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Online 1040ez 1. Online 1040ez   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. Online 1040ez At-risk limits. Online 1040ez Passive activities. Online 1040ez Net operating loss. Online 1040ez When Can I Deduct an Expense?Economic performance. Online 1040ez Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Online 1040ez  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Online 1040ez See Optional safe harbor method under Business use of your home , later. Online 1040ez Introduction This chapter covers the general rules for deducting business expenses. Online 1040ez 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. Online 1040ez 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. Online 1040ez What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Online 1040ez An ordinary expense is one that is common and accepted in your industry. Online 1040ez A necessary expense is one that is helpful and appropriate for your trade or business. Online 1040ez An expense does not have to be indispensable to be considered necessary. Online 1040ez 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. Online 1040ez In some cases you may not be allowed to deduct the expense at all. Online 1040ez Therefore, it is important to distinguish usual business expenses from expenses that include the following. Online 1040ez The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Online 1040ez 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. Online 1040ez Some of your business expenses may be included in figuring cost of goods sold. Online 1040ez Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Online 1040ez If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Online 1040ez The following are types of expenses that go into figuring cost of goods sold. Online 1040ez The cost of products or raw materials, including freight. Online 1040ez Storage. Online 1040ez Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Online 1040ez Factory overhead. Online 1040ez Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Online 1040ez Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Online 1040ez 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. Online 1040ez For more information, see the following sources. Online 1040ez Cost of goods sold—chapter 6 of Publication 334. Online 1040ez Inventories—Publication 538. Online 1040ez Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Online 1040ez Capital Expenses You must capitalize, rather than deduct, some costs. Online 1040ez These costs are a part of your investment in your business and are called “capital expenses. Online 1040ez ” Capital expenses are considered assets in your business. Online 1040ez In general, you capitalize three types of costs. Online 1040ez Business start-up costs (See Tip below). Online 1040ez Business assets. Online 1040ez Improvements. Online 1040ez You can elect to deduct or amortize certain business start-up costs. Online 1040ez See chapters 7 and 8. Online 1040ez Cost recovery. Online 1040ez   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. Online 1040ez These recovery methods allow you to deduct part of your cost each year. Online 1040ez In this way, you are able to recover your capital expense. Online 1040ez See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Online 1040ez A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Online 1040ez A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Online 1040ez See Publication 946 for details. Online 1040ez Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Online 1040ez These costs may include expenses for advertising, travel, or wages for training employees. Online 1040ez If you go into business. Online 1040ez   When you go into business, treat all costs you had to get your business started as capital expenses. Online 1040ez   Usually you recover costs for a particular asset through depreciation. Online 1040ez Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Online 1040ez However, you can choose to amortize certain costs for setting up your business. Online 1040ez See Starting a Business in chapter 8 for more information on business start-up costs. Online 1040ez If your attempt to go into business is unsuccessful. Online 1040ez   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. Online 1040ez The costs you had before making a decision to acquire or begin a specific business. Online 1040ez These costs are personal and nondeductible. Online 1040ez They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Online 1040ez The costs you had in your attempt to acquire or begin a specific business. Online 1040ez These costs are capital expenses and you can deduct them as a capital loss. Online 1040ez   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. Online 1040ez   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Online 1040ez You cannot take a deduction for these costs. Online 1040ez You will recover the costs of these assets when you dispose of them. Online 1040ez Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Online 1040ez You must fully capitalize the cost of these assets, including freight and installation charges. Online 1040ez Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Online 1040ez See Regulations section 1. Online 1040ez 263A-2 for information on these rules. Online 1040ez Improvements Improvements are generally major expenditures. Online 1040ez Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Online 1040ez 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. Online 1040ez 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. Online 1040ez Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Online 1040ez However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Online 1040ez Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Online 1040ez Restoration plan. Online 1040ez   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Online 1040ez This applies even if some of the work would by itself be classified as repairs. Online 1040ez Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Online 1040ez Motor vehicles. Online 1040ez   You usually capitalize the cost of a motor vehicle you use in your business. Online 1040ez You can recover its cost through annual deductions for depreciation. Online 1040ez   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Online 1040ez See Publication 463. Online 1040ez   Generally, repairs you make to your business vehicle are currently deductible. Online 1040ez However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Online 1040ez Roads and driveways. Online 1040ez    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. Online 1040ez The cost of maintaining a private road on your business property is a deductible expense. Online 1040ez Tools. Online 1040ez   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. Online 1040ez Machinery parts. Online 1040ez   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. Online 1040ez Heating equipment. Online 1040ez   The cost of changing from one heating system to another is a capital expense. Online 1040ez Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Online 1040ez 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. Online 1040ez You can deduct the business part. Online 1040ez 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. Online 1040ez The remaining 30% is personal interest and generally is not deductible. Online 1040ez See chapter 4 for information on deducting interest and the allocation rules. Online 1040ez Business use of your home. Online 1040ez   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Online 1040ez These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Online 1040ez   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Online 1040ez The business part of your home must be used exclusively and regularly for your trade or business. Online 1040ez 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. Online 1040ez   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. Online 1040ez   Your home office qualifies as your principal place of business if you meet the following requirements. Online 1040ez You use the office exclusively and regularly for administrative or management activities of your trade or business. Online 1040ez You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Online 1040ez   If you have more than one business location, determine your principal place of business based on the following factors. Online 1040ez The relative importance of the activities performed at each location. Online 1040ez If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Online 1040ez Optional safe harbor method. Online 1040ez   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. Online 1040ez This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Online 1040ez   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. Online 1040ez 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). Online 1040ez You are not required to allocate these deductions between personal and business use, as is required under the regular method. Online 1040ez If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Online 1040ez   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Online 1040ez All of the requirements discussed earlier under Business use of your home still apply. Online 1040ez   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Online 1040ez    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. Online 1040ez Business use of your car. Online 1040ez   If you use your car exclusively in your business, you can deduct car expenses. Online 1040ez If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Online 1040ez Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Online 1040ez   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Online 1040ez 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. Online 1040ez Beginning in 2013, the standard mileage rate is 56. Online 1040ez 5 cents per mile. Online 1040ez   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. Online 1040ez   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Online 1040ez 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. Online 1040ez Recovery of amount deducted (tax benefit rule). Online 1040ez   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. Online 1040ez If you have a recovery in a later year, include the recovered amount in income in that year. Online 1040ez 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. Online 1040ez   For more information on recoveries and the tax benefit rule, see Publication 525. Online 1040ez Payments in kind. Online 1040ez   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Online 1040ez You cannot deduct the cost of your own labor. Online 1040ez   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Online 1040ez If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Online 1040ez Limits on losses. Online 1040ez   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Online 1040ez There may be limits on how much of the loss you can deduct. Online 1040ez Not-for-profit limits. Online 1040ez   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. Online 1040ez See Not-for-Profit Activities , later. Online 1040ez At-risk limits. Online 1040ez   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. Online 1040ez You are at risk in any activity for the following. Online 1040ez The money and adjusted basis of property you contribute to the activity. Online 1040ez 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. Online 1040ez For more information, see Publication 925. Online 1040ez Passive activities. Online 1040ez   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. Online 1040ez In general, deductions for losses from passive activities only offset income from passive activities. Online 1040ez You cannot use any excess deductions to offset other income. Online 1040ez In addition, passive activity credits can only offset the tax on net passive income. Online 1040ez Any excess loss or credits are carried over to later years. Online 1040ez Suspended passive losses are fully deductible in the year you completely dispose of the activity. Online 1040ez For more information, see Publication 925. Online 1040ez Net operating loss. Online 1040ez   If your deductions are more than your income for the year, you may have a “net operating loss. Online 1040ez ” You can use a net operating loss to lower your taxes in other years. Online 1040ez See Publication 536 for more information. Online 1040ez   See Publication 542 for information about net operating losses of corporations. Online 1040ez When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Online 1040ez An accounting method is a set of rules used to determine when and how income and expenses are reported. Online 1040ez The two basic methods are the cash method and the accrual method. Online 1040ez Whichever method you choose must clearly reflect income. Online 1040ez For more information on accounting methods, see Publication 538. Online 1040ez Cash method. Online 1040ez   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Online 1040ez Accrual method. Online 1040ez   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Online 1040ez The all-events test has been met. Online 1040ez The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Online 1040ez Economic performance has occurred. Online 1040ez Economic performance. Online 1040ez   You generally cannot deduct or capitalize a business expense until economic performance occurs. Online 1040ez 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. Online 1040ez If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Online 1040ez Example. Online 1040ez Your tax year is the calendar year. Online 1040ez In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Online 1040ez You paid it by check in January 2014. Online 1040ez 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. Online 1040ez If you use the cash method of accounting, deduct the expense on your 2014 return. Online 1040ez Prepayment. Online 1040ez   You generally cannot deduct expenses in advance, even if you pay them in advance. Online 1040ez This rule applies to both the cash and accrual methods. Online 1040ez 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. Online 1040ez Example. Online 1040ez In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Online 1040ez Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Online 1040ez You can deduct the rent for 2014 and 2015 on your tax returns for those years. Online 1040ez Contested liability. Online 1040ez   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Online 1040ez Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Online 1040ez S. Online 1040ez 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. Online 1040ez However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Online 1040ez See Regulations section 1. Online 1040ez 461-2. Online 1040ez Related person. Online 1040ez   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Online 1040ez 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. Online 1040ez Your deduction is allowed when the amount is includible in income by the related cash method payee. Online 1040ez See Related Persons in Publication 538. Online 1040ez 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. Online 1040ez Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Online 1040ez The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Online 1040ez It does not apply to corporations other than S corporations. Online 1040ez In determining whether you are carrying on an activity for profit, several factors are taken into account. Online 1040ez No one factor alone is decisive. Online 1040ez 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. Online 1040ez Presumption of profit. Online 1040ez   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. Online 1040ez 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. Online 1040ez The activity must be substantially the same for each year within this period. Online 1040ez You have a profit when the gross income from an activity exceeds the deductions. Online 1040ez   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. Online 1040ez   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. Online 1040ez This means the limits discussed here will not apply. Online 1040ez You can take all your business deductions from the activity, even for the years that you have a loss. Online 1040ez You can rely on this presumption unless the IRS later shows it to be invalid. Online 1040ez Using the presumption later. Online 1040ez   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. Online 1040ez   You can elect to do this by filing Form 5213. Online 1040ez 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. Online 1040ez   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Online 1040ez Accordingly, it will not restrict your deductions. Online 1040ez Rather, you will gain time to earn a profit in the required number of years. Online 1040ez If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Online 1040ez 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. Online 1040ez   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. Online 1040ez The period is extended only for deductions of the activity and any related deductions that might be affected. Online 1040ez    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. Online 1040ez 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. Online 1040ez 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. Online 1040ez You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Online 1040ez 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. Online 1040ez 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. Online 1040ez If you are an individual, these deductions may be taken only if you itemize. Online 1040ez These deductions may be taken on Schedule A (Form 1040). Online 1040ez Category 1. Online 1040ez   Deductions you can take for personal as well as for business activities are allowed in full. Online 1040ez For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Online 1040ez Deduct them on the appropriate lines of Schedule A (Form 1040). Online 1040ez 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). Online 1040ez 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. Online 1040ez The reduction amount returns to $100 for tax years beginning after December 31, 2009. Online 1040ez See Publication 547 for more information on casualty losses. Online 1040ez For the limits that apply to home mortgage interest, see Publication 936. Online 1040ez Category 2. Online 1040ez   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. Online 1040ez Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Online 1040ez Category 3. Online 1040ez   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. Online 1040ez Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Online 1040ez Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Online 1040ez    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Online 1040ez They are subject to the 2%-of-adjusted-gross-income limit. Online 1040ez See Publication 529 for information on this limit. Online 1040ez Example. Online 1040ez Adriana is engaged in a not-for-profit activity. Online 1040ez The income and expenses of the activity are as follows. Online 1040ez 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. Online 1040ez The limit is reached in category (3), as follows. Online 1040ez 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. Online 1040ez $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. Online 1040ez Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Online 1040ez The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Online 1040ez 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. Online 1040ez Partnerships and S corporations. Online 1040ez   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Online 1040ez They are reflected in the individual shareholder's or partner's distributive shares. Online 1040ez More than one activity. Online 1040ez   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Online 1040ez The following are the most significant facts and circumstances in making this determination. Online 1040ez The degree of organizational and economic interrelationship of various undertakings. Online 1040ez The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Online 1040ez The similarity of the undertakings. Online 1040ez   The IRS will generally accept your characterization if it is supported by facts and circumstances. Online 1040ez    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Online 1040ez Figure separately whether each is a not-for-profit activity. Online 1040ez Then figure the limit on deductions and losses separately for each activity that is not for profit. Online 1040ez Prev  Up  Next   Home   More Online Publications
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Understanding your CP565 Notice

We gave you an Individual Taxpayer Identification Number (ITIN).

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Effective June 22, 2012, the IRS has made interim changes that affect the Individual Taxpayer Identification Number (ITIN) application process. Some of the information below, including the documentation requirements for individuals seeking an ITIN, has been superseded by these changes. Taxpayers and their representatives should review these changes, which are further explained in these Frequently Asked Questions, before requesting an ITIN.


What you need to do

  • Read your notice carefully. Make sure the name and date of birth we have on record for you is right.
  • You don't have to answer the notice.
  • Use your ITIN in place of a Social Security Number to file a federal tax return or a tax reporting document.

You may want to...


Answers to Common Questions

What is an ITIN?
It is a number for you to use on federal tax documents.

Who needs an ITIN?
A non-citizen who has to file a federal tax return or a tax reporting document and does not qualify for an SSN needs an ITIN.

Can I use an ITIN for identification?
No. It is only for tax purposes. It is not for non-tax purposes.

Can I use my ITIN like a Social Security number (SSN)?
You can use an ITIN like an SSN on federal tax documents. It doesn't, however, allow you to collect Social Security benefits. It doesn't change your immigration status.

Can I claim the Earned Income Tax Credit (EITC) when I file my tax return?
No, individuals filing a tax return with an ITIN can't claim the EITC.

What happens to my ITIN if I become a U.S. citizen?
You can get an SSN when you become a U.S. citizen.

What should I do if I get a Social Security number?
Use your SSN. Stop using your ITIN. Let us know you have an SSN so we can change our records. We will give you credit for taxes withheld under your old ITIN.

I sent you documents when I applied for an ITIN. When will you return them?
We will return your documents within 60 days from your notice's date. Call us at the number on your notice if you don't receive your documents by then.


Tips for next year

Use your ITIN and the name shown on your notice when you file your federal taxes next year. Do the same when you contact us by mail.

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.


Understanding your notice

Reading your notice
Your notice may look different from the sample because the information contained in your notice is tailored to your situation.

Notice CP565, Page 1

Notice CP565, Page 2

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 

Page Last Reviewed or Updated: 14-Mar-2014

The Online 1040ez

Online 1040ez Part Four -   Adjustments to Income The three chapters in this part discuss some of the adjustments to income that you can deduct in figuring your adjusted gross income. Online 1040ez These chapters cover: Contributions you make to traditional individual retirement arrangements (IRAs) — chapter 17, Alimony you pay — chapter 18, and Student loan interest you pay — chapter 19. Online 1040ez Other adjustments to income are discussed elsewhere. Online 1040ez See Table V below. Online 1040ez Table V. Online 1040ez Other Adjustments to Income  Use this table to find information about other adjustments to income not covered in this part of the publication. Online 1040ez IF you are looking for more information about the deduction for. Online 1040ez . Online 1040ez . Online 1040ez THEN see. Online 1040ez . Online 1040ez . Online 1040ez Certain business expenses of reservists, performing artists, and fee-basis officials Chapter 26. Online 1040ez Contributions to a health savings account Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Online 1040ez Moving expenses Publication 521, Moving Expenses. Online 1040ez Part of your self-employment tax Chapter 22. Online 1040ez Self-employed health insurance Chapter 21. Online 1040ez Payments to self-employed SEP, SIMPLE, and qualified plans Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Online 1040ez Penalty on the early withdrawal of savings Chapter 7. Online 1040ez Contributions to an Archer MSA Publication 969. Online 1040ez Reforestation amortization or expense Chapters 7 and 8 of Publication 535, Business Expenses. Online 1040ez Contributions to Internal Revenue Code section 501(c)(18)(D) pension plans Publication 525, Taxable and Nontaxable Income. Online 1040ez Expenses from the rental of personal property Chapter 12. Online 1040ez Certain required repayments of supplemental unemployment benefits (sub-pay) Chapter 12. Online 1040ez Foreign housing costs Chapter 4 of Publication 54, Tax Guide for U. Online 1040ez S. Online 1040ez Citizens and Resident Aliens Abroad. Online 1040ez Jury duty pay given to your employer Chapter 12. Online 1040ez Contributions by certain chaplains to Internal Revenue Code section 403(b) plans Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Online 1040ez Attorney fees and certain costs for actions involving certain unlawful discrimination claims or awards to whistleblowers Publication 525. Online 1040ez Domestic production activities deduction Form 8903, Domestic Production Activities Deduction. Online 1040ez Table of Contents 17. Online 1040ez   Individual Retirement Arrangements (IRAs)What's New Reminders Introduction Useful Items - You may want to see: Traditional IRAsWho Can Open a Traditional IRA? When and How Can a Traditional IRA Be Opened? How Much Can Be Contributed? When Can Contributions Be Made? How Much Can You Deduct? Nondeductible Contributions Inherited IRAs Can You Move Retirement Plan Assets? When Can You Withdraw or Use IRA Assets? When Must You Withdraw IRA Assets? (Required Minimum Distributions) Are Distributions Taxable? What Acts Result in Penalties or Additional Taxes? Roth IRAsWhat Is a Roth IRA? When Can a Roth IRA Be Opened? Can You Contribute to a Roth IRA? Can You Move Amounts Into a Roth IRA? Are Distributions Taxable? 18. Online 1040ez   AlimonyIntroductionSpouse or former spouse. Online 1040ez Divorce or separation instrument. Online 1040ez Useful Items - You may want to see: General RulesMortgage payments. Online 1040ez Taxes and insurance. Online 1040ez Other payments to a third party. Online 1040ez Instruments Executed After 1984Payments to a third party. Online 1040ez Exception. Online 1040ez Substitute payments. Online 1040ez Specifically designated as child support. Online 1040ez Contingency relating to your child. Online 1040ez Clearly associated with a contingency. Online 1040ez How To Deduct Alimony Paid How To Report Alimony Received Recapture Rule 19. Online 1040ez   Education- Related AdjustmentsIntroduction Useful Items - You may want to see: Student Loan Interest DeductionStudent Loan Interest Defined Can You Claim the Deduction How Much Can You Deduct How Do You Figure the Deduction Tuition and Fees DeductionCan You Claim the Deduction What Expenses Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses How Much Can You Deduct Educator Expenses Prev  Up  Next   Home   More Online Publications