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2011 Taxes Online

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2011 Taxes Online

2011 taxes online Publication 334 - Introductory Material Table of Contents IntroductionOrdering forms and publications. 2011 taxes online Tax questions. 2011 taxes online Future Developments What's New for 2013 What's New for 2014 Reminders Photographs of Missing Children Introduction The purpose of this publication is to provide general information about the federal tax laws that apply to small business owners who are sole proprietors and to statutory employees. 2011 taxes online This publication has information on business income, expenses, and tax credits that may help you file your income tax return. 2011 taxes online Are you self-employed?   You are self-employed if you carry on a trade or business as a sole proprietor or an independent contractor. 2011 taxes online Sole proprietor. 2011 taxes online   A sole proprietor is someone who owns an unincorporated business by himself or herself. 2011 taxes online However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation. 2011 taxes online Trade or business. 2011 taxes online    A trade or business is generally an activity carried on to make a profit. 2011 taxes online The facts and circumstances of each case determine whether or not an activity is a trade or business. 2011 taxes online You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. 2011 taxes online You do need to make ongoing efforts to further the interests of your business. 2011 taxes online   You do not have to carry on regular full-time business activities to be self-employed. 2011 taxes online Having a part-time business in addition to your regular job or business may be self-employment. 2011 taxes online Independent contractor. 2011 taxes online    People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. 2011 taxes online However, whether they are independent contractors or employees depends on the facts in each case. 2011 taxes online The general rule is that an individual is an independent contractor if the payer has the right to control or to direct only the result of the work and not how it will be done. 2011 taxes online The earnings of a person who is working as an independent contractor are subject to self-employment tax. 2011 taxes online For more information on determining whether you are an employee or independent contractor, see Publication 15-A, Employer's Supplemental Tax Guide. 2011 taxes online Statutory employee. 2011 taxes online   A statutory employee has a checkmark in box 13 of his or her Form W-2, Wage and Tax Statement. 2011 taxes online Statutory employees use Schedule C or C-EZ to report their wages and expenses. 2011 taxes online Limited liability company (LLC). 2011 taxes online   A limited liability company (LLC) is an entity formed under state law by filing articles of organization. 2011 taxes online Generally, a single-member LLC is disregarded as an entity separate from its owner and reports its income and deductions on its owner's federal income tax return. 2011 taxes online An owner who is an individual may use Schedule C or C-EZ. 2011 taxes online Business owned and operated by spouses. 2011 taxes online   If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. 2011 taxes online Do not use Schedule C or C-EZ. 2011 taxes online Instead, file Form 1065, U. 2011 taxes online S. 2011 taxes online Return of Partnership Income. 2011 taxes online For more information, see Publication 541, Partnerships. 2011 taxes online    Exception—Community income. 2011 taxes online If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. 2011 taxes online S. 2011 taxes online possession, you can treat the business either as a sole proprietorship or a partnership. 2011 taxes online The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 2011 taxes online A change in your reporting position will be treated as a conversion of the entity. 2011 taxes online    Exception—Qualified joint venture. 2011 taxes online If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. 2011 taxes online Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. 2011 taxes online For an explanation of "material participation," see the Instructions for Schedule C, line G. 2011 taxes online   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. 2011 taxes online Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. 2011 taxes online For more information, see Qualified Joint Ventures in the Instructions for Schedule SE. 2011 taxes online This publication does not cover the topics listed in the following table. 2011 taxes online    IF you need information about: THEN you should see: Corporations Publication 542 Farming Publication 225 Fishermen (Capital Construction Fund)  Publication 595 Partnerships Publication 541 Passive activities Publication 925 Recordkeeping Publication 583 Rental Publication 527 S corporations Instructions for Form 1120S What you need to know. 2011 taxes online   Table A provides a list of questions you need to answer to help you meet your federal tax obligations. 2011 taxes online After each question is the location in this publication where you will find the related discussion. 2011 taxes online Table A. 2011 taxes online What You Need To Know About Federal Taxes (Note. 2011 taxes online The following is a list of questions you may need to answer so you can fill out your federal income tax return. 2011 taxes online Chapters are given to help you find the related discussion in this publication. 2011 taxes online ) What must I know   Where to find the answer   What kinds of federal taxes do I have to pay? How do I pay them?   See chapter 1. 2011 taxes online What forms must I file?   See chapter 1. 2011 taxes online What must I do if I have employees?   See Employment Taxes in chapter 1. 2011 taxes online Do I have to start my tax year in January, or can I start it in any other month?   See Accounting Periods in chapter 2. 2011 taxes online What method can I use to account for my income and expenses?   See Accounting Methods in chapter 2. 2011 taxes online What kinds of business income do I have to report on my tax return?   See chapter 5. 2011 taxes online What kinds of business expenses can I deduct on my tax return?   See Business Expenses in chapter 8. 2011 taxes online What kinds of expenses are not deductible as business expenses?   See Expenses You Cannot Deduct in chapter 8. 2011 taxes online What happens if I have a business loss? Can I deduct it?   See chapter 9. 2011 taxes online What must I do if I disposed of business property during the year?   See chapter 3. 2011 taxes online What are my rights as a taxpayer?   See chapter 11. 2011 taxes online Where do I go if I need help with federal tax matters?   See chapter 12. 2011 taxes online IRS mission. 2011 taxes online   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. 2011 taxes online Comments and suggestions. 2011 taxes online   We welcome your comments about this publication and your suggestions for future editions. 2011 taxes online   You can write to us at the following address:  Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. 2011 taxes online NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. 2011 taxes online Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 2011 taxes online   You can send your comments from www. 2011 taxes online irs. 2011 taxes online gov/formspubs/. 2011 taxes online Click on “More Information” then on “Comment on Tax Forms and Publications. 2011 taxes online ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. 2011 taxes online Ordering forms and publications. 2011 taxes online   Visit  www. 2011 taxes online irs. 2011 taxes online gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. 2011 taxes online  Internal Revenue Service 1201 N. 2011 taxes online Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. 2011 taxes online   If you have a tax question, check the information available on IRS. 2011 taxes online gov or call 1-800-829-1040. 2011 taxes online We cannot answer tax questions sent to either of the above addresses. 2011 taxes online Future Developments For the latest information about developments related to Publication 334, such as legislation enacted after it was published, go to www. 2011 taxes online irs. 2011 taxes online gov/pub334. 2011 taxes online What's New for 2013 The following are some of the tax changes for 2013. 2011 taxes online For information on other changes, go to IRS. 2011 taxes online gov. 2011 taxes online Tax rates. 2011 taxes online . 2011 taxes online  For tax years beginning in 2013, the social security part of the self-employment tax increases to 12. 2011 taxes online 4%. 2011 taxes online The Medicare part of the tax remains at 2. 2011 taxes online 9%. 2011 taxes online As a result, the self-employment tax is 15. 2011 taxes online 3%. 2011 taxes online Maximum net earnings. 2011 taxes online  The maximum net self-employment earnings subject to the social security part of the self-employment tax increases to $113,700 for 2013. 2011 taxes online There is no maximum limit on earnings subject to the Medicare part. 2011 taxes online Standard mileage rate. 2011 taxes online  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. 2011 taxes online 5 cents per mile. 2011 taxes online For more information, see Car and Truck Expenses in chapter 8. 2011 taxes online Simplified method for business use of home deduction. 2011 taxes online . 2011 taxes online  The IRS now provides a simplified method to determine your expenses for business use of your home. 2011 taxes online For more information, see Business Use of Your Home in chapter 8. 2011 taxes online What's New for 2014 The following are some of the tax changes for 2014. 2011 taxes online For information on other changes, go to IRS. 2011 taxes online gov. 2011 taxes online Standard mileage rate. 2011 taxes online  For 2014, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56 cents per mile. 2011 taxes online Self-employment tax. 2011 taxes online  The maximum net self-employment earnings subject to the social security part of the self-employment tax is $117,000 for 2014. 2011 taxes online Reminders Accounting methods. 2011 taxes online  Certain small business taxpayers may be eligible to adopt or change to the cash method of accounting and may not be required to account for inventories. 2011 taxes online For more information, see Inventories in chapter 2. 2011 taxes online Reportable transactions. 2011 taxes online  You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. 2011 taxes online You may have to pay a penalty if you are required to file Form 8886 but do not do so. 2011 taxes online You may also have to pay interest and penalties on any reportable transaction understatements. 2011 taxes online Reportable transactions include: Transactions the same as or substantially similar to tax avoidance transactions identified by the IRS, Transactions offered to you under conditions of confidentiality for which you paid an advisor a minimum fee, Transactions for which you have, or a related party has, contractual protection against disallowance of the tax benefits, Transactions that result in losses of at least $2 million in any single tax year ($50,000 if from certain foreign currency transactions) or $4 million in any combination of tax years, and Transactions the same or substantially similar to one of the types of transactions the IRS has identified as a transaction of interest. 2011 taxes online For more information, see the Instructions for Form 8886. 2011 taxes online Photographs of Missing Children The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 2011 taxes online Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 2011 taxes online You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 2011 taxes online Prev  Up  Next   Home   More Online Publications
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2011 taxes online 1. 2011 taxes online   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. 2011 taxes online At-risk limits. 2011 taxes online Passive activities. 2011 taxes online Net operating loss. 2011 taxes online When Can I Deduct an Expense?Economic performance. 2011 taxes online Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. 2011 taxes online  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. 2011 taxes online See Optional safe harbor method under Business use of your home , later. 2011 taxes online Introduction This chapter covers the general rules for deducting business expenses. 2011 taxes online Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. 2011 taxes online Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. 2011 taxes online What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. 2011 taxes online An ordinary expense is one that is common and accepted in your industry. 2011 taxes online A necessary expense is one that is helpful and appropriate for your trade or business. 2011 taxes online An expense does not have to be indispensable to be considered necessary. 2011 taxes online Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. 2011 taxes online In some cases you may not be allowed to deduct the expense at all. 2011 taxes online Therefore, it is important to distinguish usual business expenses from expenses that include the following. 2011 taxes online The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. 2011 taxes online Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. 2011 taxes online Some of your business expenses may be included in figuring cost of goods sold. 2011 taxes online Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. 2011 taxes online If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. 2011 taxes online The following are types of expenses that go into figuring cost of goods sold. 2011 taxes online The cost of products or raw materials, including freight. 2011 taxes online Storage. 2011 taxes online Direct labor (including contributions to pension or annuity plans) for workers who produce the products. 2011 taxes online Factory overhead. 2011 taxes online Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. 2011 taxes online Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. 2011 taxes online This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. 2011 taxes online For more information, see the following sources. 2011 taxes online Cost of goods sold—chapter 6 of Publication 334. 2011 taxes online Inventories—Publication 538. 2011 taxes online Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. 2011 taxes online Capital Expenses You must capitalize, rather than deduct, some costs. 2011 taxes online These costs are a part of your investment in your business and are called “capital expenses. 2011 taxes online ” Capital expenses are considered assets in your business. 2011 taxes online In general, you capitalize three types of costs. 2011 taxes online Business start-up costs (See Tip below). 2011 taxes online Business assets. 2011 taxes online Improvements. 2011 taxes online You can elect to deduct or amortize certain business start-up costs. 2011 taxes online See chapters 7 and 8. 2011 taxes online Cost recovery. 2011 taxes online   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. 2011 taxes online These recovery methods allow you to deduct part of your cost each year. 2011 taxes online In this way, you are able to recover your capital expense. 2011 taxes online See Amortization (chapter 8) and Depletion (chapter 9) in this publication. 2011 taxes online A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. 2011 taxes online A greater portion of these costs can be deducted if the property is qualified disaster assistance property. 2011 taxes online See Publication 946 for details. 2011 taxes online Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. 2011 taxes online These costs may include expenses for advertising, travel, or wages for training employees. 2011 taxes online If you go into business. 2011 taxes online   When you go into business, treat all costs you had to get your business started as capital expenses. 2011 taxes online   Usually you recover costs for a particular asset through depreciation. 2011 taxes online Generally, you cannot recover other costs until you sell the business or otherwise go out of business. 2011 taxes online However, you can choose to amortize certain costs for setting up your business. 2011 taxes online See Starting a Business in chapter 8 for more information on business start-up costs. 2011 taxes online If your attempt to go into business is unsuccessful. 2011 taxes online   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. 2011 taxes online The costs you had before making a decision to acquire or begin a specific business. 2011 taxes online These costs are personal and nondeductible. 2011 taxes online They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. 2011 taxes online The costs you had in your attempt to acquire or begin a specific business. 2011 taxes online These costs are capital expenses and you can deduct them as a capital loss. 2011 taxes online   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. 2011 taxes online   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. 2011 taxes online You cannot take a deduction for these costs. 2011 taxes online You will recover the costs of these assets when you dispose of them. 2011 taxes online Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. 2011 taxes online You must fully capitalize the cost of these assets, including freight and installation charges. 2011 taxes online Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. 2011 taxes online See Regulations section 1. 2011 taxes online 263A-2 for information on these rules. 2011 taxes online Improvements Improvements are generally major expenditures. 2011 taxes online Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. 2011 taxes online The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. 2011 taxes online Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. 2011 taxes online Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. 2011 taxes online However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. 2011 taxes online Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. 2011 taxes online Restoration plan. 2011 taxes online   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. 2011 taxes online This applies even if some of the work would by itself be classified as repairs. 2011 taxes online Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. 2011 taxes online Motor vehicles. 2011 taxes online   You usually capitalize the cost of a motor vehicle you use in your business. 2011 taxes online You can recover its cost through annual deductions for depreciation. 2011 taxes online   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. 2011 taxes online See Publication 463. 2011 taxes online   Generally, repairs you make to your business vehicle are currently deductible. 2011 taxes online However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. 2011 taxes online Roads and driveways. 2011 taxes online    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. 2011 taxes online The cost of maintaining a private road on your business property is a deductible expense. 2011 taxes online Tools. 2011 taxes online   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. 2011 taxes online Machinery parts. 2011 taxes online   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. 2011 taxes online Heating equipment. 2011 taxes online   The cost of changing from one heating system to another is a capital expense. 2011 taxes online Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. 2011 taxes online However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. 2011 taxes online You can deduct the business part. 2011 taxes online For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. 2011 taxes online The remaining 30% is personal interest and generally is not deductible. 2011 taxes online See chapter 4 for information on deducting interest and the allocation rules. 2011 taxes online Business use of your home. 2011 taxes online   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. 2011 taxes online These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. 2011 taxes online   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. 2011 taxes online The business part of your home must be used exclusively and regularly for your trade or business. 2011 taxes online The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. 2011 taxes online   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. 2011 taxes online   Your home office qualifies as your principal place of business if you meet the following requirements. 2011 taxes online You use the office exclusively and regularly for administrative or management activities of your trade or business. 2011 taxes online You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 2011 taxes online   If you have more than one business location, determine your principal place of business based on the following factors. 2011 taxes online The relative importance of the activities performed at each location. 2011 taxes online If the relative importance factor does not determine your principal place of business, consider the time spent at each location. 2011 taxes online Optional safe harbor method. 2011 taxes online   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. 2011 taxes online This method is an alternative to the calculation, allocation, and substantiation of actual expenses. 2011 taxes online   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. 2011 taxes online Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). 2011 taxes online You are not required to allocate these deductions between personal and business use, as is required under the regular method. 2011 taxes online If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. 2011 taxes online   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. 2011 taxes online All of the requirements discussed earlier under Business use of your home still apply. 2011 taxes online   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. 2011 taxes online    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. 2011 taxes online Business use of your car. 2011 taxes online   If you use your car exclusively in your business, you can deduct car expenses. 2011 taxes online If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. 2011 taxes online Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. 2011 taxes online   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. 2011 taxes online Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. 2011 taxes online Beginning in 2013, the standard mileage rate is 56. 2011 taxes online 5 cents per mile. 2011 taxes online   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. 2011 taxes online   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. 2011 taxes online How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. 2011 taxes online Recovery of amount deducted (tax benefit rule). 2011 taxes online   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. 2011 taxes online If you have a recovery in a later year, include the recovered amount in income in that year. 2011 taxes online However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. 2011 taxes online   For more information on recoveries and the tax benefit rule, see Publication 525. 2011 taxes online Payments in kind. 2011 taxes online   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. 2011 taxes online You cannot deduct the cost of your own labor. 2011 taxes online   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. 2011 taxes online If these costs are included in the cost of goods sold, do not deduct them again as a business expense. 2011 taxes online Limits on losses. 2011 taxes online   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. 2011 taxes online There may be limits on how much of the loss you can deduct. 2011 taxes online Not-for-profit limits. 2011 taxes online   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. 2011 taxes online See Not-for-Profit Activities , later. 2011 taxes online At-risk limits. 2011 taxes online   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. 2011 taxes online You are at risk in any activity for the following. 2011 taxes online The money and adjusted basis of property you contribute to the activity. 2011 taxes online Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. 2011 taxes online For more information, see Publication 925. 2011 taxes online Passive activities. 2011 taxes online   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. 2011 taxes online In general, deductions for losses from passive activities only offset income from passive activities. 2011 taxes online You cannot use any excess deductions to offset other income. 2011 taxes online In addition, passive activity credits can only offset the tax on net passive income. 2011 taxes online Any excess loss or credits are carried over to later years. 2011 taxes online Suspended passive losses are fully deductible in the year you completely dispose of the activity. 2011 taxes online For more information, see Publication 925. 2011 taxes online Net operating loss. 2011 taxes online   If your deductions are more than your income for the year, you may have a “net operating loss. 2011 taxes online ” You can use a net operating loss to lower your taxes in other years. 2011 taxes online See Publication 536 for more information. 2011 taxes online   See Publication 542 for information about net operating losses of corporations. 2011 taxes online When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. 2011 taxes online An accounting method is a set of rules used to determine when and how income and expenses are reported. 2011 taxes online The two basic methods are the cash method and the accrual method. 2011 taxes online Whichever method you choose must clearly reflect income. 2011 taxes online For more information on accounting methods, see Publication 538. 2011 taxes online Cash method. 2011 taxes online   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. 2011 taxes online Accrual method. 2011 taxes online   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. 2011 taxes online The all-events test has been met. 2011 taxes online The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. 2011 taxes online Economic performance has occurred. 2011 taxes online Economic performance. 2011 taxes online   You generally cannot deduct or capitalize a business expense until economic performance occurs. 2011 taxes online If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. 2011 taxes online If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 2011 taxes online Example. 2011 taxes online Your tax year is the calendar year. 2011 taxes online In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. 2011 taxes online You paid it by check in January 2014. 2011 taxes online If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. 2011 taxes online If you use the cash method of accounting, deduct the expense on your 2014 return. 2011 taxes online Prepayment. 2011 taxes online   You generally cannot deduct expenses in advance, even if you pay them in advance. 2011 taxes online This rule applies to both the cash and accrual methods. 2011 taxes online It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 2011 taxes online Example. 2011 taxes online In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. 2011 taxes online Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. 2011 taxes online You can deduct the rent for 2014 and 2015 on your tax returns for those years. 2011 taxes online Contested liability. 2011 taxes online   Under the cash method, you can deduct a contested liability only in the year you pay the liability. 2011 taxes online Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. 2011 taxes online S. 2011 taxes online possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. 2011 taxes online However, to take the deduction in the year of payment or transfer, you must meet certain conditions. 2011 taxes online See Regulations section 1. 2011 taxes online 461-2. 2011 taxes online Related person. 2011 taxes online   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. 2011 taxes online However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. 2011 taxes online Your deduction is allowed when the amount is includible in income by the related cash method payee. 2011 taxes online See Related Persons in Publication 538. 2011 taxes online Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. 2011 taxes online Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. 2011 taxes online The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. 2011 taxes online It does not apply to corporations other than S corporations. 2011 taxes online In determining whether you are carrying on an activity for profit, several factors are taken into account. 2011 taxes online No one factor alone is decisive. 2011 taxes online Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. 2011 taxes online Presumption of profit. 2011 taxes online   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. 2011 taxes online Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. 2011 taxes online The activity must be substantially the same for each year within this period. 2011 taxes online You have a profit when the gross income from an activity exceeds the deductions. 2011 taxes online   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. 2011 taxes online   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. 2011 taxes online This means the limits discussed here will not apply. 2011 taxes online You can take all your business deductions from the activity, even for the years that you have a loss. 2011 taxes online You can rely on this presumption unless the IRS later shows it to be invalid. 2011 taxes online Using the presumption later. 2011 taxes online   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. 2011 taxes online   You can elect to do this by filing Form 5213. 2011 taxes online Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. 2011 taxes online   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. 2011 taxes online Accordingly, it will not restrict your deductions. 2011 taxes online Rather, you will gain time to earn a profit in the required number of years. 2011 taxes online If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. 2011 taxes online If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. 2011 taxes online   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. 2011 taxes online The period is extended only for deductions of the activity and any related deductions that might be affected. 2011 taxes online    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. 2011 taxes online Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. 2011 taxes online Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. 2011 taxes online You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. 2011 taxes online However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. 2011 taxes online Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. 2011 taxes online If you are an individual, these deductions may be taken only if you itemize. 2011 taxes online These deductions may be taken on Schedule A (Form 1040). 2011 taxes online Category 1. 2011 taxes online   Deductions you can take for personal as well as for business activities are allowed in full. 2011 taxes online For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. 2011 taxes online Deduct them on the appropriate lines of Schedule A (Form 1040). 2011 taxes online For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). 2011 taxes online The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. 2011 taxes online The reduction amount returns to $100 for tax years beginning after December 31, 2009. 2011 taxes online See Publication 547 for more information on casualty losses. 2011 taxes online For the limits that apply to home mortgage interest, see Publication 936. 2011 taxes online Category 2. 2011 taxes online   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. 2011 taxes online Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. 2011 taxes online Category 3. 2011 taxes online   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. 2011 taxes online Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. 2011 taxes online Where more than one asset is involved, allocate depreciation and these other deductions proportionally. 2011 taxes online    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). 2011 taxes online They are subject to the 2%-of-adjusted-gross-income limit. 2011 taxes online See Publication 529 for information on this limit. 2011 taxes online Example. 2011 taxes online Adriana is engaged in a not-for-profit activity. 2011 taxes online The income and expenses of the activity are as follows. 2011 taxes online Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. 2011 taxes online The limit is reached in category (3), as follows. 2011 taxes online Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. 2011 taxes online $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. 2011 taxes online Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. 2011 taxes online The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). 2011 taxes online Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. 2011 taxes online Partnerships and S corporations. 2011 taxes online   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. 2011 taxes online They are reflected in the individual shareholder's or partner's distributive shares. 2011 taxes online More than one activity. 2011 taxes online   If you have several undertakings, each may be a separate activity or several undertakings may be combined. 2011 taxes online The following are the most significant facts and circumstances in making this determination. 2011 taxes online The degree of organizational and economic interrelationship of various undertakings. 2011 taxes online The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. 2011 taxes online The similarity of the undertakings. 2011 taxes online   The IRS will generally accept your characterization if it is supported by facts and circumstances. 2011 taxes online    If you are carrying on two or more different activities, keep the deductions and income from each one separate. 2011 taxes online Figure separately whether each is a not-for-profit activity. 2011 taxes online Then figure the limit on deductions and losses 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