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Amending 2010 Tax Return

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Amending 2010 Tax Return

Amending 2010 tax return 1. Amending 2010 tax return   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. Amending 2010 tax return At-risk limits. Amending 2010 tax return Passive activities. Amending 2010 tax return Net operating loss. Amending 2010 tax return When Can I Deduct an Expense?Economic performance. Amending 2010 tax return Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Amending 2010 tax return  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Amending 2010 tax return See Optional safe harbor method under Business use of your home , later. Amending 2010 tax return Introduction This chapter covers the general rules for deducting business expenses. Amending 2010 tax return 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. Amending 2010 tax return 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. Amending 2010 tax return What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Amending 2010 tax return An ordinary expense is one that is common and accepted in your industry. Amending 2010 tax return A necessary expense is one that is helpful and appropriate for your trade or business. Amending 2010 tax return An expense does not have to be indispensable to be considered necessary. Amending 2010 tax return 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. Amending 2010 tax return In some cases you may not be allowed to deduct the expense at all. Amending 2010 tax return Therefore, it is important to distinguish usual business expenses from expenses that include the following. Amending 2010 tax return The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Amending 2010 tax return 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. Amending 2010 tax return Some of your business expenses may be included in figuring cost of goods sold. Amending 2010 tax return Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Amending 2010 tax return If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Amending 2010 tax return The following are types of expenses that go into figuring cost of goods sold. Amending 2010 tax return The cost of products or raw materials, including freight. Amending 2010 tax return Storage. Amending 2010 tax return Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Amending 2010 tax return Factory overhead. Amending 2010 tax return Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Amending 2010 tax return Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Amending 2010 tax return 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. Amending 2010 tax return For more information, see the following sources. Amending 2010 tax return Cost of goods sold—chapter 6 of Publication 334. Amending 2010 tax return Inventories—Publication 538. Amending 2010 tax return Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Amending 2010 tax return Capital Expenses You must capitalize, rather than deduct, some costs. Amending 2010 tax return These costs are a part of your investment in your business and are called “capital expenses. Amending 2010 tax return ” Capital expenses are considered assets in your business. Amending 2010 tax return In general, you capitalize three types of costs. Amending 2010 tax return Business start-up costs (See Tip below). Amending 2010 tax return Business assets. Amending 2010 tax return Improvements. Amending 2010 tax return You can elect to deduct or amortize certain business start-up costs. Amending 2010 tax return See chapters 7 and 8. Amending 2010 tax return Cost recovery. Amending 2010 tax return   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. Amending 2010 tax return These recovery methods allow you to deduct part of your cost each year. Amending 2010 tax return In this way, you are able to recover your capital expense. Amending 2010 tax return See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Amending 2010 tax return A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Amending 2010 tax return A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Amending 2010 tax return See Publication 946 for details. Amending 2010 tax return Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Amending 2010 tax return These costs may include expenses for advertising, travel, or wages for training employees. Amending 2010 tax return If you go into business. Amending 2010 tax return   When you go into business, treat all costs you had to get your business started as capital expenses. Amending 2010 tax return   Usually you recover costs for a particular asset through depreciation. Amending 2010 tax return Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Amending 2010 tax return However, you can choose to amortize certain costs for setting up your business. Amending 2010 tax return See Starting a Business in chapter 8 for more information on business start-up costs. Amending 2010 tax return If your attempt to go into business is unsuccessful. Amending 2010 tax return   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. Amending 2010 tax return The costs you had before making a decision to acquire or begin a specific business. Amending 2010 tax return These costs are personal and nondeductible. Amending 2010 tax return They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Amending 2010 tax return The costs you had in your attempt to acquire or begin a specific business. Amending 2010 tax return These costs are capital expenses and you can deduct them as a capital loss. Amending 2010 tax return   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. Amending 2010 tax return   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Amending 2010 tax return You cannot take a deduction for these costs. Amending 2010 tax return You will recover the costs of these assets when you dispose of them. Amending 2010 tax return Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Amending 2010 tax return You must fully capitalize the cost of these assets, including freight and installation charges. Amending 2010 tax return Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Amending 2010 tax return See Regulations section 1. Amending 2010 tax return 263A-2 for information on these rules. Amending 2010 tax return Improvements Improvements are generally major expenditures. Amending 2010 tax return Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Amending 2010 tax return 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. Amending 2010 tax return 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. Amending 2010 tax return Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Amending 2010 tax return However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Amending 2010 tax return Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Amending 2010 tax return Restoration plan. Amending 2010 tax return   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Amending 2010 tax return This applies even if some of the work would by itself be classified as repairs. Amending 2010 tax return Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Amending 2010 tax return Motor vehicles. Amending 2010 tax return   You usually capitalize the cost of a motor vehicle you use in your business. Amending 2010 tax return You can recover its cost through annual deductions for depreciation. Amending 2010 tax return   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Amending 2010 tax return See Publication 463. Amending 2010 tax return   Generally, repairs you make to your business vehicle are currently deductible. Amending 2010 tax return However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Amending 2010 tax return Roads and driveways. Amending 2010 tax return    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. Amending 2010 tax return The cost of maintaining a private road on your business property is a deductible expense. Amending 2010 tax return Tools. Amending 2010 tax return   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. Amending 2010 tax return Machinery parts. Amending 2010 tax return   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. Amending 2010 tax return Heating equipment. Amending 2010 tax return   The cost of changing from one heating system to another is a capital expense. Amending 2010 tax return Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Amending 2010 tax return 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. Amending 2010 tax return You can deduct the business part. Amending 2010 tax return 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. Amending 2010 tax return The remaining 30% is personal interest and generally is not deductible. Amending 2010 tax return See chapter 4 for information on deducting interest and the allocation rules. Amending 2010 tax return Business use of your home. Amending 2010 tax return   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Amending 2010 tax return These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Amending 2010 tax return   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Amending 2010 tax return The business part of your home must be used exclusively and regularly for your trade or business. Amending 2010 tax return 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. Amending 2010 tax return   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. Amending 2010 tax return   Your home office qualifies as your principal place of business if you meet the following requirements. Amending 2010 tax return You use the office exclusively and regularly for administrative or management activities of your trade or business. Amending 2010 tax return You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Amending 2010 tax return   If you have more than one business location, determine your principal place of business based on the following factors. Amending 2010 tax return The relative importance of the activities performed at each location. Amending 2010 tax return If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Amending 2010 tax return Optional safe harbor method. Amending 2010 tax return   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. Amending 2010 tax return This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Amending 2010 tax return   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. Amending 2010 tax return 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). Amending 2010 tax return You are not required to allocate these deductions between personal and business use, as is required under the regular method. Amending 2010 tax return If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Amending 2010 tax return   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Amending 2010 tax return All of the requirements discussed earlier under Business use of your home still apply. Amending 2010 tax return   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Amending 2010 tax return    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. Amending 2010 tax return Business use of your car. Amending 2010 tax return   If you use your car exclusively in your business, you can deduct car expenses. Amending 2010 tax return If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Amending 2010 tax return Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Amending 2010 tax return   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Amending 2010 tax return 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. Amending 2010 tax return Beginning in 2013, the standard mileage rate is 56. Amending 2010 tax return 5 cents per mile. Amending 2010 tax return   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. Amending 2010 tax return   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Amending 2010 tax return 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. Amending 2010 tax return Recovery of amount deducted (tax benefit rule). Amending 2010 tax return   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. Amending 2010 tax return If you have a recovery in a later year, include the recovered amount in income in that year. Amending 2010 tax return 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. Amending 2010 tax return   For more information on recoveries and the tax benefit rule, see Publication 525. Amending 2010 tax return Payments in kind. Amending 2010 tax return   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Amending 2010 tax return You cannot deduct the cost of your own labor. Amending 2010 tax return   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Amending 2010 tax return If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Amending 2010 tax return Limits on losses. Amending 2010 tax return   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Amending 2010 tax return There may be limits on how much of the loss you can deduct. Amending 2010 tax return Not-for-profit limits. Amending 2010 tax return   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. Amending 2010 tax return See Not-for-Profit Activities , later. Amending 2010 tax return At-risk limits. Amending 2010 tax return   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. Amending 2010 tax return You are at risk in any activity for the following. Amending 2010 tax return The money and adjusted basis of property you contribute to the activity. Amending 2010 tax return 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. Amending 2010 tax return For more information, see Publication 925. Amending 2010 tax return Passive activities. Amending 2010 tax return   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. Amending 2010 tax return In general, deductions for losses from passive activities only offset income from passive activities. Amending 2010 tax return You cannot use any excess deductions to offset other income. Amending 2010 tax return In addition, passive activity credits can only offset the tax on net passive income. Amending 2010 tax return Any excess loss or credits are carried over to later years. Amending 2010 tax return Suspended passive losses are fully deductible in the year you completely dispose of the activity. Amending 2010 tax return For more information, see Publication 925. Amending 2010 tax return Net operating loss. Amending 2010 tax return   If your deductions are more than your income for the year, you may have a “net operating loss. Amending 2010 tax return ” You can use a net operating loss to lower your taxes in other years. Amending 2010 tax return See Publication 536 for more information. Amending 2010 tax return   See Publication 542 for information about net operating losses of corporations. Amending 2010 tax return When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Amending 2010 tax return An accounting method is a set of rules used to determine when and how income and expenses are reported. Amending 2010 tax return The two basic methods are the cash method and the accrual method. Amending 2010 tax return Whichever method you choose must clearly reflect income. Amending 2010 tax return For more information on accounting methods, see Publication 538. Amending 2010 tax return Cash method. Amending 2010 tax return   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Amending 2010 tax return Accrual method. Amending 2010 tax return   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Amending 2010 tax return The all-events test has been met. Amending 2010 tax return The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Amending 2010 tax return Economic performance has occurred. Amending 2010 tax return Economic performance. Amending 2010 tax return   You generally cannot deduct or capitalize a business expense until economic performance occurs. Amending 2010 tax return 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. Amending 2010 tax return If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Amending 2010 tax return Example. Amending 2010 tax return Your tax year is the calendar year. Amending 2010 tax return In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Amending 2010 tax return You paid it by check in January 2014. Amending 2010 tax return 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. Amending 2010 tax return If you use the cash method of accounting, deduct the expense on your 2014 return. Amending 2010 tax return Prepayment. Amending 2010 tax return   You generally cannot deduct expenses in advance, even if you pay them in advance. Amending 2010 tax return This rule applies to both the cash and accrual methods. Amending 2010 tax return 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. Amending 2010 tax return Example. Amending 2010 tax return In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Amending 2010 tax return Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Amending 2010 tax return You can deduct the rent for 2014 and 2015 on your tax returns for those years. Amending 2010 tax return Contested liability. Amending 2010 tax return   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Amending 2010 tax return Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Amending 2010 tax return S. Amending 2010 tax return 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. Amending 2010 tax return However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Amending 2010 tax return See Regulations section 1. Amending 2010 tax return 461-2. Amending 2010 tax return Related person. Amending 2010 tax return   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Amending 2010 tax return 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. Amending 2010 tax return Your deduction is allowed when the amount is includible in income by the related cash method payee. Amending 2010 tax return See Related Persons in Publication 538. Amending 2010 tax return 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. Amending 2010 tax return Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Amending 2010 tax return The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Amending 2010 tax return It does not apply to corporations other than S corporations. Amending 2010 tax return In determining whether you are carrying on an activity for profit, several factors are taken into account. Amending 2010 tax return No one factor alone is decisive. Amending 2010 tax return 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. Amending 2010 tax return Presumption of profit. Amending 2010 tax return   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. Amending 2010 tax return 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. Amending 2010 tax return The activity must be substantially the same for each year within this period. Amending 2010 tax return You have a profit when the gross income from an activity exceeds the deductions. Amending 2010 tax return   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. Amending 2010 tax return   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. Amending 2010 tax return This means the limits discussed here will not apply. Amending 2010 tax return You can take all your business deductions from the activity, even for the years that you have a loss. Amending 2010 tax return You can rely on this presumption unless the IRS later shows it to be invalid. Amending 2010 tax return Using the presumption later. Amending 2010 tax return   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. Amending 2010 tax return   You can elect to do this by filing Form 5213. Amending 2010 tax return 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. Amending 2010 tax return   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Amending 2010 tax return Accordingly, it will not restrict your deductions. Amending 2010 tax return Rather, you will gain time to earn a profit in the required number of years. Amending 2010 tax return If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Amending 2010 tax return 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. Amending 2010 tax return   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. Amending 2010 tax return The period is extended only for deductions of the activity and any related deductions that might be affected. Amending 2010 tax return    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. Amending 2010 tax return 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. Amending 2010 tax return 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. Amending 2010 tax return You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Amending 2010 tax return 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. Amending 2010 tax return 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. Amending 2010 tax return If you are an individual, these deductions may be taken only if you itemize. Amending 2010 tax return These deductions may be taken on Schedule A (Form 1040). Amending 2010 tax return Category 1. Amending 2010 tax return   Deductions you can take for personal as well as for business activities are allowed in full. Amending 2010 tax return For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Amending 2010 tax return Deduct them on the appropriate lines of Schedule A (Form 1040). Amending 2010 tax return 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). Amending 2010 tax return 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. Amending 2010 tax return The reduction amount returns to $100 for tax years beginning after December 31, 2009. Amending 2010 tax return See Publication 547 for more information on casualty losses. Amending 2010 tax return For the limits that apply to home mortgage interest, see Publication 936. Amending 2010 tax return Category 2. Amending 2010 tax return   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. Amending 2010 tax return Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Amending 2010 tax return Category 3. Amending 2010 tax return   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. Amending 2010 tax return Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Amending 2010 tax return Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Amending 2010 tax return    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Amending 2010 tax return They are subject to the 2%-of-adjusted-gross-income limit. Amending 2010 tax return See Publication 529 for information on this limit. Amending 2010 tax return Example. Amending 2010 tax return Adriana is engaged in a not-for-profit activity. Amending 2010 tax return The income and expenses of the activity are as follows. Amending 2010 tax return 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. Amending 2010 tax return The limit is reached in category (3), as follows. Amending 2010 tax return 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. Amending 2010 tax return $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. Amending 2010 tax return Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Amending 2010 tax return The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Amending 2010 tax return 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. Amending 2010 tax return Partnerships and S corporations. Amending 2010 tax return   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Amending 2010 tax return They are reflected in the individual shareholder's or partner's distributive shares. Amending 2010 tax return More than one activity. Amending 2010 tax return   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Amending 2010 tax return The following are the most significant facts and circumstances in making this determination. Amending 2010 tax return The degree of organizational and economic interrelationship of various undertakings. Amending 2010 tax return The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Amending 2010 tax return The similarity of the undertakings. Amending 2010 tax return   The IRS will generally accept your characterization if it is supported by facts and circumstances. Amending 2010 tax return    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Amending 2010 tax return Figure separately whether each is a not-for-profit activity. Amending 2010 tax return Then figure the limit on deductions and losses separately for each activity that is not for profit. Amending 2010 tax return Prev  Up  Next   Home   More Online Publications
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The Taxpayer Advocate Service Is Your Voice at the IRS

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. We help taxpayers who are experiencing economic harm, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving problems with the IRS; and those who believe an IRS system or procedure is not working as it should. Here are ten things every taxpayer should know about TAS:

  1. The Taxpayer Advocate Service is your voice at the IRS.
  2. Our service is free and tailored to meet your needs.
  3. You may be eligible for our help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should.
  4. The worst thing you can do is nothing at all!
  5. We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. This includes businesses as well as individuals.
  6. If you qualify for our help, we’ll do everything we can to get your problem resolved. You will be assigned to one advocate who will be with you at every turn.
  7. We have at least one local taxpayer advocate office in every state, the District of Columbia, and Puerto Rico. You can call your local advocate, whose number is in your phone book and in Publication 1546, Taxpayer Advocate Service -- Your Voice at the IRS. You can also call our toll-free number at 1-877-777-4778.
  8. As a taxpayer, you have rights that the IRS must abide by in its dealings with you. Our tax toolkit at www.taxtoolkit.irs.gov can help you understand these rights.
  9. TAS also handles large-scale or systemic problems that affect many taxpayers. If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System.
  10. You can get updates on hot tax topics by visiting our YouTube channel at www.youtube.com/tasnta and our Facebook page at http://www.facebook.com/YourVoiceAtIRS, or by following our tweets at http://twitter.com/YourVoiceatIRS
Page Last Reviewed or Updated: 14-Mar-2014

The Amending 2010 Tax Return

Amending 2010 tax return 10. Amending 2010 tax return   Education Savings Bond Program Table of Contents Introduction Who Can Cash In Bonds Tax FreeAdjusted qualified education expenses. Amending 2010 tax return Eligible educational institution. Amending 2010 tax return Dependent for whom you claim an exemption. Amending 2010 tax return MAGI when using Form 1040A. Amending 2010 tax return MAGI when using Form 1040. Amending 2010 tax return Figuring the Tax-Free AmountEffect of the Amount of Your Income on the Amount of Your Exclusion Claiming the Exclusion Introduction Generally, you must pay tax on the interest earned on U. Amending 2010 tax return S. Amending 2010 tax return savings bonds. Amending 2010 tax return If you do not include the interest in income in the years it is earned, you must include it in your income in the year in which you cash in the bonds. Amending 2010 tax return However, when you cash in certain savings bonds under an education savings bond program, you may be able to exclude the interest from income. Amending 2010 tax return Who Can Cash In Bonds Tax Free You may be able to cash in qualified U. Amending 2010 tax return S. Amending 2010 tax return savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions. Amending 2010 tax return You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return. Amending 2010 tax return Your modified adjusted gross income (MAGI) is less than the amount specified for your filing status. Amending 2010 tax return Your filing status is not married filing separately. Amending 2010 tax return Qualified U. Amending 2010 tax return S. Amending 2010 tax return savings bonds. Amending 2010 tax return   A qualified U. Amending 2010 tax return S. Amending 2010 tax return savings bond is a series EE bond issued after 1989 or a series I bond. Amending 2010 tax return The bond must be issued either in your name (as the sole owner) or in the name of both you and your spouse (as co-owners). Amending 2010 tax return   The owner must be at least 24 years old before the bond's issue date. Amending 2010 tax return The issue date is printed on the front of the savings bond. Amending 2010 tax return    The issue date is not necessarily the date of purchase—it will be the first day of the month in which the bond is purchased (or posted, if bought electronically). Amending 2010 tax return Qualified education expenses. Amending 2010 tax return   These include the following items you pay for either yourself, your spouse, or a dependent for whom you claim an exemption. Amending 2010 tax return Tuition and fees required to enroll at or attend an eligible educational institution. Amending 2010 tax return Qualified education expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Amending 2010 tax return Contributions to a qualified tuition program (QTP) (see How Much Can You Contribute in chapter 8, Qualified Tuition Program). Amending 2010 tax return Contributions to a Coverdell education savings account (ESA) (see Contributions in chapter 7, Coverdell Education Savings Account). Amending 2010 tax return Adjusted qualified education expenses. Amending 2010 tax return   You must reduce your qualified education expenses by all of the following tax-free benefits. Amending 2010 tax return Tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). Amending 2010 tax return Expenses used to figure the tax-free portion of distributions from a Coverdell ESA (see Qualified Education Expenses in chapter 7, Coverdell Education Savings Account). Amending 2010 tax return Expenses used to figure the tax-free portion of distributions from a QTP (see Qualified education expenses in chapter 8, Qualified Tuition Program). Amending 2010 tax return Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Qualified tuition reductions (see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), or Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ). Amending 2010 tax return Any expenses used in figuring the American opportunity and lifetime learning credits. Amending 2010 tax return See What Expenses Qualify in chapter 2, American Opportunity Credit, and What Expenses Qualify in chapter 3, Lifetime Learning Credit, for more information. Amending 2010 tax return Eligible educational institution. Amending 2010 tax return   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Amending 2010 tax return S. Amending 2010 tax return Department of Education. Amending 2010 tax return It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Amending 2010 tax return The educational institution should be able to tell you if it is an eligible educational institution. Amending 2010 tax return   Certain educational institutions located outside the United States also participate in the U. Amending 2010 tax return S. Amending 2010 tax return Department of Education's Federal Student Aid (FSA) programs. Amending 2010 tax return Dependent for whom you claim an exemption. Amending 2010 tax return   You claim an exemption for a person if you list his or her name and other required information on Form 1040 (or Form 1040A), line 6c. Amending 2010 tax return Modified adjusted gross income (MAGI). Amending 2010 tax return   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return without taking into account this interest exclusion. Amending 2010 tax return However, as discussed below, there may be other modifications. Amending 2010 tax return MAGI when using Form 1040A. Amending 2010 tax return   If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction). Amending 2010 tax return MAGI when using Form 1040. Amending 2010 tax return   If you file Form 1040, your MAGI is the AGI on line 38 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, Exclusion of income by bona fide residents of Puerto Rico, Exclusion for adoption benefits received under an employer's adoption assistance program, Deduction for student loan interest, Deduction for tuition and fees, and Deduction for domestic production activities. Amending 2010 tax return    Use the worksheet in the instructions for line 9 of Form 8815 to figure your MAGI. Amending 2010 tax return If you claim any of the exclusion or deduction items (1)–(6) listed above, add the amount of the exclusion or deduction to the amount on line 5 of the worksheet. Amending 2010 tax return Do not add in the deduction for (7) student loan interest, and (8) tuition and fees, or (9) domestic production activities because line 4 of the worksheet already includes these amounts. Amending 2010 tax return Enter the total on Form 8815, line 9, as your modified adjusted gross income (MAGI). Amending 2010 tax return    Because the deduction for interest expenses attributable to royalties and other investments is limited to your net investment income, you cannot figure the deduction until you have figured this interest exclusion. Amending 2010 tax return Therefore, if you had interest expenses attributable to royalties and deductible on Schedule E (Form 1040), Supplemental Income and Loss, you must make a special computation of your deductible interest without regard to this exclusion to figure the net royalty income included in your MAGI. Amending 2010 tax return See Royalties included in MAGI under Education Savings Bond Program in Publication 550, chapter 1. Amending 2010 tax return Figuring the Tax-Free Amount If the total you receive when you cash in the bonds is not more than the adjusted qualified education expenses for the year, all of the interest on the bonds may be tax free. Amending 2010 tax return However, if the total you receive when you cash in the bonds is more than the adjusted expenses, only part of the interest may be tax free. Amending 2010 tax return To determine the tax-free amount, multiply the interest part of the proceeds by a fraction. Amending 2010 tax return The numerator (top part) of the fraction is the adjusted qualified education expenses (AQEE) you paid during the year. Amending 2010 tax return The denominator (bottom part) of the fraction is the total proceeds you received during the year. Amending 2010 tax return Example. Amending 2010 tax return In February 2013, Mark and Joan Washington, a married couple, cashed a qualified series EE U. Amending 2010 tax return S. Amending 2010 tax return savings bond. Amending 2010 tax return They received proceeds of $9,000, representing principal of $6,000 and interest of $3,000. Amending 2010 tax return In 2013, they paid $7,650 of their daughter's college tuition. Amending 2010 tax return They are not claiming an American opportunity or lifetime learning credit for those expenses, and their daughter does not have any tax-free educational assistance. Amending 2010 tax return Their MAGI for 2013 was $80,000. Amending 2010 tax return   $3,000 interest × $7,650 AQEE  $9,000 proceeds = $2,550 tax-free interest   They can exclude $2,550 of interest in 2013. Amending 2010 tax return They must pay tax on the remaining $450 ($3,000 − $2,550) interest. Amending 2010 tax return Effect of the Amount of Your Income on the Amount of Your Exclusion The amount of your interest exclusion is gradually reduced (phased out) based on your MAGI and filing status. Amending 2010 tax return Claiming the Exclusion Use Form 8815 to figure your education savings bond interest exclusion. Amending 2010 tax return Enter your exclusion on line 3 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Amending 2010 tax return Attach Form 8815 to your tax return. Amending 2010 tax return Prev  Up  Next   Home   More Online Publications