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Income Tax Return

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Income Tax Return

Income tax return 2. Income tax return   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. Income tax return Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. Income tax return Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction You must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Income tax return You must do this to figure your net capital gain or loss. Income tax return For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. Income tax return See Capital Gains Tax Rates in chapter 4. Income tax return Your deduction for a net capital loss may be limited. Income tax return See Treatment of Capital Losses in chapter 4. Income tax return Capital gain or loss. Income tax return   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. Income tax return You also may have a capital gain if your section 1231 transactions result in a net gain. Income tax return Section 1231 transactions. Income tax return   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. Income tax return They also include certain involuntary conversions of business or investment property, including capital assets. Income tax return See Section 1231 Gains and Losses in chapter 3 for more information. Income tax return Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Income tax return Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. Income tax return For exceptions, see Noncapital Assets, later. Income tax return The following items are examples of capital assets. Income tax return Stocks and bonds. Income tax return A home owned and occupied by you and your family. Income tax return Timber grown on your home property or investment property, even if you make casual sales of the timber. Income tax return Household furnishings. Income tax return A car used for pleasure or commuting. Income tax return Coin or stamp collections. Income tax return Gems and jewelry. Income tax return Gold, silver, and other metals. Income tax return Personal-use property. Income tax return   Generally, property held for personal use is a capital asset. Income tax return Gain from a sale or exchange of that property is a capital gain. Income tax return Loss from the sale or exchange of that property is not deductible. Income tax return You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Income tax return Investment property. Income tax return   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. Income tax return This treatment does not apply to property used to produce rental income. Income tax return See Business assets, later, under Noncapital Assets. Income tax return Release of restriction on land. Income tax return   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. Income tax return Noncapital Assets A noncapital asset is property that is not a capital asset. Income tax return The following kinds of property are not capital assets. Income tax return Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Income tax return Inventories are discussed in Publication 538, Accounting Periods and Methods. Income tax return But, see the Tip below. Income tax return Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. Income tax return Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Income tax return Sales of this type of property are discussed in chapter 3. Income tax return Real property used in your trade or business or as rental property, even if the property is fully depreciated. Income tax return A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. Income tax return But, see the Tip below. Income tax return U. Income tax return S. Income tax return Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. Income tax return Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. Income tax return It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. Income tax return The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. Income tax return Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. Income tax return Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Income tax return You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. Income tax return See chapter 4 of Publication 550 for details. Income tax return Property held mainly for sale to customers. Income tax return   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. Income tax return Inventories are discussed in Publication 538. Income tax return Business assets. Income tax return   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. Income tax return The sale or disposition of business property is discussed in chapter 3. Income tax return Letters and memoranda. Income tax return   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. Income tax return Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. Income tax return For this purpose, letters and memoranda addressed to you are considered prepared for you. Income tax return If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. Income tax return Commodities derivative financial instrument. Income tax return   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). Income tax return Commodities derivative dealer. Income tax return   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. Income tax return Hedging transaction. Income tax return   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. Income tax return Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. Income tax return Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. Income tax return Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. Income tax return If these rules apply, gains may be treated as ordinary income and losses may not be deductible. Income tax return See Transfers to Spouse in chapter 1 for rules that apply to spouses. Income tax return Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. Income tax return It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. Income tax return Depreciable property transaction. Income tax return   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. Income tax return A person and the person's controlled entity or entities. Income tax return A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. Income tax return An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). Income tax return An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). Income tax return Controlled entity. Income tax return   A person's controlled entity is either of the following. Income tax return A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. Income tax return An entity whose relationship with that person is one of the following. Income tax return A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Income tax return Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. Income tax return Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. Income tax return Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Income tax return Controlled partnership transaction. Income tax return   A gain recognized in a controlled partnership transaction may be ordinary income. Income tax return The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. Income tax return   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. Income tax return A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Income tax return Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Income tax return Determining ownership. Income tax return   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. Income tax return Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Income tax return (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Income tax return ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Income tax return Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Income tax return For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Income tax return But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. Income tax return Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. Income tax return This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. Income tax return For the list of related persons, see Related persons next. Income tax return If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. Income tax return The gain on each item is taxable. Income tax return The loss on any item is nondeductible. Income tax return Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. Income tax return Related persons. Income tax return   The following is a list of related persons. Income tax return Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Income tax return ), and lineal descendants (children, grandchildren, etc. Income tax return ). Income tax return An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Income tax return Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. Income tax return A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Income tax return A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Income tax return Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Income tax return A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. Income tax return A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Income tax return Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Income tax return Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Income tax return An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. Income tax return Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Income tax return A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Income tax return Partnership interests. Income tax return   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. Income tax return Controlled groups. Income tax return   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. Income tax return   For more information, see section 267(f) of the Internal Revenue Code. Income tax return Ownership of stock or partnership interests. Income tax return   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. Income tax return Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Income tax return (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Income tax return ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Income tax return Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Income tax return An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Income tax return For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Income tax return But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. Income tax return Indirect transactions. Income tax return   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. Income tax return This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. Income tax return Property received from a related person. Income tax return   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. Income tax return This rule applies only to the original transferee. Income tax return Example 1. Income tax return Your brother sold stock to you for $7,600. Income tax return His cost basis was $10,000. Income tax return His loss of $2,400 was not deductible. Income tax return You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). Income tax return Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. Income tax return Example 2. Income tax return Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. Income tax return Your recognized loss is only $700 ($7,600 − $6,900). Income tax return You cannot deduct the loss not allowed to your brother. Income tax return Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. Income tax return Sale of a Business The sale of a business usually is not a sale of one asset. Income tax return Instead, all the assets of the business are sold. Income tax return Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Income tax return A business usually has many assets. Income tax return When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. Income tax return The gain or loss on each asset is figured separately. Income tax return The sale of capital assets results in capital gain or loss. Income tax return The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). Income tax return The sale of inventory results in ordinary income or loss. Income tax return Partnership interests. Income tax return   An interest in a partnership or joint venture is treated as a capital asset when sold. Income tax return The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Income tax return For more information, see Disposition of Partner's Interest in Publication 541. Income tax return Corporation interests. Income tax return   Your interest in a corporation is represented by stock certificates. Income tax return When you sell these certificates, you usually realize capital gain or loss. Income tax return For information on the sale of stock, see chapter 4 in Publication 550. Income tax return Corporate liquidations. Income tax return   Corporate liquidations of property generally are treated as a sale or exchange. Income tax return Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Income tax return Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. Income tax return   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. Income tax return For more information, see section 332 of the Internal Revenue Code and the related regulations. Income tax return Allocation of consideration paid for a business. Income tax return   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. Income tax return Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. Income tax return This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. Income tax return It also determines the buyer's basis in the business assets. Income tax return Consideration. Income tax return   The buyer's consideration is the cost of the assets acquired. Income tax return The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. Income tax return Residual method. Income tax return   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Income tax return This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. Income tax return Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. Income tax return   A group of assets constitutes a trade or business if either of the following applies. Income tax return Goodwill or going concern value could, under any circumstances, attach to them. Income tax return The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. Income tax return   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). Income tax return The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Income tax return See Classes of assets next for the complete order. Income tax return Classes of assets. Income tax return   The following definitions are the classifications for deemed or actual asset acquisitions. Income tax return Allocate the consideration among the assets in the following order. Income tax return The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Income tax return The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. Income tax return Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Income tax return Class II assets are certificates of deposit, U. Income tax return S. Income tax return Government securities, foreign currency, and actively traded personal property, including stock and securities. Income tax return Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Income tax return However, see section 1. Income tax return 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Income tax return Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Income tax return Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. Income tax return    Note. Income tax return Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. Income tax return Class VI assets are section 197 intangibles (other than goodwill and going concern value). Income tax return Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). Income tax return   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. Income tax return For example, if an asset is described in both Class II and Class IV, choose Class II. Income tax return Example. Income tax return The total paid in the sale of the assets of Company SKB is $21,000. Income tax return No cash or deposit accounts or similar accounts were sold. Income tax return The company's U. Income tax return S. Income tax return Government securities sold had a fair market value of $3,200. Income tax return The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. Income tax return Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. Income tax return S. Income tax return Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. Income tax return Agreement. Income tax return   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Income tax return This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Income tax return Reporting requirement. Income tax return   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Income tax return Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Income tax return Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Income tax return See the Instructions for Form 8594. Income tax return Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. Income tax return It includes such items as patents, copyrights, and the goodwill value of a business. Income tax return Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. Income tax return The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. Income tax return See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. Income tax return Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. Income tax return The following discussions explain special rules that apply to certain dispositions of intangible property. Income tax return Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. Income tax return They include the following assets. Income tax return Goodwill. Income tax return Going concern value. Income tax return Workforce in place. Income tax return Business books and records, operating systems, and other information bases. Income tax return Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. Income tax return Customer-based intangibles. Income tax return Supplier-based intangibles. Income tax return Licenses, permits, and other rights granted by a governmental unit. Income tax return Covenants not to compete entered into in connection with the acquisition of a business. Income tax return Franchises, trademarks, and trade names. Income tax return See chapter 8 of Publication 535 for a description of each intangible. Income tax return Dispositions. Income tax return   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. Income tax return Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. Income tax return If you retain more than one section 197 intangible, increase each intangible's adjusted basis. Income tax return Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. Income tax return   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. Income tax return For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. Income tax return Covenant not to compete. Income tax return   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. Income tax return Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. Income tax return Anti-churning rules. Income tax return   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. Income tax return However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. Income tax return Recognize gain on the transfer of the property. Income tax return Pay income tax on the gain at the highest tax rate. Income tax return   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. Income tax return But each partner or shareholder must pay the tax on his or her share of gain. Income tax return   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. Income tax return You must file the tax return by the due date (including extensions). Income tax return You must also notify the transferee of the election in writing by the due date of the return. Income tax return   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Income tax return Attach the statement to the amended return and write “Filed pursuant to section 301. Income tax return 9100-2” at the top of the statement. Income tax return File the amended return at the same address the original return was filed. Income tax return For more information about making the election, see Regulations section 1. Income tax return 197-2(h)(9). Income tax return For information about reporting the tax on your income tax return, see the Instructions for Form 4797. Income tax return Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. Income tax return This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. Income tax return For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. Income tax return This treatment applies to your transfer of a patent if you meet all the following conditions. Income tax return You are the holder of the patent. Income tax return You transfer the patent other than by gift, inheritance, or devise. Income tax return You transfer all substantial rights to the patent or an undivided interest in all such rights. Income tax return You do not transfer the patent to a related person. Income tax return Holder. Income tax return   You are the holder of a patent if you are either of the following. Income tax return The individual whose effort created the patent property and who qualifies as the original and first inventor. Income tax return The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. Income tax return All substantial rights. Income tax return   All substantial rights to patent property are all rights that have value when they are transferred. Income tax return A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. Income tax return   All substantial rights to a patent are not transferred if any of the following apply to the transfer. Income tax return The rights are limited geographically within a country. Income tax return The rights are limited to a period less than the remaining life of the patent. Income tax return The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. Income tax return The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. Income tax return Related persons. Income tax return   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. Income tax return Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. Income tax return Substitute “25% or more” ownership for “more than 50%. Income tax return ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. Income tax return For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. Income tax return The brother-sister exception does not apply because the trust relationship is independent of family status. Income tax return Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. Income tax return A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. Income tax return Significant power, right, or continuing interest. Income tax return   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. Income tax return   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. Income tax return A right to disapprove any assignment of the interest, or any part of it. Income tax return A right to end the agreement at will. Income tax return A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. Income tax return A right to make the recipient sell or advertise only your products or services. Income tax return A right to make the recipient buy most supplies and equipment from you. Income tax return A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. Income tax return Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. Income tax return However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. Income tax return See section 1237 of the Internal Revenue Code. Income tax return Timber Standing timber held as investment property is a capital asset. Income tax return Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. Income tax return If you held the timber primarily for sale to customers, it is not a capital asset. Income tax return Gain or loss on its sale is ordinary business income or loss. Income tax return It is reported in the gross receipts or sales and cost of goods sold items of your return. Income tax return Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Income tax return These sales constitute a very minor part of their farm businesses. Income tax return In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. Income tax return , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. Income tax return Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. Income tax return Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Income tax return This is true whether the timber is cut under contract or whether you cut it yourself. Income tax return Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. Income tax return See chapter 3. Income tax return Gain or loss is reported on Form 4797. Income tax return Christmas trees. Income tax return   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Income tax return They qualify for both rules discussed below. Income tax return Election to treat cutting as a sale or exchange. Income tax return   Under the general rule, the cutting of timber results in no gain or loss. Income tax return It is not until a sale or exchange occurs that gain or loss is realized. Income tax return But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year the timber is cut. Income tax return Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Income tax return Any later sale results in ordinary business income or loss. Income tax return See Example, later. Income tax return   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or for use in your trade or business. Income tax return Making the election. Income tax return   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of the gain or loss. Income tax return You do not have to make the election in the first year you cut timber. Income tax return You can make it in any year to which the election would apply. Income tax return If the timber is partnership property, the election is made on the partnership return. Income tax return This election cannot be made on an amended return. Income tax return   Once you have made the election, it remains in effect for all later years unless you cancel it. Income tax return   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. Income tax return The prior election (and revocation) is disregarded for purposes of making a subsequent election. Income tax return See Form T (Timber), Forest Activities Schedule, for more information. Income tax return Gain or loss. Income tax return   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. Income tax return   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Income tax return Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 of the Internal Revenue Code and the related regulations. Income tax return   Timber depletion is discussed in chapter 9 of Publication 535. Income tax return Example. Income tax return In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Income tax return It had an adjusted basis for depletion of $40 per MBF. Income tax return You are a calendar year taxpayer. Income tax return On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. Income tax return It was cut in April for sale. Income tax return On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Income tax return You report the difference between the fair market value and your adjusted basis for depletion as a gain. Income tax return This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. Income tax return You figure your gain as follows. Income tax return FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value becomes your basis in the cut timber and a later sale of the cut timber including any by-product or tree tops will result in ordinary business income or loss. Income tax return Outright sales of timber. Income tax return   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined below). Income tax return However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see below). Income tax return Cutting contract. Income tax return   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Income tax return You are the owner of the timber. Income tax return You held the timber longer than 1 year before its disposal. Income tax return You kept an economic interest in the timber. Income tax return   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Income tax return   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Income tax return Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. Income tax return Date of disposal. Income tax return   The date of disposal is the date the timber is cut. Income tax return However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Income tax return   This election applies only to figure the holding period of the timber. Income tax return It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Income tax return   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Income tax return The statement must identify the advance payments subject to the election and the contract under which they were made. Income tax return   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Income tax return Attach the statement to the amended return and write “Filed pursuant to section 301. Income tax return 9100-2” at the top of the statement. Income tax return File the amended return at the same address the original return was filed. Income tax return Owner. Income tax return   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. Income tax return You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Income tax return Tree stumps. Income tax return   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Income tax return Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Income tax return However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Income tax return Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Income tax return   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Income tax return Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. Income tax return , are capital assets except when they are held for sale by a dealer. Income tax return Any gain or loss from their sale or exchange generally is a capital gain or loss. Income tax return If you are a dealer, the amount received from the sale is ordinary business income. Income tax return Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. Income tax return You owned the coal or iron ore longer than 1 year before its disposal. Income tax return You kept an economic interest in the coal or iron ore. Income tax return For this rule, the date the coal or iron ore is mined is considered the date of its disposal. Income tax return Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). Income tax return This amount is included on Form 4797 along with your other section 1231 gains and losses. Income tax return You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. Income tax return If you own only an option to buy the coal in place, you do not qualify as an owner. Income tax return In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. Income tax return The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. Income tax return Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. Income tax return If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. Income tax return Special rule. Income tax return   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. Income tax return A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). Income tax return An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. Income tax return Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. Income tax return This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. Income tax return An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). Income tax return A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. Income tax return Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. Income tax return For more information, see chapter 4 of Publication 550. Income tax return Prev  Up  Next   Home   More Online Publications
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Administration on Developmental Disabilities

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The Income Tax Return

Income tax return 11. Income tax return   Other Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Reimbursement of Travel, Meals, and EntertainmentReimbursements Miscellaneous ExpensesMeaning of generally enforced. Income tax return Kickbacks. Income tax return Form 1099-MISC. Income tax return Exception. Income tax return Tax preparation fees. Income tax return Covered executive branch official. Income tax return Exceptions to denial of deduction. Income tax return Indirect political contributions. Income tax return Type of deduction. Income tax return Repayment—$3,000 or less. Income tax return Repayment—over $3,000. Income tax return Method 1. Income tax return Method 2. Income tax return Repayment does not apply. Income tax return Year of deduction (or credit). Income tax return Telephone. Income tax return What's New Standard mileage rate. Income tax return  Beginning in 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use is 56. Income tax return 5 cents per mile. Income tax return For more information, see Car and truck expenses under Miscellaneous Expenses. Income tax return Introduction This chapter covers business expenses that may not have been explained to you, as a business owner, in previous chapters of this publication. Income tax return Topics - This chapter discusses: Travel, meals, and entertainment Bribes and kickbacks Charitable contributions Education expenses Lobbying expenses Penalties and fines Repayments (claim of right) Other miscellaneous expenses Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 463 Travel, Entertainment, Gift, and Car Expenses 526 Charitable Contributions 529 Miscellaneous Deductions 544 Sales and Other Dispositions of Assets 970 Tax Benefits for Education 1542 Per Diem Rates See chapter 12 for information about getting publications and forms. Income tax return Reimbursement of Travel, Meals, and Entertainment The following discussion explains how to handle any reimbursements or allowances you may provide to your employees under a reimbursement or allowance arrangement for travel, meals, and entertainment expenses. Income tax return If you are self-employed and report your income and expenses on Schedule C or C-EZ (Form 1040), see Publication 463. Income tax return To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. Income tax return Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business. Income tax return For more information on travel, meals, and entertainment, including deductibility, see Publication 463. Income tax return Reimbursements A “reimbursement or allowance arrangement” provides for payment of advances, reimbursements, and allowances for travel, meals, and entertainment expenses incurred by your employees during the ordinary course of business. Income tax return If the expenses are substantiated, you can deduct the allowable amount on your tax return. Income tax return Because of differences between accounting methods and tax law, the amount you can deduct for tax purposes may not be the same as the amount you deduct on your business books and records. Income tax return For example, you can deduct 100% of the cost of meals on your business books and records. Income tax return However, only 50% of these costs are allowed by law as a tax deduction. Income tax return How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: An accountable plan, or A nonaccountable plan. Income tax return If you reimburse these expenses under an accountable plan, deduct them as travel, meals, or entertainment expenses. Income tax return If you reimburse these expenses under a nonaccountable plan, report the reimbursements as wages on Form W-2, Wage and Tax Statement, and deduct them as wages on the appropriate line of your tax return. Income tax return If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement and report it accordingly. Income tax return See Table 11-1 , Reporting Reimbursements. Income tax return Accountable Plans An accountable plan requires your employees to meet all of the following requirements. Income tax return Each employee must: Have paid or incurred deductible expenses while performing services as your employee, Adequately account to you for these expenses within a reasonable period of time, and Return any excess reimbursement or allowance within a reasonable period of time. Income tax return An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. Income tax return The advance is reasonably calculated not to exceed the amount of anticipated expenses. Income tax return You make the advance within a reasonable period of time of your employee paying or incurring the expense. Income tax return If any expenses reimbursed under this arrangement are not substantiated, or an excess reimbursement is not returned within a reasonable period of time by an employee, you cannot treat these expenses as reimbursed under an accountable plan. Income tax return Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later. Income tax return Adequate accounting. Income tax return   Your employees must adequately account to you for their travel, meals, and entertainment expenses. Income tax return They must give you documentary evidence of their travel, mileage, and other employee business expenses. Income tax return This evidence should include items such as receipts, along with either a statement of expenses, an account book, a day-planner, or similar record in which the employee entered each expense at or near the time the expense was incurred. Income tax return Excess reimbursement or allowance. Income tax return   An excess reimbursement or allowance is any amount you pay to an employee that is more than the business-related expenses for which the employee adequately accounted. Income tax return The employee must return any excess reimbursement or other expense allowance to you within a reasonable period of time. Income tax return Reasonable period of time. Income tax return   A reasonable period of time depends on the facts and circumstances. Income tax return Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. Income tax return You give an advance within 30 days of the time the employee pays or incurs the expense. Income tax return Your employees adequately account for their expenses within 60 days after the expenses were paid or incurred. Income tax return Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred. Income tax return You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately account for outstanding advances and they comply within 120 days of the date of the statement. Income tax return How to deduct. Income tax return   You can claim a deduction for travel, meals, and entertainment expenses if you reimburse your employees for these expenses under an accountable plan. Income tax return Generally, the amount you can deduct for meals and entertainment is subject to a 50% limit, discussed later. Income tax return If you are a sole proprietor, or are filing as a single member limited liability company, deduct the travel reimbursement on line 24a and the deductible part of the meals and entertainment reimbursement on line 24b, Schedule C (Form 1040) or line 2, Schedule C-EZ (Form 1040). Income tax return   If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120, U. Income tax return S. Income tax return Corporation Income Tax Return. Income tax return If you are filing any other business income tax return, such as a partnership or S corporation return, deduct the reimbursement on the appropriate line of the return as provided in the instructions for that return. Income tax return Table 11-1. Income tax return Reporting Reimbursements IF the type of reimbursement (or other expense allowance) arrangement is under THEN the employer reports on Form W-2 An accountable plan with: Actual expense reimbursement:  Adequate accounting made and excess returned No amount. Income tax return Actual expense reimbursement:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Income tax return Per diem or mileage allowance up to the federal rate:  Adequate accounting made and excess returned No amount. Income tax return Per diem or mileage allowance up to the federal rate:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Income tax return The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Income tax return Per diem or mileage allowance exceeds the federal rate:  Adequate accounting made up to the federal rate only and excess not returned The excess amount as wages in box 1. Income tax return The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Income tax return A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan The entire amount as wages in box 1. Income tax return No reimbursement plan The entire amount as wages in box 1. Income tax return Per Diem and Car Allowances You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. Income tax return In these cases, your employee is considered to have accounted to you for the amount of the expense that does not exceed the rates established by the federal government. Income tax return Your employee must actually substantiate to you the other elements of the expense, such as time, place, and business purpose. Income tax return Federal rate. Income tax return   The federal rate can be figured using any one of the following methods. Income tax return For car expenses: The standard mileage rate. Income tax return A fixed and variable rate (FAVR). Income tax return For per diem amounts: The regular federal per diem rate. Income tax return The standard meal allowance. Income tax return The high-low rate. Income tax return Car allowance. Income tax return   Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. Income tax return Beginning in 2013, the standard business mileage rate is 56. Income tax return 5 cents per mile. Income tax return   You can choose to reimburse your employees using a fixed and variable rate (FAVR) allowance. Income tax return This is an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your employees' variable operating costs (such as gas, oil, etc. Income tax return ) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc. Income tax return ). Income tax return For information on using a FAVR allowance, see Revenue Procedure 2010-51, available at www. Income tax return irs. Income tax return gov/irb/2010-51_IRB/ar14. Income tax return html and Notice 2012-72, available at www. Income tax return irs. Income tax return gov/irb/2012-50_IRB/ar10. Income tax return html. Income tax return Per diem allowance. Income tax return   If your employee actually substantiates to you the other elements (discussed earlier) of the expenses reimbursed using the per diem allowance, how you report and deduct the allowance depends on whether the allowance is for lodging and meal expenses or for meal expenses only and whether the allowance is more than the federal rate. Income tax return Regular federal per diem rate. Income tax return   The regular federal per diem rate is the highest amount the federal government will pay to its employees while away from home on travel. Income tax return It has two components: Lodging expense, and Meal and incidental expense (M&IE). Income tax return The rates are different for different locations. Income tax return Publication 1542 lists the rates in the continental United States. Income tax return Standard meal allowance. Income tax return   The federal rate for meal and incidental expenses (M&IE) is the standard meal allowance. Income tax return You can pay only an M&IE allowance to employees who travel away from home if: You pay the employee for actual expenses for lodging based on receipts submitted to you, You provide for the lodging, You pay for the actual expense of the lodging directly to the provider, You do not have a reasonable belief that lodging expenses were incurred by the employee, or The allowance is computed on a basis similar to that used in computing the employee's wages (that is, number of hours worked or miles traveled). Income tax return Internet access. Income tax return    Per diem rates are available on the Internet. Income tax return You can access per diem rates at www. Income tax return gsa. Income tax return gov/perdiemrates. Income tax return High-low method. Income tax return   This is a simplified method of computing the federal per diem rate for travel within the continental United States. Income tax return It eliminates the need to keep a current list of the per diem rate for each city. Income tax return   Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 ($65 for M&IE) for certain high-cost locations. Income tax return All other areas have a per diem amount of $163 ($52 for M&IE). Income tax return The high-cost locations eligible for the higher per diem amount under the high-low method are listed in Publication 1542. Income tax return   Effective October 1, 2013, the per diem rate for high-cost locations increased to $251 ($65 for M&IE). Income tax return The rate for all other locations increased to $170 ($52 for M&IE). Income tax return For October, November, and December 2013, you can either continue to use the rates described in the preceding paragraph or change to the new rates. Income tax return However, you must use the same rate for all employees reimbursed under the high-low method. Income tax return   For more information about the high-low method, see Notice 2013-65, available at www. Income tax return irs. Income tax return gov/irb/2013-44_IRB/ar13. Income tax return html. Income tax return See Publication 1542 (available on the Internet at IRS. Income tax return gov) for the current per diem rates for all locations. Income tax return Reporting per diem and car allowances. Income tax return   The following discussion explains how to report per diem and car allowances. Income tax return The manner in which you report them depends on how the allowance compares to the federal rate. Income tax return See Table 11-1. Income tax return Allowance less than or equal to the federal rate. Income tax return   If your allowance for the employee is less than or equal to the appropriate federal rate, that allowance is not included as part of the employee's pay in box 1 of the employee's Form W-2. Income tax return Deduct the allowance as travel expenses (including meals that may be subject to the 50% limit, discussed later). Income tax return See How to deduct under Accountable Plans, earlier. Income tax return Allowance more than the federal rate. Income tax return   If your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items. Income tax return   Include the allowance amount up to the federal rate in box 12 (code L) of the employee's Form W-2. Income tax return Deduct it as travel expenses (as explained above). Income tax return This part of the allowance is treated as reimbursed under an accountable plan. Income tax return   Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. Income tax return Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Income tax return This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans. Income tax return Meals and Entertainment Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment expenses you reimburse your employees. Income tax return The deduction limit applies even if you reimburse them for 100% of the expenses. Income tax return Application of the 50% limit. Income tax return   The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant, or another location. Income tax return It applies to expenses incurred at a business convention or reception, business meeting, or business luncheon at a club. Income tax return The deduction limit may also apply to meals you furnish on your premises to your employees. Income tax return Related expenses. Income tax return   Taxes and tips relating to a meal or entertainment activity you reimburse to your employee under an accountable plan are included in the amount subject to the 50% limit. Income tax return Reimbursements you make for expenses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. Income tax return However, the cost of transportation to and from an otherwise allowable business meal or a business-related entertainment activity is not subject to the 50% limit. Income tax return Amount subject to 50% limit. Income tax return   If you provide your employees with a per diem allowance only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of the following. Income tax return The per diem allowance. Income tax return The federal rate for M&IE. Income tax return   If you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages. Income tax return If the per diem allowance you provide is less than the federal per diem rate for the area of travel, you can treat 40% of the per diem allowance as the amount for food and beverages. Income tax return Meal expenses when subject to “hours of service” limits. Income tax return   You can deduct 80% of the cost of reimbursed meals your employees consume while away from their tax home on business during, or incident to, any period subject to the Department of Transportation's “hours of service” limits. Income tax return   See Publication 463 for a detailed discussion of individuals subject to the Department of Transportation's “hours of service” limits. Income tax return De minimis (minimal) fringe benefit. Income tax return   The 50% limit does not apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit. Income tax return See Publication 15-B for additional information on de minimis fringe benefits. Income tax return Company cafeteria or executive dining room. Income tax return   The cost of food and beverages you provide primarily to your employees on your business premises is deductible. Income tax return This includes the cost of maintaining the facilities for providing the food and beverages. Income tax return These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit, as just discussed, or unless they are compensation to your employees (explained later). Income tax return Employee activities. Income tax return   The expense of providing recreational, social, or similar activities (including the use of a facility) for your employees is deductible and is not subject to the 50% limit. Income tax return The benefit must be primarily for your employees who are not highly compensated. Income tax return   For this purpose, a highly compensated employee is an employee who meets either of the following requirements. Income tax return Owned a 10% or more interest in the business during the year or the preceding year. Income tax return An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal descendants. Income tax return Received more than $115,000 in pay for the preceding year. Income tax return You can choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year. Income tax return   For example, the expenses for food, beverages, and entertainment for a company-wide picnic are not subject to the 50% limit. Income tax return Meals or entertainment treated as compensation. Income tax return   The 50% limit does not apply to either of the following. Income tax return Expenses for meals or entertainment that you treat as: Compensation to an employee who was the recipient of the meals or entertainment, and Wages subject to withholding of federal income tax. Income tax return Expenses for meals or entertainment if: A recipient of the meals or entertainment who is not your employee has to include the expenses in gross income as compensation for services or as a prize or award, and You include that amount on a Form 1099 issued to the recipient, if a Form 1099 is required. Income tax return Sales of meals or entertainment. Income tax return   You can deduct the cost of meals or entertainment (including the use of facilities) you sell to the public. Income tax return For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is a business expense that is fully deductible. Income tax return The 50% limit does not apply to this expense. Income tax return Providing meals or entertainment to general public to promote goodwill. Income tax return   You can deduct the cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Income tax return The 50% limit does not apply to this expense. Income tax return Director, stockholder, or employee meetings. Income tax return   You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. Income tax return You can provide some minor social activities, but the main purpose of the meeting must be your company's business. Income tax return These expenses are subject to the 50% limit. Income tax return Trade association meetings. Income tax return   You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. Income tax return These organizations include business leagues, chambers of commerce, real estate boards, and trade and professional associations. Income tax return Nonaccountable Plans A nonaccountable plan is an arrangement that does not meet the requirements for an accountable plan. Income tax return All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. Income tax return The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Income tax return You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. Income tax return Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions. Income tax return Miscellaneous Expenses In addition to travel, meal, and entertainment expenses, there are other expenses you can deduct. Income tax return Advertising expenses. Income tax return   You generally can deduct reasonable advertising expenses that are directly related to your business activities. Income tax return Generally, you cannot deduct amounts paid to influence legislation (i. Income tax return e. Income tax return , lobbying). Income tax return See Lobbying expenses , later. Income tax return   You can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it relates to business you reasonably expect to gain in the future. Income tax return For example, the cost of advertising that encourages people to contribute to the Red Cross, to buy U. Income tax return S. Income tax return Savings Bonds, or to participate in similar causes is usually deductible. Income tax return Anticipated liabilities. Income tax return   Anticipated liabilities or reserves for anticipated liabilities are not deductible. Income tax return For example, assume you sold 1-year TV service contracts this year totaling $50,000. Income tax return From experience, you know you will have expenses of about $15,000 in the coming year for these contracts. Income tax return You cannot deduct any of the $15,000 this year by charging expenses to a reserve or liability account. Income tax return You can deduct your expenses only when you actually pay or accrue them, depending on your accounting method. Income tax return Bribes and kickbacks. Income tax return   Engaging in the payment of bribes or kickbacks is a serious criminal matter. Income tax return Such activity could result in criminal prosecution. Income tax return Any payments that appear to have been made, either directly or indirectly, to an official or employee of any government or an agency or instrumentality of any government are not deductible for tax purposes and are in violation of the law. Income tax return   Payments paid directly or indirectly to a person in violation of any federal or state law (but only if that state law is generally enforced, defined below) that provides for a criminal penalty or for the loss of a license or privilege to engage in a trade or business are also not allowed as a deduction for tax purposes. Income tax return Meaning of “generally enforced. Income tax return ”   A state law is considered generally enforced unless it is never enforced or enforced only for infamous persons or persons whose violations are extraordinarily flagrant. Income tax return For example, a state law is generally enforced unless proper reporting of a violation of the law results in enforcement only under unusual circumstances. Income tax return Kickbacks. Income tax return   A kickback is a payment for referring a client, patient, or customer. Income tax return The common kickback situation occurs when money or property is given to someone as payment for influencing a third party to purchase from, use the services of, or otherwise deal with the person who pays the kickback. Income tax return In many cases, the person whose business is being sought or enjoyed by the person who pays the kickback is not aware of the payment. Income tax return   For example, the Yard Corporation is in the business of repairing ships. Income tax return It returns 10% of the repair bills as kickbacks to the captains and chief officers of the vessels it repairs. Income tax return Although this practice is considered an ordinary and necessary expense of getting business, it is clearly a violation of a state law that is generally enforced. Income tax return These expenditures are not deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted. Income tax return Form 1099-MISC. Income tax return   It does not matter whether any kickbacks paid during the tax year are deductible on your income tax return in regards to information reporting. Income tax return See Form 1099-MISC for more information. Income tax return Car and truck expenses. Income tax return   The costs of operating a car, truck, or other vehicle in your business are deductible. Income tax return For more information on how to figure your deduction, see Publication 463. Income tax return Charitable contributions. Income tax return   Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Income tax return If the payments are charitable contributions or gifts, you cannot deduct them as business expenses. Income tax return However, corporations (other than S corporations) can deduct charitable contributions on their income tax returns, subject to limitations. Income tax return See the Instructions for Form 1120 for more information. Income tax return Sole proprietors, partners in a partnership, or shareholders in an S corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Income tax return Example. Income tax return You paid $15 to a local church for a half-page ad in a program for a concert it is sponsoring. Income tax return The purpose of the ad was to encourage readers to buy your products. Income tax return Your payment is not a charitable contribution. Income tax return You can deduct it as an advertising expense. Income tax return Example. Income tax return You made a $100,000 donation to a committee organized by the local Chamber of Commerce to bring a convention to your city, intended to increase business activity, including yours. Income tax return Your payment is not a charitable contribution. Income tax return You can deduct it as a business expense. Income tax return See Publication 526 for a discussion of donated inventory, including capital gain property. Income tax return Club dues and membership fees. Income tax return   Generally, you cannot deduct amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or any other social purpose. Income tax return This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Income tax return Exception. Income tax return   The following organizations are not treated as clubs organized for business, pleasure, recreation, or other social purpose unless one of the main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. Income tax return Boards of trade. Income tax return Business leagues. Income tax return Chambers of commerce. Income tax return Civic or public service organizations. Income tax return Professional organizations such as bar associations and medical associations. Income tax return Real estate boards. Income tax return Trade associations. Income tax return Credit card convenience fees. Income tax return   Credit card companies charge a fee to businesses who accept their cards. Income tax return This fee when paid or incurred by the business can be deducted as a business expense. Income tax return Damages recovered. Income tax return   Special rules apply to compensation you receive for damages sustained as a result of patent infringement, breach of contract or fiduciary duty, or antitrust violations. Income tax return You must include this compensation in your income. Income tax return However, you may be able to take a special deduction. Income tax return The deduction applies only to amounts recovered for actual economic injury, not any additional amount. Income tax return The deduction is the smaller of the following. Income tax return The amount you received or accrued for damages in the tax year reduced by the amount you paid or incurred in the year to recover that amount. Income tax return Your losses from the injury you have not deducted. Income tax return Demolition expenses or losses. Income tax return   Amounts paid or incurred to demolish a structure are not deductible. Income tax return These amounts are added to the basis of the land where the demolished structure was located. Income tax return Any loss for the remaining undepreciated basis of a demolished structure would not be recognized until the property is disposed of. Income tax return Education expenses. Income tax return   Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible. Income tax return See Education Expenses in chapter 2. Income tax return   You can also deduct the cost of your own education (including certain related travel) related to your trade or business. Income tax return You must be able to show the education maintains or improves skills required in your trade or business, or that it is required by law or regulations, for keeping your license to practice, status, or job. Income tax return For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law. Income tax return   Education expenses you incur to meet the minimum requirements of your present trade or business, or those that qualify you for a new trade or business, are not deductible. Income tax return This is true even if the education maintains or improves skills presently required in your business. Income tax return For more information on education expenses, see Publication 970. Income tax return Franchise, trademark, trade name. Income tax return   If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense only if your payments are part of a series of payments that are: Contingent on productivity, use, or disposition of the item, Payable at least annually for the entire term of the transfer agreement, and Substantially equal in amount (or payable under a fixed formula). Income tax return   When determining the term of the transfer agreement, include all renewal options and any other period for which you and the transferrer reasonably expect the agreement to be renewed. Income tax return   A franchise includes an agreement that gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities within a specified area. Income tax return Impairment-related expenses. Income tax return   If you are disabled, you can deduct expenses necessary for you to be able to work (impairment-related expenses) as a business expense, rather than as a medical expense. Income tax return   You are disabled if you have either of the following. Income tax return A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed. Income tax return A physical or mental impairment that substantially limits one or more of your major life activities. Income tax return   The expense qualifies as a business expense if all the following apply. Income tax return Your work clearly requires the expense for you to satisfactorily perform that work. Income tax return The goods or services purchased are clearly not needed or used, other than incidentally, in your personal activities. Income tax return Their treatment is not specifically provided for under other tax law provisions. Income tax return Example. Income tax return You are blind. Income tax return You must use a reader to do your work, both at and away from your place of work. Income tax return The reader's services are only for your work. Income tax return You can deduct your expenses for the reader as a business expense. Income tax return Internet-related expenses. Income tax return   Generally, you can deduct internet-related expenses including domain registrations fees and webmaster consulting costs. Income tax return If you are starting a business you may have to amortize these expenses as start-up costs. Income tax return For more information about amortizing start-up and organizational costs, see chapter 8. Income tax return Interview expense allowances. Income tax return   Reimbursements you make to job candidates for transportation or other expenses related to interviews for possible employment are not wages. Income tax return You can deduct the reimbursements as a business expense. Income tax return However, expenses for food, beverages, and entertainment are subject to the 50% limit discussed earlier under Meals and Entertainment. Income tax return Legal and professional fees. Income tax return   Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. Income tax return However, usually legal fees you pay to acquire business assets are not deductible. Income tax return These costs are added to the basis of the property. Income tax return   Fees that include payments for work of a personal nature (such as drafting a will, or damages arising from a personal injury) are not allowed as a business deduction on Schedule C or C-EZ. Income tax return If the invoice includes both business and personal charges, compute the business portion as follows: multiply the total amount of the bill by a fraction, the numerator of which is the amount attributable to business matters, the denominator of which is the total amount paid. Income tax return The result is the portion of the invoice attributable to business expenses. Income tax return The portion attributable to personal matters is the difference between the total amount and the business portion (computed above). Income tax return   Legal fees relating to personal tax advice may be deductible on Schedule A (Form 1040), if you itemize deductions. Income tax return However, the deduction is subject to the 2% limitation on miscellaneous itemized deductions. Income tax return See Publication 529, Miscellaneous Deductions. Income tax return Tax preparation fees. Income tax return   The cost of hiring a tax professional, such as a C. Income tax return P. Income tax return A. Income tax return , to prepare that part of your tax return relating to your business as a sole proprietor is deductible on Schedule C or Schedule C-EZ. Income tax return Any remaining cost may be deductible on Schedule A (Form 1040) if you itemize deductions. Income tax return   You can also claim a business deduction for amounts paid or incurred in resolving asserted tax deficiencies for your business operated as a sole proprietor. Income tax return Licenses and regulatory fees. Income tax return   Licenses and regulatory fees for your trade or business paid annually to state or local governments generally are deductible. Income tax return Some licenses and fees may have to be amortized. Income tax return See chapter 8 for more information. Income tax return Lobbying expenses. Income tax return   Generally, lobbying expenses are not deductible. Income tax return Lobbying expenses include amounts paid or incurred for any of the following activities. Income tax return Influencing legislation. Income tax return Participating in or intervening in any political campaign for, or against, any candidate for public office. Income tax return Attempting to influence the general public, or segments of the public, about elections, legislative matters, or referendums. Income tax return Communicating directly with covered executive branch officials (defined later) in any attempt to influence the official actions or positions of those officials. Income tax return Researching, preparing, planning, or coordinating any of the preceding activities. Income tax return   Your expenses for influencing legislation and communicating directly with a covered executive branch official include a portion of your labor costs and general and administrative costs of your business. Income tax return For information on making this allocation, see section 1. Income tax return 162-28 of the regulations. Income tax return   You cannot claim a charitable or business expense deduction for amounts paid to an organization if both of the following apply. Income tax return The organization conducts lobbying activities on matters of direct financial interest to your business. Income tax return A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses. Income tax return   If a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues. Income tax return Covered executive branch official. Income tax return   For purposes of this discussion, a covered executive branch official is any of the following. Income tax return The President. Income tax return The Vice President. Income tax return Any officer or employee of the White House Office of the Executive Office of the President and the two most senior level officers of each of the other agencies in the Executive Office. Income tax return Any individual who: Is serving in a position in Level I of the Executive Schedule under section 5312 of title 5, United States Code, Has been designated by the President as having Cabinet-level status, or Is an immediate deputy of an individual listed in item (a) or (b). Income tax return Exceptions to denial of deduction. Income tax return   The general denial of the deduction does not apply to the following. Income tax return Expenses of appearing before, or communicating with, any committee or member of any local council or similar governing body concerning its legislation (local legislation) if the legislation is of direct interest to you or to you and an organization of which you are a member. Income tax return An Indian tribal government is treated as a local council or similar governing body. Income tax return Any in-house expenses for influencing legislation and communicating directly with a covered executive branch official if those expenses for the tax year do not exceed $2,000 (excluding overhead expenses). Income tax return Expenses incurred by taxpayers engaged in the trade or business of lobbying (professional lobbyists) on behalf of another person (but does apply to payments by the other person to the lobbyist for lobbying activities). Income tax return Moving machinery. Income tax return   Generally, the cost of moving machinery from one city to another is a deductible expense. Income tax return So is the cost of moving machinery from one plant to another, or from one part of your plant to another. Income tax return You can deduct the cost of installing the machinery in the new location. Income tax return However, you must capitalize the costs of installing or moving newly purchased machinery. Income tax return Outplacement services. Income tax return   The costs of outplacement services you provide to your employees to help them find new employment, such as career counseling, résumé assistance, skills assessment, etc. Income tax return are deductible. Income tax return   The costs of outplacement services may cover more than one deduction category. Income tax return For example, deduct as a utilities expense the cost of telephone calls made under this service and deduct as rental expense the cost of renting machinery and equipment for this service. Income tax return   For information on whether the value of outplacement services is includable in your employees' income, see Publication 15-B. Income tax return Penalties and fines. Income tax return   Penalties paid for late performance or nonperformance of a contract are generally deductible. Income tax return For instance, you own and operate a construction company. Income tax return Under a contract, you are to finish construction of a building by a certain date. Income tax return Due to construction delays, the building is not completed and ready for occupancy on the date stipulated in the contract. Income tax return You are now required to pay an additional amount for each day that completion is delayed beyond the completion date stipulated in the contract. Income tax return These additional costs are deductible business expenses. Income tax return   On the other hand, penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible. Income tax return These fines or penalties include the following amounts. Income tax return Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding. Income tax return Paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and additional amounts and assessable penalties imposed by the Internal Revenue Code. Income tax return Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal. Income tax return Forfeited as collateral posted for a proceeding that could result in a fine or penalty. Income tax return   Examples of nondeductible penalties and fines include the following. Income tax return Fines for violating city housing codes. Income tax return Fines paid by truckers for violating state maximum highway weight laws. Income tax return Fines for violating air quality laws. Income tax return Civil penalties for violating federal laws regarding mining safety standards and discharges into navigable waters. Income tax return   A fine or penalty does not include any of the following. Income tax return Legal fees and related expenses to defend yourself in a prosecution or civil action for a violation of the law imposing the fine or civil penalty. Income tax return Court costs or stenographic and printing charges. Income tax return Compensatory damages paid to a government. Income tax return Political contributions. Income tax return   Contributions or gifts paid to political parties or candidates are not deductible. Income tax return In addition, expenses paid or incurred to take part in any political campaign of a candidate for public office are not deductible. Income tax return Indirect political contributions. Income tax return   You cannot deduct indirect political contributions and costs of taking part in political activities as business expenses. Income tax return Examples of nondeductible expenses include the following. Income tax return Advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate. Income tax return Admission to a dinner or program (including, but not limited to, galas, dances, film presentations, parties, and sporting events) if any of the proceeds from the function are for, or intended for, the use of a political party or candidate. Income tax return Admission to an inaugural ball, gala, parade, concert, or similar event if identified with a political party or candidate. Income tax return Repairs. Income tax return   The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. Income tax return Routine maintenance that keeps your property in a normal efficient operating condition, but that does not materially increase the value or substantially prolong the useful life of the property, is deductible in the year that it is incurred. Income tax return Otherwise, the cost must be capitalized and depreciated. Income tax return See Form 4562 and its instructions for how to compute and claim the depreciation deduction. Income tax return   The cost of repairs includes the costs of labor, supplies, and certain other items. Income tax return The value of your own labor is not deductible. Income tax return Examples of repairs include: Reconditioning floors (but not replacement), Repainting the interior and exterior walls of a building, Cleaning and repairing roofs and gutters, and Fixing plumbing leaks (but not replacement of fixtures). Income tax return Repayments. Income tax return   If you had to repay an amount you included in your income in an earlier year, you may be able to deduct the amount repaid for the year in which you repaid it. Income tax return Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. Income tax return Type of deduction. Income tax return   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. Income tax return For instance, if you repay an amount you previously reported as a capital gain, deduct the repayment as a capital loss on Form 8949. Income tax return If you reported it as self-employment income, deduct it as a business deduction on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). Income tax return   If you reported the amount as wages, unemployment compensation, or other nonbusiness ordinary income, enter it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is subject to the 2% limitation. Income tax return However, if the repayment is over $3,000 and Method 1 (discussed later) applies, deduct it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is not subject to the 2% limitation. Income tax return Repayment—$3,000 or less. Income tax return   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Income tax return Repayment—over $3,000. Income tax return   If the amount you repaid was more than $3,000, you can deduct the repayment, as described earlier. Income tax return However, you can instead choose to take a tax credit for the year of repayment if you included the income under a “claim of right. Income tax return ” This means that at the time you included the income, it appeared that you had an unrestricted right to it. Income tax return If you qualify for this choice, figure your tax under both methods and use the method that results in less tax. Income tax return Method 1. Income tax return   Figure your tax for 2013 claiming a deduction for the repaid amount. Income tax return Method 2. Income tax return   Figure your tax for 2013 claiming a credit for the repaid amount. Income tax return Follow these steps. Income tax return Figure your tax for 2013 without deducting the repaid amount. Income tax return Refigure your tax from the earlier year without including in income the amount you repaid in 2013. Income tax return Subtract the tax in (2) from the tax shown on your return for the earlier year. Income tax return This is the amount of your credit. Income tax return Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1). Income tax return   If Method 1 results in less tax, deduct the amount repaid as discussed earlier under Type of deduction. Income tax return   If Method 2 results in less tax, claim the credit on line 71 of Form 1040, and write “I. Income tax return R. Income tax return C. Income tax return 1341” next to line 71. Income tax return Example. Income tax return For 2012, you filed a return and reported your income on the cash method. Income tax return In 2013, you repaid $5,000 included in your 2012 gross income under a claim of right. Income tax return Your filing status in 2013 and 2012 is single. Income tax return Your income and tax for both years are as follows:   2012  With Income 2012  Without Income Taxable Income $15,000 $10,000 Tax $ 1,819 $ 1,069   2013  Without Deduction 2013  With Deduction Taxable Income $49,950 $44,950 Tax $8,423 $7,173 Your tax under Method 1 is $7,173. Income tax return Your tax under Method 2 is $7,673, figured as follows: Tax previously determined for 2012 $ 1,819 Less: Tax as refigured − 1,069 Decrease in 2012 tax $ 750 Regular tax liability for 2013 $8,423 Less: Decrease in 2012 tax − 750 Refigured tax for 2013 $ 7,673 Because you pay less tax under Method 1, you should take a deduction for the repayment in 2013. Income tax return Repayment does not apply. Income tax return   This discussion does not apply to the following. Income tax return Deductions for bad debts. Income tax return Deductions from sales to customers, such as returns and allowances, and similar items. Income tax return Deductions for legal and other expenses of contesting the repayment. Income tax return Year of deduction (or credit). Income tax return   If you use the cash method of accounting, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. Income tax return If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper deduction under your accounting method. Income tax return For example, if you use the accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment accrues. Income tax return Subscriptions. Income tax return   Subscriptions to professional, technical, and trade journals that deal with your business field are deductible. Income tax return Supplies and materials. Income tax return   Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the tax year. Income tax return   If you keep incidental materials and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if all the following requirements are met. Income tax return You do not keep a record of when they are used. Income tax return You do not take an inventory of the amount on hand at the beginning and end of the tax year. Income tax return This method does not distort your income. Income tax return   You can also deduct the cost of books, professional instruments, equipment, etc. Income tax return , if you normally use them within a year. Income tax return However, if the usefulness of these items extends substantially beyond the year they are placed in service, you generally must recover their costs through depreciation. Income tax return For more information regarding depreciation see Publication 946, How To Depreciate Property. Income tax return Utilities. Income tax return   Business expenses for heat, lights, power, telephone service, and water and sewerage are deductible. Income tax return However, any part due to personal use is not deductible. Income tax return Telephone. Income tax return   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. Income tax return However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses. Income tax return Prev  Up  Next   Home   More Online Publications