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H&r block free 3. H&r block free   Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. H&r block free Leveraged leases. H&r block free Leveraged leases of limited-use property. H&r block free Taxes on Leased Property Cost of Getting a Lease Improvements by Lessee Capitalizing Rent Expenses Introduction This chapter discusses the tax treatment of rent or lease payments you make for property you use in your business but do not own. H&r block free It also discusses how to treat other kinds of payments you make that are related to your use of this property. H&r block free These include payments you make for taxes on the property. H&r block free Topics - This chapter discusses: The definition of rent Taxes on leased property The cost of getting a lease Improvements by the lessee Capitalizing rent expenses Rent Rent is any amount you pay for the use of property you do not own. H&r block free In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. H&r block free If you have or will receive equity in or title to the property, the rent is not deductible. H&r block free Unreasonable rent. H&r block free   You cannot take a rental deduction for unreasonable rent. H&r block free Ordinarily, the issue of reasonableness arises only if you and the lessor are related. H&r block free Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. H&r block free Rent is not unreasonable just because it is figured as a percentage of gross sales. H&r block free For examples of related persons, see Related persons in chapter 2, Publication 544. H&r block free Rent on your home. H&r block free   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. H&r block free You must meet the requirements for business use of your home. H&r block free For more information, see Business use of your home in chapter 1. H&r block free Rent paid in advance. H&r block free   Generally, rent paid in your trade or business is deductible in the year paid or accrued. H&r block free If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. H&r block free You can deduct the rest of your payment only over the period to which it applies. H&r block free Example 1. H&r block free You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. H&r block free Your rent is $12,000 per year. H&r block free You paid the first year's rent ($12,000) on June 30. H&r block free You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. H&r block free Example 2. H&r block free You are a calendar year taxpayer. H&r block free Last January you leased property for 3 years for $6,000 a year. H&r block free You paid the full $18,000 (3 × $6,000) during the first year of the lease. H&r block free Each year you can deduct only $6,000, the part of the lease that applies to that year. H&r block free Canceling a lease. H&r block free   You generally can deduct as rent an amount you pay to cancel a business lease. H&r block free Lease or purchase. H&r block free   There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. H&r block free You must first determine whether your agreement is a lease or a conditional sales contract. H&r block free Payments made under a conditional sales contract are not deductible as rent expense. H&r block free Conditional sales contract. H&r block free   Whether an agreement is a conditional sales contract depends on the intent of the parties. H&r block free Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. H&r block free No single test, or special combination of tests, always applies. H&r block free However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. H&r block free The agreement applies part of each payment toward an equity interest you will receive. H&r block free You get title to the property after you make a stated amount of required payments. H&r block free The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. H&r block free You pay much more than the current fair rental value of the property. H&r block free You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. H&r block free Determine this value when you make the agreement. H&r block free You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. H&r block free The agreement designates part of the payments as interest, or that part is easy to recognize as interest. H&r block free Leveraged leases. H&r block free   Leveraged lease transactions may not be considered leases. H&r block free Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. H&r block free Usually the lease term covers a large part of the useful life of the leased property, and the lessee's payments to the lessor are enough to cover the lessor's payments to the lender. H&r block free   If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. H&r block free Revenue Procedure 2001-28 on page 1156 of Internal Revenue Bulletin 2001-19 contains the guidelines the IRS will use to determine if a leveraged lease is a lease for federal income tax purposes. H&r block free Revenue Procedure 2001-29 on page 1160 of the same Internal Revenue Bulletin provides the information required to be furnished in a request for an advance ruling on a leveraged lease transaction. H&r block free Internal Revenue Bulletin 2001-19 is available at www. H&r block free irs. H&r block free gov/pub/irs-irbs/irb01-19. H&r block free pdf. H&r block free   In general, Revenue Procedure 2001-28 provides that, for advance ruling purposes only, the IRS will consider the lessor in a leveraged lease transaction to be the owner of the property and the transaction to be a valid lease if all the factors in the revenue procedure are met, including the following. H&r block free The lessor must maintain a minimum unconditional “at risk” equity investment in the property (at least 20% of the cost of the property) during the entire lease term. H&r block free The lessee may not have a contractual right to buy the property from the lessor at less than fair market value when the right is exercised. H&r block free The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. H&r block free The lessee may not lend any money to the lessor to buy the property or guarantee the loan used by the lessor to buy the property. H&r block free The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. H&r block free   The IRS may charge you a user fee for issuing a tax ruling. H&r block free For more information, see Revenue Procedure 2014-1 available at  www. H&r block free irs. H&r block free gov/irb/2014-1_IRB/ar05. H&r block free html. H&r block free Leveraged leases of limited-use property. H&r block free   The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. H&r block free Limited-use property is property not expected to be either useful to or usable by a lessor at the end of the lease term except for continued leasing or transfer to a lessee. H&r block free See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. H&r block free Leases over $250,000. H&r block free   Special rules are provided for certain leases of tangible property. H&r block free The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. H&r block free Rents increase during the lease. H&r block free Rents decrease during the lease. H&r block free Rents are deferred (rent is payable after the end of the calendar year following the calendar year in which the use occurs and the rent is allocated). H&r block free Rents are prepaid (rent is payable before the end of the calendar year preceding the calendar year in which the use occurs and the rent is allocated). H&r block free These rules do not apply if your lease specifies equal amounts of rent for each month in the lease term and all rent payments are due in the calendar year to which the rent relates (or in the preceding or following calendar year). H&r block free   Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting. H&r block free In addition, in certain cases in which the IRS has determined that a lease was designed to achieve tax avoidance, you must take rent and stated or imputed interest into account under a constant rental accrual method in which the rent is treated as accruing ratably over the entire lease term. H&r block free For details, see section 467 of the Internal Revenue Code. H&r block free Taxes on Leased Property If you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor. H&r block free When you can deduct these taxes as additional rent depends on your accounting method. H&r block free Cash method. H&r block free   If you use the cash method of accounting, you can deduct the taxes as additional rent only for the tax year in which you pay them. H&r block free Accrual method. H&r block free   If you use an accrual method of accounting, you can deduct taxes as additional rent for the tax year in which you can determine all the following. H&r block free That you have a liability for taxes on the leased property. H&r block free How much the liability is. H&r block free That economic performance occurred. H&r block free   The liability and amount of taxes are determined by state or local law and the lease agreement. H&r block free Economic performance occurs as you use the property. H&r block free Example 1. H&r block free Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. H&r block free Oak leases land for use in its business. H&r block free Under state law, owners of real property become liable (incur a lien on the property) for real estate taxes for the year on January 1 of that year. H&r block free However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. H&r block free Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. H&r block free If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. H&r block free Oak cannot deduct the real estate taxes as rent until the tax bill is issued. H&r block free This is when Oak's liability under the lease becomes fixed. H&r block free Example 2. H&r block free The facts are the same as in Example 1 except that, according to the terms of the lease, Oak becomes liable for the real estate taxes when the owner of the property becomes liable for them. H&r block free As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. H&r block free This is the year in which Oak's liability under the lease becomes fixed. H&r block free Cost of Getting a Lease You may either enter into a new lease with the lessor of the property or get an existing lease from another lessee. H&r block free Very often when you get an existing lease from another lessee, you must pay the previous lessee money to get the lease, besides having to pay the rent on the lease. H&r block free If you get an existing lease on property or equipment for your business, you generally must amortize any amount you pay to get that lease over the remaining term of the lease. H&r block free For example, if you pay $10,000 to get a lease and there are 10 years remaining on the lease with no option to renew, you can deduct $1,000 each year. H&r block free The cost of getting an existing lease of tangible property is not subject to the amortization rules for section 197 intangibles discussed in chapter 8. H&r block free Option to renew. H&r block free   The term of the lease for amortization includes all renewal options plus any other period for which you and the lessor reasonably expect the lease to be renewed. H&r block free However, this applies only if less than 75% of the cost of getting the lease is for the term remaining on the purchase date (not including any period for which you may choose to renew, extend, or continue the lease). H&r block free Allocate the lease cost to the original term and any option term based on the facts and circumstances. H&r block free In some cases, it may be appropriate to make the allocation using a present value computation. H&r block free For more information, see Regulations section 1. H&r block free 178-1(b)(5). H&r block free Example 1. H&r block free You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. H&r block free Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. H&r block free Because $7,000 is less than 75% of the total $10,000 cost of the lease (or $7,500), you must amortize the $10,000 over 30 years. H&r block free That is the remaining life of your present lease plus the periods for renewal. H&r block free Example 2. H&r block free The facts are the same as in Example 1, except that you paid $8,000 for the original lease and $2,000 for the renewal options. H&r block free You can amortize the entire $10,000 over the 20-year remaining life of the original lease. H&r block free The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). H&r block free Cost of a modification agreement. H&r block free   You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. H&r block free You must capitalize these payments and amortize them over the remaining period of the lease. H&r block free You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. H&r block free Example. H&r block free You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. H&r block free However, before you occupy it, you decide that you really need less space. H&r block free The lessor agrees to reduce your rent from $7,000 to $6,000 per year and to release the excess space from the original lease. H&r block free In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. H&r block free   You must capitalize the $3,000 and amortize it over the 20-year term of the lease. H&r block free Your amortization deduction each year will be $150 ($3,000 ÷ 20). H&r block free You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. H&r block free Commissions, bonuses, and fees. H&r block free   Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. H&r block free You must amortize these costs over the term of the lease. H&r block free Loss on merchandise and fixtures. H&r block free   If you sell at a loss merchandise and fixtures that you bought solely to get a lease, the loss is a cost of getting the lease. H&r block free You must capitalize the loss and amortize it over the remaining term of the lease. H&r block free Improvements by Lessee If you add buildings or make other permanent improvements to leased property, depreciate the cost of the improvements using the modified accelerated cost recovery system (MACRS). H&r block free Depreciate the property over its appropriate recovery period. H&r block free You cannot amortize the cost over the remaining term of the lease. H&r block free If you do not keep the improvements when you end the lease, figure your gain or loss based on your adjusted basis in the improvements at that time. H&r block free For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. H&r block free Assignment of a lease. H&r block free   If a long-term lessee who makes permanent improvements to land later assigns all lease rights to you for money and you pay the rent required by the lease, the amount you pay for the assignment is a capital investment. H&r block free If the rental value of the leased land increased since the lease began, part of your capital investment is for that increase in the rental value. H&r block free The rest is for your investment in the permanent improvements. H&r block free   The part that is for the increased rental value of the land is a cost of getting a lease, and you amortize it over the remaining term of the lease. H&r block free You can depreciate the part that is for your investment in the improvements over the recovery period of the property as discussed earlier, without regard to the lease term. H&r block free Capitalizing Rent Expenses Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. H&r block free Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. H&r block free You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. H&r block free Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. H&r block free Uniform capitalization rules. H&r block free   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. H&r block free Produce real property or tangible personal property. H&r block free For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. H&r block free Acquire property for resale. H&r block free However, these rules do not apply to the following property. H&r block free Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. H&r block free Property you produce if you meet either of the following conditions. H&r block free Your indirect costs of producing the property are $200,000 or less. H&r block free You use the cash method of accounting and do not account for inventories. H&r block free Example 1. H&r block free You rent construction equipment to build a storage facility. H&r block free If you are subject to the uniform capitalization rules, you must capitalize as part of the cost of the building the rent you paid for the equipment. H&r block free You recover your cost by claiming a deduction for depreciation on the building. H&r block free Example 2. H&r block free You rent space in a facility to conduct your business of manufacturing tools. H&r block free If you are subject to the uniform capitalization rules, you must include the rent you paid to occupy the facility in the cost of the tools you produce. H&r block free More information. H&r block free   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. H&r block free Prev  Up  Next   Home   More Online Publications

Topic 304 - Extensions of Time to File Your Tax Return

There are three ways you can request an automatic extension of time to file a U.S. individual income tax return: (1) you can electronically file Form 4868 (PDF), Application For Automatic Extension of Time To File U.S. Individual Tax Return; (2) you can pay all or part of your estimated income tax due using a credit or debit card or by using the Electronic Federal Tax Payment System (EFTPS); or (3) you can file a paper Form 4868 by mail.

If you file your Form 4868 electronically you will receive an acknowledgement or confirmation number for your records and you do not need to mail in Form 4868. If you need to pay additional taxes when filing Form 4868 electronically, you may do so through the outside service provider or through e-file. You can refer to your tax software or tax professional for ways to file electronically using e-file services. Several companies offer free filing of Form 4868 through the Free File program that you can access on the IRS.gov website. If you wish to file electronically, be sure to have a copy of last year's tax return. You will be asked to provide the adjusted gross income (AGI) from the return for taxpayer verification.

A second way of requesting an automatic extension of time to file your individual income tax return is to pay part or your entire estimated income tax due by credit card or debit card or by using EFTPS. You may pay by phone or Internet through one of the service providers listed on Form 4868. Each service provider will charge a convenience fee based on the amount of the tax payment. At the completion of the transaction, you will receive a confirmation number for your records.

Finally, you can request an automatic extension of time to file your individual income tax return by completing paper Form 4868 and mailing it to the appropriate address provided on the form.

Please be aware that an extension of time to file is NOT an extension of time to pay.

For information regarding State Government filing, visit State Government Websites.

Page Last Reviewed or Updated: January 22, 2014

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