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H&r Tax Cut

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H&r Tax Cut

H&r tax cut 6. H&r tax cut   How To Report Table of Contents Where To ReportGifts. H&r tax cut Statutory employees. H&r tax cut Vehicle Provided by Your Employer ReimbursementsAccountable Plans Nonaccountable Plans Rules for Independent Contractors and Clients How To Use Per Diem Rate TablesThe Two Substantiation Methods Transition Rules Completing Forms 2106 and 2106-EZInformation on use of cars. H&r tax cut Standard mileage rate. H&r tax cut Actual expenses. H&r tax cut Car rentals. H&r tax cut Hours of service limits. H&r tax cut Allocating your reimbursement. H&r tax cut 1. H&r tax cut Limit on meals and entertainment. H&r tax cut 2. H&r tax cut Limit on miscellaneous itemized deductions. H&r tax cut 3. H&r tax cut Limit on total itemized deductions. H&r tax cut Special Rules This chapter explains where and how to report the expenses discussed in this publication. H&r tax cut It discusses reimbursements and how to treat them under accountable and nonaccountable plans. H&r tax cut It also explains rules for independent contractors and clients, fee-basis officials, certain performing artists, Armed Forces reservists, and certain disabled employees. H&r tax cut The chapter ends with illustrations of how to report travel, entertainment, gift, and car expenses on Forms 2106 and 2106-EZ. H&r tax cut Where To Report This section provides general information on where to report the expenses discussed in this publication. H&r tax cut Self-employed. H&r tax cut   You must report your income and expenses on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) if you are a sole proprietor, or on Schedule F (Form 1040) if you are a farmer. H&r tax cut You do not use Form 2106 or 2106-EZ. H&r tax cut    If you claim car or truck expenses, you must provide certain information on the use of your vehicle. H&r tax cut You provide this information on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Form 4562. H&r tax cut   If you file Schedule C (Form 1040): Report your travel expenses, except meals, on line 24a, Report your deductible meals (actual cost or standard meal allowance) and entertainment on line 24b, Report your gift expenses and transportation expenses, other than car expenses, on line 27a, and Report your car expenses on line 9. H&r tax cut Complete Part IV of the form unless you have to file Form 4562 for depreciation or amortization. H&r tax cut   If you file Schedule C-EZ (Form 1040), report the total of all business expenses on line 2. H&r tax cut You can only include 50% of your meals and entertainment in that total. H&r tax cut If you include car expenses, you must also complete Part III of the form. H&r tax cut    If you file Schedule F (Form 1040): Report your car expenses on line 10. H&r tax cut Attach Form 4562 and provide information on the use of your car in Part V of Form 4562. H&r tax cut Report all other business expenses discussed in this publication on line 32. H&r tax cut You can only include 50% of your meals and entertainment on that line. H&r tax cut See your form instructions for more information on how to complete your tax return. H&r tax cut Both self-employed and an employee. H&r tax cut   If you are both self-employed and an employee, you must keep separate records for each business activity. H&r tax cut Report your business expenses for self-employment on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040), as discussed earlier. H&r tax cut Report your business expenses for your work as an employee on Form 2106 or 2106-EZ, as discussed next. H&r tax cut Employees. H&r tax cut    If you are an employee, you generally must complete Form 2106 to deduct your travel, transportation, and entertainment expenses. H&r tax cut However, you can use the shorter Form 2106-EZ instead of Form 2106 if you meet all of the following conditions. H&r tax cut You are an employee deducting expenses attributable to your job. H&r tax cut You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements). H&r tax cut If you claim car expenses, you use the standard mileage rate. H&r tax cut   For more information on how to report your expenses on Forms 2106 and 2106-EZ, see Completing Forms 2106 and 2106-EZ , later. H&r tax cut Gifts. H&r tax cut   If you did not receive any reimbursements (or the reimbursements were all included in box 1 of your Form W-2), the only business expense you are claiming is for gifts, and the Special Rules discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. H&r tax cut Instead, claim the amount of your deductible gifts directly on line 21 of Schedule A (Form 1040). H&r tax cut Statutory employees. H&r tax cut    If you received a Form W-2 and the “Statutory employee” box in box 13 was checked, report your income and expenses related to that income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040). H&r tax cut Do not complete Form 2106 or 2106-EZ. H&r tax cut   Statutory employees include full-time life insurance salespersons, certain agent or commission drivers, traveling salespersons, and certain homeworkers. H&r tax cut If you are entitled to a reimbursement from your employer but you do not claim it, you cannot claim a deduction for the expenses to which that unclaimed reimbursement applies. H&r tax cut Reimbursement for personal expenses. H&r tax cut    If your employer reimburses you for nondeductible personal expenses, such as for vacation trips, your employer must report the reimbursement as wage income in box 1 of your Form W-2. H&r tax cut You cannot deduct personal expenses. H&r tax cut Income-producing property. H&r tax cut   If you have travel or transportation expenses related to income-producing property, report your deductible expenses on the form appropriate for that activity. H&r tax cut   For example, if you have rental real estate income and expenses, report your expenses on Schedule E (Form 1040), Supplemental Income and Loss. H&r tax cut See Publication 527, Residential Rental Property, for more information on the rental of real estate. H&r tax cut If you have deductible investment-related transportation expenses, report them on Schedule A (Form 1040), line 23. H&r tax cut Vehicle Provided by Your Employer If your employer provides you with a car, you may be able to deduct the actual expenses of operating that car for business purposes. H&r tax cut The amount you can deduct depends on the amount that your employer included in your income and the business and personal miles you drove during the year. H&r tax cut You cannot use the standard mileage rate. H&r tax cut Value reported on Form W-2. H&r tax cut   Your employer can figure and report either the actual value of your personal use of the car or the value of the car as if you used it only for personal purposes (100% income inclusion). H&r tax cut Your employer must separately state the amount if 100% of the annual lease value was included in your income. H&r tax cut If you are unsure of the amount included on your Form W-2, ask your employer. H&r tax cut Full value included in your income. H&r tax cut   You can deduct the value of the business use of an employer-provided car if your employer reported 100% of the value of the car in your income. H&r tax cut On your 2013 Form W-2, the amount of the value will be included in box 1, Wages, tips, other compensation, and box 14. H&r tax cut    To claim your expenses, complete Form 2106, Part II, Sections A and C. H&r tax cut Enter your actual expenses on line 23 of Section C and include the entire value of the employer-provided car on line 25. H&r tax cut Complete the rest of the form. H&r tax cut Less than full value included in your income. H&r tax cut   If less than the full annual lease value of the car was included on your Form W-2, this means that your Form W-2 only includes the value of your personal use of the car. H&r tax cut Do not enter this value on your Form 2106 because it is not deductible. H&r tax cut   If you paid any actual costs (that your employer did not provide or reimburse you for) to operate the car, you can deduct the business portion of those costs. H&r tax cut Examples of costs that you may have are gas, oil, and repairs. H&r tax cut Complete Form 2106, Part II, Sections A and C. H&r tax cut Enter your actual costs on line 23 of Section C and leave line 25 blank. H&r tax cut Complete the rest of the form. H&r tax cut Reimbursements This section explains what to do when you receive an advance or are reimbursed for any of the employee business expenses discussed in this publication. H&r tax cut If you received an advance, allowance, or reimbursement for your expenses, how you report this amount and your expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. H&r tax cut This section explains the two types of plans, how per diem and car allowances simplify proving the amount of your expenses, and the tax treatment of your reimbursements and expenses. H&r tax cut It also covers rules for independent contractors. H&r tax cut No reimbursement. H&r tax cut   You are not reimbursed or given an allowance for your expenses if you are paid a salary or commission with the understanding that you will pay your own expenses. H&r tax cut In this situation, you have no reimbursement or allowance arrangement, and you do not have to read this section on reimbursements. H&r tax cut Instead, see Completing Forms 2106 and 2106-EZ , later, for information on completing your tax return. H&r tax cut Reimbursement, allowance, or advance. H&r tax cut   A reimbursement or other expense allowance arrangement is a system or plan that an employer uses to pay, substantiate, and recover the expenses, advances, reimbursements, and amounts charged to the employer for employee business expenses. H&r tax cut Arrangements include per diem and car allowances. H&r tax cut    A per diem allowance is a fixed amount of daily reimbursement your employer gives you for your lodging, meals, and incidental expenses when you are away from home on business. H&r tax cut (The term “ incidental expenses ” is defined in chapter 1 under Standard Meal Allowance. H&r tax cut ) A car allowance is an amount your employer gives you for the business use of your car. H&r tax cut   Your employer should tell you what method of reimbursement is used and what records you must provide. H&r tax cut Employers. H&r tax cut   If you are an employer and you reimburse employee business expenses, how you treat this reimbursement on your employee's Form W-2 depends in part on whether you have an accountable plan. H&r tax cut Reimbursements treated as paid under an accountable plan, as explained next, are not reported as pay. H&r tax cut Reimbursements treated as paid under nonaccountable plans , as explained later, are reported as pay. H&r tax cut See Publication 15 (Circular E), Employer's Tax Guide, for information on employee pay. H&r tax cut Accountable Plans To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules: Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. H&r tax cut You must adequately account to your employer for these expenses within a reasonable period of time. H&r tax cut You must return any excess reimbursement or allowance within a reasonable period of time. H&r tax cut “ Adequate accounting ” and “ returning excess reimbursements ” are discussed later. H&r tax cut An excess reimbursement or allowance is any amount you are paid that is more than the business-related expenses that you adequately accounted for to your employer. H&r tax cut Reasonable period of time. H&r tax cut   The definition of reasonable period of time depends on the facts and circumstances of your situation. H&r tax cut However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. H&r tax cut You receive an advance within 30 days of the time you have an expense. H&r tax cut You adequately account for your expenses within 60 days after they were paid or incurred. H&r tax cut You return any excess reimbursement within 120 days after the expense was paid or incurred. H&r tax cut You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement. H&r tax cut Employee meets accountable plan rules. H&r tax cut   If you meet the three rules for accountable plans, your employer should not include any reimbursements in your income in box 1 of your Form W-2. H&r tax cut If your expenses equal your reimbursements, you do not complete Form 2106. H&r tax cut You have no deduction since your expenses and reimbursement are equal. H&r tax cut    If your employer included reimbursements in box 1 of your Form W-2 and you meet all the rules for accountable plans, ask your employer for a corrected Form W-2. H&r tax cut Accountable plan rules not met. H&r tax cut   Even though you are reimbursed under an accountable plan, some of your expenses may not meet all three rules. H&r tax cut All reimbursements that fail to meet all three rules for accountable plans are generally treated as having been reimbursed under a nonaccountable plan (discussed later). H&r tax cut Failure to return excess reimbursements. H&r tax cut   If you are reimbursed under an accountable plan, but you fail to return, within a reasonable time, any amounts in excess of the substantiated amounts, the amounts paid in excess of the substantiated expenses are treated as paid under a nonaccountable plan. H&r tax cut See Reasonable period of time , earlier, and Returning Excess Reimbursements , later. H&r tax cut Reimbursement of nondeductible expenses. H&r tax cut   You may be reimbursed under your employer's accountable plan for expenses related to that employer's business, some of which are deductible as employee business expenses and some of which are not deductible. H&r tax cut The reimbursements you receive for the nondeductible expenses do not meet rule (1) for accountable plans, and they are treated as paid under a nonaccountable plan. H&r tax cut Example. H&r tax cut Your employer's plan reimburses you for travel expenses while away from home on business and also for meals when you work late at the office, even though you are not away from home. H&r tax cut The part of the arrangement that reimburses you for the nondeductible meals when you work late at the office is treated as paid under a nonaccountable plan. H&r tax cut The employer makes the decision whether to reimburse employees under an accountable plan or a nonaccountable plan. H&r tax cut If you are an employee who receives payments under a nonaccountable plan, you cannot convert these amounts to payments under an accountable plan by voluntarily accounting to your employer for the expenses and voluntarily returning excess reimbursements to the employer. H&r tax cut Adequate Accounting One of the rules for an accountable plan is that you must adequately account to your employer for your expenses. H&r tax cut You adequately account by giving your employer a statement of expense, an account book, a diary, or a similar record in which you entered each expense at or near the time you had it, along with documentary evidence (such as receipts) of your travel, mileage, and other employee business expenses. H&r tax cut (See Table 5-1 in chapter 5 for details you need to enter in your record and documents you need to prove certain expenses. H&r tax cut ) A per diem or car allowance satisfies the adequate accounting requirement under certain conditions. H&r tax cut See Per Diem and Car Allowances , later. H&r tax cut You must account for all amounts you received from your employer during the year as advances, reimbursements, or allowances. H&r tax cut This includes amounts you charged to your employer by credit card or other method. H&r tax cut You must give your employer the same type of records and supporting information that you would have to give to the IRS if the IRS questioned a deduction on your return. H&r tax cut You must pay back the amount of any reimbursement or other expense allowance for which you do not adequately account or that is more than the amount for which you accounted. H&r tax cut Per Diem and Car Allowances If your employer reimburses you for your expenses using a per diem or a car allowance, you can generally use the allowance as proof for the amount of your expenses. H&r tax cut A per diem or car allowance satisfies the adequate accounting requirements for the amount of your expenses only if all the following conditions apply. H&r tax cut Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade or business. H&r tax cut The allowance is similar in form to and not more than the federal rate (defined later). H&r tax cut You prove the time (dates), place, and business purpose of your expenses to your employer (as explained in Table 5-1 ) within a reasonable period of time. H&r tax cut You are not related to your employer (as defined next). H&r tax cut If you are related to your employer, you must be able to prove your expenses to the IRS even if you have already adequately accounted to your employer and returned any excess reimbursement. H&r tax cut If the IRS finds that an employer's travel allowance practices are not based on reasonably accurate estimates of travel costs (including recognition of cost differences in different areas for per diem amounts), you will not be considered to have accounted to your employer. H&r tax cut In this case, you must be able to prove your expenses to the IRS. H&r tax cut Related to employer. H&r tax cut   You are related to your employer if: Your employer is your brother or sister, half brother or half sister, spouse, ancestor, or lineal descendant, Your employer is a corporation in which you own, directly or indirectly, more than 10% in value of the outstanding stock, or Certain relationships (such as grantor, fiduciary, or beneficiary) exist between you, a trust, and your employer. H&r tax cut You may be considered to indirectly own stock, for purposes of (2), if you have an interest in a corporation, partnership, estate, or trust that owns the stock or if a member of your family or your partner owns the stock. H&r tax cut The federal rate. H&r tax cut   The federal rate can be figured using any one of the following methods. H&r tax cut For per diem amounts: The regular federal per diem rate. H&r tax cut The standard meal allowance. H&r tax cut The high-low rate. H&r tax cut For car expenses: The standard mileage rate. H&r tax cut A fixed and variable rate (FAVR). H&r tax cut    For per diem amounts, use the rate in effect for the area where you stop for sleep or rest. H&r tax cut Regular federal per diem rate. H&r tax cut   The regular federal per diem rate is the highest amount that the federal government will pay to its employees for lodging, meals, and incidental expenses (or meals and incidental expenses only) while they are traveling away from home in a particular area. H&r tax cut The rates are different for different locations. H&r tax cut Your employer should have these rates available. H&r tax cut You can also find federal per diem rates at www. H&r tax cut gsa. H&r tax cut gov/perdiem. H&r tax cut The standard meal allowance. H&r tax cut   The standard meal allowance (discussed in chapter 1) is the federal rate for meals and incidental expenses (M&IE). H&r tax cut The rate for most small localities in the United States is $46 a day. H&r tax cut Most major cities and many other localities qualify for higher rates. H&r tax cut You can find this information on the Internet at www. H&r tax cut gsa. H&r tax cut gov/perdiem. H&r tax cut   You receive an allowance only for meals and incidental expenses when your employer does one of the following. H&r tax cut Provides you with lodging (furnishes it in kind). H&r tax cut Reimburses you, based on your receipts, for the actual cost of your lodging. H&r tax cut Pays the hotel, motel, etc. H&r tax cut , directly for your lodging. H&r tax cut Does not have a reasonable belief that you had (or will have) lodging expenses, such as when you stay with friends or relatives or sleep in the cab of your truck. H&r tax cut Figures the allowance on a basis similar to that used in computing your compensation, such as number of hours worked or miles traveled. H&r tax cut High-low rate. H&r tax cut   This is a simplified method of computing the federal per diem rate for travel within the continental United States. H&r tax cut It eliminates the need to keep a current list of the per diem rates for each city. H&r tax cut   Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 (including $65 for M&IE) for certain high-cost locations. H&r tax cut All other areas have a per diem amount of $163 (including $52 for M&IE). H&r tax cut For more information, see Notice 2012-63, which can be found on the Internet at www. H&r tax cut irs. H&r tax cut gov/irb/2012-42_IRB/ar12. H&r tax cut html. H&r tax cut    Effective October 1, 2013, the per diem rate for certain high-cost locations increased to $251 (including $65 for M&IE). H&r tax cut The rate for all other locations increased to $170 (including $52 for M&IE). H&r tax cut Employers who did not use the high-low method during the first 9 months of 2013 cannot begin to use it before 2014. H&r tax cut For more information, see Notice 2013-65, which can be found on the Internet at www. H&r tax cut irs. H&r tax cut gov/pub/irs-drop/n-13–65. H&r tax cut pdf and Revenue Procedure 2011-47 at www. H&r tax cut irs. H&r tax cut gov/irb/2011-42_IRB/ar12. H&r tax cut html. H&r tax cut Prorating the standard meal allowance on partial days of travel. H&r tax cut   The standard meal allowance is for a full 24-hour day of travel. H&r tax cut If you travel for part of a day, such as on the days you depart and return, you must prorate the full-day M&IE rate. H&r tax cut This rule also applies if your employer uses the regular federal per diem rate or the high-low rate. H&r tax cut   You can use either of the following methods to figure the federal M&IE for that day. H&r tax cut Method 1: For the day you depart, add 3/4 of the standard meal allowance amount for that day. H&r tax cut For the day you return, add 3/4 of the standard meal allowance amount for the preceding day. H&r tax cut Method 2: Prorate the standard meal allowance using any method you consistently apply in accordance with reasonable business practice. H&r tax cut For example, an employer can treat 2 full days of per diem (that includes M&IE) paid for travel away from home from 9 a. H&r tax cut m. H&r tax cut of one day to 5 p. H&r tax cut m. H&r tax cut of the next day as being no more than the federal rate. H&r tax cut This is true even though a federal employee would be limited to a reimbursement of M&IE for only 1½ days of the federal M&IE rate. H&r tax cut The standard mileage rate. H&r tax cut   This is a set rate per mile that you can use to compute your deductible car expenses. H&r tax cut For 2013, the standard mileage rate for the cost of operating your car for business use is 56½ cents per mile. H&r tax cut Fixed and variable rate (FAVR). H&r tax cut   This is an allowance your employer may use to reimburse your car expenses. H&r tax cut Under this method, your employer pays an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your variable operating costs (such as gas, oil, etc. H&r tax cut ) plus a flat amount to cover your fixed costs (such as depreciation (or lease payments), insurance, etc. H&r tax cut ). H&r tax cut If your employer chooses to use this method, your employer will request the necessary records from you. H&r tax cut Reporting your expenses with a per diem or car allowance. H&r tax cut   If your reimbursement is in the form of an allowance received under an accountable plan, the following facts affect your reporting. H&r tax cut The federal rate. H&r tax cut Whether the allowance or your actual expenses were more than the federal rate. H&r tax cut The following discussions explain where to report your expenses depending upon how the amount of your allowance compares to the federal rate. H&r tax cut Allowance less than or equal to the federal rate. H&r tax cut   If your allowance is less than or equal to the federal rate, the allowance will not be included in box 1 of your Form W-2. H&r tax cut You do not need to report the related expenses or the allowance on your return if your expenses are equal to or less than the allowance. H&r tax cut   However, if your actual expenses are more than your allowance, you can complete Form 2106 and deduct the excess amount on Schedule A (Form 1040). H&r tax cut If you are using actual expenses, you must be able to prove to the IRS the total amount of your expenses and reimbursements for the entire year. H&r tax cut If you are using the standard meal allowance or the standard mileage rate, you do not have to prove that amount. H&r tax cut Example 1. H&r tax cut In April, Jeremy takes a 2-day business trip to Denver. H&r tax cut The federal rate for Denver is $215 per day. H&r tax cut As required by his employer's accountable plan, he accounts for the time (dates), place, and business purpose of the trip. H&r tax cut His employer reimburses him $215 a day ($430 total) for living expenses. H&r tax cut Jeremy's living expenses in Denver are not more than $215 a day. H&r tax cut Jeremy's employer does not include any of the reimbursement on his Form W-2 and Jeremy does not deduct the expenses on his return. H&r tax cut Example 2. H&r tax cut In June, Matt takes a 2-day business trip to Boston. H&r tax cut Matt's employer uses the high-low method to reimburse employees. H&r tax cut Since Boston is a high-cost area, Matt is given an advance of $242 a day ($484 total) for his lodging, meals, and incidental expenses. H&r tax cut Matt's actual expenses totaled $700. H&r tax cut Since Matt's $700 of expenses are more than his $484 advance, he includes the excess expenses when he itemizes his deductions. H&r tax cut Matt completes Form 2106 (showing all of his expenses and reimbursements). H&r tax cut He must also allocate his reimbursement between his meals and other expenses as discussed later under Completing Forms 2106 and 2106-EZ . H&r tax cut Example 3. H&r tax cut Nicole drives 10,000 miles in 2013 for business. H&r tax cut Under her employer's accountable plan, she accounts for the time (dates), place, and business purpose of each trip. H&r tax cut Her employer pays her a mileage allowance of 40 cents a mile. H&r tax cut Since Nicole's $5,650 expense computed under the standard mileage rate (10,000 miles x 56½ cents) is more than her $4,000 reimbursement (10,000 miles × 40 cents), she itemizes her deductions to claim the excess expense. H&r tax cut Nicole completes Form 2106 (showing all her expenses and reimbursements) and enters $1,650 ($5,650 − $4,000) as an itemized deduction. H&r tax cut Allowance more than the federal rate. H&r tax cut   If your allowance is more than the federal rate, your employer must include the allowance amount up to the federal rate in box 12 of your Form W-2. H&r tax cut This amount is not taxable. H&r tax cut However, the excess allowance will be included in box 1 of your Form W-2. H&r tax cut You must report this part of your allowance as if it were wage income. H&r tax cut   If your actual expenses are less than or equal to the federal rate, you do not complete Form 2106 or claim any of your expenses on your return. H&r tax cut   However, if your actual expenses are more than the federal rate, you can complete Form 2106 and deduct those excess expenses. H&r tax cut You must report on Form 2106 your reimbursements up to the federal rate (as shown in box 12 of your Form W-2) and all your expenses. H&r tax cut You should be able to prove these amounts to the IRS. H&r tax cut Example 1. H&r tax cut Laura lives and works in Austin. H&r tax cut In July her employer sent her to Albuquerque for 4 days on business. H&r tax cut Laura's employer paid the hotel directly for her lodging and reimbursed Laura $65 a day ($260 total) for meals and incidental expenses. H&r tax cut Laura's actual meal expenses were not more than the federal rate for Albuquerque, which is $56 per day. H&r tax cut Table 6-1. H&r tax cut Reporting Travel, Entertainment, Gift, and Car Expenses and Reimbursements IF the type of reimbursement (or  other expense allowance)  arrangement is under: THEN the employer reports on Form W-2: AND the employee reports on  Form 2106: * An accountable plan with: Actual expense reimbursement: Adequate accounting made and excess returned. H&r tax cut No amount. H&r tax cut No amount. H&r tax cut Actual expense reimbursement: Adequate accounting and return of excess both required but excess not returned. H&r tax cut The excess amount as wages in box 1. H&r tax cut No amount. H&r tax cut Per diem or mileage allowance up to the federal rate: Adequate accounting made and excess returned. H&r tax cut No amount. H&r tax cut All expenses and reimbursements only if excess expenses are claimed. H&r tax cut Otherwise, form is not filed. H&r tax cut Per diem or mileage allowance up to the federal rate: Adequate accounting and return of excess both required but excess not returned. H&r tax cut The excess amount as wages in box 1. H&r tax cut The amount up to the federal rate is reported only in box 12—it is not reported in box 1. H&r tax cut No amount. H&r tax cut Per diem or mileage allowance exceeds the federal rate: Adequate accounting up to the federal rate only and excess not returned. H&r tax cut The excess amount as wages in box 1. H&r tax cut The amount up to the federal rate is reported only in box 12—it is not reported in box 1. H&r tax cut All expenses (and reimbursements reported on Form W-2, box 12) only if expenses in excess of the federal rate are claimed. H&r tax cut Otherwise, form is not filed. H&r tax cut A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan. H&r tax cut The entire amount as wages in box 1. H&r tax cut All expenses. H&r tax cut No reimbursement plan: The entire amount as wages in box 1. H&r tax cut All expenses. H&r tax cut * You may be able to use Form 2106-EZ. H&r tax cut See Completing Forms 2106 and 2106-EZ . H&r tax cut Her employer included the $36 that was more than the federal rate (($65 − $56) × 4) in box 1 of Laura's Form W-2. H&r tax cut Her employer shows $224 ($56 a day × 4) in box 12 of her Form W-2. H&r tax cut This amount is not included in Laura's income. H&r tax cut Laura does not have to complete Form 2106; however, she must include the $36 in her gross income as wages (by reporting the total amount shown in box 1 of her Form W-2). H&r tax cut Example 2. H&r tax cut Joe also lives in Austin and works for the same employer as Laura. H&r tax cut In May the employer sent Joe to San Diego for 4 days and paid the hotel directly for Joe's hotel bill. H&r tax cut The employer reimbursed Joe $75 a day for his meals and incidental expenses. H&r tax cut The federal rate for San Diego is $71 a day. H&r tax cut Joe can prove that his actual meal expenses totaled $380. H&r tax cut His employer's accountable plan will not pay more than $75 a day for travel to San Diego, so Joe does not give his employer the records that prove that he actually spent $380. H&r tax cut However, he does account for the time, place, and business purpose of the trip. H&r tax cut This is Joe's only business trip this year. H&r tax cut Joe was reimbursed $300 ($75 × 4 days), which is $16 more than the federal rate of $284 ($71 × 4 days). H&r tax cut The employer includes the $16 as income on Joe's Form W-2 in box 1. H&r tax cut The employer also enters $284 in box 12 of Joe's Form W-2. H&r tax cut Joe completes Form 2106 to figure his deductible expenses. H&r tax cut He enters the total of his actual expenses for the year ($380) on Form 2106. H&r tax cut He also enters the reimbursements that were not included in his income ($284). H&r tax cut His total deductible expense, before the 50% limit, is $96. H&r tax cut After he figures the 50% limit on his unreimbursed meals and entertainment, he will include the balance, $48, as an itemized deduction. H&r tax cut Example 3. H&r tax cut Debbie drives 10,000 miles in 2013 for business. H&r tax cut Under her employer's accountable plan, she gets reimbursed 60 cents a mile, which is more than the standard mileage rate. H&r tax cut Her total reimbursement is $6,000. H&r tax cut Debbie's employer must include the reimbursement amount up to the standard mileage rate, $5,650 (10,000 × 56½ cents), in box 12 of her Form W-2. H&r tax cut That amount is not taxable. H&r tax cut Her employer must also include $350 ($6,000 − $5,650) in box 1 of her Form W-2. H&r tax cut This is the reimbursement that is more than the standard mileage rate. H&r tax cut If Debbie's expenses are equal to or less than the standard mileage rate, she would not complete Form 2106. H&r tax cut If her expenses are more than the standard mileage rate, she would complete Form 2106 and report her total expenses and reimbursement (shown in box 12 of her Form W-2). H&r tax cut She would then claim the excess expenses as an itemized deduction. H&r tax cut Returning Excess Reimbursements Under an accountable plan, you are required to return any excess reimbursement or other expense allowances for your business expenses to the person paying the reimbursement or allowance. H&r tax cut Excess reimbursement means any amount for which you did not adequately account within a reasonable period of time. H&r tax cut For example, if you received a travel advance and you did not spend all the money on business-related expenses or you do not have proof of all your expenses, you have an excess reimbursement. H&r tax cut “ Adequate accounting ” and “ reasonable period of time ” were discussed earlier in this chapter. H&r tax cut Travel advance. H&r tax cut   You receive a travel advance if your employer provides you with an expense allowance before you actually have the expense, and the allowance is reasonably expected to be no more than your expense. H&r tax cut Under an accountable plan, you are required to adequately account to your employer for this advance and to return any excess within a reasonable period of time. H&r tax cut   If you do not adequately account for or do not return any excess advance within a reasonable period of time, the amount you do not account for or return will be treated as having been paid under a nonaccountable plan (discussed later). H&r tax cut Unproved amounts. H&r tax cut   If you do not prove that you actually traveled on each day for which you received a per diem or car allowance (proving the elements described in Table 5-1 ), you must return this unproved amount of the travel advance within a reasonable period of time. H&r tax cut If you do not do this, the unproved amount will be considered paid under a nonaccountable plan (discussed later). H&r tax cut Per diem allowance more than federal rate. H&r tax cut   If your employer's accountable plan pays you an allowance that is higher than the federal rate, you do not have to return the difference between the two rates for the period you can prove business-related travel expenses. H&r tax cut However, the difference will be reported as wages on your Form W-2. H&r tax cut This excess amount is considered paid under a nonaccountable plan (discussed later). H&r tax cut Example. H&r tax cut Your employer sends you on a 5-day business trip to Phoenix in March 2013 and gives you a $400 ($80 × 5 days) advance to cover your meals and incidental expenses. H&r tax cut The federal per diem for meals and incidental expenses for Phoenix is $71. H&r tax cut Your trip lasts only 3 days. H&r tax cut Under your employer's accountable plan, you must return the $160 ($80 × 2 days) advance for the 2 days you did not travel. H&r tax cut For the 3 days you did travel you do not have to return the $27 difference between the allowance you received and the federal rate for Phoenix (($80 − $71) × 3 days). H&r tax cut However, the $27 will be reported on your Form W-2 as wages. H&r tax cut Nonaccountable Plans A nonaccountable plan is a reimbursement or expense allowance arrangement that does not meet one or more of the three rules listed earlier under Accountable Plans. H&r tax cut In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan: Excess reimbursements you fail to return to your employer, and Reimbursement of nondeductible expenses related to your employer's business. H&r tax cut See Reimbursement of nondeductible expenses , earlier, under Accountable Plans. H&r tax cut An arrangement that repays you for business expenses by reducing the amount reported as your wages, salary, or other pay will be treated as a nonaccountable plan. H&r tax cut This is because you are entitled to receive the full amount of your pay whether or not you have any business expenses. H&r tax cut If you are not sure if the reimbursement or expense allowance arrangement is an accountable or nonaccountable plan, ask your employer. H&r tax cut Reporting your expenses under a nonaccountable plan. H&r tax cut   Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other pay. H&r tax cut Your employer will report the total in box 1 of your Form W-2. H&r tax cut    You must complete Form 2106 or 2106-EZ and itemize your deductions to deduct your expenses for travel, transportation, meals, or entertainment. H&r tax cut Your meal and entertainment expenses will be subject to the 50% limit discussed in chapter 2. H&r tax cut Also, your total expenses will be subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions. H&r tax cut Example 1. H&r tax cut Kim's employer gives her $1,000 a month ($12,000 total for the year) for her business expenses. H&r tax cut Kim does not have to provide any proof of her expenses to her employer, and Kim can keep any funds that she does not spend. H&r tax cut Kim is being reimbursed under a nonaccountable plan. H&r tax cut Her employer will include the $12,000 on Kim's Form W-2 as if it were wages. H&r tax cut If Kim wants to deduct her business expenses, she must complete Form 2106 or 2106-EZ and itemize her deductions. H&r tax cut Example 2. H&r tax cut Kevin is paid $2,000 a month by his employer. H&r tax cut On days that he travels away from home on business, his employer designates $50 a day of his salary as paid to reimburse his travel expenses. H&r tax cut Because his employer would pay Kevin his monthly salary whether or not he was traveling away from home, the arrangement is a nonaccountable plan. H&r tax cut No part of the $50 a day designated by his employer is treated as paid under an accountable plan. H&r tax cut Rules for Independent Contractors and Clients This section provides rules for independent contractors who incur expenses on behalf of a client or customer. H&r tax cut The rules cover the reporting and substantiation of certain expenses discussed in this publication, and they affect both independent contractors and their clients or customers. H&r tax cut You are considered an independent contractor if you are self-employed and you perform services for a customer or client. H&r tax cut Accounting to Your Client If you received a reimbursement or an allowance for travel, entertainment, or gift expenses that you incurred on behalf of a client, you should provide an adequate accounting of these expenses to your client. H&r tax cut If you do not account to your client for these expenses, you must include any reimbursements or allowances in income. H&r tax cut You must keep adequate records of these expenses whether or not you account to your client for these expenses. H&r tax cut If you do not separately account for and seek reimbursement for meals and entertainment in connection with providing services for a client, you are subject to the 50% limit on those expenses. H&r tax cut See 50% Limit in chapter 2. H&r tax cut Adequate accounting. H&r tax cut   As a self-employed person, you adequately account by reporting your actual expenses. H&r tax cut You should follow the recordkeeping rules in chapter 5 . H&r tax cut How to report. H&r tax cut   For information on how to report expenses on your tax return, see Self-employed at the beginning of this chapter. H&r tax cut Required Records for Clients or Customers If you are a client or customer, you generally do not have to keep records to prove the reimbursements or allowances you give, in the course of your business, to an independent contractor for travel or gift expenses incurred on your behalf. H&r tax cut However, you must keep records if: You reimburse the contractor for entertainment expenses incurred on your behalf, and The contractor adequately accounts to you for these expenses. H&r tax cut Contractor adequately accounts. H&r tax cut   If the contractor adequately accounts to you for entertainment expenses, you (the client or customer) must keep records documenting each element of the expense, as explained in chapter 5 . H&r tax cut Use your records as proof for a deduction on your tax return. H&r tax cut If entertainment expenses are accounted for separately, you are subject to the 50% limit on entertainment. H&r tax cut If the contractor adequately accounts to you for reimbursed amounts, you do not have to report the amounts on an information return. H&r tax cut Contractor does not adequately account. H&r tax cut    If the contractor does not adequately account to you for allowances or reimbursements of entertainment expenses, you do not have to keep records of these items. H&r tax cut You are not subject to the 50% limit on entertainment in this case. H&r tax cut You can deduct the reimbursements or allowances as payment for services if they are ordinary and necessary business expenses. H&r tax cut However, you must file Form 1099-MISC to report amounts paid to the independent contractor if the total of the reimbursements and any other fees is $600 or more during the calendar year. H&r tax cut How To Use Per Diem Rate Tables This section contains information about the per diem rate substantiation methods available and the choice of rates you must make for the last 3 months of the year. H&r tax cut The Two Substantiation Methods High-low method. H&r tax cut   IRS notices list the localities that are treated under the high-low substantiation method as high-cost localities for all or part of the year. H&r tax cut Notice 2012–63, available at www. H&r tax cut irs. H&r tax cut gov/irb/2012–42_IRB/ar12. H&r tax cut html, lists the localities that are eligible for $242 ($65 meals and incidental expenses (M&IE)) per diem, effective October 1, 2012. H&r tax cut For travel on or after October 1, 2012, all other localities within CONUS are eligible for $163 ($52 M&IE) per diem under the high-low method. H&r tax cut   Notice 2013–65, available at www. H&r tax cut irs. H&r tax cut gov/pub/irs-drop/n-13–65. H&r tax cut pdf, lists the localities that are eligible for $251 ($65 M&IE) per diem, effective October 1, 2013. H&r tax cut For travel on or after October 1, 2013, the per diem for all other localities increased to $170 ($52 M&IE). H&r tax cut Regular federal per diem rate method. H&r tax cut   Regular federal per diem rates are published by the General Services Administration (GSA). H&r tax cut Both tables include the separate rate for meals and incidental expenses (M&IE) for each locality. H&r tax cut The rates listed for FY2013 at www. H&r tax cut gsa. H&r tax cut gov/perdiem are effective October 1, 2012 and those listed for FY2014 are effective October 1, 2013. H&r tax cut The standard rate for all locations within CONUS not specifically listed for FY2013 is $123 ($77 for lodging and $46 for M&IE). H&r tax cut For FY2014, this rate increased to $129 ($83 for lodging and $46 for M&IE). H&r tax cut Transition Rules The transition period covers the last 3 months of the calendar year, from the time that new rates are effective (generally October 1) through December 31. H&r tax cut During this period, you generally may change to the new rates or finish out the year with the rates you had been using. H&r tax cut High-low method. H&r tax cut   If you use the high-low substantiation method, when new rates become effective (generally October 1) you can either continue with the rates you used for the first part of the year or change to the new rates. H&r tax cut However, you must continue using the high-low method for the rest of the calendar year (through December 31). H&r tax cut If you are an employer, you must use the same rates for all employees reimbursed under the high-low method during that calendar year. H&r tax cut   The new rates and localities for the high-low method are included each year in a notice that is generally published in mid-to-late-September. H&r tax cut You can find the notice in the weekly Internal Revenue Bulletin (IRB) on the Internet at www. H&r tax cut irs. H&r tax cut gov/irb. H&r tax cut Federal per diem rate method. H&r tax cut   New CONUS per diem rates become effective on October 1 of each year and remain in effect through September 30 of the following year. H&r tax cut Employees being reimbursed under the per diem rate method during the first 9 months of a year (January 1–September 30) must continue under the same method through the end of that calendar year (December 31). H&r tax cut However, for travel by these employees from October 1 through December 31, you can choose to continue using the same per diem rates or use the new rates. H&r tax cut   The new federal CONUS per diem rates are published each year, generally early in September, on the Internet. H&r tax cut Go to www. H&r tax cut gsa. H&r tax cut gov/perdiem. H&r tax cut Per diem rates for localities listed for FY2014 may change at any time. H&r tax cut To be sure you have the most current rate, check www. H&r tax cut gsa. H&r tax cut gov/perdiem. H&r tax cut Completing Forms 2106 and 2106-EZ This section briefly describes how employees complete Forms 2106 and 2106-EZ. H&r tax cut Table 6-1 explains what the employer reports on Form W-2 and what the employee reports on Form 2106. H&r tax cut The instructions for the forms have more information on completing them. H&r tax cut If you are self-employed, do not file Form 2106 or 2106-EZ. H&r tax cut Report your expenses on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040). H&r tax cut See the instructions for the form that you must file. H&r tax cut Form 2106-EZ. H&r tax cut   You may be able to use the shorter Form 2106-EZ to claim your employee business expenses. H&r tax cut You can use this form if you meet all the following conditions. H&r tax cut You are an employee deducting ordinary and necessary expenses attributable to your job. H&r tax cut You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements). H&r tax cut If you are claiming car expenses, you are using the standard mileage rate. H&r tax cut Car expenses. H&r tax cut   If you used a car to perform your job as an employee, you may be able to deduct certain car expenses. H&r tax cut These are generally figured on Form 2106, Part II, and then claimed on Form 2106, Part I, line 1, Column A. H&r tax cut Car expenses using the standard mileage rate can also be figured on Form 2106-EZ by completing Part II and Part I, line 1. H&r tax cut Information on use of cars. H&r tax cut   If you claim any deduction for the business use of a car, you must answer certain questions and provide information about the use of the car. H&r tax cut The information relates to the following items. H&r tax cut Date placed in service. H&r tax cut Mileage (total, business, commuting, and other personal mileage). H&r tax cut Percentage of business use. H&r tax cut After-work use. H&r tax cut Use of other vehicles. H&r tax cut Whether you have evidence to support the deduction. H&r tax cut Whether or not the evidence is written. H&r tax cut Employees must complete Form 2106, Part II, Section A, or Form 2106-EZ, Part II, to provide this information. H&r tax cut Standard mileage rate. H&r tax cut   If you claim a deduction based on the standard mileage rate instead of your actual expenses, you must complete Form 2106, Part II, Section B. H&r tax cut The amount on line 22 (Section B) is carried to Form 2106, Part I, line 1. H&r tax cut In addition, on Part 1, line 2, you can deduct parking fees and tolls that apply to the business use of the car. H&r tax cut If you file Form 2106-EZ, complete Part I, line 1, for the standard mileage rate and line 2 for parking fees and tolls. H&r tax cut See Standard Mileage Rate in chapter 4 for information on using this rate. H&r tax cut Actual expenses. H&r tax cut   If you claim a deduction based on actual car expenses, you cannot use Form 2106-EZ. H&r tax cut You must complete Form 2106, Part II, Section C. H&r tax cut In addition, unless you lease your car, you must complete Section D to show your depreciation deduction and any section 179 deduction you claim. H&r tax cut   If you are still using a car that is fully depreciated, continue to complete Section C. H&r tax cut Since you have no depreciation deduction, enter zero on line 28. H&r tax cut In this case, do not complete Section D. H&r tax cut Car rentals. H&r tax cut   If you claim car rental expenses on Form 2106, line 24a, you may have to reduce that expense by an inclusion amount as described in chapter 4. H&r tax cut If so, you can show your car expenses and any inclusion amount as follows. H&r tax cut Compute the inclusion amount without taking into account your business use percentage for the tax year. H&r tax cut Report the inclusion amount from (1) on Form 2106, Part II, line 24b. H&r tax cut Report on line 24c the net amount of car rental expenses (total car rental expenses minus the inclusion amount computed in (1)). H&r tax cut The net amount of car rental expenses will be adjusted on Form 2106, Part II, line 27, to reflect the percentage of business use for the tax year. H&r tax cut Transportation expenses. H&r tax cut   Show your transportation expenses that did not involve overnight travel on Form 2106, line 2, Column A, or on Form 2106-EZ, Part I, line 2. H&r tax cut Also include on this line business expenses you have for parking fees and tolls. H&r tax cut Do not include expenses of operating your car or expenses of commuting between your home and work. H&r tax cut Employee business expenses other than meals and entertainment. H&r tax cut   Show your other employee business expenses on Form 2106, lines 3 and 4, Column A, or Form 2106-EZ, lines 3 and 4. H&r tax cut Do not include expenses for meals and entertainment on those lines. H&r tax cut Line 4 is for expenses such as gifts, educational expenses (tuition and books), office-in-the-home expenses, and trade and professional publications. H&r tax cut    If line 4 expenses are the only ones you are claiming, you received no reimbursements (or the reimbursements were all included in box 1 of your Form W-2), and the Special Rules discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. H&r tax cut Claim these amounts directly on Schedule A (Form 1040), line 21. H&r tax cut List the type and amount of each expense on the dotted lines and include the total on line 21. H&r tax cut Meal and entertainment expenses. H&r tax cut   Show the full amount of your expenses for business-related meals and entertainment on Form 2106, line 5, Column B. H&r tax cut Include meals while away from your tax home overnight and other business meals and entertainment. H&r tax cut Enter 50% of the line 8, Column B, meal and entertainment expenses on line 9, Column B. H&r tax cut   If you file Form 2106-EZ, enter the full amount of your meals and entertainment on the line to the left of line 5 and multiply the total by 50%. H&r tax cut Enter the result on line 5. H&r tax cut Hours of service limits. H&r tax cut   If you are subject to the Department of Transportation's “hours of service” limits (as explained earlier under Individuals subject to “hours of service” limits in chapter 2), use 80% instead of 50% for meals while away from your tax home. H&r tax cut Reimbursements. H&r tax cut   Enter on Form 2106, line 7 (you cannot use Form 2106-EZ) the amounts your employer (or third party) reimbursed you that were not reported to you in box 1 of your Form W-2. H&r tax cut This includes any amount reported under code L in box 12 of Form W-2. H&r tax cut Allocating your reimbursement. H&r tax cut   If you were reimbursed under an accountable plan and want to deduct excess expenses that were not reimbursed, you may have to allocate your reimbursement. H&r tax cut This is necessary when your employer pays your reimbursement in the following manner: Pays you a single amount that covers meals and/or entertainment, as well as other business expenses, and Does not clearly identify how much is for deductible meals and/or entertainment. H&r tax cut You must allocate that single payment so that you know how much to enter on Form 2106, line 7, Column A and Column B. H&r tax cut Example. H&r tax cut Rob's employer paid him an expense allowance of $12,000 this year under an accountable plan. H&r tax cut The $12,000 payment consisted of $5,000 for airfare and $7,000 for meals, entertainment, and car expenses. H&r tax cut The employer did not clearly show how much of the $7,000 was for the cost of deductible meals and entertainment. H&r tax cut Rob actually spent $14,000 during the year ($5,500 for airfare, $4,500 for meals and entertainment, and $4,000 for car expenses). H&r tax cut Since the airfare allowance was clearly identified, Rob knows that $5,000 of the payment goes in Column A, line 7, of Form 2106. H&r tax cut To allocate the remaining $7,000, Rob uses the worksheet from the Instructions for Form 2106. H&r tax cut His completed worksheet follows. H&r tax cut Reimbursement Allocation Worksheet (Keep for your records)   1. H&r tax cut Enter the total amount of reimbursements your employer gave you that were not reported to you in box 1 of Form W-2 $7,000   2. H&r tax cut Enter the total amount of your expenses for the periods covered by this reimbursement 8,500   3. H&r tax cut Of the amount on line 2, enter your total expense for meals and entertainment 4,500   4. H&r tax cut Divide line 3 by line 2. H&r tax cut Enter the result as a decimal (rounded to at least three places) . H&r tax cut 529   5. H&r tax cut Multiply line 1 by line 4. H&r tax cut Enter the result here and in Column B, line 7 3,703   6. H&r tax cut Subtract line 5 from line 1. H&r tax cut Enter the result here and in Column A, line 7 $3,297 On line 7 of Form 2106, Rob enters $8,297 ($5,000 airfare and $3,297 of the $7,000) in Column A and $3,703 (of the $7,000) in Column B. H&r tax cut After you complete the form. H&r tax cut   After you have completed your Form 2106 or 2106-EZ, follow the directions on that form to deduct your expenses on the appropriate line of your tax return. H&r tax cut For most taxpayers, this is line 21 of Schedule A (Form 1040). H&r tax cut However, if you are a government official paid on a fee basis, a performing artist, an Armed Forces reservist, or a disabled employee with impairment-related work expenses, see Special Rules , later. H&r tax cut Limits on employee business expenses. H&r tax cut   Your employee business expenses may be subject to either of the limits described next. H&r tax cut They are figured in the following order on the specified form. H&r tax cut 1. H&r tax cut Limit on meals and entertainment. H&r tax cut   Certain meal and entertainment expenses are subject to a 50% limit. H&r tax cut If you are an employee, you figure this limit on line 9 of Form 2106 or line 5 of Form 2106-EZ. H&r tax cut (See 50% Limit in chapter 2. H&r tax cut ) 2. H&r tax cut Limit on miscellaneous itemized deductions. H&r tax cut   If you are an employee, deduct your employee business expenses (as figured on Form 2106 or 2106-EZ) on line 21 of Schedule A (Form 1040). H&r tax cut Most miscellaneous itemized deductions, including employee business expenses, are subject to a 2%-of-adjusted-gross-income limit. H&r tax cut This limit is figured on line 26 of Schedule A (Form 1040). H&r tax cut 3. H&r tax cut Limit on total itemized deductions. H&r tax cut   If your adjusted gross income (line 38 of Form 1040) is more than $300,000 ($150,000 if you are married filing separately), the total of certain itemized deductions, including employee business expenses, may be limited. H&r tax cut See your form instructions for information on how to figure this limit. H&r tax cut Special Rules This section discusses special rules that apply only to Armed Forces reservists, government officials who are paid on a fee basis, performing artists, and disabled employees with impairment-related work expenses. H&r tax cut Armed Forces Reservists Traveling More Than 100 Miles From Home If you are a member of a reserve component of the Armed Forces of the United States and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct your travel expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. H&r tax cut The amount of expenses you can deduct as an adjustment to gross income is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. H&r tax cut See Per Diem and Car Allowances , earlier, for more information. H&r tax cut Any expenses in excess of these amounts can be claimed only as a miscellaneous itemized deduction subject to the 2% limit. H&r tax cut Member of a reserve component. H&r tax cut   You are a member of a reserve component of the Armed Forces of the United States if you are in the Army, Navy, Marine Corps, Air Force, or Coast Guard Reserve; the Army National Guard of the United States; the Air National Guard of the United States; or the Reserve Corps of the Public Health Service. H&r tax cut How to report. H&r tax cut   If you have reserve-related travel that takes you more than 100 miles from home, you should first complete Form 2106 or Form 2106-EZ. H&r tax cut Then include your expenses for reserve travel over 100 miles from home, up to the federal rate, from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. H&r tax cut Subtract this amount from the total on Form 2106, line 10, or Form 2106-EZ, line 6, and deduct the balance as an itemized deduction on Schedule A (Form 1040), line 21. H&r tax cut   You cannot deduct expenses of travel that does not take you more than 100 miles from home as an adjustment to gross income. H&r tax cut Instead, you must complete Form 2106 or 2106-EZ and deduct those expenses as an itemized deduction on Schedule A (Form 1040), line 21. H&r tax cut Officials Paid on a Fee Basis Certain fee-basis officials can claim their employee business expenses whether or not they itemize their other deductions on Schedule A (Form 1040). H&r tax cut Fee-basis officials are persons who are employed by a state or local government and who are paid in whole or in part on a fee basis. H&r tax cut They can deduct their business expenses in performing services in that job as an adjustment to gross income rather than as a miscellaneous itemized deduction. H&r tax cut If you are a fee-basis official, include your employee business expenses from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. H&r tax cut Expenses of Certain Performing Artists If you are a performing artist, you may qualify to deduct your employee business expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. H&r tax cut To qualify, you must meet all of the following requirements. H&r tax cut During the tax year, you perform services in the performing arts as an employee for at least two employers. H&r tax cut You receive at least $200 each from any two of these employers. H&r tax cut Your related performing-arts business expenses are more than 10% of your gross income from the performance of those services. H&r tax cut Your adjusted gross income is not more than $16,000 before deducting these business expenses. H&r tax cut Special rules for married persons. H&r tax cut   If you are married, you must file a joint return unless you lived apart from your spouse at all times during the tax year. H&r tax cut If you file a joint return, you must figure requirements (1), (2), and (3) separately for both you and your spouse. H&r tax cut However, requirement (4) applies to your and your spouse's combined adjusted gross income. H&r tax cut Where to report. H&r tax cut   If you meet all of the above requirements, you should first complete Form 2106 or 2106-EZ. H&r tax cut Then you include your performing-arts-related expenses from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. H&r tax cut   If you do not meet all of the above requirements, you do not qualify to deduct your expenses as an adjustment to gross income. H&r tax cut Instead, you must complete Form 2106 or 2106-EZ and deduct your employee business expenses as an itemized deduction on Schedule A (Form 1040), line 21. H&r tax cut Impairment-Related Work Expenses of Disabled Employees If you are an employee with a physical or mental disability, your impairment-related work expenses are not subject to the 2%-of-adjusted-gross-income limit that applies to most other employee business expenses. H&r tax cut After you complete Form 2106 or 2106-EZ, enter your impairment-related work expenses from Form 2106, line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 28, and identify the type and amount of this expense on the dotted line next to line 28. H&r tax cut Enter your employee business expenses that are unrelated to your disability from Form 2106, line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 21. H&r tax cut Impairment-related work expenses are your allowable expenses for attendant care at your workplace and other expenses in connection with your workplace that are necessary for you to be able to work. H&r tax cut You are disabled if you have: A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed, or A physical or mental impairment (for example, a sight or hearing impairment) that substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, or working. H&r tax cut You can deduct impairment-related expenses as business expenses if they are: Necessary for you to do your work satisfactorily, For goods and services not required or used, other than incidentally, in your personal activities, and Not specifically covered under other income tax laws. H&r tax cut Example 1. H&r tax cut You are blind. H&r tax cut You must use a reader to do your work. H&r tax cut You use the reader both during your regular working hours at your place of work and outside your regular working hours away from your place of work. H&r tax cut The reader's services are only for your work. H&r tax cut You can deduct your expenses for the reader as business expenses. H&r tax cut Example 2. H&r tax cut You are deaf. H&r tax cut You must use a sign language interpreter during meetings while you are at work. H&r tax cut The interpreter's services are used only for your work. H&r tax cut You can deduct your expenses for the interpreter as business expenses. 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Defense Contract Management Agency

The Defense Contract Management Agency is responsible for contract management for the Department of Defense, the National Aeronautics and Space Administration, and several other federal, state, foreign and international goverments and agencies. Its goal is to ensure contracts are fulfilled on time and at the correct cost.

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The H&r Tax Cut

H&r tax cut 2. H&r tax cut   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. H&r tax cut You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. H&r tax cut Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. H&r tax cut You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. H&r tax cut You can deduct depreciation only on the part of your property used for rental purposes. H&r tax cut Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. H&r tax cut You may have to use Form 4562 to figure and report your depreciation. H&r tax cut See Which Forms To Use in chapter 3. H&r tax cut Also see Publication 946. H&r tax cut Section 179 deduction. H&r tax cut   The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. H&r tax cut This deduction is not allowed for property used in connection with residential rental property. H&r tax cut See chapter 2 of Publication 946. H&r tax cut Alternative minimum tax (AMT). H&r tax cut   If you use accelerated depreciation, you may be subject to the AMT. H&r tax cut Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). H&r tax cut   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. H&r tax cut However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). H&r tax cut   To find out if you are subject to the AMT, see the Instructions for Form 6251. H&r tax cut The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. H&r tax cut What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. H&r tax cut You own the property. H&r tax cut You use the property in your business or income-producing activity (such as rental property). H&r tax cut The property has a determinable useful life. H&r tax cut The property is expected to last more than one year. H&r tax cut Property you own. H&r tax cut   To claim depreciation, you usually must be the owner of the property. H&r tax cut You are considered as owning property even if it is subject to a debt. H&r tax cut Rented property. H&r tax cut   Generally, if you pay rent for property, you cannot depreciate that property. H&r tax cut Usually, only the owner can depreciate it. H&r tax cut However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. H&r tax cut See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. H&r tax cut Cooperative apartments. H&r tax cut   If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. H&r tax cut See chapter 4, Special Situations. H&r tax cut Property having a determinable useful life. H&r tax cut   To be depreciable, your property must have a determinable useful life. H&r tax cut This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. H&r tax cut What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. H&r tax cut This includes land and certain excepted property. H&r tax cut Land. H&r tax cut   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. H&r tax cut But if it does, the loss is accounted for upon disposition. H&r tax cut The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. H&r tax cut   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. H&r tax cut These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. H&r tax cut Example. H&r tax cut You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. H&r tax cut Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. H&r tax cut If you replace the house, you would have to destroy the bushes and trees right next to it. H&r tax cut These bushes and trees are closely associated with the house, so they have a determinable useful life. H&r tax cut Therefore, you can depreciate them. H&r tax cut Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. H&r tax cut Excepted property. H&r tax cut   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. H&r tax cut Property placed in service and disposed of (or taken out of business use) in the same year. H&r tax cut Equipment used to build capital improvements. H&r tax cut You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. H&r tax cut For more information, see chapter 1 of Publication 946. H&r tax cut When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. H&r tax cut You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. H&r tax cut Placed in Service You place property in service in a rental activity when it is ready and available for a specific use in that activity. H&r tax cut Even if you are not using the property, it is in service when it is ready and available for its specific use. H&r tax cut Example 1. H&r tax cut On November 22 of last year, you purchased a dishwasher for your rental property. H&r tax cut The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. H&r tax cut Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. H&r tax cut If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. H&r tax cut Example 2. H&r tax cut On April 6, you purchased a house to use as residential rental property. H&r tax cut You made extensive repairs to the house and had it ready for rent on July 5. H&r tax cut You began to advertise the house for rent in July and actually rented it beginning September 1. H&r tax cut The house is considered placed in service in July when it was ready and available for rent. H&r tax cut You can begin to depreciate the house in July. H&r tax cut Example 3. H&r tax cut You moved from your home in July. H&r tax cut During August and September you made several repairs to the house. H&r tax cut On October 1, you listed the property for rent with a real estate company, which rented it on December 1. H&r tax cut The property is considered placed in service on October 1, the date when it was available for rent. H&r tax cut Conversion to business use. H&r tax cut   If you place property in service in a personal activity, you cannot claim depreciation. H&r tax cut However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. H&r tax cut You place the property in service for business or income-producing use on the date of the change. H&r tax cut Example. H&r tax cut You bought a house and used it as your personal home several years before you converted it to rental property. H&r tax cut Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. H&r tax cut You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. H&r tax cut Idle Property Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). H&r tax cut For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. H&r tax cut Cost or Other Basis Fully Recovered You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. H&r tax cut For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. H&r tax cut See Basis of Depreciable Property , later. H&r tax cut Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. H&r tax cut You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. H&r tax cut You sell or exchange the property. H&r tax cut You convert the property to personal use. H&r tax cut You abandon the property. H&r tax cut The property is destroyed. H&r tax cut Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. H&r tax cut If you placed rental property in service before 1987, you are using one of the following methods. H&r tax cut ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. H&r tax cut Straight line or declining balance method over the useful life of property placed in service before 1981. H&r tax cut See MACRS Depreciation , later, for more information. H&r tax cut Rental property placed in service before 2013. H&r tax cut   Continue to use the same method of figuring depreciation that you used in the past. H&r tax cut Use of real property changed. H&r tax cut   Generally, you must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. H&r tax cut This includes your residence that you changed to rental use. H&r tax cut See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. H&r tax cut Improvements made after 1986. H&r tax cut   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. H&r tax cut As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. H&r tax cut For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. H&r tax cut This publication discusses MACRS depreciation only. H&r tax cut If you need information about depreciating property placed in service before 1987, see Publication 534. H&r tax cut Basis of Depreciable Property The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. H&r tax cut This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity. H&r tax cut If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. H&r tax cut Basis and adjusted basis are explained in the following discussions. H&r tax cut If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. H&r tax cut See Basis of Property Changed to Rental Use in chapter 4. H&r tax cut Cost Basis The basis of property you buy is usually its cost. H&r tax cut The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. H&r tax cut Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. H&r tax cut Exception. H&r tax cut   If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. H&r tax cut Such taxes were deductible before 1987 and after 2003. H&r tax cut Loans with low or no interest. H&r tax cut   If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. H&r tax cut See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. H&r tax cut Real property. H&r tax cut   If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property. H&r tax cut Real estate taxes. H&r tax cut   If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. H&r tax cut You cannot deduct them as taxes paid. H&r tax cut   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. H&r tax cut Do not include that amount in your basis in the property. H&r tax cut Settlement fees and other costs. H&r tax cut   The following settlement fees and closing costs for buying the property are part of your basis in the property. H&r tax cut Abstract fees. H&r tax cut Charges for installing utility services. H&r tax cut Legal fees. H&r tax cut Recording fees. H&r tax cut Surveys. H&r tax cut Transfer taxes. H&r tax cut Title insurance. H&r tax cut Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. H&r tax cut   The following are settlement fees and closing costs you cannot include in your basis in the property. H&r tax cut Fire insurance premiums. H&r tax cut Rent or other charges relating to occupancy of the property before closing. H&r tax cut Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. H&r tax cut   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. H&r tax cut Assumption of a mortgage. H&r tax cut   If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. H&r tax cut Example. H&r tax cut You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. H&r tax cut Your basis is $300,000. H&r tax cut Separating cost of land and buildings. H&r tax cut   If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. H&r tax cut The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. H&r tax cut   If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes. H&r tax cut Example. H&r tax cut You buy a house and land for $200,000. H&r tax cut The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. H&r tax cut The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land. H&r tax cut You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. H&r tax cut Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000). H&r tax cut Basis Other Than Cost You cannot use cost as a basis for property that you received: In return for services you performed; In an exchange for other property; As a gift; From your spouse, or from your former spouse as the result of a divorce; or As an inheritance. H&r tax cut If you received property in one of these ways, see Publication 551 for information on how to figure your basis. H&r tax cut Adjusted Basis To figure your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. H&r tax cut The result of these adjustments to the basis is the adjusted basis. H&r tax cut Increases to basis. H&r tax cut   You must increase the basis of any property by the cost of all items properly added to a capital account. H&r tax cut These include the following. H&r tax cut The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year. H&r tax cut Amounts spent after a casualty to restore the damaged property. H&r tax cut The cost of extending utility service lines to the property. H&r tax cut Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. H&r tax cut Additions or improvements. H&r tax cut   Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. H&r tax cut This includes all direct costs, such as material and labor, but does not include your own labor. H&r tax cut It also includes all expenses related to the addition or improvement. H&r tax cut   For example, if you had an architect draw up plans for remodeling your property, the architect's fee is a part of the cost of the remodeling. H&r tax cut Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. H&r tax cut   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. H&r tax cut For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. H&r tax cut    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. H&r tax cut However, see What Rental Property Cannot Be Depreciated, earlier. H&r tax cut Assessments for local improvements. H&r tax cut   Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. H&r tax cut For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. H&r tax cut Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. H&r tax cut You cannot deduct these items as taxes or depreciate them. H&r tax cut    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. H&r tax cut Do not add them to your basis in the property. H&r tax cut Deducting vs. H&r tax cut capitalizing costs. H&r tax cut   Do not add to your basis costs you can deduct as current expenses. H&r tax cut However, there are certain costs you can choose either to deduct or to capitalize. H&r tax cut If you capitalize these costs, include them in your basis. H&r tax cut If you deduct them, do not include them in your basis. H&r tax cut   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. H&r tax cut   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. H&r tax cut Decreases to basis. H&r tax cut   You must decrease the basis of your property by any items that represent a return of your cost. H&r tax cut These include the following. H&r tax cut Insurance or other payment you receive as the result of a casualty or theft loss. H&r tax cut Casualty loss not covered by insurance for which you took a deduction. H&r tax cut Amount(s) you receive for granting an easement. H&r tax cut Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. H&r tax cut Exclusion from income of subsidies for energy conservation measures. H&r tax cut Special depreciation allowance claimed on qualified property. H&r tax cut Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. H&r tax cut If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. H&r tax cut   If your rental property was previously used as your main home, you must also decrease the basis by the following. H&r tax cut Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. H&r tax cut District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. H&r tax cut Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. H&r tax cut Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. H&r tax cut This allowance is figured before you figure your regular depreciation deduction. H&r tax cut See Publication 946, chapter 3, for details. H&r tax cut Also see the Instructions for Form 4562, Line 14. H&r tax cut If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. H&r tax cut The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. H&r tax cut MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. H&r tax cut This section explains how to determine which MACRS depreciation system applies to your property. H&r tax cut It also discusses other information you need to know before you can figure depreciation under MACRS. H&r tax cut This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. H&r tax cut Depreciation Systems MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). H&r tax cut You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. H&r tax cut Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. H&r tax cut In most cases, personal property is excluded from MACRS if you (or a person related to you) owned or used it in 1986 or if your tenant is a person (or someone related to the person) who owned or used it in 1986. H&r tax cut However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. H&r tax cut For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. H&r tax cut Electing ADS If you choose, you can use the ADS method for most property. H&r tax cut Under ADS, you use the straight line method of depreciation. H&r tax cut The election of ADS for one item in a class of property generally applies to all property in that class that is placed in service during the tax year of the election. H&r tax cut However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. H&r tax cut If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. H&r tax cut Once you make this election, you can never revoke it. H&r tax cut For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. H&r tax cut Property Classes Under GDS Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. H&r tax cut The property class generally determines the depreciation method, recovery period, and convention. H&r tax cut The property classes under GDS are: 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, Nonresidential real property, and Residential rental property. H&r tax cut Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. H&r tax cut 5-year property. H&r tax cut This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. H&r tax cut ), automobiles, and light trucks. H&r tax cut This class also includes appliances, carpeting, furniture, etc. H&r tax cut , used in a residential rental real estate activity. H&r tax cut Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. H&r tax cut See chapter 5 of Publication 946. H&r tax cut 7-year property. H&r tax cut This class includes office furniture and equipment (desks, file cabinets, etc. H&r tax cut ). H&r tax cut This class also includes any property that does not have a class life and that has not been designated by law as being in any other class. H&r tax cut 15-year property. H&r tax cut This class includes roads, fences, and shrubbery (if depreciable). H&r tax cut Residential rental property. H&r tax cut This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. H&r tax cut It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis. H&r tax cut If you live in any part of the building or structure, the gross rental income includes the fair rental value of the part you live in. H&r tax cut The other property classes do not generally apply to property used in rental activities. H&r tax cut These classes are not discussed in this publication. H&r tax cut See Publication 946 for more information. H&r tax cut Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. H&r tax cut The recovery periods are generally longer under ADS than GDS. H&r tax cut The recovery period of property depends on its property class. H&r tax cut Under GDS, the recovery period of an asset is generally the same as its property class. H&r tax cut Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. H&r tax cut See Table 2-1 for recovery periods of property commonly used in residential rental activities. H&r tax cut Qualified Indian reservation property. H&r tax cut   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. H&r tax cut For more information, see chapter 4 of Publication 946. H&r tax cut Additions or improvements to property. H&r tax cut   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. H&r tax cut   The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement. H&r tax cut   The recovery period for an addition or improvement to property begins on the later of: The date the addition or improvement is placed in service, or The date the property to which the addition or improvement was made is placed in service. H&r tax cut Example. H&r tax cut You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. H&r tax cut You built an addition onto the house and placed it in service in 2013. H&r tax cut You must use MACRS for the addition. H&r tax cut Under GDS, the addition is depreciated as residential rental property over 27. H&r tax cut 5 years. H&r tax cut Table 2-1. H&r tax cut MACRS Recovery Periods for Property Used in Rental Activities   MACRS Recovery Period   Type of Property General Depreciation System Alternative Depreciation System   Computers and their peripheral equipment 5 years 5 years   Office machinery, such as: Typewriters Calculators Copiers 5 years 6 years   Automobiles 5 years 5 years   Light trucks 5 years 5 years   Appliances, such as: Stoves Refrigerators 5 years 9 years   Carpets 5 years 9 years   Furniture used in rental property 5 years 9 years   Office furniture and equipment, such as: Desks Files 7 years 10 years   Any property that does not have a class life and that has not been designated by law as being in any other class 7 years 12 years   Roads 15 years 20 years   Shrubbery 15 years 20 years   Fences 15 years 20 years   Residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. H&r tax cut 27. H&r tax cut 5 years 40 years   Additions and improvements, such as a new roof The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. H&r tax cut   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. H&r tax cut The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. H&r tax cut Mid-month convention. H&r tax cut    A mid-month convention is used for all residential rental property and nonresidential real property. H&r tax cut Under this convention, you treat all property placed in service, or disposed of, during any month as placed in service, or disposed of, at the midpoint of that month. H&r tax cut Mid-quarter convention. H&r tax cut   A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total basis of all such property you place in service during the year. H&r tax cut   Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter. H&r tax cut Example. H&r tax cut During the tax year, Tom Martin purchased the following items to use in his rental property. H&r tax cut He elects not to claim the special depreciation allowance discussed earlier. H&r tax cut A dishwasher for $400 that he placed in service in January. H&r tax cut Used furniture for $100 that he placed in service in September. H&r tax cut A refrigerator for $800 that he placed in service in October. H&r tax cut Tom uses the calendar year as his tax year. H&r tax cut The total basis of all property placed in service that year is $1,300. H&r tax cut The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). H&r tax cut Tom must use the mid-quarter convention instead of the half-year convention for all three items. H&r tax cut Half-year convention. H&r tax cut    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. H&r tax cut Under this convention, you treat all property placed in service, or disposed of, during a tax year as placed in service, or disposed of, at the midpoint of that tax year. H&r tax cut   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. H&r tax cut You deduct a full year of depreciation for any other year during the recovery period. H&r tax cut Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. H&r tax cut The deduction is substantially the same both ways. H&r tax cut You can either: Actually compute the deduction using the depreciation method and convention that apply over the recovery period of the property, or Use the percentage from the MACRS percentage tables. H&r tax cut In this publication we will use the percentage tables. H&r tax cut For instructions on how to compute the deduction, see chapter 4 of Publication 946. H&r tax cut Residential rental property. H&r tax cut   You must use the straight line method and a mid-month convention for residential rental property. H&r tax cut In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions , earlier). H&r tax cut 5-, 7-, or 15-year property. H&r tax cut   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. H&r tax cut However, in limited cases you must use the mid-quarter convention, if it applies. H&r tax cut For property in the 15-year class, use the 150% declining balance method and a half-year convention. H&r tax cut   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. H&r tax cut The choice to use the 150% method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. H&r tax cut You make this election on Form 4562. H&r tax cut In Part III, column (f), enter “150 DB. H&r tax cut ” Once you make this election, you cannot change to another method. H&r tax cut   If you use either the 200% or 150% declining balance method, you figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. H&r tax cut   You can also choose to use the straight line method with a half-year or mid-quarter convention for 5-, 7-, or 15-year property. H&r tax cut The choice to use the straight line method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. H&r tax cut You elect the straight line method on Form 4562. H&r tax cut In Part III, column (f), enter “S/L. H&r tax cut ” Once you make this election, you cannot change to another method. H&r tax cut MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. H&r tax cut The tables show the percentages for the first few years or until the change to the straight line method is made. H&r tax cut See Appendix A of Publication 946 for complete tables. H&r tax cut The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction. H&r tax cut If you elect to use the straight line method for 5-, 7-, or 15-year property, or the 150% declining balance method for 5- or 7-year property, use the tables in Appendix A of Publication 946. H&r tax cut How to use the percentage tables. H&r tax cut   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. H&r tax cut   Once you begin using a percentage table to figure depreciation, you must continue to use it for the entire recovery period unless there is an adjustment to the basis of your property for a reason other than: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. H&r tax cut   If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. H&r tax cut For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under Figuring Your Depreciation Deduction . H&r tax cut See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. H&r tax cut Unadjusted basis. H&r tax cut   This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property , earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years. H&r tax cut   However, you do reduce your original basis by other amounts claimed on the property, including: Any amortization, Any section 179 deduction, and Any special depreciation allowance. H&r tax cut For more information, see chapter 4 of Publication 946. H&r tax cut Please click here for the text description of the image. H&r tax cut Table 2-2 Tables 2-2a, 2-2b, and 2-2c. H&r tax cut   The percentages in these tables take into account the half-year and mid-quarter conventions. H&r tax cut Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. H&r tax cut Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). H&r tax cut If you must use the mid-quarter convention, use the column that corresponds to the calendar year quarter in which you placed the property in service. H&r tax cut Example 1. H&r tax cut You purchased a stove and refrigerator and placed them in service in June. H&r tax cut Your basis in the stove is $600 and your basis in the refrigerator is $1,000. H&r tax cut Both are 5-year property. H&r tax cut Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. H&r tax cut For that year your depreciation deduction is $120 ($600 × . H&r tax cut 20) for the stove and $200 ($1,000 × . H&r tax cut 20) for the refrigerator. H&r tax cut For Year 2, the depreciation percentage is 32%. H&r tax cut That year's depreciation deduction will be $192 ($600 × . H&r tax cut 32) for the stove and $320 ($1,000 × . H&r tax cut 32) for the refrigerator. H&r tax cut Example 2. H&r tax cut Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. H&r tax cut Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × . H&r tax cut 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. H&r tax cut Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. H&r tax cut Your depreciation deduction for the refrigerator is $50 ($1,000 x . H&r tax cut 05). H&r tax cut Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. H&r tax cut For that year, your depreciation deduction for the stove is $150 ($600 x . H&r tax cut 25). H&r tax cut Table 2-2d. H&r tax cut    Use this table when you are using the GDS 27. H&r tax cut 5 year option for residential rental property. H&r tax cut Find the row for the month that you placed the property in service. H&r tax cut Use the percentages listed for that month to figure your depreciation deduction. H&r tax cut The mid-month convention is taken into account in the percentages shown in the table. H&r tax cut Continue to use the same row (month) under the column for the appropriate year. H&r tax cut Example. H&r tax cut You purchased a single family rental house for $185,000 and placed it in service on February 8. H&r tax cut The sales contract showed that the building cost $160,000 and the land cost $25,000. H&r tax cut Your basis for depreciation is its original cost, $160,000. H&r tax cut This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. H&r tax cut 5 years. H&r tax cut Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. H&r tax cut 182%. H&r tax cut That year's depreciation deduction is $5,091 ($160,000 x . H&r tax cut 03182). H&r tax cut Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. H&r tax cut See Appendix B in Publication 946 for other property. H&r tax cut If your property is not listed in Appendix B, it is considered to have no class life. H&r tax cut Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. H&r tax cut Use the mid-month convention for residential rental property and nonresidential real property. H&r tax cut For all other property, use the half-year or mid-quarter convention, as appropriate. H&r tax cut See Publication 946 for ADS depreciation tables. H&r tax cut Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. H&r tax cut If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. H&r tax cut For more information, see Depreciation under Decreases to Basis in Publication 551. H&r tax cut If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. H&r tax cut S. H&r tax cut Individual Income Tax Return. H&r tax cut If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. H&r tax cut Filing an amended return. H&r tax cut   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. H&r tax cut You claimed the incorrect amount because of a mathematical error made in any year. H&r tax cut You claimed the incorrect amount because of a posting error made in any year. H&r tax cut You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. H&r tax cut You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. H&r tax cut   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. H&r tax cut This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns. H&r tax cut   If an amended return is allowed, you must file it by the later of the following dates. H&r tax cut 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. H&r tax cut A return filed before an unextended due date is considered filed on that due date. H&r tax cut 2 years from the time you paid your tax for that year. H&r tax cut Changing your accounting method. H&r tax cut   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. H&r tax cut In some instances, that consent is automatic. H&r tax cut For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. H&r tax cut Prev  Up  Next   Home   More Online Publications