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Free file alliance Publication 547 - Main Content Table of Contents CasualtyFamily pet. Free file alliance Progressive deterioration. Free file alliance Special Procedure for Damage From Corrosive Drywall Theft Loss on Deposits Proof of Loss Figuring a LossGain from reimbursement. Free file alliance Business or income-producing property. Free file alliance Loss of inventory. Free file alliance Leased property. Free file alliance Exception for personal-use real property. Free file alliance Decrease in Fair Market Value Adjusted Basis Insurance and Other Reimbursements Deduction Limits2% Rule $100 Rule 10% Rule Figuring the Deduction Figuring a GainPostponement of Gain When To Report Gains and LossesLoss on deposits. Free file alliance Lessee's loss. Free file alliance Disaster Area LossesDisaster loss to inventory. Free file alliance Main home in disaster area. Free file alliance Unsafe home. Free file alliance Time limit for making choice. Free file alliance Revoking your choice. Free file alliance Figuring the loss deduction. Free file alliance How to report the loss on Form 1040X. Free file alliance Records. Free file alliance Need a copy of your tax return for the preceding year? Postponed Tax Deadlines Contacting the Federal Emergency Management Agency (FEMA) How To Report Gains and LossesProperty held 1 year or less. Free file alliance Property held more than 1 year. Free file alliance Depreciable property. Free file alliance Adjustments to Basis If Deductions Are More Than Income How To Get Tax HelpLow Income Taxpayer Clinics Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Free file alliance A sudden event is one that is swift, not gradual or progressive. Free file alliance An unexpected event is one that is ordinarily unanticipated and unintended. Free file alliance An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. Free file alliance Generally, casualty losses are deductible during the taxable year that the loss occurred. Free file alliance See Table 3, later. Free file alliance Deductible losses. Free file alliance   Deductible casualty losses can result from a number of different causes, including the following. Free file alliance Car accidents (but see Nondeductible losses , next, for exceptions). Free file alliance Earthquakes. Free file alliance Fires (but see Nondeductible losses , next, for exceptions). Free file alliance Floods. Free file alliance Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses , later. Free file alliance Mine cave-ins. Free file alliance Shipwrecks. Free file alliance Sonic booms. Free file alliance Storms, including hurricanes and tornadoes. Free file alliance Terrorist attacks. Free file alliance Vandalism. Free file alliance Volcanic eruptions. Free file alliance Nondeductible losses. Free file alliance   A casualty loss is not deductible if the damage or destruction is caused by the following. Free file alliance Accidentally breaking articles such as glassware or china under normal conditions. Free file alliance A family pet (explained below). Free file alliance A fire if you willfully set it, or pay someone else to set it. Free file alliance A car accident if your willful negligence or willful act caused it. Free file alliance The same is true if the willful act or willful negligence of someone acting for you caused the accident. Free file alliance Progressive deterioration (explained below). Free file alliance However, see Special Procedure for Damage From Corrosive Drywall , later. Free file alliance Family pet. Free file alliance   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met. Free file alliance Example. Free file alliance Your antique oriental rug was damaged by your new puppy before it was housebroken. Free file alliance Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss. Free file alliance Progressive deterioration. Free file alliance   Loss of property due to progressive deterioration is not deductible as a casualty loss. Free file alliance This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. Free file alliance The following are examples of damage due to progressive deterioration. Free file alliance The steady weakening of a building due to normal wind and weather conditions. Free file alliance The deterioration and damage to a water heater that bursts. Free file alliance However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty. Free file alliance Most losses of property caused by droughts. Free file alliance To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit. Free file alliance Termite or moth damage. Free file alliance The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. Free file alliance However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss. Free file alliance Special Procedure for Damage From Corrosive Drywall Under a special procedure, you can deduct the amounts you paid to repair damage to your home and household appliances due to corrosive drywall. Free file alliance Under this procedure, you treat the amounts paid for repairs as a casualty loss in the year of payment. Free file alliance For example, amounts you paid for repairs in 2013 are deductible on your 2013 tax return and amounts you paid for repairs in 2012 are deductible on your 2012 tax return. Free file alliance Note. Free file alliance If you paid for any repairs before 2013 and you choose to follow this special procedure, you can amend your return for the earlier year by filing Form 1040X, Amended U. Free file alliance S. Free file alliance Individual Income Tax Return, and attaching a completed Form 4684 for the appropriate year. Free file alliance Form 4684 for the appropriate year can be found at IRS. Free file alliance gov. Free file alliance Generally, Form 1040X must be filed within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. Free file alliance Corrosive drywall. Free file alliance   For purposes of this special procedure, “corrosive drywall” means drywall that is identified as problem drywall under the two-step identification method published by the Consumer Product Safety Commission (CPSC) and the Department of Housing and Urban Development (HUD) in their interim guidance dated January 28, 2010, as revised by the CPSC and HUD. Free file alliance The revised identification guidance and remediation guidelines are available at www. Free file alliance cpsc. Free file alliance gov/Safety-Education/Safety-Education-Centers/Drywall. Free file alliance Special instructions for completing Form 4684. Free file alliance   If you choose to follow this special procedure, complete Form 4684, Section A, according to the instructions below. Free file alliance The IRS will not challenge your treatment of damage resulting from corrosive drywall as a casualty loss if you determine and report the loss as explained below. Free file alliance Top margin of Form 4684. Free file alliance   Enter “Revenue Procedure 2010-36”. Free file alliance Line 1. Free file alliance   Enter the information required by the line 1 instructions. Free file alliance Line 2. Free file alliance   Skip this line. Free file alliance Line 3. Free file alliance   Enter the amount of insurance or other reimbursements you received (including through litigation). Free file alliance If none, enter -0-. Free file alliance Lines 4–7. Free file alliance   Skip these lines. Free file alliance Line 8. Free file alliance   Enter the amount you paid to repair the damage to your home and household appliances due to corrosive drywall. Free file alliance Enter only the amounts you paid to restore your home to the condition existing immediately before the damage. Free file alliance Do not enter any amounts you paid for improvements or additions that increased the value of your home above its pre-loss value. Free file alliance If you replaced a household appliance instead of repairing it, enter the lesser of: The current cost to replace the original appliance, or The basis of the original appliance (generally its cost). Free file alliance Line 9. Free file alliance   If line 8 is more than line 3, do one of the following. Free file alliance If you have a pending claim for reimbursement (or you intend to pursue reimbursement), enter 75% of the difference between lines 3 and 8. Free file alliance If item (1) does not apply to you, enter the full amount of the difference between lines 3 and 8. Free file alliance If line 8 is less than or equal to line 3, you cannot claim a casualty loss deduction using this special procedure. Free file alliance    If you have a pending claim for reimbursement (or you intend to pursue reimbursement), you may have income or an additional deduction in a later tax year depending on the actual amount of reimbursement received. Free file alliance See Reimbursement Received After Deducting Loss, later. Free file alliance Lines 10–18. Free file alliance   Complete these lines according to the Instructions for Form 4684. Free file alliance Choosing not to follow this special procedure. Free file alliance   If you choose not to follow this special procedure, you are subject to all of the provisions that apply to the deductibility of casualty losses, and you must complete lines 1–9 according to the Instructions for Form 4684. Free file alliance This means, for example, that you must establish that the damage, destruction, or loss of property resulted from an identifiable event as defined earlier under Casualty . Free file alliance Furthermore, you must have proof that shows the following. Free file alliance The loss is properly deductible in the tax year you claimed it and not in some other year. Free file alliance See When To Report Gains and Losses , later. Free file alliance The amount of the claimed loss. Free file alliance See Proof of Loss , later. Free file alliance No claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery. Free file alliance See When To Report Gains and Losses , later. Free file alliance Theft A theft is the taking and removing of money or property with the intent to deprive the owner of it. Free file alliance The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. Free file alliance You do not need to show a conviction for theft. Free file alliance Theft includes the taking of money or property by the following means. Free file alliance Blackmail. Free file alliance Burglary. Free file alliance Embezzlement. Free file alliance Extortion. Free file alliance Kidnapping for ransom. Free file alliance Larceny. Free file alliance Robbery. Free file alliance The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Free file alliance Decline in market value of stock. Free file alliance   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. Free file alliance However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. Free file alliance You report a capital loss on Schedule D (Form 1040). Free file alliance For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. Free file alliance Mislaid or lost property. Free file alliance    The simple disappearance of money or property is not a theft. Free file alliance However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Free file alliance Sudden, unexpected, and unusual events were defined earlier under Casualty . Free file alliance Example. Free file alliance A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. Free file alliance The diamond falls from the ring and is never found. Free file alliance The loss of the diamond is a casualty. Free file alliance Losses from Ponzi-type investment schemes. Free file alliance   The IRS has issued the following guidance to assist taxpayers who are victims of losses from Ponzi-type investment schemes: Revenue Ruling 2009-9, 2009-14 I. Free file alliance R. Free file alliance B. Free file alliance 735 (available at www. Free file alliance irs. Free file alliance gov/irb/2009-14_IRB/ar07. Free file alliance html). Free file alliance Revenue Procedure 2009-20, 2009-14 I. Free file alliance R. Free file alliance B. Free file alliance 749 (available at www. Free file alliance irs. Free file alliance gov/irb/2009-14_IRB/ar11. Free file alliance html). Free file alliance Revenue Procedure 2011-58, 2011-50 I. Free file alliance R. Free file alliance B. Free file alliance 847 (available at www. Free file alliance irs. Free file alliance gov/irb/2011-50_IRB/ar11. Free file alliance html). Free file alliance If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. Free file alliance Skip lines 19 to 27, but you must fill out Section B, lines 29 to 39, as appropriate. Free file alliance Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. Free file alliance You do not need to complete Appendix A. Free file alliance For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684. Free file alliance   If you choose not to use the procedures in Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate. Free file alliance Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. Free file alliance If you incurred this type of loss, you can choose one of the following ways to deduct the loss. Free file alliance As a casualty loss. Free file alliance As an ordinary loss. Free file alliance As a nonbusiness bad debt. Free file alliance Casualty loss or ordinary loss. Free file alliance   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. Free file alliance The choice generally is made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. Free file alliance If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. Free file alliance However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. Free file alliance Once you make the choice, you cannot change it without permission from the Internal Revenue Service. Free file alliance   If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. Free file alliance The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. Free file alliance Your loss is subject to the 2%-of-adjusted-gross-income limit. Free file alliance You cannot choose to claim an ordinary loss if any part of the deposit is federally insured. Free file alliance Nonbusiness bad debt. Free file alliance   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year. Free file alliance How to report. Free file alliance   The kind of deduction you choose for your loss on deposits determines how you report your loss. Free file alliance See Table 1. Free file alliance More information. Free file alliance   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684. Free file alliance Deducted loss recovered. Free file alliance   If you recover an amount you deducted as a loss in an earlier year, you may have to include the amount recovered in your income for the year of recovery. Free file alliance If any part of the original deduction did not reduce your tax in the earlier year, you do not have to include that part of the recovery in your income. Free file alliance For more information, see Recoveries in Publication 525. Free file alliance Proof of Loss To deduct a casualty or theft loss, you must be able to show that there was a casualty or theft. Free file alliance You also must be able to support the amount you take as a deduction. Free file alliance Casualty loss proof. Free file alliance   For a casualty loss, you should be able to show all of the following. Free file alliance The type of casualty (car accident, fire, storm, etc. Free file alliance ) and when it occurred. Free file alliance That the loss was a direct result of the casualty. Free file alliance That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage. Free file alliance Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Free file alliance Theft loss proof. Free file alliance   For a theft loss, you should be able to show all of the following. Free file alliance When you discovered that your property was missing. Free file alliance That your property was stolen. Free file alliance That you were the owner of the property. Free file alliance Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Free file alliance    It is important that you have records that will prove your deduction. Free file alliance If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it. Free file alliance Figuring a Loss To determine your deduction for a casualty or theft loss, you must first figure your loss. Free file alliance Table 1. Free file alliance Reporting Loss on Deposits IF you choose to report the loss as a(n). Free file alliance . Free file alliance . Free file alliance   THEN report it on. Free file alliance . Free file alliance . Free file alliance casualty loss   Form 4684 and Schedule A  (Form 1040). Free file alliance ordinary loss   Schedule A (Form 1040). Free file alliance nonbusiness bad debt   Form 8949 and Schedule D (Form 1040). Free file alliance Amount of loss. Free file alliance   Figure the amount of your loss using the following steps. Free file alliance Determine your adjusted basis in the property before the casualty or theft. Free file alliance Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. Free file alliance From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. Free file alliance For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss. Free file alliance Gain from reimbursement. Free file alliance   If your reimbursement is more than your adjusted basis in the property, you have a gain. Free file alliance This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. Free file alliance If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. Free file alliance See Figuring a Gain , later. Free file alliance Business or income-producing property. Free file alliance   If you have business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV is not considered. Free file alliance Your loss is figured as follows:   Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive   Loss of inventory. Free file alliance   There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers. Free file alliance   One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. Free file alliance Do not claim this loss again as a casualty or theft loss. Free file alliance If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income. Free file alliance   The other way is to deduct the loss separately. Free file alliance If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. Free file alliance Reduce the loss by the reimbursement you received. Free file alliance Do not include the reimbursement in gross income. Free file alliance If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery. Free file alliance Leased property. Free file alliance   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive. Free file alliance Separate computations. Free file alliance   Generally, if a single casualty or theft involves more than one item of property, you must figure the loss on each item separately. Free file alliance Then combine the losses to determine the total loss from that casualty or theft. Free file alliance Exception for personal-use real property. Free file alliance   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. Free file alliance Figure the loss using the smaller of the following. Free file alliance The decrease in FMV of the entire property. Free file alliance The adjusted basis of the entire property. Free file alliance   See Real property under Figuring the Deduction, later. Free file alliance Decrease in Fair Market Value Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts. Free file alliance The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. Free file alliance FMV of stolen property. Free file alliance   The FMV of property immediately after a theft is considered to be zero because you no longer have the property. Free file alliance Example. Free file alliance Several years ago, you purchased silver dollars at face value for $150. Free file alliance This is your adjusted basis in the property. Free file alliance Your silver dollars were stolen this year. Free file alliance The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. Free file alliance Your theft loss is $150. Free file alliance Recovered stolen property. Free file alliance   Recovered stolen property is your property that was stolen and later returned to you. Free file alliance If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. Free file alliance Use this amount to refigure your total loss for the year in which the loss was deducted. Free file alliance   If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. Free file alliance But report the difference only up to the amount of the loss that reduced your tax. Free file alliance For more information on the amount to report, see Recoveries in Publication 525. Free file alliance Figuring Decrease in FMV — Items To Consider To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. Free file alliance However, other measures also can be used to establish certain decreases. Free file alliance See Appraisal and Cost of cleaning up or making repairs , next. Free file alliance Appraisal. Free file alliance   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterwards should be made by a competent appraiser. Free file alliance The appraiser must recognize the effects of any general market decline that may occur along with the casualty. Free file alliance This information is needed to limit any deduction to the actual loss resulting from damage to the property. Free file alliance   Several factors are important in evaluating the accuracy of an appraisal, including the following. Free file alliance The appraiser's familiarity with your property before and after the casualty or theft. Free file alliance The appraiser's knowledge of sales of comparable property in the area. Free file alliance The appraiser's knowledge of conditions in the area of the casualty. Free file alliance The appraiser's method of appraisal. Free file alliance You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. Free file alliance For more information on disasters, see Disaster Area Losses, later. Free file alliance Cost of cleaning up or making repairs. Free file alliance   The cost of repairing damaged property is not part of a casualty loss. Free file alliance Neither is the cost of cleaning up after a casualty. Free file alliance But you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. Free file alliance The repairs are actually made. Free file alliance The repairs are necessary to bring the property back to its condition before the casualty. Free file alliance The amount spent for repairs is not excessive. Free file alliance The repairs take care of the damage only. Free file alliance The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. Free file alliance Landscaping. Free file alliance   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. Free file alliance You may be able to measure your loss by what you spend on the following. Free file alliance Removing destroyed or damaged trees and shrubs, minus any salvage you receive. Free file alliance Pruning and other measures taken to preserve damaged trees and shrubs. Free file alliance Replanting necessary to restore the property to its approximate value before the casualty. Free file alliance Car value. Free file alliance   Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. Free file alliance You can use the books' retail values and modify them by factors such as the mileage and condition of your car to figure its value. Free file alliance The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. Free file alliance If your car is not listed in the books, determine its value from other sources. Free file alliance A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value. Free file alliance Figuring Decrease in FMV — Items Not To Consider You generally should not consider the following items when attempting to establish the decrease in FMV of your property. Free file alliance Cost of protection. Free file alliance   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. Free file alliance The amount you spend on insurance or to board up your house against a storm is not part of your loss. Free file alliance If the property is business property, these expenses are deductible as business expenses. Free file alliance   If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. Free file alliance An example would be the cost of a dike to prevent flooding. Free file alliance Exception. Free file alliance   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments (discussed later under Disaster Area Losses ). Free file alliance Related expenses. Free file alliance   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. Free file alliance However, they may be deductible as business expenses if the damaged or stolen property is business property. Free file alliance Replacement cost. Free file alliance   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss. Free file alliance Example. Free file alliance You bought a new chair 4 years ago for $300. Free file alliance In April, a fire destroyed the chair. Free file alliance You estimate that it would cost $500 to replace it. Free file alliance If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. Free file alliance The chair was not insured. Free file alliance Your loss is $100, the FMV of the chair before the fire. Free file alliance It is not $500, the replacement cost. Free file alliance Sentimental value. Free file alliance   Do not consider sentimental value when determining your loss. Free file alliance If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property. Free file alliance Decline in market value of property in or near casualty area. Free file alliance   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. Free file alliance You have a loss only for actual casualty damage to your property. Free file alliance However, if your home is in a federally declared disaster area, see Disaster Area Losses , later. Free file alliance Costs of photographs and appraisals. Free file alliance   Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. Free file alliance Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful. Free file alliance   Appraisals are used to figure the decrease in FMV because of a casualty or theft. Free file alliance See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals. Free file alliance   The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. Free file alliance They are expenses in determining your tax liability. Free file alliance You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). Free file alliance Adjusted Basis The measure of your investment in the property you own is its basis. Free file alliance For property you buy, your basis is usually its cost to you. Free file alliance For property you acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in another way, as explained in Publication 551. Free file alliance If you inherited the property from someone who died in 2010 and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Free file alliance Adjustments to basis. Free file alliance    While you own the property, various events may take place that change your basis. Free file alliance Some events, such as additions or permanent improvements to the property, increase basis. Free file alliance Others, such as earlier casualty losses and depreciation deductions, decrease basis. Free file alliance When you add the increases to the basis and subtract the decreases from the basis, the result is your adjusted basis. Free file alliance See Publication 551 for more information on figuring the basis of your property. Free file alliance Insurance and Other Reimbursements If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. Free file alliance You do not have a casualty or theft loss to the extent you are reimbursed. Free file alliance If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. Free file alliance You must reduce your loss even if you do not receive payment until a later tax year. Free file alliance See Reimbursement Received After Deducting Loss , later. Free file alliance Failure to file a claim for reimbursement. Free file alliance   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. Free file alliance Otherwise, you cannot deduct this loss as a casualty or theft. Free file alliance The portion of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule. Free file alliance Example. Free file alliance You have a car insurance policy with a $1,000 deductible. Free file alliance Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the $100 and 10% rules, discussed later). Free file alliance This is true, even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible. Free file alliance Types of Reimbursements The most common type of reimbursement is an insurance payment for your stolen or damaged property. Free file alliance Other types of reimbursements are discussed next. Free file alliance Also see the Instructions for Form 4684. Free file alliance Employer's emergency disaster fund. Free file alliance   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. Free file alliance Take into consideration only the amount you used to replace your destroyed or damaged property. Free file alliance Example. Free file alliance Your home was extensively damaged by a tornado. Free file alliance Your loss after reimbursement from your insurance company was $10,000. Free file alliance Your employer set up a disaster relief fund for its employees. Free file alliance Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. Free file alliance You received $4,000 from the fund and spent the entire amount on repairs to your home. Free file alliance In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. Free file alliance Your casualty loss before applying the deduction limits (discussed later) is $6,000. Free file alliance Cash gifts. Free file alliance   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. Free file alliance This applies even if you use the money to pay for repairs to property damaged in the disaster. Free file alliance Example. Free file alliance Your home was damaged by a hurricane. Free file alliance Relatives and neighbors made cash gifts to you that were excludable from your income. Free file alliance You used part of the cash gifts to pay for repairs to your home. Free file alliance There were no limits or restrictions on how you could use the cash gifts. Free file alliance It was an excludable gift, so the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home. Free file alliance Insurance payments for living expenses. Free file alliance   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations. Free file alliance You lose the use of your main home because of a casualty. Free file alliance Government authorities do not allow you access to your main home because of a casualty or threat of one. Free file alliance Inclusion in income. Free file alliance   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. Free file alliance Report this amount on Form 1040, line 21. Free file alliance However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. Free file alliance See Qualified disaster relief payments , later, under Disaster Area Losses. Free file alliance   A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. Free file alliance Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. Free file alliance Generally, these expenses include the amounts you pay for the following. Free file alliance Renting suitable housing. Free file alliance Transportation. Free file alliance Food. Free file alliance Utilities. Free file alliance Miscellaneous services. Free file alliance Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one. Free file alliance Example. Free file alliance As a result of a fire, you vacated your apartment for a month and moved to a motel. Free file alliance You normally pay $525 a month for rent. Free file alliance None was charged for the month the apartment was vacated. Free file alliance Your motel rent for this month was $1,200. Free file alliance You normally pay $200 a month for food. Free file alliance Your food expenses for the month you lived in the motel were $400. Free file alliance You received $1,100 from your insurance company to cover your living expenses. Free file alliance You determine the payment you must include in income as follows. Free file alliance 1. Free file alliance Insurance payment for living expenses $1,100 2. Free file alliance Actual expenses during the month you are unable to use your home because of the fire $1,600   3. Free file alliance Normal living expenses 725   4. Free file alliance Temporary increase in living expenses: Subtract line 3  from line 2 875 5. Free file alliance Amount of payment includible in income: Subtract line 4 from line 1 $ 225 Tax year of inclusion. Free file alliance   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment. Free file alliance Example. Free file alliance Your main home was destroyed by a tornado in August 2011. Free file alliance You regained use of your home in November 2012. Free file alliance The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. Free file alliance You include this amount in income on your 2012 Form 1040. Free file alliance If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040. Free file alliance Disaster relief. Free file alliance   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. Free file alliance Table 2. Free file alliance Deduction Limit Rules for Personal-Use and Employee Property       $100 Rule 10% Rule 2% Rule General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. Free file alliance Apply this rule to personal-use property after you have figured the amount of your loss. Free file alliance You must reduce your total casualty or theft loss by 10% of your adjusted gross income. Free file alliance Apply this rule to personal-use property after you reduce each loss by $100 (the $100 rule). Free file alliance You must reduce your total casualty or theft loss by 2% of your adjusted gross income. Free file alliance Apply this rule to property you used in performing services as an employee after you have figured the amount of your loss and added it to your job expenses and most other miscellaneous itemized deductions. Free file alliance Single Event Apply this rule only once, even if many pieces of property are affected. Free file alliance Apply this rule only once, even if many pieces of property are affected. Free file alliance Apply this rule only once, even if many pieces of property are affected. Free file alliance More Than One Event Apply to the loss from each event. Free file alliance Apply to the total of all your losses from all events. Free file alliance Apply to the total of all your losses from all events. Free file alliance More Than One Person— With Loss From the   Same Event  (other than a married couple  filing jointly) Apply separately to each person. Free file alliance Apply separately to each person. Free file alliance Apply separately to each person. Free file alliance Married Couple—  With Loss From the  Same Event Filing Joint Return Apply as if you were one person. Free file alliance Apply as if you were one person. Free file alliance Apply as if you were one person. Free file alliance Filing Separate Return Apply separately to each spouse. Free file alliance Apply separately to each spouse. Free file alliance Apply separately to each spouse. Free file alliance More Than One Owner (other than a married couple filing jointly) Apply separately to each owner of jointly owned property. Free file alliance Apply separately to each owner of jointly owned property. Free file alliance Apply separately to each owner of jointly owned property. Free file alliance    Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster, are not taxable income to you. Free file alliance For more information, see Qualified disaster relief payments under Disaster Area Losses, later. Free file alliance   Disaster unemployment assistance payments are unemployment benefits that are taxable. Free file alliance   Generally, disaster relief grants received under the Robert T. Free file alliance Stafford Disaster Relief and Emergency Assistance Act are not included in your income. Free file alliance See Federal disaster relief grants , later, under Disaster Area Losses. Free file alliance Loan proceeds. Free file alliance   Do not reduce your casualty loss by loan proceeds you use to rehabilitate or replace property on which you are claiming a casualty loss deduction. Free file alliance If you have a federal loan that is canceled (forgiven), see Federal loan canceled , later, under Disaster Area Losses. Free file alliance Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using the amount of your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. Free file alliance This section explains the adjustment you may have to make. Free file alliance Actual reimbursement less than expected. Free file alliance   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. Free file alliance Example. Free file alliance Your personal car had a FMV of $2,000 when it was destroyed in a collision with another car in 2012. Free file alliance The accident was due to the negligence of the other driver. Free file alliance At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. Free file alliance You did not have a deductible loss in 2012. Free file alliance In January 2013, the court awards you a judgment of $2,000. Free file alliance However, in July it becomes apparent that you will be unable to collect any amount from the other driver. Free file alliance Since this is your only casualty or theft loss, you can deduct the loss in 2013 that is figured by applying the Deduction Limits (discussed later). Free file alliance Actual reimbursement more than expected. Free file alliance   If you later receive more reimbursement than you expected, after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. Free file alliance However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. Free file alliance You do not refigure your tax for the year you claimed the deduction. Free file alliance See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. Free file alliance Example. Free file alliance In 2012, a hurricane destroyed your motorboat. Free file alliance Your loss was $3,000, and you estimated that your insurance would cover $2,500 of it. Free file alliance You did not itemize deductions on your 2012 return, so you could not deduct the loss. Free file alliance When the insurance company reimburses you for the loss, you do not report any of the reimbursement as income. Free file alliance This is true even if it is for the full $3,000 because you did not deduct the loss on your 2012 return. Free file alliance The loss did not reduce your tax. Free file alliance    If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. Free file alliance If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. Free file alliance Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. Free file alliance You may be able to postpone reporting any remaining gain as explained under Postponement of Gain, later. Free file alliance Actual reimbursement same as expected. Free file alliance   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. Free file alliance Example. Free file alliance In December 2013, you had a collision while driving your personal car. Free file alliance Repairs to the car cost $950. Free file alliance You had $100 deductible collision insurance. Free file alliance Your insurance company agreed to reimburse you for the rest of the damage. Free file alliance Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013. Free file alliance Due to the $100 rule, you cannot deduct the $100 you paid as the deductible. Free file alliance When you receive the $850 from the insurance company in 2014, do not report it as income. Free file alliance Deduction Limits After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. Free file alliance The deduction for casualty and theft losses of employee property and personal-use property is limited. Free file alliance A loss on employee property is subject to the 2% rule, discussed next. Free file alliance With certain exceptions, a loss on property you own for your personal use is subject to the $100 and 10% rules, discussed later. Free file alliance The 2%, $100, and 10% rules are also summarized in Table 2 . Free file alliance Losses on business property (other than employee property) and income-producing property are not subject to these rules. Free file alliance However, if your casualty or theft loss involved a home you used for business or rented out, your deductible loss may be limited. Free file alliance See the Instructions for Form 4684, Section B. Free file alliance If the casualty or theft loss involved property used in a passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions. Free file alliance 2% Rule The casualty and theft loss deduction for employee property, when added to your job expenses and most other miscellaneous itemized deductions on Schedule A (Form 1040) or Form 1040NR, Schedule A, must be reduced by 2% of your adjusted gross income. Free file alliance Employee property is property used in performing services as an employee. Free file alliance $100 Rule After you have figured your casualty or theft loss on personal-use property, as discussed earlier, you must reduce that loss by $100. Free file alliance This reduction applies to each total casualty or theft loss. Free file alliance It does not matter how many pieces of property are involved in an event. Free file alliance Only a single $100 reduction applies. Free file alliance Example. Free file alliance You have $750 deductible collision insurance on your car. Free file alliance The car is damaged in a collision. Free file alliance The insurance company pays you for the damage minus the $750 deductible. Free file alliance The amount of the casualty loss is based solely on the deductible. Free file alliance The casualty loss is $650 ($750 − $100) because the first $100 of a casualty loss on personal-use property is not deductible. Free file alliance Single event. Free file alliance   Generally, events closely related in origin cause a single casualty. Free file alliance It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm. Free file alliance A single casualty may also damage two or more pieces of property, such as a hailstorm that damages both your home and your car parked in your driveway. Free file alliance Example 1. Free file alliance A thunderstorm destroyed your pleasure boat. Free file alliance You also lost some boating equipment in the storm. Free file alliance Your loss was $5,000 on the boat and $1,200 on the equipment. Free file alliance Your insurance company reimbursed you $4,500 for the damage to your boat. Free file alliance You had no insurance coverage on the equipment. Free file alliance Your casualty loss is from a single event and the $100 rule applies once. Free file alliance Figure your loss before applying the 10% rule (discussed later) as follows. Free file alliance     Boat Equipment 1. Free file alliance Loss $5,000 $1,200 2. Free file alliance Subtract insurance 4,500 -0- 3. Free file alliance Loss after reimbursement $ 500 $1,200 4. Free file alliance Total loss $1,700 5. Free file alliance Subtract $100 100 6. Free file alliance Loss before 10% rule $1,600 Example 2. Free file alliance Thieves broke into your home in January and stole a ring and a fur coat. Free file alliance You had a loss of $200 on the ring and $700 on the coat. Free file alliance This is a single theft. Free file alliance The $100 rule applies to the total $900 loss. Free file alliance Example 3. Free file alliance In September, hurricane winds blew the roof off your home. Free file alliance Flood waters caused by the hurricane further damaged your home and destroyed your furniture and personal car. Free file alliance This is considered a single casualty. Free file alliance The $100 rule is applied to your total loss from the flood waters and the wind. Free file alliance More than one loss. Free file alliance   If you have more than one casualty or theft loss during your tax year, you must reduce each loss by $100. Free file alliance Example. Free file alliance Your family car was damaged in an accident in January. Free file alliance Your loss after the insurance reimbursement was $75. Free file alliance In February, your car was damaged in another accident. Free file alliance This time your loss after the insurance reimbursement was $90. Free file alliance Apply the $100 rule to each separate casualty loss. Free file alliance Since neither accident resulted in a loss of over $100, you are not entitled to any deduction for these accidents. Free file alliance More than one person. Free file alliance   If two or more individuals (other than a husband and wife filing a joint return) have losses from the same casualty or theft, the $100 rule applies separately to each individual. Free file alliance Example. Free file alliance A fire damaged your house and also damaged the personal property of your house guest. Free file alliance You must reduce your loss by $100. Free file alliance Your house guest must reduce his or her loss by $100. Free file alliance Married taxpayers. Free file alliance   If you and your spouse file a joint return, you are treated as one individual in applying the $100 rule. Free file alliance It does not matter whether you own the property jointly or separately. Free file alliance   If you and your spouse have a casualty or theft loss and you file separate returns, each of you must reduce your loss by $100. Free file alliance This is true even if you own the property jointly. Free file alliance If one spouse owns the property, only that spouse can figure a loss deduction on a separate return. Free file alliance   If the casualty or theft loss is on property you own as tenants by the entirety, each of you can figure your deduction on only one-half of the loss on separate returns. Free file alliance Neither of you can figure your deduction on the entire loss on a separate return. Free file alliance Each of you must reduce the loss by $100. Free file alliance More than one owner. Free file alliance   If two or more individuals (other than a husband and wife filing a joint return) have a loss on property jointly owned, the $100 rule applies separately to each. Free file alliance For example, if two sisters live together in a home they own jointly and they have a casualty loss on the home, the $100 rule applies separately to each sister. Free file alliance 10% Rule You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Free file alliance Apply this rule after you reduce each loss by $100. Free file alliance For more information, see the Form 4684 instructions. Free file alliance If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion. Free file alliance Example. Free file alliance In June, you discovered that your house had been burglarized. Free file alliance Your loss after insurance reimbursement was $2,000. Free file alliance Your adjusted gross income for the year you discovered the theft is $29,500. Free file alliance Figure your theft loss as follows. Free file alliance 1. Free file alliance Loss after insurance $2,000 2. Free file alliance Subtract $100 100 3. Free file alliance Loss after $100 rule $1,900 4. Free file alliance Subtract 10% of $29,500 AGI $2,950 5. Free file alliance Theft loss deduction $-0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950). Free file alliance More than one loss. Free file alliance   If you have more than one casualty or theft loss during your tax year, reduce each loss by any reimbursement and by $100. Free file alliance Then you must reduce the total of all your losses by 10% of your adjusted gross income. Free file alliance Example. Free file alliance In March, you had a car accident that totally destroyed your car. Free file alliance You did not have collision insurance on your car, so you did not receive any insurance reimbursement. Free file alliance Your loss on the car was $1,800. Free file alliance In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items you had stored there. Free file alliance Your loss on the basement items after reimbursement was $2,100. Free file alliance Your adjusted gross income for the year that the accident and fire occurred is $25,000. Free file alliance You figure your casualty loss deduction as follows. Free file alliance     Car Basement 1. Free file alliance Loss $1,800 $2,100 2. Free file alliance Subtract $100 per incident 100 100 3. Free file alliance Loss after $100 rule $1,700 $2,000 4. Free file alliance Total loss $3,700 5. Free file alliance Subtract 10% of $25,000 AGI 2,500 6. Free file alliance Casualty loss deduction $1,200 Married taxpayers. Free file alliance   If you and your spouse file a joint return, you are treated as one individual in applying the 10% rule. Free file alliance It does not matter if you own the property jointly or separately. Free file alliance   If you file separate returns, the 10% rule applies to each return on which a loss is claimed. Free file alliance More than one owner. Free file alliance   If two or more individuals (other than husband and wife filing a joint return) have a loss on property that is owned jointly, the 10% rule applies separately to each. Free file alliance Gains and losses. Free file alliance   If you have casualty or theft gains as well as losses to personal-use property, you must compare your total gains to your total losses. Free file alliance Do this after you have reduced each loss by any reimbursements and by $100 but before you have reduced the losses by 10% of your adjusted gross income. Free file alliance Casualty or theft gains do not include gains you choose to postpone. Free file alliance See Postponement of Gain, later. Free file alliance Losses more than gains. Free file alliance   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. Free file alliance The rest, if any, is your deductible loss from personal-use property. Free file alliance Example. Free file alliance Your theft loss after reducing it by reimbursements and by $100 is $2,700. Free file alliance Your casualty gain is $700. Free file alliance Your loss is more than your gain, so you must reduce your $2,000 net loss ($2,700 − $700) by 10% of your adjusted gross income. Free file alliance Gains more than losses. Free file alliance   If your recognized gains are more than your losses, subtract your losses from your gains. Free file alliance The difference is treated as a capital gain and must be reported on Schedule D (Form 1040). Free file alliance The 10% rule does not apply to your gains. Free file alliance Example. Free file alliance Your theft loss is $600 after reducing it by reimbursements and by $100. Free file alliance Your casualty gain is $1,600. Free file alliance Because your gain is more than your loss, you must report the $1,000 net gain ($1,600 − $600) on Schedule D (Form 1040). Free file alliance More information. Free file alliance   For information on how to figure recognized gains, see Figuring a Gain , later. Free file alliance Figuring the Deduction Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. Free file alliance However, a special rule applies to real property you own for personal use. Free file alliance Real property. Free file alliance   In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the improvements) are considered together. Free file alliance Example 1. Free file alliance In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. Free file alliance (Your land was not damaged. Free file alliance ) This was your only casualty or theft loss for the year. Free file alliance The FMV of the property immediately before the fire was $180,000 ($145,000 for the cottage and $35,000 for the land). Free file alliance The FMV immediately after the fire was $35,000 (value of the land). Free file alliance You collected $130,000 from the insurance company. Free file alliance Your adjusted gross income for the year the fire occurred is $80,000. Free file alliance Your deduction for the casualty loss is $6,700, figured in the following manner. Free file alliance 1. Free file alliance Adjusted basis of the entire property (cost in this example) $144,800 2. Free file alliance FMV of entire property  before fire $180,000 3. Free file alliance FMV of entire property after fire 35,000 4. Free file alliance Decrease in FMV of entire property (line 2 − line 3) $145,000 5. Free file alliance Loss (smaller of line 1 or line 4) $144,800 6. Free file alliance Subtract insurance 130,000 7. Free file alliance Loss after reimbursement $14,800 8. Free file alliance Subtract $100 100 9. Free file alliance Loss after $100 rule $14,700 10. Free file alliance Subtract 10% of $80,000 AGI 8,000 11. Free file alliance Casualty loss deduction $ 6,700 Example 2. Free file alliance You bought your home a few years ago. Free file alliance You paid $150,000 ($10,000 for the land and $140,000 for the house). Free file alliance You also spent an additional $2,000 for landscaping. Free file alliance This year a fire destroyed your home. Free file alliance The fire also damaged the shrubbery and trees in your yard. Free file alliance The fire was your only casualty or theft loss this year. Free file alliance Competent appraisers valued the property as a whole at $175,000 before the fire, but only $50,000 after the fire. Free file alliance Shortly after the fire, the insurance company paid you $95,000 for the loss. Free file alliance Your adjusted gross income for this year is $70,000. Free file alliance You figure your casualty loss deduction as follows. Free file alliance 1. Free file alliance Adjusted basis of the entire property (cost of land, building, and landscaping) $152,000 2. Free file alliance FMV of entire property  before fire $175,000 3. Free file alliance FMV of entire property after fire 50,000 4. Free file alliance Decrease in FMV of entire property (line 2 − line 3) $125,000 5. Free file alliance Loss (smaller of line 1 or line 4) $125,000 6. Free file alliance Subtract insurance 95,000 7. Free file alliance Loss after reimbursement $30,000 8. Free file alliance Subtract $100 100 9. Free file alliance Loss after $100 rule $29,900 10. Free file alliance Subtract 10% of $70,000 AGI 7,000 11. Free file alliance Casualty loss deduction $ 22,900 Personal property. Free file alliance   Personal property is any property that is not real property. Free file alliance If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. Free file alliance Then combine these separate losses to figure the total loss. Free file alliance Reduce the total loss by $100 and 10% of your adjusted gross income to figure the loss deduction. Free file alliance Example 1. Free file alliance In August, a storm destroyed your pleasure boat, which cost $18,500. Free file alliance This was your only casualty or theft loss for the year. Free file alliance Its FMV immediately before the storm was $17,000. Free file alliance You had no insurance, but were able to salvage the motor of the boat and sell it for $200. Free file alliance Your adjusted gross income for the year the casualty occurred is $70,000. Free file alliance Although the motor was sold separately, it is part of the boat and not a separate item of property. Free file alliance You figure your casualty loss deduction as follows. Free file alliance 1. Free file alliance Adjusted basis (cost in this example) $18,500 2. Free file alliance FMV before storm $17,000 3. Free file alliance FMV after storm 200 4. Free file alliance Decrease in FMV  (line 2 − line 3) $16,800 5. Free file alliance Loss (smaller of line 1 or line 4) $16,800 6. Free file alliance Subtract insurance -0- 7. Free file alliance Loss after reimbursement $16,800 8. Free file alliance Subtract $100 100 9. Free file alliance Loss after $100 rule $16,700 10. Free file alliance Subtract 10% of $70,000 AGI 7,000 11. Free file alliance Casualty loss deduction $ 9,700 Example 2. Free file alliance In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. Free file alliance You had bought the car for $30,000. Free file alliance The FMV of the car just before the accident was $17,500. Free file alliance Its FMV just after the accident was $180 (scrap value). Free file alliance Your insurance company reimbursed you $16,000. Free file alliance Your watch was not insured. Free file alliance You had purchased it for $250. Free file alliance Its FMV just before the accident was $500. Free file alliance Your adjusted gross income for the year the accident occurred is $97,000. Free file alliance Your casualty loss deduction is zero, figured as follows. Free file alliance     Car Watch 1. Free file alliance Adjusted basis (cost) $30,000 $250 2. Free file alliance FMV before accident $17,500 $500 3. Free file alliance FMV after accident 180 -0- 4. Free file alliance Decrease in FMV (line 2 − line 3) $17,320 $500 5. Free file alliance Loss (smaller of line 1 or line 4) $17,320 $250 6. Free file alliance Subtract insurance 16,000 -0- 7. Free file alliance Loss after reimbursement $1,320 $250 8. Free file alliance Total loss $1,570 9. Free file alliance Subtract $100 100 10. Free file alliance Loss after $100 rule $1,470 11. Free file alliance Subtract 10% of $97,000 AGI 9,700 12. Free file alliance Casualty loss deduction $ -0- Both real and personal properties. Free file alliance   When a casualty involves both real and personal properties, you must figure the loss separately for each type of property. Free file alliance However, you apply a single $100 reduction to the total loss. Free file alliance Then, you apply the 10% rule to figure the casualty loss deduction. Free file alliance Example. Free file alliance In July, a hurricane damaged your home, which cost you $164,000 including land. Free file alliance The FMV of the property (both building and land) immediately before the storm was $170,000 and its FMV immediately after the storm was $100,000. Free file alliance Your household furnishings were also damaged. Free file alliance You separately figured the loss on each damaged household item and arrived at a total loss of $600. Free file alliance You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. Free file alliance Your adjusted gross income for the year the hurricane occurred is $65,000. Free file alliance You figure your casualty loss deduction from the hurricane in the following manner. Free file alliance 1. Free file alliance Adjusted basis of real property (cost in this example) $164,000 2. Free file alliance FMV of real property before hurricane $170,000 3. Free file alliance FMV of real property after hurricane 100,000 4. Free file alliance Decrease in FMV of real property (line 2 − line 3) $70,000 5. Free file alliance Loss on real property (smaller of line 1 or line 4) $70,000 6. Free file alliance Subtract insurance 50,000 7. Free file alliance Loss on real property after reimbursement $20,000 8. Free file alliance Loss on furnishings $600 9. Free file alliance Subtract insurance -0- 10. Free file alliance Loss on furnishings after reimbursement $600 11. Free file alliance Total loss (line 7 plus line 10) $20,600 12. Free file alliance Subtract $100 100 13. Free file alliance Loss after $100 rule $20,500 14. Free file alliance Subtract 10% of $65,000 AGI 6,500 15. Free file alliance Casualty loss deduction $14,000 Property used partly for business and partly for personal purposes. Free file alliance   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use portion and for the business or income-producing portion. Free file alliance You must figure each loss separately because the losses attributed to these two uses are figured in two different ways. Free file alliance When figuring each loss, allocate the total cost or basis, the FMV before and after the casualty or theft loss, and the insurance or other reimbursement between the business and personal use of the property. Free file alliance The $100 rule and the 10% rule apply only to the casualty or theft loss on the personal-use portion of the property. Free file alliance Example. Free file alliance You own a building that you constructed on leased land. Free file alliance You use half of the building for your business and you live in the other half. Free file alliance The cost of the building was $400,000. Free file alliance You made no further improvements or additions to it. Free file alliance A flood in March damaged the entire building. Free file alliance The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. Free file alliance Your insurance company reimbursed you $40,000 for the flood damage. Free file alliance Depreciation on the business part of the building before the flood totaled $24,000. Free file alliance Your adjusted gross income for the year the flood occurred is $125,000. Free file alliance You have a deductible business casualty loss of $10,000. Free file alliance You do not have a deductible personal casualty loss because of the 10% rule. Free file alliance You figure your loss as follows. Free file alliance     Business   Personal     Part   Part 1. Free file alliance Cost (total $400,000) $200,000   $200,000 2. Free file alliance Subtract depreciation 24,000   -0- 3. Free file alliance Adjusted basis $176,000   $200,000 4. Free file alliance FMV before flood (total $380,000) $190,000   $190,000 5. Free file alliance FMV after flood (total $320,000) 160,000   160,000 6. Free file alliance Decrease in FMV  (line 4 − line 5) $30,000   $30,000 7. Free file alliance Loss (smaller of line 3 or line 6) $30,000   $30,000 8. Free file alliance Subtract insurance 20,000   20,000 9. Free file alliance Loss after reimbursement $10,000   $10,000 10. Free file alliance Subtract $100 on personal-use property -0-   100 11. Free file alliance Loss after $100 rule $10,000   $9,900 12. Free file alliance Subtract 10% of $125,000 AGI on personal-use property -0-   12,500 13. Free file alliance Deductible business loss $10,000     14. Free file alliance Deductible personal loss $-0- Figuring a Gain If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Free file alliance Your gain is figured as follows. Free file alliance The amount you receive (discussed next), minus Your adjusted basis in the property at the time of the casualty or theft. Free file alliance See Adjusted Basis , earlier, for information on adjusted basis. Free file alliance Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. Free file alliance Amount you receive. Free file alliance   The amount you receive includes any money plus the value of any property you receive minus any expenses you have in obtaining reimbursement. Free file alliance It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. Free file alliance Example. Free file alliance A hurricane destroyed your personal residence and the insurance company awarded you $145,000. Free file alliance You received $140,000 in cash. Free file alliance The remaining $5,000 was paid directly to the holder of a mortgage on the property. Free file alliance The amount you received includes the $5,000 reimbursement paid on the mortgage. Free file alliance Main home destroyed. Free file alliance   If you have a gain because your main home was destroyed, you generally can exclude the gain from your income as if you had sold or exchanged your home. Free file alliance You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Free file alliance To exclude a gain, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date it was destroyed. Free file alliance For information on this exclusion, see Publication 523. Free file alliance If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. Free file alliance See Postponement of Gain , later. Free file alliance Reporting a gain. Free file alliance   You generally must report your gain as income in the year you receive the reimbursement. Free file alliance However, you do not have to report your gain if you meet certain requirements and choose to postpone reporting the gain according to the rules explained under Postponement of Gain, next. Free file alliance   For information on how to report a gain, see How To Report Gains and Losses , later. Free file alliance    If you have a casualty or theft gain on personal-use property that you choose to postpone reporting (as explained next) and you also have another casualty or theft loss on personal-use property, do not consider the gain you are postponing when figuring your casualty or theft loss deduction. Free file alliance See 10% Rule under Deduction Limits, earlier. Free file alliance Postponement of Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. Free file alliance Your basis in the new property is generally the same as your adjusted basis in the property it replaces. Free file alliance You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. Free file alliance However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. Free file alliance You also can choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. Free file alliance See Controlling interest in a corporation , later. Free file alliance If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. Free file alliance To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. Free file alliance If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. Free file alliance Example. Free file alliance In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. Free file alliance You made no further improvements or additions to it. Free file alliance When a storm destroyed the cottage this January, the cottage was worth $250,000. Free file alliance You received $146,000 from the insurance company in March. Free file alliance You had a gain of $128,000 ($146,000 − $18,000). Free file alliance You spent $144,000 to rebuild the cottage. Free file alliance Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. Free file alliance Buying replacement property from a related person. Free file alliance   You cannot postpone reporting a gain from a casualty or theft if you buy the replacement property from a related person (discussed later). Free file alliance This rule applies to the following taxpayers. Free file alliance C corporations. Free file alliance Partnerships in which more than 50% of the capital or profits interests is owned by C corporations. Free file alliance All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000. Free file alliance For casualties and thefts described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. Free file alliance If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Free file alliance If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Free file alliance Exception. Free file alliance   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the destroyed or stolen property. Free file alliance Related persons. Free file alliance   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. Free file alliance For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Free file alliance Death of a taxpayer. Free file alliance   If a taxpayer dies after having a gain but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. Free file alliance The executor of the estate or the person succeeding to the funds from the casualty or theft cannot postpone reporting the gain by buying replacement property. Free file alliance Replacement Property You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. Free file alliance Property you acquire as a gift or inheritance does not qualify. Free file alliance You do not have to use the same funds you receive as

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Criminal Enforcement

Tax Fraud Alerts
"If it sounds too good to be true, it probably is!" Seek expert advice before you subscribe to any scheme that offers instant wealth or exemption from your obligation as a United States Citizen to pay taxes. Buying into a tax evasion scheme can be very costly. To arrive at the 'Tax Fraud Alerts' page quickly, use the Keyword 'Fraud' from www.irs.gov

Criminal Investigation (CI) At-a-Glance
Criminal Investigation (CI) serves the American public by investigating potential criminal violations of the Internal Revenue Code and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law.

What Criminal Investigation Does
Some people bend the tax law -- others break it. Criminal Investigation's job is to pursue the lawbreakers.

Criminal Investigation Statistical Data
Enforcement statistics show trends in areas of fraud. This data assists Criminal Investigation in determining where to focus our resources.

IRS Criminal Investigation Press Releases - Calendar Year 2014
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How to Make an Offshore Voluntary Disclosure
Taxpayers wanting to report undisclosed income or assets should come in through the IRS Voluntary Disclosure Program.

Criminal Investigation Special Agent Careers
A Career In Action! As an IRS Criminal Investigation (CI) Special Agent, you will pull together your accounting and law enforcement skills. CI special agents are duly sworn law enforcement officers who investigate complex financial crimes associated with tax evasion, money laundering, narcotics, public corruption, and much more. Are You Ready For The Challenge?

Information for Retired IRS Criminal Investigation Special Agents
Information for retired IRS Criminal Investigation special agents to apply to "Retired Law Special Agent" credentials under the Law Enforcement Officers Safety Act of 2004.

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The Free File Alliance

Free file alliance 26. Free file alliance   Car Expenses and Other Employee Business Expenses Table of Contents What's New Introduction Useful Items - You may want to see: Travel ExpensesTraveling Away From Home Tax Home Temporary Assignment or Job What Travel Expenses Are Deductible? Travel in the United States Travel Outside the United States Conventions Entertainment Expenses50% Limit What Entertainment Expenses Are Deductible? What Entertainment Expenses Are Not Deductible? Gift Expenses Transportation ExpensesArmed Forces reservists. Free file alliance Parking fees. Free file alliance Advertising display on car. Free file alliance Car pools. Free file alliance Hauling tools or instruments. Free file alliance Union members' trips from a union hall. Free file alliance Car Expenses RecordkeepingHow To Prove Expenses How Long To Keep Records and Receipts How To ReportGifts. Free file alliance Statutory employees. Free file alliance Reimbursements Completing Forms 2106 and 2106-EZ Special Rules What's New Standard mileage rate. Free file alliance  For 2013, the standard mileage rate for the cost of operating your car for business use is 56½ cents per mile. Free file alliance Car expenses and use of the standard mileage rate are explained under Transportation Expenses , later. Free file alliance Depreciation limits on cars, trucks, and vans. Free file alliance  For 2013, the first-year limit on the total section 179 deduction, special depreciation allowance, and depreciation deduction for cars remains at $11,160 ($3,160 if you elect not to claim the special depreciation allowance). Free file alliance For trucks and vans the first-year limit remains at $11,360 ($3,360 if you elect not to claim the special depreciation allowance). Free file alliance For more information, see Depreciation limits in Publication 463. Free file alliance Introduction You may be able to deduct the ordinary and necessary business-related expenses you have for: Travel, Entertainment, Gifts, or Transportation. Free file alliance An ordinary expense is one that is common and accepted in your trade or business. Free file alliance A necessary expense is one that is helpful and appropriate for your business. Free file alliance An expense does not have to be required to be considered necessary. Free file alliance This chapter explains the following. Free file alliance What expenses are deductible. Free file alliance How to report your expenses on your return. Free file alliance What records you need to prove your expenses. Free file alliance How to treat any expense reimbursements you may receive. Free file alliance Who does not need to use this chapter. Free file alliance   If you are an employee, you will not need to read this chapter if all of the following are true. Free file alliance You fully accounted to your employer for your work-related expenses. Free file alliance You received full reimbursement for your expenses. Free file alliance Your employer required you to return any excess reimbursement and you did so. Free file alliance There is no amount shown with a code “L” in box 12 of your Form W-2, Wage and Tax Statement. Free file alliance If you meet all of these conditions, there is no need to show the expenses or the reimbursements on your return. Free file alliance See Reimbursements , later, if you would like more information on reimbursements and accounting to your employer. Free file alliance    If you meet these conditions and your employer included reimbursements on your Form W-2 in error, ask your employer for a corrected Form W-2. Free file alliance Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses Form (and Instructions) Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business Schedule C-EZ (Form 1040) Net Profit From Business Schedule F (Form 1040) Profit or Loss From Farming Form 2106 Employee Business Expenses Form 2106-EZ Unreimbursed Employee Business Expenses Travel Expenses If you temporarily travel away from your tax home, you can use this section to determine if you have deductible travel expenses. Free file alliance This section discusses: Traveling away from home, Tax home, Temporary assignment or job, and What travel expenses are deductible. Free file alliance It also discusses the standard meal allowance, rules for travel inside and outside the United States, and deductible convention expenses. Free file alliance Travel expenses defined. Free file alliance   For tax purposes, travel expenses are the ordinary and necessary expenses (defined earlier) of traveling away from home for your business, profession, or job. Free file alliance   You will find examples of deductible travel expenses in Table 26-1 . Free file alliance 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. Free file alliance This rest requirement is not satisfied by merely napping in your car. Free file alliance 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. Free file alliance Example 1. Free file alliance You are a railroad conductor. Free file alliance You leave your home terminal on a regularly scheduled round-trip run between two cities and return home 16 hours later. Free file alliance 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. Free file alliance You are considered to be away from home. Free file alliance Example 2. Free file alliance You are a truck driver. Free file alliance You leave your terminal and return to it later the same day. Free file alliance You get an hour off at your turnaround point to eat. Free file alliance 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. Free file alliance Members of the Armed Forces. Free file alliance   If you are a member of the U. Free file alliance S. Free file alliance Armed Forces on a permanent duty assignment overseas, you are not traveling away from home. Free file alliance You cannot deduct your expenses for meals and lodging. Free file alliance 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. Free file alliance 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. Free file alliance    A naval officer assigned to permanent duty aboard a ship that has regular eating and living facilities has a tax home aboard ship for travel expense purposes. Free file alliance Tax Home To determine whether you are traveling away from home, you must first determine the location of your tax home. Free file alliance Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. Free file alliance It includes the entire city or general area in which your business or work is located. Free file alliance If you have more than one regular place of business, your tax home is your main place of business. Free file alliance See Main place of business or work , later. Free file alliance 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. Free file alliance See No main place of business or work , later. Free file alliance If you do not have a regular or a 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. Free file alliance As an itinerant, you cannot claim a travel expense deduction because you are never considered to be traveling away from home. Free file alliance Main place of business or work. Free file alliance   If you have more than one place of business or work, consider the following when determining which one is your main place of business or work. Free file alliance The total time you ordinarily spend in each place. Free file alliance The level of your business activity in each place. Free file alliance Whether your income from each place is significant or insignificant. Free file alliance Example. Free file alliance You live in Cincinnati where you have a seasonal job for 8 months each year and earn $40,000. Free file alliance You work the other 4 months in Miami, also at a seasonal job, and earn $15,000. Free file alliance Cincinnati is your main place of work because you spend most of your time there and earn most of your income there. Free file alliance No main place of business or work. Free file alliance   You may have a tax home even if you do not have a regular or main place of business or work. Free file alliance Your tax home may be the home where you regularly live. Free file alliance Factors used to determine tax home. Free file alliance   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. Free file alliance 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. Free file alliance You have living expenses at your main home that you duplicate because your business requires you to be away from that home. Free file alliance 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. Free file alliance   If you satisfy all three factors, your tax home is the home where you regularly live. Free file alliance If you satisfy only two factors, you may have a tax home depending on all the facts and circumstances. Free file alliance If you satisfy only one factor, you are an itinerant; your tax home is wherever you work and you cannot deduct travel expenses. Free file alliance Example. Free file alliance You are single and live in Boston in an apartment you rent. Free file alliance You have worked for your employer in Boston for a number of years. Free file alliance Your employer enrolls you in a 12-month executive training program. Free file alliance You do not expect to return to work in Boston after you complete your training. Free file alliance During your training, you do not do any work in Boston. Free file alliance Instead, you receive classroom and on-the-job training throughout the United States. Free file alliance You keep your apartment in Boston and return to it frequently. Free file alliance You use your apartment to conduct your personal business. Free file alliance You also keep up your community contacts in Boston. Free file alliance When you complete your training, you are transferred to Los Angeles. Free file alliance You do not satisfy factor (1) because you did not work in Boston. Free file alliance You satisfy factor (2) because you had duplicate living expenses. Free file alliance 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. Free file alliance Therefore, you have a tax home in Boston. Free file alliance Tax home different from family home. Free file alliance   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. Free file alliance You also cannot deduct the cost of meals and lodging while at your tax home. Free file alliance See Example 1 . Free file alliance   If you are working temporarily in the same city where you and your family live, you may be considered as traveling away from home. Free file alliance See Example 2 . Free file alliance Example 1. Free file alliance You are a truck driver and you and your family live in Tucson. Free file alliance You are employed by a trucking firm that has its terminal in Phoenix. Free file alliance At the end of your long runs, you return to your home terminal in Phoenix and spend one night there before returning home. Free file alliance You cannot deduct any expenses you have for meals and lodging in Phoenix or the cost of traveling from Phoenix to Tucson. Free file alliance This is because Phoenix is your tax home. Free file alliance Example 2. Free file alliance Your family home is in Pittsburgh, where you work 12 weeks a year. Free file alliance The rest of the year you work for the same employer in Baltimore. Free file alliance In Baltimore, you eat in restaurants and sleep in a rooming house. Free file alliance Your salary is the same whether you are in Pittsburgh or Baltimore. Free file alliance Because you spend most of your working time and earn most of your salary in Baltimore, that city is your tax home. Free file alliance You cannot deduct any expenses you have for meals and lodging there. Free file alliance However, when you return to work in Pittsburgh, you are away from your tax home even though you stay at your family home. Free file alliance You can deduct the cost of your round trip between Baltimore and Pittsburgh. Free file alliance You can also deduct your part of your family's living expenses for meals and lodging while you are living and working in Pittsburgh. Free file alliance Temporary Assignment or Job You may regularly work at your tax home and also work at another location. Free file alliance It may not be practical to return to your tax home from this other location at the end of each work day. Free file alliance Temporary assignment vs. Free file alliance indefinite assignment. Free file alliance   If your assignment or job away from your main place of work is temporary, your tax home does not change. Free file alliance You are considered to be away from home for the whole period you are away from your main place of work. Free file alliance You can deduct your travel expenses if they otherwise qualify for deduction. Free file alliance 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. Free file alliance   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. Free file alliance 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. Free file alliance   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. Free file alliance You may be able to deduct the cost of relocating to your new tax home as a moving expense. Free file alliance See Publication 521 for more information. Free file alliance Exception for federal crime investigations or prosecutions. Free file alliance   If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to the 1-year rule. Free file alliance 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. Free file alliance   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 or prosecute, or provide support services for the investigation or prosecution of a federal crime. Free file alliance Determining temporary or indefinite. Free file alliance   You must determine whether your assignment is temporary or indefinite when you start work. Free file alliance 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. Free file alliance An assignment or job that is initially temporary may become indefinite due to changed circumstances. Free file alliance 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. Free file alliance Going home on days off. Free file alliance   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. Free file alliance You cannot deduct the cost of your meals and lodging there. Free file alliance However, you can deduct your travel expenses, including meals and lodging, while traveling between your temporary place of work and your tax home. Free file alliance You can claim these expenses up to the amount it would have cost you to stay at your temporary place of work. Free file alliance   If you keep your hotel room during your visit home, you can deduct the cost of your hotel room. Free file alliance 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. Free file alliance Probationary work period. Free file alliance   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. Free file alliance You cannot deduct any of your expenses for meals and lodging during the probationary period. Free file alliance 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. Free file alliance You can deduct ordinary and necessary expenses you have when you travel away from home on business. Free file alliance The type of expense you can deduct depends on the facts and your circumstances. Free file alliance Table 26-1 summarizes travel expenses you may be able to deduct. Free file alliance You may have other deductible travel expenses that are not covered there, depending on the facts and your circumstances. Free file alliance 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. Free file alliance You can use a log, diary, notebook, or any other written record to keep track of your expenses. Free file alliance The types of expenses you need to record, along with supporting documentation, are described in Table 26-2 , later. Free file alliance Separating costs. Free file alliance   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. Free file alliance You must have a reasonable basis for making this allocation. Free file alliance For example, you must allocate your expenses if a hotel includes one or more meals in its room charge. Free file alliance Travel expenses for another individual. Free file alliance   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. Free file alliance Employee. Free file alliance   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. Free file alliance Business associate. Free file alliance   If a business associate travels with you and meets the conditions in (2) and (3) above, you can deduct the travel expenses you have for that person. Free file alliance A business associate is someone with whom you could reasonably expect to engage or deal in the active conduct of your business. Free file alliance A business associate can be a current or prospective (likely to become) customer, client, supplier, employee, agent, partner, or professional advisor. Free file alliance Bona fide business purpose. Free file alliance   A bona fide business purpose exists if you can prove a real business purpose for the individual's presence. Free file alliance Incidental services, such as typing notes or assisting in entertaining customers, are not enough to make the expenses deductible. Free file alliance Example. Free file alliance Jerry drives to Chicago on business and takes his wife, Linda, with him. Free file alliance Linda is not Jerry's employee. Free file alliance Linda occasionally types notes, performs similar services, and accompanies Jerry to luncheons and dinners. Free file alliance The performance of these services does not establish that her presence on the trip is necessary to the conduct of Jerry's business. Free file alliance Her expenses are not deductible. Free file alliance Jerry pays $199 a day for a double room. Free file alliance A single room costs $149 a day. Free file alliance He can deduct the total cost of driving his car to and from Chicago, but only $149 a day for his hotel room. Free file alliance If he uses public transportation, he can deduct only his fare. Free file alliance Table 26-1. Free file alliance Travel Expenses You Can Deduct This chart summarizes expenses you can deduct when you travel away from home for business purposes. Free file alliance IF you have expenses for. Free file alliance . Free file alliance . Free file alliance THEN you can deduct the cost of. Free file alliance . Free file alliance . Free file alliance transportation travel by airplane, train, bus, or car between your home and your business destination. Free file alliance If you were provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. Free file alliance If you travel by ship, see Luxury Water Travel and Cruise ships (under Conventions) in Publication 463 for additional rules and limits. Free file alliance 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. Free file alliance baggage and shipping sending baggage and sample or display material between your regular and temporary work locations. Free file alliance car operating and maintaining your car when traveling away from home on business. Free file alliance You can deduct actual expenses or the standard mileage rate as well as business-related tolls and parking. Free file alliance If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. Free file alliance 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. Free file alliance Meals include amounts spent for food, beverages, taxes, and related tips. Free file alliance See Meals and Incidental Expenses for additional rules and limits. Free file alliance cleaning dry cleaning and laundry. Free file alliance telephone business calls while on your business trip. Free file alliance This includes business communication by fax machine or other communication devices. Free file alliance tips tips you pay for any expenses in this chart. Free file alliance other other similar ordinary and necessary expenses related to your business travel. Free file alliance 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. Free file alliance Meals and Incidental Expenses You can deduct the cost of meals in either of the following situations. Free file alliance It is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business. Free file alliance The meal is business-related entertainment. Free file alliance Business-related entertainment is discussed under Entertainment Expenses , later. Free file alliance The following discussion deals only with meals (and incidental expenses) that are not business-related entertainment. Free file alliance Lavish or extravagant. Free file alliance   You cannot deduct expenses for meals that are lavish or extravagant. Free file alliance An expense is not considered lavish or extravagant if it is reasonable based on the facts and circumstances. Free file alliance 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. Free file alliance 50% limit on meals. Free file alliance   You can figure your meal expenses using either of the following methods. Free file alliance Actual cost. Free file alliance The standard meal allowance. Free file alliance Both of these methods are explained below. Free file alliance But, regardless of the method you use, you generally can deduct only 50% of the unreimbursed cost of your meals. Free file alliance   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. Free file alliance If you are not reimbursed, the 50% limit applies whether the unreimbursed meal expense is for business travel or business entertainment. Free file alliance The 50% limit is explained later under Entertainment Expenses . Free file alliance Accountable and nonaccountable plans are discussed later under Reimbursements . Free file alliance Actual cost. Free file alliance   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. Free file alliance If you use this method, you must keep records of your actual cost. Free file alliance Standard meal allowance. Free file alliance   Generally, you can use the “standard meal allowance” method as an alternative to the actual cost method. Free file alliance 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. Free file alliance The set amount varies depending on where and when you travel. Free file alliance In this chapter, “standard meal allowance” refers to the federal rate for M&IE, discussed later under Amount of standard meal allowance . Free file alliance If you use the standard meal allowance, you still must keep records to prove the time, place, and business purpose of your travel. Free file alliance See Recordkeeping , later. Free file alliance Incidental expenses. Free file alliance   The term “incidental expenses” means fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Free file alliance 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. Free file alliance Incidental expenses only method. Free file alliance   You can use an optional method (instead of actual cost) for deducting incidental expenses only. Free file alliance The amount of the deduction is $5 a day. Free file alliance You can use this method only if you did not pay or incur any meal expenses. Free file alliance You cannot use this method on any day that you use the standard meal allowance. Free file alliance    Federal employees should refer to the Federal Travel Regulations at  www. Free file alliance gsa. Free file alliance gov. Free file alliance Find “What GSA Offers” and click on “Regulations: FMR, FTR, & FAR” for Federal Travel Regulation (FTR) for changes affecting claims for reimbursement. Free file alliance 50% limit may apply. Free file alliance   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. Free file alliance 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. Free file alliance The 50% limit is explained later under Entertainment Expenses . Free file alliance Accountable and nonaccountable plans are discussed later under Reimbursements . Free file alliance There is no optional standard lodging amount similar to the standard meal allowance. Free file alliance Your allowable lodging expense deduction is your actual cost. Free file alliance Who can use the standard meal allowance. Free file alliance   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. Free file alliance   Use of the standard meal allowance for other travel. Free file alliance    You can use the standard meal allowance to figure your meal expenses when you travel in connection with investment and other income-producing property. Free file alliance You can also use it to figure your meal expenses when you travel for qualifying educational purposes. Free file alliance You cannot use the standard meal allowance to figure the cost of your meals when you travel for medical or charitable purposes. Free file alliance Amount of standard meal allowance. Free file alliance   The standard meal allowance is the federal M&IE rate. Free file alliance For travel in 2013, the daily rate for most small localities in the United States is $46. Free file alliance   Most major cities and many other localities in the United States are designated as high-cost areas, qualifying for higher standard meal allowances. Free file alliance You can find this information (organized by state) on the Internet at www. Free file alliance gsa. Free file alliance gov. Free file alliance Click on “Per Diem Rates,” then select “2013” for the period January 1, 2013 – September 30, 2013, and select “2014” for the period October 1, 2013 – December 31, 2013. Free file alliance However, you can apply the rates in effect before October 1, 2013, for expenses of all travel within the United States for 2013 instead of the updated rates. Free file alliance You must consistently use either the rates for the first 9 months for all of 2013 or the updated rates for the period of October 1, 2013, through December 31, 2013. Free file alliance   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. Free file alliance If you work in the transportation industry, however, see Special rate for transportation workers , later. Free file alliance Standard meal allowance for areas outside the continental United States. Free file alliance    The standard meal allowance rates above do not apply to travel in Alaska, Hawaii, or any other location outside the continental United States. Free file alliance The Department of Defense establishes per diem rates for Alaska, Hawaii, Puerto Rico, American Samoa, Guam, Midway, the Northern Mariana Islands, the U. Free file alliance S. Free file alliance Virgin Islands, Wake Island, and other non-foreign areas outside the continental United States. Free file alliance The Department of State establishes per diem rates for all other foreign areas. Free file alliance    You can access per diem rates for non-foreign areas outside the continental United States at: www. Free file alliance defensetravel. Free file alliance dod. Free file alliance mil/site/perdiemCalc. Free file alliance cfm. Free file alliance You can access all other foreign per diem rates at www. Free file alliance state. Free file alliance gov/travel/. Free file alliance Click on “Travel Per Diem Allowances for Foreign Areas” under “Foreign Per Diem Rates,” to obtain the latest foreign per diem rates. Free file alliance Special rate for transportation workers. Free file alliance   You can use a special standard meal allowance if you work in the transportation industry. Free file alliance 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. Free file alliance If this applies to you, you can claim a standard daily meal allowance of $59 ($65 for travel outside the continental United States). Free file alliance   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. Free file alliance 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. Free file alliance Travel for days you depart and return. Free file alliance   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). Free file alliance You can do so by one of two methods. Free file alliance Method 1: You can claim 3/4 of the standard meal allowance. Free file alliance Method 2: You can prorate using any method that you consistently apply and that is in accordance with reasonable business practice. Free file alliance Example. Free file alliance Jen is employed in New Orleans as a convention planner. Free file alliance In March, her employer sent her on a 3-day trip to Washington, DC, to attend a planning seminar. Free file alliance She left her home in New Orleans at 10 a. Free file alliance m. Free file alliance on Wednesday and arrived in Washington, DC, at 5:30 p. Free file alliance m. Free file alliance After spending two nights there, she flew back to New Orleans on Friday and arrived back home at 8:00 p. Free file alliance m. Free file alliance Jen's employer gave her a flat amount to cover her expenses and included it with her wages. Free file alliance 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. Free file alliance Under Method 2, Jen could also use any method that she applies consistently and that is in accordance with reasonable business practice. Free file alliance 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. Free file alliance Travel in the United States The following discussion applies to travel in the United States. Free file alliance For this purpose, the United States includes only the 50 states and the District of Columbia. Free file alliance 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. Free file alliance See Part of Trip Outside the United States , later. Free file alliance Trip Primarily for Business You can deduct all your travel expenses if your trip was entirely business related. Free file alliance 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 your business-related travel expenses. Free file alliance These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination. Free file alliance Example. Free file alliance You work in Atlanta and take a business trip to New Orleans in May. Free file alliance On your way home, you stop in Mobile to visit your parents. Free file alliance You spend $1,996 for the 9 days you are away from home for travel, meals, lodging, and other travel expenses. Free file alliance If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $1,696. Free file alliance You can deduct $1,696 for your trip, including the cost of round-trip transportation to and from New Orleans. Free file alliance The deduction for your meals is subject to the 50% limit on meals mentioned earlier. Free file alliance 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. Free file alliance However, you can deduct any expenses you have while at your destination that are directly related to your business. Free file alliance 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. Free file alliance 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. Free file alliance Part of Trip Outside the United States If part of your trip is outside the United States, use the rules described later under Travel Outside the United States for that part of the trip. Free file alliance For the part of your trip that is inside the United States, use the rules for travel in the United States. Free file alliance Travel outside the United States does not include travel from one point in the United States to another point in the United States. Free file alliance The following discussion can help you determine whether your trip was entirely within the United States. Free file alliance Public transportation. Free file alliance   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. Free file alliance 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 . Free file alliance Example. Free file alliance You fly from New York to Puerto Rico with a scheduled stop in Miami. Free file alliance You return to New York nonstop. Free file alliance 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. Free file alliance Because there are no scheduled stops between Puerto Rico and New York, all of the return trip is outside the United States. Free file alliance Private car. Free file alliance   Travel by private car in the United States is travel between points in the United States, even when you are on your way to a destination outside the United States. Free file alliance Example. Free file alliance You travel by car from Denver to Mexico City and return. Free file alliance 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. Free file alliance The rules under Travel Outside the United States apply to your trip from the border to Mexico City and back to the border. Free file alliance 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. Free file alliance For this purpose, the United States includes only the 50 states and the District of Columbia. Free file alliance 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. Free file alliance See chapter 1 of Publication 463 for information on luxury water travel. Free file alliance 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. Free file alliance Travel entirely for business. Free file alliance   If you travel outside the United States and you spend the entire time on business activities, you can deduct all of your travel expenses. Free file alliance Travel considered entirely for business. Free file alliance   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. Free file alliance Exception 1 - No substantial control. Free file alliance   Your trip is considered entirely for business if you did not have substantial control over arranging the trip. Free file alliance The fact that you control the timing of your trip does not, by itself, mean that you have substantial control over arranging your trip. Free file alliance   You do not have substantial control over your trip if you: Are an employee who was reimbursed or paid a travel expense allowance, Are not related to your employer, and Are not a managing executive. Free file alliance    “Related to your employer” is defined later in this chapter under Per Diem and Car Allowances . Free file alliance   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. Free file alliance    A self-employed person generally has substantial control over arranging business trips. Free file alliance Exception 2 - Outside United States no more than a week. Free file alliance   Your trip is considered entirely for business if you were outside the United States for a week or less, combining business and nonbusiness activities. Free file alliance One week means 7 consecutive days. Free file alliance 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. Free file alliance Exception 3 - Less than 25% of time on personal activities. Free file alliance   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. Free file alliance For this purpose, count both the day your trip began and the day it ended. Free file alliance Exception 4 - Vacation not a major consideration. Free file alliance   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. Free file alliance Travel Primarily for Business If you travel outside the United States primarily for business but spend some of your time on nonbusiness activities, you generally cannot deduct all of your travel expenses. Free file alliance You can only deduct the business portion of your cost of getting to and from your destination. Free file alliance You must allocate the costs between your business and nonbusiness activities to determine your deductible amount. Free file alliance These travel allocation rules are discussed in chapter 1 of Publication 463. Free file alliance You do not have to allocate your travel expense deduction if you meet one of the four exceptions listed earlier under Travel considered entirely for business. Free file alliance In those cases, you can deduct the total cost of getting to and from your destination. Free file alliance 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. Free file alliance 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. Free file alliance Conventions You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade or business. Free file alliance You cannot deduct the travel expenses for your family. Free file alliance If the convention is for investment, political, social, or other purposes unrelated to your trade or business, you cannot deduct the expenses. Free file alliance Your appointment or election as a delegate does not, in itself, determine whether you can deduct travel expenses. Free file alliance You can deduct your travel expenses only if your attendance is connected to your own trade or business. Free file alliance Convention agenda. Free file alliance   The convention agenda or program generally shows the purpose of the convention. Free file alliance 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. Free file alliance 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. Free file alliance Conventions held outside the North American area. Free file alliance    See chapter 1 of Publication 463 for information on conventions held outside the North American area. Free file alliance Entertainment Expenses You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. Free file alliance You can deduct entertainment expenses only if they are both ordinary and necessary (defined earlier in the Introduction ) and meet one of the following tests. Free file alliance Directly-related test. Free file alliance Associated test. Free file alliance Both of these tests are explained in chapter 2 of Publication 463. Free file alliance The amount you can deduct for entertainment expenses may be limited. Free file alliance Generally, you can deduct only 50% of your unreimbursed entertainment expenses. Free file alliance This limit is discussed next. Free file alliance 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. Free file alliance (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. Free file alliance See Individuals subject to “hours of service” limits , later. Free file alliance ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. Free file alliance Figure 26-A summarizes the general rules explained in this section. Free file alliance The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. Free file alliance Included expenses. Free file alliance   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. Free file alliance However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. Free file alliance Application of 50% limit. Free file alliance   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later in this section. Free file alliance   The 50% limit also applies to certain meal and entertainment expenses that are not business related. Free file alliance It applies to meal and entertainment expenses incurred for the production of income, including rental or royalty income. Free file alliance It also applies to the cost of meals included in deductible educational expenses. Free file alliance When to apply the 50% limit. Free file alliance   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. Free file alliance You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this chapter. Free file alliance Example 1. Free file alliance You spend $200 for a business-related meal. Free file alliance If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. Free file alliance Your deduction cannot be more than $45 (. Free file alliance 50 × $90). Free file alliance Example 2. Free file alliance You purchase two tickets to a concert and give them to a client. Free file alliance You purchased the tickets through a ticket agent. Free file alliance You paid $200 for the two tickets, which had a face value of $80 each ($160 total). Free file alliance Your deduction cannot be more than $80 (. Free file alliance 50 × $160). Free file alliance Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. Free file alliance Figure 26-A can help you determine if the 50% limit applies to you. Free file alliance Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. Free file alliance Employee's reimbursed expenses. Free file alliance   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. Free file alliance Accountable plans are discussed later under Reimbursements . Free file alliance Individuals subject to “hours of service” limits. Free file alliance   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. Free file alliance The percentage is 80%. Free file alliance   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. Free file alliance Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. Free file alliance Interstate truck operators and bus drivers who are under Department of Transportation regulations. Free file alliance Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. Free file alliance Certain merchant mariners who are under Coast Guard regulations. Free file alliance Other exceptions. Free file alliance   There are also exceptions for the self-employed, advertising expenses, selling meals or entertainment, and charitable sports events. Free file alliance These are discussed in Publication 463. Free file alliance Figure 26-A. Free file alliance Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. Free file alliance See Exceptions to the 50% Limit . Free file alliance Please click here for the text description of the image. Free file alliance Entertainment expenses: 50% limit What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. Free file alliance Entertainment. Free file alliance    Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Free file alliance Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; or on hunting, fishing, vacation, and similar trips. Free file alliance A meal as a form of entertainment. Free file alliance   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. Free file alliance A meal expense includes the cost of food, beverages, taxes, and tips for the meal. Free file alliance To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. Free file alliance You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. Free file alliance Separating costs. Free file alliance   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. Free file alliance You must have a reasonable basis for making this allocation. Free file alliance For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. Free file alliance Taking turns paying for meals or entertainment. Free file alliance   If a group of business acquaintances take turns picking up each others' meal or entertainment checks without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. Free file alliance Lavish or extravagant expenses. Free file alliance   You cannot deduct expenses for entertainment that are lavish or extravagant. Free file alliance An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Free file alliance Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Free file alliance Trade association meetings. Free file alliance    You can deduct entertainment expenses that are directly related to, and necessary for, attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. Free file alliance These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. Free file alliance Entertainment tickets. Free file alliance   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. Free file alliance For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. Free file alliance What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. Free file alliance Club dues and membership fees. Free file alliance   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. Free file alliance This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities. Free file alliance   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. Free file alliance You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Free file alliance Entertainment facilities. Free file alliance   Generally, you cannot deduct any expense for the use of an entertainment facility. Free file alliance This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. Free file alliance   An entertainment facility is any property you own, rent, or use for entertainment. Free file alliance Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. Free file alliance Out-of-pocket expenses. Free file alliance   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. Free file alliance These are not expenses for the use of an entertainment facility. Free file alliance However, these expenses are subject to the directly-related and associated tests and to the 50% Limit discussed earlier. Free file alliance Additional information. Free file alliance   For more information on entertainment expenses, including discussions of the directly-related and associated tests, see chapter 2 of Publication 463. Free file alliance Gift Expenses If you give gifts in the course of your trade or business, you can deduct all or part of the cost. Free file alliance This section explains the limits and rules for deducting the costs of gifts. Free file alliance $25 limit. Free file alliance   You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year. Free file alliance A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift. Free file alliance   If you give a gift to a member of a customer's family, the gift is generally considered to be an indirect gift to the customer. Free file alliance This rule does not apply if you have a bona fide, independent business connection with that family member and the gift is not intended for the customer's eventual use or benefit. Free file alliance   If you and your spouse both give gifts, both of you are treated as one taxpayer. Free file alliance It does not matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient. Free file alliance If a partnership gives gifts, the partnership and the partners are treated as one taxpayer. Free file alliance Incidental costs. Free file alliance   Incidental costs, such as engraving on jewelry, or packaging, insuring, and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit. Free file alliance   A cost is incidental only if it does not add substantial value to the gift. Free file alliance For example, the cost of customary gift wrapping is an incidental cost. Free file alliance However, the purchase of an ornamental basket for packaging fruit is not an incidental cost if the value of the basket is substantial compared to the value of the fruit. Free file alliance Exceptions. Free file alliance   The following items are not considered gifts for purposes of the $25 limit. Free file alliance An item that costs $4 or less and: Has your name clearly and permanently imprinted on the gift, and Is one of a number of identical items you widely distribute. Free file alliance Examples include pens, desk sets, and plastic bags and cases. Free file alliance Signs, display racks, or other promotional material to be used on the business premises of the recipient. Free file alliance Gift or entertainment. Free file alliance   Any item that might be considered either a gift or entertainment generally will be considered entertainment. Free file alliance However, if you give a customer packaged food or beverages you intend the customer to use at a later date, treat it as a gift. Free file alliance    If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. Free file alliance You can treat the cost of the tickets as either a gift expense or an entertainment expense, whichever is to your advantage. Free file alliance    If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. Free file alliance You cannot choose, in this case, to treat the cost of the tickets as a gift expense. Free file alliance Transportation Expenses This section discusses expenses you can deduct for business transportation when you are not traveling away from home as defined earlier under Travel Expenses . Free file alliance These expenses include the cost of transportation by air, rail, bus, taxi, etc. Free file alliance , and the cost of driving and maintaining your car. Free file alliance Transportation expenses include the ordinary and necessary costs of all of the following. Free file alliance Getting from one workplace to another in the course of your business or profession when you are traveling within the area of your tax home. Free file alliance (Tax home is defined earlier under Travel Expenses . Free file alliance ) Visiting clients or customers. Free file alliance Going to a business meeting away from your regular workplace. Free file alliance Getting from your home to a temporary workplace when you have one or more regular places of work. Free file alliance These temporary workplaces can be either within the area of your tax home or outside that area. Free file alliance Transportation expenses do not include expenses you have while traveling away from home overnight. Free file alliance Those expenses are travel expenses, discussed earlier. Free file alliance 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 file alliance See Car Expenses , later. Free file alliance Illustration of transportation expenses. Free file alliance    Figure 26-B illustrates the rules for when you can deduct transportation expenses when you have a regular or main job away from your home. Free file alliance You may want to refer to it when deciding whether you can deduct your transportation expenses. Free file alliance Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses. Free file alliance However, there are many exceptions for deducting transportation expenses, like whether your work location is temporary (inside or outside the metropolitan area), traveling for same trade or business, or if you have a home office. Free file alliance Temporary work location. Free file alliance   If you have one or more regular work locations away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location, regardless of distance. Free file alliance   If your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary unless there are facts and circumstances that would indicate otherwise. Free file alliance   If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more than 1 year. Free file alliance   If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes. Free file alliance It will not be treated as temporary after the date you determine it will last more than 1 year. Free file alliance   If the temporary work location is beyond the general area of your regular place of work and you stay overnight, you are traveling away from home. Free file alliance You may have deductible travel expenses as discussed earlier in this chapter. Free file alliance No regular place of work. Free file alliance   If you have no regular place of work but ordinarily work in the metropolitan area where you live, you can deduct daily transportation costs between home and a temporary work site outside that metropolitan area. Free file alliance   Generally, a metropolitan area includes the area within the city limits and the suburbs that are considered part of that metropolitan area. Free file alliance   You cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. Free file alliance These are nondeductible commuting expenses. Free file alliance Two places of work. Free file alliance   If you work at two places in one day, whether or not for the same employer, you can deduct the expense of getting from one workplace to the other. Free file alliance However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the amount it would have cost you to go directly from the first location to the second. Free file alliance   Transportation expenses you have in going between home and a part-time job on a day off from your main job are commuting expenses. Free file alliance You cannot deduct them. Free file alliance Armed Forces reservists. Free file alliance   A meeting of an Armed Forces reserve unit is a second place of business if the meeting is held on a day on which you work at your regular job. Free file alliance You can deduct the expense of getting from one workplace to the other as just discussed under Two places of work , earlier. Free file alliance   You usually cannot deduct the expense if the reserve meeting is held on a day on which you do not work at your regular job. Free file alliance In this case, your transportation generally is a nondeductible commuting expense. Free file alliance However, you can deduct your transportation expenses if the location of the meeting is temporary and you have one or more regular places of work. Free file alliance   If you ordinarily work in a particular metropolitan area but not at any specific location and the reserve meeting is held at a temporary location outside that metropolitan area, you can deduct your transportation expenses. Free file alliance   If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses. Free file alliance These expenses are discussed earlier under Travel Expenses . Free file alliance   If you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you may be able to deduct some of your reserve-related travel costs as an adjustment to income rather than as an itemized deduction. Free file alliance See Armed Forces reservists traveling more than 100 miles from home under Special Rules, later. Free file alliance Commuting expenses. Free file alliance   You cannot deduct the costs of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your main or regular place of work. Free file alliance These costs are personal commuting expenses. Free file alliance You cannot deduct commuting expenses no matter how far your home is from your regular place of work. Free file alliance You cannot deduct commuting expenses even if you work during the commuting trip. Free file alliance Example. Free file alliance You sometimes use your cell phone to make business calls while commuting to and from work. Free file alliance Sometimes business associates ride with you to and from work, and you have a business discussion in the car. Free file alliance These activities do not change the trip from personal to business. Free file alliance You cannot deduct your commuting expenses. Free file alliance Parking fees. Free file alliance   Fees you pay to park your car at your place of business are nondeductible commuting expenses. Free file alliance You can, however, deduct business-related parking fees when visiting a customer or client. Free file alliance Advertising display on car. Free file alliance   Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. Free file alliance If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses. Free file alliance Car pools. Free file alliance   You cannot deduct the cost of using your car in a nonprofit car pool. Free file alliance Do not include payments you receive from the passengers in your income. Free file alliance These payments are considered reimbursements of your expenses. Free file alliance However, if you operate a car pool for a profit, you must include payments from passengers in your income. Free file alliance You can then deduct your car expenses (using the rules in this chapter). Free file alliance Hauling tools or instruments. Free file alliance   Hauling tools or instruments in your car while commuting to and from work does not make your car expenses deductible. Free file alliance However, you can deduct any additional costs you have for hauling tools or instruments (such as for renting a trailer you tow with your car). Free file alliance Union members' trips from a union hall. Free file alliance   If you get your work assignments at a union hall and then go to your place of work, the costs of getting from the union hall to your place of work are nondeductible commuting expenses. Free file alliance Although you need the union to get your work assignments, you are employed where you work, not where the union hall is located. Free file alliance Office in the home. Free file alliance   If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. Free file alliance (See chapter 28 for information on determining if your home office qualifies as a principal place of business. Free file alliance ) Figure 26-B. Free file alliance When Are Transportation Expenses Deductible? Most employees and self-employed persons can use this chart. Free file alliance (Do not use this chart if your home is your principal place of business. Free file alliance See Office in the home . Free file alliance ) Please click here for the text description of the image. Free file alliance Figure 26-B. Free file alliance Local Transportation Examples of deductible transportation. Free file alliance   The following examples show when you can deduct transportation expenses based on the location of your work and your home. Free file alliance Example 1. Free file alliance You regularly work in an office in the city where you live. Free file alliance Your employer sends you to a 1-week training session at a different office in the same city. Free file alliance You travel directly from your home to the training location and return each day. Free file alliance You can deduct the cost of your daily round-trip transportation between your home and the training location. Free file alliance Example 2. Free file alliance Your principal place of business is in your home. Free file alliance You can deduct the cost of round-trip transportation between your qualifying home office and your client's or customer's place of business. Free file alliance Example 3. Free file alliance You have no regular office, and you do not have an office in your home. Free file alliance In this case, the location of your first business contact inside the metropolitan area is considered your office. Free file alliance Transportation expenses between your home and this first contact are nondeductible commuting expenses. Free file alliance Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. Free file alliance While you cannot deduct the costs of these first and last trips, you can deduct the costs of going from one client or customer to another. Free file alliance With no regular or home office, the costs of travel between two or more business contacts in a metropolitan area are deductible while the costs of travel between the home to (and from) business contacts are not deductible. Free file alliance Car Expenses If you use your car for business purposes, you may be able to deduct car expenses. Free file alliance You generally can use one of the two following methods to figure your deductible expenses. Free file alliance Standard mileage rate. Free file alliance Actual car expenses. Free file alliance If you use actual car expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments you can deduct. Free file alliance See Leasing a car under Actual Car Expenses, later. Free file alliance In this chapter, “car” includes a van, pickup, or panel truck. Free file alliance Rural mail carriers. Free file alliance   If you are a rural mail carrier, you may be able to treat the amount of qualified reimbursement you received as the amount of your allowable expense. Free file alliance Because the qualified reimbursement is treated as paid under an accountable plan, your employer should not include the amount of reimbursement in your income. Free file alliance   If your vehicle expenses are more than the amount of your reimbursement, you can deduct the unreimbursed expenses as an itemized deduction on Schedule A (Form 1040). Free file alliance You must complete Form 2106 and attach it to your Form 1040. Free file alliance   A “qualified reimbursement” is the reimbursement you receive that meets both of the following conditions. Free file alliance It is given as an equipment maintenance allowance (EMA) to employees of the U. Free file alliance S. Free file alliance Postal Service. Free file alliance It is at the rate contained in the 1991 collective bargaining agreement. Free file alliance Any later agreement cannot increase the qualified reimbursement amount by more than the rate of inflation. Free file alliance See your employer for information on your reimbursement. Free file alliance If you are a rural mail carrier and received a qualified reimbursement, you cannot use the standard mileage rate. Free file alliance Standard Mileage Rate You may be able to use the standard mileage rate to figure the deductible costs of operating your car for business purposes. Free file alliance For 2013, the standard mileage rate for business use is 56½ cents per mile. Free file alliance If you use the standard mileage rate for a year, you cannot deduct your actual car expenses for that year, but see Parking fees and tolls, later. Free file alliance You generally can use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. Free file alliance See Reimbursements under How To Report, later. Free file alliance Choosing the standard mileage rate. Free file alliance   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Free file alliance Then in later years, you can choose to use either the standard mileage rate or actual expenses. Free file alliance   If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. Free file alliance   You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. Free file alliance You cannot revoke the choice. Free file alliance However, in a later year, you can switch from the standard mileage rate to the actual expenses method. Free file alliance If you change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation. Free file alliance Example. Free file alliance Larry is an employee who occasionally uses his own car for business purposes. Free file alliance He purchased the car in 2011, but he did not claim any unreimburse