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Free online state taxes 2. Free online state taxes   Accounting Periods and Methods Table of Contents Introduction Useful Items - You may want to see: Accounting Periods Accounting MethodsCash Method Accrual Method Combination Method Inventories Uniform Capitalization Rules Special Methods Change in Accounting Method Introduction You must figure your taxable income and file an income tax return for an annual accounting period called a tax year. Free online state taxes Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. Free online state taxes Useful Items - You may want to see: Publication 538 Accounting Periods and Methods See chapter 12 for information about getting publications and forms. Free online state taxes Accounting Periods When preparing a statement of income and expenses (generally your income tax return), you must use your books and records for a specific interval of time called an accounting period. Free online state taxes The annual accounting period for your income tax return is called a tax year. Free online state taxes You can use one of the following tax years. Free online state taxes A calendar tax year. Free online state taxes A fiscal tax year. Free online state taxes Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Free online state taxes A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Free online state taxes Calendar tax year. Free online state taxes   A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Free online state taxes   You must adopt the calendar tax year if any of the following apply. Free online state taxes You do not keep books. Free online state taxes You have no annual accounting period. Free online state taxes Your present tax year does not qualify as a fiscal year. Free online state taxes Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations. Free online state taxes   If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. Free online state taxes For more information, see Change in tax year, later. Free online state taxes   If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year. Free online state taxes Fiscal tax year. Free online state taxes   A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Free online state taxes A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Free online state taxes   If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. Free online state taxes   For more information on a fiscal tax year, including a 52-53-week tax year, see Publication 538. Free online state taxes Change in tax year. Free online state taxes   Generally, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. Free online state taxes See the Instructions for Form 1128 for exceptions. Free online state taxes If you qualify for an automatic approval request, a user fee is not required. Free online state taxes If you do not qualify for automatic approval, a ruling must be requested. Free online state taxes See the instructions for Form 1128 for information about user fees if you are requesting a ruling. Free online state taxes Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Free online state taxes Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item. Free online state taxes You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. Free online state taxes After that, if you want to change your accounting method, you must generally get IRS approval. Free online state taxes See Change in Accounting Method, later. Free online state taxes Kinds of methods. Free online state taxes   Generally, you can use any of the following accounting methods. Free online state taxes Cash method. Free online state taxes An accrual method. Free online state taxes Special methods of accounting for certain items of income and expenses. Free online state taxes Combination method using elements of two or more of the above. Free online state taxes You must use the same accounting method to figure your taxable income and to keep your books. Free online state taxes Also, you must use an accounting method that clearly shows your income. Free online state taxes Business and personal items. Free online state taxes   You can account for business and personal items under different accounting methods. Free online state taxes For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Free online state taxes Two or more businesses. Free online state taxes   If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. Free online state taxes They are separate and distinct only if you maintain complete and separate books and records for each business. Free online state taxes Cash Method Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. Free online state taxes However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. Free online state taxes For more information, see Inventories, later. Free online state taxes Income Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. Free online state taxes If you receive property or services, you must include their fair market value in income. Free online state taxes Example. Free online state taxes On December 30, 2012, Mrs. Free online state taxes Sycamore sent you a check for interior decorating services you provided to her. Free online state taxes You received the check on January 2, 2013. Free online state taxes You must include the amount of the check in income for 2013. Free online state taxes Constructive receipt. Free online state taxes   You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. Free online state taxes You do not need to have possession of it. Free online state taxes If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. Free online state taxes Example. Free online state taxes Interest is credited to your bank account in December 2013. Free online state taxes You do not withdraw it or enter it into your passbook until 2014. Free online state taxes You must include it in your gross income for 2013. Free online state taxes Delaying receipt of income. Free online state taxes   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Free online state taxes You must report the income in the year the property is received or made available to you without restriction. Free online state taxes Example. Free online state taxes Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2013. Free online state taxes She was told in December that her payment was available. Free online state taxes At her request, she was not paid until January 2014. Free online state taxes She must include this payment in her 2013 income because it was constructively received in 2013. Free online state taxes Checks. Free online state taxes   Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year. Free online state taxes Example. Free online state taxes Dr. Free online state taxes Redd received a check for $500 on December 31, 2013, from a patient. Free online state taxes She could not deposit the check in her business account until January 2, 2014. Free online state taxes She must include this fee in her income for 2013. Free online state taxes Debts paid by another person or canceled. Free online state taxes   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Free online state taxes If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Free online state taxes For more information, see Canceled Debt under Kinds of Income in chapter 5. Free online state taxes Repayment of income. Free online state taxes   If you include an amount in income and in a later year you have to repay all or part of it, you can usually deduct the repayment in the year in which you make it. Free online state taxes If the amount you repay is over $3,000, a special rule applies. Free online state taxes For details about the special rule, see Repayments in chapter 11 of Publication 535, Business Expenses. Free online state taxes Expenses Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. Free online state taxes This includes business expenses for which you contest liability. Free online state taxes However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Free online state taxes Expenses paid in advance. Free online state taxes   You can deduct an expense you pay in advance only in the year to which it applies. Free online state taxes Example. Free online state taxes You are a calendar year taxpayer and you pay $1,000 in 2013 for a business insurance policy effective for one year, beginning July 1. Free online state taxes You can deduct $500 in 2013 and $500 in 2014. Free online state taxes Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Free online state taxes The purpose of an accrual method of accounting is to match income and expenses in the correct year. Free online state taxes Income—General Rule Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. Free online state taxes Example. Free online state taxes You are a calendar year accrual method taxpayer. Free online state taxes You sold a computer on December 28, 2013. Free online state taxes You billed the customer in the first week of January 2014, but you did not receive payment until February 2014. Free online state taxes You must include the amount received for the computer in your 2013 income. Free online state taxes Income—Special Rules The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services. Free online state taxes Estimated income. Free online state taxes   If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination. Free online state taxes Change in payment schedule for services. Free online state taxes   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference. Free online state taxes Advance payments for services. Free online state taxes   Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. Free online state taxes However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. Free online state taxes However, you cannot postpone including any payment beyond that tax year. Free online state taxes   For more information, see Advance Payment for Services under Accrual Method in Publication 538. Free online state taxes That publication also explains special rules for reporting the following types of income. Free online state taxes Advance payments for service agreements. Free online state taxes Prepaid rent. Free online state taxes Advance payments for sales. Free online state taxes   Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. Free online state taxes If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. Free online state taxes An agreement includes a gift certificate that can be redeemed for goods. Free online state taxes Treat amounts that are due and payable as amounts you received. Free online state taxes   You generally include an advance payment in income for the tax year in which you receive it. Free online state taxes However, you can use an alternative method. Free online state taxes For information about the alternative method, see Publication 538. Free online state taxes Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Free online state taxes The all-events test has been met. Free online state taxes The test has been met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Free online state taxes Economic performance has occurred. Free online state taxes Economic performance. Free online state taxes   You generally cannot deduct or capitalize a business expense until economic performance occurs. Free online state taxes 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 as the property is used. Free online state taxes If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Free online state taxes An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Free online state taxes For more information on economic performance, see Economic Performance under Accrual Method in Publication 538. Free online state taxes Example. Free online state taxes You are a calendar year taxpayer and use an accrual method of accounting. Free online state taxes You buy office supplies in December 2013. Free online state taxes You receive the supplies and the bill in December, but you pay the bill in January 2014. Free online state taxes You can deduct the expense in 2013 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year. Free online state taxes Your office supplies may qualify as a recurring expense. Free online state taxes In that case, you can deduct them in 2013 even if the supplies are not delivered until 2014 (when economic performance occurs). Free online state taxes Keeping inventories. Free online state taxes   When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year. Free online state taxes If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. Free online state taxes For more information, see Inventories , later. Free online state taxes Special rule for related persons. Free online state taxes   You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person's gross income. Free online state taxes Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Free online state taxes If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. Free online state taxes   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Free online state taxes For a list of other related persons, see section 267 of the Internal Revenue Code. Free online state taxes Combination Method You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Free online state taxes However, the following restrictions apply. Free online state taxes If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. Free online state taxes (See, however, Inventories, later. Free online state taxes ) You can use the cash method for all other items of income and expenses. Free online state taxes If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Free online state taxes If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Free online state taxes If you use a combination method that includes the cash method, treat that combination method as the cash method. Free online state taxes Inventories Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. Free online state taxes However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Free online state taxes These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Free online state taxes A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Free online state taxes A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Free online state taxes Qualifying taxpayer. Free online state taxes   You are a qualifying taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 17, 1998, is $1 million or less. Free online state taxes (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing by 3. Free online state taxes ) Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code. Free online state taxes Qualifying small business taxpayer. Free online state taxes   You are a qualifying small business taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. Free online state taxes (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. Free online state taxes ) You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Free online state taxes Your principal business activity is an eligible business (described in Publication 538 and Revenue Procedure 2002-28). Free online state taxes Business not owned or not in existence for 3 years. Free online state taxes   If you did not own your business for all of the 3-tax-year period used in figuring your average annual gross receipts, include the period of any predecessor. Free online state taxes If your business has not been in existence for the 3-tax-year period, base your average on the period it has existed including any short tax years, annualizing the short tax year's gross receipts. Free online state taxes Materials and supplies that are not incidental. Free online state taxes   If you account for inventoriable items as materials and supplies that are not incidental, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later. Free online state taxes If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year. Free online state taxes Changing accounting method. Free online state taxes   If you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies, you must file Form 3115, Application for Change in Accounting Method. Free online state taxes See Change in Accounting Method, later. Free online state taxes More information. Free online state taxes    For more information about the qualifying taxpayer exception, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Free online state taxes For more information about the qualifying small business taxpayer exception, see Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Free online state taxes Items included in inventory. Free online state taxes   If you are required to account for inventories, include the following items when accounting for your inventory. Free online state taxes Merchandise or stock in trade. Free online state taxes Raw materials. Free online state taxes Work in process. Free online state taxes Finished products. Free online state taxes Supplies that physically become a part of the item intended for sale. Free online state taxes Valuing inventory. Free online state taxes   You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). Free online state taxes To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items. Free online state taxes   Inventory valuation rules cannot be the same for all kinds of businesses. Free online state taxes The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Free online state taxes Your inventory practices must be consistent from year to year. Free online state taxes More information. Free online state taxes   For more information about inventories, see Publication 538. Free online state taxes Uniform Capitalization Rules Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. Free online state taxes Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Free online state taxes You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Free online state taxes Activities subject to the uniform capitalization rules. Free online state taxes   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. Free online state taxes Produce real or tangible personal property. Free online state taxes For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Free online state taxes Acquire property for resale. Free online state taxes Exceptions. Free online state taxes   These rules do not apply to the following property. Free online state taxes Personal property you acquire for resale if your average annual gross receipts are $10 million or less. Free online state taxes Property you produce if you meet either of the following conditions. Free online state taxes Your indirect costs of producing the property are $200,000 or less. Free online state taxes You use the cash method of accounting and do not account for inventories. Free online state taxes For more information, see Inventories, earlier. Free online state taxes Special Methods There are special methods of accounting for certain items of income or expense. Free online state taxes These include the following. Free online state taxes Amortization, discussed in chapter 8 of Publication 535, Business Expenses. Free online state taxes Bad debts, discussed in chapter 10 of Publication 535. Free online state taxes Depletion, discussed in chapter 9 of Publication 535. Free online state taxes Depreciation, discussed in Publication 946, How To Depreciate Property. Free online state taxes Installment sales, discussed in Publication 537, Installment Sales. Free online state taxes Change in Accounting Method Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Free online state taxes A change in your accounting method includes a change in: Your overall method, such as from cash to an accrual method, and Your treatment of any material item. Free online state taxes To get approval, you must file Form 3115, Application for Change in Accounting Method. Free online state taxes You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. Free online state taxes You may have to pay a user fee. Free online state taxes For more information, see the form instructions. Free online state taxes Automatic change procedures. Free online state taxes   Certain taxpayers can presume to have IRS approval to change their method of accounting. Free online state taxes The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. Free online state taxes No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9. Free online state taxes   Generally, you must use Form 3115 to request an automatic change. Free online state taxes For more information, see the Instructions for Form 3115. Free online state taxes Prev  Up  Next   Home   More Online Publications
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The Free Online State Taxes

Free online state taxes 2. Free online state taxes   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. Free online state taxes 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. Free online state taxes Deduction may depend on your type of business. Free online state taxes Exception for events that benefit charitable organizations. Free online state taxes Food and beverages in skybox seats. Free online state taxes What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. Free online state taxes You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. Free online state taxes The rules and definitions are summarized in Table 2-1 . Free online state taxes You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. Free online state taxes Directly-related test. Free online state taxes Associated test. Free online state taxes Both of these tests are explained later. Free online state taxes An ordinary expense is one that is common and accepted in your trade or business. Free online state taxes A necessary expense is one that is helpful and appropriate for your business. Free online state taxes An expense does not have to be required to be considered necessary. Free online state taxes The amount you can deduct for entertainment expenses may be limited. Free online state taxes Generally, you can deduct only 50% of your unreimbursed entertainment expenses. Free online state taxes This limit is discussed later under 50% Limit. Free online state taxes Directly-Related Test To meet the directly-related test for entertainment expenses (including entertainment-related meals), you must show that: The main purpose of the combined business and entertainment was the active conduct of business, You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit at some future time. Free online state taxes Business is generally not considered to be the main purpose when business and entertainment are combined on hunting or fishing trips, or on yachts or other pleasure boats. Free online state taxes Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. Free online state taxes See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. Free online state taxes You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. Free online state taxes It is not necessary to devote more time to business than to entertainment. Free online state taxes However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. Free online state taxes Table 2-1. Free online state taxes When Are Entertainment Expenses Deductible? General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Free online state taxes Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Free online state taxes An ordinary expense is one that is common and accepted in your trade or business. Free online state taxes A necessary expense is one that is helpful and appropriate. Free online state taxes Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. Free online state taxes   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. Free online state taxes Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Free online state taxes You cannot deduct expenses that are lavish or extravagant under the circumstances. Free online state taxes You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). Free online state taxes You do not have to show that business income or other business benefit actually resulted from each entertainment expense. Free online state taxes Clear business setting. Free online state taxes   If the entertainment takes place in a clear business setting and is for your business or work, the expenses are considered directly related to your business or work. Free online state taxes The following situations are examples of entertainment in a clear business setting. Free online state taxes Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. Free online state taxes Entertainment that is mainly a price rebate on the sale of your products (such as a restaurant owner providing an occasional free meal to a loyal customer). Free online state taxes Entertainment of a clear business nature occurring under circumstances where there is no meaningful personal or social relationship between you and the persons entertained. Free online state taxes An example is entertainment of business and civic leaders at the opening of a new hotel or play when the purpose is to get business publicity rather than to create or maintain the goodwill of the persons entertained. Free online state taxes Expenses not considered directly related. Free online state taxes   Entertainment expenses generally are not considered directly related if you are not there or in situations where there are substantial distractions that generally prevent you from actively conducting business. Free online state taxes The following are examples of situations where there are substantial distractions. Free online state taxes A meeting or discussion at a nightclub, theater, or sporting event. Free online state taxes A meeting or discussion during what is essentially a social gathering, such as a cocktail party. Free online state taxes A meeting with a group that includes persons who are not business associates at places such as cocktail lounges, country clubs, golf clubs, athletic clubs, or vacation resorts. Free online state taxes Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. Free online state taxes To meet the associated test for entertainment expenses (including entertainment-related meals), you must show that the entertainment is: Associated with the active conduct of your trade or business, and Directly before or after a substantial business discussion (defined later). Free online state taxes Associated with trade or business. Free online state taxes   Generally, an expense is associated with the active conduct of your trade or business if you can show that you had a clear business purpose for having the expense. Free online state taxes The purpose may be to get new business or to encourage the continuation of an existing business relationship. Free online state taxes Substantial business discussion. Free online state taxes   Whether a business discussion is substantial depends on the facts of each case. Free online state taxes A business discussion will not be considered substantial unless you can show that you actively engaged in the discussion, meeting, negotiation, or other business transaction to get income or some other specific business benefit. Free online state taxes   The meeting does not have to be for any specified length of time, but you must show that the business discussion was substantial in relation to the meal or entertainment. Free online state taxes It is not necessary that you devote more time to business than to entertainment. Free online state taxes You do not have to discuss business during the meal or entertainment. Free online state taxes Meetings at conventions. Free online state taxes   You are considered to have a substantial business discussion if you attend meetings at a convention or similar event, or at a trade or business meeting sponsored and conducted by a business or professional organization. Free online state taxes However, your reason for attending the convention or meeting must be to further your trade or business. Free online state taxes The organization that sponsors the convention or meeting must schedule a program of business activities that is the main activity of the convention or meeting. Free online state taxes Directly before or after business discussion. Free online state taxes   If the entertainment is held on the same day as the business discussion, it is considered to be held directly before or after the business discussion. Free online state taxes   If the entertainment and the business discussion are not held on the same day, you must consider the facts of each case to see if the associated test is met. Free online state taxes Among the facts to consider are the place, date, and duration of the business discussion. Free online state taxes If you or your business associates are from out of town, you must also consider the dates of arrival and departure, and the reasons the entertainment and the discussion did not take place on the same day. Free online state taxes Example. Free online state taxes A group of business associates comes from out of town to your place of business to hold a substantial business discussion. Free online state taxes If you entertain those business guests on the evening before the business discussion, or on the evening of the day following the business discussion, the entertainment generally is considered to be held directly before or after the discussion. Free online state taxes The expense meets the associated test. Free online state taxes 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. Free online state taxes (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct 80% of your business-related meal and entertainment expenses. Free online state taxes See Individuals subject to “hours of service” limits , later. Free online state taxes ) The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed. Free online state taxes Figure A summarizes the general rules explained in this section. Free online state taxes The 50% limit applies to business meals or entertainment expenses you have while: Traveling away from home (whether eating alone or with others) on business, Entertaining customers at your place of business, a restaurant, or other location, or Attending a business convention or reception, business meeting, or business luncheon at a club. Free online state taxes Included expenses. Free online state taxes   Expenses subject to the 50% limit include: Taxes and tips relating to a business meal or entertainment activity, Cover charges for admission to a nightclub, Rent paid for a room in which you hold a dinner or cocktail party, and Amounts paid for parking at a sports arena. Free online state taxes However, the cost of transportation to and from a business meal or a business-related entertainment activity is not subject to the 50% limit. Free online state taxes Figure A. Free online state taxes Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. Free online state taxes See Exceptions to the 50% Limit . Free online state taxes Please click here for the text description of the image. Free online state taxes Figure A. Free online state taxes Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. Free online state taxes   The 50% limit on meal and entertainment expenses applies if the expense is otherwise deductible and is not covered by one of the exceptions discussed later. Free online state taxes   The 50% limit also applies to certain meal and entertainment expenses that are not business related. Free online state taxes It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. Free online state taxes It also applies to the cost of meals included in deductible educational expenses. Free online state taxes When to apply the 50% limit. Free online state taxes   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. Free online state taxes You first have to determine the amount of meal and entertainment expenses that would be deductible under the other rules discussed in this publication. Free online state taxes Example 1. Free online state taxes You spend $200 for a business-related meal. Free online state taxes If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. Free online state taxes Your deduction cannot be more than $45 (50% × $90). Free online state taxes Example 2. Free online state taxes You purchase two tickets to a concert and give them to a client. Free online state taxes You purchased the tickets through a ticket agent. Free online state taxes You paid $200 for the two tickets, which had a face value of $80 each ($160 total). Free online state taxes Your deduction cannot be more than $80 (50% × $160). Free online state taxes Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. Free online state taxes Figure A can help you determine if the 50% limit applies to you. Free online state taxes Expenses not subject to 50% limit. Free online state taxes   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. Free online state taxes 1 - Employee's reimbursed expenses. Free online state taxes   If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. Free online state taxes Accountable plans are discussed in chapter 6. Free online state taxes 2 - Self-employed. Free online state taxes   If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met. Free online state taxes You have these expenses as an independent contractor. Free online state taxes Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. Free online state taxes You provide adequate records of these expenses to your customer or client. Free online state taxes (See chapter 5 . Free online state taxes )   In this case, your client or customer is subject to the 50% limit on the expenses. Free online state taxes Example. Free online state taxes You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. Free online state taxes You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. Free online state taxes If the client can deduct the expenses, the client is subject to the 50% limit. Free online state taxes If you (as an independent contractor) have expenses for meals and entertainment related to providing services for a client but do not adequately account for and seek reimbursement from the client for those expenses, you are subject to the directly-related or associated test and to the 50% limit. Free online state taxes 3 - Advertising expenses. Free online state taxes   You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Free online state taxes For example, neither the expense of sponsoring a television or radio show nor the expense of distributing free food and beverages to the general public is subject to the 50% limit. Free online state taxes 4 - Sale of meals or entertainment. Free online state taxes   You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. Free online state taxes For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit. Free online state taxes 5 - Charitable sports event. Free online state taxes   You are not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event. Free online state taxes For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. Free online state taxes Individuals subject to “hours of service” limits. Free online state taxes   You can deduct a higher percentage of your meal expenses while traveling away from your tax home if the meals take place during or incident to any period subject to the Department of Transportation's “hours of service” limits. Free online state taxes The percentage is 80%. Free online state taxes   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. Free online state taxes Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. Free online state taxes Interstate truck operators and bus drivers who are under Department of Transportation regulations. Free online state taxes Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. Free online state taxes Certain merchant mariners who are under Coast Guard regulations. Free online state taxes What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. Free online state taxes Entertainment. Free online state taxes   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Free online state taxes Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. Free online state taxes   Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. Free online state taxes A meal as a form of entertainment. Free online state taxes   Entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself. Free online state taxes A meal expense includes the cost of food, beverages, taxes, and tips for the meal. Free online state taxes To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. Free online state taxes    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. Free online state taxes    Meals sold in the normal course of your business are not considered entertainment. Free online state taxes Deduction may depend on your type of business. Free online state taxes   Your kind of business may determine if a particular activity is considered entertainment. Free online state taxes For example, if you are a dress designer and have a fashion show to introduce your new designs to store buyers, the show generally is not considered entertainment. Free online state taxes This is because fashion shows are typical in your business. Free online state taxes But, if you are an appliance distributor and hold a fashion show for the spouses of your retailers, the show generally is considered entertainment. Free online state taxes Separating costs. Free online state taxes   If you have one expense that includes the costs of entertainment and other services (such as lodging or transportation), you must allocate that expense between the cost of entertainment and the cost of other services. Free online state taxes You must have a reasonable basis for making this allocation. Free online state taxes For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. Free online state taxes Taking turns paying for meals or entertainment. Free online state taxes   If a group of business acquaintances takes turns picking up each others' meal or entertainment checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense. Free online state taxes Lavish or extravagant expenses. Free online state taxes   You cannot deduct expenses for entertainment that are lavish or extravagant. Free online state taxes An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Free online state taxes Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Free online state taxes Allocating between business and nonbusiness. Free online state taxes   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. Free online state taxes You can deduct only the business part. Free online state taxes If you cannot establish the part of the expense for each person participating, allocate the expense to each participant on a pro rata basis. Free online state taxes Example. Free online state taxes You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. Free online state taxes Only 4/11 of the expense qualifies as a business entertainment expense. Free online state taxes You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. Free online state taxes Trade association meetings. Free online state taxes   You can deduct entertainment expenses that are directly related to and necessary for attending business meetings or conventions of certain exempt organizations if the expenses of your attendance are related to your active trade or business. Free online state taxes These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. Free online state taxes Entertainment tickets. Free online state taxes   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. Free online state taxes For example, you cannot deduct service fees you pay to ticket agencies or brokers or any amount over the face value of the tickets you pay to scalpers. Free online state taxes Exception for events that benefit charitable organizations. Free online state taxes   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. Free online state taxes You can take into account the full cost you pay for the ticket, even if it is more than the face value, if all of the following conditions apply. Free online state taxes The event's main purpose is to benefit a qualified charitable organization. Free online state taxes The entire net proceeds go to the charity. Free online state taxes The event uses volunteers to perform substantially all the event's work. Free online state taxes    The 50% limit on entertainment does not apply to any expense for a package deal that includes a ticket to such a charitable sports event. Free online state taxes Example 1. Free online state taxes You purchase tickets to a golf tournament organized by the local volunteer fire company. Free online state taxes All net proceeds will be used to buy new fire equipment. Free online state taxes The volunteers will run the tournament. Free online state taxes You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. Free online state taxes Example 2. Free online state taxes You purchase tickets to a college football game through a ticket broker. Free online state taxes After having a business discussion, you take a client to the game. Free online state taxes Net proceeds from the game go to colleges that qualify as charitable organizations. Free online state taxes However, since the colleges also pay individuals to perform services, such as coaching and recruiting, you can only use the face value of the tickets in determining your business deduction. Free online state taxes Skyboxes and other private luxury boxes. Free online state taxes   If you rent a skybox or other private luxury box for more than one event at the same sports arena, you generally cannot deduct more than the price of a nonluxury box seat ticket. Free online state taxes   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. Free online state taxes For example, renting a skybox for a series of playoff games is considered renting it for more than one event. Free online state taxes All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. Free online state taxes   Related parties include: Family members (spouses, ancestors, and lineal descendants), Parties who have made a reciprocal arrangement involving the sharing of skyboxes, Related corporations, A partnership and its principal partners, and A corporation and a partnership with common ownership. Free online state taxes Example. Free online state taxes You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. Free online state taxes The cost of regular nonluxury box seats at each event is $30 a seat. Free online state taxes You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). Free online state taxes Food and beverages in skybox seats. Free online state taxes   If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. Free online state taxes The amounts separately stated for food and beverages must be reasonable. Free online state taxes You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. Free online state taxes What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. Free online state taxes Club dues and membership fees. Free online state taxes   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. Free online state taxes This rule applies to any membership organization if one of its principal purposes is either: To conduct entertainment activities for members or their guests, or To provide members or their guests with access to entertainment facilities, discussed later. Free online state taxes   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. Free online state taxes You cannot deduct dues paid to: Country clubs, Golf and athletic clubs, Airline clubs, Hotel clubs, and Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Free online state taxes Entertainment facilities. Free online state taxes   Generally, you cannot deduct any expense for the use of an entertainment facility. Free online state taxes This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. Free online state taxes   An entertainment facility is any property you own, rent, or use for entertainment. Free online state taxes Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. Free online state taxes Out-of-pocket expenses. Free online state taxes   You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. Free online state taxes These are not expenses for the use of an entertainment facility. Free online state taxes However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. Free online state taxes Expenses for spouses. Free online state taxes   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. Free online state taxes However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose, for providing the entertainment. Free online state taxes Example. Free online state taxes You entertain a customer. Free online state taxes The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. Free online state taxes The customer's spouse joins you because it is impractical to entertain the customer without the spouse. Free online state taxes You can deduct the cost of entertaining the customer's spouse. Free online state taxes If your spouse joins the party because the customer's spouse is present, the cost of the entertainment for your spouse is also deductible. Free online state taxes Gift or entertainment. Free online state taxes   Any item that might be considered either a gift or entertainment generally will be considered entertainment. Free online state taxes However, if you give a customer packaged food or beverages that you intend the customer to use at a later date, treat it as a gift. Free online state taxes   If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, you have a choice. Free online state taxes You can treat the tickets as either a gift or entertainment, whichever is to your advantage. Free online state taxes   You can change your treatment of the tickets at a later date by filing an amended return. Free online state taxes Generally, an amended return must be filed within 3 years from the date the original return was filed or within 2 years from the time the tax was paid, whichever is later. Free online state taxes   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. Free online state taxes You cannot choose, in this case, to treat the tickets as a gift. Free online state taxes Prev  Up  Next   Home   More Online Publications