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Irs1040 Publication 925 - Introductory Material Table of Contents Future Developments Reminders IntroductionOrdering forms and publications. Irs1040 Tax questions. Irs1040 Useful Items - You may want to see: Future Developments For the latest developments related to Publication 925, such as legislation enacted after it was published, go to www. Irs1040 irs. Irs1040 gov/pub925. Irs1040 Reminders At-risk amounts. Irs1040  The following rules apply to amounts borrowed after May 3, 2004. Irs1040 You must file Form 6198, At-Risk Limitations, if you are engaged in an activity included in (6) under Activities Covered by the At-Risk Rules and you have borrowed certain amounts described in Certain borrowed amounts excluded under At-Risk Amounts in this publication. Irs1040 You may be considered at risk for certain amounts described in Certain borrowed amounts excluded under At-Risk Amounts secured by real property used in the activity of holding real property (other than mineral property) that, if nonrecourse, would be qualified nonrecourse financing. Irs1040 Photographs of missing children. Irs1040  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Irs1040 Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Irs1040 You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Irs1040 Introduction This publication discusses two sets of rules that may limit the amount of your deductible loss from a trade, business, rental, or other income-producing activity. Irs1040 The first part of the publication discusses the passive activity rules. Irs1040 The second part discusses the at-risk rules. Irs1040 However, when you figure your allowable losses from any activity, you must apply the at-risk rules before the passive activity rules. Irs1040 Comments and suggestions. Irs1040   We welcome your comments about this publication and your suggestions for future editions. Irs1040   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Irs1040 NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Irs1040 Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Irs1040   You can send your comments from www. Irs1040 irs. Irs1040 gov/formspubs/. Irs1040 Click on “More Information” and then on “Comment on Tax Forms and Publications. Irs1040 ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Irs1040 Ordering forms and publications. Irs1040   Visit www. Irs1040 irs. Irs1040 gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Irs1040 Internal Revenue Service 1201 N. Irs1040 Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Irs1040   If you have a tax question, check the information available on IRS. Irs1040 gov or call 1-800-829-1040. Irs1040 We cannot answer tax questions sent to either of the above addresses. Irs1040 Useful Items - You may want to see: Publication 527 Residential Rental Property (Including Rental of Vacation Homes) 541 Partnerships Form (and Instructions) 4952 Investment Interest Expense Deduction 6198 At-Risk Limitations 8582 Passive Activity Loss Limitations 8582-CR Passive Activity Credit Limitations 8810 Corporate Passive Activity Loss and Credit Limitations 8949 Sales and Other Dispositions of Capital Assets See How To Get Tax Help near the end of this publication for information about getting these publications and forms. Irs1040 Prev  Up  Next   Home   More Online Publications

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Irs1040 2. Irs1040   Employees' Pay Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Tests for Deducting PayTest 1—Reasonableness Test 2—For Services Performed Kinds of PayAwards Bonuses Education Expenses Fringe Benefits Loans or Advances Property Reimbursements for Business Expenses Sick and Vacation Pay Introduction You can generally deduct the amount you pay your employees for the services they perform. Irs1040 The pay may be in cash, property, or services. Irs1040 It may include wages, salaries, bonuses, commissions, or other non-cash compensation such as vacation allowances and fringe benefits. Irs1040 For information about deducting employment taxes, see chapter 5. Irs1040 You can claim employment credits, such as the following, if you hire individuals who meet certain requirements. Irs1040 Empowerment zone employment credit (Form 8844). Irs1040 Indian employment credit (Form 8845). Irs1040 Work opportunity credit (Form 5884). Irs1040 Credit for employer differential wage payments (Form 8932). Irs1040 Reduce your deduction for employee wages by the amount of employment credits you claim. Irs1040 For more information about these credits, see the form on which the credit is claimed. Irs1040 Topics - This chapter discusses: Tests for deducting pay Kinds of pay Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits See chapter 12 for information about getting publications and forms. Irs1040 Tests for Deducting Pay To be deductible, your employees' pay must be an ordinary and necessary business expense and you must pay or incur it. Irs1040 These and other requirements that apply to all business expenses are explained in chapter 1. Irs1040 In addition, the pay must meet both of the following tests. Irs1040 Test 1. Irs1040 It must be reasonable. Irs1040 Test 2. Irs1040 It must be for services performed. Irs1040 The form or method of figuring the pay does not affect its deductibility. Irs1040 For example, bonuses and commissions based on sales or earnings, and paid under an agreement made before the services were performed, are both deductible. Irs1040 Test 1—Reasonableness You must be able to prove that the pay is reasonable. Irs1040 Whether the pay is reasonable depends on the circumstances that existed when you contracted for the services, not those that exist when reasonableness is questioned. Irs1040 If the pay is excessive, the excess pay is disallowed as a deduction. Irs1040 Factors to consider. Irs1040   Determine the reasonableness of pay by the facts and circumstances. Irs1040 Generally, reasonable pay is the amount that a similar business would pay for the same or similar services. Irs1040   To determine if pay is reasonable, also consider the following items and any other pertinent facts. Irs1040 The duties performed by the employee. Irs1040 The volume of business handled. Irs1040 The character and amount of responsibility. Irs1040 The complexities of your business. Irs1040 The amount of time required. Irs1040 The cost of living in the locality. Irs1040 The ability and achievements of the individual employee performing the service. Irs1040 The pay compared with the gross and net income of the business, as well as with distributions to shareholders if the business is a corporation. Irs1040 Your policy regarding pay for all your employees. Irs1040 The history of pay for each employee. Irs1040 Test 2—For Services Performed You must be able to prove the payment was made for services actually performed. Irs1040 Employee-shareholder salaries. Irs1040   If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services actually performed, the excessive part of the salary may be treated as a constructive dividend to the employee-shareholder. Irs1040 The excessive part of the salary would not be allowed as a salary deduction by the corporation. Irs1040 For more information on corporate distributions to shareholders, see Publication 542, Corporations. Irs1040 Kinds of Pay Some of the ways you may provide pay to your employees in addition to regular wages or salaries are discussed next. Irs1040 For specialized and detailed information on employees' pay and the employment tax treatment of employees' pay, see Publications 15, 15-A, and 15-B. Irs1040 Awards You can generally deduct amounts you pay to your employees as awards, whether paid in cash or property. Irs1040 If you give property to an employee as an employee achievement award, your deduction may be limited. Irs1040 Achievement awards. Irs1040   An achievement award is an item of tangible personal property that meets all the following requirements. Irs1040 It is given to an employee for length of service or safety achievement. Irs1040 It is awarded as part of a meaningful presentation. Irs1040 It is awarded under conditions and circumstances that do not create a significant likelihood of disguised pay. Irs1040 Length-of-service award. Irs1040    An award will qualify as a length-of-service award only if either of the following applies. Irs1040 The employee receives the award after his or her first 5 years of employment. Irs1040 The employee did not receive another length-of-service award (other than one of very small value) during the same year or in any of the prior 4 years. Irs1040 Safety achievement award. Irs1040    An award for safety achievement will qualify as an achievement award unless one of the following applies. Irs1040 It is given to a manager, administrator, clerical employee, or other professional employee. Irs1040 During the tax year, more than 10% of your employees, excluding those listed in (1), have already received a safety achievement award (other than one of very small value). Irs1040 Deduction limit. Irs1040   Your deduction for the cost of employee achievement awards given to any one employee during the tax year is limited to the following. Irs1040 $400 for awards that are not qualified plan awards. Irs1040 $1,600 for all awards, whether or not qualified plan awards. Irs1040   A qualified plan award is an achievement award given as part of an established written plan or program that does not favor highly compensated employees as to eligibility or benefits. Irs1040   A highly compensated employee is an employee who meets either of the following tests. Irs1040 The employee was a 5% owner at any time during the year or the preceding year. Irs1040 The employee received more than $115,000 in pay for the preceding year. Irs1040 You can choose to ignore test (2) if the employee was not also in the top 20% of employees ranked by pay for the preceding year. Irs1040   An award is not a qualified plan award if the average cost of all the employee achievement awards given during the tax year (that would be qualified plan awards except for this limit) is more than $400. Irs1040 To figure this average cost, ignore awards of nominal value. Irs1040 Deduct achievement awards as a nonwage business expense on your return or business schedule. Irs1040 You may not owe employment taxes on the value of some achievement awards you provide to an employee. Irs1040 See Publication 15-B. Irs1040 Bonuses You can generally deduct a bonus paid to an employee if you intended the bonus as additional pay for services, not as a gift, and the services were performed. Irs1040 However, the total bonuses, salaries, and other pay must be reasonable for the services performed. Irs1040 If the bonus is paid in property, see Property , later. Irs1040 Gifts of nominal value. Irs1040    If, to promote employee goodwill, you distribute food or merchandise of nominal value to your employees at holidays, you can deduct the cost of these items as a nonwage business expense. Irs1040 Your deduction for de minimis gifts of food or drink are not subject to the 50% deduction limit that generally applies to meals. Irs1040 For more information on this deduction limit, see Meals and lodging , later. Irs1040 Education Expenses If you pay or reimburse education expenses for an employee, you can deduct the payments if they are part of a qualified educational assistance program. Irs1040 Deduct them on the “Employee benefit programs” or other appropriate line of your tax return. Irs1040 For information on educational assistance programs, see Educational Assistance in section 2 of Publication 15-B. Irs1040 Fringe Benefits A fringe benefit is a form of pay for the performance of services. Irs1040 You can generally deduct the cost of fringe benefits. Irs1040 You may be able to exclude all or part of the value of some fringe benefits from your employees' pay. Irs1040 You also may not owe employment taxes on the value of the fringe benefits. Irs1040 See Table 2-1, Special Rules for Various Types of Fringe Benefits, in Publication 15-B for details. Irs1040 Your deduction for the cost of fringe benefits for activities generally considered entertainment, amusement, or recreation, or for a facility used in connection with such an activity (for example, a company aircraft) for certain officers, directors, and more-than-10% shareholders is limited. Irs1040 Certain fringe benefits are discussed next. Irs1040 See Publication 15-B for more details on these and other fringe benefits. Irs1040 Meals and lodging. Irs1040   You can usually deduct the cost of furnishing meals and lodging to your employees. Irs1040 Deduct the cost in whatever category the expense falls. Irs1040 For example, if you operate a restaurant, deduct the cost of the meals you furnish to employees as part of the cost of goods sold. Irs1040 If you operate a nursing home, motel, or rental property, deduct the cost of furnishing lodging to an employee as expenses for utilities, linen service, salaries, depreciation, etc. Irs1040 Deduction limit on meals. Irs1040   You can generally deduct only 50% of the cost of furnishing meals to your employees. Irs1040 However, you can deduct the full cost of the following meals. Irs1040 Meals whose value you include in an employee's wages. Irs1040 Meals that qualify as a de minimis fringe benefit as discussed in section 2 of Publication 15-B. Irs1040 This generally includes meals you furnish to employees at your place of business if more than half of these employees are provided the meals for your convenience. Irs1040 Meals you furnish to your employees at the work site when you operate a restaurant or catering service. Irs1040 Meals you furnish to your employees as part of the expense of providing recreational or social activities, such as a company picnic. Irs1040 Meals you are required by federal law to furnish to crew members of certain commercial vessels (or would be required to furnish if the vessels were operated at sea). Irs1040 This does not include meals you furnish on vessels primarily providing luxury water transportation. Irs1040 Meals you furnish on an oil or gas platform or drilling rig located offshore or in Alaska. Irs1040 This includes meals you furnish at a support camp that is near and integral to an oil or gas drilling rig located in Alaska. Irs1040 Employee benefit programs. Irs1040   Employee benefit programs include the following. Irs1040 Accident and health plans. Irs1040 Adoption assistance. Irs1040 Cafeteria plans. Irs1040 Dependent care assistance. Irs1040 Education assistance. Irs1040 Life insurance coverage. Irs1040 Welfare benefit funds. Irs1040   You can generally deduct amounts you spend on employee benefit programs on the applicable line of your tax return. Irs1040 For example, if you provide dependent care by operating a dependent care facility for your employees, deduct your costs in whatever categories they fall (utilities, salaries, etc. Irs1040 ). Irs1040 Life insurance coverage. Irs1040   You cannot deduct the cost of life insurance coverage for you, an employee, or any person with a financial interest in your business, if you are directly or indirectly the beneficiary of the policy. Irs1040 See Regulations section 1. Irs1040 264-1 for more information. Irs1040 Welfare benefit funds. Irs1040   A welfare benefit fund is a funded plan (or a funded arrangement having the effect of a plan) that provides welfare benefits to your employees, independent contractors, or their beneficiaries. Irs1040 Welfare benefits are any benefits other than deferred compensation or transfers of restricted property. Irs1040   Your deduction for contributions to a welfare benefit fund is limited to the fund's qualified cost for the tax year. Irs1040 If your contributions to the fund are more than its qualified cost, carry the excess over to the next tax year. Irs1040   Generally, the fund's “qualified cost” is the total of the following amounts, reduced by the after-tax income of the fund. Irs1040 The cost you would have been able to deduct using the cash method of accounting if you had paid for the benefits directly. Irs1040 The contributions added to a reserve account that are needed to fund claims incurred but not paid as of the end of the year. Irs1040 These claims can be for supplemental unemployment benefits, severance pay, or disability, medical, or life insurance benefits. Irs1040   For more information, see sections 419(c) and 419A of the Internal Revenue Code and the related regulations. Irs1040 Loans or Advances You generally can deduct as wages an advance you make to an employee for services performed if you do not expect the employee to repay the advance. Irs1040 However, if the employee performs no services, treat the amount you advanced as a loan. Irs1040 If the employee does not repay the loan, treat it as income to the employee. Irs1040 Below-market interest rate loans. Irs1040   On certain loans you make to an employee or shareholder, you are treated as having received interest income and as having paid compensation or dividends equal to that interest. Irs1040 See Below-Market Loans in chapter 4. Irs1040 Property If you transfer property (including your company's stock) to an employee as payment for services, you can generally deduct it as wages. Irs1040 The amount you can deduct is the property's fair market value on the date of the transfer less any amount the employee paid for the property. Irs1040 You can claim the deduction only for the tax year in which your employee includes the property's value in income. Irs1040 Your employee is deemed to have included the value in income if you report it on Form W-2, Wage and Tax Statement, in a timely manner. Irs1040 You treat the deductible amount as received in exchange for the property, and you must recognize any gain or loss realized on the transfer, unless it is the company's stock transferred as payment for services. Irs1040 Your gain or loss is the difference between the fair market value of the property and its adjusted basis on the date of transfer. Irs1040 These rules also apply to property transferred to an independent contractor for services, generally reported on Form 1099-MISC, Miscellaneous Income. Irs1040 Restricted property. Irs1040   If the property you transfer for services is subject to restrictions that affect its value, you generally cannot deduct it and do not report gain or loss until it is substantially vested in the recipient. Irs1040 However, if the recipient pays for the property, you must report any gain at the time of the transfer up to the amount paid. Irs1040    “Substantially vested” means the property is not subject to a substantial risk of forfeiture. Irs1040 This means that the recipient is not likely to have to give up his or her rights in the property in the future. Irs1040 Reimbursements for Business Expenses You can generally deduct the amount you pay or reimburse employees for business expenses incurred for your business. Irs1040 However, your deduction may be limited. Irs1040 If you make the payment under an accountable plan, deduct it in the category of the expense paid. Irs1040 For example, if you pay an employee for travel expenses incurred on your behalf, deduct this payment as a travel expense. Irs1040 If you make the payment under a nonaccountable plan, deduct it as wages and include it in the employee's Form W-2. Irs1040 See Reimbursement of Travel, Meals, and Entertainment in chapter 11 for more information about deducting reimbursements and an explanation of accountable and nonaccountable plans. Irs1040 Sick and Vacation Pay Sick pay. Irs1040   You can deduct amounts you pay to your employees for sickness and injury, including lump-sum amounts, as wages. Irs1040 However, your deduction is limited to amounts not compensated by insurance or other means. Irs1040 Vacation pay. Irs1040   Vacation pay is an employee benefit. Irs1040 It includes amounts paid for unused vacation leave. Irs1040 You can deduct vacation pay only in the tax year in which the employee actually receives it. Irs1040 This rule applies regardless of whether you use the cash or accrual method of accounting. Irs1040 Prev  Up  Next   Home   More Online Publications