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Tax Form 1040a

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Tax Form 1040a

Tax form 1040a 1. Tax form 1040a   Travel Table of Contents Traveling Away From HomeTax Home Tax Home Different From Family Home Temporary Assignment or Job What Travel Expenses Are Deductible?Employee. Tax form 1040a Business associate. Tax form 1040a Bona fide business purpose. Tax form 1040a Meals Travel in the United States Travel Outside the United States Luxury Water Travel Conventions If you temporarily travel away from your tax home, you can use this chapter to determine if you have deductible travel expenses. Tax form 1040a This chapter discusses: Traveling away from home, Temporary assignment or job, and What travel expenses are deductible. Tax form 1040a It also discusses the standard meal allowance, rules for travel inside and outside the United States, luxury water travel, and deductible convention expenses. Tax form 1040a Travel expenses defined. Tax form 1040a   For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. Tax form 1040a   An ordinary expense is one that is common and accepted in your trade or business. Tax form 1040a A necessary expense is one that is helpful and appropriate for your business. Tax form 1040a An expense does not have to be required to be considered necessary. Tax form 1040a   You will find examples of deductible travel expenses in Table 1-1 , later. Tax form 1040a Traveling Away From Home You are traveling away from home if: Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work, and You need to sleep or rest to meet the demands of your work while away from home. Tax form 1040a This rest requirement is not satisfied by merely napping in your car. Tax form 1040a You do not have to be away from your tax home for a whole day or from dusk to dawn as long as your relief from duty is long enough to get necessary sleep or rest. Tax form 1040a Example 1. Tax form 1040a You are a railroad conductor. Tax form 1040a You leave your home terminal on a regularly scheduled round-trip run between two cities and return home 16 hours later. Tax form 1040a During the run, you have 6 hours off at your turnaround point where you eat two meals and rent a hotel room to get necessary sleep before starting the return trip. Tax form 1040a You are considered to be away from home. Tax form 1040a Example 2. Tax form 1040a You are a truck driver. Tax form 1040a You leave your terminal and return to it later the same day. Tax form 1040a You get an hour off at your turnaround point to eat. Tax form 1040a Because you are not off to get necessary sleep and the brief time off is not an adequate rest period, you are not traveling away from home. Tax form 1040a Members of the Armed Forces. Tax form 1040a   If you are a member of the U. Tax form 1040a S. Tax form 1040a Armed Forces on a permanent duty assignment overseas, you are not traveling away from home. Tax form 1040a You cannot deduct your expenses for meals and lodging. Tax form 1040a You cannot deduct these expenses even if you have to maintain a home in the United States for your family members who are not allowed to accompany you overseas. Tax form 1040a If you are transferred from one permanent duty station to another, you may have deductible moving expenses, which are explained in Publication 521, Moving Expenses. Tax form 1040a   A naval officer assigned to permanent duty aboard a ship that has regular eating and living facilities has a tax home (explained next) aboard the ship for travel expense purposes. Tax form 1040a Tax Home To determine whether you are traveling away from home, you must first determine the location of your tax home. Tax form 1040a Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. Tax form 1040a It includes the entire city or general area in which your business or work is located. Tax form 1040a If you have more than one regular place of business, your tax home is your main place of business. Tax form 1040a See Main place of business or work , later. Tax form 1040a If you do not have a regular or a main place of business because of the nature of your work, then your tax home may be the place where you regularly live. Tax form 1040a See No main place of business or work , later. Tax form 1040a If you do not have a regular or main place of business or post of duty and there is no place where you regularly live, you are considered an itinerant (a transient) and your tax home is wherever you work. Tax form 1040a As an itinerant, you cannot claim a travel expense deduction because you are never considered to be traveling away from home. Tax form 1040a Main place of business or work. Tax form 1040a   If you have more than one place of work, consider the following when determining which one is your main place of business or work. Tax form 1040a The total time you ordinarily spend in each place. Tax form 1040a The level of your business activity in each place. Tax form 1040a Whether your income from each place is significant or insignificant. Tax form 1040a Example. Tax form 1040a You live in Cincinnati where you have a seasonal job for 8 months each year and earn $40,000. Tax form 1040a You work the other 4 months in Miami, also at a seasonal job, and earn $15,000. Tax form 1040a Cincinnati is your main place of work because you spend most of your time there and earn most of your income there. Tax form 1040a No main place of business or work. Tax form 1040a   You may have a tax home even if you do not have a regular or main place of work. Tax form 1040a Your tax home may be the home where you regularly live. Tax form 1040a Factors used to determine tax home. Tax form 1040a   If you do not have a regular or main place of business or work, use the following three factors to determine where your tax home is. Tax form 1040a You perform part of your business in the area of your main home and use that home for lodging while doing business in the area. Tax form 1040a You have living expenses at your main home that you duplicate because your business requires you to be away from that home. Tax form 1040a You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or you often use that home for lodging. Tax form 1040a   If you satisfy all three factors, your tax home is the home where you regularly live. Tax form 1040a If you satisfy only two factors, you may have a tax home depending on all the facts and circumstances. Tax form 1040a If you satisfy only one factor, you are an itinerant; your tax home is wherever you work and you cannot deduct travel expenses. Tax form 1040a Example 1. Tax form 1040a You are single and live in Boston in an apartment you rent. Tax form 1040a You have worked for your employer in Boston for a number of years. Tax form 1040a Your employer enrolls you in a 12-month executive training program. Tax form 1040a You do not expect to return to work in Boston after you complete your training. Tax form 1040a During your training, you do not do any work in Boston. Tax form 1040a Instead, you receive classroom and on-the-job training throughout the United States. Tax form 1040a You keep your apartment in Boston and return to it frequently. Tax form 1040a You use your apartment to conduct your personal business. Tax form 1040a You also keep up your community contacts in Boston. Tax form 1040a When you complete your training, you are transferred to Los Angeles. Tax form 1040a You do not satisfy factor (1) because you did not work in Boston. Tax form 1040a You satisfy factor (2) because you had duplicate living expenses. Tax form 1040a You also satisfy factor (3) because you did not abandon your apartment in Boston as your main home, you kept your community contacts, and you frequently returned to live in your apartment. Tax form 1040a Therefore, you have a tax home in Boston. Tax form 1040a Example 2. Tax form 1040a You are an outside salesperson with a sales territory covering several states. Tax form 1040a Your employer's main office is in Newark, but you do not conduct any business there. Tax form 1040a Your work assignments are temporary, and you have no way of knowing where your future assignments will be located. Tax form 1040a You have a room in your married sister's house in Dayton. Tax form 1040a You stay there for one or two weekends a year, but you do no work in the area. Tax form 1040a You do not pay your sister for the use of the room. Tax form 1040a You do not satisfy any of the three factors listed earlier. Tax form 1040a You are an itinerant and have no tax home. Tax form 1040a Tax Home Different From Family Home If you (and your family) do not live at your tax home (defined earlier), you cannot deduct the cost of traveling between your tax home and your family home. Tax form 1040a You also cannot deduct the cost of meals and lodging while at your tax home. Tax form 1040a See Example 1 , later. Tax form 1040a If you are working temporarily in the same city where you and your family live, you may be considered as traveling away from home. Tax form 1040a See Example 2 , later. Tax form 1040a Example 1. Tax form 1040a You are a truck driver and you and your family live in Tucson. Tax form 1040a You are employed by a trucking firm that has its terminal in Phoenix. Tax form 1040a At the end of your long runs, you return to your home terminal in Phoenix and spend one night there before returning home. Tax form 1040a You cannot deduct any expenses you have for meals and lodging in Phoenix or the cost of traveling from Phoenix to Tucson. Tax form 1040a This is because Phoenix is your tax home. Tax form 1040a Example 2. Tax form 1040a Your family home is in Pittsburgh, where you work 12 weeks a year. Tax form 1040a The rest of the year you work for the same employer in Baltimore. Tax form 1040a In Baltimore, you eat in restaurants and sleep in a rooming house. Tax form 1040a Your salary is the same whether you are in Pittsburgh or Baltimore. Tax form 1040a Because you spend most of your working time and earn most of your salary in Baltimore, that city is your tax home. Tax form 1040a You cannot deduct any expenses you have for meals and lodging there. Tax form 1040a However, when you return to work in Pittsburgh, you are away from your tax home even though you stay at your family home. Tax form 1040a You can deduct the cost of your round trip between Baltimore and Pittsburgh. Tax form 1040a You can also deduct your part of your family's living expenses for meals and lodging while you are living and working in Pittsburgh. Tax form 1040a Temporary Assignment or Job You may regularly work at your tax home and also work at another location. Tax form 1040a It may not be practical to return to your tax home from this other location at the end of each work day. Tax form 1040a Temporary assignment vs. Tax form 1040a indefinite assignment. Tax form 1040a   If your assignment or job away from your main place of work is temporary, your tax home does not change. Tax form 1040a You are considered to be away from home for the whole period you are away from your main place of work. Tax form 1040a You can deduct your travel expenses if they otherwise qualify for deduction. Tax form 1040a Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. Tax form 1040a    However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. Tax form 1040a An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than 1 year, whether or not it actually lasts for more than 1 year. Tax form 1040a   If your assignment is indefinite, you must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them. Tax form 1040a You may be able to deduct the cost of relocating to your new tax home as a moving expense. Tax form 1040a See Publication 521 for more information. Tax form 1040a Exception for federal crime investigations or prosecutions. Tax form 1040a   If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to the 1-year rule. Tax form 1040a This means you may be able to deduct travel expenses even if you are away from your tax home for more than 1 year provided you meet the other requirements for deductibility. Tax form 1040a   For you to qualify, the Attorney General (or his or her designee) must certify that you are traveling: For the federal government, In a temporary duty status, and To investigate, prosecute, or provide support services for the investigation or prosecution of a federal crime. Tax form 1040a Determining temporary or indefinite. Tax form 1040a   You must determine whether your assignment is temporary or indefinite when you start work. Tax form 1040a If you expect an assignment or job to last for 1 year or less, it is temporary unless there are facts and circumstances that indicate otherwise. Tax form 1040a An assignment or job that is initially temporary may become indefinite due to changed circumstances. Tax form 1040a A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment. Tax form 1040a   The following examples illustrate whether an assignment or job is temporary or indefinite. Tax form 1040a Example 1. Tax form 1040a You are a construction worker. Tax form 1040a You live and regularly work in Los Angeles. Tax form 1040a You are a member of a trade union in Los Angeles that helps you get work in the Los Angeles area. Tax form 1040a Your tax home is Los Angeles. Tax form 1040a Because of a shortage of work, you took a job on a construction project in Fresno. Tax form 1040a Your job was scheduled to end in 8 months. Tax form 1040a The job actually lasted 10 months. Tax form 1040a You realistically expected the job in Fresno to last 8 months. Tax form 1040a The job actually did last less than 1 year. Tax form 1040a The job is temporary and your tax home is still in Los Angeles. Tax form 1040a Example 2. Tax form 1040a The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 18 months. Tax form 1040a The job actually was completed in 10 months. Tax form 1040a Your job in Fresno is indefinite because you realistically expected the work to last longer than 1 year, even though it actually lasted less than 1 year. Tax form 1040a You cannot deduct any travel expenses you had in Fresno because Fresno became your tax home. Tax form 1040a Example 3. Tax form 1040a The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 9 months. Tax form 1040a After 8 months, however, you were asked to remain for 7 more months (for a total actual stay of 15 months). Tax form 1040a Initially, you realistically expected the job in Fresno to last for only 9 months. Tax form 1040a However, due to changed circumstances occurring after 8 months, it was no longer realistic for you to expect that the job in Fresno would last for 1 year or less. Tax form 1040a You can only deduct your travel expenses for the first 8 months. Tax form 1040a You cannot deduct any travel expenses you had after that time because Fresno became your tax home when the job became indefinite. Tax form 1040a Going home on days off. Tax form 1040a   If you go back to your tax home from a temporary assignment on your days off, you are not considered away from home while you are in your hometown. Tax form 1040a You cannot deduct the cost of your meals and lodging there. Tax form 1040a However, you can deduct your travel expenses, including meals and lodging, while traveling between your temporary place of work and your tax home. Tax form 1040a You can claim these expenses up to the amount it would have cost you to stay at your temporary place of work. Tax form 1040a   If you keep your hotel room during your visit home, you can deduct the cost of your hotel room. Tax form 1040a In addition, you can deduct your expenses of returning home up to the amount you would have spent for meals had you stayed at your temporary place of work. Tax form 1040a Probationary work period. Tax form 1040a   If you take a job that requires you to move, with the understanding that you will keep the job if your work is satisfactory during a probationary period, the job is indefinite. Tax form 1040a You cannot deduct any of your expenses for meals and lodging during the probationary period. Tax form 1040a What Travel Expenses Are Deductible? Once you have determined that you are traveling away from your tax home, you can determine what travel expenses are deductible. Tax form 1040a You can deduct ordinary and necessary expenses you have when you travel away from home on business. Tax form 1040a The type of expense you can deduct depends on the facts and your circumstances. Tax form 1040a Table 1-1 summarizes travel expenses you may be able to deduct. Tax form 1040a You may have other deductible travel expenses that are not covered there, depending on the facts and your circumstances. Tax form 1040a When you travel away from home on business, you should keep records of all the expenses you have and any advances you receive from your employer. Tax form 1040a You can use a log, diary, notebook, or any other written record to keep track of your expenses. Tax form 1040a The types of expenses you need to record, along with supporting documentation, are described in Table 5-1 (see chapter 5). Tax form 1040a Separating costs. Tax form 1040a   If you have one expense that includes the costs of meals, entertainment, and other services (such as lodging or transportation), you must allocate that expense between the cost of meals and entertainment and the cost of other services. Tax form 1040a You must have a reasonable basis for making this allocation. Tax form 1040a For example, you must allocate your expenses if a hotel includes one or more meals in its room charge. Tax form 1040a Travel expenses for another individual. Tax form 1040a    If a spouse, dependent, or other individual goes with you (or your employee) on a business trip or to a business convention, you generally cannot deduct his or her travel expenses. Tax form 1040a Employee. Tax form 1040a   You can deduct the travel expenses of someone who goes with you if that person: Is your employee, Has a bona fide business purpose for the travel, and Would otherwise be allowed to deduct the travel expenses. Tax form 1040a Business associate. Tax form 1040a   If a business associate travels with you and meets the conditions in (2) and (3), earlier, you can deduct the travel expenses you have for that person. Tax form 1040a A business associate is someone with whom you could reasonably expect to actively conduct business. Tax form 1040a A business associate can be a current or prospective (likely to become) customer, client, supplier, employee, agent, partner, or professional advisor. Tax form 1040a Bona fide business purpose. Tax form 1040a   A bona fide business purpose exists if you can prove a real business purpose for the individual's presence. Tax form 1040a Incidental services, such as typing notes or assisting in entertaining customers, are not enough to make the expenses deductible. Tax form 1040a Table 1-1. Tax form 1040a Travel Expenses You Can Deduct   This chart summarizes expenses you can deduct when you travel away from home for business purposes. Tax form 1040a IF you have expenses for. Tax form 1040a . Tax form 1040a . Tax form 1040a THEN you can deduct the cost of. Tax form 1040a . Tax form 1040a . Tax form 1040a transportation travel by airplane, train, bus, or car between your home and your business destination. Tax form 1040a If you were provided with a free ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. Tax form 1040a If you travel by ship, see Luxury Water Travel and Cruise Ships (under Conventions) for additional rules and limits. Tax form 1040a taxi, commuter bus, and airport limousine fares for these and other types of transportation that take you between: The airport or station and your hotel, and The hotel and the work location of your customers or clients, your business meeting place, or your temporary work location. Tax form 1040a baggage and shipping sending baggage and sample or display material between your regular and temporary work locations. Tax form 1040a car operating and maintaining your car when traveling away from home on business. Tax form 1040a You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. Tax form 1040a If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. Tax form 1040a lodging and meals your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Tax form 1040a Meals include amounts spent for food, beverages, taxes, and related tips. Tax form 1040a See Meals for additional rules and limits. Tax form 1040a cleaning dry cleaning and laundry. Tax form 1040a telephone business calls while on your business trip. Tax form 1040a This includes business communication by fax machine or other communication devices. Tax form 1040a tips tips you pay for any expenses in this chart. Tax form 1040a other other similar ordinary and necessary expenses related to your business travel. Tax form 1040a These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer. Tax form 1040a Example. Tax form 1040a Jerry drives to Chicago on business and takes his wife, Linda, with him. Tax form 1040a Linda is not Jerry's employee. Tax form 1040a Linda occasionally types notes, performs similar services, and accompanies Jerry to luncheons and dinners. Tax form 1040a The performance of these services does not establish that her presence on the trip is necessary to the conduct of Jerry's business. Tax form 1040a Her expenses are not deductible. Tax form 1040a Jerry pays $199 a day for a double room. Tax form 1040a A single room costs $149 a day. Tax form 1040a He can deduct the total cost of driving his car to and from Chicago, but only $149 a day for his hotel room. Tax form 1040a If he uses public transportation, he can deduct only his fare. Tax form 1040a Meals You can deduct the cost of meals in either of the following situations. Tax form 1040a It is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business. Tax form 1040a The meal is business-related entertainment. Tax form 1040a Business-related entertainment is discussed in chapter 2 . Tax form 1040a The following discussion deals only with meals that are not business-related entertainment. Tax form 1040a Lavish or extravagant. Tax form 1040a   You cannot deduct expenses for meals that are lavish or extravagant. Tax form 1040a An expense is not considered lavish or extravagant if it is reasonable based on the facts and circumstances. Tax form 1040a Expenses will not be disallowed merely because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Tax form 1040a 50% limit on meals. Tax form 1040a   You can figure your meals expense using either of the following methods. Tax form 1040a Actual cost. Tax form 1040a The standard meal allowance. Tax form 1040a Both of these methods are explained below. Tax form 1040a But, regardless of the method you use, you generally can deduct only 50% of the unreimbursed cost of your meals. Tax form 1040a   If you are reimbursed for the cost of your meals, how you apply the 50% limit depends on whether your employer's reimbursement plan was accountable or nonaccountable. Tax form 1040a If you are not reimbursed, the 50% limit applies whether the unreimbursed meal expense is for business travel or business entertainment. Tax form 1040a Chapter 2 discusses the 50% Limit in more detail, and chapter 6 discusses accountable and nonaccountable plans. Tax form 1040a Actual Cost You can use the actual cost of your meals to figure the amount of your expense before reimbursement and application of the 50% deduction limit. Tax form 1040a If you use this method, you must keep records of your actual cost. Tax form 1040a Standard Meal Allowance Generally, you can use the “standard meal allowance” method as an alternative to the actual cost method. Tax form 1040a It allows you to use a set amount for your daily meals and incidental expenses (M&IE), instead of keeping records of your actual costs. Tax form 1040a The set amount varies depending on where and when you travel. Tax form 1040a In this publication, “standard meal allowance” refers to the federal rate for M&IE, discussed later under Amount of standard meal allowance . Tax form 1040a If you use the standard meal allowance, you still must keep records to prove the time, place, and business purpose of your travel. Tax form 1040a See the recordkeeping rules for travel in chapter 5 . Tax form 1040a Incidental expenses. Tax form 1040a   The term “incidental expenses” means fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Tax form 1040a   Incidental expenses do not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, costs of telegrams or telephone calls, transportation between places of lodging or business and places where meals are taken, or the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings. Tax form 1040a Incidental-expenses-only method. Tax form 1040a   You can use an optional method (instead of actual cost) for deducting incidental expenses only. Tax form 1040a The amount of the deduction is $5 a day. Tax form 1040a You can use this method only if you did not pay or incur any meal expenses. Tax form 1040a You cannot use this method on any day that you use the standard meal allowance. Tax form 1040a This method is subject to the proration rules for partial days. Tax form 1040a See Travel for days you depart and return , later in this chapter. Tax form 1040a Note. Tax form 1040a The incidental-expenses-only method is not subject to the 50% limit discussed below. Tax form 1040a Federal employees should refer to the Federal Travel Regulations at www. Tax form 1040a gsa. Tax form 1040a gov. Tax form 1040a Find the “Most Requested Links” on the upper left and click on “Regulations: FAR, FMR, FTR” for Federal Travel Regulation (FTR) for changes affecting claims for reimbursement. Tax form 1040a 50% limit may apply. Tax form 1040a   If you use the standard meal allowance method for meal expenses and you are not reimbursed or you are reimbursed under a nonaccountable plan, you can generally deduct only 50% of the standard meal allowance. Tax form 1040a If you are reimbursed under an accountable plan and you are deducting amounts that are more than your reimbursements, you can deduct only 50% of the excess amount. Tax form 1040a The 50% limit is discussed in more detail in chapter 2, and accountable and nonaccountable plans are discussed in chapter 6. Tax form 1040a There is no optional standard lodging amount similar to the standard meal allowance. Tax form 1040a Your allowable lodging expense deduction is your actual cost. Tax form 1040a Who can use the standard meal allowance. Tax form 1040a   You can use the standard meal allowance whether you are an employee or self-employed, and whether or not you are reimbursed for your traveling expenses. Tax form 1040a Use of the standard meal allowance for other travel. Tax form 1040a   You can use the standard meal allowance to figure your meal expenses when you travel in connection with investment and other income-producing property. Tax form 1040a You can also use it to figure your meal expenses when you travel for qualifying educational purposes. Tax form 1040a You cannot use the standard meal allowance to figure the cost of your meals when you travel for medical or charitable purposes. Tax form 1040a Amount of standard meal allowance. Tax form 1040a   The standard meal allowance is the federal M&IE rate. Tax form 1040a For travel in 2013, the rate for most small localities in the United States is $46 a day. Tax form 1040a    Most major cities and many other localities in the United States are designated as high-cost areas, qualifying for higher standard meal allowances. Tax form 1040a    You can find this information (organized by state) on the Internet at www. Tax form 1040a gsa. Tax form 1040a gov/perdiem. Tax form 1040a Enter a zip code or select a city and state for the per diem rates for the current fiscal year. Tax form 1040a Per diem rates for prior fiscal years are available by using the drop down menu under “Search by State. Tax form 1040a ”   Per diem rates are listed by the Federal government's fiscal year which runs from October 1 to September 30. Tax form 1040a You can choose to use the rates from the 2013 fiscal year per diem tables or the rates from the 2014 fiscal year tables, but you must consistently use the same tables for all travel you are reporting on your income tax return for the year. Tax form 1040a   If you travel to more than one location in one day, use the rate in effect for the area where you stop for sleep or rest. Tax form 1040a If you work in the transportation industry, however, see Special rate for transportation workers , later. Tax form 1040a Standard meal allowance for areas outside the continental United States. Tax form 1040a   The standard meal allowance rates above do not apply to travel in Alaska, Hawaii, or any other location outside the continental United States. Tax form 1040a The Department of Defense establishes per diem rates for Alaska, Hawaii, Puerto Rico, American Samoa, Guam, Midway, the Northern Mariana Islands, the U. Tax form 1040a S. Tax form 1040a Virgin Islands, Wake Island, and other non-foreign areas outside the continental United States. Tax form 1040a The Department of State establishes per diem rates for all other foreign areas. Tax form 1040a    You can access per diem rates for non-foreign areas outside the continental United States at: www. Tax form 1040a defensetravel. Tax form 1040a dod. Tax form 1040a mil/site/perdiemCalc. Tax form 1040a cfm. Tax form 1040a You can access all other foreign per diem rates at: www. Tax form 1040a state. Tax form 1040a gov/travel/. Tax form 1040a Click on “Travel Per Diem Allowances for Foreign Areas,” under “Foreign Per Diem Rates” to obtain the latest foreign per diem rates. Tax form 1040a Special rate for transportation workers. Tax form 1040a   You can use a special standard meal allowance if you work in the transportation industry. Tax form 1040a You are in the transportation industry if your work: Directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and Regularly requires you to travel away from home and, during any single trip, usually involves travel to areas eligible for different standard meal allowance rates. Tax form 1040a If this applies to you, you can claim a standard meal allowance of $59 a day ($65 for travel outside the continental United States). Tax form 1040a   Using the special rate for transportation workers eliminates the need for you to determine the standard meal allowance for every area where you stop for sleep or rest. Tax form 1040a If you choose to use the special rate for any trip, you must use the special rate (and not use the regular standard meal allowance rates) for all trips you take that year. Tax form 1040a Travel for days you depart and return. Tax form 1040a   For both the day you depart for and the day you return from a business trip, you must prorate the standard meal allowance (figure a reduced amount for each day). Tax form 1040a You can do so by one of two methods. Tax form 1040a Method 1: You can claim 3/4 of the standard meal allowance. Tax form 1040a Method 2: You can prorate using any method that you consistently apply and that is in accordance with reasonable business practice. Tax form 1040a Example. Tax form 1040a Jen is employed in New Orleans as a convention planner. Tax form 1040a In March, her employer sent her on a 3-day trip to Washington, DC, to attend a planning seminar. Tax form 1040a She left her home in New Orleans at 10 a. Tax form 1040a m. Tax form 1040a on Wednesday and arrived in Washington, DC, at 5:30 p. Tax form 1040a m. Tax form 1040a After spending two nights there, she flew back to New Orleans on Friday and arrived back home at 8:00 p. Tax form 1040a m. Tax form 1040a Jen's employer gave her a flat amount to cover her expenses and included it with her wages. Tax form 1040a Under Method 1, Jen can claim 2½ days of the standard meal allowance for Washington, DC: 3/4 of the daily rate for Wednesday and Friday (the days she departed and returned), and the full daily rate for Thursday. Tax form 1040a Under Method 2, Jen could also use any method that she applies consistently and that is in accordance with reasonable business practice. Tax form 1040a For example, she could claim 3 days of the standard meal allowance even though a federal employee would have to use Method 1 and be limited to only 2½ days. Tax form 1040a Travel in the United States The following discussion applies to travel in the United States. Tax form 1040a For this purpose, the United States includes the 50 states and the District of Columbia. Tax form 1040a The treatment of your travel expenses depends on how much of your trip was business related and on how much of your trip occurred within the United States. Tax form 1040a See Part of Trip Outside the United States , later. Tax form 1040a Trip Primarily for Business You can deduct all of your travel expenses if your trip was entirely business related. Tax form 1040a If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only your business-related travel expenses. Tax form 1040a These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination. Tax form 1040a Example. Tax form 1040a You work in Atlanta and take a business trip to New Orleans in May. Tax form 1040a Your business travel totals 850 miles round trip. Tax form 1040a On your way, you stop in Mobile to visit your parents. Tax form 1040a You spend $2,120 for the 9 days you are away from home for travel, meals, lodging, and other travel expenses. Tax form 1040a If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $1,820. Tax form 1040a You can deduct $1,820 for your trip, including the cost of round-trip transportation to and from New Orleans. Tax form 1040a The deduction for your meals is subject to the 50% limit on meals mentioned earlier. Tax form 1040a Trip Primarily for Personal Reasons If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. Tax form 1040a However, you can deduct any expenses you have while at your destination that are directly related to your business. Tax form 1040a A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business. Tax form 1040a The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip. Tax form 1040a Part of Trip Outside the United States If part of your trip is outside the United States, use the rules described later in this chapter under Travel Outside the United States for that part of the trip. Tax form 1040a For the part of your trip that is inside the United States, use the rules for travel in the United States. Tax form 1040a Travel outside the United States does not include travel from one point in the United States to another point in the United States. Tax form 1040a The following discussion can help you determine whether your trip was entirely within the United States. Tax form 1040a Public transportation. Tax form 1040a   If you travel by public transportation, any place in the United States where that vehicle makes a scheduled stop is a point in the United States. Tax form 1040a Once the vehicle leaves the last scheduled stop in the United States on its way to a point outside the United States, you apply the rules under Travel Outside the United States . Tax form 1040a Example. Tax form 1040a You fly from New York to Puerto Rico with a scheduled stop in Miami. Tax form 1040a You return to New York nonstop. Tax form 1040a The flight from New York to Miami is in the United States, so only the flight from Miami to Puerto Rico is outside the United States. Tax form 1040a Because there are no scheduled stops between Puerto Rico and New York, all of the return trip is outside the United States. Tax form 1040a Private car. Tax form 1040a   Travel by private car in the United States is travel between points in the United States, even though you are on your way to a destination outside the United States. Tax form 1040a Example. Tax form 1040a You travel by car from Denver to Mexico City and return. Tax form 1040a Your travel from Denver to the border and from the border back to Denver is travel in the United States, and the rules in this section apply. Tax form 1040a The rules under Travel Outside the United States apply to your trip from the border to Mexico City and back to the border. Tax form 1040a Travel Outside the United States If any part of your business travel is outside the United States, some of your deductions for the cost of getting to and from your destination may be limited. Tax form 1040a For this purpose, the United States includes the 50 states and the District of Columbia. Tax form 1040a How much of your travel expenses you can deduct depends in part upon how much of your trip outside the United States was business related. Tax form 1040a Travel Entirely for Business or Considered Entirely for Business You can deduct all your travel expenses of getting to and from your business destination if your trip is entirely for business or considered entirely for business. Tax form 1040a Travel entirely for business. Tax form 1040a   If you travel outside the United States and you spend the entire time on business activities, you can deduct all of your travel expenses. Tax form 1040a Travel considered entirely for business. Tax form 1040a   Even if you did not spend your entire time on business activities, your trip is considered entirely for business if you meet at least one of the following four exceptions. Tax form 1040a Exception 1 - No substantial control. Tax form 1040a   Your trip is considered entirely for business if you did not have substantial control over arranging the trip. Tax form 1040a The fact that you control the timing of your trip does not, by itself, mean that you have substantial control over arranging your trip. Tax form 1040a   You do not have substantial control over your trip if you: Are an employee who was reimbursed or paid a travel expense allowance, and Are not related to your employer, or Are not a managing executive. Tax form 1040a    “Related to your employer” is defined later in chapter 6 under Per Diem and Car Allowances . Tax form 1040a   A “managing executive” is an employee who has the authority and responsibility, without being subject to the veto of another, to decide on the need for the business travel. Tax form 1040a   A self-employed person generally has substantial control over arranging business trips. Tax form 1040a Exception 2 - Outside United States no more than a week. Tax form 1040a   Your trip is considered entirely for business if you were outside the United States for a week or less, combining business and nonbusiness activities. Tax form 1040a One week means 7 consecutive days. Tax form 1040a In counting the days, do not count the day you leave the United States, but do count the day you return to the United States. Tax form 1040a Example. Tax form 1040a You traveled to Brussels primarily for business. Tax form 1040a You left Denver on Tuesday and flew to New York. Tax form 1040a On Wednesday, you flew from New York to Brussels, arriving the next morning. Tax form 1040a On Thursday and Friday, you had business discussions, and from Saturday until Tuesday, you were sightseeing. Tax form 1040a You flew back to New York, arriving Wednesday afternoon. Tax form 1040a On Thursday, you flew back to Denver. Tax form 1040a Although you were away from your home in Denver for more than a week, you were not outside the United States for more than a week. Tax form 1040a This is because the day you depart does not count as a day outside the United States. Tax form 1040a You can deduct your cost of the round-trip flight between Denver and Brussels. Tax form 1040a You can also deduct the cost of your stay in Brussels for Thursday and Friday while you conducted business. Tax form 1040a However, you cannot deduct the cost of your stay in Brussels from Saturday through Tuesday because those days were spent on nonbusiness activities. Tax form 1040a Exception 3 - Less than 25% of time on personal activities. Tax form 1040a   Your trip is considered entirely for business if: You were outside the United States for more than a week, and You spent less than 25% of the total time you were outside the United States on nonbusiness activities. Tax form 1040a For this purpose, count both the day your trip began and the day it ended. Tax form 1040a Example. Tax form 1040a You flew from Seattle to Tokyo, where you spent 14 days on business and 5 days on personal matters. Tax form 1040a You then flew back to Seattle. Tax form 1040a You spent 1 day flying in each direction. Tax form 1040a Because only 5/21 (less than 25%) of your total time abroad was for nonbusiness activities, you can deduct as travel expenses what it would have cost you to make the trip if you had not engaged in any nonbusiness activity. Tax form 1040a The amount you can deduct is the cost of the round-trip plane fare and 16 days of meals (subject to the 50% limit), lodging, and other related expenses. Tax form 1040a Exception 4 - Vacation not a major consideration. Tax form 1040a   Your trip is considered entirely for business if you can establish that a personal vacation was not a major consideration, even if you have substantial control over arranging the trip. Tax form 1040a Travel Primarily for Business If you travel outside the United States primarily for business but spend some of your time on other activities, you generally cannot deduct all of your travel expenses. Tax form 1040a You can only deduct the business portion of your cost of getting to and from your destination. Tax form 1040a You must allocate the costs between your business and other activities to determine your deductible amount. Tax form 1040a See Travel allocation rules , later. Tax form 1040a You do not have to allocate your travel expenses if you meet one of the four exceptions listed earlier under Travel considered entirely for business . Tax form 1040a In those cases, you can deduct the total cost of getting to and from your destination. Tax form 1040a Travel allocation rules. Tax form 1040a   If your trip outside the United States was primarily for business, you must allocate your travel time on a day-to-day basis between business days and nonbusiness days. Tax form 1040a The days you depart from and return to the United States are both counted as days outside the United States. Tax form 1040a   To figure the deductible amount of your round-trip travel expenses, use the following fraction. Tax form 1040a The numerator (top number) is the total number of business days outside the United States. Tax form 1040a The denominator (bottom number) is the total number of business and nonbusiness days of travel. Tax form 1040a Counting business days. Tax form 1040a   Your business days include transportation days, days your presence was required, days you spent on business, and certain weekends and holidays. Tax form 1040a Transportation day. Tax form 1040a   Count as a business day any day you spend traveling to or from a business destination. Tax form 1040a However, if because of a nonbusiness activity you do not travel by a direct route, your business days are the days it would take you to travel a reasonably direct route to your business destination. Tax form 1040a Extra days for side trips or nonbusiness activities cannot be counted as business days. Tax form 1040a Presence required. Tax form 1040a   Count as a business day any day your presence is required at a particular place for a specific business purpose. Tax form 1040a Count it as a business day even if you spend most of the day on nonbusiness activities. Tax form 1040a Day spent on business. Tax form 1040a   If your principal activity during working hours is the pursuit of your trade or business, count the day as a business day. Tax form 1040a Also, count as a business day any day you are prevented from working because of circumstances beyond your control. Tax form 1040a Certain weekends and holidays. Tax form 1040a   Count weekends, holidays, and other necessary standby days as business days if they fall between business days. Tax form 1040a But if they follow your business meetings or activity and you remain at your business destination for nonbusiness or personal reasons, do not count them as business days. Tax form 1040a Example 1. Tax form 1040a Your tax home is New York City. Tax form 1040a You travel to Quebec, where you have a business appointment on Friday. Tax form 1040a You have another appointment on the following Monday. Tax form 1040a Because your presence was required on both Friday and Monday, they are business days. Tax form 1040a Because the weekend is between business days, Saturday and Sunday are counted as business days. Tax form 1040a This is true even though you use the weekend for sightseeing, visiting friends, or other nonbusiness activity. Tax form 1040a Example 2. Tax form 1040a If, in Example 1, you had no business in Quebec after Friday, but stayed until Monday before starting home, Saturday and Sunday would be nonbusiness days. Tax form 1040a Nonbusiness activity on the way to or from your business destination. Tax form 1040a   If you stopped for a vacation or other nonbusiness activity either on the way from the United States to your business destination, or on the way back to the United States from your business destination, you must allocate part of your travel expenses to the nonbusiness activity. Tax form 1040a   The part you must allocate is the amount it would have cost you to travel between the point where travel outside the United States begins and your nonbusiness destination and a return to the point where travel outside the United States ends. Tax form 1040a   You determine the nonbusiness portion of that expense by multiplying it by a fraction. Tax form 1040a The numerator (top number) of the fraction is the number of nonbusiness days during your travel outside the United States and the denominator (bottom number) is the total number of days you spend outside the United States. Tax form 1040a Example. Tax form 1040a You live in New York. Tax form 1040a On May 4 you flew to Paris to attend a business conference that began on May 5. Tax form 1040a The conference ended at noon on May 14. Tax form 1040a That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. Tax form 1040a The primary purpose for the trip was to attend the conference. Tax form 1040a If you had not stopped in Dublin, you would have arrived home the evening of May 14. Tax form 1040a You do not meet any of the exceptions that would allow you to consider your travel entirely for business. Tax form 1040a May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are nonbusiness days. Tax form 1040a You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris. Tax form 1040a You cannot deduct your expenses while in Dublin. Tax form 1040a You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin. Tax form 1040a You paid $750 to fly from New York to Paris, $400 to fly from Paris to Dublin, and $700 to fly from Dublin back to New York. Tax form 1040a Round-trip airfare from New York to Dublin would have been $1,250. Tax form 1040a You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($1,250 × 7/18 = $486) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($750 + $400 + $700 = $1,850). Tax form 1040a Your deductible air travel expense is $1,364 ($1,850 − $486). Tax form 1040a Nonbusiness activity at, near, or beyond business destination. Tax form 1040a   If you had a vacation or other nonbusiness activity at, near, or beyond your business destination, you must allocate part of your travel expenses to the nonbusiness activity. Tax form 1040a   The part you must allocate is the amount it would have cost you to travel between the point where travel outside the United States begins and your business destination and a return to the point where travel outside the United States ends. Tax form 1040a   You determine the nonbusiness portion of that expense by multiplying it by a fraction. Tax form 1040a The numerator (top number) of the fraction is the number of nonbusiness days during your travel outside the United States and the denominator (bottom number) is the total number of days you spend outside the United States. Tax form 1040a   None of your travel expenses for nonbusiness activities at, near, or beyond your business destination are deductible. Tax form 1040a Example. Tax form 1040a Assume that the dates are the same as in the previous example but that instead of going to Dublin for your vacation, you fly to Venice, Italy, for a vacation. Tax form 1040a You cannot deduct any part of the cost of your trip from Paris to Venice and return to Paris. Tax form 1040a In addition, you cannot deduct 7/18 of the airfare and other expenses from New York to Paris and back to New York. Tax form 1040a You can deduct 11/18 of the round-trip plane fare and other travel expenses from New York to Paris, plus your meals (subject to the 50% limit), lodging, and any other business expenses you had in Paris. Tax form 1040a (Assume these expenses total $4,939. Tax form 1040a ) If the round-trip plane fare and other travel-related expenses (such as food during the trip) are $1,750, you can deduct travel costs of $1,069 (11/18 × $1,750), plus the full $4,939 for the expenses you had in Paris. Tax form 1040a Other methods. Tax form 1040a   You can use another method of counting business days if you establish that it more clearly reflects the time spent on other than business activities outside the United States. Tax form 1040a Travel Primarily for Personal Reasons If you travel outside the United States primarily for vacation or for investment purposes, the entire cost of the trip is a nondeductible personal expense. Tax form 1040a However, if you spend some time attending brief professional seminars or a continuing education program, you can deduct your registration fees and other expenses you have that are directly related to your business. Tax form 1040a Example. Tax form 1040a The university from which you graduated has a continuing education program for members of its alumni association. Tax form 1040a This program consists of trips to various foreign countries where academic exercises and conferences are set up to acquaint individuals in most occupations with selected facilities in several regions of the world. Tax form 1040a However, none of the conferences are directed toward specific occupations or professions. Tax form 1040a It is up to each participant to seek out specialists and organizational settings appropriate to his or her occupational interests. Tax form 1040a Three-hour sessions are held each day over a 5-day period at each of the selected overseas facilities where participants can meet with individual practitioners. Tax form 1040a These sessions are composed of a variety of activities including workshops, mini-lectures, role playing, skill development, and exercises. Tax form 1040a Professional conference directors schedule and conduct the sessions. Tax form 1040a Participants can choose those sessions they wish to attend. Tax form 1040a You can participate in this program since you are a member of the alumni association. Tax form 1040a You and your family take one of the trips. Tax form 1040a You spend about 2 hours at each of the planned sessions. Tax form 1040a The rest of the time you go touring and sightseeing with your family. Tax form 1040a The trip lasts less than 1 week. Tax form 1040a Your travel expenses for the trip are not deductible since the trip was primarily a vacation. Tax form 1040a However, registration fees and any other incidental expenses you have for the five planned sessions you attended that are directly related and beneficial to your business are deductible business expenses. Tax form 1040a These expenses should be specifically stated in your records to ensure proper allocation of your deductible business expenses. Tax form 1040a Luxury Water Travel If you travel by ocean liner, cruise ship, or other form of luxury water transportation for business purposes, there is a daily limit on the amount you can deduct. Tax form 1040a The limit is twice the highest federal per diem rate allowable at the time of your travel. Tax form 1040a (Generally, the federal per diem is the amount paid to federal government employees for daily living expenses when they travel away from home, but in the United States, for business purposes. Tax form 1040a ) Daily limit on luxury water travel. Tax form 1040a   The highest federal per diem rate allowed and the daily limit for luxury water travel in 2013 is shown in the following table. Tax form 1040a   2013 Dates Highest Federal Per Diem Daily Limit on Luxury Water Travel   Jan. Tax form 1040a 1 – Mar. Tax form 1040a 31 $367 $734   Apr. Tax form 1040a 1 – June 30 312 624   July 1 – Aug. Tax form 1040a 31 310 620   Sept. Tax form 1040a 1 – Sept. Tax form 1040a 30 366 732   Oct. Tax form 1040a 1 – Dec. Tax form 1040a 31 374 748 Example. Tax form 1040a Caroline, a travel agent, traveled by ocean liner from New York to London, England, on business in May. Tax form 1040a Her expense for the 6-day cruise was $5,200. Tax form 1040a Caroline's deduction for the cruise cannot exceed $3,744 (6 days × $624 daily limit). Tax form 1040a Meals and entertainment. Tax form 1040a   If your expenses for luxury water travel include separately stated amounts for meals or entertainment, those amounts are subject to the 50% limit on meals and entertainment before you apply the daily limit. Tax form 1040a For a discussion of the 50% Limit , see chapter 2. Tax form 1040a Example. Tax form 1040a In the previous example, Caroline's luxury water travel had a total cost of $5,200. Tax form 1040a Of that amount, $3,700 was separately stated as meals and entertainment. Tax form 1040a Caroline, who is self-employed, is not reimbursed for any of her travel expenses. Tax form 1040a Caroline figures her deductible travel expenses as follows. Tax form 1040a Meals and entertainment $3,700   50% limit × . Tax form 1040a 50   Allowable meals &     entertainment $1,850   Other travel expenses + 1,800   Allowable cost before the daily limit $3,650 Daily limit for May 2013 $624   Times number of days × 6   Maximum luxury water travel     deduction $3,744 Amount of allowable deduction $3,650 Caroline's deduction for her cruise is limited to $3,650, even though the limit on luxury water travel is slightly higher. Tax form 1040a Not separately stated. Tax form 1040a   If your meal or entertainment charges are not separately stated or are not clearly identifiable, you do not have to allocate any portion of the total charge to meals or entertainment. Tax form 1040a Exceptions The daily limit on luxury water travel (discussed earlier) does not apply to expenses you have to attend a convention, seminar, or meeting on board a cruise ship. Tax form 1040a See Cruise Ships under Conventions. Tax form 1040a Conventions You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade or business. Tax form 1040a You cannot deduct the travel expenses for your family. Tax form 1040a If the convention is for investment, political, social, or other purposes unrelated to your trade or business, you cannot deduct the expenses. Tax form 1040a Your appointment or election as a delegate does not, in itself, determine whether you can deduct travel expenses. Tax form 1040a You can deduct your travel expenses only if your attendance is connected to your own trade or business. Tax form 1040a Convention agenda. Tax form 1040a   The convention agenda or program generally shows the purpose of the convention. Tax form 1040a You can show your attendance at the convention benefits your trade or business by comparing the agenda with the official duties and responsibilities of your position. Tax form 1040a The agenda does not have to deal specifically with your official duties and responsibilities; it will be enough if the agenda is so related to your position that it shows your attendance was for business purposes. Tax form 1040a Conventions Held Outside the North American Area You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless: The meeting is directly related to your trade or business, and It is reasonable to hold the meeting outside the North American area. Tax form 1040a See Reasonableness test , later. Tax form 1040a If the meeting meets these requirements, you also must satisfy the rules for deducting expenses for business trips in general, discussed earlier under Travel Outside the United States . Tax form 1040a North American area. Tax form 1040a   The North American area includes the following locations. Tax form 1040a American Samoa Johnston Island Antigua and Barbuda Kingman Reef Aruba Marshall Islands Bahamas Mexico Baker Island Micronesia Barbados Midway Islands Bermuda Netherlands Antilles Canada Northern Mariana Costa Rica Islands Dominica Palau Dominican Republic Palmyra Atoll Grenada Panama Guam Puerto Rico Guyana Trinidad and Tobago Honduras USA Howland Island U. Tax form 1040a S. Tax form 1040a Virgin Islands Jamaica Wake Island Jarvis Island   The North American area also includes U. Tax form 1040a S. Tax form 1040a islands, cays, and reefs that are possessions of the United States and not part of the fifty states or the District of Columbia. Tax form 1040a Reasonableness test. Tax form 1040a   The following factors are taken into account to determine if it was reasonable to hold the meeting outside the North American area. Tax form 1040a The purpose of the meeting and the activities taking place at the meeting. Tax form 1040a The purposes and activities of the sponsoring organizations or groups. Tax form 1040a The homes of the active members of the sponsoring organizations and the places at which other meetings of the sponsoring organizations or groups have been or will be held. Tax form 1040a Other relevant factors you may present. Tax form 1040a Cruise Ships You can deduct up to $2,000 per year of your expenses of attending conventions, seminars, or similar meetings held on cruise ships. Tax form 1040a All ships that sail are considered cruise ships. Tax form 1040a You can deduct these expenses only if all of the following requirements are met. Tax form 1040a The convention, seminar, or meeting is directly related to your trade or business. Tax form 1040a The cruise ship is a vessel registered in the United States. Tax form 1040a All of the cruise ship's ports of call are in the United States or in possessions of the United States. Tax form 1040a You attach to your return a written statement signed by you that includes information about: The total days of the trip (not including the days of transportation to and from the cruise ship port), The number of hours each day that you devoted to scheduled business activities, and A program of the scheduled business activities of the meeting. Tax form 1040a You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes: A schedule of the business activities of each day of the meeting, and The number of hours you attended the scheduled business activities. Tax form 1040a Prev  Up  Next   Home   More Online Publications
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Tax Relief for Victims of June 19 Severe Storms in Kentucky

IN-2011-12, Sept. 2, 2011

INDIANAPOLIS — Victims of severe storms, tornadoes, and flooding that began on June 19, 2011 in parts of Kentucky may qualify for tax relief from the Internal Revenue Service.

The President has declared the following counties a federal disaster area: Bell, Knox, and Perry. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone until August 18 certain deadlines falling on or after June 19 and on or before August 18 for taxpayers who reside or have a business in the disaster area.

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after June 19 and on or before July 5, 2011, as long as the deposits were made by July 5, 2011.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief.

Covered Disaster Area

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until August 18 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after June 19 and on or before August 18.

The IRS also gives affected taxpayers until August 18 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (August 20, 2007), that are due to be performed on or after June 19 and on or before August 18.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after June 19 and on or before July 5 provided the taxpayer made these deposits by July 5.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.
Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “Kentucky/Severe Storms, Tornadoes, and Flooding” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 1-800-TAX-FORM (1-800-829-3676). The IRS toll-free number for general tax questions is 1-800-829-1040.

Related Information

Page Last Reviewed or Updated: 20-Mar-2014

The Tax Form 1040a

Tax form 1040a 4. Tax form 1040a   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Tax form 1040a Payments from checking accounts. Tax form 1040a Amounts paid within 30 days. Tax form 1040a Optional method for determining date of reallocation. Tax form 1040a Interest on a segregated account. Tax form 1040a How to report. Tax form 1040a Interest You Can DeductStatement. Tax form 1040a Expenses paid to obtain a mortgage. Tax form 1040a Prepayment penalty. Tax form 1040a De minimis OID. Tax form 1040a Constant-yield method. Tax form 1040a Loan or mortgage ends. Tax form 1040a Interest You Cannot DeductPenalties. Tax form 1040a Who is a key person? Exceptions for pre-June 1997 contracts. Tax form 1040a Interest allocated to unborrowed policy cash value. Tax form 1040a Capitalization of Interest When To Deduct InterestPrepaid interest. Tax form 1040a Discounted loan. Tax form 1040a Refunds of interest. Tax form 1040a Prepaid interest. Tax form 1040a Discounted loan. Tax form 1040a Tax deficiency. Tax form 1040a Related person. Tax form 1040a Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Tax form 1040a Introduction This chapter discusses the tax treatment of business interest expense. Tax form 1040a Business interest expense is an amount charged for the use of money you borrowed for business activities. Tax form 1040a Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Tax form 1040a Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Tax form 1040a 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Tax form 1040a Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Tax form 1040a If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Tax form 1040a Allocate your interest expense to the following categories. Tax form 1040a Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Tax form 1040a You allocate loan proceeds by tracing disbursements to specific uses. Tax form 1040a The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Tax form 1040a Secured loan. Tax form 1040a   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Tax form 1040a Example. Tax form 1040a You secure a loan with property used in your business. Tax form 1040a You use the loan proceeds to buy an automobile for personal use. Tax form 1040a You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Tax form 1040a    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Tax form 1040a The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Tax form 1040a For more information, see Publication 936. Tax form 1040a Allocation period. Tax form 1040a   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Tax form 1040a The date the loan is repaid. Tax form 1040a The date the loan is reallocated to another use. Tax form 1040a Proceeds not disbursed to borrower. Tax form 1040a   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Tax form 1040a This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Tax form 1040a Proceeds deposited in borrower's account. Tax form 1040a   Treat loan proceeds deposited in an account as property held for investment. Tax form 1040a It does not matter whether the account pays interest. Tax form 1040a Any interest you pay on the loan is investment interest expense. Tax form 1040a If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Tax form 1040a Example. Tax form 1040a Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Tax form 1040a No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Tax form 1040a On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Tax form 1040a On September 4, Celina uses an additional $40,000 from the account for personal purposes. Tax form 1040a Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Tax form 1040a From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Tax form 1040a From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Tax form 1040a Order of funds spent. Tax form 1040a   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Tax form 1040a Any unborrowed amounts held in the same account. Tax form 1040a Any amounts deposited after these loan proceeds. Tax form 1040a Example. Tax form 1040a On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Tax form 1040a The following table shows the transactions in her account during the tax year. Tax form 1040a Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Tax form 1040a She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Tax form 1040a She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Tax form 1040a She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Tax form 1040a For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Tax form 1040a Payments from checking accounts. Tax form 1040a   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Tax form 1040a You can treat checks written on the same day as written in any order. Tax form 1040a Amounts paid within 30 days. Tax form 1040a   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Tax form 1040a This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Tax form 1040a   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Tax form 1040a If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Tax form 1040a   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Tax form 1040a Example. Tax form 1040a Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Tax form 1040a Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Tax form 1040a Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Tax form 1040a Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Tax form 1040a In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Tax form 1040a Optional method for determining date of reallocation. Tax form 1040a   You can use the following method to determine the date loan proceeds are reallocated to another use. Tax form 1040a You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Tax form 1040a The first day of that month. Tax form 1040a The date the loan proceeds are deposited in the account. Tax form 1040a However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Tax form 1040a Interest on a segregated account. Tax form 1040a   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Tax form 1040a When the interest earned is used up, any remaining payments are from loan proceeds. Tax form 1040a Example. Tax form 1040a You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Tax form 1040a When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Tax form 1040a You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Tax form 1040a All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Tax form 1040a The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Tax form 1040a The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Tax form 1040a Loan repayment. Tax form 1040a   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Tax form 1040a Personal use. Tax form 1040a Investments and passive activities (other than those included in (3)). Tax form 1040a Passive activities in connection with a rental real estate activity in which you actively participate. Tax form 1040a Former passive activities. Tax form 1040a Trade or business use and expenses for certain low-income housing projects. Tax form 1040a Line of credit (continuous borrowings). Tax form 1040a   The following rules apply if you have a line of credit or similar arrangement. Tax form 1040a Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Tax form 1040a Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Tax form 1040a Treat these loans as repaid in the order shown on the loan agreement. Tax form 1040a Loan refinancing. Tax form 1040a   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Tax form 1040a Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Tax form 1040a Debt-financed distribution. Tax form 1040a   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Tax form 1040a The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Tax form 1040a How to report. Tax form 1040a   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Tax form 1040a If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Tax form 1040a If the proceeds were used in an investment activity, enter the interest on Form 4952. Tax form 1040a If the proceeds are used for personal purposes, the interest is generally not deductible. Tax form 1040a Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Tax form 1040a Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Tax form 1040a It does not matter what type of property secures the loan. Tax form 1040a You can deduct interest on a debt only if you meet all the following requirements. Tax form 1040a You are legally liable for that debt. Tax form 1040a Both you and the lender intend that the debt be repaid. Tax form 1040a You and the lender have a true debtor-creditor relationship. Tax form 1040a Partial liability. Tax form 1040a   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Tax form 1040a Example. Tax form 1040a You and your brother borrow money. Tax form 1040a You are liable for 50% of the note. Tax form 1040a You use your half of the loan in your business, and you make one-half of the loan payments. Tax form 1040a You can deduct your half of the total interest payments as a business deduction. Tax form 1040a Mortgage. Tax form 1040a   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Tax form 1040a However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Tax form 1040a Statement. Tax form 1040a   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Tax form 1040a You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Tax form 1040a A governmental unit is a person for purposes of furnishing the statement. Tax form 1040a   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Tax form 1040a You cannot deduct this amount. Tax form 1040a For information on how to report this refund, see Refunds of interest, later in this chapter. Tax form 1040a Expenses paid to obtain a mortgage. Tax form 1040a   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Tax form 1040a These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Tax form 1040a If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Tax form 1040a Prepayment penalty. Tax form 1040a   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Tax form 1040a Interest on employment tax deficiency. Tax form 1040a   Interest charged on employment taxes assessed on your business is deductible. Tax form 1040a Original issue discount (OID). Tax form 1040a   OID is a form of interest. Tax form 1040a A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Tax form 1040a The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Tax form 1040a   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Tax form 1040a Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Tax form 1040a You generally deduct OID over the term of the loan. Tax form 1040a Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Tax form 1040a De minimis OID. Tax form 1040a   The OID is de minimis if it is less than one-fourth of 1% (. Tax form 1040a 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Tax form 1040a   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Tax form 1040a On a constant-yield basis over the term of the loan. Tax form 1040a On a straight-line basis over the term of the loan. Tax form 1040a In proportion to stated interest payments. Tax form 1040a In its entirety at maturity of the loan. Tax form 1040a You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Tax form 1040a Example. Tax form 1040a On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Tax form 1040a The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Tax form 1040a Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Tax form 1040a The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Tax form 1040a 0025 × 10). Tax form 1040a You choose to deduct the OID on a straight-line basis over the term of the loan. Tax form 1040a Beginning in 2013, you can deduct $150 each year for 10 years. Tax form 1040a Constant-yield method. Tax form 1040a   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Tax form 1040a You figure your deduction for the first year using the following steps. Tax form 1040a Determine the issue price of the loan. Tax form 1040a Generally, this equals the proceeds of the loan. Tax form 1040a If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Tax form 1040a Multiply the result in (1) by the yield to maturity. Tax form 1040a Subtract any qualified stated interest payments from the result in (2). Tax form 1040a This is the OID you can deduct in the first year. Tax form 1040a   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Tax form 1040a To get the adjusted issue price, add to the issue price any OID previously deducted. Tax form 1040a Then follow steps (2) and (3) above. Tax form 1040a   The yield to maturity is generally shown in the literature you receive from your lender. Tax form 1040a If you do not have this information, consult your lender or tax advisor. Tax form 1040a In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Tax form 1040a Example. Tax form 1040a The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Tax form 1040a The yield to maturity on your loan is 10. Tax form 1040a 2467%, compounded annually. Tax form 1040a For 2013, you can deduct $93 [($98,500 × . Tax form 1040a 102467) − $10,000]. Tax form 1040a For 2014, you can deduct $103 [($98,593 × . Tax form 1040a 102467) − $10,000]. Tax form 1040a Loan or mortgage ends. Tax form 1040a   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Tax form 1040a A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Tax form 1040a If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Tax form 1040a See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Tax form 1040a Points. Tax form 1040a   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Tax form 1040a These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Tax form 1040a If any of these charges (points) are solely for the use of money, they are interest. Tax form 1040a   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Tax form 1040a However, you can choose to fully deduct points in the year paid if you meet certain tests. Tax form 1040a For exceptions to the general rule, see Publication 936. Tax form 1040a The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Tax form 1040a Partial payments on a nontax debt. Tax form 1040a   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Tax form 1040a You can deduct only the interest. Tax form 1040a This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Tax form 1040a Installment purchase. Tax form 1040a   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Tax form 1040a If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Tax form 1040a The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Tax form 1040a For more information on installment sales and unstated interest, see Publication 537. Tax form 1040a Interest You Cannot Deduct Certain interest payments cannot be deducted. Tax form 1040a In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Tax form 1040a You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Tax form 1040a Interest paid with funds borrowed from original lender. Tax form 1040a   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Tax form 1040a You can deduct the interest expense once you start making payments on the new loan. Tax form 1040a   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Tax form 1040a All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Tax form 1040a Capitalized interest. Tax form 1040a   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Tax form 1040a See Capitalization of Interest, later. Tax form 1040a In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Tax form 1040a Add this interest to the basis of the property. Tax form 1040a Commitment fees or standby charges. Tax form 1040a   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Tax form 1040a You may be able to deduct them as business expenses. Tax form 1040a   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Tax form 1040a See Capitalization of Interest, later. Tax form 1040a Interest on income tax. Tax form 1040a   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Tax form 1040a Treat this interest as a business deduction only in figuring a net operating loss deduction. Tax form 1040a Penalties. Tax form 1040a   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Tax form 1040a You cannot deduct them. Tax form 1040a Generally, you cannot deduct any fines or penalties. Tax form 1040a Interest on loans with respect to life insurance policies. Tax form 1040a   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Tax form 1040a   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Tax form 1040a However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Tax form 1040a Who is a key person?   A key person is an officer or 20% owner. Tax form 1040a However, the number of individuals you can treat as key persons is limited to the greater of the following. Tax form 1040a Five individuals. Tax form 1040a The lesser of 5% of the total officers and employees of the company or 20 individuals. Tax form 1040a Exceptions for pre-June 1997 contracts. Tax form 1040a   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Tax form 1040a If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Tax form 1040a Interest allocated to unborrowed policy cash value. Tax form 1040a   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Tax form 1040a This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Tax form 1040a For more information, see section 264(f) of the Internal Revenue Code. Tax form 1040a Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Tax form 1040a The property must be produced by you for use in your trade or business or for sale to customers. Tax form 1040a You cannot capitalize interest related to property that you acquire in any other manner. Tax form 1040a Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Tax form 1040a Designated property is any of the following. Tax form 1040a Real property. Tax form 1040a Tangible personal property with a class life of 20 years or more. Tax form 1040a Tangible personal property with an estimated production period of more than 2 years. Tax form 1040a Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Tax form 1040a Property you produce. Tax form 1040a   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Tax form 1040a Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Tax form 1040a Carrying charges. Tax form 1040a   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Tax form 1040a You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Tax form 1040a For more information, see chapter 7. Tax form 1040a Capitalized interest. Tax form 1040a   Treat capitalized interest as a cost of the property produced. Tax form 1040a You recover your interest when you sell or use the property. Tax form 1040a If the property is inventory, recover capitalized interest through cost of goods sold. Tax form 1040a If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Tax form 1040a Partnerships and S corporations. Tax form 1040a   The interest capitalization rules are applied first at the partnership or S corporation level. Tax form 1040a The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Tax form 1040a   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Tax form 1040a You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Tax form 1040a To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Tax form 1040a Additional information. Tax form 1040a   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Tax form 1040a For more information, see sections 1. Tax form 1040a 263A-8 through 1. Tax form 1040a 263A-15 of the regulations and Notice 88-99. Tax form 1040a Notice 88-99 is in Cumulative Bulletin 1988-2. Tax form 1040a When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Tax form 1040a Cash method. Tax form 1040a   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Tax form 1040a You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Tax form 1040a Prepaid interest. Tax form 1040a   You generally cannot deduct any interest paid before the year it is due. Tax form 1040a Interest paid in advance can be deducted only in the tax year in which it is due. Tax form 1040a Discounted loan. Tax form 1040a   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Tax form 1040a For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Tax form 1040a Refunds of interest. Tax form 1040a   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Tax form 1040a If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Tax form 1040a Accrual method. Tax form 1040a   Under an accrual method, you can deduct only interest that has accrued during the tax year. Tax form 1040a Prepaid interest. Tax form 1040a   See Prepaid interest, earlier. Tax form 1040a Discounted loan. Tax form 1040a   See Discounted loan, earlier. Tax form 1040a Tax deficiency. Tax form 1040a   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Tax form 1040a If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Tax form 1040a   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Tax form 1040a Related person. Tax form 1040a   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Tax form 1040a The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Tax form 1040a See section 267 of the Internal Revenue Code for more information. Tax form 1040a Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Tax form 1040a See Treatment of gift and demand loans, later, in this discussion. Tax form 1040a A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Tax form 1040a A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Tax form 1040a A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Tax form 1040a An additional payment in an amount equal to the forgone interest. Tax form 1040a The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Tax form 1040a Forgone interest. Tax form 1040a   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Tax form 1040a Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Tax form 1040a Internal Revenue Bulletins are available on the IRS web site at www. Tax form 1040a irs. Tax form 1040a gov/irb. Tax form 1040a You can also contact an IRS office to get these rates. Tax form 1040a Loans subject to the rules. Tax form 1040a   The rules for below-market loans apply to the following. Tax form 1040a Gift loans (below-market loans where the forgone interest is in the nature of a gift). Tax form 1040a Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Tax form 1040a Corporation-shareholder loans. Tax form 1040a Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Tax form 1040a Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Tax form 1040a   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Tax form 1040a Treatment of gift and demand loans. Tax form 1040a   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Tax form 1040a ) equal to the forgone interest on the loan. Tax form 1040a You are then treated as transferring this amount back to the lender as interest. Tax form 1040a These transfers are considered to occur annually, generally on December 31. Tax form 1040a If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Tax form 1040a The lender must report it as interest income. Tax form 1040a Limit on forgone interest for gift loans of $100,000 or less. Tax form 1040a   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Tax form 1040a This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Tax form 1040a If the borrower's net investment income is $1,000 or less, it is treated as zero. Tax form 1040a This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Tax form 1040a Treatment of term loans. Tax form 1040a   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Tax form 1040a ) on the date the loan is made. Tax form 1040a This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Tax form 1040a The same amount is treated as original issue discount on the loan. Tax form 1040a See Original issue discount (OID) under Interest You Can Deduct, earlier. Tax form 1040a Exceptions for loans of $10,000 or less. Tax form 1040a   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Tax form 1040a This exception applies only to the following. Tax form 1040a Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Tax form 1040a Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Tax form 1040a This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Tax form 1040a Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Tax form 1040a Exceptions for loans without significant tax effect. Tax form 1040a   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Tax form 1040a Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Tax form 1040a Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Tax form 1040a Certain employee-relocation loans. Tax form 1040a Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Tax form 1040a S. Tax form 1040a trade or business and not exempt from U. Tax form 1040a S. Tax form 1040a tax under an income tax treaty. Tax form 1040a Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Tax form 1040a Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Tax form 1040a Consider all the following factors. Tax form 1040a Whether items of income and deduction generated by the loan offset each other. Tax form 1040a The amount of the items. Tax form 1040a The cost of complying with the below-market loan provisions if they were to apply. Tax form 1040a Any reasons, other than taxes, for structuring the transaction as a below-market loan. Tax form 1040a Exception for loans to qualified continuing care facilities. Tax form 1040a   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Tax form 1040a A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Tax form 1040a Designed to provide services under continuing care contracts (defined below). Tax form 1040a Includes an independent living unit, and either an assisted living or nursing facility, or both. Tax form 1040a Substantially all of the independent living unit residents are covered by continuing care contracts. Tax form 1040a A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Tax form 1040a The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Tax form 1040a The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Tax form 1040a The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Tax form 1040a For more information, see section 7872(h) of the Internal Revenue Code. Tax form 1040a Sale or exchange of property. Tax form 1040a   Different rules generally apply to a loan connected with the sale or exchange of property. Tax form 1040a If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Tax form 1040a However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Tax form 1040a See Unstated Interest and Original Issue Discount (OID) in Publication 537. Tax form 1040a More information. Tax form 1040a   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Tax form 1040a 7872-5 of the regulations. Tax form 1040a Prev  Up  Next   Home   More Online Publications