha, and Pawnee. Military taxes 05/22/2008through06/24/2008 Nebraska Adams, Blaine, Boone, Boyd, Brown, Burt, Cass, Chase, Cherry, Cuming, Dundy, Fillmore, Frontier, Furnas, Garfield, Gosper, Greeley, Hall, Hayes, Howard, Johnson, Keya Paha, Lincoln, Logan, Loup, Merrick, McPherson, Morrill, Nance, Nemaha, Otoe, Phelps, Polk, Red Willow, Rock, Saline, Seward, Sherman, Stanton, Thayer, Thomas, Thurston, Valley, Webster, Wheeler, and York. Military taxes 06/27/2008 Nebraska Dodge, Douglas, Sarpy, and Saunders. Military taxes 06/05/2008through07/25/2008 Wisconsin Lafayette. Military taxes * For more details, go to www. Military taxes fema. Military taxes gov Charitable Giving Incentives Temporary Suspension of Limits on Charitable Contributions This benefit applies only to the counties in Table 1. Military taxes Individuals. Military taxes   Qualified contributions are not subject to the overall limit on itemized deductions or the 50% of adjusted gross income (AGI) limit. Military taxes A qualified contribution is a charitable contribution paid in cash or by check to a 50% limit organization if you make an election to have the 50% limit not apply to these contributions. Military taxes   A qualified contribution must also meet all of the following requirements. Military taxes Be paid after May 1, 2008, and before January 1, 2009. Military taxes The contribution must be for relief efforts in one or more Midwestern disaster areas. Military taxes Documentation must be provided by the donee organization that the contribution was used (or will be used) for relief efforts in one or more Midwestern disaster areas. Military taxes   Your deduction for qualified contributions is limited to your AGI minus your deduction for all other charitable contributions. Military taxes You can carry over any contributions you are not able to deduct for 2008 because of this limit. Military taxes In 2009, the carryover of your unused qualified contributions is subject to the 50% of AGI limit. Military taxes Exception. Military taxes   Qualified contributions do not include contributions to certain private foundations described in section 509(a)(3) or contributions for the establishment of a new, or maintenance of an existing, donor advised fund. Military taxes Corporations. Military taxes   A corporation can elect to deduct qualified cash contributions without regard to the 10% of taxable income limit if the contributions were paid after May 1, 2008, and before January 1, 2009, to a qualified charitable organization (other than certain private foundations described in section 509(a)(3) or contributions for the establishment of a new, or maintenance of an existing, donor advised fund), for relief efforts in one or more Midwestern disaster areas. Military taxes Documentation must be provided by the donee organization that the contribution was used (or will be used) for relief efforts in one or more Midwestern disaster areas. Military taxes The corporation's deduction for these qualified contributions is limited to 100% of taxable income (as modified for the 10% limit) minus the corporation's deduction for all other charitable contributions. Military taxes Any qualified contributions over this limit can be carried over to the next 5 years, subject to the 10% of taxable income limit. Military taxes Partners and shareholders. Military taxes   Each partner in a partnership and each shareholder in an S corporation must make a separate election to have the appropriate limit not apply. Military taxes More information. Military taxes   For more information, see Publication 526 or Publication 542, Corporations. Military taxes Publication 526 includes a worksheet you can use to figure your deduction if any limits apply to your charitable contributions. Military taxes Standard Mileage Rate for Charitable Use of Vehicles This benefit applies only to the counties in Table 1. Military taxes The following are special standard mileage rates in effect for 2008 for the cost of operating your vehicle for providing charitable services related only to the severe storms, tornadoes, or flooding. Military taxes 36 cents per mile for the period beginning on the applicable disaster date through June 30, 2008. Military taxes 41 cents per mile for the period July 1 through December 31, 2008. Military taxes Mileage Reimbursements to Charitable Volunteers This benefit applies only to the counties in Table 1. Military taxes You can exclude from income amounts you receive as mileage reimbursements for the use of a private passenger vehicle for the benefit of a qualified charitable organization in providing relief related to the severe storms, tornadoes, or flooding during the period beginning on the applicable disaster date, and ending on December 31, 2008. Military taxes You cannot claim a deduction or credit for amounts you exclude. Military taxes You must keep records of miles driven, time, place (or use), and purpose of the mileage. Military taxes The amount you can exclude cannot exceed the standard business mileage rate (shown below) for expenses incurred during the following periods. Military taxes 50. Military taxes 5 cents per mile for the period beginning on the applicable disaster date through June 30, 2008. Military taxes 58. Military taxes 5 cents per mile for the period July 1 through December 31, 2008. Military taxes Casualty and Theft Losses This benefit applies to the counties in both Tables 1 and 2. Military taxes The following paragraphs explain changes to casualty and theft losses that were caused by the severe storms, tornadoes, or flooding in the Midwestern disaster areas. Military taxes For more information, see Publication 547. Military taxes Limits on personal casualty or theft losses. Military taxes   Losses of personal use property that arose in a Midwestern disaster area on or after the applicable disaster date are not subject to the $100 or 10% of AGI limits. Military taxes Qualifying losses include losses from casualties and thefts that arose in a Midwestern disaster area that were attributable to the severe storms, tornadoes, or flooding. Military taxes When completing Form 4684, do not include on line 17 any losses that arose in a Midwestern disaster area. Military taxes A loss arising in a Midwestern disaster area is not considered a loss attributable to a federally declared disaster for purposes of that line and cannot be added to your standard deduction. Military taxes When to deduct the loss. Military taxes   Casualty and theft losses are generally deductible only in the year the casualty occurred or the theft was discovered. Military taxes However, you can elect to deduct losses caused by the severe storms, tornadoes, or flooding on your return for the prior year. Military taxes Special instructions for individuals who elect to claim a Midwestern disaster area casualty or theft loss for 2007. Military taxes   Individuals filing or amending their 2007 tax return for casualty or theft losses that were attributable to the severe storms, tornadoes, or flooding should: Enter “Midwestern Disaster Area” at the top of Form 1040 or Form 1040X, and Complete the 2008 version of Form 4684. Military taxes Cross out “2008” and enter “2007” at the top of Form 4684. Military taxes Time limit for making election. Military taxes   You must make this election to claim your casualty or theft loss in 2007 by the later of the following dates. Military taxes The due date (without extensions) for filing your 2008 income tax return. Military taxes The due date (with extensions) for filing your 2007 income tax return. Military taxes Example. Military taxes If you are a calendar year individual taxpayer, you have until April 15, 2009, to amend your 2007 tax return to claim a casualty or theft loss that occurred during 2008. Military taxes Replacement Period for Nonrecognition of Gain This benefit applies to the counties in both Tables 1 and 2. Military taxes Generally, an involuntary conversion occurs when property is damaged, destroyed, stolen, seized, requisitioned, or condemned, and you receive other property or money in payment, such as insurance or a condemnation award. Military taxes Generally, you do not have to report a gain (if any) if you replace the property within 2 years (4 years for a main home in a federally declared disaster area). Military taxes However, for property that was involuntarily converted on or after the applicable disaster date, as a result of the severe storms, tornadoes, or flooding, a 5-year replacement period applies if substantially all of the use of the replacement property is in a Midwestern disaster area. Military taxes For more information, see the Instructions for Form 4684. Military taxes Net Operating Losses This benefit applies only to the counties in Table 1. Military taxes Qualified disaster recovery assistance loss. Military taxes   Generally, you can carry a net operating loss (NOL) back to the 2 tax years before the NOL year. Military taxes However, the portion of an NOL that is a qualified disaster recovery assistance loss can be carried back to the 5 tax years before the NOL year. Military taxes In addition, the 90% limit on the alternative tax NOL deduction (ATNOLD) does not apply to such portion of the ATNOLD. Military taxes   A qualified disaster recovery assistance loss is the smaller of: The excess of the NOL for the year over the specified liability loss for the year to which a 10-year carryback applies, or The total of the following deductions (to the extent they are taken into account in computing the NOL for the tax year): Qualified disaster recovery assistance casualty loss (as defined below), Moving expenses paid or incurred on or after the applicable disaster date, and before January 1, 2011, for the employment of an individual whose main home was in a Midwestern disaster area before the applicable disaster date, who was unable to remain in that home because of the severe storms, tornadoes, or flooding, and whose main job location (after the move) is in a Midwestern disaster area, Temporary housing expenses paid or incurred on or after the applicable disaster date, and before January 1, 2011, to house employees of the taxpayer whose main job location is in a Midwestern disaster area, Depreciation or amortization allowable for any qualified disaster recovery assistance property (even if you elected not to claim the special disaster recovery assistance depreciation allowance for such property) for the year placed in service, and Repair expenses (including expenses for the removal of debris) paid or incurred on or after the applicable disaster date, and before January 1, 2011, for any damage from the severe storms, tornadoes, or flooding to property located in a Midwestern disaster area. Military taxes Qualified disaster recovery assistance casualty loss. Military taxes   A qualified disaster recovery assistance casualty loss is any deductible section 1231 loss of property located in a Midwestern disaster area if the loss was caused by the severe storms, tornadoes, or flooding. Military taxes For this purpose, the amount of the loss is reduced by any recognized gain from an involuntary conversion caused by the severe storms, tornadoes, or flooding of property located in a Midwestern disaster area. Military taxes Any such loss taken into account in figuring your qualified disaster recovery assistance loss is not eligible for the election to be treated as having occurred in the previous tax year. Military taxes More information. Military taxes   For more information on NOLs, see Publication 536 or Publication 542, Corporations. Military taxes IRAs and Other Retirement Plans New rules provide for tax-favored withdrawals, repayments, and loans from certain retirement plans for taxpayers who suffered economic losses as a result of the severe storms, tornadoes, or flooding. Military taxes Definitions Qualified disaster recovery assistance distribution. Military taxes   A qualified disaster recovery assistance distribution is any distribution you received from an eligible retirement plan if all of the following apply. Military taxes The distribution was made on or after the applicable disaster date and before January 1, 2010. Military taxes Your main home was located in a Midwestern disaster area on the applicable disaster date. Military taxes You sustained an economic loss because of the severe storms, tornadoes, or flooding and your main home was in a Midwestern disaster area on the applicable disaster date. Military taxes Examples of an economic loss include, but are not limited to: Loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause; Loss related to displacement from your home; or Loss of livelihood due to temporary or permanent layoffs. Military taxes   If (1) through (3) above apply, you can generally designate any distribution (including periodic payments and required minimum distributions) from an eligible retirement plan as a qualified disaster recovery assistance distribution, regardless of whether the distribution was made on account of the severe storms, tornadoes, or flooding. Military taxes Qualified disaster recovery assistance distributions are permitted without regard to your need or the actual amount of your economic loss. Military taxes   The total of your qualified disaster recovery assistance distributions from all plans is limited to $100,000. Military taxes If you have distributions in excess of $100,000 from more than one type of plan, such as a 401(k) plan and an IRA, you can allocate the $100,000 limit among the plans any way you choose. Military taxes   A reduction or offset (on or after the applicable disaster date) of your account balance in an eligible retirement plan in order to repay a loan can also be designated as a qualified disaster recovery assistance distribution. Military taxes Eligible retirement plan. Military taxes   An eligible retirement plan can be any of the following. Military taxes A qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan). Military taxes A qualified annuity plan. Military taxes A tax-sheltered annuity contract. Military taxes A governmental section 457 deferred compensation plan. Military taxes A traditional, SEP, SIMPLE, or Roth IRA. Military taxes Main home. Military taxes   Generally, your main home is the home where you live most of the time. Military taxes A temporary absence due to special circumstances, such as illness, education, business, military service, evacuation, or vacation, will not change your main home. Military taxes Taxation of Qualified Disaster Recovery Assistance Distributions This benefit applies to the counties in both Tables 1 and 2. Military taxes Qualified disaster recovery assistance distributions are included in income in equal amounts over three years. Military taxes However, if you elect, you can include the entire distribution in your income in the year it was received. Military taxes Qualified disaster recovery assistance distributions are not subject to the additional 10% tax (or the additional 25% tax for certain distributions from SIMPLE IRAs) on early distributions from qualified retirement plans (including IRAs). Military taxes However, any distributions you receive in excess of the $100,000 qualified disaster recovery assistance distribution limit may be subject to the additional tax on early distributions. Military taxes For more information, see Form 8930. Military taxes Repayment of Qualified Disaster Recovery Assistance Distributions This benefit applies to the counties in both Tables 1 and 2. Military taxes If you choose, you generally can repay any portion of a qualified disaster recovery assistance distribution that is eligible for tax-free rollover treatment to an eligible retirement plan. Military taxes Also, you can repay a qualified disaster recovery assistance distribution made on account of a hardship from a retirement plan. Military taxes However, see Exceptions later for qualified disaster recovery assistance distributions you cannot repay. Military taxes You have three years from the day after the date you received the distribution to make a repayment. Military taxes Amounts that are repaid are treated as a qualified rollover and are not included in income. Military taxes Also, a repayment of a qualified disaster recovery assistance distribution to an IRA is not counted when figuring the one-rollover-per-year limitation. Military taxes See Form 8930 for more information on how to report repayments. Military taxes Exceptions. Military taxes   You cannot repay the following types of distributions. Military taxes Qualified disaster recovery assistance distributions received as a beneficiary (other than a surviving spouse). Military taxes Required minimum distributions. Military taxes Periodic payments (other than from an IRA) that are for: A period of 10 years or more, Your life or life expectancy, or The joint lives or joint life expectancies of you and your beneficiary. Military taxes Repayment of Qualified Distributions for the Purchase or Construction of a Main Home This benefit applies to the counties in both Tables 1 and 2. Military taxes If you received a qualified distribution to purchase or construct a main home in a Midwestern disaster area, you can repay part or all of that distribution on or after the applicable disaster date, but no later than March 3, 2009, to an eligible retirement plan. Military taxes For this purpose, an eligible retirement plan is any plan, annuity, or IRA to which a qualified rollover can be made. Military taxes To be a qualified distribution, the distribution must meet all of the following requirements. Military taxes The distribution is a hardship distribution from a 401(k) plan, a hardship distribution from a tax-sheltered annuity contract, or a qualified first-time homebuyer distribution from an IRA. Military taxes The distribution was received after the date that was 6 months before the day after the applicable disaster date. Military taxes The distribution was to be used to purchase or construct a main home in a Midwestern disaster area that was not purchased or constructed because of the severe storms, tornadoes, or flooding. Military taxes Amounts that are repaid before March 4, 2009, are treated as a qualified rollover and are not included in income. Military taxes Also, a repayment of a qualified distribution to an IRA is not counted when figuring the one-rollover-per-year limitation. Military taxes A qualified distribution not repaid before March 4, 2009, may be taxable for 2007 or 2008 and subject to the additional 10% tax (or the additional 25% tax for certain SIMPLE IRAs) on early distributions. Military taxes You must file Form 8930 if you received a qualified distribution that you repaid, in whole or in part, before March 4, 2009. Military taxes Loans From Qualified Plans This benefit applies to the counties in both Tables 1 and 2. Military taxes The following benefits are available to qualified individuals. Military taxes Increases to the limits for distributions treated as loans from employer plans. Military taxes A 1-year suspension for payments due on plan loans. Military taxes Qualified individual. Military taxes   You are a qualified individual if your main home was located in a Midwestern disaster area on the applicable disaster date and you had an economic loss because of the severe storms, tornadoes, or flooding. Military taxes Examples of an economic loss include, but are not limited to: Loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause; Loss related to displacement from your home; or Loss of livelihood due to temporary or permanent layoffs. Military taxes Limits on plan loans. Military taxes   The $50,000 limit for distributions treated as plan loans is increased to $100,000. Military taxes In addition, the limit based on 50% of your vested accrued benefit is increased to 100% of that benefit. Military taxes If your main home was located in a Midwestern disaster area, the higher limits apply only to loans received during the period beginning on October 3, 2008, and ending on December 31, 2009. Military taxes One-year suspension of loan payments. Military taxes   Payments on plan loans outstanding on or after the applicable disaster date, may be suspended for 1 year by the plan administrator. Military taxes To qualify for the suspension, the due date for any loan payment must occur during the period beginning on the applicable disaster date and ending on December 31, 2009. Military taxes Additional Tax Relief for Individuals Earned Income Credit and Child Tax Credit This benefit applies to the counties in both Tables 1 and 2. Military taxes You can elect to use your 2007 earned income to figure your earned income credit (EIC) and additional child tax credit for 2008 if: Your 2008 earned income is less than your 2007 earned income, and At least one of the following statements is true. Military taxes Your main home on the applicable disaster date was in a Midwestern disaster area as shown in Table 1. Military taxes Your main home on the applicable disaster date was in a Midwestern disaster area as shown in Table 2, and you were displaced from that home because of the severe storms, tornadoes, or flooding. Military taxes Earned income. Military taxes    For the purpose of this election, your earned income for both the EIC and the additional child tax credit is the amount of earned income used to figure your EIC, even if you did not take the EIC and even if that amount is different than your earned income for the additional child tax credit. Military taxes If you are claiming only the additional child tax credit, you must figure the amount of your earned income for EIC purposes to determine your eligibility to make the election and the amount of the credit. Military taxes Joint returns. Military taxes   If you file a joint return, you qualify to make this election even if only one spouse meets the requirements. Military taxes If you make the election, your 2007 earned income is the sum of your 2007 earned income and your spouse's 2007 earned income. Military taxes Making the election. Military taxes   If you make the election to use your 2007 earned income, the election applies for figuring both the EIC and the additional child tax credit. Military taxes However, you can make the election for the additional child tax credit even if you do not take the EIC. Military taxes   Electing to use your 2007 earned income can increase or decrease your EIC. Military taxes Take the following steps to decide whether to make the election. Military taxes Figure your 2008 EIC using your 2007 earned income. Military taxes Figure your 2008 additional child tax credit using your 2007 earned income for EIC purposes. Military taxes Add the results of (1) and (2). Military taxes Figure your 2008 EIC using your 2008 earned income. Military taxes Figure your 2008 additional child tax credit using your 2008 earned income for additional child tax credit purposes. Military taxes Add the results of (4) and (5). Military taxes Compare the results of (3) and (6). Military taxes If (3) is larger than (6), it is to your benefit to make the election. Military taxes If (3) is equal to or smaller than (6), making the election will not help you. Military taxes   If you elect to use your 2007 earned income and you are claiming the EIC, enter “PYEI” and the amount of your 2007 earned income on the dotted line next to line 64a of Form 1040, on the line next to line 40a of Form 1040A, or in the space to the left of line 8a of Form 1040EZ. Military taxes   If you elect to use your 2007 earned income and you are claiming the additional child tax credit, enter your 2007 earned income for EIC purposes (even if you did not claim the EIC) on Form 8812, Additional Child Tax Credit, line 4a, and check the box on that line. Military taxes Getting your 2007 tax return information. Military taxes   If you do not have your 2007 tax records, you can get the amount of earned income used to figure your 2007 EIC by calling 1-866-562-5227. Military taxes You can also get this information by visiting the IRS website at www. Military taxes irs. Military taxes gov. Military taxes   If you prefer to figure your 2007 earned income yourself, copies or transcripts of your filed and processed tax returns can help you reconstruct your tax records. Military taxes See Request for Copy or Transcript of Tax Return on page 11. Military taxes Additional Exemption for Housing Individuals Displaced by the Severe Storms, Tornadoes, or Flooding This benefit applies to the counties in both Tables 1 and 2. Military taxes You can claim an additional exemption amount of $500 for providing housing in your main home for each individual displaced by the severe storms, tornadoes, or flooding. Military taxes The additional exemption amount is claimed on Form 8914. Military taxes You can claim an additional exemption amount only one time for a specific individual. Military taxes If you claimed an additional exemption amount for an individual in 2008, you cannot claim that amount again for the same individual in 2009. Military taxes The maximum additional exemption amount you can claim for all displaced individuals is $2,000. Military taxes Any additional exemption amount you claimed for displaced individuals in 2008 will reduce the $2,000 maximum for 2009. Military taxes The $2,000 limit applies to a husband and wife, whether the husband and wife file joint returns or separate returns. Military taxes If married filing separately, the $2,000 can be divided in $500 increments between the spouses. Military taxes For example, if one spouse claims an additional exemption amount for one displaced individual, the other spouse, if otherwise eligible, can claim additional exemption amounts for three different displaced individuals. Military taxes If two or more taxpayers share the same main home, only one taxpayer in that main home can claim the additional exemption amount for a specific displaced individual. Military taxes In order for you to be considered to have provided housing, you must have a legal interest in the main home (that is, own or rent the home). Military taxes To qualify as a displaced individual, the individual: Must have had his or her main home in a Midwestern disaster area on the applicable disaster date, and he or she must have been displaced from that home. Military taxes If the individual's main home was located in a Midwestern disaster area as shown in Table 2, that home must have been damaged by the severe storms, tornadoes, or flooding or the individual must have been evacuated from that home because of the severe storms, tornadoes, or flooding, Must have been provided housing in your main home for a period of at least 60 consecutive days ending in the tax year in which the exemption is claimed, and Cannot be your spouse or dependent. Military taxes You cannot claim the additional exemption amount if you received rent (or any other amount) from any source for providing the housing. Military taxes You are permitted to receive payments or reimbursements that do not relate to normal housing costs, including the following. Military taxes Food, clothing, or personal items consumed or used by the displaced individual. Military taxes Reimbursement for the cost of any long distance telephone calls made by the displaced individual. Military taxes Reimbursement for the cost of gasoline for the displaced individual's use of your vehicle. Military taxes However, you cannot claim the additional exemption amount if you received any reimbursement for the extra costs of heat, electricity, or water used by the displaced individual. Military taxes Also, you must report on Form 8914 the displaced individual's social security number or individual taxpayer identification number to claim an additional exemption amount. Military taxes For more information, see Form 8914. Military taxes Education Credits This benefit applies only to the counties in Table 1. Military taxes The education credits have been expanded for students attending an eligible educational institution located in a Midwestern disaster area (Midwestern disaster area students) for any tax year beginning in 2008 or 2009. Military taxes The Hope credit for a Midwestern disaster area student is increased to 100% of the first $2,400 in qualified education expenses and 50% of the next $2,400 of qualified education expenses for a maximum credit of $3,600 per student. Military taxes The lifetime learning credit rate for a Midwestern disaster area student is increased from 20% to 40%. Military taxes The definition of qualified education expenses for a Midwestern disaster area student also has been expanded. Military taxes This expanded definition also applies to the tuition and fees deduction claimed on Form 8917. Military taxes In addition to tuition and fees required for the student's enrollment or attendance at an eligible educational institution, qualified education expenses for a Midwestern disaster area student include the following. Military taxes Books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Military taxes For a special needs student, expenses that are necessary for that person's enrollment or attendance at an eligible educational institution. Military taxes For a student who is at least a half-time student, the reasonable costs of room and board, but only to the extent that the costs are not more than the greater of the following two amounts. Military taxes The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Military taxes The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Military taxes You will need to contact the eligible educational institution for qualified room and board costs. Military taxes For more information, see Form 8863. Military taxes See Form 8917 for the tuition and fees deduction. Military taxes Recapture of Federal Mortgage Subsidy This benefit applies only to the counties in Table 1. Military taxes Generally, if you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. Military taxes However, you do not have to recapture any benefit if your mortgage loan was a qualified home improvement loan of not more than $15,000. Military taxes This amount is increased to $150,000 if the loan was provided before 2011 and was used to alter, repair, or improve an existing owner-occupied residence in a Midwestern disaster area as shown in Table 1. Military taxes Exclusion of Certain Cancellations of Indebtedness by Reason of the Severe Storms, Tornadoes, or Flooding This benefit applies to the counties in both Tables 1 and 2. Military taxes Generally, discharges of nonbusiness debts (such as mortgages) made on or after the applicable disaster date and before January 1, 2010, are excluded from income for individuals whose main home was in a Midwestern disaster area on the applicable disaster date. Military taxes If the individual's main home was located in a Midwestern disaster area as shown in Table 2, the individual also must have had an economic loss because of the severe storms, tornadoes, or flooding. Military taxes Examples of an economic loss include, but are not limited to: Loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause; Loss related to displacement from your home; or Loss of livelihood due to temporary or permanent layoffs. Military taxes This relief does not apply to any debt secured by real property located outside a Midwestern disaster area. Military taxes You may also have to reduce certain tax attributes by the amount excluded. Military taxes For more information, see Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). Military taxes Tax Relief for Temporary Relocation This benefit applies only to the counties in Table 1. Military taxes The IRS can adjust the internal revenue laws to ensure that taxpayers do not lose a deduction or credit or experience a change of filing status in 2008 or 2009 as a result of a temporary relocation caused by the severe storms, tornadoes, or flooding. Military taxes However, any such adjustment must ensure that an individual is not taken into account by more than one taxpayer for the same tax benefit. Military taxes The IRS has exercised this authority as follows. Military taxes In determining whether you furnished over one-half of the cost of maintaining a household, you can exclude from total household costs any assistance received from the government or charitable organizations because you were temporarily relocated as a result of the severe storms, tornadoes, or flooding. Military taxes In determining whether you provided more than one-half of an individual's support, you can disregard any assistance received from the government or charitable organizations because you were temporarily relocated as a result of the severe storms, tornadoes, or flooding. Military taxes You can treat as a student an individual who enrolled in school before the applicable disaster date, and who is unable to attend classes because of the severe storms, tornadoes, or flooding, for each month of the enrollment period that individual is prevented by the severe storms, tornadoes, or flooding from attending school as planned. Military taxes Additional Tax Relief for Businesses Employee Retention Credit This benefit applies only to the counties in Table 1. Military taxes An eligible employer who conducted an active trade or business in a Midwestern disaster area can claim the employee retention credit. Military taxes The credit is 40% of qualified wages for each eligible employee (up to a maximum of $6,000 in qualified wages per employee). Military taxes Generally, you must reduce your deduction for salaries and wages by the amount of this credit (before the tax liability limit). Military taxes Use Form 5884-A to claim the credit. Military taxes Employers affected by the severe storms, tornadoes, or flooding. Military taxes   The following definitions apply to employers affected by the severe storms, tornadoes, or flooding. Military taxes Eligible employer. Military taxes   For this purpose, an eligible employer is any employer who meets all of the following. Military taxes Employed an average of not more than 200 employees on business days during the tax year before the applicable disaster date. Military taxes Conducted an active trade or business on the applicable disaster date in a Midwestern disaster area. Military taxes Whose trade or business was inoperable on any day after the applicable disaster date and before January 1, 2009, because of the damage caused by the severe storms, tornadoes, or flooding. Military taxes Eligible employee. Military taxes   For this purpose, an eligible employee is an employee whose principal place of employment on the applicable disaster date with such eligible employer was in a Midwestern disaster area. Military taxes An employee is not an eligible employee for purposes of the severe storms, tornadoes, or flooding if the employee is treated as an eligible employee for the work opportunity credit. Military taxes Qualified wages. Military taxes   Qualified wages are wages (up to $6,000 per employee) you paid or incurred before January 1, 2009, for an eligible employee beginning on the date your trade or business first became inoperable at the employee's principal place of employment immediately before the applicable disaster, and ending on the date your trade or business resumed significant operations at that place. Military taxes In addition, the wages must have been paid or incurred after the applicable disaster date. Military taxes    This includes wages paid even if the employee performed no services, performed services at a place of employment other than the principal place of employment, or performed services at the principal place of employment before significant operations resumed. Military taxes    Wages qualifying for the credit generally have the same meaning as wages subject to the Federal Unemployment Tax Act (FUTA). Military taxes Qualified wages also include amounts you paid for medical or hospitalization expenses in connection with sickness or accident disability. Military taxes Qualified wages for any employee must be reduced by the amount of any work supplementation payment you received under the Social Security Act. Military taxes   For agricultural employees, if the work performed by any employee during more than half of any pay period qualified under FUTA as agricultural labor, that employee's wages subject to social security and Medicare taxes are qualified wages. Military taxes For a special rule that applies to railroad employees, see section 51(h)(1)(B). Military taxes   Qualified wages do not include the following. Military taxes Wages paid to your dependent or a related individual. Military taxes See section 51(i)(1). Military taxes Wages paid to any employee during the period for which you received payment for the employee from a federally funded on-the-job training program. Military taxes Wages for services of replacement workers during a strike or lockout. Military taxes   For more information, see Form 5884-A. Military taxes Employer Housing Credit and Exclusion This benefit applies only to the counties in Table 1. Military taxes An employer who conducted an active trade or business in a Midwestern disaster area can claim the employer housing credit. Military taxes The credit is equal to 30% of the value (up to $600 per month per employee) of in-kind lodging furnished to a qualified employee (and the employee's spouse or dependents) from November 1, 2008, through May 1, 2009. Military taxes The value of the lodging is excluded from the income of the qualified employee but is treated as wages for purposes of taxes imposed under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). Military taxes Generally, you must reduce your deduction for salaries and wages by the amount of this credit (before the tax liability limit). Military taxes The employer must use Form 5884-A to claim the credit. Military taxes A qualified employee is an individual who had a main home in a Midwestern disaster area on the applicable disaster date, and who performs substantially all employment services in a Midwestern disaster area for the employer furnishing the lodging. Military taxes The employee cannot be your dependent or a related individual. Military taxes See section 51(i)(1). Military taxes For more information, see Form 5884-A. Military taxes Demolition and Clean-up Costs This benefit applies only to the counties in Table 1. Military taxes You can elect to deduct 50% of any qualified disaster recovery assistance clean-up costs for the tax year in which the costs are paid or incurred, instead of capitalizing them. Military taxes Qualified disaster recovery assistance clean-up costs are any amounts paid or incurred on or after the applicable disaster date, and before January 1, 2011, for the removal of debris from, or the demolition of structures on, real property located in a Midwestern disaster area that is: Held by you for use in a trade or business or for the production of income, or Inventory or other property held primarily for sale to customers in the ordinary course of your trade or business. Military taxes Qualified disaster recovery assistance clean-up costs are limited to amounts necessary due to damage attributable to the severe storms, tornadoes, or flooding in the Midwestern disaster areas. Military taxes Increase in Rehabilitation Tax Credit This benefit applies only to the counties in Table 1. Military taxes The rehabilitation credit is increased for qualified rehabilitation expenditures paid or incurred on or after the applicable disaster date, and before January 1, 2012, on buildings located in a Midwestern disaster area as follows. Military taxes For pre-1936 buildings (other than certified historic structures), the credit percentage is increased from 10% to 13%. Military taxes For certified historic structures, the credit percentage is increased from 20% to 26%. Military taxes For more information, see Form 3468, Investment Credit. Military taxes Request for Copy or Transcript of Tax Return Request for copy of tax return. Military taxes   You can use Form 4506 to order a copy of your tax return. Military taxes Generally, there is a $57 fee for requesting each copy of a tax return. Military taxes If your main home, principal place of business, or tax records are located in a Midwestern disaster area, the fee will be waived if “Midwestern Disaster Area” is written in red across the top of the form when filed. Military taxes Request for transcript of tax return. Military taxes   You can use Form 4506-T to order a free transcript of your tax return. Military taxes A transcript provides most of the line entries from a tax return and usually contains the information that a third party requires. Military taxes You can also call 1-800-829-1040 to order a transcript. Military taxes How To Get Tax Help Special IRS assistance. Military taxes   The IRS is providing special help for those affected by the severe storms, tornadoes, or flooding, as well as survivors and personal representatives of the victims. Military taxes We have set up a special toll-free number for people who may have trouble filing or paying their taxes because they were affected by recent federally declared disasters, or who have other tax issues related to the severe storms, tornadoes, or flooding. Military taxes Call 1-866-562-5227 Monday through FridayIn English–7 a. Military taxes m. Military taxes to 10 p. Military taxes m. Military taxes local timeIn Spanish–8 a. Military taxes m. Military taxes to 9:30 p. Military taxes m. Military taxes local time   The IRS website at www. Military taxes irs. Military taxes gov has notices and other tax relief information. Military taxes Check it periodically for any new guidance. Military taxes You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. Military taxes By selecting the method that is best for you, you will have quick and easy access to tax help. Military taxes Contacting your Taxpayer Advocate. Military taxes   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. Military taxes Here are seven things every taxpayer should know about TAS: TAS is your voice at the IRS. Military taxes Our service is free, confidential, and tailored to meet your needs. Military taxes You may be eligible for TAS help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. Military taxes TAS helps taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. Military taxes This includes businesses as well as individuals. Military taxes TAS employees know the IRS and how to navigate it. Military taxes We will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. Military taxes TAS has at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. Military taxes You can call your local advocate, whose number is in your phone book, in Pub. Military taxes 1546, Taxpayer Advocate Service—Your Voice at the IRS, and on our website at www. Military taxes irs. Military taxes gov/advocate. Military taxes You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. Military taxes You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. Military taxes taxtoolkit. Military taxes irs. Military taxes gov. Military taxes Low Income Taxpayer Clinics (LITCs). Military taxes   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. Military taxes LITCs are independent from the IRS. Military taxes Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. Military taxes If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. Military taxes For more information, see Publication 4134, Low Income Taxpayer Clinic List. Military taxes This publication is available at www. Military taxes irs. Military taxes gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. Military taxes Free tax services. Military taxes   To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. Military taxes It contains lists of free tax information sources, including publications, services, and free tax education and assistance programs. Military taxes It also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on your telephone. Military taxes   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities. Military taxes Free help with your return. Military taxes   Free help in preparing your return is available nationwide from IRS-trained volunteers. Military taxes The Volunteer Income Tax Assistance (VITA) program is designed to help low-income taxpayers and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. Military taxes Many VITA sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Military taxes To find the nearest VITA or TCE site, call 1-800-829-1040. Military taxes   As part of the TCE program, AARP offers the Tax-Aide counseling program. Military taxes To find the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP's website atwww. Military taxes aarp. Military taxes org/money/taxaide. Military taxes   For more information on these programs, go to www. Military taxes irs. Military taxes gov and enter keyword “VITA” in the upper right-hand corner. Military taxes Internet. Military taxes You can access the IRS website at www. Military taxes irs. Military taxes gov 24 hours a day, 7 days a week to: E-file your return. Military taxes Find out about commercial tax preparation and e-file services available free to eligible taxpayers. Military taxes Check the status of your 2009 refund. Military taxes Go to www. Military taxes irs. Military taxes gov and click on Where's My Refund. Military taxes Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Military taxes If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Military taxes Have your 2009 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Military taxes Download forms, instructions, and publications. Military taxes Order IRS products online. Military taxes Research your tax questions online. Military taxes Search publications online by topic or keyword. Military taxes Use the online Internal Revenue Code, Regulations, or other official guidance. Military taxes View Internal Revenue Bulletins (IRBs) published in the last few years. Military taxes Figure your withholding allowances using the withholding calculator online at www. Military taxes irs. Military taxes gov/individuals. Military taxes Determine if Form 6251 must be filed by using our Alternative Minimum Tax (AMT) Assistant. Military taxes Sign up to receive local and national tax news by email. Military taxes Get information on starting and operating a small business. Military taxes Phone. Military taxes Many services are available by phone. Military taxes Ordering forms, instructions, and publications. Military taxes Call 1-800-TAX FORM (1-800-829-3676) to order current-year forms, instructions, and publications, and prior-year forms and instructions. Military taxes You should receive your order within 10 days. Military taxes Asking tax questions. Military taxes Call the IRS with your tax questions at 1-800-829-1040. Military taxes Solving problems. Military taxes You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. Military taxes An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Military taxes Call your local Taxpayer Assistance Center for an appointment. Military taxes To find the number, go to www. Military taxes irs. Military taxes gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Military taxes TTY/TDD equipment. Military taxes If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications. Military taxes TeleTax topics. Military taxes Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics. Military taxes Refund information. Military taxes To check the status of your 2009 refund, call 1-800-829-1954 during business hours or 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). Military taxes Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Military taxes If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Military taxes Have your 2009 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Military taxes Refunds are sent out weekly on Fridays. Military taxes If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back. Military taxes Other refund information. Military taxes To check the status of a prior year refund or amended return refund, call 1-800-829-1954. Military taxes Evaluating the quality of our telephone services. Military taxes To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. Military taxes One method is for a second IRS representative to listen in on or record random telephone calls. Military taxes Another is to ask some callers to complete a short survey at the end of the call. Military taxes Walk-in. Military taxes Many products and services are available on a walk-in basis. Military taxes Products. Military taxes You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Military taxes Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Military taxes Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes. Military taxes Services. Military taxes You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. Military taxes An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. Military taxes If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. Military taxes No appointment is necessary—just walk in. Military taxes If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. Military taxes A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. Military taxes If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. Military taxes All other issues will be handled without an appointment. Military taxes To find the number of your local office, go to www. Military taxes irs. Military taxes gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Military taxes Mail. Military taxes You can send your order for forms, instructions, and publications to the address below. Military taxes You should receive a response within 10 days after your request is received. Military taxes Internal Revenue Service1201 N. Military taxes Mitsubishi MotorwayBloomington, IL 61705-6613 DVD for tax products. Military taxes You can order Publication 1796, IRS Tax Products DVD, and obtain: Current-year forms, instructions, and publications. Military taxes Prior-year forms, instructions, and publications. Military taxes Tax Map: an electronic research tool and finding aid. Military taxes Tax law frequently asked questions. Military taxes Tax Topics from the IRS telephone response system. Military taxes Internal Revenue Code—Title 26 of the U. Military taxes S. Military taxes Code. Military taxes Fill-in, print, and save features for most tax forms. Military taxes Internal Revenue Bulletins. Military taxes Toll-free and email technical support. Military taxes Two releases during the year. Military taxes – The first release will ship the beginning of January 2010. Military taxes – The final release will ship the beginning of March 2010. Military taxes Purchase the DVD from National Technical Information Service (NTIS) at www. Military taxes irs. Military taxes gov/cdorders for $30 (no handling fee) or call 1-877-233-6767 toll free to buy the DVD for $30 (plus a $6 handling fee). Military taxes Prev  Up  Next   Home   More Online Publications
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Military taxes 1. Military taxes   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. Military taxes At-risk limits. Military taxes Passive activities. Military taxes Net operating loss. Military taxes When Can I Deduct an Expense?Economic performance. Military taxes Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Military taxes  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Military taxes See Optional safe harbor method under Business use of your home , later. Military taxes Introduction This chapter covers the general rules for deducting business expenses. Military taxes Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. Military taxes Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. Military taxes What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Military taxes An ordinary expense is one that is common and accepted in your industry. Military taxes A necessary expense is one that is helpful and appropriate for your trade or business. Military taxes An expense does not have to be indispensable to be considered necessary. Military taxes Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. Military taxes In some cases you may not be allowed to deduct the expense at all. Military taxes Therefore, it is important to distinguish usual business expenses from expenses that include the following. Military taxes The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Military taxes Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Military taxes Some of your business expenses may be included in figuring cost of goods sold. Military taxes Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Military taxes If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Military taxes The following are types of expenses that go into figuring cost of goods sold. Military taxes The cost of products or raw materials, including freight. Military taxes Storage. Military taxes Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Military taxes Factory overhead. Military taxes Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Military taxes Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Military taxes This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. Military taxes For more information, see the following sources. Military taxes Cost of goods sold—chapter 6 of Publication 334. Military taxes Inventories—Publication 538. Military taxes Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Military taxes Capital Expenses You must capitalize, rather than deduct, some costs. Military taxes These costs are a part of your investment in your business and are called “capital expenses. Military taxes ” Capital expenses are considered assets in your business. Military taxes In general, you capitalize three types of costs. Military taxes Business start-up costs (See Tip below). Military taxes Business assets. Military taxes Improvements. Military taxes You can elect to deduct or amortize certain business start-up costs. Military taxes See chapters 7 and 8. Military taxes Cost recovery. Military taxes   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. Military taxes These recovery methods allow you to deduct part of your cost each year. Military taxes In this way, you are able to recover your capital expense. Military taxes See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Military taxes A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Military taxes A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Military taxes See Publication 946 for details. Military taxes Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Military taxes These costs may include expenses for advertising, travel, or wages for training employees. Military taxes If you go into business. Military taxes   When you go into business, treat all costs you had to get your business started as capital expenses. Military taxes   Usually you recover costs for a particular asset through depreciation. Military taxes Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Military taxes However, you can choose to amortize certain costs for setting up your business. Military taxes See Starting a Business in chapter 8 for more information on business start-up costs. Military taxes If your attempt to go into business is unsuccessful. Military taxes   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. Military taxes The costs you had before making a decision to acquire or begin a specific business. Military taxes These costs are personal and nondeductible. Military taxes They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Military taxes The costs you had in your attempt to acquire or begin a specific business. Military taxes These costs are capital expenses and you can deduct them as a capital loss. Military taxes   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. Military taxes   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Military taxes You cannot take a deduction for these costs. Military taxes You will recover the costs of these assets when you dispose of them. Military taxes Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Military taxes You must fully capitalize the cost of these assets, including freight and installation charges. Military taxes Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Military taxes See Regulations section 1. Military taxes 263A-2 for information on these rules. Military taxes Improvements Improvements are generally major expenditures. Military taxes Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Military taxes The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. Military taxes Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Military taxes Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Military taxes However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Military taxes Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Military taxes Restoration plan. Military taxes   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Military taxes This applies even if some of the work would by itself be classified as repairs. Military taxes Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Military taxes Motor vehicles. Military taxes   You usually capitalize the cost of a motor vehicle you use in your business. Military taxes You can recover its cost through annual deductions for depreciation. Military taxes   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Military taxes See Publication 463. Military taxes   Generally, repairs you make to your business vehicle are currently deductible. Military taxes However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Military taxes Roads and driveways. Military taxes    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. Military taxes The cost of maintaining a private road on your business property is a deductible expense. Military taxes Tools. Military taxes   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. Military taxes Machinery parts. Military taxes   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. Military taxes Heating equipment. Military taxes   The cost of changing from one heating system to another is a capital expense. Military taxes Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Military taxes However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. Military taxes You can deduct the business part. Military taxes For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. Military taxes The remaining 30% is personal interest and generally is not deductible. Military taxes See chapter 4 for information on deducting interest and the allocation rules. Military taxes Business use of your home. Military taxes   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Military taxes These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Military taxes   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Military taxes The business part of your home must be used exclusively and regularly for your trade or business. Military taxes The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. Military taxes   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. Military taxes   Your home office qualifies as your principal place of business if you meet the following requirements. Military taxes You use the office exclusively and regularly for administrative or management activities of your trade or business. Military taxes You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Military taxes   If you have more than one business location, determine your principal place of business based on the following factors. Military taxes The relative importance of the activities performed at each location. Military taxes If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Military taxes Optional safe harbor method. Military taxes   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. Military taxes This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Military taxes   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. Military taxes Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). Military taxes You are not required to allocate these deductions between personal and business use, as is required under the regular method. Military taxes If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Military taxes   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Military taxes All of the requirements discussed earlier under Business use of your home still apply. Military taxes   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Military taxes    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. Military taxes Business use of your car. Military taxes   If you use your car exclusively in your business, you can deduct car expenses. Military taxes If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Military taxes Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Military taxes   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Military taxes Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Military taxes Beginning in 2013, the standard mileage rate is 56. Military taxes 5 cents per mile. Military taxes   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. Military taxes   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Military taxes How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. Military taxes Recovery of amount deducted (tax benefit rule). Military taxes   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. Military taxes If you have a recovery in a later year, include the recovered amount in income in that year. Military taxes However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. Military taxes   For more information on recoveries and the tax benefit rule, see Publication 525. Military taxes Payments in kind. Military taxes   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Military taxes You cannot deduct the cost of your own labor. Military taxes   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Military taxes If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Military taxes Limits on losses. Military taxes   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Military taxes There may be limits on how much of the loss you can deduct. Military taxes Not-for-profit limits. Military taxes   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. Military taxes See Not-for-Profit Activities , later. Military taxes At-risk limits. Military taxes   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. Military taxes You are at risk in any activity for the following. Military taxes The money and adjusted basis of property you contribute to the activity. Military taxes Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Military taxes For more information, see Publication 925. Military taxes Passive activities. Military taxes   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. Military taxes In general, deductions for losses from passive activities only offset income from passive activities. Military taxes You cannot use any excess deductions to offset other income. Military taxes In addition, passive activity credits can only offset the tax on net passive income. Military taxes Any excess loss or credits are carried over to later years. Military taxes Suspended passive losses are fully deductible in the year you completely dispose of the activity. Military taxes For more information, see Publication 925. Military taxes Net operating loss. Military taxes   If your deductions are more than your income for the year, you may have a “net operating loss. Military taxes ” You can use a net operating loss to lower your taxes in other years. Military taxes See Publication 536 for more information. Military taxes   See Publication 542 for information about net operating losses of corporations. Military taxes When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Military taxes An accounting method is a set of rules used to determine when and how income and expenses are reported. Military taxes The two basic methods are the cash method and the accrual method. Military taxes Whichever method you choose must clearly reflect income. Military taxes For more information on accounting methods, see Publication 538. Military taxes Cash method. Military taxes   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Military taxes Accrual method. Military taxes   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Military taxes The all-events test has been met. Military taxes The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Military taxes Economic performance has occurred. Military taxes Economic performance. Military taxes   You generally cannot deduct or capitalize a business expense until economic performance occurs. Military taxes If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. Military taxes If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Military taxes Example. Military taxes Your tax year is the calendar year. Military taxes In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Military taxes You paid it by check in January 2014. Military taxes If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. Military taxes If you use the cash method of accounting, deduct the expense on your 2014 return. Military taxes Prepayment. Military taxes   You generally cannot deduct expenses in advance, even if you pay them in advance. Military taxes This rule applies to both the cash and accrual methods. Military taxes It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Military taxes Example. Military taxes In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Military taxes Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Military taxes You can deduct the rent for 2014 and 2015 on your tax returns for those years. Military taxes Contested liability. Military taxes   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Military taxes Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Military taxes S. Military taxes possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. Military taxes However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Military taxes See Regulations section 1. Military taxes 461-2. Military taxes Related person. Military taxes   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Military taxes However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. Military taxes Your deduction is allowed when the amount is includible in income by the related cash method payee. Military taxes See Related Persons in Publication 538. Military taxes Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Military taxes Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Military taxes The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Military taxes It does not apply to corporations other than S corporations. Military taxes In determining whether you are carrying on an activity for profit, several factors are taken into account. Military taxes No one factor alone is decisive. Military taxes Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. Military taxes Presumption of profit. Military taxes   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Military taxes Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Military taxes The activity must be substantially the same for each year within this period. Military taxes You have a profit when the gross income from an activity exceeds the deductions. Military taxes   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. Military taxes   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. Military taxes This means the limits discussed here will not apply. Military taxes You can take all your business deductions from the activity, even for the years that you have a loss. Military taxes You can rely on this presumption unless the IRS later shows it to be invalid. Military taxes Using the presumption later. Military taxes   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. Military taxes   You can elect to do this by filing Form 5213. Military taxes Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. Military taxes   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Military taxes Accordingly, it will not restrict your deductions. Military taxes Rather, you will gain time to earn a profit in the required number of years. Military taxes If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Military taxes If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. Military taxes   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. Military taxes The period is extended only for deductions of the activity and any related deductions that might be affected. Military taxes    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Military taxes Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. Military taxes Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. Military taxes You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Military taxes However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. Military taxes Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. Military taxes If you are an individual, these deductions may be taken only if you itemize. Military taxes These deductions may be taken on Schedule A (Form 1040). Military taxes Category 1. Military taxes   Deductions you can take for personal as well as for business activities are allowed in full. Military taxes For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Military taxes Deduct them on the appropriate lines of Schedule A (Form 1040). Military taxes For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). Military taxes The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. Military taxes The reduction amount returns to $100 for tax years beginning after December 31, 2009. Military taxes See Publication 547 for more information on casualty losses. Military taxes For the limits that apply to home mortgage interest, see Publication 936. Military taxes Category 2. Military taxes   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. Military taxes Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Military taxes Category 3. Military taxes   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. Military taxes Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Military taxes Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Military taxes    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Military taxes They are subject to the 2%-of-adjusted-gross-income limit. Military taxes See Publication 529 for information on this limit. Military taxes Example. Military taxes Adriana is engaged in a not-for-profit activity. Military taxes The income and expenses of the activity are as follows. Military taxes Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. Military taxes The limit is reached in category (3), as follows. Military taxes Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. Military taxes $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. Military taxes Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Military taxes The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Military taxes Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. Military taxes Partnerships and S corporations. Military taxes   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Military taxes They are reflected in the individual shareholder's or partner's distributive shares. Military taxes More than one activity. Military taxes   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Military taxes The following are the most significant facts and circumstances in making this determination. Military taxes The degree of organizational and economic interrelationship of various undertakings. Military taxes The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Military taxes The similarity of the undertakings. Military taxes   The IRS will generally accept your characterization if it is supported by facts and circumstances. Military taxes    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Military taxes Figure separately whether each is a not-for-profit activity. Military taxes Then figure the limit on deductions and losses separately for each activity that is not for profit. Military taxes Prev  Up  Next   Home   More Online Publications