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Free tax preparation software 5. Free tax preparation software   Personal Use of Dwelling Unit (Including Vacation Home) Table of Contents Dividing Expenses Dwelling Unit Used as a HomeMain home. Free tax preparation software Shared equity financing agreement. Free tax preparation software Donation of use of the property. Free tax preparation software Examples. Free tax preparation software Days used for repairs and maintenance. Free tax preparation software Days used as a main home before or after renting. Free tax preparation software Reporting Income and DeductionsNot used as a home. Free tax preparation software Used as a home but rented less than 15 days. Free tax preparation software Used as a home and rented 15 days or more. Free tax preparation software If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Free tax preparation software In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Free tax preparation software Only your rental expenses may deducted on Schedule E (Form 1040). Free tax preparation software Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Free tax preparation software You must also determine if the dwelling unit is considered a home. Free tax preparation software The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Free tax preparation software Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Free tax preparation software There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. Free tax preparation software Dwelling unit. Free tax preparation software   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Free tax preparation software It also includes all structures or other property belonging to the dwelling unit. Free tax preparation software A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Free tax preparation software   A dwelling unit does not include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment. Free tax preparation software Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. Free tax preparation software Example. Free tax preparation software You rent a room in your home that is always available for short-term occupancy by paying customers. Free tax preparation software You do not use the room yourself and you allow only paying customers to use the room. Free tax preparation software This room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Free tax preparation software Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Free tax preparation software When dividing your expenses, follow these rules. Free tax preparation software Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. Free tax preparation software (This rule does not apply when determining whether you used the unit as a home. Free tax preparation software ) Any day that the unit is available for rent but not actually rented is not a day of rental use. Free tax preparation software Fair rental price. Free tax preparation software   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. Free tax preparation software The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. Free tax preparation software   Ask yourself the following questions when comparing another property with yours. Free tax preparation software Is it used for the same purpose? Is it approximately the same size? Is it in approximately the same condition? Does it have similar furnishings? Is it in a similar location? If any of the answers are no, the properties probably are not similar. Free tax preparation software Example. Free tax preparation software Your beach cottage was available for rent from June 1 through August 31 (92 days). Free tax preparation software Except for the first week in August (7 days), when you were unable to find a renter, you rented the cottage at a fair rental price during that time. Free tax preparation software The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Free tax preparation software Your family also used the cottage during the last 2 weeks of May (14 days). Free tax preparation software The cottage was not used at all before May 17 or after August 31. Free tax preparation software You figure the part of the cottage expenses to treat as rental expenses as follows. Free tax preparation software The cottage was used for rental a total of 85 days (92 − 7). Free tax preparation software The days it was available for rent but not rented (7 days) are not days of rental use. Free tax preparation software The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Free tax preparation software You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Free tax preparation software The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Free tax preparation software Your rental expenses are 85/99 (86%) of the cottage expenses. Free tax preparation software Note. Free tax preparation software When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Free tax preparation software Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Free tax preparation software Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. Free tax preparation software If you have a net loss, you may not be able to deduct all of the rental expenses. Free tax preparation software See Dwelling Unit Used as a Home, next. Free tax preparation software Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. Free tax preparation software You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. Free tax preparation software See What is a day of personal use , later. Free tax preparation software If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price (discussed earlier), do not count that day as a day of rental use in applying (2) above. Free tax preparation software Instead, count it as a day of personal use in applying both (1) and (2) above. Free tax preparation software What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. Free tax preparation software You or any other person who owns an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). Free tax preparation software However, see Days used as a main home before or after renting , later. Free tax preparation software A member of your family or a member of the family of any other person who owns an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Free tax preparation software Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Free tax preparation software ), and lineal descendants (children, grandchildren, etc. Free tax preparation software ). Free tax preparation software Anyone under an arrangement that lets you use some other dwelling unit. Free tax preparation software Anyone at less than a fair rental price. Free tax preparation software Main home. Free tax preparation software   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. Free tax preparation software Shared equity financing agreement. Free tax preparation software   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. Free tax preparation software Donation of use of the property. Free tax preparation software   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Free tax preparation software Examples. Free tax preparation software   The following examples show how to determine if you have days of personal use. Free tax preparation software Example 1. Free tax preparation software You and your neighbor are co-owners of a condominium at the beach. Free tax preparation software Last year, you rented the unit to vacationers whenever possible. Free tax preparation software The unit was not used as a main home by anyone. Free tax preparation software Your neighbor used the unit for 2 weeks last year; you did not use it at all. Free tax preparation software Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. Free tax preparation software Example 2. Free tax preparation software You and your neighbors are co-owners of a house under a shared equity financing agreement. Free tax preparation software Your neighbors live in the house and pay you a fair rental price. Free tax preparation software Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. Free tax preparation software This is because your neighbors rent the house as their main home under a shared equity financing agreement. Free tax preparation software Example 3. Free tax preparation software You own a rental property that you rent to your son. Free tax preparation software Your son does not own any interest in this property. Free tax preparation software He uses it as his main home and pays you a fair rental price. Free tax preparation software Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Free tax preparation software Example 4. Free tax preparation software You rent your beach house to Rosa. Free tax preparation software Rosa rents her cabin in the mountains to you. Free tax preparation software You each pay a fair rental price. Free tax preparation software You are using your beach house for personal purposes on the days that Rosa uses it because your house is used by Rosa under an arrangement that allows you to use her cabin. Free tax preparation software Example 5. Free tax preparation software You rent an apartment to your mother at less than a fair rental price. Free tax preparation software You are using the apartment for personal purposes on the days that your mother rents it because you rent it for less than a fair rental price. Free tax preparation software Days used for repairs and maintenance. Free tax preparation software   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Free tax preparation software Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. Free tax preparation software Example. Free tax preparation software Corey owns a cabin in the mountains that he rents for most of the year. Free tax preparation software He spends a week at the cabin with family members. Free tax preparation software Corey works on maintenance of the cabin 3 or 4 hours each day during the week and spends the rest of the time fishing, hiking, and relaxing. Free tax preparation software Corey's family members, however, work substantially full time on the cabin each day during the week. Free tax preparation software The main purpose of being at the cabin that week is to do maintenance work. Free tax preparation software Therefore, the use of the cabin during the week by Corey and his family will not be considered personal use by Corey. Free tax preparation software Days used as a main home before or after renting. Free tax preparation software   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Free tax preparation software Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Free tax preparation software You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. Free tax preparation software However, this special rule does not apply when dividing expenses between rental and personal use. Free tax preparation software See Property Changed to Rental Use in chapter 4. Free tax preparation software Example 1. Free tax preparation software On February 29, 2012, you moved out of the house you had lived in for 6 years because you accepted a job in another town. Free tax preparation software You rented your house at a fair rental price from March 15, 2012, to May 14, 2013 (14 months). Free tax preparation software On June 1, 2013, you moved back into your old house. Free tax preparation software The days you used the house as your main home from January 1 to February 29, 2012, and from June 1 to December 31, 2013, are not counted as days of personal use. Free tax preparation software Therefore, you would use the rules in chapter 1 when figuring your rental income and expenses. Free tax preparation software Example 2. Free tax preparation software On January 31, you moved out of the condominium where you had lived for 3 years. Free tax preparation software You offered it for rent at a fair rental price beginning on February 1. Free tax preparation software You were unable to rent it until April. Free tax preparation software On September 15, you sold the condominium. Free tax preparation software The days you used the condominium as your main home from January 1 to January 31 are not counted as days of personal use when determining whether you used it as a home. Free tax preparation software Examples. Free tax preparation software   The following examples show how to determine whether you used your rental property as a home. Free tax preparation software Example 1. Free tax preparation software You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Free tax preparation software You rented the basement apartment at a fair rental price to college students during the regular school year. Free tax preparation software You rented to them on a 9-month lease (273 days). Free tax preparation software You figured 10% of the total days rented to others at a fair rental price is 27 days. Free tax preparation software During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Free tax preparation software Your basement apartment was used as a home because you used it for personal purposes for 30 days. Free tax preparation software Rent-free use by your brothers is considered personal use. Free tax preparation software Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Free tax preparation software Example 2. Free tax preparation software You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Free tax preparation software Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Free tax preparation software You figured 10% of the total days rented to others at a fair rental price is 3 days. Free tax preparation software The room was used as a home because you used it for personal purposes for 21 days. Free tax preparation software That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Free tax preparation software Example 3. Free tax preparation software You own a condominium apartment in a resort area. Free tax preparation software You rented it at a fair rental price for a total of 170 days during the year. Free tax preparation software For 12 of these days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Free tax preparation software Your family actually used the apartment for 10 of those days. Free tax preparation software Therefore, the apartment is treated as having been rented for 160 (170 – 10) days. Free tax preparation software You figured 10% of the total days rented to others at a fair rental price is 16 days. Free tax preparation software Your family also used the apartment for 7 other days during the year. Free tax preparation software You used the apartment as a home because you used it for personal purposes for 17 days. Free tax preparation software That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Free tax preparation software Minimal rental use. Free tax preparation software   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Free tax preparation software See Used as a home but rented less than 15 days, later, for more information. Free tax preparation software Limit on deductions. Free tax preparation software   Renting a dwelling unit that is considered a home is not a passive activity. Free tax preparation software Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Free tax preparation software The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Free tax preparation software Any expenses carried forward to the next year will be subject to any limits that apply for that year. Free tax preparation software This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Free tax preparation software   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 5–1. Free tax preparation software Reporting Income and Deductions Property not used for personal purposes. Free tax preparation software   If you do not use a dwelling unit for personal purposes, see chapter 3 for how to report your rental income and expenses. Free tax preparation software Property used for personal purposes. Free tax preparation software   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Free tax preparation software Not used as a home. Free tax preparation software   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Free tax preparation software Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in this chapter under Dividing Expenses . Free tax preparation software The expenses for personal use are not deductible as rental expenses. Free tax preparation software   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses in chapter 3. Free tax preparation software Used as a home but rented less than 15 days. Free tax preparation software   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Free tax preparation software You are not required to report the rental income and rental expenses from this activity. Free tax preparation software The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Free tax preparation software See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Free tax preparation software Used as a home and rented 15 days or more. Free tax preparation software   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Free tax preparation software Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in this chapter under Dividing Expenses . Free tax preparation software The expenses for personal use are not deductible as rental expenses. Free tax preparation software   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. Free tax preparation software You do not need to use Worksheet 5-1. Free tax preparation software   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Free tax preparation software To figure your deductible rental expenses and any carryover to next year, use Worksheet 5–1. Free tax preparation software Worksheet 5-1. Free tax preparation software Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Free tax preparation software Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Free tax preparation software ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Free tax preparation software Rental Use Percentage A. Free tax preparation software Total days available for rent at fair rental price A. Free tax preparation software       B. Free tax preparation software Total days available for rent (line A) but not rented B. Free tax preparation software       C. Free tax preparation software Total days of rental use. Free tax preparation software Subtract line B from line A C. Free tax preparation software       D. Free tax preparation software Total days of personal use (including days rented at less than fair rental price) D. Free tax preparation software       E. Free tax preparation software Total days of rental and personal use. Free tax preparation software Add lines C and D E. Free tax preparation software       F. Free tax preparation software Percentage of expenses allowed for rental. Free tax preparation software Divide line C by line E     F. Free tax preparation software . Free tax preparation software PART II. Free tax preparation software Allowable Rental Expenses 1. Free tax preparation software Enter rents received 1. Free tax preparation software   2a. Free tax preparation software Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Free tax preparation software       b. Free tax preparation software Enter the rental portion of real estate taxes b. Free tax preparation software       c. Free tax preparation software Enter the rental portion of deductible casualty and theft losses (see instructions) c. Free tax preparation software       d. Free tax preparation software Enter direct rental expenses (see instructions) d. Free tax preparation software       e. Free tax preparation software Fully deductible rental expenses. Free tax preparation software Add lines 2a–2d. Free tax preparation software Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Free tax preparation software   3. Free tax preparation software Subtract line 2e from line 1. Free tax preparation software If zero or less, enter -0- 3. Free tax preparation software   4a. Free tax preparation software Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Free tax preparation software       b. Free tax preparation software Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Free tax preparation software       c. Free tax preparation software Carryover of operating expenses from 2012 worksheet c. Free tax preparation software       d. Free tax preparation software Add lines 4a–4c d. Free tax preparation software       e. Free tax preparation software Allowable expenses. Free tax preparation software Enter the smaller of line 3 or line 4d (see instructions) 4e. Free tax preparation software   5. Free tax preparation software Subtract line 4e from line 3. Free tax preparation software If zero or less, enter -0- 5. Free tax preparation software   6a. Free tax preparation software Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Free tax preparation software       b. Free tax preparation software Enter the rental portion of depreciation of the dwelling unit b. Free tax preparation software       c. Free tax preparation software Carryover of excess casualty losses and depreciation from 2012 worksheet c. Free tax preparation software       d. Free tax preparation software Add lines 6a–6c d. Free tax preparation software       e. Free tax preparation software Allowable excess casualty and theft losses and depreciation. Free tax preparation software Enter the smaller of  line 5 or line 6d (see instructions) 6e. Free tax preparation software   PART III. Free tax preparation software Carryover of Unallowed Expenses to Next Year 7a. Free tax preparation software Operating expenses to be carried over to next year. Free tax preparation software Subtract line 4e from line 4d 7a. Free tax preparation software   b. Free tax preparation software Excess casualty and theft losses and depreciation to be carried over to next year. Free tax preparation software  Subtract line 6e from line 6d b. Free tax preparation software   Worksheet 5-1 Instructions. Free tax preparation software Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Free tax preparation software Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. Free tax preparation software Line 2a. Free tax preparation software Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Free tax preparation software Do not include interest on a loan that did not benefit the dwelling unit. Free tax preparation software For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Free tax preparation software Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Free tax preparation software Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Free tax preparation software   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Free tax preparation software See the Schedule A instructions. Free tax preparation software However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Free tax preparation software See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Free tax preparation software Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Free tax preparation software   Note. Free tax preparation software Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Free tax preparation software Instead, figure the personal portion on a separate Schedule A. Free tax preparation software If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Free tax preparation software           Line 2c. Free tax preparation software Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. Free tax preparation software To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Free tax preparation software If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Free tax preparation software On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Free tax preparation software Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Free tax preparation software   Note. Free tax preparation software Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Free tax preparation software Instead, figure the personal portion on a separate Form 4684. Free tax preparation software           Line 2d. Free tax preparation software Enter the total of your rental expenses that are directly related only to the rental activity. Free tax preparation software These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Free tax preparation software Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Free tax preparation software           Line 2e. Free tax preparation software You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Free tax preparation software Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Free tax preparation software           Line 4b. Free tax preparation software On line 2a, you entered the rental portion of the mortgage interest or qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Free tax preparation software If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Free tax preparation software Do not include interest on a loan that did not benefit the dwelling unit  (as explained in the line 2a instructions). Free tax preparation software           Line 4e. Free tax preparation software You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. Free tax preparation software *           Line 6a. Free tax preparation software To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Free tax preparation software   A. Free tax preparation software Enter the amount from Form 4684, line 10       B. Free tax preparation software Enter the rental portion of line A       C. Free tax preparation software Enter the amount from line 2c of this worksheet       D. Free tax preparation software Subtract line C from line B. Free tax preparation software Enter the result here and on line 6a of this worksheet               Line 6e. Free tax preparation software You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. Free tax preparation software * *Allocating the limited deduction. Free tax preparation software If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Free tax preparation software Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Free tax preparation software Prev  Up  Next   Home   More Online Publications
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Free tax preparation software 2. Free tax preparation software   Entertainment Table of Contents Directly-Related Test Associated TestMeetings at conventions. Free tax preparation software 50% LimitExceptions to the 50% Limit What Entertainment Expenses Are Deductible?A meal as a form of entertainment. Free tax preparation software Deduction may depend on your type of business. Free tax preparation software Exception for events that benefit charitable organizations. Free tax preparation software Food and beverages in skybox seats. Free tax preparation software What Entertainment Expenses Are Not Deductible?Out-of-pocket expenses. Free tax preparation software You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee. Free tax preparation software The rules and definitions are summarized in Table 2-1 . Free tax preparation software You can deduct entertainment expenses only if they are both ordinary and necessary and meet one of the following tests. Free tax preparation software Directly-related test. Free tax preparation software Associated test. Free tax preparation software Both of these tests are explained later. Free tax preparation software An ordinary expense is one that is common and accepted in your trade or business. Free tax preparation software A necessary expense is one that is helpful and appropriate for your business. Free tax preparation software An expense does not have to be required to be considered necessary. Free tax preparation software The amount you can deduct for entertainment expenses may be limited. Free tax preparation software Generally, you can deduct only 50% of your unreimbursed entertainment expenses. Free tax preparation software This limit is discussed later under 50% Limit. Free tax preparation software 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 tax preparation software 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 tax preparation software Even if you show that business was the main purpose, you generally cannot deduct the expenses for the use of an entertainment facility. Free tax preparation software See Entertainment facilities under What Entertainment Expenses Are Not Deductible? later in this chapter. Free tax preparation software You must consider all the facts, including the nature of the business transacted and the reasons for conducting business during the entertainment. Free tax preparation software It is not necessary to devote more time to business than to entertainment. Free tax preparation software However, if the business discussion is only incidental to the entertainment, the entertainment expenses do not meet the directly-related test. Free tax preparation software Table 2-1. Free tax preparation software 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 tax preparation software Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Free tax preparation software An ordinary expense is one that is common and accepted in your trade or business. Free tax preparation software A necessary expense is one that is helpful and appropriate. Free tax preparation software 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 tax preparation software   Associated test Entertainment is associated with your trade or business, and Entertainment is directly before or after a substantial business discussion. Free tax preparation software 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 tax preparation software You cannot deduct expenses that are lavish or extravagant under the circumstances. Free tax preparation software You generally can deduct only 50% of your unreimbursed entertainment expenses (see 50% Limit ). Free tax preparation software You do not have to show that business income or other business benefit actually resulted from each entertainment expense. Free tax preparation software Clear business setting. Free tax preparation software   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 tax preparation software The following situations are examples of entertainment in a clear business setting. Free tax preparation software Entertainment in a hospitality room at a convention where business goodwill is created through the display or discussion of business products. Free tax preparation software 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 tax preparation software 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 tax preparation software 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 tax preparation software Expenses not considered directly related. Free tax preparation software   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 tax preparation software The following are examples of situations where there are substantial distractions. Free tax preparation software A meeting or discussion at a nightclub, theater, or sporting event. Free tax preparation software A meeting or discussion during what is essentially a social gathering, such as a cocktail party. Free tax preparation software 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 tax preparation software Associated Test Even if your expenses do not meet the directly-related test, they may meet the associated test. Free tax preparation software 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 tax preparation software Associated with trade or business. Free tax preparation software   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 tax preparation software The purpose may be to get new business or to encourage the continuation of an existing business relationship. Free tax preparation software Substantial business discussion. Free tax preparation software   Whether a business discussion is substantial depends on the facts of each case. Free tax preparation software 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 tax preparation software   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 tax preparation software It is not necessary that you devote more time to business than to entertainment. Free tax preparation software You do not have to discuss business during the meal or entertainment. Free tax preparation software Meetings at conventions. Free tax preparation software   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 tax preparation software However, your reason for attending the convention or meeting must be to further your trade or business. Free tax preparation software 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 tax preparation software Directly before or after business discussion. Free tax preparation software   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 tax preparation software   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 tax preparation software Among the facts to consider are the place, date, and duration of the business discussion. Free tax preparation software 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 tax preparation software Example. Free tax preparation software A group of business associates comes from out of town to your place of business to hold a substantial business discussion. Free tax preparation software 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 tax preparation software The expense meets the associated test. Free tax preparation software 50% Limit In general, you can deduct only 50% of your business-related meal and entertainment expenses. Free tax preparation software (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 tax preparation software See Individuals subject to “hours of service” limits , later. Free tax preparation software ) 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 tax preparation software Figure A summarizes the general rules explained in this section. Free tax preparation software 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 tax preparation software Included expenses. Free tax preparation software   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 tax preparation software 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 tax preparation software Figure A. Free tax preparation software Does the 50% Limit Apply to Your Expenses? There are exceptions to these rules. Free tax preparation software See Exceptions to the 50% Limit . Free tax preparation software Please click here for the text description of the image. Free tax preparation software Figure A. Free tax preparation software Does the 50% limit apply to Your Expenses?TAs for Figure A are: Notice 87-23; Form 2106 instructions Application of 50% limit. Free tax preparation software   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 tax preparation software   The 50% limit also applies to certain meal and entertainment expenses that are not business related. Free tax preparation software It applies to meal and entertainment expenses you have for the production of income, including rental or royalty income. Free tax preparation software It also applies to the cost of meals included in deductible educational expenses. Free tax preparation software When to apply the 50% limit. Free tax preparation software   You apply the 50% limit after determining the amount that would otherwise qualify for a deduction. Free tax preparation software 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 tax preparation software Example 1. Free tax preparation software You spend $200 for a business-related meal. Free tax preparation software If $110 of that amount is not allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. Free tax preparation software Your deduction cannot be more than $45 (50% × $90). Free tax preparation software Example 2. Free tax preparation software You purchase two tickets to a concert and give them to a client. Free tax preparation software You purchased the tickets through a ticket agent. Free tax preparation software You paid $200 for the two tickets, which had a face value of $80 each ($160 total). Free tax preparation software Your deduction cannot be more than $80 (50% × $160). Free tax preparation software Exceptions to the 50% Limit Generally, business-related meal and entertainment expenses are subject to the 50% limit. Free tax preparation software Figure A can help you determine if the 50% limit applies to you. Free tax preparation software Expenses not subject to 50% limit. Free tax preparation software   Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions. Free tax preparation software 1 - Employee's reimbursed expenses. Free tax preparation software   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 tax preparation software Accountable plans are discussed in chapter 6. Free tax preparation software 2 - Self-employed. Free tax preparation software   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 tax preparation software You have these expenses as an independent contractor. Free tax preparation software Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform. Free tax preparation software You provide adequate records of these expenses to your customer or client. Free tax preparation software (See chapter 5 . Free tax preparation software )   In this case, your client or customer is subject to the 50% limit on the expenses. Free tax preparation software Example. Free tax preparation software You are a self-employed attorney who adequately accounts for meal and entertainment expenses to a client who reimburses you for these expenses. Free tax preparation software You are not subject to the directly-related or associated test, nor are you subject to the 50% limit. Free tax preparation software If the client can deduct the expenses, the client is subject to the 50% limit. Free tax preparation software 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 tax preparation software 3 - Advertising expenses. Free tax preparation software   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 tax preparation software 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 tax preparation software 4 - Sale of meals or entertainment. Free tax preparation software   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 tax preparation software 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 tax preparation software 5 - Charitable sports event. Free tax preparation software   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 tax preparation software For the conditions the sports event must meet, see Exception for events that benefit charitable organizations under What Entertainment Expenses Are Deductible?, later. Free tax preparation software Individuals subject to “hours of service” limits. Free tax preparation software   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 tax preparation software The percentage is 80%. Free tax preparation software   Individuals subject to the Department of Transportation's “hours of service” limits include the following persons. Free tax preparation software Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. Free tax preparation software Interstate truck operators and bus drivers who are under Department of Transportation regulations. Free tax preparation software Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. Free tax preparation software Certain merchant mariners who are under Coast Guard regulations. Free tax preparation software What Entertainment Expenses Are Deductible? This section explains different types of entertainment expenses you may be able to deduct. Free tax preparation software Entertainment. Free tax preparation software   Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Free tax preparation software 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 tax preparation software   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 tax preparation software A meal as a form of entertainment. Free tax preparation software   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 tax preparation software A meal expense includes the cost of food, beverages, taxes, and tips for the meal. Free tax preparation software To deduct an entertainment-related meal, you or your employee must be present when the food or beverages are provided. Free tax preparation software    You cannot claim the cost of your meal both as an entertainment expense and as a travel expense. Free tax preparation software    Meals sold in the normal course of your business are not considered entertainment. Free tax preparation software Deduction may depend on your type of business. Free tax preparation software   Your kind of business may determine if a particular activity is considered entertainment. Free tax preparation software 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 tax preparation software This is because fashion shows are typical in your business. Free tax preparation software 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 tax preparation software Separating costs. Free tax preparation software   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 tax preparation software You must have a reasonable basis for making this allocation. Free tax preparation software For example, you must allocate your expenses if a hotel includes entertainment in its lounge on the same bill with your room charge. Free tax preparation software Taking turns paying for meals or entertainment. Free tax preparation software   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 tax preparation software Lavish or extravagant expenses. Free tax preparation software   You cannot deduct expenses for entertainment that are lavish or extravagant. Free tax preparation software An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances. Free tax preparation software 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 tax preparation software Allocating between business and nonbusiness. Free tax preparation software   If you entertain business and nonbusiness individuals at the same event, you must divide your entertainment expenses between business and nonbusiness. Free tax preparation software You can deduct only the business part. Free tax preparation software 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 tax preparation software Example. Free tax preparation software You entertain a group of individuals that includes yourself, three business prospects, and seven social guests. Free tax preparation software Only 4/11 of the expense qualifies as a business entertainment expense. Free tax preparation software You cannot deduct the expenses for the seven social guests because those costs are nonbusiness expenses. Free tax preparation software Trade association meetings. Free tax preparation software   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 tax preparation software These organizations include business leagues, chambers of commerce, real estate boards, trade associations, and professional associations. Free tax preparation software Entertainment tickets. Free tax preparation software   Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. Free tax preparation software 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 tax preparation software Exception for events that benefit charitable organizations. Free tax preparation software   Different rules apply when the cost of a ticket to a sports event benefits a charitable organization. Free tax preparation software 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 tax preparation software The event's main purpose is to benefit a qualified charitable organization. Free tax preparation software The entire net proceeds go to the charity. Free tax preparation software The event uses volunteers to perform substantially all the event's work. Free tax preparation software    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 tax preparation software Example 1. Free tax preparation software You purchase tickets to a golf tournament organized by the local volunteer fire company. Free tax preparation software All net proceeds will be used to buy new fire equipment. Free tax preparation software The volunteers will run the tournament. Free tax preparation software You can deduct the entire cost of the tickets as a business expense if they otherwise qualify as an entertainment expense. Free tax preparation software Example 2. Free tax preparation software You purchase tickets to a college football game through a ticket broker. Free tax preparation software After having a business discussion, you take a client to the game. Free tax preparation software Net proceeds from the game go to colleges that qualify as charitable organizations. Free tax preparation software 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 tax preparation software Skyboxes and other private luxury boxes. Free tax preparation software   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 tax preparation software   To determine whether a skybox has been rented for more than one event, count each game or other performance as one event. Free tax preparation software For example, renting a skybox for a series of playoff games is considered renting it for more than one event. Free tax preparation software All skyboxes you rent in the same arena, along with any rentals by related parties, are considered in making this determination. Free tax preparation software   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 tax preparation software Example. Free tax preparation software You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. Free tax preparation software The cost of regular nonluxury box seats at each event is $30 a seat. Free tax preparation software You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events). Free tax preparation software Food and beverages in skybox seats. Free tax preparation software   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 tax preparation software The amounts separately stated for food and beverages must be reasonable. Free tax preparation software You cannot inflate the charges for food and beverages to avoid the limited deduction for skybox rentals. Free tax preparation software What Entertainment Expenses Are Not Deductible? This section explains different types of entertainment expenses you generally may not be able to deduct. Free tax preparation software Club dues and membership fees. Free tax preparation software   You cannot deduct dues (including initiation fees) for membership in any club organized for: Business, Pleasure, Recreation, or Other social purpose. Free tax preparation software 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 tax preparation software   The purposes and activities of a club, not its name, will determine whether or not you can deduct the dues. Free tax preparation software 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 tax preparation software Entertainment facilities. Free tax preparation software   Generally, you cannot deduct any expense for the use of an entertainment facility. Free tax preparation software This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. Free tax preparation software   An entertainment facility is any property you own, rent, or use for entertainment. Free tax preparation software 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 tax preparation software Out-of-pocket expenses. Free tax preparation software   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 tax preparation software These are not expenses for the use of an entertainment facility. Free tax preparation software However, these expenses are subject to the directly-related and associated tests and to the 50% limit , all discussed earlier. Free tax preparation software Expenses for spouses. Free tax preparation software   You generally cannot deduct the cost of entertainment for your spouse or for the spouse of a customer. Free tax preparation software 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 tax preparation software Example. Free tax preparation software You entertain a customer. Free tax preparation software The cost is an ordinary and necessary business expense and is allowed under the entertainment rules. Free tax preparation software The customer's spouse joins you because it is impractical to entertain the customer without the spouse. Free tax preparation software You can deduct the cost of entertaining the customer's spouse. Free tax preparation software 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 tax preparation software Gift or entertainment. Free tax preparation software   Any item that might be considered either a gift or entertainment generally will be considered entertainment. Free tax preparation software 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 tax preparation software   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 tax preparation software You can treat the tickets as either a gift or entertainment, whichever is to your advantage. Free tax preparation software   You can change your treatment of the tickets at a later date by filing an amended return. Free tax preparation software 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 tax preparation software   If you go with the customer to the event, you must treat the cost of the tickets as an entertainment expense. Free tax preparation software You cannot choose, in this case, to treat the tickets as a gift. Free tax preparation software Prev  Up  Next   Home   More Online Publications