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

Free 1040 ez 27. Free 1040 ez   Tax Benefits for Work-Related Education Table of Contents What's New Introduction Useful Items - You may want to see: Qualifying Work-Related EducationEducation Required by Employer or by Law Education To Maintain or Improve Skills Education To Meet Minimum Requirements Education That Qualifies You for a New Trade or Business What Expenses Can Be DeductedUnclaimed reimbursement. Free 1040 ez Transportation Expenses Travel Expenses No Double Benefit Allowed Reimbursements Deducting Business ExpensesSelf-Employed Persons Employees Performing Artists and Fee-Basis Officials Impairment-Related Work Expenses Recordkeeping What's New Standard mileage rate. Free 1040 ez  Generally, if you claim a business deduction for work-related education and you drive your car to and from school, the amount you can deduct for miles driven from January 1, 2013, through December 31, 2013, is 56½ cents per mile. Free 1040 ez For more information, see Transportation Expenses under What Expenses Can Be Deducted. Free 1040 ez Introduction This chapter discusses work-related education expenses that you may be able to deduct as business expenses. Free 1040 ez To claim such a deduction, you must: Itemize your deductions on Schedule A (Form 1040) 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, and Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education . Free 1040 ez 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. Free 1040 ez Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses (except for impairment-related work expenses of disabled individuals) is greater than 2% of your adjusted gross income. Free 1040 ez See chapter 28. Free 1040 ez If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. Free 1040 ez Your work-related education expenses may also qualify you for other tax benefits, such as the American opportunity and lifetime learning credits (see chapter 35). Free 1040 ez You may qualify for these other benefits even if you do not meet the requirements listed earlier. Free 1040 ez Also, keep in mind that your work-related education expenses may qualify you to claim more than one tax benefit. Free 1040 ez Generally, you may claim any number of benefits as long as you use different expenses to figure each one. Free 1040 ez When you figure your taxes, you may want to compare these tax benefits so you can choose the method(s) that give you the lowest tax liability. Free 1040 ez Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 970 Tax Benefits for Education Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses Schedule A (Form 1040) Itemized Deductions Qualifying Work-Related Education You can deduct the costs of qualifying work-related education as business expenses. Free 1040 ez This is education that meets at least one of the following two tests. Free 1040 ez The education is required by your employer or the law to keep your present salary, status, or job. Free 1040 ez The required education must serve a bona fide business purpose of your employer. Free 1040 ez The education maintains or improves skills needed in your present work. Free 1040 ez 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. Free 1040 ez You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree. Free 1040 ez Use Figure 27-A, later, as a quick check to see if your education qualifies. Free 1040 ez Education Required by Employer or by Law Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. Free 1040 ez This additional education is qualifying work-related education if all three of the following requirements are met. Free 1040 ez It is required for you to keep your present salary, status, or job, The requirement serves a bona fide business purpose of your employer, and The education is not part of a program that will qualify you for a new trade or business. Free 1040 ez 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. Free 1040 ez See Education To Maintain or Improve Skills , later. Free 1040 ez Example. Free 1040 ez You are a teacher who has satisfied the minimum requirements for teaching. Free 1040 ez Your employer requires you to take an additional college course each year to keep your teaching job. Free 1040 ez If the courses will not qualify you for a new trade or business, they are qualifying work-related education even if you eventually receive a master's degree and an increase in salary because of this extra education. Free 1040 ez 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. Free 1040 ez This could include refresher courses, courses on current developments, and academic or vocational courses. Free 1040 ez Example. Free 1040 ez You repair televisions, radios, and stereo systems for XYZ Store. Free 1040 ez To keep up with the latest changes, you take special courses in radio and stereo service. Free 1040 ez These courses maintain and improve skills required in your work. Free 1040 ez Maintaining skills vs. Free 1040 ez qualifying for new job. Free 1040 ez   Education to maintain or improve skills needed in your present work is not qualifying education if it will also qualify you for a new trade or business. Free 1040 ez Education during temporary absence. Free 1040 ez   If you stop working for a year or less in order to get education to maintain or improve skills needed in your present work and then return to the same general type of work, your absence is considered temporary. Free 1040 ez Education that you get during a temporary absence is qualifying work-related education if it maintains or improves skills needed in your present work. Free 1040 ez Example. Free 1040 ez You quit your biology research job to become a full-time biology graduate student for one year. Free 1040 ez If you return to work in biology research after completing the courses, the education is related to your present work even if you do not go back to work with the same employer. Free 1040 ez Education during indefinite absence. Free 1040 ez   If you stop work for more than a year, your absence from your job is considered indefinite. Free 1040 ez Education during an indefinite absence, even if it maintains or improves skills needed in the work from which you are absent, is considered to qualify you for a new trade or business. Free 1040 ez Therefore, it is not qualifying work-related education. Free 1040 ez Education To Meet Minimum Requirements Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Free 1040 ez The minimum educational requirements are determined by: Laws and regulations, Standards of your profession, trade, or business, and Your employer. Free 1040 ez Once you have met the minimum educational requirements that were in effect when you were hired, you do not have to meet any new minimum educational requirements. Free 1040 ez This means that if the minimum requirements change after you were hired, any education you need to meet the new requirements can be qualifying education. Free 1040 ez You have not necessarily met the minimum educational requirements of your trade or business simply because you are already doing the work. Free 1040 ez Example 1. Free 1040 ez You are a full-time engineering student. Free 1040 ez Although you have not received your degree or certification, you work part-time as an engineer for a firm that will employ you as a full-time engineer after you finish college. Free 1040 ez Although your college engineering courses improve your skills in your present job, they are also needed to meet the minimum job requirements for a full-time engineer. Free 1040 ez The education is not qualifying work-related education. Free 1040 ez Example 2. Free 1040 ez You are an accountant and you have met the minimum educational requirements of your employer. Free 1040 ez Your employer later changes the minimum educational requirements and requires you to take college courses to keep your job. Free 1040 ez These additional courses can be qualifying work-related education because you have already satisfied the minimum requirements that were in effect when you were hired. Free 1040 ez Requirements for Teachers States or school districts usually set the minimum educational requirements for teachers. Free 1040 ez The requirement is the college degree or the minimum number of college hours usually required of a person hired for that position. Free 1040 ez If there are no requirements, you will have met the minimum educational requirements when you become a faculty member. Free 1040 ez The determination of whether you are a faculty member of an educational institution must be made on the basis of the particular practices of the institution. Free 1040 ez You generally will be considered a faculty member when one or more of the following occurs. Free 1040 ez You have tenure. Free 1040 ez Your years of service count toward obtaining tenure. Free 1040 ez You have a vote in faculty decisions. Free 1040 ez Your school makes contributions for you to a retirement plan other than social security or a similar program. Free 1040 ez Example 1. Free 1040 ez The law in your state requires beginning secondary school teachers to have a bachelor's degree, including 10 professional education courses. Free 1040 ez In addition, to keep the job a teacher must complete a fifth year of training within 10 years from the date of hire. Free 1040 ez If the employing school certifies to the state Department of Education that qualified teachers cannot be found, the school can hire persons with only 3 years of college. Free 1040 ez However, to keep their jobs, these teachers must get a bachelor's degree and the required professional education courses within 3 years. Free 1040 ez Under these facts, the bachelor's degree, whether or not it includes the 10 professional education courses, is considered the minimum educational requirement for qualification as a teacher in your state. Free 1040 ez If you have all the required education except the fifth year, you have met the minimum educational requirements. Free 1040 ez The fifth year of training is qualifying work-related education unless it is part of a program of study that will qualify you for a new trade or business. Free 1040 ez Figure 27-A Does Your Work-Related Education Qualify? Please click here for the text description of the image. Free 1040 ez Figure 27-A. Free 1040 ez Does Your Work-Related Education Qualify?" Example 2. Free 1040 ez Assume the same facts as in Example 1 except that you have a bachelor's degree and only six professional education courses. Free 1040 ez The additional four education courses can be qualifying work-related education. Free 1040 ez Although you do not have all the required courses, you have already met the minimum educational requirements. Free 1040 ez Example 3. Free 1040 ez Assume the same facts as in Example 1 except that you are hired with only 3 years of college. Free 1040 ez The courses you take that lead to a bachelor's degree (including those in education) are not qualifying work-related education. Free 1040 ez They are needed to meet the minimum educational requirements for employment as a teacher. Free 1040 ez Example 4. Free 1040 ez You have a bachelor's degree and you work as a temporary instructor at a university. Free 1040 ez At the same time, you take graduate courses toward an advanced degree. Free 1040 ez The rules of the university state that you can become a faculty member only if you get a graduate degree. Free 1040 ez Also, you can keep your job as an instructor only as long as you show satisfactory progress toward getting this degree. Free 1040 ez You have not met the minimum educational requirements to qualify you as a faculty member. Free 1040 ez The graduate courses are not qualifying work-related education. Free 1040 ez Certification in a new state. Free 1040 ez   Once you have met the minimum educational requirements for teachers for your state, you are considered to have met the minimum educational requirements in all states. Free 1040 ez This is true even if you must get additional education to be certified in another state. Free 1040 ez Any additional education you need is qualifying work-related education. Free 1040 ez You have already met the minimum requirements for teaching. Free 1040 ez Teaching in another state is not a new trade or business. Free 1040 ez Example. Free 1040 ez You hold a permanent teaching certificate in State A and are employed as a teacher in that state for several years. Free 1040 ez You move to State B and are promptly hired as a teacher. Free 1040 ez You are required, however, to complete certain prescribed courses to get a permanent teaching certificate in State B. Free 1040 ez These additional courses are qualifying work-related education because the teaching position in State B involves the same general kind of work for which you were qualified in State A. Free 1040 ez Education That Qualifies You for a New Trade or Business Education that is part of a program of study that will qualify you for a new trade or business is not qualifying work-related education. Free 1040 ez This is true even if you do not plan to enter that trade or business. Free 1040 ez If you are an employee, a change of duties that involves the same general kind of work is not a new trade or business. Free 1040 ez Example 1. Free 1040 ez You are an accountant. Free 1040 ez Your employer requires you to get a law degree at your own expense. Free 1040 ez You register at a law school for the regular curriculum that leads to a law degree. Free 1040 ez Even if you do not intend to become a lawyer, the education is not qualifying because the law degree will qualify you for a new trade or business. Free 1040 ez Example 2. Free 1040 ez You are a general practitioner of medicine. Free 1040 ez You take a 2-week course to review developments in several specialized fields of medicine. Free 1040 ez The course does not qualify you for a new profession. Free 1040 ez It is qualifying work-related education because it maintains or improves skills required in your present profession. Free 1040 ez Example 3. Free 1040 ez While working in the private practice of psychiatry, you enter a program to study and train at an accredited psychoanalytic institute. Free 1040 ez The program will lead to qualifying you to practice psychoanalysis. Free 1040 ez The psychoanalytic training does not qualify you for a new profession. Free 1040 ez It is qualifying work-related education because it maintains or improves skills required in your present profession. Free 1040 ez Bar or CPA Review Course Review courses to prepare for the bar examination or the certified public accountant (CPA) examination are not qualifying work-related education. Free 1040 ez They are part of a program of study that can qualify you for a new profession. Free 1040 ez Teaching and Related Duties All teaching and related duties are considered the same general kind of work. Free 1040 ez A change in duties in any of the following ways is not considered a change to a new business. Free 1040 ez Elementary school teacher to secondary school teacher. Free 1040 ez Teacher of one subject, such as biology, to teacher of another subject, such as art. Free 1040 ez Classroom teacher to guidance counselor. Free 1040 ez Classroom teacher to school administrator. Free 1040 ez What Expenses Can Be Deducted If your education meets the requirements described earlier under Qualifying Work-Related Education , you can generally deduct your education expenses as business expenses. Free 1040 ez If you are not self-employed, you can deduct business expenses only if you itemize your deductions. Free 1040 ez You cannot deduct expenses related to tax-exempt and excluded income. Free 1040 ez Deductible expenses. Free 1040 ez   The following education expenses can be deducted. Free 1040 ez Tuition, books, supplies, lab fees, and similar items. Free 1040 ez Certain transportation and travel costs. Free 1040 ez Other education expenses, such as costs of research and typing when writing a paper as part of an educational program. Free 1040 ez Nondeductible expenses. Free 1040 ez   You cannot deduct personal or capital expenses. Free 1040 ez For example, you cannot deduct the dollar value of vacation time or annual leave you take to attend classes. Free 1040 ez This amount is a personal expense. Free 1040 ez Unclaimed reimbursement. Free 1040 ez   If you do not claim reimbursement that you are entitled to receive from your employer, you cannot deduct the expenses that apply to that unclaimed reimbursement. Free 1040 ez Example. Free 1040 ez Your employer agrees to pay your education expenses if you file a voucher showing your expenses. Free 1040 ez You do not file a voucher, and you do not get reimbursed. Free 1040 ez Because you did not file a voucher, you cannot deduct the expenses on your tax return. Free 1040 ez Transportation Expenses If your education qualifies, you can deduct local transportation costs of going directly from work to school. Free 1040 ez If you are regularly employed and go to school on a temporary basis, you can also deduct the costs of returning from school to home. Free 1040 ez Temporary basis. Free 1040 ez   You go to school on a temporary basis if either of the following situations applies to you. Free 1040 ez Your attendance at school is realistically expected to last 1 year or less and does indeed last for 1 year or less. Free 1040 ez Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Free 1040 ez Your attendance is temporary up to the date you determine it will last more than 1 year. Free 1040 ez Note. Free 1040 ez If you are in either situation (1) or (2), your attendance is not temporary if facts and circumstances indicate otherwise. Free 1040 ez Attendance not on a temporary basis. Free 1040 ez   You do not go to school on a temporary basis if either of the following situations apply to you. Free 1040 ez Your attendance at school is realistically expected to last more than 1 year. Free 1040 ez It does not matter how long you actually attend. Free 1040 ez Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Free 1040 ez Your attendance is not temporary after the date you determine it will last more than 1 year. Free 1040 ez Deductible Transportation Expenses If you are regularly employed and go directly from home to school on a temporary basis, you can deduct the round-trip costs of transportation between your home and school. Free 1040 ez This is true regardless of the location of the school, the distance traveled, or whether you attend school on nonwork days. Free 1040 ez Transportation expenses include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. Free 1040 ez Transportation expenses do not include amounts spent for travel, meals, or lodging while you are away from home overnight. Free 1040 ez Example 1. Free 1040 ez You regularly work in a nearby town, and go directly from work to home. Free 1040 ez You also attend school every work night for 3 months to take a course that improves your job skills. Free 1040 ez Since you are attending school on a temporary basis, you can deduct your daily round-trip transportation expenses in going between home and school. Free 1040 ez This is true regardless of the distance traveled. Free 1040 ez Example 2. Free 1040 ez Assume the same facts as in Example 1 except that on certain nights you go directly from work to school and then home. Free 1040 ez You can deduct your transportation expenses from your regular work site to school and then home. Free 1040 ez Example 3. Free 1040 ez Assume the same facts as in Example 1 except that you attend the school for 9 months on Saturdays, nonwork days. Free 1040 ez Since you are attending school on a temporary basis, you can deduct your round-trip transportation expenses in going between home and school. Free 1040 ez Example 4. Free 1040 ez Assume the same facts as in Example 1 except that you attend classes twice a week for 15 months. Free 1040 ez Since your attendance in school is not considered temporary, you cannot deduct your transportation expenses in going between home and school. Free 1040 ez If you go directly from work to school, you can deduct the one-way transportation expenses of going from work to school. Free 1040 ez If you go from work to home to school and return home, your transportation expenses cannot be more than if you had gone directly from work to school. Free 1040 ez Using your car. Free 1040 ez   If you use your car (whether you own or lease it) for transportation to school, you can deduct your actual expenses or use the standard mileage rate to figure the amount you can deduct. Free 1040 ez The standard mileage rate for miles driven from January 1, 2013, through December 31, 2013 is 56½ cents per mile. Free 1040 ez Whichever method you use, you can also deduct parking fees and tolls. Free 1040 ez See chapter 26 for information on deducting your actual expenses of using a car. Free 1040 ez Travel Expenses You can deduct expenses for travel, meals (see 50% limit on meals , later), and lodging if you travel overnight mainly to obtain qualifying work-related education. Free 1040 ez Travel expenses for qualifying work-related education are treated the same as travel expenses for other employee business purposes. Free 1040 ez For more information, see chapter 26. Free 1040 ez You cannot deduct expenses for personal activities, such as sightseeing, visiting, or entertaining. Free 1040 ez Mainly personal travel. Free 1040 ez   If your travel away from home is mainly personal, you cannot deduct all of your expenses for travel, meals, and lodging. Free 1040 ez You can deduct only your expenses for lodging and 50% of your expenses for meals during the time you attend the qualified educational activities. Free 1040 ez   Whether a trip's purpose is mainly personal or educational depends upon the facts and circumstances. Free 1040 ez An important factor is the comparison of time spent on personal activities with time spent on educational activities. Free 1040 ez If you spend more time on personal activities, the trip is considered mainly educational only if you can show a substantial nonpersonal reason for traveling to a particular location. Free 1040 ez Example 1. Free 1040 ez John works in Newark, New Jersey. Free 1040 ez He traveled to Chicago to take a deductible 1-week course at the request of his employer. Free 1040 ez His main reason for going to Chicago was to take the course. Free 1040 ez While there, he took a sight-seeing trip, entertained some friends, and took a side trip to Pleasantville for a day. Free 1040 ez Since the trip was mainly for business, John can deduct his round-trip airfare to Chicago. Free 1040 ez He cannot deduct his transportation expenses of going to Pleasantville. Free 1040 ez He can deduct only the meals (subject to the 50% limit) and lodging connected with his educational activities. Free 1040 ez Example 2. Free 1040 ez Sue works in Boston. Free 1040 ez She went to a university in Michigan to take a course for work. Free 1040 ez The course is qualifying work-related education. Free 1040 ez She took one course, which is one-fourth of a full course load of study. Free 1040 ez She spent the rest of the time on personal activities. Free 1040 ez Her reasons for taking the course in Michigan were all personal. Free 1040 ez Sue's trip is mainly personal because three-fourths of her time is considered personal time. Free 1040 ez She cannot deduct the cost of her round-trip train ticket to Michigan. Free 1040 ez She can deduct one-fourth of the meals (subject to the 50% limit) and lodging costs for the time she attended the university. Free 1040 ez Example 3. Free 1040 ez Dave works in Nashville and recently traveled to California to take a 2-week seminar. Free 1040 ez The seminar is qualifying work-related education. Free 1040 ez While there, he spent an extra 8 weeks on personal activities. Free 1040 ez The facts, including the extra 8-week stay, show that his main purpose was to take a vacation. Free 1040 ez Dave cannot deduct his round-trip airfare or his meals and lodging for the 8 weeks. Free 1040 ez He can deduct only his expenses for meals (subject to the 50% limit) and lodging for the 2 weeks he attended the seminar. Free 1040 ez Cruises and conventions. Free 1040 ez   Certain cruises and conventions offer seminars or courses as part of their itinerary. Free 1040 ez Even if the seminars or courses are work-related, your deduction for travel may be limited. Free 1040 ez This applies to: Travel by ocean liner, cruise ship, or other form of luxury water transportation, and Conventions outside the North American area. Free 1040 ez   For a discussion of the limits on travel expense deductions that apply to cruises and conventions, see Luxury Water Travel and Conventions in chapter 1 of Publication 463. Free 1040 ez 50% limit on meals. Free 1040 ez   You can deduct only 50% of the cost of your meals while traveling away from home to obtain qualifying work-related education. Free 1040 ez You cannot have been reimbursed for the meals. Free 1040 ez   Employees must use Form 2106 or Form 2106-EZ to apply the 50% limit. Free 1040 ez Travel as Education You cannot deduct the cost of travel as a form of education even if it is directly related to your duties in your work or business. Free 1040 ez Example. Free 1040 ez You are a French language teacher. Free 1040 ez While on sabbatical leave granted for travel, you traveled through France to improve your knowledge of the French language. Free 1040 ez You chose your itinerary and most of your activities to improve your French language skills. Free 1040 ez You cannot deduct your travel expenses as education expenses. Free 1040 ez This is true even if you spent most of your time learning French by visiting French schools and families, attending movies or plays, and engaging in similar activities. Free 1040 ez No Double Benefit Allowed You cannot do either of the following. Free 1040 ez Deduct work-related education expenses as business expenses if you benefit from these expenses under any other provision of the law, for example, the tuition and fees deduction (see chapter 35). Free 1040 ez Deduct work-related education expenses paid with tax-free scholarship, grant, or employer-provided educational assistance. Free 1040 ez See Adjustments to Qualifying Work-Related Education Expenses , next. Free 1040 ez Adjustments to Qualifying Work-Related Education Expenses If you pay qualifying work-related education expenses with certain tax-free funds, you cannot claim a deduction for those amounts. Free 1040 ez You must reduce the qualifying expenses by the amount of such expenses allocable to the tax-free educational assistance. Free 1040 ez For more information, see chapter 12 of Publication 970. Free 1040 ez Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see chapter 1 of Publication 970), The tax-free part of Pell grants (see chapter 1 of Publication 970), The tax-free part of employer-provided educational assistance (see chapter 11 of Publication 970), Veterans' educational assistance (see chapter 1 of Publication 970), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received for education assistance. Free 1040 ez Amounts that do not reduce qualifying work-related education expenses. Free 1040 ez   Do not reduce the qualifying work-related education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Free 1040 ez   Also, do not reduce the qualifying work-related education expenses by any scholarship or fellowship reported as income on the student's return or any scholarship which, by its terms, cannot be applied to qualifying work-related education expenses. Free 1040 ez Reimbursements How you treat reimbursements depends on the arrangement you have with your employer. Free 1040 ez There are two basic types of reimbursement arrangements—accountable plans and nonaccountable plans. Free 1040 ez You can tell the type of plan you are reimbursed under by the way the reimbursement is reported on your Form W-2. Free 1040 ez For information on how to treat reimbursements under both accountable and nonaccountable plans, see Reimbursements in chapter 26. Free 1040 ez Deducting Business Expenses Self-employed persons and employees report business expenses differently. Free 1040 ez The following information explains what forms you must use to deduct the cost of your qualifying work-related education as a business expense. Free 1040 ez Self-Employed Persons If you are self-employed, report the cost of your qualifying work-related education on the appropriate form used to report your business income and expenses (generally Schedule C, C-EZ, or F). Free 1040 ez If your educational expenses include expenses for a car or truck, travel, or meals, report those expenses the same way you report other business expenses for those items. Free 1040 ez See the instructions for the form you file for information on how to complete it. Free 1040 ez Employees If you are an employee, you can deduct the cost of qualifying work-related education only if you: Did not receive (and were not entitled to receive) any reimbursement from your employer, Were reimbursed under a nonaccountable plan (amount is included in box 1 of Form W-2), or Received reimbursement under an accountable plan, but the amount received was less than your expenses for which you claimed reimbursement. Free 1040 ez If either (1) or (2) applies, you can deduct the total qualifying cost. Free 1040 ez If (3) applies, you can deduct only the qualifying costs that were more than your reimbursement. Free 1040 ez In order to deduct the cost of your qualifying work-related education as a business expense, include the amount with your deduction for any other employee business expenses on Schedule A (Form 1040), line 21. Free 1040 ez (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later. Free 1040 ez ) This deduction (except for impairment-related work expenses of disabled individuals) is subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions. Free 1040 ez See chapter 28. Free 1040 ez Form 2106 or 2106-EZ. Free 1040 ez   To figure your deduction for employee business expenses, including qualifying work-related education, you generally must complete Form 2106 or Form 2106-EZ. Free 1040 ez Form not required. Free 1040 ez   Do not complete either Form 2106 or Form 2106-EZ if: If amounts included in box 1 of your Form W-2, are not considered reimbursements, and You are not claiming travel, transportation, meal, or entertainment expenses. Free 1040 ez   If you meet both of these requirements, enter the expenses directly on Schedule A (Form 1040), line 21. Free 1040 ez (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later. Free 1040 ez ) Using Form 2106-EZ. Free 1040 ez   This form is shorter and easier to use than Form 2106. Free 1040 ez Generally, you can use this form if: All reimbursements, if any, are included in box 1 of your Form W-2, and You are using the standard mileage rate if you are claiming vehicle expenses. Free 1040 ez   If you do not meet both of these requirements, use Form 2106. Free 1040 ez Performing Artists and Fee-Basis Officials If you are a qualified performing artist, or a state (or local) government official who is paid in whole or in part on a fee basis, you can deduct the cost of your qualifying work-related education as an adjustment to gross income rather than as an itemized deduction. Free 1040 ez Include the cost of your qualifying work-related education with any other employee business expenses on Form 1040, line 24. Free 1040 ez You do not have to itemize your deductions on Schedule A (Form 1040), and, therefore, the deduction is not subject to the 2%-of-adjusted-gross-income limit. Free 1040 ez You must complete Form 2106 or 2106-EZ to figure your deduction, even if you meet the requirements described earlier under Form not required . Free 1040 ez For more information on qualified performing artists, see chapter 6 of Publication 463. Free 1040 ez Impairment-Related Work Expenses If you are disabled and have impairment-related work expenses that are necessary for you to be able to get qualifying work-related education, you can deduct these expenses on Schedule A (Form 1040), line 28. Free 1040 ez They are not subject to the 2%-of-adjusted-gross-income limit. Free 1040 ez To deduct these expenses, you must complete Form 2106 or 2106-EZ even if you meet the requirements described earlier under Form not required . Free 1040 ez For more information on impairment-related work expenses, see chapter 6 of Publication 463. Free 1040 ez Recordkeeping You must keep records as proof of any deduction claimed on your tax return. Free 1040 ez Generally, you should keep your records for 3 years from the date of filing the tax return and claiming the deduction. Free 1040 ez For specific information about keeping records of business expenses, see Recordkeeping in chapter 26. Free 1040 ez Prev  Up  Next   Home   More Online Publications