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Www taxcut com 4. Www taxcut com   Special Situations Table of Contents Condominiums CooperativesDepreciation Property Changed to Rental UseBasis of Property Changed to Rental Use Figuring the Depreciation Deduction Renting Part of Property Not Rented for ProfitPostponing decision. Www taxcut com Example—Property Changed to Rental Use This chapter discusses some rental real estate activities that are subject to additional rules. Www taxcut com Condominiums A condominium is most often a dwelling unit in a multi-unit building, but can also take other forms, such as a townhouse or garden apartment. Www taxcut com If you own a condominium, you also own a share of the common elements, such as land, lobbies, elevators, and service areas. Www taxcut com You and the other condominium owners may pay dues or assessments to a special corporation that is organized to take care of the common elements. Www taxcut com Special rules apply if you rent your condominium to others. Www taxcut com You can deduct as rental expenses all the expenses discussed in chapters 1 and 2. Www taxcut com In addition, you can deduct any dues or assessments paid for maintenance of the common elements. Www taxcut com You cannot deduct special assessments you pay to a condominium management corporation for improvements. Www taxcut com However, you may be able to recover your share of the cost of any improvement by taking depreciation. Www taxcut com Cooperatives If you live in a cooperative, you do not own your apartment. Www taxcut com Instead, a corporation owns the apartments and you are a tenant-stockholder in the cooperative housing corporation. Www taxcut com If you rent your apartment to others, you usually can deduct, as a rental expense, all the maintenance fees you pay to the cooperative housing corporation. Www taxcut com In addition to the maintenance fees paid to the cooperative housing corporation, you can deduct your direct payments for repairs, upkeep, and other rental expenses, including interest paid on a loan used to buy your stock in the corporation. Www taxcut com Depreciation You will be depreciating your stock in the corporation rather than the apartment itself. Www taxcut com Figure your depreciation deduction as follows. Www taxcut com Figure the depreciation for all the depreciable real property owned by the corporation. Www taxcut com (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. Www taxcut com ) If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Www taxcut com Multiply your cost per share by the total number of outstanding shares. Www taxcut com Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Www taxcut com Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Www taxcut com Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Www taxcut com Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Www taxcut com Multiply the result of (2) by the percentage you figured in (3). Www taxcut com This is your depreciation on the stock. Www taxcut com Your depreciation deduction for the year cannot be more than the part of your adjusted basis (defined in chapter 2) in the stock of the corporation that is allocable to your rental property. Www taxcut com Payments added to capital account. Www taxcut com   Payments earmarked for a capital asset or improvement, or otherwise charged to the corporation's capital account are added to the basis of your stock in the corporation. Www taxcut com For example, you cannot deduct a payment used to pave a community parking lot, install a new roof, or pay the principal of the corporation's mortgage. Www taxcut com   Treat as a capital cost the amount you were assessed for capital items. Www taxcut com This cannot be more than the amount by which your payments to the corporation exceeded your share of the corporation's mortgage interest and real estate taxes. Www taxcut com   Your share of interest and taxes is the amount the corporation elected to allocate to you, if it reasonably reflects those expenses for your apartment. Www taxcut com Otherwise, figure your share in the following manner. Www taxcut com Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Www taxcut com Multiply the corporation's deductible interest by the number you figured in (1). Www taxcut com This is your share of the interest. Www taxcut com Multiply the corporation's deductible taxes by the number you figured in (1). Www taxcut com This is your share of the taxes. Www taxcut com Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. Www taxcut com You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. Www taxcut com You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Www taxcut com However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). Www taxcut com Example. Www taxcut com Your tax year is the calendar year. Www taxcut com You moved from your home in May and started renting it out on June 1. Www taxcut com You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Www taxcut com Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Www taxcut com When figuring depreciation, treat the property as placed in service on June 1. Www taxcut com Basis of Property Changed to Rental Use When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. Www taxcut com Fair market value. Www taxcut com   This is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. Www taxcut com Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property. Www taxcut com Figuring the basis. Www taxcut com   The basis for depreciation is the lesser of: The fair market value of the property on the date you changed it to rental use, or Your adjusted basis on the date of the change—that is, your original cost or other basis of the property, plus the cost of permanent additions or improvements since you acquired it, minus deductions for any casualty or theft losses claimed on earlier years' income tax returns and other decreases to basis. Www taxcut com For other increases and decreases to basis, see Adjusted Basis in chapter 2. Www taxcut com Example. Www taxcut com Several years ago you built your home for $140,000 on a lot that cost you $14,000. Www taxcut com Before changing the property to rental use this year, you added $28,000 of permanent improvements to the house and claimed a $3,500 casualty loss deduction for damage to the house. Www taxcut com Part of the improvements qualified for a $500 residential energy credit, which you claimed on your 2010 tax return. Www taxcut com Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation. Www taxcut com The adjusted basis of the house at the time of the change in its use was $164,000 ($140,000 + $28,000 − $3,500 − $500). Www taxcut com On the date of the change in use, your property had a fair market value of $168,000, of which $21,000 was for the land and $147,000 was for the house. Www taxcut com The basis for depreciation on the house is the fair market value on the date of the change ($147,000), because it is less than your adjusted basis ($164,000). Www taxcut com Cooperatives If you change your cooperative apartment to rental use, figure your allowable depreciation as explained earlier. Www taxcut com (Depreciation methods are discussed in chapter 2 of this publication and Publication 946. Www taxcut com ) The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Www taxcut com The fair market value of the property on the date you change your apartment to rental use. Www taxcut com This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Www taxcut com The corporation's adjusted basis in the property on that date. Www taxcut com Do not subtract depreciation when figuring the corporation's adjusted basis. Www taxcut com If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1) under Depreciation (under Cooperatives, near the beginning of this chapter). Www taxcut com The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Www taxcut com Figuring the Depreciation Deduction To figure the deduction, use the depreciation system in effect when you convert your residence to rental use. Www taxcut com Generally, that will be MACRS for any conversion after 1986. Www taxcut com Treat the property as placed in service on the conversion date. Www taxcut com Example. Www taxcut com Your converted residence (see previous example under Figuring the basis) was available for rent on August 1. Www taxcut com Using Table 2-2d (see chapter 2), the percentage for Year 1 beginning in August is 1. Www taxcut com 364% and the depreciation deduction for Year 1 is $2,005 ($147,000 × . Www taxcut com 01364). Www taxcut com Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. Www taxcut com You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). Www taxcut com You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity, or painting the outside of the house. Www taxcut com There is no change in the types of expenses deductible for the personal-use part of your property. Www taxcut com Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Www taxcut com You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Www taxcut com You do not have to divide the expenses that belong only to the rental part of your property. Www taxcut com For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. Www taxcut com If you install a second phone line strictly for your tenant's use, all of the cost of the second line is deductible as a rental expense. Www taxcut com You can deduct depreciation on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Www taxcut com How to divide expenses. Www taxcut com   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. Www taxcut com You can use any reasonable method for dividing the expense. Www taxcut com It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Www taxcut com The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home. Www taxcut com Example. Www taxcut com You rent a room in your house. Www taxcut com The room is 12 × 15 feet, or 180 square feet. Www taxcut com Your entire house has 1,800 square feet of floor space. Www taxcut com You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. Www taxcut com If your heating bill for the year for the entire house was $600, $60 ($600 × . Www taxcut com 10) is a rental expense. Www taxcut com The balance, $540, is a personal expense that you cannot deduct. Www taxcut com Duplex. Www taxcut com   A common situation is the duplex where you live in one unit and rent out the other. Www taxcut com Certain expenses apply to the entire property, such as mortgage interest and real estate taxes, and must be split to determine rental and personal expenses. Www taxcut com Example. Www taxcut com You own a duplex and live in one half, renting the other half. Www taxcut com Both units are approximately the same size. Www taxcut com Last year, you paid a total of $10,000 mortgage interest and $2,000 real estate taxes for the entire property. Www taxcut com You can deduct $5,000 mortgage interest and $1,000 real estate taxes on Schedule E (Form 1040), and if you itemize your deductions, you can deduct the other $5,000 mortgage interest and $1,000 real estate taxes on Schedule A (Form 1040). Www taxcut com Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. Www taxcut com You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. Www taxcut com Where to report. Www taxcut com   Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. Www taxcut com For example, if you are filing Form 1040, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. Www taxcut com   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. Www taxcut com You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Www taxcut com Presumption of profit. Www taxcut com   If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. Www taxcut com Postponing decision. Www taxcut com   If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. Www taxcut com You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. Www taxcut com 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. Www taxcut com More information. Www taxcut com   For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. Www taxcut com Example—Property Changed to Rental Use In January, Eileen Johnson bought a condominium apartment to live in. Www taxcut com Instead of selling the house she had been living in, she decided to change it to rental property. Www taxcut com Eileen selected a tenant and started renting the house on February 1. Www taxcut com Eileen charges $750 a month for rent and collects it herself. Www taxcut com Eileen also received a $750 security deposit from her tenant. Www taxcut com Because she plans to return it to her tenant at the end of the lease, she does not include it in her income. Www taxcut com Her rental expenses for the year are as follows. Www taxcut com   Mortgage interest $1,800     Fire insurance (1-year policy) 100     Miscellaneous repairs (after renting) 297     Real estate taxes imposed and paid 1,200   Eileen must divide the real estate taxes, mortgage interest, and fire insurance between the personal use of the property and the rental use of the property. Www taxcut com She can deduct eleven-twelfths of these expenses as rental expenses. Www taxcut com She can include the balance of the allowable taxes and mortgage interest on Schedule A (Form 1040) if she itemizes. Www taxcut com She cannot deduct the balance of the fire insurance because it is a personal expense. Www taxcut com Eileen bought this house in 1984 for $35,000. Www taxcut com Her property tax was based on assessed values of $10,000 for the land and $25,000 for the house. Www taxcut com Before changing it to rental property, Eileen added several improvements to the house. Www taxcut com She figures her adjusted basis as follows:   Improvements Cost     House $25,000     Remodeled kitchen 4,200     Recreation room 5,800     New roof 1,600     Patio and deck 2,400     Adjusted basis $39,000   On February 1, when Eileen changed her house to rental property, the property had a fair market value of $152,000. Www taxcut com Of this amount, $35,000 was for the land and $117,000 was for the house. Www taxcut com Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation. Www taxcut com As specified for residential rental property, Eileen must use the straight line method of depreciation over the GDS or ADS recovery period. Www taxcut com She chooses the GDS recovery period of 27. Www taxcut com 5 years. Www taxcut com She uses Table 2-2d to find her depreciation percentage. Www taxcut com Since she placed the property in service in February, the percentage is 3. Www taxcut com 182%. Www taxcut com On April 1, Eileen bought a new dishwasher for the rental property at a cost of $425. Www taxcut com The dishwasher is personal property used in a rental real estate activity, which has a 5-year recovery period. Www taxcut com She uses Table 2-2a to find the percentage for Year 1 under “Half-year convention” (20%) to figure her depreciation deduction. Www taxcut com On May 1, Eileen paid $4,000 to have a furnace installed in the house. Www taxcut com The furnace is residential rental property. Www taxcut com Because she placed the property in service in May, the percentage from Table 2-2d is 2. Www taxcut com 273%. Www taxcut com Eileen figures her net rental income or loss for the house as follows: Total rental income received  ($750 × 11) $8,250 Minus: Expenses     Mortgage interest ($1,800 × 11/12) $1,650   Fire insurance ($100 × 11/12) 92   Miscellaneous repairs 297   Real estate taxes ($1,200 × 11/12) 1,100   Total expenses 3,139 Balance $5,111 Minus: Depreciation     House ($39,000 × . Www taxcut com 03182) $1,241   Dishwasher ($425 × . Www taxcut com 20) 85   Furnace ($4,000 × . Www taxcut com 02273) 91   Total depreciation 1,417 Net rental income for house   $3,694       Eileen uses Schedule E, Part I, to report her rental income and expenses. Www taxcut com She enters her income, expenses, and depreciation for the house in the column for Property A. Www taxcut com Since all property was placed in service this year, Eileen must use Form 4562 to figure the depreciation. Www taxcut com See the Instructions for Form 4562 for more information on preparing the form. 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Self-Employed Individuals Tax Center

Who is Self-Employed?

Generally, you are self-employed if any of the following apply to you.

What are My Self-Employed Tax Obligations?

As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly.

Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording "self-employment tax" is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).

Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040. But in some situations your loss is limited. See Pub. 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) for more information.

You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions (PDF).

How Do I Make My Quarterly Payments?

Estimated tax is the method used to pay Social Security and Medicare taxes and income tax, because you do not have an employer withholding these taxes for you. Form 1040-ES, Estimated Tax for Individuals (PDF), is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.

Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax.

Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.

See the Estimated Taxes page for more information. The Self-Employment Tax page has more information on Social Security and Medicare taxes.

How Do I File My Annual Return?

To file your annual tax return, you will need to use Schedule C (PDF) or Schedule C-EZ (PDF) to report your income or loss from a business you operated or a profession you practiced as a sole proprietor. Schedule C Instructions (PDF) may be helpful in filling out this form.

Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. To find out if you can use Schedule C-EZ, see the instructions in the Schedule C-EZ form.

In order to report your Social Security and Medicare taxes, you must file Schedule SE (Form 1040), Self-Employment Tax (PDF). Use the income or loss calculated on Schedule C or Schedule C-EZ to calculate the amount of Social Security and Medicare taxes you should have paid during the year. The Instructions (PDF) for Schedule SE may be helpful in filing out the form.

Business Structures

When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. Visit the Business Structures page to learn more about each type of entity and what forms to file.

Home Office Deduction

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.

Husband and Wife Business - What is a Qualified Joint Venture?

Husband and Wife Business
The employment tax requirements for family employees may vary from those that apply to other employees. On this page we point out some issues to consider when operating a husband and wife business.

Election for Husband and Wife Unincorporated Businesses
For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a "qualified joint venture," whose only members are a husband and wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

Considering a Tax Professional

Tips for Choosing a Tax Return Preparer

Online Learning Tools

The Small Business Taxes: The Virtual Workshop is composed of nine interactive lessons designed to help new small business owners learn their tax rights and responsibilities. The IRS Video Portal contains video and audio presentations on topics of interest to small businesses, individuals and tax professionals.

Page Last Reviewed or Updated: 04-Mar-2014

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Www taxcut com 1. Www taxcut com   Travel Table of Contents Traveling Away From HomeTax Home Tax Home Different From Family Home Temporary Assignment or Job What Travel Expenses Are Deductible?Employee. Www taxcut com Business associate. Www taxcut com Bona fide business purpose. Www taxcut com Meals Travel in the United States Travel Outside the United States Luxury Water Travel Conventions If you temporarily travel away from your tax home, you can use this chapter to determine if you have deductible travel expenses. Www taxcut com This chapter discusses: Traveling away from home, Temporary assignment or job, and What travel expenses are deductible. Www taxcut com It also discusses the standard meal allowance, rules for travel inside and outside the United States, luxury water travel, and deductible convention expenses. Www taxcut com Travel expenses defined. Www taxcut com   For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. Www taxcut com   An ordinary expense is one that is common and accepted in your trade or business. Www taxcut com A necessary expense is one that is helpful and appropriate for your business. Www taxcut com An expense does not have to be required to be considered necessary. Www taxcut com   You will find examples of deductible travel expenses in Table 1-1 , later. Www taxcut com Traveling Away From Home You are traveling away from home if: Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work, and You need to sleep or rest to meet the demands of your work while away from home. Www taxcut com This rest requirement is not satisfied by merely napping in your car. Www taxcut com You do not have to be away from your tax home for a whole day or from dusk to dawn as long as your relief from duty is long enough to get necessary sleep or rest. Www taxcut com Example 1. Www taxcut com You are a railroad conductor. Www taxcut com You leave your home terminal on a regularly scheduled round-trip run between two cities and return home 16 hours later. Www taxcut com During the run, you have 6 hours off at your turnaround point where you eat two meals and rent a hotel room to get necessary sleep before starting the return trip. Www taxcut com You are considered to be away from home. Www taxcut com Example 2. Www taxcut com You are a truck driver. Www taxcut com You leave your terminal and return to it later the same day. Www taxcut com You get an hour off at your turnaround point to eat. Www taxcut com Because you are not off to get necessary sleep and the brief time off is not an adequate rest period, you are not traveling away from home. Www taxcut com Members of the Armed Forces. Www taxcut com   If you are a member of the U. Www taxcut com S. Www taxcut com Armed Forces on a permanent duty assignment overseas, you are not traveling away from home. Www taxcut com You cannot deduct your expenses for meals and lodging. Www taxcut com You cannot deduct these expenses even if you have to maintain a home in the United States for your family members who are not allowed to accompany you overseas. Www taxcut com If you are transferred from one permanent duty station to another, you may have deductible moving expenses, which are explained in Publication 521, Moving Expenses. Www taxcut com   A naval officer assigned to permanent duty aboard a ship that has regular eating and living facilities has a tax home (explained next) aboard the ship for travel expense purposes. Www taxcut com Tax Home To determine whether you are traveling away from home, you must first determine the location of your tax home. Www taxcut com Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. Www taxcut com It includes the entire city or general area in which your business or work is located. Www taxcut com If you have more than one regular place of business, your tax home is your main place of business. Www taxcut com See Main place of business or work , later. Www taxcut com If you do not have a regular or a main place of business because of the nature of your work, then your tax home may be the place where you regularly live. Www taxcut com See No main place of business or work , later. Www taxcut com If you do not have a regular or main place of business or post of duty and there is no place where you regularly live, you are considered an itinerant (a transient) and your tax home is wherever you work. Www taxcut com As an itinerant, you cannot claim a travel expense deduction because you are never considered to be traveling away from home. Www taxcut com Main place of business or work. Www taxcut com   If you have more than one place of work, consider the following when determining which one is your main place of business or work. Www taxcut com The total time you ordinarily spend in each place. Www taxcut com The level of your business activity in each place. Www taxcut com Whether your income from each place is significant or insignificant. Www taxcut com Example. Www taxcut com You live in Cincinnati where you have a seasonal job for 8 months each year and earn $40,000. Www taxcut com You work the other 4 months in Miami, also at a seasonal job, and earn $15,000. Www taxcut com Cincinnati is your main place of work because you spend most of your time there and earn most of your income there. Www taxcut com No main place of business or work. Www taxcut com   You may have a tax home even if you do not have a regular or main place of work. Www taxcut com Your tax home may be the home where you regularly live. Www taxcut com Factors used to determine tax home. Www taxcut com   If you do not have a regular or main place of business or work, use the following three factors to determine where your tax home is. Www taxcut com You perform part of your business in the area of your main home and use that home for lodging while doing business in the area. Www taxcut com You have living expenses at your main home that you duplicate because your business requires you to be away from that home. Www taxcut com You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or you often use that home for lodging. Www taxcut com   If you satisfy all three factors, your tax home is the home where you regularly live. Www taxcut com If you satisfy only two factors, you may have a tax home depending on all the facts and circumstances. Www taxcut com If you satisfy only one factor, you are an itinerant; your tax home is wherever you work and you cannot deduct travel expenses. Www taxcut com Example 1. Www taxcut com You are single and live in Boston in an apartment you rent. Www taxcut com You have worked for your employer in Boston for a number of years. Www taxcut com Your employer enrolls you in a 12-month executive training program. Www taxcut com You do not expect to return to work in Boston after you complete your training. Www taxcut com During your training, you do not do any work in Boston. Www taxcut com Instead, you receive classroom and on-the-job training throughout the United States. Www taxcut com You keep your apartment in Boston and return to it frequently. Www taxcut com You use your apartment to conduct your personal business. Www taxcut com You also keep up your community contacts in Boston. Www taxcut com When you complete your training, you are transferred to Los Angeles. Www taxcut com You do not satisfy factor (1) because you did not work in Boston. Www taxcut com You satisfy factor (2) because you had duplicate living expenses. Www taxcut com You also satisfy factor (3) because you did not abandon your apartment in Boston as your main home, you kept your community contacts, and you frequently returned to live in your apartment. Www taxcut com Therefore, you have a tax home in Boston. Www taxcut com Example 2. Www taxcut com You are an outside salesperson with a sales territory covering several states. Www taxcut com Your employer's main office is in Newark, but you do not conduct any business there. Www taxcut com Your work assignments are temporary, and you have no way of knowing where your future assignments will be located. Www taxcut com You have a room in your married sister's house in Dayton. Www taxcut com You stay there for one or two weekends a year, but you do no work in the area. Www taxcut com You do not pay your sister for the use of the room. Www taxcut com You do not satisfy any of the three factors listed earlier. Www taxcut com You are an itinerant and have no tax home. Www taxcut com Tax Home Different From Family Home If you (and your family) do not live at your tax home (defined earlier), you cannot deduct the cost of traveling between your tax home and your family home. Www taxcut com You also cannot deduct the cost of meals and lodging while at your tax home. Www taxcut com See Example 1 , later. Www taxcut com If you are working temporarily in the same city where you and your family live, you may be considered as traveling away from home. Www taxcut com See Example 2 , later. Www taxcut com Example 1. Www taxcut com You are a truck driver and you and your family live in Tucson. Www taxcut com You are employed by a trucking firm that has its terminal in Phoenix. Www taxcut com At the end of your long runs, you return to your home terminal in Phoenix and spend one night there before returning home. Www taxcut com You cannot deduct any expenses you have for meals and lodging in Phoenix or the cost of traveling from Phoenix to Tucson. Www taxcut com This is because Phoenix is your tax home. Www taxcut com Example 2. Www taxcut com Your family home is in Pittsburgh, where you work 12 weeks a year. Www taxcut com The rest of the year you work for the same employer in Baltimore. Www taxcut com In Baltimore, you eat in restaurants and sleep in a rooming house. Www taxcut com Your salary is the same whether you are in Pittsburgh or Baltimore. Www taxcut com Because you spend most of your working time and earn most of your salary in Baltimore, that city is your tax home. Www taxcut com You cannot deduct any expenses you have for meals and lodging there. Www taxcut com However, when you return to work in Pittsburgh, you are away from your tax home even though you stay at your family home. Www taxcut com You can deduct the cost of your round trip between Baltimore and Pittsburgh. Www taxcut com You can also deduct your part of your family's living expenses for meals and lodging while you are living and working in Pittsburgh. Www taxcut com Temporary Assignment or Job You may regularly work at your tax home and also work at another location. Www taxcut com It may not be practical to return to your tax home from this other location at the end of each work day. Www taxcut com Temporary assignment vs. Www taxcut com indefinite assignment. Www taxcut com   If your assignment or job away from your main place of work is temporary, your tax home does not change. Www taxcut com You are considered to be away from home for the whole period you are away from your main place of work. Www taxcut com You can deduct your travel expenses if they otherwise qualify for deduction. Www taxcut com Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. Www taxcut com    However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. Www taxcut com An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than 1 year, whether or not it actually lasts for more than 1 year. Www taxcut com   If your assignment is indefinite, you must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them. Www taxcut com You may be able to deduct the cost of relocating to your new tax home as a moving expense. Www taxcut com See Publication 521 for more information. Www taxcut com Exception for federal crime investigations or prosecutions. Www taxcut com   If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to the 1-year rule. Www taxcut com This means you may be able to deduct travel expenses even if you are away from your tax home for more than 1 year provided you meet the other requirements for deductibility. Www taxcut com   For you to qualify, the Attorney General (or his or her designee) must certify that you are traveling: For the federal government, In a temporary duty status, and To investigate, prosecute, or provide support services for the investigation or prosecution of a federal crime. Www taxcut com Determining temporary or indefinite. Www taxcut com   You must determine whether your assignment is temporary or indefinite when you start work. Www taxcut com If you expect an assignment or job to last for 1 year or less, it is temporary unless there are facts and circumstances that indicate otherwise. Www taxcut com An assignment or job that is initially temporary may become indefinite due to changed circumstances. Www taxcut com A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment. Www taxcut com   The following examples illustrate whether an assignment or job is temporary or indefinite. Www taxcut com Example 1. Www taxcut com You are a construction worker. Www taxcut com You live and regularly work in Los Angeles. Www taxcut com You are a member of a trade union in Los Angeles that helps you get work in the Los Angeles area. Www taxcut com Your tax home is Los Angeles. Www taxcut com Because of a shortage of work, you took a job on a construction project in Fresno. Www taxcut com Your job was scheduled to end in 8 months. Www taxcut com The job actually lasted 10 months. Www taxcut com You realistically expected the job in Fresno to last 8 months. Www taxcut com The job actually did last less than 1 year. Www taxcut com The job is temporary and your tax home is still in Los Angeles. Www taxcut com Example 2. Www taxcut com The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 18 months. Www taxcut com The job actually was completed in 10 months. Www taxcut com Your job in Fresno is indefinite because you realistically expected the work to last longer than 1 year, even though it actually lasted less than 1 year. Www taxcut com You cannot deduct any travel expenses you had in Fresno because Fresno became your tax home. Www taxcut com Example 3. Www taxcut com The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 9 months. Www taxcut com After 8 months, however, you were asked to remain for 7 more months (for a total actual stay of 15 months). Www taxcut com Initially, you realistically expected the job in Fresno to last for only 9 months. Www taxcut com However, due to changed circumstances occurring after 8 months, it was no longer realistic for you to expect that the job in Fresno would last for 1 year or less. Www taxcut com You can only deduct your travel expenses for the first 8 months. Www taxcut com You cannot deduct any travel expenses you had after that time because Fresno became your tax home when the job became indefinite. Www taxcut com Going home on days off. Www taxcut com   If you go back to your tax home from a temporary assignment on your days off, you are not considered away from home while you are in your hometown. Www taxcut com You cannot deduct the cost of your meals and lodging there. Www taxcut com However, you can deduct your travel expenses, including meals and lodging, while traveling between your temporary place of work and your tax home. Www taxcut com You can claim these expenses up to the amount it would have cost you to stay at your temporary place of work. Www taxcut com   If you keep your hotel room during your visit home, you can deduct the cost of your hotel room. Www taxcut com In addition, you can deduct your expenses of returning home up to the amount you would have spent for meals had you stayed at your temporary place of work. Www taxcut com Probationary work period. Www taxcut com   If you take a job that requires you to move, with the understanding that you will keep the job if your work is satisfactory during a probationary period, the job is indefinite. Www taxcut com You cannot deduct any of your expenses for meals and lodging during the probationary period. Www taxcut com What Travel Expenses Are Deductible? Once you have determined that you are traveling away from your tax home, you can determine what travel expenses are deductible. Www taxcut com You can deduct ordinary and necessary expenses you have when you travel away from home on business. Www taxcut com The type of expense you can deduct depends on the facts and your circumstances. Www taxcut com Table 1-1 summarizes travel expenses you may be able to deduct. Www taxcut com You may have other deductible travel expenses that are not covered there, depending on the facts and your circumstances. Www taxcut com When you travel away from home on business, you should keep records of all the expenses you have and any advances you receive from your employer. Www taxcut com You can use a log, diary, notebook, or any other written record to keep track of your expenses. Www taxcut com The types of expenses you need to record, along with supporting documentation, are described in Table 5-1 (see chapter 5). Www taxcut com Separating costs. Www taxcut com   If you have one expense that includes the costs of meals, entertainment, and other services (such as lodging or transportation), you must allocate that expense between the cost of meals and entertainment and the cost of other services. Www taxcut com You must have a reasonable basis for making this allocation. Www taxcut com For example, you must allocate your expenses if a hotel includes one or more meals in its room charge. Www taxcut com Travel expenses for another individual. Www taxcut com    If a spouse, dependent, or other individual goes with you (or your employee) on a business trip or to a business convention, you generally cannot deduct his or her travel expenses. Www taxcut com Employee. Www taxcut com   You can deduct the travel expenses of someone who goes with you if that person: Is your employee, Has a bona fide business purpose for the travel, and Would otherwise be allowed to deduct the travel expenses. Www taxcut com Business associate. Www taxcut com   If a business associate travels with you and meets the conditions in (2) and (3), earlier, you can deduct the travel expenses you have for that person. Www taxcut com A business associate is someone with whom you could reasonably expect to actively conduct business. Www taxcut com A business associate can be a current or prospective (likely to become) customer, client, supplier, employee, agent, partner, or professional advisor. Www taxcut com Bona fide business purpose. Www taxcut com   A bona fide business purpose exists if you can prove a real business purpose for the individual's presence. Www taxcut com Incidental services, such as typing notes or assisting in entertaining customers, are not enough to make the expenses deductible. Www taxcut com Table 1-1. Www taxcut com Travel Expenses You Can Deduct   This chart summarizes expenses you can deduct when you travel away from home for business purposes. Www taxcut com IF you have expenses for. Www taxcut com . Www taxcut com . Www taxcut com THEN you can deduct the cost of. Www taxcut com . Www taxcut com . Www taxcut com transportation travel by airplane, train, bus, or car between your home and your business destination. Www taxcut com If you were provided with a free ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. Www taxcut com If you travel by ship, see Luxury Water Travel and Cruise Ships (under Conventions) for additional rules and limits. Www taxcut com taxi, commuter bus, and airport limousine fares for these and other types of transportation that take you between: The airport or station and your hotel, and The hotel and the work location of your customers or clients, your business meeting place, or your temporary work location. Www taxcut com baggage and shipping sending baggage and sample or display material between your regular and temporary work locations. Www taxcut com car operating and maintaining your car when traveling away from home on business. Www taxcut com You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. Www taxcut com If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. Www taxcut com lodging and meals your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Www taxcut com Meals include amounts spent for food, beverages, taxes, and related tips. Www taxcut com See Meals for additional rules and limits. Www taxcut com cleaning dry cleaning and laundry. Www taxcut com telephone business calls while on your business trip. Www taxcut com This includes business communication by fax machine or other communication devices. Www taxcut com tips tips you pay for any expenses in this chart. Www taxcut com other other similar ordinary and necessary expenses related to your business travel. Www taxcut com These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer. Www taxcut com Example. Www taxcut com Jerry drives to Chicago on business and takes his wife, Linda, with him. Www taxcut com Linda is not Jerry's employee. Www taxcut com Linda occasionally types notes, performs similar services, and accompanies Jerry to luncheons and dinners. Www taxcut com The performance of these services does not establish that her presence on the trip is necessary to the conduct of Jerry's business. Www taxcut com Her expenses are not deductible. Www taxcut com Jerry pays $199 a day for a double room. Www taxcut com A single room costs $149 a day. Www taxcut com He can deduct the total cost of driving his car to and from Chicago, but only $149 a day for his hotel room. Www taxcut com If he uses public transportation, he can deduct only his fare. Www taxcut com Meals You can deduct the cost of meals in either of the following situations. Www taxcut com It is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business. Www taxcut com The meal is business-related entertainment. Www taxcut com Business-related entertainment is discussed in chapter 2 . Www taxcut com The following discussion deals only with meals that are not business-related entertainment. Www taxcut com Lavish or extravagant. Www taxcut com   You cannot deduct expenses for meals that are lavish or extravagant. Www taxcut com An expense is not considered lavish or extravagant if it is reasonable based on the facts and circumstances. Www taxcut com Expenses will not be disallowed merely because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Www taxcut com 50% limit on meals. Www taxcut com   You can figure your meals expense using either of the following methods. Www taxcut com Actual cost. Www taxcut com The standard meal allowance. Www taxcut com Both of these methods are explained below. Www taxcut com But, regardless of the method you use, you generally can deduct only 50% of the unreimbursed cost of your meals. Www taxcut com   If you are reimbursed for the cost of your meals, how you apply the 50% limit depends on whether your employer's reimbursement plan was accountable or nonaccountable. Www taxcut com If you are not reimbursed, the 50% limit applies whether the unreimbursed meal expense is for business travel or business entertainment. Www taxcut com Chapter 2 discusses the 50% Limit in more detail, and chapter 6 discusses accountable and nonaccountable plans. Www taxcut com Actual Cost You can use the actual cost of your meals to figure the amount of your expense before reimbursement and application of the 50% deduction limit. Www taxcut com If you use this method, you must keep records of your actual cost. Www taxcut com Standard Meal Allowance Generally, you can use the “standard meal allowance” method as an alternative to the actual cost method. Www taxcut com It allows you to use a set amount for your daily meals and incidental expenses (M&IE), instead of keeping records of your actual costs. Www taxcut com The set amount varies depending on where and when you travel. Www taxcut com In this publication, “standard meal allowance” refers to the federal rate for M&IE, discussed later under Amount of standard meal allowance . Www taxcut com If you use the standard meal allowance, you still must keep records to prove the time, place, and business purpose of your travel. Www taxcut com See the recordkeeping rules for travel in chapter 5 . Www taxcut com Incidental expenses. Www taxcut com   The term “incidental expenses” means fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Www taxcut com   Incidental expenses do not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, costs of telegrams or telephone calls, transportation between places of lodging or business and places where meals are taken, or the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings. Www taxcut com Incidental-expenses-only method. Www taxcut com   You can use an optional method (instead of actual cost) for deducting incidental expenses only. Www taxcut com The amount of the deduction is $5 a day. Www taxcut com You can use this method only if you did not pay or incur any meal expenses. Www taxcut com You cannot use this method on any day that you use the standard meal allowance. Www taxcut com This method is subject to the proration rules for partial days. Www taxcut com See Travel for days you depart and return , later in this chapter. Www taxcut com Note. Www taxcut com The incidental-expenses-only method is not subject to the 50% limit discussed below. Www taxcut com Federal employees should refer to the Federal Travel Regulations at www. Www taxcut com gsa. Www taxcut com gov. Www taxcut com Find the “Most Requested Links” on the upper left and click on “Regulations: FAR, FMR, FTR” for Federal Travel Regulation (FTR) for changes affecting claims for reimbursement. Www taxcut com 50% limit may apply. Www taxcut com   If you use the standard meal allowance method for meal expenses and you are not reimbursed or you are reimbursed under a nonaccountable plan, you can generally deduct only 50% of the standard meal allowance. Www taxcut com If you are reimbursed under an accountable plan and you are deducting amounts that are more than your reimbursements, you can deduct only 50% of the excess amount. Www taxcut com The 50% limit is discussed in more detail in chapter 2, and accountable and nonaccountable plans are discussed in chapter 6. Www taxcut com There is no optional standard lodging amount similar to the standard meal allowance. Www taxcut com Your allowable lodging expense deduction is your actual cost. Www taxcut com Who can use the standard meal allowance. Www taxcut com   You can use the standard meal allowance whether you are an employee or self-employed, and whether or not you are reimbursed for your traveling expenses. Www taxcut com Use of the standard meal allowance for other travel. Www taxcut com   You can use the standard meal allowance to figure your meal expenses when you travel in connection with investment and other income-producing property. Www taxcut com You can also use it to figure your meal expenses when you travel for qualifying educational purposes. Www taxcut com You cannot use the standard meal allowance to figure the cost of your meals when you travel for medical or charitable purposes. Www taxcut com Amount of standard meal allowance. Www taxcut com   The standard meal allowance is the federal M&IE rate. Www taxcut com For travel in 2013, the rate for most small localities in the United States is $46 a day. Www taxcut com    Most major cities and many other localities in the United States are designated as high-cost areas, qualifying for higher standard meal allowances. Www taxcut com    You can find this information (organized by state) on the Internet at www. Www taxcut com gsa. Www taxcut com gov/perdiem. Www taxcut com Enter a zip code or select a city and state for the per diem rates for the current fiscal year. Www taxcut com Per diem rates for prior fiscal years are available by using the drop down menu under “Search by State. Www taxcut com ”   Per diem rates are listed by the Federal government's fiscal year which runs from October 1 to September 30. Www taxcut com You can choose to use the rates from the 2013 fiscal year per diem tables or the rates from the 2014 fiscal year tables, but you must consistently use the same tables for all travel you are reporting on your income tax return for the year. Www taxcut com   If you travel to more than one location in one day, use the rate in effect for the area where you stop for sleep or rest. Www taxcut com If you work in the transportation industry, however, see Special rate for transportation workers , later. Www taxcut com Standard meal allowance for areas outside the continental United States. Www taxcut com   The standard meal allowance rates above do not apply to travel in Alaska, Hawaii, or any other location outside the continental United States. Www taxcut com The Department of Defense establishes per diem rates for Alaska, Hawaii, Puerto Rico, American Samoa, Guam, Midway, the Northern Mariana Islands, the U. Www taxcut com S. Www taxcut com Virgin Islands, Wake Island, and other non-foreign areas outside the continental United States. Www taxcut com The Department of State establishes per diem rates for all other foreign areas. Www taxcut com    You can access per diem rates for non-foreign areas outside the continental United States at: www. Www taxcut com defensetravel. Www taxcut com dod. Www taxcut com mil/site/perdiemCalc. Www taxcut com cfm. Www taxcut com You can access all other foreign per diem rates at: www. Www taxcut com state. Www taxcut com gov/travel/. Www taxcut com Click on “Travel Per Diem Allowances for Foreign Areas,” under “Foreign Per Diem Rates” to obtain the latest foreign per diem rates. Www taxcut com Special rate for transportation workers. Www taxcut com   You can use a special standard meal allowance if you work in the transportation industry. Www taxcut com You are in the transportation industry if your work: Directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and Regularly requires you to travel away from home and, during any single trip, usually involves travel to areas eligible for different standard meal allowance rates. Www taxcut com If this applies to you, you can claim a standard meal allowance of $59 a day ($65 for travel outside the continental United States). Www taxcut com   Using the special rate for transportation workers eliminates the need for you to determine the standard meal allowance for every area where you stop for sleep or rest. Www taxcut com If you choose to use the special rate for any trip, you must use the special rate (and not use the regular standard meal allowance rates) for all trips you take that year. Www taxcut com Travel for days you depart and return. Www taxcut com   For both the day you depart for and the day you return from a business trip, you must prorate the standard meal allowance (figure a reduced amount for each day). Www taxcut com You can do so by one of two methods. Www taxcut com Method 1: You can claim 3/4 of the standard meal allowance. Www taxcut com Method 2: You can prorate using any method that you consistently apply and that is in accordance with reasonable business practice. Www taxcut com Example. Www taxcut com Jen is employed in New Orleans as a convention planner. Www taxcut com In March, her employer sent her on a 3-day trip to Washington, DC, to attend a planning seminar. Www taxcut com She left her home in New Orleans at 10 a. Www taxcut com m. Www taxcut com on Wednesday and arrived in Washington, DC, at 5:30 p. Www taxcut com m. Www taxcut com After spending two nights there, she flew back to New Orleans on Friday and arrived back home at 8:00 p. Www taxcut com m. Www taxcut com Jen's employer gave her a flat amount to cover her expenses and included it with her wages. Www taxcut com Under Method 1, Jen can claim 2½ days of the standard meal allowance for Washington, DC: 3/4 of the daily rate for Wednesday and Friday (the days she departed and returned), and the full daily rate for Thursday. Www taxcut com Under Method 2, Jen could also use any method that she applies consistently and that is in accordance with reasonable business practice. Www taxcut com For example, she could claim 3 days of the standard meal allowance even though a federal employee would have to use Method 1 and be limited to only 2½ days. Www taxcut com Travel in the United States The following discussion applies to travel in the United States. Www taxcut com For this purpose, the United States includes the 50 states and the District of Columbia. Www taxcut com The treatment of your travel expenses depends on how much of your trip was business related and on how much of your trip occurred within the United States. Www taxcut com See Part of Trip Outside the United States , later. Www taxcut com Trip Primarily for Business You can deduct all of your travel expenses if your trip was entirely business related. Www taxcut com If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only your business-related travel expenses. Www taxcut com These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination. Www taxcut com Example. Www taxcut com You work in Atlanta and take a business trip to New Orleans in May. Www taxcut com Your business travel totals 850 miles round trip. Www taxcut com On your way, you stop in Mobile to visit your parents. Www taxcut com You spend $2,120 for the 9 days you are away from home for travel, meals, lodging, and other travel expenses. Www taxcut com If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $1,820. Www taxcut com You can deduct $1,820 for your trip, including the cost of round-trip transportation to and from New Orleans. Www taxcut com The deduction for your meals is subject to the 50% limit on meals mentioned earlier. Www taxcut com Trip Primarily for Personal Reasons If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. Www taxcut com However, you can deduct any expenses you have while at your destination that are directly related to your business. Www taxcut com A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business. Www taxcut com The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip. Www taxcut com Part of Trip Outside the United States If part of your trip is outside the United States, use the rules described later in this chapter under Travel Outside the United States for that part of the trip. Www taxcut com For the part of your trip that is inside the United States, use the rules for travel in the United States. Www taxcut com Travel outside the United States does not include travel from one point in the United States to another point in the United States. Www taxcut com The following discussion can help you determine whether your trip was entirely within the United States. Www taxcut com Public transportation. Www taxcut com   If you travel by public transportation, any place in the United States where that vehicle makes a scheduled stop is a point in the United States. Www taxcut com Once the vehicle leaves the last scheduled stop in the United States on its way to a point outside the United States, you apply the rules under Travel Outside the United States . Www taxcut com Example. Www taxcut com You fly from New York to Puerto Rico with a scheduled stop in Miami. Www taxcut com You return to New York nonstop. Www taxcut com The flight from New York to Miami is in the United States, so only the flight from Miami to Puerto Rico is outside the United States. Www taxcut com Because there are no scheduled stops between Puerto Rico and New York, all of the return trip is outside the United States. Www taxcut com Private car. Www taxcut com   Travel by private car in the United States is travel between points in the United States, even though you are on your way to a destination outside the United States. Www taxcut com Example. Www taxcut com You travel by car from Denver to Mexico City and return. Www taxcut com Your travel from Denver to the border and from the border back to Denver is travel in the United States, and the rules in this section apply. Www taxcut com The rules under Travel Outside the United States apply to your trip from the border to Mexico City and back to the border. Www taxcut com Travel Outside the United States If any part of your business travel is outside the United States, some of your deductions for the cost of getting to and from your destination may be limited. Www taxcut com For this purpose, the United States includes the 50 states and the District of Columbia. Www taxcut com How much of your travel expenses you can deduct depends in part upon how much of your trip outside the United States was business related. Www taxcut com Travel Entirely for Business or Considered Entirely for Business You can deduct all your travel expenses of getting to and from your business destination if your trip is entirely for business or considered entirely for business. Www taxcut com Travel entirely for business. Www taxcut com   If you travel outside the United States and you spend the entire time on business activities, you can deduct all of your travel expenses. Www taxcut com Travel considered entirely for business. Www taxcut com   Even if you did not spend your entire time on business activities, your trip is considered entirely for business if you meet at least one of the following four exceptions. Www taxcut com Exception 1 - No substantial control. Www taxcut com   Your trip is considered entirely for business if you did not have substantial control over arranging the trip. Www taxcut com The fact that you control the timing of your trip does not, by itself, mean that you have substantial control over arranging your trip. Www taxcut com   You do not have substantial control over your trip if you: Are an employee who was reimbursed or paid a travel expense allowance, and Are not related to your employer, or Are not a managing executive. Www taxcut com    “Related to your employer” is defined later in chapter 6 under Per Diem and Car Allowances . Www taxcut com   A “managing executive” is an employee who has the authority and responsibility, without being subject to the veto of another, to decide on the need for the business travel. Www taxcut com   A self-employed person generally has substantial control over arranging business trips. Www taxcut com Exception 2 - Outside United States no more than a week. Www taxcut com   Your trip is considered entirely for business if you were outside the United States for a week or less, combining business and nonbusiness activities. Www taxcut com One week means 7 consecutive days. Www taxcut com In counting the days, do not count the day you leave the United States, but do count the day you return to the United States. Www taxcut com Example. Www taxcut com You traveled to Brussels primarily for business. Www taxcut com You left Denver on Tuesday and flew to New York. Www taxcut com On Wednesday, you flew from New York to Brussels, arriving the next morning. Www taxcut com On Thursday and Friday, you had business discussions, and from Saturday until Tuesday, you were sightseeing. Www taxcut com You flew back to New York, arriving Wednesday afternoon. Www taxcut com On Thursday, you flew back to Denver. Www taxcut com Although you were away from your home in Denver for more than a week, you were not outside the United States for more than a week. Www taxcut com This is because the day you depart does not count as a day outside the United States. Www taxcut com You can deduct your cost of the round-trip flight between Denver and Brussels. Www taxcut com You can also deduct the cost of your stay in Brussels for Thursday and Friday while you conducted business. Www taxcut com However, you cannot deduct the cost of your stay in Brussels from Saturday through Tuesday because those days were spent on nonbusiness activities. Www taxcut com Exception 3 - Less than 25% of time on personal activities. Www taxcut com   Your trip is considered entirely for business if: You were outside the United States for more than a week, and You spent less than 25% of the total time you were outside the United States on nonbusiness activities. Www taxcut com For this purpose, count both the day your trip began and the day it ended. Www taxcut com Example. Www taxcut com You flew from Seattle to Tokyo, where you spent 14 days on business and 5 days on personal matters. Www taxcut com You then flew back to Seattle. Www taxcut com You spent 1 day flying in each direction. Www taxcut com Because only 5/21 (less than 25%) of your total time abroad was for nonbusiness activities, you can deduct as travel expenses what it would have cost you to make the trip if you had not engaged in any nonbusiness activity. Www taxcut com The amount you can deduct is the cost of the round-trip plane fare and 16 days of meals (subject to the 50% limit), lodging, and other related expenses. Www taxcut com Exception 4 - Vacation not a major consideration. Www taxcut com   Your trip is considered entirely for business if you can establish that a personal vacation was not a major consideration, even if you have substantial control over arranging the trip. Www taxcut com Travel Primarily for Business If you travel outside the United States primarily for business but spend some of your time on other activities, you generally cannot deduct all of your travel expenses. Www taxcut com You can only deduct the business portion of your cost of getting to and from your destination. Www taxcut com You must allocate the costs between your business and other activities to determine your deductible amount. Www taxcut com See Travel allocation rules , later. Www taxcut com You do not have to allocate your travel expenses if you meet one of the four exceptions listed earlier under Travel considered entirely for business . Www taxcut com In those cases, you can deduct the total cost of getting to and from your destination. Www taxcut com Travel allocation rules. Www taxcut com   If your trip outside the United States was primarily for business, you must allocate your travel time on a day-to-day basis between business days and nonbusiness days. Www taxcut com The days you depart from and return to the United States are both counted as days outside the United States. Www taxcut com   To figure the deductible amount of your round-trip travel expenses, use the following fraction. Www taxcut com The numerator (top number) is the total number of business days outside the United States. Www taxcut com The denominator (bottom number) is the total number of business and nonbusiness days of travel. Www taxcut com Counting business days. Www taxcut com   Your business days include transportation days, days your presence was required, days you spent on business, and certain weekends and holidays. Www taxcut com Transportation day. Www taxcut com   Count as a business day any day you spend traveling to or from a business destination. Www taxcut com However, if because of a nonbusiness activity you do not travel by a direct route, your business days are the days it would take you to travel a reasonably direct route to your business destination. Www taxcut com Extra days for side trips or nonbusiness activities cannot be counted as business days. Www taxcut com Presence required. Www taxcut com   Count as a business day any day your presence is required at a particular place for a specific business purpose. Www taxcut com Count it as a business day even if you spend most of the day on nonbusiness activities. Www taxcut com Day spent on business. Www taxcut com   If your principal activity during working hours is the pursuit of your trade or business, count the day as a business day. Www taxcut com Also, count as a business day any day you are prevented from working because of circumstances beyond your control. Www taxcut com Certain weekends and holidays. Www taxcut com   Count weekends, holidays, and other necessary standby days as business days if they fall between business days. Www taxcut com But if they follow your business meetings or activity and you remain at your business destination for nonbusiness or personal reasons, do not count them as business days. Www taxcut com Example 1. Www taxcut com Your tax home is New York City. Www taxcut com You travel to Quebec, where you have a business appointment on Friday. Www taxcut com You have another appointment on the following Monday. Www taxcut com Because your presence was required on both Friday and Monday, they are business days. Www taxcut com Because the weekend is between business days, Saturday and Sunday are counted as business days. Www taxcut com This is true even though you use the weekend for sightseeing, visiting friends, or other nonbusiness activity. Www taxcut com Example 2. Www taxcut com If, in Example 1, you had no business in Quebec after Friday, but stayed until Monday before starting home, Saturday and Sunday would be nonbusiness days. Www taxcut com Nonbusiness activity on the way to or from your business destination. Www taxcut com   If you stopped for a vacation or other nonbusiness activity either on the way from the United States to your business destination, or on the way back to the United States from your business destination, you must allocate part of your travel expenses to the nonbusiness activity. Www taxcut com   The part you must allocate is the amount it would have cost you to travel between the point where travel outside the United States begins and your nonbusiness destination and a return to the point where travel outside the United States ends. Www taxcut com   You determine the nonbusiness portion of that expense by multiplying it by a fraction. Www taxcut com The numerator (top number) of the fraction is the number of nonbusiness days during your travel outside the United States and the denominator (bottom number) is the total number of days you spend outside the United States. Www taxcut com Example. Www taxcut com You live in New York. Www taxcut com On May 4 you flew to Paris to attend a business conference that began on May 5. Www taxcut com The conference ended at noon on May 14. Www taxcut com That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. Www taxcut com The primary purpose for the trip was to attend the conference. Www taxcut com If you had not stopped in Dublin, you would have arrived home the evening of May 14. Www taxcut com You do not meet any of the exceptions that would allow you to consider your travel entirely for business. Www taxcut com May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are nonbusiness days. Www taxcut com You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris. Www taxcut com You cannot deduct your expenses while in Dublin. Www taxcut com You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin. Www taxcut com You paid $750 to fly from New York to Paris, $400 to fly from Paris to Dublin, and $700 to fly from Dublin back to New York. Www taxcut com Round-trip airfare from New York to Dublin would have been $1,250. Www taxcut com You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($1,250 × 7/18 = $486) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($750 + $400 + $700 = $1,850). Www taxcut com Your deductible air travel expense is $1,364 ($1,850 − $486). Www taxcut com Nonbusiness activity at, near, or beyond business destination. Www taxcut com   If you had a vacation or other nonbusiness activity at, near, or beyond your business destination, you must allocate part of your travel expenses to the nonbusiness activity. Www taxcut com   The part you must allocate is the amount it would have cost you to travel between the point where travel outside the United States begins and your business destination and a return to the point where travel outside the United States ends. Www taxcut com   You determine the nonbusiness portion of that expense by multiplying it by a fraction. Www taxcut com The numerator (top number) of the fraction is the number of nonbusiness days during your travel outside the United States and the denominator (bottom number) is the total number of days you spend outside the United States. Www taxcut com   None of your travel expenses for nonbusiness activities at, near, or beyond your business destination are deductible. Www taxcut com Example. Www taxcut com Assume that the dates are the same as in the previous example but that instead of going to Dublin for your vacation, you fly to Venice, Italy, for a vacation. Www taxcut com You cannot deduct any part of the cost of your trip from Paris to Venice and return to Paris. Www taxcut com In addition, you cannot deduct 7/18 of the airfare and other expenses from New York to Paris and back to New York. Www taxcut com You can deduct 11/18 of the round-trip plane fare and other travel expenses from New York to Paris, plus your meals (subject to the 50% limit), lodging, and any other business expenses you had in Paris. Www taxcut com (Assume these expenses total $4,939. Www taxcut com ) If the round-trip plane fare and other travel-related expenses (such as food during the trip) are $1,750, you can deduct travel costs of $1,069 (11/18 × $1,750), plus the full $4,939 for the expenses you had in Paris. Www taxcut com Other methods. Www taxcut com   You can use another method of counting business days if you establish that it more clearly reflects the time spent on other than business activities outside the United States. Www taxcut com Travel Primarily for Personal Reasons If you travel outside the United States primarily for vacation or for investment purposes, the entire cost of the trip is a nondeductible personal expense. Www taxcut com However, if you spend some time attending brief professional seminars or a continuing education program, you can deduct your registration fees and other expenses you have that are directly related to your business. Www taxcut com Example. Www taxcut com The university from which you graduated has a continuing education program for members of its alumni association. Www taxcut com This program consists of trips to various foreign countries where academic exercises and conferences are set up to acquaint individuals in most occupations with selected facilities in several regions of the world. Www taxcut com However, none of the conferences are directed toward specific occupations or professions. Www taxcut com It is up to each participant to seek out specialists and organizational settings appropriate to his or her occupational interests. Www taxcut com Three-hour sessions are held each day over a 5-day period at each of the selected overseas facilities where participants can meet with individual practitioners. Www taxcut com These sessions are composed of a variety of activities including workshops, mini-lectures, role playing, skill development, and exercises. Www taxcut com Professional conference directors schedule and conduct the sessions. Www taxcut com Participants can choose those sessions they wish to attend. Www taxcut com You can participate in this program since you are a member of the alumni association. Www taxcut com You and your family take one of the trips. Www taxcut com You spend about 2 hours at each of the planned sessions. Www taxcut com The rest of the time you go touring and sightseeing with your family. Www taxcut com The trip lasts less than 1 week. Www taxcut com Your travel expenses for the trip are not deductible since the trip was primarily a vacation. Www taxcut com However, registration fees and any other incidental expenses you have for the five planned sessions you attended that are directly related and beneficial to your business are deductible business expenses. Www taxcut com These expenses should be specifically stated in your records to ensure proper allocation of your deductible business expenses. Www taxcut com Luxury Water Travel If you travel by ocean liner, cruise ship, or other form of luxury water transportation for business purposes, there is a daily limit on the amount you can deduct. Www taxcut com The limit is twice the highest federal per diem rate allowable at the time of your travel. Www taxcut com (Generally, the federal per diem is the amount paid to federal government employees for daily living expenses when they travel away from home, but in the United States, for business purposes. Www taxcut com ) Daily limit on luxury water travel. Www taxcut com   The highest federal per diem rate allowed and the daily limit for luxury water travel in 2013 is shown in the following table. Www taxcut com   2013 Dates Highest Federal Per Diem Daily Limit on Luxury Water Travel   Jan. Www taxcut com 1 – Mar. Www taxcut com 31 $367 $734   Apr. Www taxcut com 1 – June 30 312 624   July 1 – Aug. Www taxcut com 31 310 620   Sept. Www taxcut com 1 – Sept. Www taxcut com 30 366 732   Oct. Www taxcut com 1 – Dec. Www taxcut com 31 374 748 Example. Www taxcut com Caroline, a travel agent, traveled by ocean liner from New York to London, England, on business in May. Www taxcut com Her expense for the 6-day cruise was $5,200. Www taxcut com Caroline's deduction for the cruise cannot exceed $3,744 (6 days × $624 daily limit). Www taxcut com Meals and entertainment. Www taxcut com   If your expenses for luxury water travel include separately stated amounts for meals or entertainment, those amounts are subject to the 50% limit on meals and entertainment before you apply the daily limit. Www taxcut com For a discussion of the 50% Limit , see chapter 2. Www taxcut com Example. Www taxcut com In the previous example, Caroline's luxury water travel had a total cost of $5,200. Www taxcut com Of that amount, $3,700 was separately stated as meals and entertainment. Www taxcut com Caroline, who is self-employed, is not reimbursed for any of her travel expenses. Www taxcut com Caroline figures her deductible travel expenses as follows. Www taxcut com Meals and entertainment $3,700   50% limit × . Www taxcut com 50   Allowable meals &     entertainment $1,850   Other travel expenses + 1,800   Allowable cost before the daily limit $3,650 Daily limit for May 2013 $624   Times number of days × 6   Maximum luxury water travel     deduction $3,744 Amount of allowable deduction $3,650 Caroline's deduction for her cruise is limited to $3,650, even though the limit on luxury water travel is slightly higher. Www taxcut com Not separately stated. Www taxcut com   If your meal or entertainment charges are not separately stated or are not clearly identifiable, you do not have to allocate any portion of the total charge to meals or entertainment. Www taxcut com Exceptions The daily limit on luxury water travel (discussed earlier) does not apply to expenses you have to attend a convention, seminar, or meeting on board a cruise ship. Www taxcut com See Cruise Ships under Conventions. Www taxcut com Conventions You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade or business. Www taxcut com You cannot deduct the travel expenses for your family. Www taxcut com If the convention is for investment, political, social, or other purposes unrelated to your trade or business, you cannot deduct the expenses. Www taxcut com Your appointment or election as a delegate does not, in itself, determine whether you can deduct travel expenses. Www taxcut com You can deduct your travel expenses only if your attendance is connected to your own trade or business. Www taxcut com Convention agenda. Www taxcut com   The convention agenda or program generally shows the purpose of the convention. Www taxcut com You can show your attendance at the convention benefits your trade or business by comparing the agenda with the official duties and responsibilities of your position. Www taxcut com The agenda does not have to deal specifically with your official duties and responsibilities; it will be enough if the agenda is so related to your position that it shows your attendance was for business purposes. Www taxcut com Conventions Held Outside the North American Area You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless: The meeting is directly related to your trade or business, and It is reasonable to hold the meeting outside the North American area. Www taxcut com See Reasonableness test , later. Www taxcut com If the meeting meets these requirements, you also must satisfy the rules for deducting expenses for business trips in general, discussed earlier under Travel Outside the United States . Www taxcut com North American area. Www taxcut com   The North American area includes the following locations. Www taxcut com American Samoa Johnston Island Antigua and Barbuda Kingman Reef Aruba Marshall Islands Bahamas Mexico Baker Island Micronesia Barbados Midway Islands Bermuda Netherlands Antilles Canada Northern Mariana Costa Rica Islands Dominica Palau Dominican Republic Palmyra Atoll Grenada Panama Guam Puerto Rico Guyana Trinidad and Tobago Honduras USA Howland Island U. Www taxcut com S. Www taxcut com Virgin Islands Jamaica Wake Island Jarvis Island   The North American area also includes U. Www taxcut com S. Www taxcut com islands, cays, and reefs that are possessions of the United States and not part of the fifty states or the District of Columbia. Www taxcut com Reasonableness test. Www taxcut com   The following factors are taken into account to determine if it was reasonable to hold the meeting outside the North American area. Www taxcut com The purpose of the meeting and the activities taking place at the meeting. Www taxcut com The purposes and activities of the sponsoring organizations or groups. Www taxcut com The homes of the active members of the sponsoring organizations and the places at which other meetings of the sponsoring organizations or groups have been or will be held. Www taxcut com Other relevant factors you may present. Www taxcut com Cruise Ships You can deduct up to $2,000 per year of your expenses of attending conventions, seminars, or similar meetings held on cruise ships. Www taxcut com All ships that sail are considered cruise ships. Www taxcut com You can deduct these expenses only if all of the following requirements are met. Www taxcut com The convention, seminar, or meeting is directly related to your trade or business. Www taxcut com The cruise ship is a vessel registered in the United States. Www taxcut com All of the cruise ship's ports of call are in the United States or in possessions of the United States. Www taxcut com You attach to your return a written statement signed by you that includes information about: The total days of the trip (not including the days of transportation to and from the cruise ship port), The number of hours each day that you devoted to scheduled business activities, and A program of the scheduled business activities of the meeting. Www taxcut com You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes: A schedule of the business activities of each day of the meeting, and The number of hours you attended the scheduled business activities. Www taxcut com Prev  Up  Next   Home   More Online Publications