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Filing Tax Return 2012

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Filing Tax Return 2012

Filing tax return 2012 11. Filing tax return 2012   Other Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Reimbursement of Travel, Meals, and EntertainmentReimbursements Miscellaneous ExpensesMeaning of generally enforced. Filing tax return 2012 Kickbacks. Filing tax return 2012 Form 1099-MISC. Filing tax return 2012 Exception. Filing tax return 2012 Tax preparation fees. Filing tax return 2012 Covered executive branch official. Filing tax return 2012 Exceptions to denial of deduction. Filing tax return 2012 Indirect political contributions. Filing tax return 2012 Type of deduction. Filing tax return 2012 Repayment—$3,000 or less. Filing tax return 2012 Repayment—over $3,000. Filing tax return 2012 Method 1. Filing tax return 2012 Method 2. Filing tax return 2012 Repayment does not apply. Filing tax return 2012 Year of deduction (or credit). Filing tax return 2012 Telephone. Filing tax return 2012 What's New Standard mileage rate. Filing tax return 2012  Beginning in 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use is 56. Filing tax return 2012 5 cents per mile. Filing tax return 2012 For more information, see Car and truck expenses under Miscellaneous Expenses. Filing tax return 2012 Introduction This chapter covers business expenses that may not have been explained to you, as a business owner, in previous chapters of this publication. Filing tax return 2012 Topics - This chapter discusses: Travel, meals, and entertainment Bribes and kickbacks Charitable contributions Education expenses Lobbying expenses Penalties and fines Repayments (claim of right) Other miscellaneous expenses Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 463 Travel, Entertainment, Gift, and Car Expenses 526 Charitable Contributions 529 Miscellaneous Deductions 544 Sales and Other Dispositions of Assets 970 Tax Benefits for Education 1542 Per Diem Rates See chapter 12 for information about getting publications and forms. Filing tax return 2012 Reimbursement of Travel, Meals, and Entertainment The following discussion explains how to handle any reimbursements or allowances you may provide to your employees under a reimbursement or allowance arrangement for travel, meals, and entertainment expenses. Filing tax return 2012 If you are self-employed and report your income and expenses on Schedule C or C-EZ (Form 1040), see Publication 463. Filing tax return 2012 To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. Filing tax return 2012 Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business. Filing tax return 2012 For more information on travel, meals, and entertainment, including deductibility, see Publication 463. Filing tax return 2012 Reimbursements A “reimbursement or allowance arrangement” provides for payment of advances, reimbursements, and allowances for travel, meals, and entertainment expenses incurred by your employees during the ordinary course of business. Filing tax return 2012 If the expenses are substantiated, you can deduct the allowable amount on your tax return. Filing tax return 2012 Because of differences between accounting methods and tax law, the amount you can deduct for tax purposes may not be the same as the amount you deduct on your business books and records. Filing tax return 2012 For example, you can deduct 100% of the cost of meals on your business books and records. Filing tax return 2012 However, only 50% of these costs are allowed by law as a tax deduction. Filing tax return 2012 How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: An accountable plan, or A nonaccountable plan. Filing tax return 2012 If you reimburse these expenses under an accountable plan, deduct them as travel, meals, or entertainment expenses. Filing tax return 2012 If you reimburse these expenses under a nonaccountable plan, report the reimbursements as wages on Form W-2, Wage and Tax Statement, and deduct them as wages on the appropriate line of your tax return. Filing tax return 2012 If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement and report it accordingly. Filing tax return 2012 See Table 11-1 , Reporting Reimbursements. Filing tax return 2012 Accountable Plans An accountable plan requires your employees to meet all of the following requirements. Filing tax return 2012 Each employee must: Have paid or incurred deductible expenses while performing services as your employee, Adequately account to you for these expenses within a reasonable period of time, and Return any excess reimbursement or allowance within a reasonable period of time. Filing tax return 2012 An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. Filing tax return 2012 The advance is reasonably calculated not to exceed the amount of anticipated expenses. Filing tax return 2012 You make the advance within a reasonable period of time of your employee paying or incurring the expense. Filing tax return 2012 If any expenses reimbursed under this arrangement are not substantiated, or an excess reimbursement is not returned within a reasonable period of time by an employee, you cannot treat these expenses as reimbursed under an accountable plan. Filing tax return 2012 Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later. Filing tax return 2012 Adequate accounting. Filing tax return 2012   Your employees must adequately account to you for their travel, meals, and entertainment expenses. Filing tax return 2012 They must give you documentary evidence of their travel, mileage, and other employee business expenses. Filing tax return 2012 This evidence should include items such as receipts, along with either a statement of expenses, an account book, a day-planner, or similar record in which the employee entered each expense at or near the time the expense was incurred. Filing tax return 2012 Excess reimbursement or allowance. Filing tax return 2012   An excess reimbursement or allowance is any amount you pay to an employee that is more than the business-related expenses for which the employee adequately accounted. Filing tax return 2012 The employee must return any excess reimbursement or other expense allowance to you within a reasonable period of time. Filing tax return 2012 Reasonable period of time. Filing tax return 2012   A reasonable period of time depends on the facts and circumstances. Filing tax return 2012 Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. Filing tax return 2012 You give an advance within 30 days of the time the employee pays or incurs the expense. Filing tax return 2012 Your employees adequately account for their expenses within 60 days after the expenses were paid or incurred. Filing tax return 2012 Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred. Filing tax return 2012 You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately account for outstanding advances and they comply within 120 days of the date of the statement. Filing tax return 2012 How to deduct. Filing tax return 2012   You can claim a deduction for travel, meals, and entertainment expenses if you reimburse your employees for these expenses under an accountable plan. Filing tax return 2012 Generally, the amount you can deduct for meals and entertainment is subject to a 50% limit, discussed later. Filing tax return 2012 If you are a sole proprietor, or are filing as a single member limited liability company, deduct the travel reimbursement on line 24a and the deductible part of the meals and entertainment reimbursement on line 24b, Schedule C (Form 1040) or line 2, Schedule C-EZ (Form 1040). Filing tax return 2012   If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120, U. Filing tax return 2012 S. Filing tax return 2012 Corporation Income Tax Return. Filing tax return 2012 If you are filing any other business income tax return, such as a partnership or S corporation return, deduct the reimbursement on the appropriate line of the return as provided in the instructions for that return. Filing tax return 2012 Table 11-1. Filing tax return 2012 Reporting Reimbursements IF the type of reimbursement (or other expense allowance) arrangement is under THEN the employer reports on Form W-2 An accountable plan with: Actual expense reimbursement:  Adequate accounting made and excess returned No amount. Filing tax return 2012 Actual expense reimbursement:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Filing tax return 2012 Per diem or mileage allowance up to the federal rate:  Adequate accounting made and excess returned No amount. Filing tax return 2012 Per diem or mileage allowance up to the federal rate:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Filing tax return 2012 The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Filing tax return 2012 Per diem or mileage allowance exceeds the federal rate:  Adequate accounting made up to the federal rate only and excess not returned The excess amount as wages in box 1. Filing tax return 2012 The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Filing tax return 2012 A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan The entire amount as wages in box 1. Filing tax return 2012 No reimbursement plan The entire amount as wages in box 1. Filing tax return 2012 Per Diem and Car Allowances You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. Filing tax return 2012 In these cases, your employee is considered to have accounted to you for the amount of the expense that does not exceed the rates established by the federal government. Filing tax return 2012 Your employee must actually substantiate to you the other elements of the expense, such as time, place, and business purpose. Filing tax return 2012 Federal rate. Filing tax return 2012   The federal rate can be figured using any one of the following methods. Filing tax return 2012 For car expenses: The standard mileage rate. Filing tax return 2012 A fixed and variable rate (FAVR). Filing tax return 2012 For per diem amounts: The regular federal per diem rate. Filing tax return 2012 The standard meal allowance. Filing tax return 2012 The high-low rate. Filing tax return 2012 Car allowance. Filing tax return 2012   Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. Filing tax return 2012 Beginning in 2013, the standard business mileage rate is 56. Filing tax return 2012 5 cents per mile. Filing tax return 2012   You can choose to reimburse your employees using a fixed and variable rate (FAVR) allowance. Filing tax return 2012 This is an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your employees' variable operating costs (such as gas, oil, etc. Filing tax return 2012 ) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc. Filing tax return 2012 ). Filing tax return 2012 For information on using a FAVR allowance, see Revenue Procedure 2010-51, available at www. Filing tax return 2012 irs. Filing tax return 2012 gov/irb/2010-51_IRB/ar14. Filing tax return 2012 html and Notice 2012-72, available at www. Filing tax return 2012 irs. Filing tax return 2012 gov/irb/2012-50_IRB/ar10. Filing tax return 2012 html. Filing tax return 2012 Per diem allowance. Filing tax return 2012   If your employee actually substantiates to you the other elements (discussed earlier) of the expenses reimbursed using the per diem allowance, how you report and deduct the allowance depends on whether the allowance is for lodging and meal expenses or for meal expenses only and whether the allowance is more than the federal rate. Filing tax return 2012 Regular federal per diem rate. Filing tax return 2012   The regular federal per diem rate is the highest amount the federal government will pay to its employees while away from home on travel. Filing tax return 2012 It has two components: Lodging expense, and Meal and incidental expense (M&IE). Filing tax return 2012 The rates are different for different locations. Filing tax return 2012 Publication 1542 lists the rates in the continental United States. Filing tax return 2012 Standard meal allowance. Filing tax return 2012   The federal rate for meal and incidental expenses (M&IE) is the standard meal allowance. Filing tax return 2012 You can pay only an M&IE allowance to employees who travel away from home if: You pay the employee for actual expenses for lodging based on receipts submitted to you, You provide for the lodging, You pay for the actual expense of the lodging directly to the provider, You do not have a reasonable belief that lodging expenses were incurred by the employee, or The allowance is computed on a basis similar to that used in computing the employee's wages (that is, number of hours worked or miles traveled). Filing tax return 2012 Internet access. Filing tax return 2012    Per diem rates are available on the Internet. Filing tax return 2012 You can access per diem rates at www. Filing tax return 2012 gsa. Filing tax return 2012 gov/perdiemrates. Filing tax return 2012 High-low method. Filing tax return 2012   This is a simplified method of computing the federal per diem rate for travel within the continental United States. Filing tax return 2012 It eliminates the need to keep a current list of the per diem rate for each city. Filing tax return 2012   Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 ($65 for M&IE) for certain high-cost locations. Filing tax return 2012 All other areas have a per diem amount of $163 ($52 for M&IE). Filing tax return 2012 The high-cost locations eligible for the higher per diem amount under the high-low method are listed in Publication 1542. Filing tax return 2012   Effective October 1, 2013, the per diem rate for high-cost locations increased to $251 ($65 for M&IE). Filing tax return 2012 The rate for all other locations increased to $170 ($52 for M&IE). Filing tax return 2012 For October, November, and December 2013, you can either continue to use the rates described in the preceding paragraph or change to the new rates. Filing tax return 2012 However, you must use the same rate for all employees reimbursed under the high-low method. Filing tax return 2012   For more information about the high-low method, see Notice 2013-65, available at www. Filing tax return 2012 irs. Filing tax return 2012 gov/irb/2013-44_IRB/ar13. Filing tax return 2012 html. Filing tax return 2012 See Publication 1542 (available on the Internet at IRS. Filing tax return 2012 gov) for the current per diem rates for all locations. Filing tax return 2012 Reporting per diem and car allowances. Filing tax return 2012   The following discussion explains how to report per diem and car allowances. Filing tax return 2012 The manner in which you report them depends on how the allowance compares to the federal rate. Filing tax return 2012 See Table 11-1. Filing tax return 2012 Allowance less than or equal to the federal rate. Filing tax return 2012   If your allowance for the employee is less than or equal to the appropriate federal rate, that allowance is not included as part of the employee's pay in box 1 of the employee's Form W-2. Filing tax return 2012 Deduct the allowance as travel expenses (including meals that may be subject to the 50% limit, discussed later). Filing tax return 2012 See How to deduct under Accountable Plans, earlier. Filing tax return 2012 Allowance more than the federal rate. Filing tax return 2012   If your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items. Filing tax return 2012   Include the allowance amount up to the federal rate in box 12 (code L) of the employee's Form W-2. Filing tax return 2012 Deduct it as travel expenses (as explained above). Filing tax return 2012 This part of the allowance is treated as reimbursed under an accountable plan. Filing tax return 2012   Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. Filing tax return 2012 Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Filing tax return 2012 This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans. Filing tax return 2012 Meals and Entertainment Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment expenses you reimburse your employees. Filing tax return 2012 The deduction limit applies even if you reimburse them for 100% of the expenses. Filing tax return 2012 Application of the 50% limit. Filing tax return 2012   The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant, or another location. Filing tax return 2012 It applies to expenses incurred at a business convention or reception, business meeting, or business luncheon at a club. Filing tax return 2012 The deduction limit may also apply to meals you furnish on your premises to your employees. Filing tax return 2012 Related expenses. Filing tax return 2012   Taxes and tips relating to a meal or entertainment activity you reimburse to your employee under an accountable plan are included in the amount subject to the 50% limit. Filing tax return 2012 Reimbursements you make for expenses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. Filing tax return 2012 However, the cost of transportation to and from an otherwise allowable business meal or a business-related entertainment activity is not subject to the 50% limit. Filing tax return 2012 Amount subject to 50% limit. Filing tax return 2012   If you provide your employees with a per diem allowance only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of the following. Filing tax return 2012 The per diem allowance. Filing tax return 2012 The federal rate for M&IE. Filing tax return 2012   If you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages. Filing tax return 2012 If the per diem allowance you provide is less than the federal per diem rate for the area of travel, you can treat 40% of the per diem allowance as the amount for food and beverages. Filing tax return 2012 Meal expenses when subject to “hours of service” limits. Filing tax return 2012   You can deduct 80% of the cost of reimbursed meals your employees consume while away from their tax home on business during, or incident to, any period subject to the Department of Transportation's “hours of service” limits. Filing tax return 2012   See Publication 463 for a detailed discussion of individuals subject to the Department of Transportation's “hours of service” limits. Filing tax return 2012 De minimis (minimal) fringe benefit. Filing tax return 2012   The 50% limit does not apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit. Filing tax return 2012 See Publication 15-B for additional information on de minimis fringe benefits. Filing tax return 2012 Company cafeteria or executive dining room. Filing tax return 2012   The cost of food and beverages you provide primarily to your employees on your business premises is deductible. Filing tax return 2012 This includes the cost of maintaining the facilities for providing the food and beverages. Filing tax return 2012 These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit, as just discussed, or unless they are compensation to your employees (explained later). Filing tax return 2012 Employee activities. Filing tax return 2012   The expense of providing recreational, social, or similar activities (including the use of a facility) for your employees is deductible and is not subject to the 50% limit. Filing tax return 2012 The benefit must be primarily for your employees who are not highly compensated. Filing tax return 2012   For this purpose, a highly compensated employee is an employee who meets either of the following requirements. Filing tax return 2012 Owned a 10% or more interest in the business during the year or the preceding year. Filing tax return 2012 An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal descendants. Filing tax return 2012 Received more than $115,000 in pay for the preceding year. Filing tax return 2012 You can choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year. Filing tax return 2012   For example, the expenses for food, beverages, and entertainment for a company-wide picnic are not subject to the 50% limit. Filing tax return 2012 Meals or entertainment treated as compensation. Filing tax return 2012   The 50% limit does not apply to either of the following. Filing tax return 2012 Expenses for meals or entertainment that you treat as: Compensation to an employee who was the recipient of the meals or entertainment, and Wages subject to withholding of federal income tax. Filing tax return 2012 Expenses for meals or entertainment if: A recipient of the meals or entertainment who is not your employee has to include the expenses in gross income as compensation for services or as a prize or award, and You include that amount on a Form 1099 issued to the recipient, if a Form 1099 is required. Filing tax return 2012 Sales of meals or entertainment. Filing tax return 2012   You can deduct the cost of meals or entertainment (including the use of facilities) you sell to the public. Filing tax return 2012 For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is a business expense that is fully deductible. Filing tax return 2012 The 50% limit does not apply to this expense. Filing tax return 2012 Providing meals or entertainment to general public to promote goodwill. Filing tax return 2012   You can deduct the cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Filing tax return 2012 The 50% limit does not apply to this expense. Filing tax return 2012 Director, stockholder, or employee meetings. Filing tax return 2012   You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. Filing tax return 2012 You can provide some minor social activities, but the main purpose of the meeting must be your company's business. Filing tax return 2012 These expenses are subject to the 50% limit. Filing tax return 2012 Trade association meetings. Filing tax return 2012   You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. Filing tax return 2012 These organizations include business leagues, chambers of commerce, real estate boards, and trade and professional associations. Filing tax return 2012 Nonaccountable Plans A nonaccountable plan is an arrangement that does not meet the requirements for an accountable plan. Filing tax return 2012 All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. Filing tax return 2012 The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Filing tax return 2012 You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. Filing tax return 2012 Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions. Filing tax return 2012 Miscellaneous Expenses In addition to travel, meal, and entertainment expenses, there are other expenses you can deduct. Filing tax return 2012 Advertising expenses. Filing tax return 2012   You generally can deduct reasonable advertising expenses that are directly related to your business activities. Filing tax return 2012 Generally, you cannot deduct amounts paid to influence legislation (i. Filing tax return 2012 e. Filing tax return 2012 , lobbying). Filing tax return 2012 See Lobbying expenses , later. Filing tax return 2012   You can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it relates to business you reasonably expect to gain in the future. Filing tax return 2012 For example, the cost of advertising that encourages people to contribute to the Red Cross, to buy U. Filing tax return 2012 S. Filing tax return 2012 Savings Bonds, or to participate in similar causes is usually deductible. Filing tax return 2012 Anticipated liabilities. Filing tax return 2012   Anticipated liabilities or reserves for anticipated liabilities are not deductible. Filing tax return 2012 For example, assume you sold 1-year TV service contracts this year totaling $50,000. Filing tax return 2012 From experience, you know you will have expenses of about $15,000 in the coming year for these contracts. Filing tax return 2012 You cannot deduct any of the $15,000 this year by charging expenses to a reserve or liability account. Filing tax return 2012 You can deduct your expenses only when you actually pay or accrue them, depending on your accounting method. Filing tax return 2012 Bribes and kickbacks. Filing tax return 2012   Engaging in the payment of bribes or kickbacks is a serious criminal matter. Filing tax return 2012 Such activity could result in criminal prosecution. Filing tax return 2012 Any payments that appear to have been made, either directly or indirectly, to an official or employee of any government or an agency or instrumentality of any government are not deductible for tax purposes and are in violation of the law. Filing tax return 2012   Payments paid directly or indirectly to a person in violation of any federal or state law (but only if that state law is generally enforced, defined below) that provides for a criminal penalty or for the loss of a license or privilege to engage in a trade or business are also not allowed as a deduction for tax purposes. Filing tax return 2012 Meaning of “generally enforced. Filing tax return 2012 ”   A state law is considered generally enforced unless it is never enforced or enforced only for infamous persons or persons whose violations are extraordinarily flagrant. Filing tax return 2012 For example, a state law is generally enforced unless proper reporting of a violation of the law results in enforcement only under unusual circumstances. Filing tax return 2012 Kickbacks. Filing tax return 2012   A kickback is a payment for referring a client, patient, or customer. Filing tax return 2012 The common kickback situation occurs when money or property is given to someone as payment for influencing a third party to purchase from, use the services of, or otherwise deal with the person who pays the kickback. Filing tax return 2012 In many cases, the person whose business is being sought or enjoyed by the person who pays the kickback is not aware of the payment. Filing tax return 2012   For example, the Yard Corporation is in the business of repairing ships. Filing tax return 2012 It returns 10% of the repair bills as kickbacks to the captains and chief officers of the vessels it repairs. Filing tax return 2012 Although this practice is considered an ordinary and necessary expense of getting business, it is clearly a violation of a state law that is generally enforced. Filing tax return 2012 These expenditures are not deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted. Filing tax return 2012 Form 1099-MISC. Filing tax return 2012   It does not matter whether any kickbacks paid during the tax year are deductible on your income tax return in regards to information reporting. Filing tax return 2012 See Form 1099-MISC for more information. Filing tax return 2012 Car and truck expenses. Filing tax return 2012   The costs of operating a car, truck, or other vehicle in your business are deductible. Filing tax return 2012 For more information on how to figure your deduction, see Publication 463. Filing tax return 2012 Charitable contributions. Filing tax return 2012   Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Filing tax return 2012 If the payments are charitable contributions or gifts, you cannot deduct them as business expenses. Filing tax return 2012 However, corporations (other than S corporations) can deduct charitable contributions on their income tax returns, subject to limitations. Filing tax return 2012 See the Instructions for Form 1120 for more information. Filing tax return 2012 Sole proprietors, partners in a partnership, or shareholders in an S corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Filing tax return 2012 Example. Filing tax return 2012 You paid $15 to a local church for a half-page ad in a program for a concert it is sponsoring. Filing tax return 2012 The purpose of the ad was to encourage readers to buy your products. Filing tax return 2012 Your payment is not a charitable contribution. Filing tax return 2012 You can deduct it as an advertising expense. Filing tax return 2012 Example. Filing tax return 2012 You made a $100,000 donation to a committee organized by the local Chamber of Commerce to bring a convention to your city, intended to increase business activity, including yours. Filing tax return 2012 Your payment is not a charitable contribution. Filing tax return 2012 You can deduct it as a business expense. Filing tax return 2012 See Publication 526 for a discussion of donated inventory, including capital gain property. Filing tax return 2012 Club dues and membership fees. Filing tax return 2012   Generally, you cannot deduct amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or any other social purpose. Filing tax return 2012 This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Filing tax return 2012 Exception. Filing tax return 2012   The following organizations are not treated as clubs organized for business, pleasure, recreation, or other social purpose unless one of the main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. Filing tax return 2012 Boards of trade. Filing tax return 2012 Business leagues. Filing tax return 2012 Chambers of commerce. Filing tax return 2012 Civic or public service organizations. Filing tax return 2012 Professional organizations such as bar associations and medical associations. Filing tax return 2012 Real estate boards. Filing tax return 2012 Trade associations. Filing tax return 2012 Credit card convenience fees. Filing tax return 2012   Credit card companies charge a fee to businesses who accept their cards. Filing tax return 2012 This fee when paid or incurred by the business can be deducted as a business expense. Filing tax return 2012 Damages recovered. Filing tax return 2012   Special rules apply to compensation you receive for damages sustained as a result of patent infringement, breach of contract or fiduciary duty, or antitrust violations. Filing tax return 2012 You must include this compensation in your income. Filing tax return 2012 However, you may be able to take a special deduction. Filing tax return 2012 The deduction applies only to amounts recovered for actual economic injury, not any additional amount. Filing tax return 2012 The deduction is the smaller of the following. Filing tax return 2012 The amount you received or accrued for damages in the tax year reduced by the amount you paid or incurred in the year to recover that amount. Filing tax return 2012 Your losses from the injury you have not deducted. Filing tax return 2012 Demolition expenses or losses. Filing tax return 2012   Amounts paid or incurred to demolish a structure are not deductible. Filing tax return 2012 These amounts are added to the basis of the land where the demolished structure was located. Filing tax return 2012 Any loss for the remaining undepreciated basis of a demolished structure would not be recognized until the property is disposed of. Filing tax return 2012 Education expenses. Filing tax return 2012   Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible. Filing tax return 2012 See Education Expenses in chapter 2. Filing tax return 2012   You can also deduct the cost of your own education (including certain related travel) related to your trade or business. Filing tax return 2012 You must be able to show the education maintains or improves skills required in your trade or business, or that it is required by law or regulations, for keeping your license to practice, status, or job. Filing tax return 2012 For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law. Filing tax return 2012   Education expenses you incur to meet the minimum requirements of your present trade or business, or those that qualify you for a new trade or business, are not deductible. Filing tax return 2012 This is true even if the education maintains or improves skills presently required in your business. Filing tax return 2012 For more information on education expenses, see Publication 970. Filing tax return 2012 Franchise, trademark, trade name. Filing tax return 2012   If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense only if your payments are part of a series of payments that are: Contingent on productivity, use, or disposition of the item, Payable at least annually for the entire term of the transfer agreement, and Substantially equal in amount (or payable under a fixed formula). Filing tax return 2012   When determining the term of the transfer agreement, include all renewal options and any other period for which you and the transferrer reasonably expect the agreement to be renewed. Filing tax return 2012   A franchise includes an agreement that gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities within a specified area. Filing tax return 2012 Impairment-related expenses. Filing tax return 2012   If you are disabled, you can deduct expenses necessary for you to be able to work (impairment-related expenses) as a business expense, rather than as a medical expense. Filing tax return 2012   You are disabled if you have either of the following. Filing tax return 2012 A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed. Filing tax return 2012 A physical or mental impairment that substantially limits one or more of your major life activities. Filing tax return 2012   The expense qualifies as a business expense if all the following apply. Filing tax return 2012 Your work clearly requires the expense for you to satisfactorily perform that work. Filing tax return 2012 The goods or services purchased are clearly not needed or used, other than incidentally, in your personal activities. Filing tax return 2012 Their treatment is not specifically provided for under other tax law provisions. Filing tax return 2012 Example. Filing tax return 2012 You are blind. Filing tax return 2012 You must use a reader to do your work, both at and away from your place of work. Filing tax return 2012 The reader's services are only for your work. Filing tax return 2012 You can deduct your expenses for the reader as a business expense. Filing tax return 2012 Internet-related expenses. Filing tax return 2012   Generally, you can deduct internet-related expenses including domain registrations fees and webmaster consulting costs. Filing tax return 2012 If you are starting a business you may have to amortize these expenses as start-up costs. Filing tax return 2012 For more information about amortizing start-up and organizational costs, see chapter 8. Filing tax return 2012 Interview expense allowances. Filing tax return 2012   Reimbursements you make to job candidates for transportation or other expenses related to interviews for possible employment are not wages. Filing tax return 2012 You can deduct the reimbursements as a business expense. Filing tax return 2012 However, expenses for food, beverages, and entertainment are subject to the 50% limit discussed earlier under Meals and Entertainment. Filing tax return 2012 Legal and professional fees. Filing tax return 2012   Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. Filing tax return 2012 However, usually legal fees you pay to acquire business assets are not deductible. Filing tax return 2012 These costs are added to the basis of the property. Filing tax return 2012   Fees that include payments for work of a personal nature (such as drafting a will, or damages arising from a personal injury) are not allowed as a business deduction on Schedule C or C-EZ. Filing tax return 2012 If the invoice includes both business and personal charges, compute the business portion as follows: multiply the total amount of the bill by a fraction, the numerator of which is the amount attributable to business matters, the denominator of which is the total amount paid. Filing tax return 2012 The result is the portion of the invoice attributable to business expenses. Filing tax return 2012 The portion attributable to personal matters is the difference between the total amount and the business portion (computed above). Filing tax return 2012   Legal fees relating to personal tax advice may be deductible on Schedule A (Form 1040), if you itemize deductions. Filing tax return 2012 However, the deduction is subject to the 2% limitation on miscellaneous itemized deductions. Filing tax return 2012 See Publication 529, Miscellaneous Deductions. Filing tax return 2012 Tax preparation fees. Filing tax return 2012   The cost of hiring a tax professional, such as a C. Filing tax return 2012 P. Filing tax return 2012 A. Filing tax return 2012 , to prepare that part of your tax return relating to your business as a sole proprietor is deductible on Schedule C or Schedule C-EZ. Filing tax return 2012 Any remaining cost may be deductible on Schedule A (Form 1040) if you itemize deductions. Filing tax return 2012   You can also claim a business deduction for amounts paid or incurred in resolving asserted tax deficiencies for your business operated as a sole proprietor. Filing tax return 2012 Licenses and regulatory fees. Filing tax return 2012   Licenses and regulatory fees for your trade or business paid annually to state or local governments generally are deductible. Filing tax return 2012 Some licenses and fees may have to be amortized. Filing tax return 2012 See chapter 8 for more information. Filing tax return 2012 Lobbying expenses. Filing tax return 2012   Generally, lobbying expenses are not deductible. Filing tax return 2012 Lobbying expenses include amounts paid or incurred for any of the following activities. Filing tax return 2012 Influencing legislation. Filing tax return 2012 Participating in or intervening in any political campaign for, or against, any candidate for public office. Filing tax return 2012 Attempting to influence the general public, or segments of the public, about elections, legislative matters, or referendums. Filing tax return 2012 Communicating directly with covered executive branch officials (defined later) in any attempt to influence the official actions or positions of those officials. Filing tax return 2012 Researching, preparing, planning, or coordinating any of the preceding activities. Filing tax return 2012   Your expenses for influencing legislation and communicating directly with a covered executive branch official include a portion of your labor costs and general and administrative costs of your business. Filing tax return 2012 For information on making this allocation, see section 1. Filing tax return 2012 162-28 of the regulations. Filing tax return 2012   You cannot claim a charitable or business expense deduction for amounts paid to an organization if both of the following apply. Filing tax return 2012 The organization conducts lobbying activities on matters of direct financial interest to your business. Filing tax return 2012 A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses. Filing tax return 2012   If a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues. Filing tax return 2012 Covered executive branch official. Filing tax return 2012   For purposes of this discussion, a covered executive branch official is any of the following. Filing tax return 2012 The President. Filing tax return 2012 The Vice President. Filing tax return 2012 Any officer or employee of the White House Office of the Executive Office of the President and the two most senior level officers of each of the other agencies in the Executive Office. Filing tax return 2012 Any individual who: Is serving in a position in Level I of the Executive Schedule under section 5312 of title 5, United States Code, Has been designated by the President as having Cabinet-level status, or Is an immediate deputy of an individual listed in item (a) or (b). Filing tax return 2012 Exceptions to denial of deduction. Filing tax return 2012   The general denial of the deduction does not apply to the following. Filing tax return 2012 Expenses of appearing before, or communicating with, any committee or member of any local council or similar governing body concerning its legislation (local legislation) if the legislation is of direct interest to you or to you and an organization of which you are a member. Filing tax return 2012 An Indian tribal government is treated as a local council or similar governing body. Filing tax return 2012 Any in-house expenses for influencing legislation and communicating directly with a covered executive branch official if those expenses for the tax year do not exceed $2,000 (excluding overhead expenses). Filing tax return 2012 Expenses incurred by taxpayers engaged in the trade or business of lobbying (professional lobbyists) on behalf of another person (but does apply to payments by the other person to the lobbyist for lobbying activities). Filing tax return 2012 Moving machinery. Filing tax return 2012   Generally, the cost of moving machinery from one city to another is a deductible expense. Filing tax return 2012 So is the cost of moving machinery from one plant to another, or from one part of your plant to another. Filing tax return 2012 You can deduct the cost of installing the machinery in the new location. Filing tax return 2012 However, you must capitalize the costs of installing or moving newly purchased machinery. Filing tax return 2012 Outplacement services. Filing tax return 2012   The costs of outplacement services you provide to your employees to help them find new employment, such as career counseling, résumé assistance, skills assessment, etc. Filing tax return 2012 are deductible. Filing tax return 2012   The costs of outplacement services may cover more than one deduction category. Filing tax return 2012 For example, deduct as a utilities expense the cost of telephone calls made under this service and deduct as rental expense the cost of renting machinery and equipment for this service. Filing tax return 2012   For information on whether the value of outplacement services is includable in your employees' income, see Publication 15-B. Filing tax return 2012 Penalties and fines. Filing tax return 2012   Penalties paid for late performance or nonperformance of a contract are generally deductible. Filing tax return 2012 For instance, you own and operate a construction company. Filing tax return 2012 Under a contract, you are to finish construction of a building by a certain date. Filing tax return 2012 Due to construction delays, the building is not completed and ready for occupancy on the date stipulated in the contract. Filing tax return 2012 You are now required to pay an additional amount for each day that completion is delayed beyond the completion date stipulated in the contract. Filing tax return 2012 These additional costs are deductible business expenses. Filing tax return 2012   On the other hand, penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible. Filing tax return 2012 These fines or penalties include the following amounts. Filing tax return 2012 Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding. Filing tax return 2012 Paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and additional amounts and assessable penalties imposed by the Internal Revenue Code. Filing tax return 2012 Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal. Filing tax return 2012 Forfeited as collateral posted for a proceeding that could result in a fine or penalty. Filing tax return 2012   Examples of nondeductible penalties and fines include the following. Filing tax return 2012 Fines for violating city housing codes. Filing tax return 2012 Fines paid by truckers for violating state maximum highway weight laws. Filing tax return 2012 Fines for violating air quality laws. Filing tax return 2012 Civil penalties for violating federal laws regarding mining safety standards and discharges into navigable waters. Filing tax return 2012   A fine or penalty does not include any of the following. Filing tax return 2012 Legal fees and related expenses to defend yourself in a prosecution or civil action for a violation of the law imposing the fine or civil penalty. Filing tax return 2012 Court costs or stenographic and printing charges. Filing tax return 2012 Compensatory damages paid to a government. Filing tax return 2012 Political contributions. Filing tax return 2012   Contributions or gifts paid to political parties or candidates are not deductible. Filing tax return 2012 In addition, expenses paid or incurred to take part in any political campaign of a candidate for public office are not deductible. Filing tax return 2012 Indirect political contributions. Filing tax return 2012   You cannot deduct indirect political contributions and costs of taking part in political activities as business expenses. Filing tax return 2012 Examples of nondeductible expenses include the following. Filing tax return 2012 Advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate. Filing tax return 2012 Admission to a dinner or program (including, but not limited to, galas, dances, film presentations, parties, and sporting events) if any of the proceeds from the function are for, or intended for, the use of a political party or candidate. Filing tax return 2012 Admission to an inaugural ball, gala, parade, concert, or similar event if identified with a political party or candidate. Filing tax return 2012 Repairs. Filing tax return 2012   The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. Filing tax return 2012 Routine maintenance that keeps your property in a normal efficient operating condition, but that does not materially increase the value or substantially prolong the useful life of the property, is deductible in the year that it is incurred. Filing tax return 2012 Otherwise, the cost must be capitalized and depreciated. Filing tax return 2012 See Form 4562 and its instructions for how to compute and claim the depreciation deduction. Filing tax return 2012   The cost of repairs includes the costs of labor, supplies, and certain other items. Filing tax return 2012 The value of your own labor is not deductible. Filing tax return 2012 Examples of repairs include: Reconditioning floors (but not replacement), Repainting the interior and exterior walls of a building, Cleaning and repairing roofs and gutters, and Fixing plumbing leaks (but not replacement of fixtures). Filing tax return 2012 Repayments. Filing tax return 2012   If you had to repay an amount you included in your income in an earlier year, you may be able to deduct the amount repaid for the year in which you repaid it. Filing tax return 2012 Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. Filing tax return 2012 Type of deduction. Filing tax return 2012   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. Filing tax return 2012 For instance, if you repay an amount you previously reported as a capital gain, deduct the repayment as a capital loss on Form 8949. Filing tax return 2012 If you reported it as self-employment income, deduct it as a business deduction on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). Filing tax return 2012   If you reported the amount as wages, unemployment compensation, or other nonbusiness ordinary income, enter it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is subject to the 2% limitation. Filing tax return 2012 However, if the repayment is over $3,000 and Method 1 (discussed later) applies, deduct it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is not subject to the 2% limitation. Filing tax return 2012 Repayment—$3,000 or less. Filing tax return 2012   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Filing tax return 2012 Repayment—over $3,000. Filing tax return 2012   If the amount you repaid was more than $3,000, you can deduct the repayment, as described earlier. Filing tax return 2012 However, you can instead choose to take a tax credit for the year of repayment if you included the income under a “claim of right. Filing tax return 2012 ” This means that at the time you included the income, it appeared that you had an unrestricted right to it. Filing tax return 2012 If you qualify for this choice, figure your tax under both methods and use the method that results in less tax. Filing tax return 2012 Method 1. Filing tax return 2012   Figure your tax for 2013 claiming a deduction for the repaid amount. Filing tax return 2012 Method 2. Filing tax return 2012   Figure your tax for 2013 claiming a credit for the repaid amount. Filing tax return 2012 Follow these steps. Filing tax return 2012 Figure your tax for 2013 without deducting the repaid amount. Filing tax return 2012 Refigure your tax from the earlier year without including in income the amount you repaid in 2013. Filing tax return 2012 Subtract the tax in (2) from the tax shown on your return for the earlier year. Filing tax return 2012 This is the amount of your credit. Filing tax return 2012 Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1). Filing tax return 2012   If Method 1 results in less tax, deduct the amount repaid as discussed earlier under Type of deduction. Filing tax return 2012   If Method 2 results in less tax, claim the credit on line 71 of Form 1040, and write “I. Filing tax return 2012 R. Filing tax return 2012 C. Filing tax return 2012 1341” next to line 71. Filing tax return 2012 Example. Filing tax return 2012 For 2012, you filed a return and reported your income on the cash method. Filing tax return 2012 In 2013, you repaid $5,000 included in your 2012 gross income under a claim of right. Filing tax return 2012 Your filing status in 2013 and 2012 is single. Filing tax return 2012 Your income and tax for both years are as follows:   2012  With Income 2012  Without Income Taxable Income $15,000 $10,000 Tax $ 1,819 $ 1,069   2013  Without Deduction 2013  With Deduction Taxable Income $49,950 $44,950 Tax $8,423 $7,173 Your tax under Method 1 is $7,173. Filing tax return 2012 Your tax under Method 2 is $7,673, figured as follows: Tax previously determined for 2012 $ 1,819 Less: Tax as refigured − 1,069 Decrease in 2012 tax $ 750 Regular tax liability for 2013 $8,423 Less: Decrease in 2012 tax − 750 Refigured tax for 2013 $ 7,673 Because you pay less tax under Method 1, you should take a deduction for the repayment in 2013. Filing tax return 2012 Repayment does not apply. Filing tax return 2012   This discussion does not apply to the following. Filing tax return 2012 Deductions for bad debts. Filing tax return 2012 Deductions from sales to customers, such as returns and allowances, and similar items. Filing tax return 2012 Deductions for legal and other expenses of contesting the repayment. Filing tax return 2012 Year of deduction (or credit). Filing tax return 2012   If you use the cash method of accounting, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. Filing tax return 2012 If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper deduction under your accounting method. Filing tax return 2012 For example, if you use the accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment accrues. Filing tax return 2012 Subscriptions. Filing tax return 2012   Subscriptions to professional, technical, and trade journals that deal with your business field are deductible. Filing tax return 2012 Supplies and materials. Filing tax return 2012   Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the tax year. Filing tax return 2012   If you keep incidental materials and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if all the following requirements are met. Filing tax return 2012 You do not keep a record of when they are used. Filing tax return 2012 You do not take an inventory of the amount on hand at the beginning and end of the tax year. Filing tax return 2012 This method does not distort your income. Filing tax return 2012   You can also deduct the cost of books, professional instruments, equipment, etc. Filing tax return 2012 , if you normally use them within a year. Filing tax return 2012 However, if the usefulness of these items extends substantially beyond the year they are placed in service, you generally must recover their costs through depreciation. Filing tax return 2012 For more information regarding depreciation see Publication 946, How To Depreciate Property. Filing tax return 2012 Utilities. Filing tax return 2012   Business expenses for heat, lights, power, telephone service, and water and sewerage are deductible. Filing tax return 2012 However, any part due to personal use is not deductible. Filing tax return 2012 Telephone. Filing tax return 2012   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. Filing tax return 2012 However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses. Filing tax return 2012 Prev  Up  Next   Home   More Online Publications
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Tax Benefits for Education: Information Center

Tax credits, deductions and savings plans can help taxpayers with their expenses for higher education.

  • A tax credit reduces the amount of income tax you may have to pay.
  • A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
  • Certain savings plans allow the accumulated interest to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.
  • An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit. 
  • Education credits are claimed on Form 8863, Education Credits. For details, see IRS Publication 970, Tax Benefits of Education.
 You can use the IRS’s Interactive Tax Assistant tool to help determine if you’re eligible for educational credits or deductions, including the American opportunity credit, the lifetime learning credit and the tuition and fees deduction.

Credits


American Opportunity Credit

Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualify for a tax credit, the American opportunity credit, to pay for college expenses.

The American opportunity credit originally modified the existing Hope credit for tax years 2009 and 2010. The American opportunity credit was later extended through 2017, making the benefit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the the prior Hope and existing lifetime learning credit.

If you have questions about the American opportunity credit, these questions and answers might help. For more information, see American opportunity credit.

Lifetime Learning Credit

The lifetime learning credit helps parents and students pay for post-secondary education.

For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim both the American opportunity credit and lifetime learning credits for the same student in one year. Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree.

Generally, you can claim the lifetime learning credit if all three of the following requirements are met:

  • You pay qualified education expenses of higher education.
  • You pay the education expenses for an eligible student.
  • The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.

If you’re eligible to claim the lifetime learning credit and are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.

If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year.


Deductions


Tuition and Fees Deduction

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.

The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.

You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax.

Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:

  • You pay qualified education expenses of higher education.
  • You pay the education expenses for an eligible student.
  • The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.

You cannot claim the tuition and fees deduction if any of the following apply:

  • Your filing status is married filing separately.

  • Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.

  • Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).

  • You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.

  • You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid.

Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

Student Loan Interest Deduction

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $75,000 ($150,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.

The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040's Schedule A.

Qualified Student Loan

This is a loan you took out solely to pay qualified education expenses (defined later) that were:

  • For you, your spouse, or a person who was your dependent when you took out the loan.
  • Paid or incurred within a reasonable period of time before or after you took out the loan.
  • For education provided during an academic period for an eligible student.

Loans from the following sources are not qualified student loans:

  • A related person.
  • A qualified employer plan.

Qualified Education Expenses

For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items:

  • Tuition and fees.
  • Room and board.
  • Books, supplies and equipment.
  • Other necessary expenses (such as transportation).

The cost of room and board qualifies only to the extent that it is not more than the greater of:

  • The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or
  • The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Business Deduction for Work-Related Education


If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax.

If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This may reduce the amount of your income subject to both income tax and self-employment tax.

Your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the lifetime learning credit. You may qualify for these other benefits even if you do not meet the requirements listed above.

To claim a business deduction for work-related education, you must:

  • Be working.
  • Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee.
  • File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed.
  • Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education, below.

Qualifying Work-Related Education

You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests:

  • The education is required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer.
  • The education maintains or improves skills needed in your present work.

However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:

  • Is needed to meet the minimum educational requirements of your present trade or business or
  • Is part of a program of study that will qualify you for a new trade or business.

You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.

Education Required by Employer or by Law

Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met.

  • It is required for you to keep your present salary, status or job.
  • The requirement serves a business purpose of your employer.
  • The education is not part of a program that will qualify you for a new trade or business.

When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work.

Education to Maintain or Improve Skills

If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments and academic or vocational courses.


Savings Plans


529 Plans

States sponsor 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — that allow taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student's qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.

529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualify.

For 2009 and 2010, an ARRA change to tax-free college savings plans and prepaid tuition programs added to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, lifetime learning credit or tuition and fees deduction.

Coverdell Education Savings Account

This account was created as an incentive to help parents and students save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used to pay a student’s eligible k-12 expenses, as well as post-secondary expenses. On the other hand, income limits apply to contributors, and  the total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

Here are some things to remember about distributions from Coverdell accounts:

  • Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.

  • There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Virtually all accredited public, nonprofit and proprietary (privately owned profit-making) post-secondary institutions are eligible.

  • Education tax credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.

  • If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

For more information, see Tax Tip 2008-59, Coverdell Education Savings Accounts.


Scholarships and Fellowships


A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.

A scholarship or fellowship is tax free only if you meet the following conditions:

  • You are a candidate for a degree at an eligible educational institution.
  • You use the scholarship or fellowship to pay qualified education expenses.

Qualified Education Expenses

For purposes of tax-free scholarships and fellowships, these are expenses for:

  • Tuition and fees required to enroll at or attend an eligible educational institution.
  • Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses. 

Expenses that Don’t Qualify

Qualified education expenses do not include the cost of:

  • Room and board.
  • Travel.
  • Research.
  • Clerical help.
  • Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.

For more information, see Pub. 970.


Exclusions from Income


You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the lifetime learning credit.

Employer-Provided Educational Assistance


If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2.

Educational Assistance Program

To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.

Educational Assistance Benefits

Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for the following items.

  • Meals, lodging, or transportation.
  • Tools or supplies (other than textbooks) that you can keep after completing the course of instruction.
  • Courses involving sports, games, or hobbies unless they:
    • Have a reasonable relationship to the business of your employer, or
    • Are required as part of a degree program.

Benefits over $5,250

If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.

Working Condition Fringe Benefit 

However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense. For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.


Related Items:

 

Page Last Reviewed or Updated: 24-Jan-2014

The Filing Tax Return 2012

Filing tax return 2012 15. Filing tax return 2012   Estimated Tax Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Special Estimated Tax Rules for Qualified FarmersQualified Farmer Special Rules for Qualified Farmers Estimated Tax Penalty for 2013 What's New Net Investment Income Tax. Filing tax return 2012 . Filing tax return 2012  For tax years beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). Filing tax return 2012 NIIT is a 3. Filing tax return 2012 8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount. Filing tax return 2012 NIIT may need to be included when calculating your estimated tax. Filing tax return 2012 For more information, see Publication 505,Tax Withholding and Estimated Tax. Filing tax return 2012 Additional Medicare Tax. Filing tax return 2012  For tax years beginning in 2013, a 0. Filing tax return 2012 9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income over a threshold amount based on your filing status. Filing tax return 2012 You may need to include this amount when figuring your estimated tax. Filing tax return 2012 For more information, see Publication 505. Filing tax return 2012 Introduction Estimated tax is the method used to pay tax on income that is not subject to withholding. Filing tax return 2012 See Publication 505 for the general rules and requirements for paying estimated tax. Filing tax return 2012 If you are a qualified farmer, defined below, you are subject to the special rules covered in this chapter for paying estimated tax. Filing tax return 2012 Topics - This chapter discusses: Special estimated tax rules for qualified farmers Estimated tax penalty Useful Items - You may want to see: Publication 505 Tax Withholding and Estimated Tax Form (and Instructions) 1040 U. Filing tax return 2012 S. Filing tax return 2012 Individual Income Tax Return 1040-ES Estimated Tax for Individuals 2210-F Underpayment of Estimated Tax by Farmers and Fishermen See chapter 16 for information about getting publications and forms. Filing tax return 2012 Special Estimated Tax Rules for Qualified Farmers Special rules apply to the payment of estimated tax by individuals who are qualified farmers. Filing tax return 2012 If you are not a qualified farmer as defined next, see Publication 505 for the estimated tax rules that apply. Filing tax return 2012 Qualified Farmer An individual is a qualified farmer for 2013 if at least two-thirds of his or her gross income from all sources for 2012 or 2013 was from farming. Filing tax return 2012 See Gross Income , next, for information on how to figure your gross income from all sources and see Gross Income From Farming , later, for information on how to figure your gross income from farming. Filing tax return 2012 See also Percentage From Farming , later, for information on how to determine the percentage of your gross income from farming. Filing tax return 2012 Gross Income Gross income is all income you receive in the form of money, goods, property, and services that is not exempt from income tax. Filing tax return 2012 On a joint return, you must add your spouse's gross income to your gross income. Filing tax return 2012 To decide whether two-thirds of your gross income was from farming, use as your gross income the total of the following income (not loss) amounts from your tax return. Filing tax return 2012 Wages, salaries, tips, etc. Filing tax return 2012 Taxable interest. Filing tax return 2012 Ordinary dividends. Filing tax return 2012 Taxable refunds, credits, or offsets of state and local income taxes. Filing tax return 2012 Alimony. Filing tax return 2012 Gross business income from Schedule C (Form 1040). Filing tax return 2012 Gross business receipts from Schedule C-EZ (Form 1040). Filing tax return 2012 Capital gains from Schedule D (Form 1040). Filing tax return 2012 Losses are not netted against gains. Filing tax return 2012 Gains on sales of business property. Filing tax return 2012 Taxable IRA distributions, pensions, annuities, and social security benefits. Filing tax return 2012 Gross rental income from Schedule E (Form 1040). Filing tax return 2012 Gross royalty income from Schedule E (Form 1040). Filing tax return 2012 Taxable net income from an estate or trust reported on Schedule E (Form 1040). Filing tax return 2012 Income from a Real Estate Mortgage Investment Conduit reported on Schedule E (Form 1040). Filing tax return 2012 Gross farm rental income from Form 4835. Filing tax return 2012 Gross farm income from Schedule F (Form 1040). Filing tax return 2012 Your distributive share of gross income from a partnership, or limited liability company treated as a partnership, from Schedule K-1 (Form 1065). Filing tax return 2012 Your pro rata share of gross income from an S corporation, from Schedule K-1 (Form 1120S). Filing tax return 2012 Unemployment compensation. Filing tax return 2012 Other income not included with any of the items listed above. Filing tax return 2012 Gross Income From Farming Gross income from farming is income from cultivating the soil or raising agricultural commodities. Filing tax return 2012 It includes the following amounts. Filing tax return 2012 Income from operating a stock, dairy, poultry, bee, fruit, or truck farm. Filing tax return 2012 Income from a plantation, ranch, nursery, range, orchard, or oyster bed. Filing tax return 2012 Crop shares for the use of your land. Filing tax return 2012 Gains from sales of draft, breeding, dairy, or sporting livestock. Filing tax return 2012 Gross income from farming is the total of the following amounts from your tax return. Filing tax return 2012 Gross farm income from Schedule F (Form 1040). Filing tax return 2012 Gross farm rental income from Form 4835. Filing tax return 2012 Gross farm income from Schedule E (Form 1040), Parts II and III. Filing tax return 2012 Gains from the sale of livestock used for draft, breeding, sport, or dairy purposes reported on Form 4797. Filing tax return 2012 For more information about income from farming, see chapter 3. Filing tax return 2012 Farm income does not include any of the following: Wages you receive as a farm employee. Filing tax return 2012 Income you receive from contract grain harvesting and hauling with workers and machines you furnish. Filing tax return 2012 Gains you receive from the sale of farm land and depreciable farm equipment. Filing tax return 2012 Percentage From Farming Figure your gross income from all sources, discussed earlier. Filing tax return 2012 Then figure your gross income from farming, discussed earlier. Filing tax return 2012 Divide your farm gross income by your total gross income to determine the percentage of gross income from farming. Filing tax return 2012 Example 1. Filing tax return 2012 Jane Smith had the following total gross income and farm gross income amounts in 2013. Filing tax return 2012 Gross Income   Total Farm Taxable interest $3,000   Dividends 500   Rental income (Sch E) 41,500   Farm income (Sch F) 75,000 $75,000 Gain (Form 4797) 5,000 5,000 Total $125,000 $80,000 Schedule D showed gain from the sale of dairy cows carried over from Form 4797 ($5,000) in addition to a loss from the sale of corporate stock ($2,000). Filing tax return 2012 However, that loss is not netted against the gain to figure Ms. Filing tax return 2012 Smith's total gross income or her gross farm income. Filing tax return 2012 Her gross farm income is 64% of her total gross income ($80,000 ÷ $125,000 = 0. Filing tax return 2012 64). Filing tax return 2012 Special Rules for Qualified Farmers The following special estimated tax rules apply if you are a qualified farmer for 2013. Filing tax return 2012 You do not have to pay estimated tax if you file your 2013 tax return and pay all the tax due by March 3, 2014. Filing tax return 2012 You do not have to pay estimated tax if your 2013 income tax withholding (including any amount applied to your 2013 estimated tax from your 2012 return) will be at least 662/3% (. Filing tax return 2012 6667) of the total tax shown on your 2013 tax return or 100% of the total tax shown on your 2012 return. Filing tax return 2012 If you must pay estimated tax, you are required to make only one estimated tax payment (your required annual payment) by January 15, 2014, using special rules to figure the amount of the payment. Filing tax return 2012 See Required Annual Payment , next, for details. Filing tax return 2012 Figure 15-1 presents an overview of the special estimated tax rules that apply to qualified farmers. Filing tax return 2012 Example 2. Filing tax return 2012 Assume the same fact as in Example 1. Filing tax return 2012 Ms. Filing tax return 2012 Smith's gross farm income is only 64% of her total income. Filing tax return 2012 Therefore, based on her 2013 income, she does not qualify to use the special estimated tax rules for qualified farmers. Filing tax return 2012 However, she does qualify if at least two-thirds of her 2012 gross income was from farming. Filing tax return 2012 Example 3. Filing tax return 2012 Assume the same facts as in Example 1 except that Ms. Filing tax return 2012 Smith's farm income from Schedule F was $90,000 instead of $75,000. Filing tax return 2012 This made her total gross income $140,000 ($3,000 + $500 + $41,500 + $90,000 + $5,000) and her farm gross income $95,000 ($90,000 + $5,000). Filing tax return 2012 She qualifies to use the special estimated tax rules for qualified farmers, since 67. Filing tax return 2012 9% (at least two-thirds) of her gross income is from farming ($95,000 ÷ $140,000 = . Filing tax return 2012 679). Filing tax return 2012 Required Annual Payment If you are a qualified farmer and must pay estimated tax for 2013, use the worksheet on Form 1040-ES to figure the amount of your required annual payment. Filing tax return 2012 Apply the following special rules for qualified farmers to the worksheet. Filing tax return 2012 On line 14a, multiply line 13c by 662/3% (. Filing tax return 2012 6667). Filing tax return 2012 On line 14b, enter 100% of the tax shown on your 2012 tax return regardless of the amount of your adjusted gross income. Filing tax return 2012 For this purpose, the “tax shown on your 2012 tax return” is the amount on line 61 of your 2012 return modified by certain adjustments. Filing tax return 2012 For more information, see chapter 4 of Publication 505. Filing tax return 2012 Estimated Tax Penalty for 2013 If you do not pay all your required estimated tax for 2013 by January 15, 2014, or file your 2013 return and pay any tax due by March 3, 2014, you may owe a penalty. Filing tax return 2012 Use Form 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen, to determine if you owe a penalty. Filing tax return 2012 See the instructions for Form 2210-F. Filing tax return 2012 Figure 15-1. Filing tax return 2012 Estimated Tax for Farmers Please click here for the text description of the image. Filing tax return 2012 Figure 2–A If you receive a penalty notice, do not ignore it, even if you think it is in error. Filing tax return 2012 You may get a penalty notice even though you filed your return on time, attached Form 2210-F, and met the gross-income-from-farming requirement. Filing tax return 2012 If you receive a penalty notice for underpaying estimated tax and you think it is in error, write to the address on the notice and explain why you think the notice is in error. Filing tax return 2012 Include a computation similar to the one in Example 1 (earlier), showing that you met the gross income from farming requirement. Filing tax return 2012 Prev  Up  Next   Home   More Online Publications