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Free 1040x 8. Free 1040x   Business Expenses Table of Contents Introduction Useful Items - You may want to see: Bad DebtsAccrual method. Free 1040x Cash method. Free 1040x Car and Truck ExpensesOffice in the home. Free 1040x Methods for Deducting Car and Truck Expenses Reimbursing Your Employees for Expenses Depreciation Employees' PayFringe benefits. Free 1040x InsuranceHow to figure the deduction. Free 1040x Interest Legal and Professional FeesTax preparation fees. Free 1040x Pension Plans Rent Expense Taxes Travel, Meals, and EntertainmentTransportation. Free 1040x Taxi, commuter bus, and limousine. Free 1040x Baggage and shipping. Free 1040x Car or truck. Free 1040x Meals and lodging. Free 1040x Cleaning. Free 1040x Telephone. Free 1040x Tips. Free 1040x More information. Free 1040x Business Use of Your HomeExceptions to exclusive use. Free 1040x Other Expenses You Can Deduct Expenses You Cannot Deduct Introduction You can deduct the costs of operating your business. Free 1040x These costs are known as business expenses. Free 1040x These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year. Free 1040x To be deductible, a business expense must be both ordinary and necessary. Free 1040x An ordinary expense is one that is common and accepted in your field of business. Free 1040x A necessary expense is one that is helpful and appropriate for your business. Free 1040x An expense does not have to be indispensable to be considered necessary. Free 1040x For more information about the general rules for deducting business expenses, see chapter 1 in Publication 535, Business Expenses. Free 1040x If you have an expense that is partly for business and partly personal, separate the personal part from the business part. Free 1040x The personal part is not deductible. Free 1040x Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 946 How To Depreciate Property See chapter 12 for information about getting publications and forms. Free 1040x Bad Debts If someone owes you money you cannot collect, you have a bad debt. Free 1040x There are two kinds of bad debts, business bad debts and nonbusiness bad debts. Free 1040x A business bad debt is generally one that comes from operating your trade or business. Free 1040x You may be able to deduct business bad debts as an expense on your business tax return. Free 1040x Business bad debt. Free 1040x   A business bad debt is a loss from the worthlessness of a debt that was either of the following. Free 1040x Created or acquired in your business. Free 1040x Closely related to your business when it became partly or totally worthless. Free 1040x A debt is closely related to your business if your primary motive for incurring the debt is a business reason. Free 1040x   Business bad debts are mainly the result of credit sales to customers. Free 1040x They can also be the result of loans to suppliers, clients, employees, or distributors. Free 1040x Goods and services customers have not paid for are shown in your books as either accounts receivable or notes receivable. Free 1040x If you are unable to collect any part of these accounts or notes receivable, the uncollectible part is a business bad debt. Free 1040x    You can take a bad debt deduction for these accounts and notes receivable only if the amount you were owed was included in your gross income either for the year the deduction is claimed or for a prior year. Free 1040x Accrual method. Free 1040x   If you use an accrual method of accounting, you normally report income as you earn it. Free 1040x You can take a bad debt deduction for an uncollectible receivable if you have included the uncollectible amount in income. Free 1040x Cash method. Free 1040x   If you use the cash method of accounting, you normally report income when you receive payment. Free 1040x You cannot take a bad debt deduction for amounts owed to you that you have not received and cannot collect if you never included those amounts in income. Free 1040x More information. Free 1040x   For more information about business bad debts, see chapter 10 in Publication 535. Free 1040x Nonbusiness bad debts. Free 1040x   All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses on Form 8949 and Schedule D (Form 1040). Free 1040x For more information on nonbusiness bad debts, see Publication 550, Investment Income and Expenses. Free 1040x Car and Truck Expenses If you use your car or truck in your business, you may be able to deduct the costs of operating and maintaining your vehicle. Free 1040x You also may be able to deduct other costs of local transportation and traveling away from home overnight on business. Free 1040x You may qualify for a tax credit for qualified plug-in electric vehicles, qualified plug-in electric drive motor vehicles, and alternative motor vehicles you place in service during the year. Free 1040x See Form 8936 and Form 8910 for more information. Free 1040x Local transportation expenses. Free 1040x   Local transportation expenses include the ordinary and necessary costs of all the following. Free 1040x Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Free 1040x Tax home is defined later. Free 1040x Visiting clients or customers. Free 1040x Going to a business meeting away from your regular workplace. Free 1040x Getting from your home to a temporary workplace when you have one or more regular places of work. Free 1040x These temporary workplaces can be either within the area of your tax home or outside that area. Free 1040x Local business transportation does not include expenses you have while traveling away from home overnight. Free 1040x Those expenses are deductible as travel expenses and are discussed later under Travel, Meals, and Entertainment. Free 1040x However, if you use your car while traveling away from home overnight, use the rules in this section to figure your car expense deduction. Free 1040x   Generally, your tax home is your regular place of business, regardless of where you maintain your family home. Free 1040x It includes the entire city or general area in which your business or work is located. Free 1040x Example. Free 1040x You operate a printing business out of rented office space. Free 1040x You use your van to deliver completed jobs to your customers. Free 1040x You can deduct the cost of round-trip transportation between your customers and your print shop. Free 1040x    You cannot deduct the costs of driving your car or truck between your home and your main or regular workplace. Free 1040x These costs are personal commuting expenses. Free 1040x Office in the home. Free 1040x   Your workplace can be your home if you have an office in your home that qualifies as your principal place of business. Free 1040x For more information, see Business Use of Your Home, later. Free 1040x Example. Free 1040x You are a graphics designer. Free 1040x You operate your business out of your home. Free 1040x Your home qualifies as your principal place of business. Free 1040x You occasionally have to drive to your clients to deliver your completed work. Free 1040x You can deduct the cost of the round-trip transportation between your home and your clients. Free 1040x Methods for Deducting Car and Truck Expenses For local transportation or overnight travel by car or truck, you generally can use one of the following methods to figure your expenses. Free 1040x Standard mileage rate. Free 1040x Actual expenses. Free 1040x Standard mileage rate. Free 1040x   You may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. Free 1040x For 2013, the standard mileage rate is 56. Free 1040x 5 cents per mile. Free 1040x    If you choose to use the standard mileage rate for a year, you cannot deduct your actual expenses for that year except for business-related parking fees and tolls. Free 1040x Choosing the standard mileage rate. Free 1040x   If you want to use the standard mileage rate for a car or truck you own, you must choose to use it in the first year the car is available for use in your business. Free 1040x In later years, you can choose to use either the standard mileage rate or actual expenses. Free 1040x   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). Free 1040x Standard mileage rate not allowed. Free 1040x   You cannot use the standard mileage rate if you: Operate five or more cars at the same time, Claimed a depreciation deduction using any method other than straight line, for example, ACRS or MACRS, Claimed a section 179 deduction on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. Free 1040x Parking fees and tolls. Free 1040x   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. Free 1040x (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. Free 1040x ) Actual expenses. Free 1040x   If you do not choose to use the standard mileage rate, you may be able to deduct your actual car or truck expenses. Free 1040x    If you qualify to use both methods, figure your deduction both ways to see which gives you a larger deduction. Free 1040x   Actual car expenses include the costs of the following items. Free 1040x Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. Free 1040x You can divide your expenses based on the miles driven for each purpose. Free 1040x Example. Free 1040x You are the sole proprietor of a flower shop. Free 1040x You drove your van 20,000 miles during the year. Free 1040x 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use (including commuting miles). Free 1040x You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Free 1040x More information. Free 1040x   For more information about the rules for claiming car and truck expenses, see Publication 463. Free 1040x Reimbursing Your Employees for Expenses You generally can deduct the amount you reimburse your employees for car and truck expenses. Free 1040x The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. Free 1040x For details, see chapter 11 in Publication 535. Free 1040x That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. Free 1040x Depreciation If property you acquire to use in your business is expected to last more than 1 year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. Free 1040x You must spread the cost over more than 1 tax year and deduct part of it each year on Schedule C. Free 1040x This method of deducting the cost of business property is called depreciation. Free 1040x The discussion here is brief. Free 1040x You will find more information about depreciation in Publication 946. Free 1040x What property can be depreciated?   You can depreciate property if it meets all the following requirements. Free 1040x It must be property you own. Free 1040x It must be used in business or held to produce income. Free 1040x You never can depreciate inventory (explained in chapter 2) because it is not held for use in your business. Free 1040x It must have a useful life that extends substantially beyond the year it is placed in service. Free 1040x It must have a determinable useful life, which means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Free 1040x You never can depreciate the cost of land because land does not wear out, become obsolete, or get used up. Free 1040x It must not be excepted property. Free 1040x This includes property placed in service and disposed of in the same year. Free 1040x Repairs. Free 1040x    You cannot depreciate repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life. Free 1040x You can deduct these amounts on line 21 of Schedule C or line 2 of Schedule C-EZ. Free 1040x Depreciation method. Free 1040x   The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). Free 1040x MACRS is discussed in detail in Publication 946. Free 1040x Section 179 deduction. Free 1040x   You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Free 1040x This deduction is known as the “section 179 deduction. Free 1040x ” The maximum amount you can elect to deduct during 2013 is generally $500,000 (higher limits apply to certain property). Free 1040x See IRC 179(e). Free 1040x   This limit is generally reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Free 1040x The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2013 is $3,160 ($11,160 if you take the special depreciation allowance for qualified passenger automobiles placed in service in 2013). Free 1040x Special rules apply to trucks and vans. Free 1040x For more information, see Publication 946. Free 1040x It explains what property qualifies for the deduction, what limits apply to the deduction, and when and how to recapture the deduction. Free 1040x    Your section 179 election for the cost of any sport utility vehicle (SUV) and certain other vehicles is limited to $25,000. Free 1040x For more information, see the Instructions for Form 4562 or Publication 946. Free 1040x Listed property. Free 1040x   You must follow special rules and recordkeeping requirements when depreciating listed property. Free 1040x Listed property is any of the following. Free 1040x Most passenger automobiles. Free 1040x Most other property used for transportation. Free 1040x Any property of a type generally used for entertainment, recreation, or amusement. Free 1040x Certain computers and related peripheral equipment. Free 1040x   For more information about listed property, see Publication 946. Free 1040x Form 4562. Free 1040x   Use Form 4562, Depreciation and Amortization, if you are claiming any of the following. Free 1040x Depreciation on property placed in service during the current tax year. Free 1040x A section 179 deduction. Free 1040x Depreciation on any listed property (regardless of when it was placed in service). Free 1040x    If you have to use Form 4562, you must file Schedule C. Free 1040x You cannot use Schedule C-EZ. Free 1040x   Employees' Pay You can generally deduct on Schedule C the pay you give your employees for the services they perform for your business. Free 1040x The pay may be in cash, property, or services. Free 1040x To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. Free 1040x In addition, the pay must meet both the following tests. Free 1040x The pay must be reasonable. Free 1040x The pay must be for services performed. Free 1040x Chapter 2 in Publication 535 explains and defines these requirements. Free 1040x You cannot deduct your own salary or any personal withdrawals you make from your business. Free 1040x As a sole proprietor, you are not an employee of the business. Free 1040x If you had employees during the year, you must use Schedule C. Free 1040x You cannot use Schedule C-EZ. Free 1040x Kinds of pay. Free 1040x   Some of the ways you may provide pay to your employees are listed below. Free 1040x For an explanation of each of these items, see chapter 2 in Publication 535. Free 1040x Awards. Free 1040x Bonuses. Free 1040x Education expenses. Free 1040x Fringe benefits (discussed later). Free 1040x Loans or advances you do not expect the employee to repay if they are for personal services actually performed. Free 1040x Property you transfer to an employee as payment for services. Free 1040x Reimbursements for employee business expenses. Free 1040x Sick pay. Free 1040x Vacation pay. Free 1040x Fringe benefits. Free 1040x   A fringe benefit is a form of pay for the performance of services. Free 1040x The following are examples of fringe benefits. Free 1040x Benefits under qualified employee benefit programs. Free 1040x Meals and lodging. Free 1040x The use of a car. Free 1040x Flights on airplanes. Free 1040x Discounts on property or services. Free 1040x Memberships in country clubs or other social clubs. Free 1040x Tickets to entertainment or sporting events. Free 1040x   Employee benefit programs include the following. Free 1040x Accident and health plans. Free 1040x Adoption assistance. Free 1040x Cafeteria plans. Free 1040x Dependent care assistance. Free 1040x Educational assistance. Free 1040x Group-term life insurance coverage. Free 1040x Welfare benefit funds. Free 1040x   You can generally deduct the cost of fringe benefits you provide on your Schedule C in whatever category the cost falls. Free 1040x For example, if you allow an employee to use a car or other property you lease, deduct the cost of the lease as a rent or lease expense. Free 1040x If you own the property, include your deduction for its cost or other basis as a section 179 deduction or a depreciation deduction. Free 1040x    You may be able to exclude all or part of the fringe benefits you provide from your employees' wages. Free 1040x For more information about fringe benefits and the exclusion of benefits, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Free 1040x Insurance You can generally deduct premiums you pay for the following kinds of insurance related to your business. Free 1040x Fire, theft, flood, or similar insurance. Free 1040x Credit insurance that covers losses from business bad debts. Free 1040x Group hospitalization and medical insurance for employees, including long-term care insurance. Free 1040x Liability insurance. Free 1040x Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients. Free 1040x Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault. Free 1040x Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law. Free 1040x Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness. Free 1040x Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. Free 1040x If you operate a vehicle partly for personal use, deduct only the part of the insurance premium that applies to the business use of the vehicle. Free 1040x If you use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums. Free 1040x Life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract. Free 1040x Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause. Free 1040x Nondeductible premiums. Free 1040x   You cannot deduct premiums on the following kinds of insurance. Free 1040x Self-insurance reserve funds. Free 1040x You cannot deduct amounts credited to a reserve set up for self-insurance. Free 1040x This applies even if you cannot get business insurance coverage for certain business risks. Free 1040x However, your actual losses may be deductible. Free 1040x For more information, see Publication 547, Casualties, Disasters, and Thefts. Free 1040x Loss of earnings. Free 1040x You cannot deduct premiums for a policy that pays for your lost earnings due to sickness or disability. Free 1040x However, see item (8) in the previous list. Free 1040x Certain life insurance and annuities. Free 1040x For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. Free 1040x You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. Free 1040x A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business. Free 1040x For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. Free 1040x The disallowance applies without regard to whom the policy covers. Free 1040x Insurance to secure a loan. Free 1040x If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. Free 1040x Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. Free 1040x In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Free 1040x Self-employed health insurance deduction. Free 1040x   You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for you and your family. Free 1040x How to figure the deduction. Free 1040x   Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. Free 1040x However, if any of the following apply, you must use the worksheet in chapter 6 of Publication 535. Free 1040x You have more than one source of income subject to self-employment tax. Free 1040x You file Form 2555 or Form 2555-EZ (relating to foreign earned income). Free 1040x You are using amounts paid for qualified long-term care insurance to figure the deduction. Free 1040x Prepayment. Free 1040x   You cannot deduct expenses in advance, even if you pay them in advance. Free 1040x This rule applies to any 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. Free 1040x Example. Free 1040x In 2013, you signed a 3-year insurance contract. Free 1040x Even though you paid the premiums for 2013, 2014, and 2015 when you signed the contract, you can only deduct the premium for 2013 on your 2013 tax return. Free 1040x You can deduct in 2014 and 2015 the premium allocable to those years. Free 1040x More information. Free 1040x   For more information about deducting insurance, see chapter 6 in Publication 535. Free 1040x Interest You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your business. Free 1040x Interest relates to your business if you use the proceeds of the loan for a business expense. Free 1040x It does not matter what type of property secures the loan. Free 1040x You can deduct interest on a debt only if you meet all of the following requirements. Free 1040x You are legally liable for that debt. Free 1040x Both you and the lender intend that the debt be repaid. Free 1040x You and the lender have a true debtor-creditor relationship. Free 1040x You cannot deduct on Schedule C or C-EZ the interest you paid on personal loans. Free 1040x If a loan is part business and part personal, you must divide the interest between the personal part and the business part. Free 1040x Example. Free 1040x In 2013, you paid $600 interest on a car loan. Free 1040x During 2013, you used the car 60% for business and 40% for personal purposes. Free 1040x You are claiming actual expenses on the car. Free 1040x You can only deduct $360 (60% × $600) for 2013 on Schedule C or C-EZ. Free 1040x The remaining interest of $240 is a nondeductible personal expense. Free 1040x More information. Free 1040x   For more information about deducting interest, see chapter 4 in Publication 535. Free 1040x That chapter explains the following items. Free 1040x Interest you can deduct. Free 1040x Interest you cannot deduct. Free 1040x How to allocate interest between personal and business use. Free 1040x When to deduct interest. Free 1040x The rules for a below-market interest rate loan. Free 1040x (This is generally a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Free 1040x ) Legal and Professional Fees Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on Schedule C or C-EZ. Free 1040x However, you usually cannot deduct legal fees you pay to acquire business assets. Free 1040x Add them to the basis of the property. Free 1040x If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business. Free 1040x The personal part of legal fees for producing or collecting taxable income, doing or keeping your job, or for tax advice may be deductible on Schedule A (Form 1040) if you itemize deductions. Free 1040x For more information, see Publication 529, Miscellaneous Deductions. Free 1040x Tax preparation fees. Free 1040x   You can deduct on Schedule C or C-EZ the cost of preparing that part of your tax return relating to your business as a sole proprietor or statutory employee. Free 1040x You can deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Free 1040x   You can also deduct on Schedule C or C-EZ the amount you pay or incur in resolving asserted tax deficiencies for your business as a sole proprietor or statutory employee. Free 1040x Pension Plans You can set up and maintain the following small business retirement plans for yourself and your employees. Free 1040x SEP (Simplified Employee Pension) plans. Free 1040x SIMPLE (Savings Incentive Match Plan for Employees) plans. Free 1040x Qualified plans (including Keogh or H. Free 1040x R. Free 1040x 10 plans). Free 1040x SEP, SIMPLE, and qualified plans offer you and your employees a tax favored way to save for retirement. Free 1040x You can deduct contributions you make to the plan for your employees on line 19 of Schedule C. Free 1040x If you are a sole proprietor, you can deduct contributions you make to the plan for yourself on line 28 of Form 1040. Free 1040x You can also deduct trustees' fees if contributions to the plan do not cover them. Free 1040x Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. Free 1040x You may also be able to claim a tax credit of 50% of the first $1,000 of qualified startup costs if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. Free 1040x Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. Free 1040x These amounts (and earnings on them) are generally tax free until your employees receive distributions from the plan. Free 1040x For more information on retirement plans for small business, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Free 1040x Publication 590, Individual Retirement Arrangements (IRAs), discusses other tax favored ways to save for retirement. Free 1040x Rent Expense Rent is any amount you pay for the use of property you do not own. Free 1040x In general, you can deduct rent as a business expense only if the rent is for property you use in your business. Free 1040x If you have or will receive equity in or title to the property, you cannot deduct the rent. Free 1040x Unreasonable rent. Free 1040x   You cannot take a rental deduction for unreasonable rents. Free 1040x Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Free 1040x Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Free 1040x Rent is not unreasonable just because it is figured as a percentage of gross receipts. Free 1040x   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Free 1040x For a list of the other related persons, see section 267 of the Internal Revenue Code. Free 1040x Rent on your home. Free 1040x   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. Free 1040x You must meet the requirements for business use of your home. Free 1040x For more information, see Business Use of Your Home , later. Free 1040x Rent paid in advance. Free 1040x   Generally, rent paid in your business is deductible in the year paid or accrued. Free 1040x If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. Free 1040x You can deduct the rest of your payment only over the period to which it applies. Free 1040x More information. Free 1040x   For more information about rent, see chapter 3 in Publication 535. Free 1040x Taxes You can deduct on Schedule C or C-EZ various federal, state, local, and foreign taxes directly attributable to your business. Free 1040x Income taxes. Free 1040x   You can deduct on Schedule C or C-EZ a state tax on gross income (as distinguished from net income) directly attributable to your business. Free 1040x You can deduct other state and local income taxes on Schedule A (Form 1040) if you itemize your deductions. Free 1040x Do not deduct federal income tax. Free 1040x Employment taxes. Free 1040x   You can deduct the social security, Medicare, and federal unemployment (FUTA) taxes you paid out of your own funds as an employer. Free 1040x Employment taxes are discussed briefly in chapter 1. Free 1040x You can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund. Free 1040x Deduct these payments as taxes. Free 1040x Self-employment tax. Free 1040x   You can deduct one-half of your self-employment tax on line 27 of Form 1040. Free 1040x Self-employment tax is discussed in chapters 1 and 10. Free 1040x Personal property tax. Free 1040x   You can deduct on Schedule C or C-EZ any tax imposed by a state or local government on personal property used in your business. Free 1040x   You can also deduct registration fees for the right to use property within a state or local area. Free 1040x Example. Free 1040x May and Julius Winter drove their car 7,000 business miles out of a total of 10,000 miles. Free 1040x They had to pay $25 for their annual state license tags and $20 for their city registration sticker. Free 1040x They also paid $235 in city personal property tax on the car, for a total of $280. Free 1040x They are claiming their actual car expenses. Free 1040x Because they used the car 70% for business, they can deduct 70% of the $280, or $196, as a business expense. Free 1040x Real estate taxes. Free 1040x   You can deduct on Schedule C or C-EZ the real estate taxes you pay on your business property. Free 1040x Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. Free 1040x The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. Free 1040x   For more information about real estate taxes, see chapter 5 in Publication 535. Free 1040x That chapter explains special rules for deducting the following items. Free 1040x Taxes for local benefits, such as those for sidewalks, streets, water mains, and sewer lines. Free 1040x Real estate taxes when you buy or sell property during the year. Free 1040x Real estate taxes if you use an accrual method of accounting and choose to accrue real estate tax related to a definite period ratably over that period. Free 1040x Sales tax. Free 1040x   Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. Free 1040x If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. Free 1040x If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. Free 1040x If the property is depreciable, add the sales tax to the basis for depreciation. Free 1040x For information on the basis of property, see Publication 551, Basis of Assets. Free 1040x    Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Free 1040x Do not include these taxes in gross receipts or sales. Free 1040x Excise taxes. Free 1040x   You can deduct on Schedule C or C-EZ all excise taxes that are ordinary and necessary expenses of carrying on your business. Free 1040x Excise taxes are discussed briefly in chapter 1. Free 1040x Fuel taxes. Free 1040x   Taxes on gasoline, diesel fuel, and other motor fuels you use in your business are usually included as part of the cost of the fuel. Free 1040x Do not deduct these taxes as a separate item. Free 1040x   You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. Free 1040x For more information, see Publication 510, Excise Taxes. Free 1040x Travel, Meals, and Entertainment This section briefly explains the kinds of travel and entertainment expenses you can deduct on Schedule C or C-EZ. Free 1040x Table 8-1. Free 1040x When Are Entertainment Expenses Deductible? (Note. Free 1040x The following is a summary of the rules for deducting entertainment expenses. Free 1040x For more details about these rules, see Publication 463. Free 1040x ) General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Free 1040x Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Free 1040x An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Free 1040x A necessary expense is one that is helpful and appropriate, although not necessarily required, for your business. Free 1040x Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. Free 1040x   Associated test Entertainment is associated with your trade or business, and Entertainment directly precedes or follows a substantial business discussion. Free 1040x Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Free 1040x You cannot deduct expenses that are lavish or extravagant under the circumstances. Free 1040x You generally can deduct only 50% of your unreimbursed entertainment expenses. Free 1040x Travel expenses. Free 1040x   These are the ordinary and necessary expenses of traveling away from home for your business. Free 1040x You are traveling away from home if both the following conditions are met. Free 1040x 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. Free 1040x You need to get sleep or rest to meet the demands of your work while away from home. Free 1040x Generally, your tax home is your regular place of business, regardless of where you maintain your family home. Free 1040x It includes the entire city or general area in which your business is located. Free 1040x See Publication 463 for more information. Free 1040x   The following is a brief discussion of the expenses you can deduct. Free 1040x Transportation. Free 1040x   You can deduct the cost of travel by airplane, train, bus, or car between your home and your business destination. Free 1040x Taxi, commuter bus, and limousine. Free 1040x   You can deduct fares for these and other types of transportation between the airport or station and your hotel, or between the hotel and your work location away from home. Free 1040x Baggage and shipping. Free 1040x   You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations. Free 1040x Car or truck. Free 1040x   You can deduct the costs of operating and maintaining your vehicle when traveling away from home on business. Free 1040x You can deduct actual expenses or the standard mileage rate (discussed earlier under Car and Truck Expenses), as well as business-related tolls and parking. Free 1040x If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. Free 1040x Meals and lodging. Free 1040x   You can deduct the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Free 1040x In most cases, you can deduct only 50% of your meal expenses. Free 1040x Cleaning. Free 1040x   You can deduct the costs of dry cleaning and laundry while on your business trip. Free 1040x Telephone. Free 1040x   You can deduct the cost of business calls while on your business trip, including business communication by fax machine or other communication devices. Free 1040x Tips. Free 1040x   You can deduct the tips you pay for any expense in this list. Free 1040x More information. Free 1040x   For more information about travel expenses, see Publication 463. Free 1040x Entertainment expenses. Free 1040x   You may be able to deduct business-related entertainment expenses for entertaining a client, customer, or employee. Free 1040x In most cases, you can deduct only 50% of these expenses. Free 1040x   The following are examples of entertainment expenses. Free 1040x Entertaining guests at nightclubs, athletic clubs, theaters, or sporting events. Free 1040x Providing meals, a hotel suite, or a car to business customers or their families. Free 1040x To be deductible, the expenses must meet the rules listed in Table 8-1. Free 1040x For details about these rules, see Publication 463. Free 1040x Reimbursing your employees for expenses. Free 1040x   You generally can deduct the amount you reimburse your employees for travel and entertainment expenses. Free 1040x The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. Free 1040x For details, see chapter 11 in Publication 535. Free 1040x That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. Free 1040x Business Use of Your Home To deduct expenses related to the part of your home used for business, you must meet specific requirements. Free 1040x Even then, your deduction may be limited. Free 1040x To qualify to claim expenses for business use of your home, you must meet the following tests. Free 1040x Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use , later), Regular, For your business, and The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your business, or A separate structure (not attached to your home) you use in connection with your business. Free 1040x Exclusive use. Free 1040x   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Free 1040x The area used for business can be a room or other separately identifiable space. Free 1040x The space does not need to be marked off by a permanent partition. Free 1040x   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Free 1040x Example. Free 1040x You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Free 1040x Your family also uses the den for recreation. Free 1040x The den is not used exclusively in your profession, so you cannot claim a business deduction for its use. Free 1040x Exceptions to exclusive use. Free 1040x   You do not have to meet the exclusive use test if you use part of your home in either of the following ways. Free 1040x For the storage of inventory or product samples. Free 1040x As a daycare facility. Free 1040x For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Free 1040x Regular use. Free 1040x   To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. Free 1040x You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose. Free 1040x Principal place of business. Free 1040x   You can have more than one business location, including your home, for a single trade or business. Free 1040x To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. Free 1040x To determine your principal place of business, you must consider all the facts and circumstances. Free 1040x   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. Free 1040x You use it exclusively and regularly for administrative or management activities of your business. Free 1040x You have no other fixed location where you conduct substantial administrative or management activities of your business. Free 1040x   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. Free 1040x The relative importance of the activities performed at each location. Free 1040x If the relative importance factor does not determine your principal place of business, you can also consider the time spent at each location. Free 1040x   If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Free 1040x However, for other ways to qualify to deduct home office expenses, see Publication 587. Free 1040x Deduction limit. Free 1040x   If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. Free 1040x If your gross income from the business use is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. Free 1040x   Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), allocable to the business is limited to the gross income from the business use of your home minus the sum of the following. Free 1040x The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). Free 1040x The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. Free 1040x Do not include in (2) above your deduction for one-half of your self-employment tax. Free 1040x   Use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. Free 1040x New simplified method. Free 1040x    The IRS now provides a simplified method to determine your expenses for business use of your home. Free 1040x The simplified method is an alternative to calculating and substantiating actual expenses. Free 1040x In most cases, you will figure your deduction by multiplying $5 by the area of your home used for a qualified business use. Free 1040x The area you use to figure your deduction is limited to 300 square feet. Free 1040x For more information, see the Instructions for Schedule C. Free 1040x More information. Free 1040x   For more information on deducting expenses for the business use of your home, see Publication 587. Free 1040x Other Expenses You Can Deduct You may also be able to deduct the following expenses. Free 1040x See Publication 535 to find out whether you can deduct them. Free 1040x Advertising. Free 1040x Bank fees. Free 1040x Donations to business organizations. Free 1040x Education expenses. Free 1040x Energy efficient commercial buildings deduction expenses. Free 1040x Impairment-related expenses. Free 1040x Interview expense allowances. Free 1040x Licenses and regulatory fees. Free 1040x Moving machinery. Free 1040x Outplacement services. Free 1040x Penalties and fines you pay for late performance or nonperformance of a contract. Free 1040x Repairs that keep your property in a normal efficient operating condition. Free 1040x Repayments of income. Free 1040x Subscriptions to trade or professional publications. Free 1040x Supplies and materials. Free 1040x Utilities. Free 1040x Expenses You Cannot Deduct You usually cannot deduct the following as business expenses. Free 1040x For more information, see Publication 535. Free 1040x Bribes and kickbacks. Free 1040x Charitable contributions. Free 1040x Demolition expenses or losses. Free 1040x Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs. Free 1040x Lobbying expenses. Free 1040x Penalties and fines you pay to a governmental agency or instrumentality because you broke the law. Free 1040x Personal, living, and family expenses. Free 1040x Political contributions. Free 1040x Repairs that add to the value of your property or significantly increase its life. Free 1040x Prev  Up  Next   Home   More Online Publications
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The Free 1040x

Free 1040x 6. Free 1040x   Retail Tax on Heavy Trucks, Trailers, and Tractors Table of Contents Highway vehicle. Free 1040x Vehicles not considered highway vehicles. Free 1040x Idling reduction device. Free 1040x Separate purchase. Free 1040x Leases. Free 1040x Exported vehicle. Free 1040x Tax on resale of tax-paid trailers and semitrailers. Free 1040x Use treated as sale. Free 1040x Sale. Free 1040x Long-term lease. Free 1040x Short-term lease. Free 1040x Related person. Free 1040x Exclusions from tax base. Free 1040x Sales not at arm's length. Free 1040x Installment sales. Free 1040x Repairs and modifications. Free 1040x Further manufacture. Free 1040x Rail trailers and rail vans. Free 1040x Parts and accessories. Free 1040x Trash containers. Free 1040x House trailers. Free 1040x Camper coaches or bodies for self-propelled mobile homes. Free 1040x Farm feed, seed, and fertilizer equipment. Free 1040x Ambulances and hearses. Free 1040x Truck-tractors. Free 1040x Concrete mixers. Free 1040x Registration requirement. Free 1040x Further manufacture. Free 1040x A tax of 12% of the sales price is imposed on the first retail sale of the following articles, including related parts and accessories sold on or in connection with, or with the sale of, the articles. Free 1040x Truck chassis and bodies. Free 1040x Truck trailer and semitrailer chassis and bodies. Free 1040x Tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer. Free 1040x A truck is a highway vehicle primarily designed to transport its load on the same chassis as the engine, even if it is equipped to tow a vehicle, such as a trailer or semitrailer. Free 1040x A tractor is a highway vehicle designed to tow a vehicle, such as a trailer or semitrailer. Free 1040x A tractor may carry incidental items of cargo when towing or limited amounts of cargo when not towing. Free 1040x A sale of a truck, truck trailer, or semitrailer is considered a sale of a chassis and a body. Free 1040x The seller is liable for the tax. Free 1040x Chassis or body. Free 1040x   A chassis or body is taxable only if you sell it for use as a component part of a highway vehicle that is a truck, truck trailer or semitrailer, or a tractor of the kind chiefly used for highway transportation in combination with a trailer or semitrailer. Free 1040x Highway vehicle. Free 1040x   A highway vehicle is any self-propelled vehicle designed to carry a load over public highways, whether or not it is also designed to perform other functions. Free 1040x Examples of vehicles designed to carry a load over public highways are passenger automobiles, motorcycles, buses, and highway-type trucks and truck tractors. Free 1040x A vehicle is a highway vehicle even though the vehicle's design allows it to perform a highway transportation function for only one of the following. Free 1040x A particular type of load, such as passengers, furnishings, and personal effects (as in a house, office, or utility trailer). Free 1040x A special kind of cargo, goods, supplies, or materials. Free 1040x Some off-highway task unrelated to highway transportation, except as discussed next. Free 1040x Vehicles not considered highway vehicles. Free 1040x   Generally, the following kinds of vehicles are not considered highway vehicles for purposes of the retail tax. Free 1040x Specially designed mobile machinery for nontransportation functions. Free 1040x A self-propelled vehicle is not a highway vehicle if all the following apply. Free 1040x The chassis has permanently mounted to it machinery or equipment used to perform certain operations (construction, manufacturing, drilling, mining, timbering, processing, farming, or similar operations) if the operation of the machinery or equipment is unrelated to transportation on or off the public highways. Free 1040x The chassis has been specially designed to serve only as a mobile carriage and mount (and power source, if applicable) for the machinery or equipment, whether or not the machinery or equipment is in operation. Free 1040x The chassis could not, because of its special design and without substantial structural modification, be used as part of a vehicle designed to carry any other load. Free 1040x Vehicles specially designed for off-highway transportation. Free 1040x A vehicle is not treated as a highway vehicle if the vehicle is specially designed for the primary function of transporting a particular type of load other than over the public highway and because of this special design, the vehicles's capability to transport a load over a public highway is substantially limited or impaired. Free 1040x To make this determination, you can take into account the vehicle's size, whether the vehicle is subject to licensing, safety, or other requirements, and whether the vehicle can transport a load at a sustained speed of at least 25 miles per hour. Free 1040x It does not matter that the vehicle can carry heavier loads off highway than it is allowed to carry over the highway. Free 1040x Nontransportation trailers and semitrailers. Free 1040x A trailer or semitrailer is not treated as a highway vehicle if it is specially designed to function only as an enclosed stationary shelter for carrying on a nontransportation function at an off-highway site. Free 1040x For example, a trailer that is capable only of functioning as an office for an off-highway construction operation is not a highway vehicle. Free 1040x Gross vehicle weight. Free 1040x   The tax does not apply to truck chassis and bodies suitable for use with a vehicle that has a gross vehicle weight (defined below) of 33,000 pounds or less. Free 1040x It also does not apply to truck trailer and semitrailer chassis and bodies suitable for use with a trailer or semitrailer that has a gross vehicle weight of 26,000 pounds or less. Free 1040x Tractors that have a gross vehicle weight of 19,500 pounds or less and a gross combined weight of 33,000 pounds or less are excluded from the 12% retail tax. Free 1040x   The following four classifications of truck body types meet the suitable for use standard and will be excluded from the retail excise tax. Free 1040x Platform truck bodies 21 feet or less in length. Free 1040x Dry freight and refrigerated truck van bodies 24 feet or less in length. Free 1040x Dump truck bodies with load capacities of 8 cubic yards or less. Free 1040x Refuse packer truck bodies with load capacities of 20 cubic yards or less. Free 1040x For more information on these classifications, see Revenue Procedure 2005-19, which is on page 832 of I. Free 1040x R. Free 1040x B. Free 1040x 2005-14 at www. Free 1040x irs. Free 1040x gov/pub/irs-irbs/irb05-14. Free 1040x pdf. Free 1040x   The gross vehicle weight means the maximum total weight of a loaded vehicle. Free 1040x Generally, this maximum total weight is the gross vehicle weight rating provided by the manufacturer or determined by the seller of the completed article. Free 1040x The seller's gross vehicle weight rating is determined solely on the basis of the strength of the chassis frame and the axle capacity and placement. Free 1040x The seller may not take into account any readily attachable components (such as tires or rim assemblies) in determining the gross vehicle weight. Free 1040x See Regulations section 145. Free 1040x 4051-1(e)(3) for more information. Free 1040x Parts or accessories. Free 1040x   The tax applies to parts or accessories sold on or in connection with, or with the sale of, a taxable article. Free 1040x For example, if at the time of the sale by the retailer, the part or accessory has been ordered from the retailer, the part or accessory will be considered as sold in connection with the sale of the vehicle. Free 1040x The tax applies in this case whether or not the retailer bills the parts or accessories separately. Free 1040x   If the retailer sells a taxable chassis, body, or tractor without parts or accessories considered essential for the operation or appearance of the taxable article, the sale of the parts or accessories by the retailer to the purchaser is considered made in connection with the sale of the taxable article even though they are shipped separately, at the same time, or on a different date. Free 1040x The tax applies unless there is evidence to the contrary. Free 1040x For example, if a retailer sells to any person a chassis and the bumpers for the chassis, or sells a taxable tractor and the fifth wheel and attachments, the tax applies to the parts or accessories regardless of the method of billing or the time at which the shipments were made. Free 1040x The tax does not apply to parts and accessories that are spares or replacements. Free 1040x   The tax imposed on parts and accessories sold on or in connection with the taxable articles listed earlier and the tax imposed on the separate purchase of parts and accessories (discussed next) for the taxable articles listed earlier do not apply to an idling reduction device or insulation that has an R value of at least R35 per inch. Free 1040x Idling reduction device. Free 1040x   An idling reduction device is any device or system of devices that provide the tractor with services, such as heat, air conditioning, and electricity, without the use of the main drive engine while the tractor is temporarily parked or stationary. Free 1040x The device must be affixed to the tractor and determined by the Administrator of the EPA, in consultation with the Secretary of Energy and Secretary of Transportation, to reduce idling while parked or stationary. Free 1040x The EPA discusses idling reduction technologies on its website at www. Free 1040x epa. Free 1040x gov/smartway/technology/idling. Free 1040x htm. Free 1040x Separate purchase. Free 1040x   The tax generally applies to the price of a part or accessory and its installation if the following conditions are met. Free 1040x The owner, lessee, or operator of any vehicle that contains a taxable article installs any part or accessory on the vehicle. Free 1040x The installation occurs within 6 months after the vehicle is first placed in service. Free 1040x   The owners of the trade or business installing the parts or accessories are secondarily liable for the tax. Free 1040x   A vehicle is placed in service on the date the owner takes actual possession of the vehicle. Free 1040x This date is established by a signed delivery ticket or other comparable document indicating delivery to and acceptance by the owner. Free 1040x   The tax does not apply if the installed part or accessory is a replacement part or accessory. Free 1040x The tax also does not apply if the total price of the parts and accessories, including installation charges, during the 6-month period is $1,000 or less. Free 1040x However, if the total price is more than $1,000, the tax applies to the cost of all parts and accessories (and installation charges) during that period. Free 1040x Example. Free 1040x You bought a taxable vehicle and placed it in service on April 8. Free 1040x On May 3, you bought and installed parts and accessories at a cost of $850. Free 1040x On July 15, you bought and installed parts and accessories for $300. Free 1040x Tax of $138 (12% of $1,150) applies on July 15. Free 1040x Also, tax will apply to any costs of additional parts and accessories installed on the vehicle before October 8. Free 1040x First retail sale defined. Free 1040x   The sale of an article is treated as the first retail sale, and the seller will be liable for the tax imposed on the sale unless one of the following exceptions applies. Free 1040x There has been a prior taxable sale, lease, or use of the article (however, see Tax on resale of tax-paid trailers and semitrailers, later). Free 1040x The sale qualifies as a tax-free sale under section 4221 (see Sales exempt from tax, later). Free 1040x The seller in good faith accepts from the purchaser a statement signed under penalties of perjury and executed in good faith that the purchaser intends to resell the article or lease it on a long-term basis. Free 1040x There is no registration requirement. Free 1040x Leases. Free 1040x   A long-term lease (a lease with a term of 1 year or more, taking into account options to renew) before a first retail sale is treated as a taxable sale. Free 1040x The tax is imposed on the lessor at the time of the lease. Free 1040x   A short-term lease (a lease with a term of less than 1 year, taking into account options to renew) before a first retail sale is treated as a taxable use. Free 1040x The tax is imposed on the lessor at the time of the lease. Free 1040x Exported vehicle. Free 1040x   A vehicle exported before its first retail sale, used in a foreign country, and then returned to the United States is subject to the retail tax on its first domestic use or retail sale after importation. Free 1040x Tax on resale of tax-paid trailers and semitrailers. Free 1040x   The tax applies to a trailer or semitrailer resold within 6 months after having been sold in a taxable sale. Free 1040x The seller liable for the tax on the resale can claim a credit equal to the tax paid on the prior taxable sale. Free 1040x The credit cannot exceed the tax on the resale. Free 1040x See Regulations section 145. Free 1040x 4052-1(a)(4) for information on the conditions to allowance for the credit. Free 1040x Use treated as sale. Free 1040x   If any person uses a taxable article before the first retail sale of the article, that person is liable for the tax as if the article had been sold at retail by that person. Free 1040x Figure the tax on the price at which similar articles are sold in the ordinary course of trade by retailers. Free 1040x The tax attaches when the use begins. Free 1040x   If the seller of an article regularly sells the articles at retail in arm's-length transactions, figure the tax on its use on the lowest established retail price for the articles in effect at the time of the taxable use. Free 1040x   If the seller of an article does not regularly sell the articles at retail in arm's-length transactions, a constructive price on which the tax is figured will be determined by the IRS after considering the selling practices and price structures of sellers of similar articles. Free 1040x   If a seller of an article incurs liability for tax on the use of the article and later sells or leases the article in a transaction that otherwise would be taxable, liability for tax is not incurred on the later sale or lease. Free 1040x Presumptive retail sales price. Free 1040x   There are rules to ensure that the tax base of transactions considered to be taxable sales includes either an actual or presumed markup percentage. Free 1040x If the person liable for tax is the vehicle's manufacturer, producer, or importer, the following discussions show how you figure the presumptive retail sales price depending on the type of transaction and the persons involved in the transaction. Free 1040x Table 6-1 outlines the appropriate tax base calculation for various transactions. Free 1040x   The presumed markup percentage to be used for trucks and truck-tractors is 4%. Free 1040x But for truck trailers and semitrailers and remanufactured trucks and tractors, the presumed markup percentage is zero. Free 1040x Sale. Free 1040x   For a taxable sale by a manufacturer, producer, importer, or related person, you generally figure the tax on a tax base of the sales price plus an amount equal to the presumed markup percentage times that sales price. Free 1040x Long-term lease. Free 1040x   In the case of a long-term lease by a manufacturer, producer, importer, or related person, figure the tax on a tax base of the constructive sales price plus an amount equal to the presumed markup percentage times the constructive sales price. Free 1040x Short-term lease. Free 1040x   When a manufacturer, producer, importer, or related person leases an article in a short-term lease considered a taxable use, figure the tax on a constructive sales price at which those or similar articles generally are sold in the ordinary course of trade by retailers. Free 1040x   But if the lessor in this situation regularly sells articles at retail in arm's-length transactions, figure the tax on the lowest established retail price in effect at the time of the taxable use. Free 1040x   If a person other than the manufacturer, producer, importer, or related person leases an article in a short-term lease considered a taxable use, figure the tax on a tax base of the price for which the article was sold to the lessor plus the cost of parts and accessories installed by the lessor and a presumed markup percentage. Free 1040x Related person. Free 1040x   A related person is any member of the same controlled group as the manufacturer, producer, or importer. Free 1040x Do not treat as a related person a person that sells the articles through a permanent retail establishment in the normal course of being a retailer if that person has records to prove the article was sold for a price that included a markup equal to or greater than the presumed markup percentage. Free 1040x Table 6-1. Free 1040x Tax Base IF the transaction is a. Free 1040x . Free 1040x . Free 1040x THEN figuring the base by using the. Free 1040x . Free 1040x . Free 1040x Sale by the manufacturer, producer, importer, or related person Sales price plus (presumed markup percentage × sales price) Sale by the dealer Total consideration paid for the item including any charges incident to placing it in a condition ready for use Long-term lease by the manufacturer, producer, importer, or related person Constructive sales price plus (presumed markup percentage × constructive sales price) Short-term lease by the manufacturer, producer, importer, or related person Constructive sales price at which such or similar articles are sold Short-term lease by a lessor other than the manufacturer, producer, importer, or related person Price for which the article was sold to the lessor plus the cost of parts and accessories installed by the lessor plus a presumed markup percentage Short-term lease where the articles are regularly sold at arm's length Lowest established retail price in effect at the time of the taxable use General rule for sales by dealers to the consumer. Free 1040x   For a taxable sale, other than a long-term lease, by a person other than a manufacturer, producer, importer, or related person, your tax base is the retail sales price as discussed next under Determination of tax base. Free 1040x   When you sell an article to the consumer, generally you do not add a presumed markup to the tax base. Free 1040x However, you do add a markup if all the following apply. Free 1040x You do not perform any significant activities relating to the processing of the sale of a taxable article. Free 1040x The main reason for processing the sale through you is to avoid or evade the presumed markup. Free 1040x You do not have records proving that the article was sold for a price that included a markup equal to or greater than the presumed markup percentage. Free 1040x In these situations, your tax base is the sales price plus an amount equal to the presumed markup percentage times that selling price. Free 1040x Determination of tax base. Free 1040x   These rules apply to both normal retail sales price and presumptive retail sales price computations. Free 1040x To arrive at the tax base, the price is the total consideration paid (including trade-in allowance) for the item and includes any charge incident to placing the article in a condition ready for use. Free 1040x However, see Presumptive retail sales price, earlier. Free 1040x Exclusions from tax base. Free 1040x   Exclude from the tax base the retail excise tax imposed on the sale. Free 1040x Exclude any state or local retail sales tax if stated as a separate charge from the price whether the sales tax is imposed on the seller or purchaser. Free 1040x Also exclude the value of any used component of the article furnished by the first user of the article. Free 1040x   Exclude charges for transportation, delivery, insurance, and installation (other than installation charges for parts and accessories, discussed earlier) and other expenses incurred in connection with the delivery of an article to a purchaser. Free 1040x These expenses are those incurred in delivery from the retail dealer to the customer. Free 1040x In the case of delivery directly from the manufacturer to the dealer's customer, include the transportation and delivery charges to the extent the charges do not exceed what it would have cost to ship the article to the dealer. Free 1040x   Exclude amounts charged for machinery or equipment that does not contribute to the highway transportation function of the vehicle, provided those charges are supported by adequate records. Free 1040x For example, for an industrial vacuum loader vehicle, exclude amounts charged for the vacuum pump and hose, filter system, material separator, silencer or muffler, control cabinet, and ladder. Free 1040x Similarly, for a sewer cleaning vehicle, exclude amounts charged for the high pressure water pump, hose components, and the vacuum pipe. Free 1040x Sales not at arm's length. Free 1040x   For any taxable article sold (not at arm's length) at less than the fair market price, figure the excise tax on the price for which similar articles are sold at retail in the ordinary course of trade. Free 1040x   A sale is not at arm's length if either of the following apply. Free 1040x One of the parties is controlled (in law or in fact) by the other or there is common control, whether or not the control is actually exercised to influence the sales price. Free 1040x The sale is made under special arrangements between a seller and a purchaser. Free 1040x Installment sales. Free 1040x   If the first retail sale is an installment sale, or other form of sale in which the sales price is paid in installments, tax liability arises at the time of the sale. Free 1040x The tax is figured on the entire sales price. Free 1040x No part of the tax is deferred because the sales price is paid in installments. Free 1040x Repairs and modifications. Free 1040x   The tax does not apply to the sale or use of an article that has been repaired or modified unless the cost of the repairs and modifications is more than 75% of the retail price of a comparable new article. Free 1040x This includes modifications that change the transportation function of an article or restore a wrecked article to a functional condition. Free 1040x However, this exception generally does not apply to an article that was not subject to the tax when it was new. Free 1040x Further manufacture. Free 1040x   The tax does not apply to the use by a person of a taxable article as material in the manufacture or production of, or as a component part of, another article to be manufactured or produced by that person. Free 1040x Do not treat a person as engaged in the manufacture of any article merely because that person combines the article with a: Coupling device (including any fifth wheel); Wrecker crane; Loading and unloading equipment (including any crane, hoist, winch, or power liftgate); Aerial ladder or tower; Ice and snow control equipment; Earth moving, excavation, and construction equipment; Spreader; Sleeper cab; Cab shield; or Wood or metal floor. Free 1040x Combining an article with an item in this list does not give rise to taxability. Free 1040x However, see Parts or accessories discussed earlier. Free 1040x Articles exempt from tax. Free 1040x   The tax on heavy trucks, trailers, and tractors does not apply to sales of the articles described in the following discussions. Free 1040x Rail trailers and rail vans. Free 1040x   This is any chassis or body of a trailer or semitrailer designed for use both as a highway vehicle and a railroad car (including any parts and accessories designed primarily for use on and in connection with it). Free 1040x Do not treat a piggyback trailer or semitrailer as designed for use as a railroad car. Free 1040x Parts and accessories. Free 1040x   This is any part or accessory sold separately from the truck or trailer, except as described earlier under Parts or accessories and Separate purchase. Free 1040x Trash containers. Free 1040x   This is any box, container, receptacle, bin, or similar article that meets all the following conditions. Free 1040x It is designed to be used as a trash container. Free 1040x It is not designed to carry freight other than trash. Free 1040x It is not designed to be permanently mounted on or affixed to a truck chassis or body. Free 1040x House trailers. Free 1040x   This is any house trailer (regardless of size) suitable for use in connection with either passenger automobiles or trucks. Free 1040x Camper coaches or bodies for self-propelled mobile homes. Free 1040x   This is any article designed to be mounted or placed on trucks, truck chassis, or automobile chassis and to be used primarily as living quarters or camping accommodations. Free 1040x Further, the tax does not apply to chassis specifically designed and constructed to accommodate and transport self-propelled mobile home bodies. Free 1040x Farm feed, seed, and fertilizer equipment. Free 1040x   This is any body primarily designed to process or prepare, haul, spread, load, or unload feed, seed, or fertilizer to or on farms. Free 1040x This exemption applies only to the farm equipment body (and parts and accessories) and not to the chassis upon which the farm equipment is mounted. Free 1040x Ambulances and hearses. Free 1040x   This is any ambulance, hearse, or combination ambulance-hearse. Free 1040x Truck-tractors. Free 1040x   This is any truck-tractor specifically designed for use in shifting semitrailers in and around freight yards and freight terminals. Free 1040x Concrete mixers. Free 1040x   This is any article designed to be placed or mounted on a truck, truck trailer, or semitrailer chassis to be used to process or prepare concrete. Free 1040x This exemption does not apply to the chassis on which the article is mounted. Free 1040x Sales exempt from tax. Free 1040x   The following sales are ordinarily exempt from tax. Free 1040x Sales to a state or local government for its exclusive use. Free 1040x Sales to Indian tribal governments, but only if the transaction involves the exercise of an essential tribal government function. Free 1040x Sales to a nonprofit educational organization for its exclusive use. Free 1040x Sales to a qualified blood collector organization (as defined under Communications Tax in chapter 4) for its exclusive use in the collection, storage, or transportation of blood. Free 1040x Sales for use by the purchaser for further manufacture of other taxable articles (see below). Free 1040x Sales for export or for resale by the purchaser to a second purchaser for export. Free 1040x Sales to the United Nations for official use. Free 1040x Registration requirement. Free 1040x   In general, the seller and buyer must be registered for a sale to be tax free. Free 1040x See the Form 637 instructions for more information. Free 1040x Certain registration exceptions apply in the case of sales to state and local governments, sales to foreign purchasers for export, and sales for resale or long term leasing. Free 1040x Further manufacture. Free 1040x   If you buy articles tax free and resell or use them other than in the manufacture of another article, you are liable for the tax on their resale or use just as if you had manufactured and made the first retail sale of them. Free 1040x Credits or refunds. Free 1040x   A credit or refund (without interest) of the retail tax on the taxable articles described earlier may be allowable if the tax has been paid with respect to an article and, before any other use, such article is used by any person as a component part of another taxable article manufactured or produced. Free 1040x The person using the article as a component part is eligible for the credit or refund. Free 1040x   A credit or refund is allowable if, before any other use, an article is, by any person: Exported, Used or sold for use as supplies for vessels, Sold to a state or local government for its exclusive use, Sold to a nonprofit educational organization for its exclusive use, or Sold to a qualified blood collector organization (as defined under Communications Tax in chapter 4) for its exclusive use in the collection, storage, or transportation of blood. Free 1040x A credit or refund is also allowable if there is a price readjustment by reason of the return or repossession of an article or by reason of a bona fide discount, rebate, or allowance. Free 1040x   See also Conditions to allowance in chapter 5. Free 1040x Tire credit. Free 1040x   A credit is allowed against the retail tax on the taxable articles described earlier if taxable tires are sold on or in connection with the sale of the article. Free 1040x The credit is equal to the manufacturers excise tax imposed on the taxable tires (discussed earlier). Free 1040x This is the section 4051(d) taxable tire credit and is claimed on Schedule C (Form 720) for the same quarter for which the tax on the heavy vehicle is reported. Free 1040x Prev  Up  Next   Home   More Online Publications