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Free taxes Publication 936 - Introductory Material Table of Contents Reminders IntroductionOrdering forms and publications. Free taxes Tax questions. Free taxes Useful Items - You may want to see: Reminders Future developments. Free taxes  For the latest information about developments related to Publication 936, Home Mortgage Interest Deduction, such as legislation enacted after it was published, go to www. Free taxes irs. Free taxes gov/pub936. Free taxes Photographs of missing children. Free taxes  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free taxes Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free taxes You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free taxes Introduction This publication discusses the rules for deducting home mortgage interest. Free taxes Part I contains general information on home mortgage interest, including points and mortgage insurance premiums. Free taxes It also explains how to report deductible interest on your tax return. Free taxes Part II explains how your deduction for home mortgage interest may be limited. Free taxes It contains Table 1, which is a worksheet you can use to figure the limit on your deduction. Free taxes Comments and suggestions. Free taxes   We welcome your comments about this publication and your suggestions for future editions. Free taxes   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Free taxes NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free taxes Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free taxes   You can send your comments from www. Free taxes irs. Free taxes gov/formspubs. Free taxes Click on “More Information” and then on “Comment on Tax Forms and Publications. Free taxes ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free taxes Ordering forms and publications. Free taxes   Visit www. Free taxes irs. Free taxes gov/formspubs to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free taxes Internal Revenue Service 1201 N. Free taxes Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free taxes   If you have a tax question, check the information available on IRS. Free taxes gov or call 1-800-829-1040. Free taxes We cannot answer tax questions sent to either of the above addresses. Free taxes Useful Items - You may want to see: Publication 523 Selling Your Home 527 Residential Rental Property 530 Tax Information for Homeowners 535 Business Expenses   See How To Get Tax Help near the end of this publication, for information about getting these publications. Free taxes Prev  Up  Next   Home   More Online Publications
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Free taxes 8. Free taxes   Business Expenses Table of Contents Introduction Useful Items - You may want to see: Bad DebtsAccrual method. Free taxes Cash method. Free taxes Car and Truck ExpensesOffice in the home. Free taxes Methods for Deducting Car and Truck Expenses Reimbursing Your Employees for Expenses Depreciation Employees' PayFringe benefits. Free taxes InsuranceHow to figure the deduction. Free taxes Interest Legal and Professional FeesTax preparation fees. Free taxes Pension Plans Rent Expense Taxes Travel, Meals, and EntertainmentTransportation. Free taxes Taxi, commuter bus, and limousine. Free taxes Baggage and shipping. Free taxes Car or truck. Free taxes Meals and lodging. Free taxes Cleaning. Free taxes Telephone. Free taxes Tips. Free taxes More information. Free taxes Business Use of Your HomeExceptions to exclusive use. Free taxes Other Expenses You Can Deduct Expenses You Cannot Deduct Introduction You can deduct the costs of operating your business. Free taxes These costs are known as business expenses. Free taxes These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year. Free taxes To be deductible, a business expense must be both ordinary and necessary. Free taxes An ordinary expense is one that is common and accepted in your field of business. Free taxes A necessary expense is one that is helpful and appropriate for your business. Free taxes An expense does not have to be indispensable to be considered necessary. Free taxes For more information about the general rules for deducting business expenses, see chapter 1 in Publication 535, Business Expenses. Free taxes If you have an expense that is partly for business and partly personal, separate the personal part from the business part. Free taxes The personal part is not deductible. Free taxes Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 946 How To Depreciate Property See chapter 12 for information about getting publications and forms. Free taxes Bad Debts If someone owes you money you cannot collect, you have a bad debt. Free taxes There are two kinds of bad debts, business bad debts and nonbusiness bad debts. Free taxes A business bad debt is generally one that comes from operating your trade or business. Free taxes You may be able to deduct business bad debts as an expense on your business tax return. Free taxes Business bad debt. Free taxes   A business bad debt is a loss from the worthlessness of a debt that was either of the following. Free taxes Created or acquired in your business. Free taxes Closely related to your business when it became partly or totally worthless. Free taxes A debt is closely related to your business if your primary motive for incurring the debt is a business reason. Free taxes   Business bad debts are mainly the result of credit sales to customers. Free taxes They can also be the result of loans to suppliers, clients, employees, or distributors. Free taxes Goods and services customers have not paid for are shown in your books as either accounts receivable or notes receivable. Free taxes If you are unable to collect any part of these accounts or notes receivable, the uncollectible part is a business bad debt. Free taxes    You can take a bad debt deduction for these accounts and notes receivable only if the amount you were owed was included in your gross income either for the year the deduction is claimed or for a prior year. Free taxes Accrual method. Free taxes   If you use an accrual method of accounting, you normally report income as you earn it. Free taxes You can take a bad debt deduction for an uncollectible receivable if you have included the uncollectible amount in income. Free taxes Cash method. Free taxes   If you use the cash method of accounting, you normally report income when you receive payment. Free taxes You cannot take a bad debt deduction for amounts owed to you that you have not received and cannot collect if you never included those amounts in income. Free taxes More information. Free taxes   For more information about business bad debts, see chapter 10 in Publication 535. Free taxes Nonbusiness bad debts. Free taxes   All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses on Form 8949 and Schedule D (Form 1040). Free taxes For more information on nonbusiness bad debts, see Publication 550, Investment Income and Expenses. Free taxes Car and Truck Expenses If you use your car or truck in your business, you may be able to deduct the costs of operating and maintaining your vehicle. Free taxes You also may be able to deduct other costs of local transportation and traveling away from home overnight on business. Free taxes You may qualify for a tax credit for qualified plug-in electric vehicles, qualified plug-in electric drive motor vehicles, and alternative motor vehicles you place in service during the year. Free taxes See Form 8936 and Form 8910 for more information. Free taxes Local transportation expenses. Free taxes   Local transportation expenses include the ordinary and necessary costs of all the following. Free taxes Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Free taxes Tax home is defined later. Free taxes Visiting clients or customers. Free taxes Going to a business meeting away from your regular workplace. Free taxes Getting from your home to a temporary workplace when you have one or more regular places of work. Free taxes These temporary workplaces can be either within the area of your tax home or outside that area. Free taxes Local business transportation does not include expenses you have while traveling away from home overnight. Free taxes Those expenses are deductible as travel expenses and are discussed later under Travel, Meals, and Entertainment. Free taxes 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 taxes   Generally, your tax home is your regular place of business, regardless of where you maintain your family home. Free taxes It includes the entire city or general area in which your business or work is located. Free taxes Example. Free taxes You operate a printing business out of rented office space. Free taxes You use your van to deliver completed jobs to your customers. Free taxes You can deduct the cost of round-trip transportation between your customers and your print shop. Free taxes    You cannot deduct the costs of driving your car or truck between your home and your main or regular workplace. Free taxes These costs are personal commuting expenses. Free taxes Office in the home. Free taxes   Your workplace can be your home if you have an office in your home that qualifies as your principal place of business. Free taxes For more information, see Business Use of Your Home, later. Free taxes Example. Free taxes You are a graphics designer. Free taxes You operate your business out of your home. Free taxes Your home qualifies as your principal place of business. Free taxes You occasionally have to drive to your clients to deliver your completed work. Free taxes You can deduct the cost of the round-trip transportation between your home and your clients. Free taxes Methods for Deducting Car and Truck Expenses For local transportation or overnight travel by car or truck, you generally can use one of the following methods to figure your expenses. Free taxes Standard mileage rate. Free taxes Actual expenses. Free taxes Standard mileage rate. Free taxes   You may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. Free taxes For 2013, the standard mileage rate is 56. Free taxes 5 cents per mile. Free taxes    If you choose to use the standard mileage rate for a year, you cannot deduct your actual expenses for that year except for business-related parking fees and tolls. Free taxes Choosing the standard mileage rate. Free taxes   If you want to use the standard mileage rate for a car or truck you own, you must choose to use it in the first year the car is available for use in your business. Free taxes In later years, you can choose to use either the standard mileage rate or actual expenses. Free taxes   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). Free taxes Standard mileage rate not allowed. Free taxes   You cannot use the standard mileage rate if you: Operate five or more cars at the same time, Claimed a depreciation deduction using any method other than straight line, for example, ACRS or MACRS, Claimed a section 179 deduction on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. Free taxes Parking fees and tolls. Free taxes   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. Free taxes (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. Free taxes ) Actual expenses. Free taxes   If you do not choose to use the standard mileage rate, you may be able to deduct your actual car or truck expenses. Free taxes    If you qualify to use both methods, figure your deduction both ways to see which gives you a larger deduction. Free taxes   Actual car expenses include the costs of the following items. Free taxes Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. Free taxes You can divide your expenses based on the miles driven for each purpose. Free taxes Example. Free taxes You are the sole proprietor of a flower shop. Free taxes You drove your van 20,000 miles during the year. Free taxes 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use (including commuting miles). Free taxes You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Free taxes More information. Free taxes   For more information about the rules for claiming car and truck expenses, see Publication 463. Free taxes Reimbursing Your Employees for Expenses You generally can deduct the amount you reimburse your employees for car and truck expenses. Free taxes The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. Free taxes For details, see chapter 11 in Publication 535. Free taxes That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. Free taxes Depreciation If property you acquire to use in your business is expected to last more than 1 year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. Free taxes You must spread the cost over more than 1 tax year and deduct part of it each year on Schedule C. Free taxes This method of deducting the cost of business property is called depreciation. Free taxes The discussion here is brief. Free taxes You will find more information about depreciation in Publication 946. Free taxes What property can be depreciated?   You can depreciate property if it meets all the following requirements. Free taxes It must be property you own. Free taxes It must be used in business or held to produce income. Free taxes You never can depreciate inventory (explained in chapter 2) because it is not held for use in your business. Free taxes It must have a useful life that extends substantially beyond the year it is placed in service. Free taxes It must have a determinable useful life, which means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Free taxes You never can depreciate the cost of land because land does not wear out, become obsolete, or get used up. Free taxes It must not be excepted property. Free taxes This includes property placed in service and disposed of in the same year. Free taxes Repairs. Free taxes    You cannot depreciate repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life. Free taxes You can deduct these amounts on line 21 of Schedule C or line 2 of Schedule C-EZ. Free taxes Depreciation method. Free taxes   The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). Free taxes MACRS is discussed in detail in Publication 946. Free taxes Section 179 deduction. Free taxes   You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Free taxes This deduction is known as the “section 179 deduction. Free taxes ” The maximum amount you can elect to deduct during 2013 is generally $500,000 (higher limits apply to certain property). Free taxes See IRC 179(e). Free taxes   This limit is generally reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Free taxes The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2013 is $3,160 ($11,160 if you take the special depreciation allowance for qualified passenger automobiles placed in service in 2013). Free taxes Special rules apply to trucks and vans. Free taxes For more information, see Publication 946. Free taxes It explains what property qualifies for the deduction, what limits apply to the deduction, and when and how to recapture the deduction. Free taxes    Your section 179 election for the cost of any sport utility vehicle (SUV) and certain other vehicles is limited to $25,000. Free taxes For more information, see the Instructions for Form 4562 or Publication 946. Free taxes Listed property. Free taxes   You must follow special rules and recordkeeping requirements when depreciating listed property. Free taxes Listed property is any of the following. Free taxes Most passenger automobiles. Free taxes Most other property used for transportation. Free taxes Any property of a type generally used for entertainment, recreation, or amusement. Free taxes Certain computers and related peripheral equipment. Free taxes   For more information about listed property, see Publication 946. Free taxes Form 4562. Free taxes   Use Form 4562, Depreciation and Amortization, if you are claiming any of the following. Free taxes Depreciation on property placed in service during the current tax year. Free taxes A section 179 deduction. Free taxes Depreciation on any listed property (regardless of when it was placed in service). Free taxes    If you have to use Form 4562, you must file Schedule C. Free taxes You cannot use Schedule C-EZ. Free taxes   Employees' Pay You can generally deduct on Schedule C the pay you give your employees for the services they perform for your business. Free taxes The pay may be in cash, property, or services. Free taxes To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. Free taxes In addition, the pay must meet both the following tests. Free taxes The pay must be reasonable. Free taxes The pay must be for services performed. Free taxes Chapter 2 in Publication 535 explains and defines these requirements. Free taxes You cannot deduct your own salary or any personal withdrawals you make from your business. Free taxes As a sole proprietor, you are not an employee of the business. Free taxes If you had employees during the year, you must use Schedule C. Free taxes You cannot use Schedule C-EZ. Free taxes Kinds of pay. Free taxes   Some of the ways you may provide pay to your employees are listed below. Free taxes For an explanation of each of these items, see chapter 2 in Publication 535. Free taxes Awards. Free taxes Bonuses. Free taxes Education expenses. Free taxes Fringe benefits (discussed later). Free taxes Loans or advances you do not expect the employee to repay if they are for personal services actually performed. Free taxes Property you transfer to an employee as payment for services. Free taxes Reimbursements for employee business expenses. Free taxes Sick pay. Free taxes Vacation pay. Free taxes Fringe benefits. Free taxes   A fringe benefit is a form of pay for the performance of services. Free taxes The following are examples of fringe benefits. Free taxes Benefits under qualified employee benefit programs. Free taxes Meals and lodging. Free taxes The use of a car. Free taxes Flights on airplanes. Free taxes Discounts on property or services. Free taxes Memberships in country clubs or other social clubs. Free taxes Tickets to entertainment or sporting events. Free taxes   Employee benefit programs include the following. Free taxes Accident and health plans. Free taxes Adoption assistance. Free taxes Cafeteria plans. Free taxes Dependent care assistance. Free taxes Educational assistance. Free taxes Group-term life insurance coverage. Free taxes Welfare benefit funds. Free taxes   You can generally deduct the cost of fringe benefits you provide on your Schedule C in whatever category the cost falls. Free taxes For example, if you allow an employee to use a car or other property you lease, deduct the cost of the lease as a rent or lease expense. Free taxes If you own the property, include your deduction for its cost or other basis as a section 179 deduction or a depreciation deduction. Free taxes    You may be able to exclude all or part of the fringe benefits you provide from your employees' wages. Free taxes For more information about fringe benefits and the exclusion of benefits, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Free taxes Insurance You can generally deduct premiums you pay for the following kinds of insurance related to your business. Free taxes Fire, theft, flood, or similar insurance. Free taxes Credit insurance that covers losses from business bad debts. Free taxes Group hospitalization and medical insurance for employees, including long-term care insurance. Free taxes Liability insurance. Free taxes Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients. Free taxes Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault. Free taxes Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law. Free taxes Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness. Free taxes Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. Free taxes If you operate a vehicle partly for personal use, deduct only the part of the insurance premium that applies to the business use of the vehicle. Free taxes If you use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums. Free taxes Life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract. Free taxes Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause. Free taxes Nondeductible premiums. Free taxes   You cannot deduct premiums on the following kinds of insurance. Free taxes Self-insurance reserve funds. Free taxes You cannot deduct amounts credited to a reserve set up for self-insurance. Free taxes This applies even if you cannot get business insurance coverage for certain business risks. Free taxes However, your actual losses may be deductible. Free taxes For more information, see Publication 547, Casualties, Disasters, and Thefts. Free taxes Loss of earnings. Free taxes You cannot deduct premiums for a policy that pays for your lost earnings due to sickness or disability. Free taxes However, see item (8) in the previous list. Free taxes Certain life insurance and annuities. Free taxes For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. Free taxes You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. Free taxes A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business. Free taxes For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. Free taxes The disallowance applies without regard to whom the policy covers. Free taxes Insurance to secure a loan. Free taxes If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. Free taxes Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. Free taxes In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Free taxes Self-employed health insurance deduction. Free taxes   You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for you and your family. Free taxes How to figure the deduction. Free taxes   Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. Free taxes However, if any of the following apply, you must use the worksheet in chapter 6 of Publication 535. Free taxes You have more than one source of income subject to self-employment tax. Free taxes You file Form 2555 or Form 2555-EZ (relating to foreign earned income). Free taxes You are using amounts paid for qualified long-term care insurance to figure the deduction. Free taxes Prepayment. Free taxes   You cannot deduct expenses in advance, even if you pay them in advance. Free taxes This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Free taxes Example. Free taxes In 2013, you signed a 3-year insurance contract. Free taxes Even though you paid the premiums for 2013, 2014, and 2015 when you signed the contract, you can only deduct the premium for 2013 on your 2013 tax return. Free taxes You can deduct in 2014 and 2015 the premium allocable to those years. Free taxes More information. Free taxes   For more information about deducting insurance, see chapter 6 in Publication 535. Free taxes Interest You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your business. Free taxes Interest relates to your business if you use the proceeds of the loan for a business expense. Free taxes It does not matter what type of property secures the loan. Free taxes You can deduct interest on a debt only if you meet all of the following requirements. Free taxes You are legally liable for that debt. Free taxes Both you and the lender intend that the debt be repaid. Free taxes You and the lender have a true debtor-creditor relationship. Free taxes You cannot deduct on Schedule C or C-EZ the interest you paid on personal loans. Free taxes If a loan is part business and part personal, you must divide the interest between the personal part and the business part. Free taxes Example. Free taxes In 2013, you paid $600 interest on a car loan. Free taxes During 2013, you used the car 60% for business and 40% for personal purposes. Free taxes You are claiming actual expenses on the car. Free taxes You can only deduct $360 (60% × $600) for 2013 on Schedule C or C-EZ. Free taxes The remaining interest of $240 is a nondeductible personal expense. Free taxes More information. Free taxes   For more information about deducting interest, see chapter 4 in Publication 535. Free taxes That chapter explains the following items. Free taxes Interest you can deduct. Free taxes Interest you cannot deduct. Free taxes How to allocate interest between personal and business use. Free taxes When to deduct interest. Free taxes The rules for a below-market interest rate loan. Free taxes (This is generally a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Free taxes ) Legal and Professional Fees Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on Schedule C or C-EZ. Free taxes However, you usually cannot deduct legal fees you pay to acquire business assets. Free taxes Add them to the basis of the property. Free taxes If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business. Free taxes The personal part of legal fees for producing or collecting taxable income, doing or keeping your job, or for tax advice may be deductible on Schedule A (Form 1040) if you itemize deductions. Free taxes For more information, see Publication 529, Miscellaneous Deductions. Free taxes Tax preparation fees. Free taxes   You can deduct on Schedule C or C-EZ the cost of preparing that part of your tax return relating to your business as a sole proprietor or statutory employee. Free taxes You can deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Free taxes   You can also deduct on Schedule C or C-EZ the amount you pay or incur in resolving asserted tax deficiencies for your business as a sole proprietor or statutory employee. Free taxes Pension Plans You can set up and maintain the following small business retirement plans for yourself and your employees. Free taxes SEP (Simplified Employee Pension) plans. Free taxes SIMPLE (Savings Incentive Match Plan for Employees) plans. Free taxes Qualified plans (including Keogh or H. Free taxes R. Free taxes 10 plans). Free taxes SEP, SIMPLE, and qualified plans offer you and your employees a tax favored way to save for retirement. Free taxes You can deduct contributions you make to the plan for your employees on line 19 of Schedule C. Free taxes If you are a sole proprietor, you can deduct contributions you make to the plan for yourself on line 28 of Form 1040. Free taxes You can also deduct trustees' fees if contributions to the plan do not cover them. Free taxes Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. Free taxes You may also be able to claim a tax credit of 50% of the first $1,000 of qualified startup costs if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. Free taxes Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. Free taxes These amounts (and earnings on them) are generally tax free until your employees receive distributions from the plan. Free taxes For more information on retirement plans for small business, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Free taxes Publication 590, Individual Retirement Arrangements (IRAs), discusses other tax favored ways to save for retirement. Free taxes Rent Expense Rent is any amount you pay for the use of property you do not own. Free taxes In general, you can deduct rent as a business expense only if the rent is for property you use in your business. Free taxes If you have or will receive equity in or title to the property, you cannot deduct the rent. Free taxes Unreasonable rent. Free taxes   You cannot take a rental deduction for unreasonable rents. Free taxes Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Free taxes Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Free taxes Rent is not unreasonable just because it is figured as a percentage of gross receipts. Free taxes   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Free taxes For a list of the other related persons, see section 267 of the Internal Revenue Code. Free taxes Rent on your home. Free taxes   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. Free taxes You must meet the requirements for business use of your home. Free taxes For more information, see Business Use of Your Home , later. Free taxes Rent paid in advance. Free taxes   Generally, rent paid in your business is deductible in the year paid or accrued. Free taxes If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. Free taxes You can deduct the rest of your payment only over the period to which it applies. Free taxes More information. Free taxes   For more information about rent, see chapter 3 in Publication 535. Free taxes Taxes You can deduct on Schedule C or C-EZ various federal, state, local, and foreign taxes directly attributable to your business. Free taxes Income taxes. Free taxes   You can deduct on Schedule C or C-EZ a state tax on gross income (as distinguished from net income) directly attributable to your business. Free taxes You can deduct other state and local income taxes on Schedule A (Form 1040) if you itemize your deductions. Free taxes Do not deduct federal income tax. Free taxes Employment taxes. Free taxes   You can deduct the social security, Medicare, and federal unemployment (FUTA) taxes you paid out of your own funds as an employer. Free taxes Employment taxes are discussed briefly in chapter 1. Free taxes You can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund. Free taxes Deduct these payments as taxes. Free taxes Self-employment tax. Free taxes   You can deduct one-half of your self-employment tax on line 27 of Form 1040. Free taxes Self-employment tax is discussed in chapters 1 and 10. Free taxes Personal property tax. Free taxes   You can deduct on Schedule C or C-EZ any tax imposed by a state or local government on personal property used in your business. Free taxes   You can also deduct registration fees for the right to use property within a state or local area. Free taxes Example. Free taxes May and Julius Winter drove their car 7,000 business miles out of a total of 10,000 miles. Free taxes They had to pay $25 for their annual state license tags and $20 for their city registration sticker. Free taxes They also paid $235 in city personal property tax on the car, for a total of $280. Free taxes They are claiming their actual car expenses. Free taxes Because they used the car 70% for business, they can deduct 70% of the $280, or $196, as a business expense. Free taxes Real estate taxes. Free taxes   You can deduct on Schedule C or C-EZ the real estate taxes you pay on your business property. Free taxes Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. Free taxes The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. Free taxes   For more information about real estate taxes, see chapter 5 in Publication 535. Free taxes That chapter explains special rules for deducting the following items. Free taxes Taxes for local benefits, such as those for sidewalks, streets, water mains, and sewer lines. Free taxes Real estate taxes when you buy or sell property during the year. Free taxes Real estate taxes if you use an accrual method of accounting and choose to accrue real estate tax related to a definite period ratably over that period. Free taxes Sales tax. Free taxes   Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. Free taxes If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. Free taxes If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. Free taxes If the property is depreciable, add the sales tax to the basis for depreciation. Free taxes For information on the basis of property, see Publication 551, Basis of Assets. Free taxes    Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Free taxes Do not include these taxes in gross receipts or sales. Free taxes Excise taxes. Free taxes   You can deduct on Schedule C or C-EZ all excise taxes that are ordinary and necessary expenses of carrying on your business. Free taxes Excise taxes are discussed briefly in chapter 1. Free taxes Fuel taxes. Free taxes   Taxes on gasoline, diesel fuel, and other motor fuels you use in your business are usually included as part of the cost of the fuel. Free taxes Do not deduct these taxes as a separate item. Free taxes   You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. Free taxes For more information, see Publication 510, Excise Taxes. Free taxes Travel, Meals, and Entertainment This section briefly explains the kinds of travel and entertainment expenses you can deduct on Schedule C or C-EZ. Free taxes Table 8-1. Free taxes When Are Entertainment Expenses Deductible? (Note. Free taxes The following is a summary of the rules for deducting entertainment expenses. Free taxes For more details about these rules, see Publication 463. Free taxes ) General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Free taxes Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Free taxes An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Free taxes A necessary expense is one that is helpful and appropriate, although not necessarily required, for your business. Free taxes Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. Free taxes   Associated test Entertainment is associated with your trade or business, and Entertainment directly precedes or follows a substantial business discussion. Free taxes Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Free taxes You cannot deduct expenses that are lavish or extravagant under the circumstances. Free taxes You generally can deduct only 50% of your unreimbursed entertainment expenses. Free taxes Travel expenses. Free taxes   These are the ordinary and necessary expenses of traveling away from home for your business. Free taxes You are traveling away from home if both the following conditions are met. Free taxes Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work. Free taxes You need to get sleep or rest to meet the demands of your work while away from home. Free taxes Generally, your tax home is your regular place of business, regardless of where you maintain your family home. Free taxes It includes the entire city or general area in which your business is located. Free taxes See Publication 463 for more information. Free taxes   The following is a brief discussion of the expenses you can deduct. Free taxes Transportation. Free taxes   You can deduct the cost of travel by airplane, train, bus, or car between your home and your business destination. Free taxes Taxi, commuter bus, and limousine. Free taxes   You can deduct fares for these and other types of transportation between the airport or station and your hotel, or between the hotel and your work location away from home. Free taxes Baggage and shipping. Free taxes   You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations. Free taxes Car or truck. Free taxes   You can deduct the costs of operating and maintaining your vehicle when traveling away from home on business. Free taxes You can deduct actual expenses or the standard mileage rate (discussed earlier under Car and Truck Expenses), as well as business-related tolls and parking. Free taxes If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. Free taxes Meals and lodging. Free taxes   You can deduct the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Free taxes In most cases, you can deduct only 50% of your meal expenses. Free taxes Cleaning. Free taxes   You can deduct the costs of dry cleaning and laundry while on your business trip. Free taxes Telephone. Free taxes   You can deduct the cost of business calls while on your business trip, including business communication by fax machine or other communication devices. Free taxes Tips. Free taxes   You can deduct the tips you pay for any expense in this list. Free taxes More information. Free taxes   For more information about travel expenses, see Publication 463. Free taxes Entertainment expenses. Free taxes   You may be able to deduct business-related entertainment expenses for entertaining a client, customer, or employee. Free taxes In most cases, you can deduct only 50% of these expenses. Free taxes   The following are examples of entertainment expenses. Free taxes Entertaining guests at nightclubs, athletic clubs, theaters, or sporting events. Free taxes Providing meals, a hotel suite, or a car to business customers or their families. Free taxes To be deductible, the expenses must meet the rules listed in Table 8-1. Free taxes For details about these rules, see Publication 463. Free taxes Reimbursing your employees for expenses. Free taxes   You generally can deduct the amount you reimburse your employees for travel and entertainment expenses. Free taxes The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. Free taxes For details, see chapter 11 in Publication 535. Free taxes That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. Free taxes Business Use of Your Home To deduct expenses related to the part of your home used for business, you must meet specific requirements. Free taxes Even then, your deduction may be limited. Free taxes To qualify to claim expenses for business use of your home, you must meet the following tests. Free taxes Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use , later), Regular, For your business, and The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your business, or A separate structure (not attached to your home) you use in connection with your business. Free taxes Exclusive use. Free taxes   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Free taxes The area used for business can be a room or other separately identifiable space. Free taxes The space does not need to be marked off by a permanent partition. Free taxes   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Free taxes Example. Free taxes You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Free taxes Your family also uses the den for recreation. Free taxes The den is not used exclusively in your profession, so you cannot claim a business deduction for its use. Free taxes Exceptions to exclusive use. Free taxes   You do not have to meet the exclusive use test if you use part of your home in either of the following ways. Free taxes For the storage of inventory or product samples. Free taxes As a daycare facility. Free taxes For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Free taxes Regular use. Free taxes   To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. Free taxes You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose. Free taxes Principal place of business. Free taxes   You can have more than one business location, including your home, for a single trade or business. Free taxes To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. Free taxes To determine your principal place of business, you must consider all the facts and circumstances. Free taxes   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. Free taxes You use it exclusively and regularly for administrative or management activities of your business. Free taxes You have no other fixed location where you conduct substantial administrative or management activities of your business. Free taxes   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. Free taxes The relative importance of the activities performed at each location. Free taxes If the relative importance factor does not determine your principal place of business, you can also consider the time spent at each location. Free taxes   If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Free taxes However, for other ways to qualify to deduct home office expenses, see Publication 587. Free taxes Deduction limit. Free taxes   If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. Free taxes If your gross income from the business use is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. Free taxes   Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), allocable to the business is limited to the gross income from the business use of your home minus the sum of the following. Free taxes The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). Free taxes The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. Free taxes Do not include in (2) above your deduction for one-half of your self-employment tax. Free taxes   Use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. Free taxes New simplified method. Free taxes    The IRS now provides a simplified method to determine your expenses for business use of your home. Free taxes The simplified method is an alternative to calculating and substantiating actual expenses. Free taxes In most cases, you will figure your deduction by multiplying $5 by the area of your home used for a qualified business use. Free taxes The area you use to figure your deduction is limited to 300 square feet. Free taxes For more information, see the Instructions for Schedule C. Free taxes More information. Free taxes   For more information on deducting expenses for the business use of your home, see Publication 587. Free taxes Other Expenses You Can Deduct You may also be able to deduct the following expenses. Free taxes See Publication 535 to find out whether you can deduct them. Free taxes Advertising. Free taxes Bank fees. Free taxes Donations to business organizations. Free taxes Education expenses. Free taxes Energy efficient commercial buildings deduction expenses. Free taxes Impairment-related expenses. Free taxes Interview expense allowances. Free taxes Licenses and regulatory fees. Free taxes Moving machinery. Free taxes Outplacement services. Free taxes Penalties and fines you pay for late performance or nonperformance of a contract. Free taxes Repairs that keep your property in a normal efficient operating condition. Free taxes Repayments of income. Free taxes Subscriptions to trade or professional publications. Free taxes Supplies and materials. Free taxes Utilities. Free taxes Expenses You Cannot Deduct You usually cannot deduct the following as business expenses. Free taxes For more information, see Publication 535. Free taxes Bribes and kickbacks. Free taxes Charitable contributions. Free taxes Demolition expenses or losses. Free taxes Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs. Free taxes Lobbying expenses. Free taxes Penalties and fines you pay to a governmental agency or instrumentality because you broke the law. Free taxes Personal, living, and family expenses. Free taxes Political contributions. Free taxes Repairs that add to the value of your property or significantly increase its life. Free taxes Prev  Up  Next   Home   More Online Publications