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Turbo Tax2011 Taxes

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Turbo Tax2011 Taxes

Turbo tax2011 taxes Index A Assistance (see Help) C Casualty and theft losses, Casualty and Theft Losses Clean-up costs, Demolition and Clean-up Costs Copy of tax return, request for, Request for copy of tax return. Turbo tax2011 taxes Credits: Employee retention, Employee Retention Credit D Demolition costs, Demolition and Clean-up Costs Depreciation: Qualified recovery assistance property, Qualified recovery assistance property. Turbo tax2011 taxes Special allowance, Special Depreciation Allowance Disaster area: May 4, 2007 storms and tornadoes, Kansas Disaster Area Distributions: Home purchase or construction, Repayment of Qualified Distributions for the Purchase or Construction of a Main Home Qualified recovery assistance, Qualified recovery assistance distribution. Turbo tax2011 taxes Repayment of, Repayment of Qualified Recovery Assistance Distributions Taxation of, Taxation of Qualified Recovery Assistance Distributions E Eligible retirement plan, Eligible retirement plan. Turbo tax2011 taxes Employee retention credit, Employee Retention Credit F Free tax services, How To Get Tax Help H Help: How to get, How To Get Tax Help Phone number, How To Get Tax Help Special IRS assistance, How To Get Tax Help Website, How To Get Tax Help I Involuntary conversion (see Replacement period for nonrecognition of gain) IRAs and other retirement plans, IRAs and Other Retirement Plans K Kansas disaster area, Kansas Disaster Area M More information (see Tax help) N Net operating losses, Net Operating Losses P Publications (see Tax help) Q Qualified recovery assistance distribution, Qualified recovery assistance distribution. Turbo tax2011 taxes Qualified recovery assistance loss, Qualified recovery assistance loss. Turbo tax2011 taxes R Replacement period for nonrecognition of gain, Replacement Period for Nonrecognition of Gain Retirement plan, eligible, Eligible retirement plan. Turbo tax2011 taxes Retirement plans, IRAs and Other Retirement Plans S Section 179 deduction, Increased Section 179 Deduction Storms and tornadoes, Storms and Tornadoes T Tax help, How To Get Tax Help (see Help) Tax return: Request for copy, Request for copy of tax return. Turbo tax2011 taxes Request for transcript, Request for transcript of tax return. Turbo tax2011 taxes Taxpayer Advocate, Contacting your Taxpayer Advocate. Turbo tax2011 taxes Theft losses, Casualty and Theft Losses Transcript of tax return, request for, Request for transcript of tax return. Turbo tax2011 taxes TTY/TDD information, How To Get Tax Help Prev  Up     Home   More Online Publications
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The Turbo Tax2011 Taxes

Turbo tax2011 taxes 1. Turbo tax2011 taxes   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. Turbo tax2011 taxes At-risk limits. Turbo tax2011 taxes Passive activities. Turbo tax2011 taxes Net operating loss. Turbo tax2011 taxes When Can I Deduct an Expense?Economic performance. Turbo tax2011 taxes Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Turbo tax2011 taxes  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Turbo tax2011 taxes See Optional safe harbor method under Business use of your home , later. Turbo tax2011 taxes Introduction This chapter covers the general rules for deducting business expenses. Turbo tax2011 taxes Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. Turbo tax2011 taxes Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. Turbo tax2011 taxes What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Turbo tax2011 taxes An ordinary expense is one that is common and accepted in your industry. Turbo tax2011 taxes A necessary expense is one that is helpful and appropriate for your trade or business. Turbo tax2011 taxes An expense does not have to be indispensable to be considered necessary. Turbo tax2011 taxes Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. Turbo tax2011 taxes In some cases you may not be allowed to deduct the expense at all. Turbo tax2011 taxes Therefore, it is important to distinguish usual business expenses from expenses that include the following. Turbo tax2011 taxes The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Turbo tax2011 taxes Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Turbo tax2011 taxes Some of your business expenses may be included in figuring cost of goods sold. Turbo tax2011 taxes Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Turbo tax2011 taxes If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Turbo tax2011 taxes The following are types of expenses that go into figuring cost of goods sold. Turbo tax2011 taxes The cost of products or raw materials, including freight. Turbo tax2011 taxes Storage. Turbo tax2011 taxes Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Turbo tax2011 taxes Factory overhead. Turbo tax2011 taxes Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Turbo tax2011 taxes Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Turbo tax2011 taxes This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. Turbo tax2011 taxes For more information, see the following sources. Turbo tax2011 taxes Cost of goods sold—chapter 6 of Publication 334. Turbo tax2011 taxes Inventories—Publication 538. Turbo tax2011 taxes Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Turbo tax2011 taxes Capital Expenses You must capitalize, rather than deduct, some costs. Turbo tax2011 taxes These costs are a part of your investment in your business and are called “capital expenses. Turbo tax2011 taxes ” Capital expenses are considered assets in your business. Turbo tax2011 taxes In general, you capitalize three types of costs. Turbo tax2011 taxes Business start-up costs (See Tip below). Turbo tax2011 taxes Business assets. Turbo tax2011 taxes Improvements. Turbo tax2011 taxes You can elect to deduct or amortize certain business start-up costs. Turbo tax2011 taxes See chapters 7 and 8. Turbo tax2011 taxes Cost recovery. Turbo tax2011 taxes   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. Turbo tax2011 taxes These recovery methods allow you to deduct part of your cost each year. Turbo tax2011 taxes In this way, you are able to recover your capital expense. Turbo tax2011 taxes See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Turbo tax2011 taxes A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Turbo tax2011 taxes A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Turbo tax2011 taxes See Publication 946 for details. Turbo tax2011 taxes Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Turbo tax2011 taxes These costs may include expenses for advertising, travel, or wages for training employees. Turbo tax2011 taxes If you go into business. Turbo tax2011 taxes   When you go into business, treat all costs you had to get your business started as capital expenses. Turbo tax2011 taxes   Usually you recover costs for a particular asset through depreciation. Turbo tax2011 taxes Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Turbo tax2011 taxes However, you can choose to amortize certain costs for setting up your business. Turbo tax2011 taxes See Starting a Business in chapter 8 for more information on business start-up costs. Turbo tax2011 taxes If your attempt to go into business is unsuccessful. Turbo tax2011 taxes   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. Turbo tax2011 taxes The costs you had before making a decision to acquire or begin a specific business. Turbo tax2011 taxes These costs are personal and nondeductible. Turbo tax2011 taxes They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Turbo tax2011 taxes The costs you had in your attempt to acquire or begin a specific business. Turbo tax2011 taxes These costs are capital expenses and you can deduct them as a capital loss. Turbo tax2011 taxes   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. Turbo tax2011 taxes   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Turbo tax2011 taxes You cannot take a deduction for these costs. Turbo tax2011 taxes You will recover the costs of these assets when you dispose of them. Turbo tax2011 taxes Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Turbo tax2011 taxes You must fully capitalize the cost of these assets, including freight and installation charges. Turbo tax2011 taxes Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Turbo tax2011 taxes See Regulations section 1. Turbo tax2011 taxes 263A-2 for information on these rules. Turbo tax2011 taxes Improvements Improvements are generally major expenditures. Turbo tax2011 taxes Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Turbo tax2011 taxes The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. Turbo tax2011 taxes Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Turbo tax2011 taxes Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Turbo tax2011 taxes However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Turbo tax2011 taxes Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Turbo tax2011 taxes Restoration plan. Turbo tax2011 taxes   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Turbo tax2011 taxes This applies even if some of the work would by itself be classified as repairs. Turbo tax2011 taxes Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Turbo tax2011 taxes Motor vehicles. Turbo tax2011 taxes   You usually capitalize the cost of a motor vehicle you use in your business. Turbo tax2011 taxes You can recover its cost through annual deductions for depreciation. Turbo tax2011 taxes   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Turbo tax2011 taxes See Publication 463. Turbo tax2011 taxes   Generally, repairs you make to your business vehicle are currently deductible. Turbo tax2011 taxes However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Turbo tax2011 taxes Roads and driveways. Turbo tax2011 taxes    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. Turbo tax2011 taxes The cost of maintaining a private road on your business property is a deductible expense. Turbo tax2011 taxes Tools. Turbo tax2011 taxes   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. Turbo tax2011 taxes Machinery parts. Turbo tax2011 taxes   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. Turbo tax2011 taxes Heating equipment. Turbo tax2011 taxes   The cost of changing from one heating system to another is a capital expense. Turbo tax2011 taxes Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Turbo tax2011 taxes However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. Turbo tax2011 taxes You can deduct the business part. Turbo tax2011 taxes For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. Turbo tax2011 taxes The remaining 30% is personal interest and generally is not deductible. Turbo tax2011 taxes See chapter 4 for information on deducting interest and the allocation rules. Turbo tax2011 taxes Business use of your home. Turbo tax2011 taxes   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Turbo tax2011 taxes These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Turbo tax2011 taxes   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Turbo tax2011 taxes The business part of your home must be used exclusively and regularly for your trade or business. Turbo tax2011 taxes The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. Turbo tax2011 taxes   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. Turbo tax2011 taxes   Your home office qualifies as your principal place of business if you meet the following requirements. Turbo tax2011 taxes You use the office exclusively and regularly for administrative or management activities of your trade or business. Turbo tax2011 taxes You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Turbo tax2011 taxes   If you have more than one business location, determine your principal place of business based on the following factors. Turbo tax2011 taxes The relative importance of the activities performed at each location. Turbo tax2011 taxes If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Turbo tax2011 taxes Optional safe harbor method. Turbo tax2011 taxes   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. Turbo tax2011 taxes This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Turbo tax2011 taxes   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. Turbo tax2011 taxes Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). Turbo tax2011 taxes You are not required to allocate these deductions between personal and business use, as is required under the regular method. Turbo tax2011 taxes If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Turbo tax2011 taxes   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Turbo tax2011 taxes All of the requirements discussed earlier under Business use of your home still apply. Turbo tax2011 taxes   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Turbo tax2011 taxes    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. Turbo tax2011 taxes Business use of your car. Turbo tax2011 taxes   If you use your car exclusively in your business, you can deduct car expenses. Turbo tax2011 taxes If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Turbo tax2011 taxes Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Turbo tax2011 taxes   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Turbo tax2011 taxes Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Turbo tax2011 taxes Beginning in 2013, the standard mileage rate is 56. Turbo tax2011 taxes 5 cents per mile. Turbo tax2011 taxes   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. Turbo tax2011 taxes   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Turbo tax2011 taxes How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. Turbo tax2011 taxes Recovery of amount deducted (tax benefit rule). Turbo tax2011 taxes   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. Turbo tax2011 taxes If you have a recovery in a later year, include the recovered amount in income in that year. Turbo tax2011 taxes However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. Turbo tax2011 taxes   For more information on recoveries and the tax benefit rule, see Publication 525. Turbo tax2011 taxes Payments in kind. Turbo tax2011 taxes   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Turbo tax2011 taxes You cannot deduct the cost of your own labor. Turbo tax2011 taxes   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Turbo tax2011 taxes If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Turbo tax2011 taxes Limits on losses. Turbo tax2011 taxes   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Turbo tax2011 taxes There may be limits on how much of the loss you can deduct. Turbo tax2011 taxes Not-for-profit limits. Turbo tax2011 taxes   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. Turbo tax2011 taxes See Not-for-Profit Activities , later. Turbo tax2011 taxes At-risk limits. Turbo tax2011 taxes   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. Turbo tax2011 taxes You are at risk in any activity for the following. Turbo tax2011 taxes The money and adjusted basis of property you contribute to the activity. Turbo tax2011 taxes Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Turbo tax2011 taxes For more information, see Publication 925. Turbo tax2011 taxes Passive activities. Turbo tax2011 taxes   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. Turbo tax2011 taxes In general, deductions for losses from passive activities only offset income from passive activities. Turbo tax2011 taxes You cannot use any excess deductions to offset other income. Turbo tax2011 taxes In addition, passive activity credits can only offset the tax on net passive income. Turbo tax2011 taxes Any excess loss or credits are carried over to later years. Turbo tax2011 taxes Suspended passive losses are fully deductible in the year you completely dispose of the activity. Turbo tax2011 taxes For more information, see Publication 925. Turbo tax2011 taxes Net operating loss. Turbo tax2011 taxes   If your deductions are more than your income for the year, you may have a “net operating loss. Turbo tax2011 taxes ” You can use a net operating loss to lower your taxes in other years. Turbo tax2011 taxes See Publication 536 for more information. Turbo tax2011 taxes   See Publication 542 for information about net operating losses of corporations. Turbo tax2011 taxes When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Turbo tax2011 taxes An accounting method is a set of rules used to determine when and how income and expenses are reported. Turbo tax2011 taxes The two basic methods are the cash method and the accrual method. Turbo tax2011 taxes Whichever method you choose must clearly reflect income. Turbo tax2011 taxes For more information on accounting methods, see Publication 538. Turbo tax2011 taxes Cash method. Turbo tax2011 taxes   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Turbo tax2011 taxes Accrual method. Turbo tax2011 taxes   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Turbo tax2011 taxes The all-events test has been met. Turbo tax2011 taxes The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Turbo tax2011 taxes Economic performance has occurred. Turbo tax2011 taxes Economic performance. Turbo tax2011 taxes   You generally cannot deduct or capitalize a business expense until economic performance occurs. Turbo tax2011 taxes If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. Turbo tax2011 taxes If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Turbo tax2011 taxes Example. Turbo tax2011 taxes Your tax year is the calendar year. Turbo tax2011 taxes In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Turbo tax2011 taxes You paid it by check in January 2014. Turbo tax2011 taxes If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. Turbo tax2011 taxes If you use the cash method of accounting, deduct the expense on your 2014 return. Turbo tax2011 taxes Prepayment. Turbo tax2011 taxes   You generally cannot deduct expenses in advance, even if you pay them in advance. Turbo tax2011 taxes This rule applies to both the cash and accrual methods. Turbo tax2011 taxes It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Turbo tax2011 taxes Example. Turbo tax2011 taxes In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Turbo tax2011 taxes Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Turbo tax2011 taxes You can deduct the rent for 2014 and 2015 on your tax returns for those years. Turbo tax2011 taxes Contested liability. Turbo tax2011 taxes   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Turbo tax2011 taxes Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Turbo tax2011 taxes S. Turbo tax2011 taxes possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. Turbo tax2011 taxes However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Turbo tax2011 taxes See Regulations section 1. Turbo tax2011 taxes 461-2. Turbo tax2011 taxes Related person. Turbo tax2011 taxes   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Turbo tax2011 taxes However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. Turbo tax2011 taxes Your deduction is allowed when the amount is includible in income by the related cash method payee. Turbo tax2011 taxes See Related Persons in Publication 538. Turbo tax2011 taxes Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Turbo tax2011 taxes Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Turbo tax2011 taxes The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Turbo tax2011 taxes It does not apply to corporations other than S corporations. Turbo tax2011 taxes In determining whether you are carrying on an activity for profit, several factors are taken into account. Turbo tax2011 taxes No one factor alone is decisive. Turbo tax2011 taxes Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. Turbo tax2011 taxes Presumption of profit. Turbo tax2011 taxes   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Turbo tax2011 taxes Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Turbo tax2011 taxes The activity must be substantially the same for each year within this period. Turbo tax2011 taxes You have a profit when the gross income from an activity exceeds the deductions. Turbo tax2011 taxes   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. Turbo tax2011 taxes   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. Turbo tax2011 taxes This means the limits discussed here will not apply. Turbo tax2011 taxes You can take all your business deductions from the activity, even for the years that you have a loss. Turbo tax2011 taxes You can rely on this presumption unless the IRS later shows it to be invalid. Turbo tax2011 taxes Using the presumption later. Turbo tax2011 taxes   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. Turbo tax2011 taxes   You can elect to do this by filing Form 5213. Turbo tax2011 taxes Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. Turbo tax2011 taxes   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Turbo tax2011 taxes Accordingly, it will not restrict your deductions. Turbo tax2011 taxes Rather, you will gain time to earn a profit in the required number of years. Turbo tax2011 taxes If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Turbo tax2011 taxes If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. Turbo tax2011 taxes   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. Turbo tax2011 taxes The period is extended only for deductions of the activity and any related deductions that might be affected. Turbo tax2011 taxes    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Turbo tax2011 taxes Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. Turbo tax2011 taxes Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. Turbo tax2011 taxes You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Turbo tax2011 taxes However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. Turbo tax2011 taxes Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. Turbo tax2011 taxes If you are an individual, these deductions may be taken only if you itemize. Turbo tax2011 taxes These deductions may be taken on Schedule A (Form 1040). Turbo tax2011 taxes Category 1. Turbo tax2011 taxes   Deductions you can take for personal as well as for business activities are allowed in full. Turbo tax2011 taxes For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Turbo tax2011 taxes Deduct them on the appropriate lines of Schedule A (Form 1040). Turbo tax2011 taxes For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). Turbo tax2011 taxes The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. Turbo tax2011 taxes The reduction amount returns to $100 for tax years beginning after December 31, 2009. Turbo tax2011 taxes See Publication 547 for more information on casualty losses. Turbo tax2011 taxes For the limits that apply to home mortgage interest, see Publication 936. Turbo tax2011 taxes Category 2. Turbo tax2011 taxes   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. Turbo tax2011 taxes Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Turbo tax2011 taxes Category 3. Turbo tax2011 taxes   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. Turbo tax2011 taxes Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Turbo tax2011 taxes Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Turbo tax2011 taxes    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Turbo tax2011 taxes They are subject to the 2%-of-adjusted-gross-income limit. Turbo tax2011 taxes See Publication 529 for information on this limit. Turbo tax2011 taxes Example. Turbo tax2011 taxes Adriana is engaged in a not-for-profit activity. Turbo tax2011 taxes The income and expenses of the activity are as follows. Turbo tax2011 taxes Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. Turbo tax2011 taxes The limit is reached in category (3), as follows. Turbo tax2011 taxes Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. Turbo tax2011 taxes $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. Turbo tax2011 taxes Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Turbo tax2011 taxes The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Turbo tax2011 taxes Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. Turbo tax2011 taxes Partnerships and S corporations. Turbo tax2011 taxes   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Turbo tax2011 taxes They are reflected in the individual shareholder's or partner's distributive shares. Turbo tax2011 taxes More than one activity. Turbo tax2011 taxes   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Turbo tax2011 taxes The following are the most significant facts and circumstances in making this determination. Turbo tax2011 taxes The degree of organizational and economic interrelationship of various undertakings. Turbo tax2011 taxes The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Turbo tax2011 taxes The similarity of the undertakings. Turbo tax2011 taxes   The IRS will generally accept your characterization if it is supported by facts and circumstances. Turbo tax2011 taxes    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Turbo tax2011 taxes Figure separately whether each is a not-for-profit activity. Turbo tax2011 taxes Then figure the limit on deductions and losses separately for each activity that is not for profit. Turbo tax2011 taxes Prev  Up  Next   Home   More Online Publications