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Help with 1040x 2. Help with 1040x   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. Help with 1040x 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. Help with 1040x Deduction may depend on your type of business. Help with 1040x Exception for events that benefit charitable organizations. Help with 1040x Food and beverages in skybox seats. Help with 1040x What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. Help with 1040x You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. Help with 1040x The rules and definitions are summarized in Table 2-1 . Help with 1040x You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. Help with 1040x Directly-related test. Help with 1040x Associated test. Help with 1040x Both of these tests are explained later. Help with 1040x An ordinary expense is one that is common and accepted in your trade or business. Help with 1040x A necessary expense is one that is helpful and appropriate for your business. Help with 1040x An expense does not have to be required to be considered necessary. Help with 1040x The amount you can deduct for entertainment expenses may be limited. Help with 1040x Generally, you can deduct only 50% of your unreimbursed entertainment expenses. Help with 1040x This limit is discussed later under 50% Limit. Help with 1040x Directly-Related Test To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that: The main purpose of the combined business and entertainment was the active conduct of business, You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit at some future time. Help with 1040x Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. Help with 1040x Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. Help with 1040x See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. Help with 1040x You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. Help with 1040x It is not necessary to devote more time to business than to entertainment. Help with 1040x However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. Help with 1040x Table 2-1. Help with 1040x When Are Entertainment Expenses Deductible? General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Help with 1040x Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Help with 1040x An ordinary expense is one that is common and accepted in your trade or business. Help with 1040x A necessary expense is one that is helpful and appropriate. Help with 1040x Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. Help with 1040x   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. Help with 1040x Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Help with 1040x You cannot deduct expenses that are lavish or extravagant under the circumstances. Help with 1040x You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). Help with 1040x You do not have to show that business income or other business benefit actually resulted from each entertainment expense. Help with 1040x Clear business setting. Help with 1040x   If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. Help with 1040x The following situations are examples of entertainment in a clear business setting. Help with 1040x Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. Help with 1040x Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer). Help with 1040x Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. Help with 1040x An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained. Help with 1040x Expenses not considered directly related. Help with 1040x   Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. Help with 1040x The following are examples of situations where there are substantial distractions. Help with 1040x A meeting or discussion at a nightclub, theater, or sporting event. Help with 1040x A meeting or discussion during what is essentially a social gathering, such as a cocktail party. Help with 1040x A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts. Help with 1040x Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. Help with 1040x To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and Directly before or after a substantial business discussion (defined later). Help with 1040x Associated with trade or business. Help with 1040x   Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. Help with 1040x The purpose may be to get new business or to encourage the continuation of an existing business relationship. Help with 1040x Substantial business discussion. Help with 1040x   Whether a business discussion is substantial depends on the facts of each case. Help with 1040x A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. Help with 1040x   The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. Help with 1040x It is not necessary that you devote more time to business than to entertainment. Help with 1040x You do not have to discuss business during the meal or entertainment. Help with 1040x Meetings at conventions. Help with 1040x   You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. Help with 1040x However, your reason for attending the convention or meeting must be to further your trade or business. Help with 1040x The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting. Help with 1040x Directly before or after business discussion. Help with 1040x   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. Help with 1040x   If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. Help with 1040x Among the facts to consider are the place, date, and duration of the business discussion. Help with 1040x If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day. Help with 1040x Example. Help with 1040x A group of business associates comes from out of town to your place of business to hold a substantial business discussion. Help with 1040x If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. Help with 1040x The expense meets the associated test. Help with 1040x 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. Help with 1040x (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. Help with 1040x See Individuals subject to “hours of service” limits , later. Help with 1040x ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. Help with 1040x Figure A summarizes the general rules explained in this section. Help with 1040x The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. Help with 1040x Included expenses. Help with 1040x   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. Help with 1040x However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. Help with 1040x Figure A. Help with 1040x Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. Help with 1040x See Exceptions to the 50% Limit . Help with 1040x Please click here for the text description of the image. Help with 1040x Figure A. Help with 1040x Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. Help with 1040x   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later. Help with 1040x   The 50% limit also applies to certain meal and entertainment expenses that are not business related. Help with 1040x It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. Help with 1040x It also applies to the cost of meals included in deductible educational expenses. Help with 1040x When to apply the 50% limit. Help with 1040x   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. Help with 1040x You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication. Help with 1040x Example 1. Help with 1040x You spend $200 for a business-related meal. Help with 1040x If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. Help with 1040x Your deduction cannot be more than $45 (50% × $90). Help with 1040x Example 2. Help with 1040x You purchase two tickets to a concert and give them to a client. Help with 1040x You purchased the tickets through a ticket agent. Help with 1040x You paid $200 for the two tickets, which had a face value of $80 each ($160 total). Help with 1040x Your deduction cannot be more than $80 (50% × $160). Help with 1040x Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. Help with 1040x Figure A can help you determine if the 50% limit applies to you. Help with 1040x Expenses not subject to 50% limit. Help with 1040x   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. Help with 1040x 1 - Employee's reimbursed expenses. Help with 1040x   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. Help with 1040x Accountable plans are discussed in chapter 6. Help with 1040x 2 - Self-employed. Help with 1040x   If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met. Help with 1040x You have these expenses as an independent contractor. Help with 1040x Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. Help with 1040x You provide adequate records of these expenses to your customer or client. Help with 1040x (See chapter 5 . Help with 1040x )   In this case, your client or customer is subject to the 50% limit on the expenses. Help with 1040x Example. Help with 1040x You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. Help with 1040x You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. Help with 1040x If the client can deduct the expenses, the client is subject to the 50% limit. Help with 1040x If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit. Help with 1040x 3 - Advertising expenses. Help with 1040x   You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Help with 1040x For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit. Help with 1040x 4 - Sale of meals or entertainment. Help with 1040x   You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. Help with 1040x For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit. Help with 1040x 5 - Charitable sports event. Help with 1040x   You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. Help with 1040x For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. Help with 1040x Individuals subject to “hours of service” limits. Help with 1040x   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. Help with 1040x The percentage is 80%. Help with 1040x   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. Help with 1040x Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. Help with 1040x Interstate truck operators and bus drivers who are under Department of Transportation regulations. Help with 1040x Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. Help with 1040x Certain merchant mariners who are under Coast Guard regulations. Help with 1040x What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. Help with 1040x Entertainment. Help with 1040x   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Help with 1040x Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. Help with 1040x   Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. Help with 1040x A meal as a form of entertainment. Help with 1040x   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. Help with 1040x A meal expense includes the cost of food, beverages, taxes, and tips for the meal. Help with 1040x To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. Help with 1040x    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. Help with 1040x    Meals sold in the normal course of your business are not considered entertainment. Help with 1040x Deduction may depend on your type of business. Help with 1040x   Your kind of business may determine if a particular activity is considered entertainment. Help with 1040x For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered entertainment. Help with 1040x This is because fashion shows are typical in your business. Help with 1040x But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment. Help with 1040x Separating costs. Help with 1040x   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. Help with 1040x You must have a reasonable basis for making this allocation. Help with 1040x For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. Help with 1040x Taking turns paying for meals or entertainment. Help with 1040x   If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. Help with 1040x Lavish or extravagant expenses. Help with 1040x   You cannot deduct expenses for entertainment that are lavish or extravagant. Help with 1040x An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Help with 1040x Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Help with 1040x Allocating between business and nonbusiness. Help with 1040x   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. Help with 1040x You can deduct only the business part. Help with 1040x If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis. Help with 1040x Example. Help with 1040x You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. Help with 1040x Only 4/11 of the expense qualifies as a business entertainment expense. Help with 1040x You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. Help with 1040x Trade association meetings. Help with 1040x   You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. Help with 1040x These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. Help with 1040x Entertainment tickets. Help with 1040x   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. Help with 1040x For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. Help with 1040x Exception for events that benefit charitable organizations. Help with 1040x   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. Help with 1040x You can take into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions apply. Help with 1040x The event's main purpose is to benefit a qualified charitable organization. Help with 1040x The entire net proceeds go to the charity. Help with 1040x The event uses volunteers to perform substantially all the event's work. Help with 1040x    The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable sports event. Help with 1040x Example 1. Help with 1040x You purchase tickets to a golf tournament organized by the local volunteer fire company. Help with 1040x All net proceeds will be used to buy new fire equipment. Help with 1040x The volunteers will run the tournament. Help with 1040x You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. Help with 1040x Example 2. Help with 1040x You purchase tickets to a college football game through a ticket broker. Help with 1040x After having a business discussion, you take a client to the game. Help with 1040x Net proceeds from the game go to colleges that qualify as charitable organizations. Help with 1040x However, since the colleges also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets in determining your business deduction. Help with 1040x Skyboxes and other private luxury boxes. Help with 1040x   If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket. Help with 1040x   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. Help with 1040x For example, renting a skybox for a series of playoff games is considered renting it for more than one event. Help with 1040x All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. Help with 1040x   Related parties include: Family members (spouses, ancestors, and lineal descendants), Parties who have made a reciprocal arrangement involving the sharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with common ownership. Help with 1040x Example. Help with 1040x You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. Help with 1040x The cost of regular nonluxury box seats at each event is $30 a seat. Help with 1040x You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). Help with 1040x Food and beverages in skybox seats. Help with 1040x   If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. Help with 1040x The amounts separately stated for food and beverages must be reasonable. Help with 1040x You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. Help with 1040x What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. Help with 1040x Club dues and membership fees. Help with 1040x   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. Help with 1040x This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities, discussed later. Help with 1040x   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. Help with 1040x You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Help with 1040x Entertainment facilities. Help with 1040x   Generally, you cannot deduct any expense for the use of an entertainment facility. Help with 1040x This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. Help with 1040x   An entertainment facility is any property you own, rent, or use for entertainment. Help with 1040x Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. Help with 1040x Out-of-pocket expenses. Help with 1040x   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. Help with 1040x These are not expenses for the use of an entertainment facility. Help with 1040x However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. Help with 1040x Expenses for spouses. Help with 1040x   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. Help with 1040x However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. Help with 1040x Example. Help with 1040x You entertain a customer. Help with 1040x The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. Help with 1040x The customer's spouse joins you because it is impractical to entertain the customer without the spouse. Help with 1040x You can deduct the cost of entertaining the customer's spouse. Help with 1040x If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible. Help with 1040x Gift or entertainment. Help with 1040x   Any item that might be considered either a gift or entertainment generally will be considered entertainment. Help with 1040x However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift. Help with 1040x   If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. Help with 1040x You can treat the tickets as either a gift or entertainment, whichever is to your advantage. Help with 1040x   You can change your treatment of the tickets at a later date by filing an amended return. Help with 1040x Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. Help with 1040x   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. Help with 1040x You cannot choose, in this case, to treat the tickets as a gift. Help with 1040x Prev  Up  Next   Home   More Online Publications
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The Help With 1040x

Help with 1040x 5. Help with 1040x   Taxes Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: When To Deduct Taxes Real Estate TaxesSeparate elections. Help with 1040x Making the election. Help with 1040x Form 3115. Help with 1040x Income TaxesAccrual of contested income taxes. Help with 1040x Employment Taxes Other TaxesAdditional Medicare Tax. Help with 1040x What's New Additional Medicare Tax. Help with 1040x  Beginning in 2013, you must withhold a 0. Help with 1040x 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Help with 1040x Also, self-employed individuals may be required to pay Additional Medicare Tax on self-employment income. Help with 1040x See Employment Taxes , and Self-employment tax , later. Help with 1040x Introduction You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses. Help with 1040x You cannot deduct federal income taxes, estate and gift taxes, or state inheritance, legacy, and succession taxes. Help with 1040x Topics - This chapter discusses: When to deduct taxes Real estate taxes Income taxes Employment taxes Other taxes Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 334 Tax Guide for Small Business 510 Excise Taxes 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch SE (Form 1040) Self-Employment Tax 3115 Application for Change in Accounting Method 8959 Additional Medicare Tax See chapter 12 for information about getting publications and forms. Help with 1040x When To Deduct Taxes Generally, you can only deduct taxes in the year you pay them. Help with 1040x This applies whether you use the cash method or an accrual method of accounting. Help with 1040x Under an accrual method, you can deduct a tax before you pay it if you meet the exception for recurring items discussed under Economic Performance in Publication 538. Help with 1040x You can also elect to ratably accrue real estate taxes as discussed later under Real Estate Taxes . Help with 1040x Limit on accrual of taxes. Help with 1040x   A taxing jurisdiction can require the use of a date for accruing taxes that is earlier than the date it originally required. Help with 1040x However, if you use an accrual method, and can deduct the tax before you pay it, use the original accrual date for the year of change and all future years to determine when you can deduct the tax. Help with 1040x Example. Help with 1040x Your state imposes a tax on personal property used in a trade or business conducted in the state. Help with 1040x This tax is assessed and becomes a lien as of July 1 (accrual date). Help with 1040x In 2013, the state changed the assessment and lien dates from July 1, 2014, to December 31, 2013, for property tax year 2014. Help with 1040x Use the original accrual date (July 1, 2014) to determine when you can deduct the tax. Help with 1040x You must also use the July 1 accrual date for all future years to determine when you can deduct the tax. Help with 1040x Uniform capitalization rules. Help with 1040x   Uniform capitalization rules apply to certain taxpayers who produce real property or tangible personal property for use in a trade or business or for sale to customers. Help with 1040x They also apply to certain taxpayers who acquire property for resale. Help with 1040x Under these rules, you either include certain costs in inventory or capitalize certain expenses related to the property, such as taxes. Help with 1040x For more information, see chapter 1. Help with 1040x Carrying charges. Help with 1040x   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Help with 1040x You can elect to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Help with 1040x For more information, see chapter 7. Help with 1040x Refunds of taxes. Help with 1040x   If you receive a refund for any taxes you deducted in an earlier year, include the refund in income to the extent the deduction reduced your federal income tax in the earlier year. Help with 1040x For more information, see Recovery of amount deducted (tax benefit rule) in chapter 1. Help with 1040x    You must include in income any interest you receive on tax refunds. Help with 1040x Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. Help with 1040x The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. Help with 1040x Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. Help with 1040x See Taxes for local benefits , later. Help with 1040x If you use an accrual method, you generally cannot accrue real estate taxes until you pay them to the government authority. Help with 1040x However, you can elect to ratably accrue the taxes during the year. Help with 1040x See Electing to ratably accrue , later. Help with 1040x Taxes for local benefits. Help with 1040x   Generally, you cannot deduct taxes charged for local benefits and improvements that tend to increase the value of your property. Help with 1040x These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. Help with 1040x You should increase the basis of your property by the amount of the assessment. Help with 1040x   You can deduct taxes for these local benefits only if the taxes are for maintenance, repairs, or interest charges related to those benefits. Help with 1040x If part of the tax is for maintenance, repairs, or interest, you must be able to show how much of the tax is for these expenses to claim a deduction for that part of the tax. Help with 1040x Example. Help with 1040x To improve downtown commercial business, Waterfront City converted a downtown business area street into an enclosed pedestrian mall. Help with 1040x The city assessed the full cost of construction, financed with 10-year bonds, against the affected properties. Help with 1040x The city is paying the principal and interest with the annual payments made by the property owners. Help with 1040x The assessments for construction costs are not deductible as taxes or as business expenses, but are depreciable capital expenses. Help with 1040x The part of the payments used to pay the interest charges on the bonds is deductible as taxes. Help with 1040x Charges for services. Help with 1040x   Water bills, sewerage, and other service charges assessed against your business property are not real estate taxes, but are deductible as business expenses. Help with 1040x Purchase or sale of real estate. Help with 1040x   If real estate is sold, the real estate taxes must be allocated between the buyer and the seller. Help with 1040x   The buyer and seller must allocate the real estate taxes according to the number of days in the real property tax year (the period to which the tax imposed relates) that each owned the property. Help with 1040x Treat the seller as paying the taxes up to but not including the date of sale. Help with 1040x Treat the buyer as paying the taxes beginning with the date of sale. Help with 1040x You can usually find this information on the settlement statement you received at closing. Help with 1040x   If you (the seller) use an accrual method and have not elected to ratably accrue real estate taxes, you are considered to have accrued your part of the tax on the date you sell the property. Help with 1040x Example. Help with 1040x Alberto Verde, a calendar year accrual method taxpayer, owns real estate in Olmo County. Help with 1040x He has not elected to ratably accrue property taxes. Help with 1040x November 30 of each year is the assessment and lien date for the current real property tax year, which is the calendar year. Help with 1040x He sold the property on June 30, 2013. Help with 1040x Under his accounting method he would not be able to claim a deduction for the taxes because the sale occurred before November 30. Help with 1040x He is treated as having accrued his part of the tax, 181/366  (January 1–June 29), on June 30, and he can deduct it for 2013. Help with 1040x Electing to ratably accrue. Help with 1040x   If you use an accrual method, you can elect to accrue real estate tax related to a definite period ratably over that period. Help with 1040x Example. Help with 1040x Juan Sanchez is a calendar year taxpayer who uses an accrual method. Help with 1040x His real estate taxes for the real property tax year, July 1, 2013, to June 30, 2014, are $1,200. Help with 1040x July 1 is the assessment and lien date. Help with 1040x If Juan elects to ratably accrue the taxes, $600 will accrue in 2013 ($1,200 × 6/12, July 1–December 31) and the balance will accrue in 2014. Help with 1040x Separate elections. Help with 1040x   You can elect to ratably accrue the taxes for each separate trade or business and for nonbusiness activities if you account for them separately. Help with 1040x Once you elect to ratably accrue real estate taxes, you must use that method unless you get permission from the IRS to change. Help with 1040x See Form 3115 , later. Help with 1040x Making the election. Help with 1040x   If you elect to ratably accrue the taxes for the first year in which you incur real estate taxes, attach a statement to your income tax return for that year. Help with 1040x The statement should show all the following items. Help with 1040x The trades or businesses to which the election applies and the accounting method or methods used. Help with 1040x The period to which the taxes relate. Help with 1040x The computation of the real estate tax deduction for that first year. Help with 1040x   Generally, you must file your return by the due date (including extensions). Help with 1040x However, if you timely filed your return for the year without electing to ratably accrue, you can still make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Help with 1040x Attach the statement to the amended return and write “Filed pursuant to section 301. Help with 1040x 9100-2” on the statement. Help with 1040x File the amended return at the same address where you filed the original return. Help with 1040x Form 3115. Help with 1040x    If you elect to ratably accrue real estate taxes for a year after the first year in which you incur real estate taxes, or if you want to revoke your election to ratably accrue real estate taxes, file Form 3115. Help with 1040x For more information, including applicable time frames for filing, see the Instructions for Form 3115. Help with 1040x Note. Help with 1040x If you are filing an application for a change in accounting method filed after January 9, 2011, for a year of change ending after April 29, 2010, see Revenue Procedure 2011-14, 2011-4 I. Help with 1040x R. Help with 1040x B. Help with 1040x 330, as modified and clarified by Revenue Procedure 2012-19, 2012-14 I. Help with 1040x R. Help with 1040x B. Help with 1040x 689, and Revenue Procedure 2012-20, 2012-14 I. Help with 1040x R. Help with 1040x B. Help with 1040x 700, or any successor. Help with 1040x Revenue Procedure 2011-14 is available at  www. Help with 1040x irs. Help with 1040x gov/irb/2011-04IRB/ar08. Help with 1040x html. Help with 1040x Income Taxes This section discusses federal, state, local, and foreign income taxes. Help with 1040x Federal income taxes. Help with 1040x   You cannot deduct federal income taxes. Help with 1040x State and local income taxes. Help with 1040x   A corporation or partnership can deduct state and local income taxes imposed on the corporation or partnership as business expenses. Help with 1040x An individual can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Help with 1040x   However, an individual can deduct a state tax on gross income (as distinguished from net income) directly attributable to a trade or business as a business expense. Help with 1040x Accrual of contested income taxes. Help with 1040x   If you use an accrual method, and you contest a state or local income tax liability, you must accrue and deduct any contested amount in the tax year in which the liability is finally determined. Help with 1040x   If additional state or local income taxes for a prior year are assessed in a later year, you can deduct the taxes in the year in which they were originally imposed (the prior year) if the tax liability is not contested. Help with 1040x You cannot deduct them in the year in which the liability is finally determined. Help with 1040x    The filing of an income tax return is not considered a contest and, in the absence of an overt act of protest, you can deduct the tax in the prior year. Help with 1040x Also, you can deduct any additional taxes in the prior year if you do not show some affirmative evidence of denial of the liability. Help with 1040x   However, if you consistently deduct additional assessments in the year they are paid or finally determined (including those for which there was no contest), you must continue to do so. Help with 1040x You cannot take a deduction in the earlier year unless you receive permission to change your method of accounting. Help with 1040x For more information on accounting methods, see When Can I Deduct an Expense in chapter 1. Help with 1040x Foreign income taxes. Help with 1040x   Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U. Help with 1040x S. Help with 1040x possession. Help with 1040x However, an individual cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U. Help with 1040x S. Help with 1040x tax under the foreign earned income exclusion or the foreign housing exclusion. Help with 1040x For information on these exclusions, see Publication 54, Tax Guide for U. Help with 1040x S. Help with 1040x Citizens and Resident Aliens Abroad. Help with 1040x For information on the foreign tax credit, see Publication 514, Foreign Tax Credit for Individuals. Help with 1040x Employment Taxes If you have employees, you must withhold various taxes from your employees' pay. Help with 1040x Most employers must withhold their employees' share of social security, Medicare taxes, and Additional Medicare Tax (if applicable) along with state and federal income taxes. Help with 1040x You may also need to pay certain employment taxes from your own funds. Help with 1040x These include your share of social security and Medicare taxes as an employer, along with unemployment taxes. Help with 1040x Note. Help with 1040x Additional Medicare Tax is only imposed on the employee. Help with 1040x There is no employer share of Additional Medicare Tax. Help with 1040x Your deduction for wages paid is not reduced by the social security and Medicare taxes, Additional Medicare Tax, and income taxes you withhold from your employees. Help with 1040x You can deduct the employment taxes you must pay from your own funds as taxes. Help with 1040x Example. Help with 1040x You pay your employee $18,000 a year. Help with 1040x However, after you withhold various taxes, your employee receives $14,500. Help with 1040x You also pay an additional $1,500 in employment taxes. Help with 1040x You should deduct the full $18,000 as wages. Help with 1040x You can deduct the $1,500 you pay from your own funds as taxes. Help with 1040x For more information on employment taxes, see Publication 15 (Circular E). Help with 1040x Unemployment fund taxes. Help with 1040x   As an employer, you may have to make payments to a state unemployment compensation fund or to a state disability benefit fund. Help with 1040x Deduct these payments as taxes. Help with 1040x Other Taxes The following are other taxes you can deduct if you incur them in the ordinary course of your trade or business. Help with 1040x Excise taxes. Help with 1040x   Generally, you can deduct as a business expense all excise taxes that are ordinary and necessary expenses of carrying on your trade or business. Help with 1040x However, see Fuel taxes , later. Help with 1040x   For more information on excise taxes, see Publication 510. Help with 1040x Franchise taxes. Help with 1040x   You can deduct corporate franchise taxes as a business expense. Help with 1040x Fuel taxes. Help with 1040x   Generally, taxes on gasoline, diesel fuel, and other motor fuels that you use in your business are included as part of the cost of the fuel. Help with 1040x Do not deduct these taxes as a separate item. Help with 1040x   You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. Help with 1040x For more information, see Publication 510. Help with 1040x Occupational taxes. Help with 1040x   You can deduct as a business expense an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. Help with 1040x Personal property tax. Help with 1040x   You can deduct any tax imposed by a state or local government on personal property used in your trade or business. Help with 1040x Sales tax. Help with 1040x   Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. Help with 1040x If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. Help with 1040x If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. Help with 1040x If the property is depreciable, add the sales tax to the basis for depreciation. Help with 1040x For more information on basis, see Publication 551. Help with 1040x    Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Help with 1040x Also, do not include these taxes in gross receipts or sales. Help with 1040x Self-employment tax. Help with 1040x   You can deduct part of your self-employment tax as a business expense in figuring your adjusted gross income. Help with 1040x This deduction only affects your income tax. Help with 1040x It does not affect your net earnings from self-employment or your self-employment tax. Help with 1040x   To deduct the tax, enter on Form 1040, line 27, the amount shown on the Deduction for one-half of self-employment tax line of Schedule SE (Form 1040). Help with 1040x   For more information on self-employment tax, see Publication 334. Help with 1040x Additional Medicare Tax. Help with 1040x   Beginning in 2013, you may be required to pay Additional Medicare Tax on self-employment income. Help with 1040x See Form 8959 and the Instructions for Form 8959 for more information on the Additional Medicare Tax. Help with 1040x Prev  Up  Next   Home   More Online Publications