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1040ex Form

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1040ex Form

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

1040ex form 5. 1040ex form   Exemptions, Deductions, and Credits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Items Related to Excluded Income Exemptions Contributions to Foreign Charitable Organizations Moving ExpensesAllocation of Moving Expenses Forms To File Contributions to Individual Retirement Arrangements Taxes of Foreign Countries and U. 1040ex form S. 1040ex form PossessionsCredit for Foreign Income Taxes Deduction for Foreign Income Taxes Deduction for Other Foreign Taxes How To Report Deductions Topics - This chapter discusses: The rules concerning items related to excluded income, Exemptions, Contributions to foreign charitable organizations, Moving expenses, Contributions to individual retirement arrangements (IRAs), Taxes of foreign countries and U. 1040ex form S. 1040ex form possessions, and How to report deductions. 1040ex form Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 514 Foreign Tax Credit for Individuals 521 Moving Expenses 523 Selling Your Home 590 Individual Retirement Arrangements (IRAs) 597 Information on the United States—Canada Income Tax Treaty Form (and Instructions) 1116 Foreign Tax Credit 2106 Employee Business Expenses 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion 3903 Moving Expenses Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business SS-5 Application for a Social Security Card W-7 Application for IRS Individual Taxpayer Identification Number See chapter 7 for information about getting these publications and forms. 1040ex form Items Related to Excluded Income U. 1040ex form S. 1040ex form citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. 1040ex form If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 1040ex form This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. 1040ex form You can deduct only those expenses connected with earning includible income. 1040ex form These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. 1040ex form These rules do not apply to items such as: Personal exemptions, Qualified retirement contributions, Alimony payments, Charitable contributions, Medical expenses, Mortgage interest, or Real estate taxes on your personal residence. 1040ex form For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self- employment tax is. 1040ex form If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions. 1040ex form Example. 1040ex form In 2012, you had $90,400 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. 1040ex form You did not have a housing exclusion. 1040ex form Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2012 return. 1040ex form In 2013, you received a $12,000 bonus for work you did abroad in 2012. 1040ex form You can exclude $4,700 of the bonus because the limit on the foreign earned income exclusion for 2012 was $95,100 and you have already excluded $90,400. 1040ex form Since you must include $7,300 of the bonus ($12,000 − $4,700) for work you did in 2012 in income, you can file an amended return for 2012 to claim $677 of the deductions. 1040ex form This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($7,300) and divided by the total foreign earned income for 2012 ($102,400). 1040ex form Exemptions You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U. 1040ex form S. 1040ex form tax purposes and is not the dependent of another U. 1040ex form S. 1040ex form taxpayer. 1040ex form You also can claim exemptions for individuals who qualify as your dependents. 1040ex form To be your dependent, the individual must be a U. 1040ex form S. 1040ex form citizen, U. 1040ex form S. 1040ex form national, U. 1040ex form S. 1040ex form resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins. 1040ex form Children. 1040ex form   Children usually are citizens or residents of the same country as their parents. 1040ex form If you were a U. 1040ex form S. 1040ex form citizen when your child was born, your child generally is a U. 1040ex form S. 1040ex form citizen. 1040ex form This is true even if the child's other parent is a nonresident alien, the child was born in a foreign country, and the child lives abroad with the other parent. 1040ex form   If you have a legally adopted child who is not a U. 1040ex form S. 1040ex form citizen, U. 1040ex form S. 1040ex form resident, or U. 1040ex form S. 1040ex form national, the child meets the citizen requirement if you are a U. 1040ex form S. 1040ex form citizen or U. 1040ex form S. 1040ex form national and the child lived with you as a member of your household all year. 1040ex form Social security number. 1040ex form   You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. 1040ex form To get a social security number for a dependent, apply at a Social Security office or U. 1040ex form S. 1040ex form consulate. 1040ex form You must provide original or certified copies of documents to verify the dependent's age, identity, and citizenship, and complete Form SS-5. 1040ex form   If you do not have an SSN for a child who was born in 2013 and died in 2013, attach a copy of the child's birth certificate to your tax return. 1040ex form Print “Died” in column (2) of line 6c of your Form 1040 or Form 1040A. 1040ex form   If your dependent is a nonresident alien who is not eligible to get a social security number, you must list the dependent's individual taxpayer identification number (ITIN) instead of an SSN. 1040ex form To apply for an ITIN, file Form W-7 with the IRS. 1040ex form It usually takes 6 to 10 weeks to get an ITIN. 1040ex form Enter your dependent's ITIN wherever an SSN is requested on your tax return. 1040ex form More information. 1040ex form   For more information about exemptions, see Publication 501. 1040ex form Contributions to Foreign Charitable Organizations If you make contributions directly to a foreign church or other foreign charitable organization, you generally cannot deduct them. 1040ex form Exceptions are explained under Canadian, Mexican, and Israeli charities, later. 1040ex form You can deduct contributions to a U. 1040ex form S. 1040ex form organization that transfers funds to a charitable foreign organization if the U. 1040ex form S. 1040ex form organization controls the use of the funds by the foreign organization or if the foreign organization is just an administrative arm of the U. 1040ex form S. 1040ex form organization. 1040ex form Canadian, Mexican, and Israeli charities. 1040ex form   Under the income tax treaties with Canada, Mexico and Israel, you may be able to deduct contributions to certain Canadian, Mexican, and Israeli charitable organizations. 1040ex form Generally, you must have income from sources in Canada, Mexico, or Israel, and the organization must meet certain requirements. 1040ex form See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information. 1040ex form Moving Expenses If you moved to a new home in 2013 because of your job or business, you may be able to deduct the expenses of your move. 1040ex form Generally, to be deductible, the moving expenses must have been paid or incurred in connection with starting work at a new job location. 1040ex form See Publication 521 for a complete discussion of the deduction for moving expenses and information about moves within the United States. 1040ex form Foreign moves. 1040ex form   A foreign move is a move in connection with the start of work at a new job location outside the United States and its possessions. 1040ex form A foreign move does not include a move back to the United States or its possessions. 1040ex form Allocation of Moving Expenses When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. 1040ex form If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expense that is allocable to the excluded income. 1040ex form Also, you cannot deduct the part of the moving expense related to the excluded income for a move from a foreign country to the United States if you receive a reimbursement that you are able to treat as compensation for services performed in the foreign country. 1040ex form Year to which expense is connected. 1040ex form   The moving expense is connected with earning the income (including reimbursements, as discussed in chapter 4 under Reimbursement of moving expenses ) either entirely in the year of the move or in 2 years. 1040ex form It is connected with earning the income entirely in the year of the move if you qualify for the foreign earned income exclusion under the bona fide residence test or physical presence test for at least 120 days during that tax year. 1040ex form   If you do not qualify under either the bona fide residence test or the physical presence test for at least 120 days during the year of the move, the expense is connected with earning the income in 2 years. 1040ex form The moving expense is connected with the year of the move and the following year if the move is from the United States to a foreign country. 1040ex form The moving expense is connected with the year of the move and the preceding year if the move is from a foreign country to the United States. 1040ex form Amount allocable to excluded income. 1040ex form   To figure the amount of your moving expense that is allocable to your excluded foreign earned income (and not deductible), you must multiply your total moving expense deduction by a fraction. 1040ex form The numerator (top number) of the fraction is the total of your excluded foreign earned income and housing amounts for both years and the denominator (bottom number) of the fraction is your total foreign earned income for both years. 1040ex form Example. 1040ex form On November 1, 2012, you transfer to Monaco. 1040ex form Your tax home is in Monaco, and you are a bona fide resident of Monaco for the entire tax year 2013. 1040ex form In 2012, you paid $6,000 for allowable moving expenses for your move from the United States to Monaco. 1040ex form You were fully reimbursed (under a nonaccountable plan) for these expenses in the same year. 1040ex form The reimbursement is included in your income. 1040ex form Your only other income consists of $16,000 wages earned in 2012 after the date of your move, and $100,100 wages earned in Monaco for 2013. 1040ex form Because you did not meet the bona fide residence test for at least 120 days during 2012, the year of the move, the moving expenses are for services you performed in both 2012 and the following year, 2013. 1040ex form Your total foreign earned income for both years is $122,100, consisting of $16,000 wages for 2012, $100,100 wages for 2013, and $6,000 moving expense reimbursement for both years. 1040ex form You have no housing exclusion. 1040ex form The total amount you can exclude is $113,190, consisting of the $97,600 full-year exclusion for 2013 and a $15,590 part-year exclusion for 2012 ($95,100 times the fraction of 60 qualifying bona fide residence days over 366 total days in the year). 1040ex form To find the part of your moving expenses that is not deductible, multiply your $6,000 total expenses by the fraction $113,190 over $122,100. 1040ex form The result, $5,562, is your nondeductible amount. 1040ex form    You must report the full amount of the moving expense reimbursement in the year in which you received the reimbursement. 1040ex form In the preceding example, this year was 2012. 1040ex form You attribute the reimbursement to both 2012 and 2013 only to figure the amount of foreign earned income eligible for exclusion for each year. 1040ex form Move between foreign countries. 1040ex form   If you move between foreign countries, your moving expense is allocable to income earned in the year of the move if you qualified under either the bona fide residence test or the physical presence test for a period that includes at least 120 days in the year of the move. 1040ex form New place of work in U. 1040ex form S. 1040ex form   If your new place of work is in the United States, the deductible moving expenses are directly connected with the income earned in the United States. 1040ex form If you treat a reimbursement from your employer as foreign earned income (see the discussion in chapter 4), you must allocate deductible moving expenses to foreign earned income. 1040ex form Storage expenses. 1040ex form   These expenses are attributable to work you do during the year in which you incur the storage expenses. 1040ex form You cannot deduct the amount allocable to excluded income. 1040ex form Moving Expense Attributable to Foreign Earnings in 2 Years If your moving expense deduction is attributable to your foreign earnings in 2 years (the year of the move and the following year), you should request an extension of time to file your return for the year of the move until after the end of the second year. 1040ex form By then, you should have all the information needed to properly figure the moving expense deduction. 1040ex form See Extensions under When To File and Pay in chapter 1. 1040ex form If you do not request an extension, you should figure the part of the moving expense that you cannot deduct because it is allocable to the foreign earned income you are excluding. 1040ex form You do this by multiplying the moving expense by a fraction, the numerator (top number) of which is your excluded foreign earned income for the year of the move, and the denominator (bottom number) of which is your total foreign earned income for the year of the move. 1040ex form Once you know your foreign earnings and exclusion for the following year, you must either: Adjust the moving expense deduction by filing an amended return for the year of the move, or Recapture any additional unallowable amount as income on your return for the following year. 1040ex form If, after you make the final computation, you have an additional amount of allowable moving expense deduction, you can claim this only on an amended return for the year of the move. 1040ex form You cannot claim it on the return for the second year. 1040ex form Forms To File Report your moving expenses on Form 3903. 1040ex form Report your moving expense deduction on line 26 of Form 1040. 1040ex form If you must reduce your moving expenses by the amount allocable to excluded income (as explained later under How To Report Deductions ), attach a statement to your return showing how you figured this amount. 1040ex form For more information about figuring moving expenses, see Publication 521. 1040ex form Contributions to Individual Retirement Arrangements Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,500 ($6,500 if 50 or older) or your compensation that is includible in your gross income for the tax year. 1040ex form In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. 1040ex form Do not reduce your compensation by the foreign housing deduction. 1040ex form If you are covered by an employer retirement plan at work, your deduction for your contributions to your traditional IRAs is generally limited based on your modified adjusted gross income. 1040ex form This is your adjusted gross income figured without taking into account the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 1040ex form Other modifications are also required. 1040ex form For more information on IRAs, see Publication 590. 1040ex form Taxes of Foreign Countries and U. 1040ex form S. 1040ex form Possessions You can take either a credit or a deduction for income taxes paid to a foreign country or a U. 1040ex form S. 1040ex form possession. 1040ex form Taken as a deduction, foreign income taxes reduce your taxable income. 1040ex form Taken as a credit, foreign income taxes reduce your tax liability. 1040ex form You must treat all foreign income taxes the same way. 1040ex form If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. 1040ex form However, you may be able to deduct other foreign taxes. 1040ex form See Deduction for Other Foreign Taxes, later. 1040ex form There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. 1040ex form In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U. 1040ex form S. 1040ex form tax liability, rather than as a deduction in figuring taxable income. 1040ex form However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U. 1040ex form S. 1040ex form income is small, a lower final tax may result from deducting the foreign income taxes. 1040ex form In any event, you should figure your tax liability both ways and then use the one that is better for you. 1040ex form You can make or change your choice within 10 years from the due date for filing the tax return on which you are entitled to take either the deduction or the credit. 1040ex form Foreign income taxes. 1040ex form   These are generally income taxes you pay to any foreign country or possession of the United States. 1040ex form Foreign income taxes on U. 1040ex form S. 1040ex form return. 1040ex form   Foreign income taxes can only be taken as a credit on Form 1040, line 47, or as an itemized deduction on Schedule A. 1040ex form These amounts cannot be included as withheld income taxes on Form 1040, line 62. 1040ex form Foreign taxes paid on excluded income. 1040ex form   You cannot take a credit or deduction for foreign income taxes paid on earnings you exclude from tax under any of the following. 1040ex form Foreign earned income exclusion. 1040ex form Foreign housing exclusion. 1040ex form Possession exclusion. 1040ex form If your wages are completely excluded, you cannot deduct or take a credit for any of the foreign taxes paid on your wages. 1040ex form   If only part of your wages is excluded, you cannot deduct or take a credit for the foreign income taxes allocable to the excluded part. 1040ex form You find the taxes allocable to your excluded wages by applying a fraction to the foreign taxes paid on foreign earned income received during the tax year. 1040ex form The numerator (top number) of the fraction is your excluded foreign earned income received during the tax year minus deductible expenses allocable to that income (not including the foreign housing deduction). 1040ex form The denominator (bottom number) of the fraction is your total foreign earned income received during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). 1040ex form   If foreign law taxes both earned income and some other type of income and the taxes on the other type cannot be separated, the denominator of the fraction is the total amount of income subject to foreign tax minus deductible expenses allocable to that income. 1040ex form    If you take a foreign tax credit for tax on income you could have excluded under your choice to exclude foreign earned income or your choice to exclude foreign housing costs, one or both of the choices may be considered revoked. 1040ex form Credit for Foreign Income Taxes If you take the foreign tax credit, you may have to file Form 1116 with Form 1040. 1040ex form Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. 1040ex form Do not include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040, line 62. 1040ex form The foreign income tax for which you can claim a credit is the amount of legal and actual tax liability you pay or accrue during the year. 1040ex form The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. 1040ex form You cannot take a foreign tax credit for income tax you paid to a foreign country that would be refunded by the foreign country if you made a claim for refund. 1040ex form Subsidies. 1040ex form   If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. 1040ex form This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax. 1040ex form   Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 1040ex form A credit is also not allowed if the subsidy is given to a person related to you, or persons who participated in a transaction or a related transaction with you. 1040ex form Limit The foreign tax credit is limited to the part of your total U. 1040ex form S. 1040ex form tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. 1040ex form The allowable foreign tax credit cannot be more than your actual foreign tax liability. 1040ex form Exemption from limit. 1040ex form   You will not be subject to this limit and will not have to file Form 1116 if you meet all three of the following requirements. 1040ex form Your only foreign source income for the year is passive income (dividends, interest, royalties, etc. 1040ex form ) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). 1040ex form Your foreign taxes for the year that qualify for the credit are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement. 1040ex form You elect this procedure. 1040ex form If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year. 1040ex form Separate limit. 1040ex form   You must figure the limit on a separate basis with regard to “passive category income” and “general category income” (see the instructions for Form 1116). 1040ex form Figuring the limit. 1040ex form   In figuring taxable income in each category, you take into account only the amount that you must include in income on your federal tax return. 1040ex form Do not take any excluded amount into account. 1040ex form   To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income. 1040ex form   Other expenses (such as itemized deductions or the standard deduction) not definitely related to specific items of income must be apportioned to the foreign income in each category by multiplying them by a fraction. 1040ex form The numerator (top number) of the fraction is your gross foreign income in the separate limit category. 1040ex form The denominator (bottom number) of the fraction is your gross income from all sources. 1040ex form For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. 1040ex form You must use special rules for deducting interest expenses. 1040ex form For more information on allocating and apportioning your deductions, see Publication 514. 1040ex form Exemptions. 1040ex form   Do not take the deduction for exemptions for yourself, your spouse, or your dependents in figuring taxable income for purposes of the limit. 1040ex form Recapture of foreign losses. 1040ex form   If you have an overall foreign loss and the loss reduces your U. 1040ex form S. 1040ex form source income (resulting in a reduction of your U. 1040ex form S. 1040ex form tax liability), you must recapture the loss in later years when you have taxable income from foreign sources. 1040ex form This is done by treating a part of your taxable income from foreign sources in later years as U. 1040ex form S. 1040ex form source income. 1040ex form This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit. 1040ex form Recapture of domestic losses. 1040ex form   If you have an overall domestic loss (resulting in no U. 1040ex form S. 1040ex form tax liability), you cannot claim a foreign tax credit for taxes paid during that year. 1040ex form You must recapture the loss in later years when you have U. 1040ex form S. 1040ex form source taxable income. 1040ex form This is done by treating a part of your taxable income from U. 1040ex form S. 1040ex form sources in later years as foreign source income. 1040ex form This increases the numerator of the limiting fraction and the resulting foreign tax credit limit. 1040ex form Foreign tax credit carryback and carryover. 1040ex form   The amount of foreign income tax not allowed as a credit because of the limit can be carried back 1 year and carried forward 10 years. 1040ex form   More information on figuring the foreign tax credit can be found in Publication 514. 1040ex form Deduction for Foreign Income Taxes Instead of taking the foreign tax credit, you can deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040). 1040ex form You can deduct only foreign income taxes paid on income that is subject to U. 1040ex form S. 1040ex form tax. 1040ex form You cannot deduct foreign taxes paid on earnings you exclude from tax under any of the following. 1040ex form Foreign earned income exclusion. 1040ex form Foreign housing exclusion. 1040ex form Possession exclusion. 1040ex form Example. 1040ex form You are a U. 1040ex form S. 1040ex form citizen and qualify to exclude your foreign earned income. 1040ex form Your excluded wages in Country X are $70,000 on which you paid income tax of $10,000. 1040ex form You received dividends from Country X of $2,000 on which you paid income tax of $600. 1040ex form You can deduct the $600 tax payment because the dividends relating to it are subject to U. 1040ex form S. 1040ex form tax. 1040ex form Because you exclude your wages, you cannot deduct the income tax of $10,000. 1040ex form If you exclude only a part of your wages, see the earlier discussion under Foreign taxes paid on excluded income. 1040ex form Deduction for Other Foreign Taxes You can deduct real property taxes you pay that are imposed on you by a foreign country. 1040ex form You take this deduction on Schedule A (Form 1040). 1040ex form You cannot deduct other foreign taxes, such as personal property taxes, unless you incurred the expenses in a trade or business or in the production of income. 1040ex form On the other hand, you generally can deduct personal property taxes when you pay them to U. 1040ex form S. 1040ex form possessions. 1040ex form But if you claim the possession exclusion, see Publication 570. 1040ex form The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. 1040ex form You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country. 1040ex form How To Report Deductions If you exclude foreign earned income or housing amounts, how you show your deductions on your tax return and how you figure the amount allocable to your excluded income depends on whether the expenses are used in figuring adjusted gross income (Form 1040, line 38) or are itemized deductions. 1040ex form If you have deductions used in figuring adjusted gross income, enter the total amount for each of these items on the appropriate lines and schedules of Form 1040. 1040ex form Generally, you figure the amount of a deduction related to the excluded income by multiplying the deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 1040ex form Enter the amount of the deduction(s) related to excluded income on line 44 of Form 2555. 1040ex form If you have itemized deductions related to excluded income, enter on Schedule A (Form 1040) only the part not related to excluded income. 1040ex form You figure that amount by subtracting from the total deduction the amount related to excluded income. 1040ex form Generally, you figure the amount that is related to the excluded income by multiplying the total deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 1040ex form Attach a statement to your return showing how you figured the deductible amount. 1040ex form Example 1. 1040ex form You are a U. 1040ex form S. 1040ex form citizen employed as an accountant. 1040ex form Your tax home is in Germany for the entire tax year. 1040ex form You meet the physical presence test. 1040ex form Your foreign earned income for the year was $122,000 and your investment income was $10,380. 1040ex form After excluding $97,600, your AGI is $34,780. 1040ex form You had unreimbursed business expenses of $2,500 for travel and entertainment in earning your foreign income, of which $500 was for meals and entertainment. 1040ex form These expenses are deductible only as miscellaneous deductions on Schedule A (Form 1040). 1040ex form You also have $500 of miscellaneous expenses that are not related to your foreign income that you enter on line 23 of Schedule A. 1040ex form You must fill out Form 2106. 1040ex form On that form, reduce your deductible meal and entertainment expenses by 50% ($250). 1040ex form You must reduce the remaining $2,250 of travel and entertainment expenses by 80% ($1,800) because you excluded 80% ($97,600/$122,000) of your foreign earned income. 1040ex form You carry the remaining total of $450 to line 21 of Schedule A. 1040ex form Add the $450 to the $500 that you have on line 23 and enter the total ($950) on line 24. 1040ex form On line 26 of Schedule A, enter $696, which is 2% of your adjusted gross income of $34,780 (line 38, Form 1040) and subtract it from the amount on line 24. 1040ex form Enter $254 on line 27 of Schedule A. 1040ex form Example 2. 1040ex form You are a U. 1040ex form S. 1040ex form citizen, have a tax home in Spain, and meet the physical presence test. 1040ex form You are self-employed and personal services produce the business income. 1040ex form Your gross income was $116,931, business expenses $66,895, and net income (profit) $50,036. 1040ex form You choose the foreign earned income exclusion and exclude $97,600 of your gross income. 1040ex form Since your excluded income is 83. 1040ex form 47% of your total income, 83. 1040ex form 47% of your business expenses are not deductible. 1040ex form Report your total income and expenses on Schedule C (Form 1040). 1040ex form On Form 2555 you will show the following: Line 20a, $116,931, gross income, Lines 42 and 43, $97,600, foreign earned income exclusion, and Line 44, $55,837 (83. 1040ex form 47% × $66,895) business expenses attributable to the exclusion. 1040ex form In this situation (Example 2), you cannot use Form 2555-EZ since you had self-employment income and business expenses. 1040ex form Example 3. 1040ex form Assume in Example 2 that both capital and personal services combine to produce the business income. 1040ex form No more than 30% of your net income, or $15,011, assuming that this amount is a reasonable allowance for your services, is considered earned and can be excluded. 1040ex form Your exclusion of $15,011 is 12. 1040ex form 84% of your gross income ($15,011 ÷ $116,931). 1040ex form Because you excluded 12. 1040ex form 84% of your total income, $8,589 (. 1040ex form 1284 x $66,895) of your business expenses is attributable to the excluded income and is not deductible. 1040ex form Example 4. 1040ex form You are a U. 1040ex form S. 1040ex form citizen, have a tax home in Brazil, and meet the physical presence test. 1040ex form You are self-employed and both capital and personal services combine to produce business income. 1040ex form Your gross income was $146,000, business expenses were $172,000, and your net loss was $26,000. 1040ex form A reasonable allowance for the services you performed for the business is $77,000. 1040ex form Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. 1040ex form The $77,000 is foreign earned income. 1040ex form If you choose to exclude the $77,000, you exclude 52. 1040ex form 74% of your gross income ($77,000 ÷ $146,000), and 52. 1040ex form 74% of your business expenses ($90,713) is attributable to that income and is not deductible. 1040ex form Show your total income and expenses on Schedule C (Form 1040). 1040ex form On Form 2555, exclude $77,000 and show $90,713 on line 44. 1040ex form Subtract line 44 from line 43, and enter the difference as a negative (in parentheses) on line 45. 1040ex form Because this amount is negative, enter it as a positive (no parentheses) on line 21, Form 1040, and combine it with your other income to arrive at total income on line 22 of Form 1040. 1040ex form In this situation (Example 4), you would probably not want to choose the foreign earned income exclusion if this was the first year you were eligible. 1040ex form If you had chosen the exclusion in an earlier year, you might want to revoke the choice for this year. 1040ex form To do so would mean that you could not claim the exclusion again for the next 5 tax years without IRS approval. 1040ex form See Choosing the Exclusion in chapter 4. 1040ex form Example 5. 1040ex form You are a U. 1040ex form S. 1040ex form citizen, have a tax home in Panama, and meet the bona fide residence test. 1040ex form You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. 1040ex form Capital investment is not material in producing the partnership's income. 1040ex form Under the terms of the partnership agreement, you are to receive 50% of the net profits. 1040ex form The partnership received gross income of $244,000 and incurred operating expenses of $98,250. 1040ex form Of the net profits of $145,750, you received $72,875 as your distributive share. 1040ex form You choose to exclude $97,600 of your share of the gross income. 1040ex form Because you exclude 80% ($97,600 ÷ $122,000) of your share of the gross income, you cannot deduct $39,300, 80% of your share of the operating expenses (. 1040ex form 80 × $49,125). 1040ex form Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040), Supplemental Income and Loss. 1040ex form On Form 2555, show $97,600 on line 42 and show $39,300 on line 44. 1040ex form Your exclusion on Form 2555 is $58,300. 1040ex form In this situation (Example 5), you cannot use Form 2555-EZ since you had earned income other than salaries and wages and you had business expenses. 1040ex form Prev  Up  Next   Home   More Online Publications