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File 2012 state taxes online free 1. File 2012 state taxes online free   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. File 2012 state taxes online free At-risk limits. File 2012 state taxes online free Passive activities. File 2012 state taxes online free Net operating loss. File 2012 state taxes online free When Can I Deduct an Expense?Economic performance. File 2012 state taxes online free Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. File 2012 state taxes online free  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. File 2012 state taxes online free See Optional safe harbor method under Business use of your home , later. File 2012 state taxes online free Introduction This chapter covers the general rules for deducting business expenses. File 2012 state taxes online free 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. File 2012 state taxes online free 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. File 2012 state taxes online free What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. File 2012 state taxes online free An ordinary expense is one that is common and accepted in your industry. File 2012 state taxes online free A necessary expense is one that is helpful and appropriate for your trade or business. File 2012 state taxes online free An expense does not have to be indispensable to be considered necessary. File 2012 state taxes online free 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. File 2012 state taxes online free In some cases you may not be allowed to deduct the expense at all. File 2012 state taxes online free Therefore, it is important to distinguish usual business expenses from expenses that include the following. File 2012 state taxes online free The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. File 2012 state taxes online free 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. File 2012 state taxes online free Some of your business expenses may be included in figuring cost of goods sold. File 2012 state taxes online free Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. File 2012 state taxes online free If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. File 2012 state taxes online free The following are types of expenses that go into figuring cost of goods sold. File 2012 state taxes online free The cost of products or raw materials, including freight. File 2012 state taxes online free Storage. File 2012 state taxes online free Direct labor (including contributions to pension or annuity plans) for workers who produce the products. File 2012 state taxes online free Factory overhead. File 2012 state taxes online free Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. File 2012 state taxes online free Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. File 2012 state taxes online free 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. File 2012 state taxes online free For more information, see the following sources. File 2012 state taxes online free Cost of goods sold—chapter 6 of Publication 334. File 2012 state taxes online free Inventories—Publication 538. File 2012 state taxes online free Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. File 2012 state taxes online free Capital Expenses You must capitalize, rather than deduct, some costs. File 2012 state taxes online free These costs are a part of your investment in your business and are called “capital expenses. File 2012 state taxes online free ” Capital expenses are considered assets in your business. File 2012 state taxes online free In general, you capitalize three types of costs. File 2012 state taxes online free Business start-up costs (See Tip below). File 2012 state taxes online free Business assets. File 2012 state taxes online free Improvements. File 2012 state taxes online free You can elect to deduct or amortize certain business start-up costs. File 2012 state taxes online free See chapters 7 and 8. File 2012 state taxes online free Cost recovery. File 2012 state taxes online free   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. File 2012 state taxes online free These recovery methods allow you to deduct part of your cost each year. File 2012 state taxes online free In this way, you are able to recover your capital expense. File 2012 state taxes online free See Amortization (chapter 8) and Depletion (chapter 9) in this publication. File 2012 state taxes online free A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. File 2012 state taxes online free A greater portion of these costs can be deducted if the property is qualified disaster assistance property. File 2012 state taxes online free See Publication 946 for details. File 2012 state taxes online free Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. File 2012 state taxes online free These costs may include expenses for advertising, travel, or wages for training employees. File 2012 state taxes online free If you go into business. File 2012 state taxes online free   When you go into business, treat all costs you had to get your business started as capital expenses. File 2012 state taxes online free   Usually you recover costs for a particular asset through depreciation. File 2012 state taxes online free Generally, you cannot recover other costs until you sell the business or otherwise go out of business. File 2012 state taxes online free However, you can choose to amortize certain costs for setting up your business. File 2012 state taxes online free See Starting a Business in chapter 8 for more information on business start-up costs. File 2012 state taxes online free If your attempt to go into business is unsuccessful. File 2012 state taxes online free   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. File 2012 state taxes online free The costs you had before making a decision to acquire or begin a specific business. File 2012 state taxes online free These costs are personal and nondeductible. File 2012 state taxes online free They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. File 2012 state taxes online free The costs you had in your attempt to acquire or begin a specific business. File 2012 state taxes online free These costs are capital expenses and you can deduct them as a capital loss. File 2012 state taxes online free   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. File 2012 state taxes online free   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. File 2012 state taxes online free You cannot take a deduction for these costs. File 2012 state taxes online free You will recover the costs of these assets when you dispose of them. File 2012 state taxes online free Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. File 2012 state taxes online free You must fully capitalize the cost of these assets, including freight and installation charges. File 2012 state taxes online free Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. File 2012 state taxes online free See Regulations section 1. File 2012 state taxes online free 263A-2 for information on these rules. File 2012 state taxes online free Improvements Improvements are generally major expenditures. File 2012 state taxes online free Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. File 2012 state taxes online free 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. File 2012 state taxes online free 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. File 2012 state taxes online free Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. File 2012 state taxes online free However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. File 2012 state taxes online free Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. File 2012 state taxes online free Restoration plan. File 2012 state taxes online free   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. File 2012 state taxes online free This applies even if some of the work would by itself be classified as repairs. File 2012 state taxes online free Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. File 2012 state taxes online free Motor vehicles. File 2012 state taxes online free   You usually capitalize the cost of a motor vehicle you use in your business. File 2012 state taxes online free You can recover its cost through annual deductions for depreciation. File 2012 state taxes online free   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. File 2012 state taxes online free See Publication 463. File 2012 state taxes online free   Generally, repairs you make to your business vehicle are currently deductible. File 2012 state taxes online free However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. File 2012 state taxes online free Roads and driveways. File 2012 state taxes online free    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. File 2012 state taxes online free The cost of maintaining a private road on your business property is a deductible expense. File 2012 state taxes online free Tools. File 2012 state taxes online free   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. File 2012 state taxes online free Machinery parts. File 2012 state taxes online free   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. File 2012 state taxes online free Heating equipment. File 2012 state taxes online free   The cost of changing from one heating system to another is a capital expense. File 2012 state taxes online free Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. File 2012 state taxes online free 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. File 2012 state taxes online free You can deduct the business part. File 2012 state taxes online free 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. File 2012 state taxes online free The remaining 30% is personal interest and generally is not deductible. File 2012 state taxes online free See chapter 4 for information on deducting interest and the allocation rules. File 2012 state taxes online free Business use of your home. File 2012 state taxes online free   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. File 2012 state taxes online free These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. File 2012 state taxes online free   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. File 2012 state taxes online free The business part of your home must be used exclusively and regularly for your trade or business. File 2012 state taxes online free 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. File 2012 state taxes online free   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. File 2012 state taxes online free   Your home office qualifies as your principal place of business if you meet the following requirements. File 2012 state taxes online free You use the office exclusively and regularly for administrative or management activities of your trade or business. File 2012 state taxes online free You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. File 2012 state taxes online free   If you have more than one business location, determine your principal place of business based on the following factors. File 2012 state taxes online free The relative importance of the activities performed at each location. File 2012 state taxes online free If the relative importance factor does not determine your principal place of business, consider the time spent at each location. File 2012 state taxes online free Optional safe harbor method. File 2012 state taxes online free   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. File 2012 state taxes online free This method is an alternative to the calculation, allocation, and substantiation of actual expenses. File 2012 state taxes online free   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. File 2012 state taxes online free 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). File 2012 state taxes online free You are not required to allocate these deductions between personal and business use, as is required under the regular method. File 2012 state taxes online free If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. File 2012 state taxes online free   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. File 2012 state taxes online free All of the requirements discussed earlier under Business use of your home still apply. File 2012 state taxes online free   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. File 2012 state taxes online free    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. File 2012 state taxes online free Business use of your car. File 2012 state taxes online free   If you use your car exclusively in your business, you can deduct car expenses. File 2012 state taxes online free If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. File 2012 state taxes online free Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. File 2012 state taxes online free   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. File 2012 state taxes online free 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. File 2012 state taxes online free Beginning in 2013, the standard mileage rate is 56. File 2012 state taxes online free 5 cents per mile. File 2012 state taxes online free   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. File 2012 state taxes online free   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. File 2012 state taxes online free 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. File 2012 state taxes online free Recovery of amount deducted (tax benefit rule). File 2012 state taxes online free   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. File 2012 state taxes online free If you have a recovery in a later year, include the recovered amount in income in that year. File 2012 state taxes online free 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. File 2012 state taxes online free   For more information on recoveries and the tax benefit rule, see Publication 525. File 2012 state taxes online free Payments in kind. File 2012 state taxes online free   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. File 2012 state taxes online free You cannot deduct the cost of your own labor. File 2012 state taxes online free   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. File 2012 state taxes online free If these costs are included in the cost of goods sold, do not deduct them again as a business expense. File 2012 state taxes online free Limits on losses. File 2012 state taxes online free   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. File 2012 state taxes online free There may be limits on how much of the loss you can deduct. File 2012 state taxes online free Not-for-profit limits. File 2012 state taxes online free   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. File 2012 state taxes online free See Not-for-Profit Activities , later. File 2012 state taxes online free At-risk limits. File 2012 state taxes online free   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. File 2012 state taxes online free You are at risk in any activity for the following. File 2012 state taxes online free The money and adjusted basis of property you contribute to the activity. File 2012 state taxes online free 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. File 2012 state taxes online free For more information, see Publication 925. File 2012 state taxes online free Passive activities. File 2012 state taxes online free   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. File 2012 state taxes online free In general, deductions for losses from passive activities only offset income from passive activities. File 2012 state taxes online free You cannot use any excess deductions to offset other income. File 2012 state taxes online free In addition, passive activity credits can only offset the tax on net passive income. File 2012 state taxes online free Any excess loss or credits are carried over to later years. File 2012 state taxes online free Suspended passive losses are fully deductible in the year you completely dispose of the activity. File 2012 state taxes online free For more information, see Publication 925. File 2012 state taxes online free Net operating loss. File 2012 state taxes online free   If your deductions are more than your income for the year, you may have a “net operating loss. File 2012 state taxes online free ” You can use a net operating loss to lower your taxes in other years. File 2012 state taxes online free See Publication 536 for more information. File 2012 state taxes online free   See Publication 542 for information about net operating losses of corporations. File 2012 state taxes online free When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. File 2012 state taxes online free An accounting method is a set of rules used to determine when and how income and expenses are reported. File 2012 state taxes online free The two basic methods are the cash method and the accrual method. File 2012 state taxes online free Whichever method you choose must clearly reflect income. File 2012 state taxes online free For more information on accounting methods, see Publication 538. File 2012 state taxes online free Cash method. File 2012 state taxes online free   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. File 2012 state taxes online free Accrual method. File 2012 state taxes online free   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. File 2012 state taxes online free The all-events test has been met. File 2012 state taxes online free The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. File 2012 state taxes online free Economic performance has occurred. File 2012 state taxes online free Economic performance. File 2012 state taxes online free   You generally cannot deduct or capitalize a business expense until economic performance occurs. File 2012 state taxes online free 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. File 2012 state taxes online free If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. File 2012 state taxes online free Example. File 2012 state taxes online free Your tax year is the calendar year. File 2012 state taxes online free In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. File 2012 state taxes online free You paid it by check in January 2014. File 2012 state taxes online free 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. File 2012 state taxes online free If you use the cash method of accounting, deduct the expense on your 2014 return. File 2012 state taxes online free Prepayment. File 2012 state taxes online free   You generally cannot deduct expenses in advance, even if you pay them in advance. File 2012 state taxes online free This rule applies to both the cash and accrual methods. File 2012 state taxes online free 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. File 2012 state taxes online free Example. File 2012 state taxes online free In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. File 2012 state taxes online free Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. File 2012 state taxes online free You can deduct the rent for 2014 and 2015 on your tax returns for those years. File 2012 state taxes online free Contested liability. File 2012 state taxes online free   Under the cash method, you can deduct a contested liability only in the year you pay the liability. File 2012 state taxes online free Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. File 2012 state taxes online free S. File 2012 state taxes online free 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. File 2012 state taxes online free However, to take the deduction in the year of payment or transfer, you must meet certain conditions. File 2012 state taxes online free See Regulations section 1. File 2012 state taxes online free 461-2. File 2012 state taxes online free Related person. File 2012 state taxes online free   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. File 2012 state taxes online free 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. File 2012 state taxes online free Your deduction is allowed when the amount is includible in income by the related cash method payee. File 2012 state taxes online free See Related Persons in Publication 538. File 2012 state taxes online free 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. File 2012 state taxes online free Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. File 2012 state taxes online free The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. File 2012 state taxes online free It does not apply to corporations other than S corporations. File 2012 state taxes online free In determining whether you are carrying on an activity for profit, several factors are taken into account. File 2012 state taxes online free No one factor alone is decisive. File 2012 state taxes online free 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. File 2012 state taxes online free Presumption of profit. File 2012 state taxes online free   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. File 2012 state taxes online free 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. File 2012 state taxes online free The activity must be substantially the same for each year within this period. File 2012 state taxes online free You have a profit when the gross income from an activity exceeds the deductions. File 2012 state taxes online free   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. File 2012 state taxes online free   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. File 2012 state taxes online free This means the limits discussed here will not apply. File 2012 state taxes online free You can take all your business deductions from the activity, even for the years that you have a loss. File 2012 state taxes online free You can rely on this presumption unless the IRS later shows it to be invalid. File 2012 state taxes online free Using the presumption later. File 2012 state taxes online free   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. File 2012 state taxes online free   You can elect to do this by filing Form 5213. File 2012 state taxes online free 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. File 2012 state taxes online free   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. File 2012 state taxes online free Accordingly, it will not restrict your deductions. File 2012 state taxes online free Rather, you will gain time to earn a profit in the required number of years. File 2012 state taxes online free If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. File 2012 state taxes online free 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. File 2012 state taxes online free   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. File 2012 state taxes online free The period is extended only for deductions of the activity and any related deductions that might be affected. File 2012 state taxes online free    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. File 2012 state taxes online free 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. File 2012 state taxes online free 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. File 2012 state taxes online free You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. File 2012 state taxes online free 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. File 2012 state taxes online free 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. File 2012 state taxes online free If you are an individual, these deductions may be taken only if you itemize. File 2012 state taxes online free These deductions may be taken on Schedule A (Form 1040). File 2012 state taxes online free Category 1. File 2012 state taxes online free   Deductions you can take for personal as well as for business activities are allowed in full. File 2012 state taxes online free For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. File 2012 state taxes online free Deduct them on the appropriate lines of Schedule A (Form 1040). File 2012 state taxes online free 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). File 2012 state taxes online free 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. File 2012 state taxes online free The reduction amount returns to $100 for tax years beginning after December 31, 2009. File 2012 state taxes online free See Publication 547 for more information on casualty losses. File 2012 state taxes online free For the limits that apply to home mortgage interest, see Publication 936. File 2012 state taxes online free Category 2. File 2012 state taxes online free   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. File 2012 state taxes online free Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. File 2012 state taxes online free Category 3. File 2012 state taxes online free   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. File 2012 state taxes online free Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. File 2012 state taxes online free Where more than one asset is involved, allocate depreciation and these other deductions proportionally. File 2012 state taxes online free    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). File 2012 state taxes online free They are subject to the 2%-of-adjusted-gross-income limit. File 2012 state taxes online free See Publication 529 for information on this limit. File 2012 state taxes online free Example. File 2012 state taxes online free Adriana is engaged in a not-for-profit activity. File 2012 state taxes online free The income and expenses of the activity are as follows. File 2012 state taxes online free 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. File 2012 state taxes online free The limit is reached in category (3), as follows. File 2012 state taxes online free 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. File 2012 state taxes online free $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. File 2012 state taxes online free Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. File 2012 state taxes online free The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). File 2012 state taxes online free 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. File 2012 state taxes online free Partnerships and S corporations. File 2012 state taxes online free   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. File 2012 state taxes online free They are reflected in the individual shareholder's or partner's distributive shares. File 2012 state taxes online free More than one activity. File 2012 state taxes online free   If you have several undertakings, each may be a separate activity or several undertakings may be combined. File 2012 state taxes online free The following are the most significant facts and circumstances in making this determination. File 2012 state taxes online free The degree of organizational and economic interrelationship of various undertakings. File 2012 state taxes online free The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. File 2012 state taxes online free The similarity of the undertakings. File 2012 state taxes online free   The IRS will generally accept your characterization if it is supported by facts and circumstances. File 2012 state taxes online free    If you are carrying on two or more different activities, keep the deductions and income from each one separate. File 2012 state taxes online free Figure separately whether each is a not-for-profit activity. File 2012 state taxes online free Then figure the limit on deductions and losses separately for each activity that is not for profit. File 2012 state taxes online free Prev  Up  Next   Home   More Online Publications