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Free taxes Publication 524 - 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 524, such as legislation enacted after it was published, go to www. Free taxes irs. Free taxes gov/pub524. 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 If you qualify, you may be able to reduce the tax you owe by taking the credit for the elderly or the disabled. Free taxes This publication explains: Who qualifies for the credit for the elderly or the disabled, and How to figure the credit. Free taxes You may be able to take the credit for the elderly or the disabled if: You are age 65 or older at the end of 2013, or You retired on permanent and total disability and have taxable disability income. 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 554 Tax Guide for Seniors Form (and instruction) Schedule R (Form 1040A or 1040) Credit for the Elderly or the Disabled See How To Get Tax Help , near the end of this publication, for information about getting this publication and form. Free taxes Prev  Up  Next   Home   More Online Publications
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Free taxes 1. Free taxes   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. Free taxes At-risk limits. Free taxes Passive activities. Free taxes Net operating loss. Free taxes When Can I Deduct an Expense?Economic performance. Free taxes Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Free taxes  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Free taxes See Optional safe harbor method under Business use of your home , later. Free taxes Introduction This chapter covers the general rules for deducting business expenses. Free taxes Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. Free taxes Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. Free taxes What Can I Deduct? 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 industry. Free taxes A necessary expense is one that is helpful and appropriate for your trade or business. Free taxes An expense does not have to be indispensable to be considered necessary. Free taxes Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. Free taxes In some cases you may not be allowed to deduct the expense at all. Free taxes Therefore, it is important to distinguish usual business expenses from expenses that include the following. Free taxes The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Free taxes Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Free taxes Some of your business expenses may be included in figuring cost of goods sold. Free taxes Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Free taxes If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Free taxes The following are types of expenses that go into figuring cost of goods sold. Free taxes The cost of products or raw materials, including freight. Free taxes Storage. Free taxes Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Free taxes Factory overhead. Free taxes Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Free taxes Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Free taxes This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. Free taxes For more information, see the following sources. Free taxes Cost of goods sold—chapter 6 of Publication 334. Free taxes Inventories—Publication 538. Free taxes Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Free taxes Capital Expenses You must capitalize, rather than deduct, some costs. Free taxes These costs are a part of your investment in your business and are called “capital expenses. Free taxes ” Capital expenses are considered assets in your business. Free taxes In general, you capitalize three types of costs. Free taxes Business start-up costs (See Tip below). Free taxes Business assets. Free taxes Improvements. Free taxes You can elect to deduct or amortize certain business start-up costs. Free taxes See chapters 7 and 8. Free taxes Cost recovery. Free taxes   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. Free taxes These recovery methods allow you to deduct part of your cost each year. Free taxes In this way, you are able to recover your capital expense. Free taxes See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Free taxes A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Free taxes A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Free taxes See Publication 946 for details. Free taxes Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Free taxes These costs may include expenses for advertising, travel, or wages for training employees. Free taxes If you go into business. Free taxes   When you go into business, treat all costs you had to get your business started as capital expenses. Free taxes   Usually you recover costs for a particular asset through depreciation. Free taxes Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Free taxes However, you can choose to amortize certain costs for setting up your business. Free taxes See Starting a Business in chapter 8 for more information on business start-up costs. Free taxes If your attempt to go into business is unsuccessful. Free taxes   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. Free taxes The costs you had before making a decision to acquire or begin a specific business. Free taxes These costs are personal and nondeductible. Free taxes They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Free taxes The costs you had in your attempt to acquire or begin a specific business. Free taxes These costs are capital expenses and you can deduct them as a capital loss. Free taxes   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. Free taxes   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Free taxes You cannot take a deduction for these costs. Free taxes You will recover the costs of these assets when you dispose of them. Free taxes Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Free taxes You must fully capitalize the cost of these assets, including freight and installation charges. Free taxes Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Free taxes See Regulations section 1. Free taxes 263A-2 for information on these rules. Free taxes Improvements Improvements are generally major expenditures. Free taxes Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Free taxes The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. Free taxes Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Free taxes Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Free taxes However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Free taxes Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Free taxes Restoration plan. Free taxes   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Free taxes This applies even if some of the work would by itself be classified as repairs. Free taxes Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Free taxes Motor vehicles. Free taxes   You usually capitalize the cost of a motor vehicle you use in your business. Free taxes You can recover its cost through annual deductions for depreciation. Free taxes   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Free taxes See Publication 463. Free taxes   Generally, repairs you make to your business vehicle are currently deductible. Free taxes However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Free taxes Roads and driveways. Free taxes    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. Free taxes The cost of maintaining a private road on your business property is a deductible expense. Free taxes Tools. Free taxes   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. Free taxes Machinery parts. Free taxes   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. Free taxes Heating equipment. Free taxes   The cost of changing from one heating system to another is a capital expense. Free taxes Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Free taxes However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. Free taxes You can deduct the business part. Free taxes For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. Free taxes The remaining 30% is personal interest and generally is not deductible. Free taxes See chapter 4 for information on deducting interest and the allocation rules. Free taxes Business use of your home. Free taxes   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Free taxes These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Free taxes   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Free taxes The business part of your home must be used exclusively and regularly for your trade or business. Free taxes The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. Free taxes   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. Free taxes   Your home office qualifies as your principal place of business if you meet the following requirements. Free taxes You use the office exclusively and regularly for administrative or management activities of your trade or business. Free taxes You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Free taxes   If you have more than one business location, 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, consider the time spent at each location. Free taxes Optional safe harbor method. Free taxes   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. Free taxes This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Free taxes   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. Free taxes Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). Free taxes You are not required to allocate these deductions between personal and business use, as is required under the regular method. Free taxes If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Free taxes   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Free taxes All of the requirements discussed earlier under Business use of your home still apply. Free taxes   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Free taxes    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. Free taxes Business use of your car. Free taxes   If you use your car exclusively in your business, you can deduct car expenses. Free taxes If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Free taxes Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Free taxes   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Free taxes Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Free taxes Beginning in 2013, the standard mileage rate is 56. Free taxes 5 cents per mile. Free taxes   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. Free taxes   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Free taxes How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. Free taxes Recovery of amount deducted (tax benefit rule). Free taxes   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. Free taxes If you have a recovery in a later year, include the recovered amount in income in that year. Free taxes However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. Free taxes   For more information on recoveries and the tax benefit rule, see Publication 525. Free taxes Payments in kind. Free taxes   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Free taxes You cannot deduct the cost of your own labor. Free taxes   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Free taxes If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Free taxes Limits on losses. Free taxes   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Free taxes There may be limits on how much of the loss you can deduct. Free taxes Not-for-profit limits. Free taxes   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. Free taxes See Not-for-Profit Activities , later. Free taxes At-risk limits. Free taxes   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. Free taxes You are at risk in any activity for the following. Free taxes The money and adjusted basis of property you contribute to the activity. Free taxes Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Free taxes For more information, see Publication 925. Free taxes Passive activities. Free taxes   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. Free taxes In general, deductions for losses from passive activities only offset income from passive activities. Free taxes You cannot use any excess deductions to offset other income. Free taxes In addition, passive activity credits can only offset the tax on net passive income. Free taxes Any excess loss or credits are carried over to later years. Free taxes Suspended passive losses are fully deductible in the year you completely dispose of the activity. Free taxes For more information, see Publication 925. Free taxes Net operating loss. Free taxes   If your deductions are more than your income for the year, you may have a “net operating loss. Free taxes ” You can use a net operating loss to lower your taxes in other years. Free taxes See Publication 536 for more information. Free taxes   See Publication 542 for information about net operating losses of corporations. Free taxes When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Free taxes An accounting method is a set of rules used to determine when and how income and expenses are reported. Free taxes The two basic methods are the cash method and the accrual method. Free taxes Whichever method you choose must clearly reflect income. Free taxes For more information on accounting methods, see Publication 538. Free taxes Cash method. Free taxes   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Free taxes Accrual method. Free taxes   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Free taxes The all-events test has been met. Free taxes The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Free taxes Economic performance has occurred. Free taxes Economic performance. Free taxes   You generally cannot deduct or capitalize a business expense until economic performance occurs. Free taxes If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. Free taxes If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Free taxes Example. Free taxes Your tax year is the calendar year. Free taxes In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Free taxes You paid it by check in January 2014. Free taxes If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. Free taxes If you use the cash method of accounting, deduct the expense on your 2014 return. Free taxes Prepayment. Free taxes   You generally cannot deduct expenses in advance, even if you pay them in advance. Free taxes This rule applies to both the cash and accrual methods. Free taxes It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Free taxes Example. Free taxes In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Free taxes Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Free taxes You can deduct the rent for 2014 and 2015 on your tax returns for those years. Free taxes Contested liability. Free taxes   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Free taxes Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Free taxes S. Free taxes possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. Free taxes However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Free taxes See Regulations section 1. Free taxes 461-2. Free taxes Related person. Free taxes   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Free taxes However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. Free taxes Your deduction is allowed when the amount is includible in income by the related cash method payee. Free taxes See Related Persons in Publication 538. Free taxes Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Free taxes Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Free taxes The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Free taxes It does not apply to corporations other than S corporations. Free taxes In determining whether you are carrying on an activity for profit, several factors are taken into account. Free taxes No one factor alone is decisive. Free taxes Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. Free taxes Presumption of profit. Free taxes   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Free taxes Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Free taxes The activity must be substantially the same for each year within this period. Free taxes You have a profit when the gross income from an activity exceeds the deductions. Free taxes   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. Free taxes   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. Free taxes This means the limits discussed here will not apply. Free taxes You can take all your business deductions from the activity, even for the years that you have a loss. Free taxes You can rely on this presumption unless the IRS later shows it to be invalid. Free taxes Using the presumption later. Free taxes   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. Free taxes   You can elect to do this by filing Form 5213. Free taxes Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. Free taxes   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Free taxes Accordingly, it will not restrict your deductions. Free taxes Rather, you will gain time to earn a profit in the required number of years. Free taxes If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Free taxes If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. Free taxes   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. Free taxes The period is extended only for deductions of the activity and any related deductions that might be affected. Free taxes    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Free taxes Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. Free taxes Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. Free taxes You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Free taxes However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. Free taxes Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. Free taxes If you are an individual, these deductions may be taken only if you itemize. Free taxes These deductions may be taken on Schedule A (Form 1040). Free taxes Category 1. Free taxes   Deductions you can take for personal as well as for business activities are allowed in full. Free taxes For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Free taxes Deduct them on the appropriate lines of Schedule A (Form 1040). Free taxes For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). Free taxes The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. Free taxes The reduction amount returns to $100 for tax years beginning after December 31, 2009. Free taxes See Publication 547 for more information on casualty losses. Free taxes For the limits that apply to home mortgage interest, see Publication 936. Free taxes Category 2. Free taxes   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. Free taxes Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Free taxes Category 3. Free taxes   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. Free taxes Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Free taxes Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Free taxes    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Free taxes They are subject to the 2%-of-adjusted-gross-income limit. Free taxes See Publication 529 for information on this limit. Free taxes Example. Free taxes Adriana is engaged in a not-for-profit activity. Free taxes The income and expenses of the activity are as follows. Free taxes Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. Free taxes The limit is reached in category (3), as follows. Free taxes Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. Free taxes $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. Free taxes Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Free taxes The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Free taxes Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. Free taxes Partnerships and S corporations. Free taxes   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Free taxes They are reflected in the individual shareholder's or partner's distributive shares. Free taxes More than one activity. Free taxes   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Free taxes The following are the most significant facts and circumstances in making this determination. Free taxes The degree of organizational and economic interrelationship of various undertakings. Free taxes The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Free taxes The similarity of the undertakings. Free taxes   The IRS will generally accept your characterization if it is supported by facts and circumstances. Free taxes    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Free taxes Figure separately whether each is a not-for-profit activity. Free taxes Then figure the limit on deductions and losses separately for each activity that is not for profit. Free taxes Prev  Up  Next   Home   More Online Publications