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Tax Act 1040x

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Tax Act 1040x

Tax act 1040x 11. Tax act 1040x   Other Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Reimbursement of Travel, Meals, and EntertainmentReimbursements Miscellaneous ExpensesMeaning of generally enforced. Tax act 1040x Kickbacks. Tax act 1040x Form 1099-MISC. Tax act 1040x Exception. Tax act 1040x Tax preparation fees. Tax act 1040x Covered executive branch official. Tax act 1040x Exceptions to denial of deduction. Tax act 1040x Indirect political contributions. Tax act 1040x Type of deduction. Tax act 1040x Repayment—$3,000 or less. Tax act 1040x Repayment—over $3,000. Tax act 1040x Method 1. Tax act 1040x Method 2. Tax act 1040x Repayment does not apply. Tax act 1040x Year of deduction (or credit). Tax act 1040x Telephone. Tax act 1040x What's New Standard mileage rate. Tax act 1040x  Beginning in 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use is 56. Tax act 1040x 5 cents per mile. Tax act 1040x For more information, see Car and truck expenses under Miscellaneous Expenses. Tax act 1040x Introduction This chapter covers business expenses that may not have been explained to you, as a business owner, in previous chapters of this publication. Tax act 1040x Topics - This chapter discusses: Travel, meals, and entertainment Bribes and kickbacks Charitable contributions Education expenses Lobbying expenses Penalties and fines Repayments (claim of right) Other miscellaneous expenses Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 463 Travel, Entertainment, Gift, and Car Expenses 526 Charitable Contributions 529 Miscellaneous Deductions 544 Sales and Other Dispositions of Assets 970 Tax Benefits for Education 1542 Per Diem Rates See chapter 12 for information about getting publications and forms. Tax act 1040x Reimbursement of Travel, Meals, and Entertainment The following discussion explains how to handle any reimbursements or allowances you may provide to your employees under a reimbursement or allowance arrangement for travel, meals, and entertainment expenses. Tax act 1040x If you are self-employed and report your income and expenses on Schedule C or C-EZ (Form 1040), see Publication 463. Tax act 1040x To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. Tax act 1040x Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business. Tax act 1040x For more information on travel, meals, and entertainment, including deductibility, see Publication 463. Tax act 1040x Reimbursements A “reimbursement or allowance arrangement” provides for payment of advances, reimbursements, and allowances for travel, meals, and entertainment expenses incurred by your employees during the ordinary course of business. Tax act 1040x If the expenses are substantiated, you can deduct the allowable amount on your tax return. Tax act 1040x Because of differences between accounting methods and tax law, the amount you can deduct for tax purposes may not be the same as the amount you deduct on your business books and records. Tax act 1040x For example, you can deduct 100% of the cost of meals on your business books and records. Tax act 1040x However, only 50% of these costs are allowed by law as a tax deduction. Tax act 1040x How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: An accountable plan, or A nonaccountable plan. Tax act 1040x If you reimburse these expenses under an accountable plan, deduct them as travel, meals, or entertainment expenses. Tax act 1040x If you reimburse these expenses under a nonaccountable plan, report the reimbursements as wages on Form W-2, Wage and Tax Statement, and deduct them as wages on the appropriate line of your tax return. Tax act 1040x If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement and report it accordingly. Tax act 1040x See Table 11-1 , Reporting Reimbursements. Tax act 1040x Accountable Plans An accountable plan requires your employees to meet all of the following requirements. Tax act 1040x Each employee must: Have paid or incurred deductible expenses while performing services as your employee, Adequately account to you for these expenses within a reasonable period of time, and Return any excess reimbursement or allowance within a reasonable period of time. Tax act 1040x An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. Tax act 1040x The advance is reasonably calculated not to exceed the amount of anticipated expenses. Tax act 1040x You make the advance within a reasonable period of time of your employee paying or incurring the expense. Tax act 1040x If any expenses reimbursed under this arrangement are not substantiated, or an excess reimbursement is not returned within a reasonable period of time by an employee, you cannot treat these expenses as reimbursed under an accountable plan. Tax act 1040x Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later. Tax act 1040x Adequate accounting. Tax act 1040x   Your employees must adequately account to you for their travel, meals, and entertainment expenses. Tax act 1040x They must give you documentary evidence of their travel, mileage, and other employee business expenses. Tax act 1040x This evidence should include items such as receipts, along with either a statement of expenses, an account book, a day-planner, or similar record in which the employee entered each expense at or near the time the expense was incurred. Tax act 1040x Excess reimbursement or allowance. Tax act 1040x   An excess reimbursement or allowance is any amount you pay to an employee that is more than the business-related expenses for which the employee adequately accounted. Tax act 1040x The employee must return any excess reimbursement or other expense allowance to you within a reasonable period of time. Tax act 1040x Reasonable period of time. Tax act 1040x   A reasonable period of time depends on the facts and circumstances. Tax act 1040x Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. Tax act 1040x You give an advance within 30 days of the time the employee pays or incurs the expense. Tax act 1040x Your employees adequately account for their expenses within 60 days after the expenses were paid or incurred. Tax act 1040x Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred. Tax act 1040x You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately account for outstanding advances and they comply within 120 days of the date of the statement. Tax act 1040x How to deduct. Tax act 1040x   You can claim a deduction for travel, meals, and entertainment expenses if you reimburse your employees for these expenses under an accountable plan. Tax act 1040x Generally, the amount you can deduct for meals and entertainment is subject to a 50% limit, discussed later. Tax act 1040x If you are a sole proprietor, or are filing as a single member limited liability company, deduct the travel reimbursement on line 24a and the deductible part of the meals and entertainment reimbursement on line 24b, Schedule C (Form 1040) or line 2, Schedule C-EZ (Form 1040). Tax act 1040x   If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120, U. Tax act 1040x S. Tax act 1040x Corporation Income Tax Return. Tax act 1040x If you are filing any other business income tax return, such as a partnership or S corporation return, deduct the reimbursement on the appropriate line of the return as provided in the instructions for that return. Tax act 1040x Table 11-1. Tax act 1040x Reporting Reimbursements IF the type of reimbursement (or other expense allowance) arrangement is under THEN the employer reports on Form W-2 An accountable plan with: Actual expense reimbursement:  Adequate accounting made and excess returned No amount. Tax act 1040x Actual expense reimbursement:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Tax act 1040x Per diem or mileage allowance up to the federal rate:  Adequate accounting made and excess returned No amount. Tax act 1040x Per diem or mileage allowance up to the federal rate:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Tax act 1040x The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Tax act 1040x Per diem or mileage allowance exceeds the federal rate:  Adequate accounting made up to the federal rate only and excess not returned The excess amount as wages in box 1. Tax act 1040x The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Tax act 1040x A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan The entire amount as wages in box 1. Tax act 1040x No reimbursement plan The entire amount as wages in box 1. Tax act 1040x Per Diem and Car Allowances You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. Tax act 1040x In these cases, your employee is considered to have accounted to you for the amount of the expense that does not exceed the rates established by the federal government. Tax act 1040x Your employee must actually substantiate to you the other elements of the expense, such as time, place, and business purpose. Tax act 1040x Federal rate. Tax act 1040x   The federal rate can be figured using any one of the following methods. Tax act 1040x For car expenses: The standard mileage rate. Tax act 1040x A fixed and variable rate (FAVR). Tax act 1040x For per diem amounts: The regular federal per diem rate. Tax act 1040x The standard meal allowance. Tax act 1040x The high-low rate. Tax act 1040x Car allowance. Tax act 1040x   Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. Tax act 1040x Beginning in 2013, the standard business mileage rate is 56. Tax act 1040x 5 cents per mile. Tax act 1040x   You can choose to reimburse your employees using a fixed and variable rate (FAVR) allowance. Tax act 1040x This is an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your employees' variable operating costs (such as gas, oil, etc. Tax act 1040x ) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc. Tax act 1040x ). Tax act 1040x For information on using a FAVR allowance, see Revenue Procedure 2010-51, available at www. Tax act 1040x irs. Tax act 1040x gov/irb/2010-51_IRB/ar14. Tax act 1040x html and Notice 2012-72, available at www. Tax act 1040x irs. Tax act 1040x gov/irb/2012-50_IRB/ar10. Tax act 1040x html. Tax act 1040x Per diem allowance. Tax act 1040x   If your employee actually substantiates to you the other elements (discussed earlier) of the expenses reimbursed using the per diem allowance, how you report and deduct the allowance depends on whether the allowance is for lodging and meal expenses or for meal expenses only and whether the allowance is more than the federal rate. Tax act 1040x Regular federal per diem rate. Tax act 1040x   The regular federal per diem rate is the highest amount the federal government will pay to its employees while away from home on travel. Tax act 1040x It has two components: Lodging expense, and Meal and incidental expense (M&IE). Tax act 1040x The rates are different for different locations. Tax act 1040x Publication 1542 lists the rates in the continental United States. Tax act 1040x Standard meal allowance. Tax act 1040x   The federal rate for meal and incidental expenses (M&IE) is the standard meal allowance. Tax act 1040x You can pay only an M&IE allowance to employees who travel away from home if: You pay the employee for actual expenses for lodging based on receipts submitted to you, You provide for the lodging, You pay for the actual expense of the lodging directly to the provider, You do not have a reasonable belief that lodging expenses were incurred by the employee, or The allowance is computed on a basis similar to that used in computing the employee's wages (that is, number of hours worked or miles traveled). Tax act 1040x Internet access. Tax act 1040x    Per diem rates are available on the Internet. Tax act 1040x You can access per diem rates at www. Tax act 1040x gsa. Tax act 1040x gov/perdiemrates. Tax act 1040x High-low method. Tax act 1040x   This is a simplified method of computing the federal per diem rate for travel within the continental United States. Tax act 1040x It eliminates the need to keep a current list of the per diem rate for each city. Tax act 1040x   Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 ($65 for M&IE) for certain high-cost locations. Tax act 1040x All other areas have a per diem amount of $163 ($52 for M&IE). Tax act 1040x The high-cost locations eligible for the higher per diem amount under the high-low method are listed in Publication 1542. Tax act 1040x   Effective October 1, 2013, the per diem rate for high-cost locations increased to $251 ($65 for M&IE). Tax act 1040x The rate for all other locations increased to $170 ($52 for M&IE). Tax act 1040x For October, November, and December 2013, you can either continue to use the rates described in the preceding paragraph or change to the new rates. Tax act 1040x However, you must use the same rate for all employees reimbursed under the high-low method. Tax act 1040x   For more information about the high-low method, see Notice 2013-65, available at www. Tax act 1040x irs. Tax act 1040x gov/irb/2013-44_IRB/ar13. Tax act 1040x html. Tax act 1040x See Publication 1542 (available on the Internet at IRS. Tax act 1040x gov) for the current per diem rates for all locations. Tax act 1040x Reporting per diem and car allowances. Tax act 1040x   The following discussion explains how to report per diem and car allowances. Tax act 1040x The manner in which you report them depends on how the allowance compares to the federal rate. Tax act 1040x See Table 11-1. Tax act 1040x Allowance less than or equal to the federal rate. Tax act 1040x   If your allowance for the employee is less than or equal to the appropriate federal rate, that allowance is not included as part of the employee's pay in box 1 of the employee's Form W-2. Tax act 1040x Deduct the allowance as travel expenses (including meals that may be subject to the 50% limit, discussed later). Tax act 1040x See How to deduct under Accountable Plans, earlier. Tax act 1040x Allowance more than the federal rate. Tax act 1040x   If your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items. Tax act 1040x   Include the allowance amount up to the federal rate in box 12 (code L) of the employee's Form W-2. Tax act 1040x Deduct it as travel expenses (as explained above). Tax act 1040x This part of the allowance is treated as reimbursed under an accountable plan. Tax act 1040x   Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. Tax act 1040x Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Tax act 1040x This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans. Tax act 1040x Meals and Entertainment Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment expenses you reimburse your employees. Tax act 1040x The deduction limit applies even if you reimburse them for 100% of the expenses. Tax act 1040x Application of the 50% limit. Tax act 1040x   The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant, or another location. Tax act 1040x It applies to expenses incurred at a business convention or reception, business meeting, or business luncheon at a club. Tax act 1040x The deduction limit may also apply to meals you furnish on your premises to your employees. Tax act 1040x Related expenses. Tax act 1040x   Taxes and tips relating to a meal or entertainment activity you reimburse to your employee under an accountable plan are included in the amount subject to the 50% limit. Tax act 1040x Reimbursements you make for expenses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. Tax act 1040x However, the cost of transportation to and from an otherwise allowable business meal or a business-related entertainment activity is not subject to the 50% limit. Tax act 1040x Amount subject to 50% limit. Tax act 1040x   If you provide your employees with a per diem allowance only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of the following. Tax act 1040x The per diem allowance. Tax act 1040x The federal rate for M&IE. Tax act 1040x   If you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages. Tax act 1040x If the per diem allowance you provide is less than the federal per diem rate for the area of travel, you can treat 40% of the per diem allowance as the amount for food and beverages. Tax act 1040x Meal expenses when subject to “hours of service” limits. Tax act 1040x   You can deduct 80% of the cost of reimbursed meals your employees consume while away from their tax home on business during, or incident to, any period subject to the Department of Transportation's “hours of service” limits. Tax act 1040x   See Publication 463 for a detailed discussion of individuals subject to the Department of Transportation's “hours of service” limits. Tax act 1040x De minimis (minimal) fringe benefit. Tax act 1040x   The 50% limit does not apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit. Tax act 1040x See Publication 15-B for additional information on de minimis fringe benefits. Tax act 1040x Company cafeteria or executive dining room. Tax act 1040x   The cost of food and beverages you provide primarily to your employees on your business premises is deductible. Tax act 1040x This includes the cost of maintaining the facilities for providing the food and beverages. Tax act 1040x These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit, as just discussed, or unless they are compensation to your employees (explained later). Tax act 1040x Employee activities. Tax act 1040x   The expense of providing recreational, social, or similar activities (including the use of a facility) for your employees is deductible and is not subject to the 50% limit. Tax act 1040x The benefit must be primarily for your employees who are not highly compensated. Tax act 1040x   For this purpose, a highly compensated employee is an employee who meets either of the following requirements. Tax act 1040x Owned a 10% or more interest in the business during the year or the preceding year. Tax act 1040x An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal descendants. Tax act 1040x Received more than $115,000 in pay for the preceding year. Tax act 1040x You can choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year. Tax act 1040x   For example, the expenses for food, beverages, and entertainment for a company-wide picnic are not subject to the 50% limit. Tax act 1040x Meals or entertainment treated as compensation. Tax act 1040x   The 50% limit does not apply to either of the following. Tax act 1040x Expenses for meals or entertainment that you treat as: Compensation to an employee who was the recipient of the meals or entertainment, and Wages subject to withholding of federal income tax. Tax act 1040x Expenses for meals or entertainment if: A recipient of the meals or entertainment who is not your employee has to include the expenses in gross income as compensation for services or as a prize or award, and You include that amount on a Form 1099 issued to the recipient, if a Form 1099 is required. Tax act 1040x Sales of meals or entertainment. Tax act 1040x   You can deduct the cost of meals or entertainment (including the use of facilities) you sell to the public. Tax act 1040x For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is a business expense that is fully deductible. Tax act 1040x The 50% limit does not apply to this expense. Tax act 1040x Providing meals or entertainment to general public to promote goodwill. Tax act 1040x   You can deduct the cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Tax act 1040x The 50% limit does not apply to this expense. Tax act 1040x Director, stockholder, or employee meetings. Tax act 1040x   You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. Tax act 1040x You can provide some minor social activities, but the main purpose of the meeting must be your company's business. Tax act 1040x These expenses are subject to the 50% limit. Tax act 1040x Trade association meetings. Tax act 1040x   You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. Tax act 1040x These organizations include business leagues, chambers of commerce, real estate boards, and trade and professional associations. Tax act 1040x Nonaccountable Plans A nonaccountable plan is an arrangement that does not meet the requirements for an accountable plan. Tax act 1040x All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. Tax act 1040x The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Tax act 1040x You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. Tax act 1040x Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions. Tax act 1040x Miscellaneous Expenses In addition to travel, meal, and entertainment expenses, there are other expenses you can deduct. Tax act 1040x Advertising expenses. Tax act 1040x   You generally can deduct reasonable advertising expenses that are directly related to your business activities. Tax act 1040x Generally, you cannot deduct amounts paid to influence legislation (i. Tax act 1040x e. Tax act 1040x , lobbying). Tax act 1040x See Lobbying expenses , later. Tax act 1040x   You can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it relates to business you reasonably expect to gain in the future. Tax act 1040x For example, the cost of advertising that encourages people to contribute to the Red Cross, to buy U. Tax act 1040x S. Tax act 1040x Savings Bonds, or to participate in similar causes is usually deductible. Tax act 1040x Anticipated liabilities. Tax act 1040x   Anticipated liabilities or reserves for anticipated liabilities are not deductible. Tax act 1040x For example, assume you sold 1-year TV service contracts this year totaling $50,000. Tax act 1040x From experience, you know you will have expenses of about $15,000 in the coming year for these contracts. Tax act 1040x You cannot deduct any of the $15,000 this year by charging expenses to a reserve or liability account. Tax act 1040x You can deduct your expenses only when you actually pay or accrue them, depending on your accounting method. Tax act 1040x Bribes and kickbacks. Tax act 1040x   Engaging in the payment of bribes or kickbacks is a serious criminal matter. Tax act 1040x Such activity could result in criminal prosecution. Tax act 1040x Any payments that appear to have been made, either directly or indirectly, to an official or employee of any government or an agency or instrumentality of any government are not deductible for tax purposes and are in violation of the law. Tax act 1040x   Payments paid directly or indirectly to a person in violation of any federal or state law (but only if that state law is generally enforced, defined below) that provides for a criminal penalty or for the loss of a license or privilege to engage in a trade or business are also not allowed as a deduction for tax purposes. Tax act 1040x Meaning of “generally enforced. Tax act 1040x ”   A state law is considered generally enforced unless it is never enforced or enforced only for infamous persons or persons whose violations are extraordinarily flagrant. Tax act 1040x For example, a state law is generally enforced unless proper reporting of a violation of the law results in enforcement only under unusual circumstances. Tax act 1040x Kickbacks. Tax act 1040x   A kickback is a payment for referring a client, patient, or customer. Tax act 1040x The common kickback situation occurs when money or property is given to someone as payment for influencing a third party to purchase from, use the services of, or otherwise deal with the person who pays the kickback. Tax act 1040x In many cases, the person whose business is being sought or enjoyed by the person who pays the kickback is not aware of the payment. Tax act 1040x   For example, the Yard Corporation is in the business of repairing ships. Tax act 1040x It returns 10% of the repair bills as kickbacks to the captains and chief officers of the vessels it repairs. Tax act 1040x Although this practice is considered an ordinary and necessary expense of getting business, it is clearly a violation of a state law that is generally enforced. Tax act 1040x These expenditures are not deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted. Tax act 1040x Form 1099-MISC. Tax act 1040x   It does not matter whether any kickbacks paid during the tax year are deductible on your income tax return in regards to information reporting. Tax act 1040x See Form 1099-MISC for more information. Tax act 1040x Car and truck expenses. Tax act 1040x   The costs of operating a car, truck, or other vehicle in your business are deductible. Tax act 1040x For more information on how to figure your deduction, see Publication 463. Tax act 1040x Charitable contributions. Tax act 1040x   Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Tax act 1040x If the payments are charitable contributions or gifts, you cannot deduct them as business expenses. Tax act 1040x However, corporations (other than S corporations) can deduct charitable contributions on their income tax returns, subject to limitations. Tax act 1040x See the Instructions for Form 1120 for more information. Tax act 1040x Sole proprietors, partners in a partnership, or shareholders in an S corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Tax act 1040x Example. Tax act 1040x You paid $15 to a local church for a half-page ad in a program for a concert it is sponsoring. Tax act 1040x The purpose of the ad was to encourage readers to buy your products. Tax act 1040x Your payment is not a charitable contribution. Tax act 1040x You can deduct it as an advertising expense. Tax act 1040x Example. Tax act 1040x You made a $100,000 donation to a committee organized by the local Chamber of Commerce to bring a convention to your city, intended to increase business activity, including yours. Tax act 1040x Your payment is not a charitable contribution. Tax act 1040x You can deduct it as a business expense. Tax act 1040x See Publication 526 for a discussion of donated inventory, including capital gain property. Tax act 1040x Club dues and membership fees. Tax act 1040x   Generally, you cannot deduct amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or any other social purpose. Tax act 1040x This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Tax act 1040x Exception. Tax act 1040x   The following organizations are not treated as clubs organized for business, pleasure, recreation, or other social purpose unless one of the main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. Tax act 1040x Boards of trade. Tax act 1040x Business leagues. Tax act 1040x Chambers of commerce. Tax act 1040x Civic or public service organizations. Tax act 1040x Professional organizations such as bar associations and medical associations. Tax act 1040x Real estate boards. Tax act 1040x Trade associations. Tax act 1040x Credit card convenience fees. Tax act 1040x   Credit card companies charge a fee to businesses who accept their cards. Tax act 1040x This fee when paid or incurred by the business can be deducted as a business expense. Tax act 1040x Damages recovered. Tax act 1040x   Special rules apply to compensation you receive for damages sustained as a result of patent infringement, breach of contract or fiduciary duty, or antitrust violations. Tax act 1040x You must include this compensation in your income. Tax act 1040x However, you may be able to take a special deduction. Tax act 1040x The deduction applies only to amounts recovered for actual economic injury, not any additional amount. Tax act 1040x The deduction is the smaller of the following. Tax act 1040x The amount you received or accrued for damages in the tax year reduced by the amount you paid or incurred in the year to recover that amount. Tax act 1040x Your losses from the injury you have not deducted. Tax act 1040x Demolition expenses or losses. Tax act 1040x   Amounts paid or incurred to demolish a structure are not deductible. Tax act 1040x These amounts are added to the basis of the land where the demolished structure was located. Tax act 1040x Any loss for the remaining undepreciated basis of a demolished structure would not be recognized until the property is disposed of. Tax act 1040x Education expenses. Tax act 1040x   Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible. Tax act 1040x See Education Expenses in chapter 2. Tax act 1040x   You can also deduct the cost of your own education (including certain related travel) related to your trade or business. Tax act 1040x You must be able to show the education maintains or improves skills required in your trade or business, or that it is required by law or regulations, for keeping your license to practice, status, or job. Tax act 1040x For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law. Tax act 1040x   Education expenses you incur to meet the minimum requirements of your present trade or business, or those that qualify you for a new trade or business, are not deductible. Tax act 1040x This is true even if the education maintains or improves skills presently required in your business. Tax act 1040x For more information on education expenses, see Publication 970. Tax act 1040x Franchise, trademark, trade name. Tax act 1040x   If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense only if your payments are part of a series of payments that are: Contingent on productivity, use, or disposition of the item, Payable at least annually for the entire term of the transfer agreement, and Substantially equal in amount (or payable under a fixed formula). Tax act 1040x   When determining the term of the transfer agreement, include all renewal options and any other period for which you and the transferrer reasonably expect the agreement to be renewed. Tax act 1040x   A franchise includes an agreement that gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities within a specified area. Tax act 1040x Impairment-related expenses. Tax act 1040x   If you are disabled, you can deduct expenses necessary for you to be able to work (impairment-related expenses) as a business expense, rather than as a medical expense. Tax act 1040x   You are disabled if you have either of the following. Tax act 1040x A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed. Tax act 1040x A physical or mental impairment that substantially limits one or more of your major life activities. Tax act 1040x   The expense qualifies as a business expense if all the following apply. Tax act 1040x Your work clearly requires the expense for you to satisfactorily perform that work. Tax act 1040x The goods or services purchased are clearly not needed or used, other than incidentally, in your personal activities. Tax act 1040x Their treatment is not specifically provided for under other tax law provisions. Tax act 1040x Example. Tax act 1040x You are blind. Tax act 1040x You must use a reader to do your work, both at and away from your place of work. Tax act 1040x The reader's services are only for your work. Tax act 1040x You can deduct your expenses for the reader as a business expense. Tax act 1040x Internet-related expenses. Tax act 1040x   Generally, you can deduct internet-related expenses including domain registrations fees and webmaster consulting costs. Tax act 1040x If you are starting a business you may have to amortize these expenses as start-up costs. Tax act 1040x For more information about amortizing start-up and organizational costs, see chapter 8. Tax act 1040x Interview expense allowances. Tax act 1040x   Reimbursements you make to job candidates for transportation or other expenses related to interviews for possible employment are not wages. Tax act 1040x You can deduct the reimbursements as a business expense. Tax act 1040x However, expenses for food, beverages, and entertainment are subject to the 50% limit discussed earlier under Meals and Entertainment. Tax act 1040x Legal and professional fees. Tax act 1040x   Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. Tax act 1040x However, usually legal fees you pay to acquire business assets are not deductible. Tax act 1040x These costs are added to the basis of the property. Tax act 1040x   Fees that include payments for work of a personal nature (such as drafting a will, or damages arising from a personal injury) are not allowed as a business deduction on Schedule C or C-EZ. Tax act 1040x If the invoice includes both business and personal charges, compute the business portion as follows: multiply the total amount of the bill by a fraction, the numerator of which is the amount attributable to business matters, the denominator of which is the total amount paid. Tax act 1040x The result is the portion of the invoice attributable to business expenses. Tax act 1040x The portion attributable to personal matters is the difference between the total amount and the business portion (computed above). Tax act 1040x   Legal fees relating to personal tax advice may be deductible on Schedule A (Form 1040), if you itemize deductions. Tax act 1040x However, the deduction is subject to the 2% limitation on miscellaneous itemized deductions. Tax act 1040x See Publication 529, Miscellaneous Deductions. Tax act 1040x Tax preparation fees. Tax act 1040x   The cost of hiring a tax professional, such as a C. Tax act 1040x P. Tax act 1040x A. Tax act 1040x , to prepare that part of your tax return relating to your business as a sole proprietor is deductible on Schedule C or Schedule C-EZ. Tax act 1040x Any remaining cost may be deductible on Schedule A (Form 1040) if you itemize deductions. Tax act 1040x   You can also claim a business deduction for amounts paid or incurred in resolving asserted tax deficiencies for your business operated as a sole proprietor. Tax act 1040x Licenses and regulatory fees. Tax act 1040x   Licenses and regulatory fees for your trade or business paid annually to state or local governments generally are deductible. Tax act 1040x Some licenses and fees may have to be amortized. Tax act 1040x See chapter 8 for more information. Tax act 1040x Lobbying expenses. Tax act 1040x   Generally, lobbying expenses are not deductible. Tax act 1040x Lobbying expenses include amounts paid or incurred for any of the following activities. Tax act 1040x Influencing legislation. Tax act 1040x Participating in or intervening in any political campaign for, or against, any candidate for public office. Tax act 1040x Attempting to influence the general public, or segments of the public, about elections, legislative matters, or referendums. Tax act 1040x Communicating directly with covered executive branch officials (defined later) in any attempt to influence the official actions or positions of those officials. Tax act 1040x Researching, preparing, planning, or coordinating any of the preceding activities. Tax act 1040x   Your expenses for influencing legislation and communicating directly with a covered executive branch official include a portion of your labor costs and general and administrative costs of your business. Tax act 1040x For information on making this allocation, see section 1. Tax act 1040x 162-28 of the regulations. Tax act 1040x   You cannot claim a charitable or business expense deduction for amounts paid to an organization if both of the following apply. Tax act 1040x The organization conducts lobbying activities on matters of direct financial interest to your business. Tax act 1040x A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses. Tax act 1040x   If a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues. Tax act 1040x Covered executive branch official. Tax act 1040x   For purposes of this discussion, a covered executive branch official is any of the following. Tax act 1040x The President. Tax act 1040x The Vice President. Tax act 1040x Any officer or employee of the White House Office of the Executive Office of the President and the two most senior level officers of each of the other agencies in the Executive Office. Tax act 1040x Any individual who: Is serving in a position in Level I of the Executive Schedule under section 5312 of title 5, United States Code, Has been designated by the President as having Cabinet-level status, or Is an immediate deputy of an individual listed in item (a) or (b). Tax act 1040x Exceptions to denial of deduction. Tax act 1040x   The general denial of the deduction does not apply to the following. Tax act 1040x Expenses of appearing before, or communicating with, any committee or member of any local council or similar governing body concerning its legislation (local legislation) if the legislation is of direct interest to you or to you and an organization of which you are a member. Tax act 1040x An Indian tribal government is treated as a local council or similar governing body. Tax act 1040x Any in-house expenses for influencing legislation and communicating directly with a covered executive branch official if those expenses for the tax year do not exceed $2,000 (excluding overhead expenses). Tax act 1040x Expenses incurred by taxpayers engaged in the trade or business of lobbying (professional lobbyists) on behalf of another person (but does apply to payments by the other person to the lobbyist for lobbying activities). Tax act 1040x Moving machinery. Tax act 1040x   Generally, the cost of moving machinery from one city to another is a deductible expense. Tax act 1040x So is the cost of moving machinery from one plant to another, or from one part of your plant to another. Tax act 1040x You can deduct the cost of installing the machinery in the new location. Tax act 1040x However, you must capitalize the costs of installing or moving newly purchased machinery. Tax act 1040x Outplacement services. Tax act 1040x   The costs of outplacement services you provide to your employees to help them find new employment, such as career counseling, résumé assistance, skills assessment, etc. Tax act 1040x are deductible. Tax act 1040x   The costs of outplacement services may cover more than one deduction category. Tax act 1040x For example, deduct as a utilities expense the cost of telephone calls made under this service and deduct as rental expense the cost of renting machinery and equipment for this service. Tax act 1040x   For information on whether the value of outplacement services is includable in your employees' income, see Publication 15-B. Tax act 1040x Penalties and fines. Tax act 1040x   Penalties paid for late performance or nonperformance of a contract are generally deductible. Tax act 1040x For instance, you own and operate a construction company. Tax act 1040x Under a contract, you are to finish construction of a building by a certain date. Tax act 1040x Due to construction delays, the building is not completed and ready for occupancy on the date stipulated in the contract. Tax act 1040x You are now required to pay an additional amount for each day that completion is delayed beyond the completion date stipulated in the contract. Tax act 1040x These additional costs are deductible business expenses. Tax act 1040x   On the other hand, penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible. Tax act 1040x These fines or penalties include the following amounts. Tax act 1040x Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding. Tax act 1040x Paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and additional amounts and assessable penalties imposed by the Internal Revenue Code. Tax act 1040x Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal. Tax act 1040x Forfeited as collateral posted for a proceeding that could result in a fine or penalty. Tax act 1040x   Examples of nondeductible penalties and fines include the following. Tax act 1040x Fines for violating city housing codes. Tax act 1040x Fines paid by truckers for violating state maximum highway weight laws. Tax act 1040x Fines for violating air quality laws. Tax act 1040x Civil penalties for violating federal laws regarding mining safety standards and discharges into navigable waters. Tax act 1040x   A fine or penalty does not include any of the following. Tax act 1040x Legal fees and related expenses to defend yourself in a prosecution or civil action for a violation of the law imposing the fine or civil penalty. Tax act 1040x Court costs or stenographic and printing charges. Tax act 1040x Compensatory damages paid to a government. Tax act 1040x Political contributions. Tax act 1040x   Contributions or gifts paid to political parties or candidates are not deductible. Tax act 1040x In addition, expenses paid or incurred to take part in any political campaign of a candidate for public office are not deductible. Tax act 1040x Indirect political contributions. Tax act 1040x   You cannot deduct indirect political contributions and costs of taking part in political activities as business expenses. Tax act 1040x Examples of nondeductible expenses include the following. Tax act 1040x Advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate. Tax act 1040x Admission to a dinner or program (including, but not limited to, galas, dances, film presentations, parties, and sporting events) if any of the proceeds from the function are for, or intended for, the use of a political party or candidate. Tax act 1040x Admission to an inaugural ball, gala, parade, concert, or similar event if identified with a political party or candidate. Tax act 1040x Repairs. Tax act 1040x   The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. Tax act 1040x Routine maintenance that keeps your property in a normal efficient operating condition, but that does not materially increase the value or substantially prolong the useful life of the property, is deductible in the year that it is incurred. Tax act 1040x Otherwise, the cost must be capitalized and depreciated. Tax act 1040x See Form 4562 and its instructions for how to compute and claim the depreciation deduction. Tax act 1040x   The cost of repairs includes the costs of labor, supplies, and certain other items. Tax act 1040x The value of your own labor is not deductible. Tax act 1040x Examples of repairs include: Reconditioning floors (but not replacement), Repainting the interior and exterior walls of a building, Cleaning and repairing roofs and gutters, and Fixing plumbing leaks (but not replacement of fixtures). Tax act 1040x Repayments. Tax act 1040x   If you had to repay an amount you included in your income in an earlier year, you may be able to deduct the amount repaid for the year in which you repaid it. Tax act 1040x Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. Tax act 1040x Type of deduction. Tax act 1040x   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. Tax act 1040x For instance, if you repay an amount you previously reported as a capital gain, deduct the repayment as a capital loss on Form 8949. Tax act 1040x If you reported it as self-employment income, deduct it as a business deduction on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). Tax act 1040x   If you reported the amount as wages, unemployment compensation, or other nonbusiness ordinary income, enter it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is subject to the 2% limitation. Tax act 1040x However, if the repayment is over $3,000 and Method 1 (discussed later) applies, deduct it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is not subject to the 2% limitation. Tax act 1040x Repayment—$3,000 or less. Tax act 1040x   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Tax act 1040x Repayment—over $3,000. Tax act 1040x   If the amount you repaid was more than $3,000, you can deduct the repayment, as described earlier. Tax act 1040x However, you can instead choose to take a tax credit for the year of repayment if you included the income under a “claim of right. Tax act 1040x ” This means that at the time you included the income, it appeared that you had an unrestricted right to it. Tax act 1040x If you qualify for this choice, figure your tax under both methods and use the method that results in less tax. Tax act 1040x Method 1. Tax act 1040x   Figure your tax for 2013 claiming a deduction for the repaid amount. Tax act 1040x Method 2. Tax act 1040x   Figure your tax for 2013 claiming a credit for the repaid amount. Tax act 1040x Follow these steps. Tax act 1040x Figure your tax for 2013 without deducting the repaid amount. Tax act 1040x Refigure your tax from the earlier year without including in income the amount you repaid in 2013. Tax act 1040x Subtract the tax in (2) from the tax shown on your return for the earlier year. Tax act 1040x This is the amount of your credit. Tax act 1040x Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1). Tax act 1040x   If Method 1 results in less tax, deduct the amount repaid as discussed earlier under Type of deduction. Tax act 1040x   If Method 2 results in less tax, claim the credit on line 71 of Form 1040, and write “I. Tax act 1040x R. Tax act 1040x C. Tax act 1040x 1341” next to line 71. Tax act 1040x Example. Tax act 1040x For 2012, you filed a return and reported your income on the cash method. Tax act 1040x In 2013, you repaid $5,000 included in your 2012 gross income under a claim of right. Tax act 1040x Your filing status in 2013 and 2012 is single. Tax act 1040x Your income and tax for both years are as follows:   2012  With Income 2012  Without Income Taxable Income $15,000 $10,000 Tax $ 1,819 $ 1,069   2013  Without Deduction 2013  With Deduction Taxable Income $49,950 $44,950 Tax $8,423 $7,173 Your tax under Method 1 is $7,173. Tax act 1040x Your tax under Method 2 is $7,673, figured as follows: Tax previously determined for 2012 $ 1,819 Less: Tax as refigured − 1,069 Decrease in 2012 tax $ 750 Regular tax liability for 2013 $8,423 Less: Decrease in 2012 tax − 750 Refigured tax for 2013 $ 7,673 Because you pay less tax under Method 1, you should take a deduction for the repayment in 2013. Tax act 1040x Repayment does not apply. Tax act 1040x   This discussion does not apply to the following. Tax act 1040x Deductions for bad debts. Tax act 1040x Deductions from sales to customers, such as returns and allowances, and similar items. Tax act 1040x Deductions for legal and other expenses of contesting the repayment. Tax act 1040x Year of deduction (or credit). Tax act 1040x   If you use the cash method of accounting, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. Tax act 1040x If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper deduction under your accounting method. Tax act 1040x For example, if you use the accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment accrues. Tax act 1040x Subscriptions. Tax act 1040x   Subscriptions to professional, technical, and trade journals that deal with your business field are deductible. Tax act 1040x Supplies and materials. Tax act 1040x   Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the tax year. Tax act 1040x   If you keep incidental materials and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if all the following requirements are met. Tax act 1040x You do not keep a record of when they are used. Tax act 1040x You do not take an inventory of the amount on hand at the beginning and end of the tax year. Tax act 1040x This method does not distort your income. Tax act 1040x   You can also deduct the cost of books, professional instruments, equipment, etc. Tax act 1040x , if you normally use them within a year. Tax act 1040x However, if the usefulness of these items extends substantially beyond the year they are placed in service, you generally must recover their costs through depreciation. Tax act 1040x For more information regarding depreciation see Publication 946, How To Depreciate Property. Tax act 1040x Utilities. Tax act 1040x   Business expenses for heat, lights, power, telephone service, and water and sewerage are deductible. Tax act 1040x However, any part due to personal use is not deductible. Tax act 1040x Telephone. Tax act 1040x   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. Tax act 1040x However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses. Tax act 1040x Prev  Up  Next   Home   More Online Publications
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Letter 1961C Frequently Asked Questions (FAQs)

What is the letter telling me?

This letter is in response to an oral or written request for a Direct Debit Installment Agreement. It explains why your request for a Direct Debit could not be granted and the steps you need to take to qualify for a Direct Debit Installment Agreement.

What do I have to do?

You need to complete the Form 433 and return it to us with your bank account and routing numbers.

How much time do I have?

You should return this information to us as soon as possible.

What happens if I don't take any action?

If you do not make an arrangement to pay the balance you owe, enforced collection action may be taken to collect the amount you owe, including the filing of a Notice of Federal Tax Lien, or garnishment of your wages and/or bank accounts.

Who should I contact?

If you have any questions about this letter, call us at the number printed in the letter. The person who answers the phone will assist you.

What if I don't agree or have already taken corrective action?

If you do not agree with this letter, call us immediately at the number included. We will do our best to help you. If you have called us about this matter before, but we did not correct the problem, you may want to contact the Office of the Taxpayer Advocate.

Page Last Reviewed or Updated: 30-Jan-2014

The Tax Act 1040x

Tax act 1040x Publication 334 - Additional Material Prev  Up  Next   Home   More Online Publications