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H&r Block Taxes

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H&r Block Taxes

H&r block taxes Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. H&r block taxes Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. H&r block taxes Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. H&r block taxes Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. H&r block taxes However, a joint undertaking merely to share expenses is not a partnership. H&r block taxes For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. H&r block taxes The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. H&r block taxes Organizations formed after 1996. H&r block taxes   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. H&r block taxes An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. H&r block taxes An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. H&r block taxes An insurance company. H&r block taxes Certain banks. H&r block taxes An organization wholly owned by a state, local, or foreign government. H&r block taxes An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). H&r block taxes Certain foreign organizations identified in section 301. H&r block taxes 7701-2(b)(8) of the regulations. H&r block taxes A tax-exempt organization. H&r block taxes A real estate investment trust. H&r block taxes An organization classified as a trust under section 301. H&r block taxes 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. H&r block taxes Any other organization that elects to be classified as a corporation by filing Form 8832. H&r block taxes For more information, see the instructions for Form 8832. H&r block taxes Limited liability company. H&r block taxes   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. H&r block taxes Unlike a partnership, none of the members of an LLC are personally liable for its debts. H&r block taxes An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. H&r block taxes 7701-3. H&r block taxes See Form 8832 and section 301. H&r block taxes 7701-3 of the regulations for more details. H&r block taxes A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. H&r block taxes Organizations formed before 1997. H&r block taxes   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. H&r block taxes Community property. H&r block taxes    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. H&r block taxes They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. H&r block taxes A change in reporting position will be treated for federal tax purposes as a conversion of the entity. H&r block taxes   A qualified entity is a business entity that meets all the following requirements. H&r block taxes The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. H&r block taxes No person other than one or both spouses would be considered an owner for federal tax purposes. H&r block taxes The business entity is not treated as a corporation. H&r block taxes   For more information about community property, see Publication 555, Community Property. H&r block taxes Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. H&r block taxes Family Partnership Members of a family can be partners. H&r block taxes However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. H&r block taxes If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. H&r block taxes If capital is not a material income-producing factor, they joined together in good faith to conduct a business. H&r block taxes They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. H&r block taxes Capital is material. H&r block taxes   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. H&r block taxes Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. H&r block taxes Capital is not material. H&r block taxes   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. H&r block taxes Capital interest. H&r block taxes   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. H&r block taxes The owner withdraws from the partnership. H&r block taxes The partnership liquidates. H&r block taxes   The mere right to share in earnings and profits is not a capital interest in the partnership. H&r block taxes Gift of capital interest. H&r block taxes   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. H&r block taxes It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. H&r block taxes The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. H&r block taxes Purchase. H&r block taxes   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. H&r block taxes The fair market value of the purchased interest is considered donated capital. H&r block taxes For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). H&r block taxes Example. H&r block taxes A father sold 50% of his business to his son. H&r block taxes The resulting partnership had a profit of $60,000. H&r block taxes Capital is a material income-producing factor. H&r block taxes The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. H&r block taxes The $24,000 must be allocated to the father as compensation. H&r block taxes Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. H&r block taxes The son's share of partnership profit cannot be more than $18,000. H&r block taxes Business owned and operated by spouses. H&r block taxes   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. H&r block taxes If so, they should report income or loss from the business on Form 1065. H&r block taxes They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. H&r block taxes However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. H&r block taxes Qualified Joint Venture Election. H&r block taxes   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. H&r block taxes A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. H&r block taxes   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. H&r block taxes All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. H&r block taxes Each spouse takes into account his or her respective share of these items as a sole proprietor. H&r block taxes Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). H&r block taxes For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. H&r block taxes e. H&r block taxes , based on their respective interests in the venture). H&r block taxes   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. H&r block taxes Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. H&r block taxes   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. H&r block taxes However, this may not be true if either spouse exceeds the social security tax limitation. H&r block taxes   For more information on qualified joint ventures, go to IRS. H&r block taxes gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. H&r block taxes ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. H&r block taxes The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. H&r block taxes The agreement or modifications can be oral or written. H&r block taxes Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. H&r block taxes This filing date does not include any extension of time. H&r block taxes If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. H&r block taxes Terminating a Partnership A partnership terminates when one of the following events takes place. H&r block taxes All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. H&r block taxes At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. H&r block taxes Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. H&r block taxes See section 1. H&r block taxes 708-1(b) of the regulations for more information on the termination of a partnership. H&r block taxes For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. H&r block taxes 708-1(c) and 1. H&r block taxes 708-1(d) of the regulations. H&r block taxes Date of termination. H&r block taxes   The partnership's tax year ends on the date of termination. H&r block taxes For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. H&r block taxes For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. H&r block taxes Short period return. H&r block taxes   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. H&r block taxes The return is due the 15th day of the fourth month following the date of termination. H&r block taxes See Partnership Return (Form 1065), later, for information about filing Form 1065. H&r block taxes Conversion of partnership into limited liability company (LLC). H&r block taxes   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. H&r block taxes The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. H&r block taxes   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. H&r block taxes Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. H&r block taxes If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. H&r block taxes For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. H&r block taxes   The same rules apply if an LLC classified as a partnership is converted into a partnership. H&r block taxes IRS e-file (Electronic Filing) Please click here for the text description of the image. H&r block taxes e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). H&r block taxes Other partnerships generally have the option to file electronically. H&r block taxes For details about IRS e-file, see the Form 1065 instructions. H&r block taxes Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. H&r block taxes All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. H&r block taxes However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. H&r block taxes Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. H&r block taxes Investing partnership. H&r block taxes   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. H&r block taxes They own the property as co-owners. H&r block taxes They reserve the right separately to take or dispose of their shares of any property acquired or retained. H&r block taxes They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. H&r block taxes Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. H&r block taxes Operating agreement partnership. H&r block taxes   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. H&r block taxes They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. H&r block taxes They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. H&r block taxes They do not jointly sell services or the property produced or extracted. H&r block taxes Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. H&r block taxes However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. H&r block taxes Electing the exclusion. H&r block taxes   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. H&r block taxes This filing date includes any extension of time. H&r block taxes See Regulations section 1. H&r block taxes 761-2(b) for the procedures to follow. H&r block taxes Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. H&r block taxes The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. H&r block taxes The return must be signed by a general partner. H&r block taxes If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. H&r block taxes A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. H&r block taxes See the Instructions for Form 1065 for more information about who must file Form 1065. H&r block taxes Partnership Distributions Partnership distributions include the following. H&r block taxes A withdrawal by a partner in anticipation of the current year's earnings. H&r block taxes A distribution of the current year's or prior years' earnings not needed for working capital. H&r block taxes A complete or partial liquidation of a partner's interest. H&r block taxes A distribution to all partners in a complete liquidation of the partnership. H&r block taxes A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. H&r block taxes If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. H&r block taxes Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. H&r block taxes Effect on partner's basis. H&r block taxes   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. H&r block taxes See Adjusted Basis under Basis of Partner's Interest, later. H&r block taxes Effect on partnership. H&r block taxes   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. H&r block taxes The partnership may be able to elect to adjust the basis of its undistributed property. H&r block taxes Certain distributions treated as a sale or exchange. H&r block taxes   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. H&r block taxes Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. H&r block taxes Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. H&r block taxes   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. H&r block taxes   This treatment does not apply to the following distributions. H&r block taxes A distribution of property to the partner who contributed the property to the partnership. H&r block taxes Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. H&r block taxes Substantially appreciated inventory items. H&r block taxes   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. H&r block taxes However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. H&r block taxes Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. H&r block taxes Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. H&r block taxes If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. H&r block taxes For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. H&r block taxes Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. H&r block taxes Example. H&r block taxes The adjusted basis of Jo's partnership interest is $14,000. H&r block taxes She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. H&r block taxes Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. H&r block taxes Any gain on the land will be recognized when she sells or otherwise disposes of it. H&r block taxes The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. H&r block taxes Marketable securities treated as money. H&r block taxes   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. H&r block taxes This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. H&r block taxes   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). H&r block taxes   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. H&r block taxes Loss on distribution. H&r block taxes   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. H&r block taxes The adjusted basis of the partner's interest in the partnership exceeds the distribution. H&r block taxes The partner's entire interest in the partnership is liquidated. H&r block taxes The distribution is in money, unrealized receivables, or inventory items. H&r block taxes   There are exceptions to these general rules. H&r block taxes See the following discussions. H&r block taxes Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. H&r block taxes Distribution of partner's debt. H&r block taxes   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). H&r block taxes   The partner is treated as having satisfied the debt for its fair market value. H&r block taxes If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. H&r block taxes   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. H&r block taxes Net precontribution gain. H&r block taxes   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. H&r block taxes   The gain recognized is the lesser of the following amounts. H&r block taxes The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. H&r block taxes The “net precontribution gain” of the partner. H&r block taxes This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. H&r block taxes For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. H&r block taxes   The character of the gain is determined by reference to the character of the net precontribution gain. H&r block taxes This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. H&r block taxes For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. H&r block taxes Effect on basis. H&r block taxes   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. H&r block taxes Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. H&r block taxes See Basis of Partner's Interest , later. H&r block taxes   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. H&r block taxes Exceptions. H&r block taxes   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. H&r block taxes For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. H&r block taxes   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. H&r block taxes Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. H&r block taxes However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. H&r block taxes Example 1. H&r block taxes The adjusted basis of Emily's partnership interest is $30,000. H&r block taxes She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. H&r block taxes Her basis for the property is $20,000. H&r block taxes Example 2. H&r block taxes The adjusted basis of Steve's partnership interest is $10,000. H&r block taxes He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. H&r block taxes His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). H&r block taxes Complete liquidation of partner's interest. H&r block taxes   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. H&r block taxes Partner's holding period. H&r block taxes   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. H&r block taxes If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. H&r block taxes Basis divided among properties. H&r block taxes   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. H&r block taxes For property distributed after August 5, 1997, allocate the basis using the following rules. H&r block taxes Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. H&r block taxes If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. H&r block taxes Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. H&r block taxes If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. H&r block taxes If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. H&r block taxes Allocating a basis increase. H&r block taxes   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. H&r block taxes If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. H&r block taxes Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. H&r block taxes Example. H&r block taxes Eun's basis in her partnership interest is $55,000. H&r block taxes In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. H&r block taxes Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. H&r block taxes Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. H&r block taxes To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). H&r block taxes This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). H&r block taxes She first allocates $35,000 to property A (its unrealized appreciation). H&r block taxes The remaining $5,000 is allocated between the properties based on their fair market values. H&r block taxes $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. H&r block taxes Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). H&r block taxes Allocating a basis decrease. H&r block taxes   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. H&r block taxes Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. H&r block taxes If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. H&r block taxes Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). H&r block taxes Example. H&r block taxes Armando's basis in his partnership interest is $20,000. H&r block taxes In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. H&r block taxes Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. H&r block taxes Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. H&r block taxes To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). H&r block taxes This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). H&r block taxes He allocates the entire $10,000 to property D (its unrealized depreciation). H&r block taxes Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). H&r block taxes Distributions before August 6, 1997. H&r block taxes   For property distributed before August 6, 1997, allocate the basis using the following rules. H&r block taxes Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. H&r block taxes If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. H&r block taxes Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. H&r block taxes Partner's interest more than partnership basis. H&r block taxes   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. H&r block taxes Special adjustment to basis. H&r block taxes   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. H&r block taxes To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. H&r block taxes Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. H&r block taxes   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. H&r block taxes However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. H&r block taxes   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. H&r block taxes If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. H&r block taxes   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. H&r block taxes The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. H&r block taxes Example. H&r block taxes Chin Ho purchased a 25% interest in X partnership for $17,000 cash. H&r block taxes At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. H&r block taxes Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. H&r block taxes Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. H&r block taxes The value of the inventory received was 25% of the value of all partnership inventory. H&r block taxes (It is immaterial whether the inventory he received was on hand when he acquired his interest. H&r block taxes ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. H&r block taxes His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). H&r block taxes The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. H&r block taxes The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). H&r block taxes His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). H&r block taxes The remaining $11,500 is allocated to his new basis for the other property he received. H&r block taxes Mandatory adjustment. H&r block taxes   A partner does not always have a choice of making this special adjustment to basis. H&r block taxes The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. H&r block taxes The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. H&r block taxes If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. H&r block taxes The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. H&r block taxes Required statement. H&r block taxes   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. H&r block taxes The statement must provide information necessary for the partner to compute the special basis adjustment. H&r block taxes Marketable securities. H&r block taxes   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. H&r block taxes See Marketable securities treated as money under Partner's Gain or Loss, earlier. H&r block taxes The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. H&r block taxes Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. H&r block taxes These transactions include the following. H&r block taxes Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. H&r block taxes Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. H&r block taxes Payments by accrual basis partnership to cash basis partner. H&r block taxes   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. H&r block taxes However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. H&r block taxes Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. H&r block taxes A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. H&r block taxes This treatment is for purposes of determining gross income and deductible business expenses only. H&r block taxes For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. H&r block taxes Guaranteed payments are not subject to income tax withholding. H&r block taxes The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. H&r block taxes They are also listed on Schedules K and K-1 of the partnership return. H&r block taxes The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. H&r block taxes Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. H&r block taxes Generally, organizational and syndication expenses are not deductible by the partnership. H&r block taxes However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). H&r block taxes Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. H&r block taxes Minimum payment. H&r block taxes   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. H&r block taxes Example. H&r block taxes Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. H&r block taxes The partnership has net income of $20,000. H&r block taxes Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). H&r block taxes The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). H&r block taxes Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. H&r block taxes If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. H&r block taxes Self-employed health insurance premiums. H&r block taxes   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. H&r block taxes The partnership can deduct the payments as a business expense, and the partner must include them in gross income. H&r block taxes However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. H&r block taxes   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. H&r block taxes The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. H&r block taxes For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. H&r block taxes Including payments in partner's income. H&r block taxes   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. H&r block taxes Example 1. H&r block taxes Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. H&r block taxes Her distributive share of the partnership income is 10%. H&r block taxes The partnership has $50,000 of ordinary income after deducting the guaranteed payment. H&r block taxes She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. H&r block taxes Example 2. H&r block taxes Lamont is a calendar year taxpayer who is a partner in a partnership. H&r block taxes The partnership uses a fiscal year that ended January 31, 2013. H&r block taxes Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. H&r block taxes He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. H&r block taxes Payments resulting in loss. H&r block taxes   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. H&r block taxes The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. H&r block taxes Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. H&r block taxes Losses. H&r block taxes   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. H&r block taxes   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. H&r block taxes   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. H&r block taxes   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. H&r block taxes If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. H&r block taxes Gains. H&r block taxes   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. H&r block taxes More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). H&r block taxes The property in the hands of the transferee immediately after the transfer is not a capital asset. H&r block taxes Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. H&r block taxes More than 50% ownership. H&r block taxes   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. H&r block taxes An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. H&r block taxes An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. H&r block taxes For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. H&r block taxes If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. H&r block taxes However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. H&r block taxes Example. H&r block taxes Individuals A and B and Trust T are equal partners in Partnership ABT. H&r block taxes A's husband, AH, is the sole beneficiary of Trust T. H&r block taxes Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. H&r block taxes As a result, A is a more-than-50% partner. H&r block taxes This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. H&r block taxes More information. H&r block taxes   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. H&r block taxes Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. H&r block taxes This applies whether a partnership is being formed or is already operating. H&r block taxes The partnership's holding period for the property includes the partner's holding period. H&r block taxes The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. H&r block taxes The exchange is not subject to the rules explained later under Disposition of Partner's Interest. H&r block taxes Disguised sales. H&r block taxes   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. H&r block taxes The distribution would not have been made but for the contribution. H&r block taxes The partner's right to the distribution does not depend on the success of partnership operations. H&r block taxes   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. H&r block taxes However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. H&r block taxes If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. H&r block taxes Form 8275 required. H&r block taxes   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. H&r block taxes For exceptions to this requirement, see section 1. H&r block taxes 707-3(c)(2) of the regulations. H&r block taxes   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. H&r block taxes   Form 8275 must include the following information. H&r block taxes A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. H&r block taxes A description of the transferred property or money, including its value. H&r block taxes A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. H&r block taxes See section 1. H&r block taxes 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. H&r block taxes Contribution to partnership treated as investment company. H&r block taxes   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. H&r block taxes   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. H&r block taxes These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. H&r block taxes For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. H&r block taxes Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. H&r block taxes   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. H&r block taxes Contribution to foreign partnership. H&r block taxes   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. H&r block taxes Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. H&r block taxes The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. H&r block taxes   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. H&r block taxes See the form instructions for more information. H&r block taxes Basis of contributed property. H&r block taxes   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. H&r block taxes Allocations to account for built-in gain or loss. H&r block taxes   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. H&r block taxes The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. H&r block taxes This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. H&r block taxes   The partnership can use different allocation methods for different items of contributed property. H&r block taxes A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. H&r block taxes See section 1. H&r block taxes 704-3 of the regulations for allocation methods generally considered reasonable. H&r block taxes   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. H&r block taxes If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. H&r block taxes However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. H&r block taxes Example. H&r block taxes Areta and Sofia formed an equal partnership. H&r block taxes Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. H&r block taxes The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. H&r block taxes In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. H&r block taxes Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. H&r block taxes To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. H&r block taxes However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. H&r block taxes The entire $400 must be allocated to Areta. H&r block taxes Distribution of contributed property to another partner. H&r block taxes   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. H&r block taxes   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. H&r block taxes This amount is the difference between the property's basis and its fair market value at the time of contribution. H&r block taxes The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. H&r block taxes Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. H&r block taxes Disposition of certain contributed property. H&r block taxes   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. H&r block taxes Unrealized receivables. H&r block taxes If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. H&r block taxes Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. H&r block taxes When reading the definition, substitute “partner” for “partnership. H&r block taxes ” Inventory items. H&r block taxes If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. H&r block taxes Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. H&r block taxes Capital loss property. H&r block taxes If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. H&r block taxes The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. H&r block taxes Substituted basis property. H&r block taxes If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. H&r block taxes Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. H&r block taxes Capital interest. H&r block taxes   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. H&r block taxes This determination generally is made at the time of receipt of the partnership interest. H&r block taxes The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. H&r block taxes The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. H&r block taxes   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. H&r block taxes Profits interest. H&r block taxes   A profits interest is a partnership interest other than a capital interest. H&r block taxes If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. H&r block taxes However, this does not apply in the following situations. H&r block taxes The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. H&r block taxes Within 2 years of receipt, the partner disposes of the profits interest. H&r block taxes The profits interest is a limited partnership interest in a publicly traded partnership. H&r block taxes   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. H&r block taxes Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. H&r block taxes If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. H&r block taxes Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. H&r block taxes Interest acquired by gift, etc. H&r block taxes   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. H&r block taxes Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). H&r block taxes The basis of an interest in a partnership is increased or decreased by certain items. H&r block taxes Increases. H&r block taxes   A partner's basis is increased by the following items. H&r block taxes The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. H&r block taxes The partner's distributive share of taxable and nontaxable partnership income. H&r block taxes The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. H&r block taxes Decreases. H&r block taxes   The partner's basis is decreased (but never below zero) by the following items. H&r block taxes The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. H&r block taxes The partner's distributive share of the partnership losses (including capital losses). H&r block taxes The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. H&r block taxes This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. H&r block taxes The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner. H&r block taxes Partner's liabilities assumed by partnership. H&r block taxes   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. H&r block taxes This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. H&r block taxes The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. H&r block taxes See Effect of Partnership Liabilities , later. H&r block taxes Example 1. H&r block taxes Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. H&r block taxes The partnership assumed payment of the mortgage. H&r block taxes The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. H&r block taxes If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. H&r block taxes The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. H&r block taxes However, this gain would not increase the basis of his partnership interest. H&r block taxes Book value of partner's interest. H&r block taxes   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. H&r block taxes Example. H&r block taxes Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. H&r block taxes His partner contributes $1,000 cash. H&r block taxes While each partner has increased his capital account by $1,000, which will be re
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H&r block taxes 6. H&r block taxes   How To Report Table of Contents Where To ReportGifts. H&r block taxes Statutory employees. H&r block taxes Vehicle Provided by Your Employer ReimbursementsAccountable Plans Nonaccountable Plans Rules for Independent Contractors and Clients How To Use Per Diem Rate TablesThe Two Substantiation Methods Transition Rules Completing Forms 2106 and 2106-EZInformation on use of cars. H&r block taxes Standard mileage rate. H&r block taxes Actual expenses. H&r block taxes Car rentals. H&r block taxes Hours of service limits. H&r block taxes Allocating your reimbursement. H&r block taxes 1. H&r block taxes Limit on meals and entertainment. H&r block taxes 2. H&r block taxes Limit on miscellaneous itemized deductions. H&r block taxes 3. H&r block taxes Limit on total itemized deductions. H&r block taxes Special Rules This chapter explains where and how to report the expenses discussed in this publication. H&r block taxes It discusses reimbursements and how to treat them under accountable and nonaccountable plans. H&r block taxes It also explains rules for independent contractors and clients, fee-basis officials, certain performing artists, Armed Forces reservists, and certain disabled employees. H&r block taxes The chapter ends with illustrations of how to report travel, entertainment, gift, and car expenses on Forms 2106 and 2106-EZ. H&r block taxes Where To Report This section provides general information on where to report the expenses discussed in this publication. H&r block taxes Self-employed. H&r block taxes   You must report your income and expenses on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) if you are a sole proprietor, or on Schedule F (Form 1040) if you are a farmer. H&r block taxes You do not use Form 2106 or 2106-EZ. H&r block taxes    If you claim car or truck expenses, you must provide certain information on the use of your vehicle. H&r block taxes You provide this information on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Form 4562. H&r block taxes   If you file Schedule C (Form 1040): Report your travel expenses, except meals, on line 24a, Report your deductible meals (actual cost or standard meal allowance) and entertainment on line 24b, Report your gift expenses and transportation expenses, other than car expenses, on line 27a, and Report your car expenses on line 9. H&r block taxes Complete Part IV of the form unless you have to file Form 4562 for depreciation or amortization. H&r block taxes   If you file Schedule C-EZ (Form 1040), report the total of all business expenses on line 2. H&r block taxes You can only include 50% of your meals and entertainment in that total. H&r block taxes If you include car expenses, you must also complete Part III of the form. H&r block taxes    If you file Schedule F (Form 1040): Report your car expenses on line 10. H&r block taxes Attach Form 4562 and provide information on the use of your car in Part V of Form 4562. H&r block taxes Report all other business expenses discussed in this publication on line 32. H&r block taxes You can only include 50% of your meals and entertainment on that line. H&r block taxes See your form instructions for more information on how to complete your tax return. H&r block taxes Both self-employed and an employee. H&r block taxes   If you are both self-employed and an employee, you must keep separate records for each business activity. H&r block taxes Report your business expenses for self-employment on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040), as discussed earlier. H&r block taxes Report your business expenses for your work as an employee on Form 2106 or 2106-EZ, as discussed next. H&r block taxes Employees. H&r block taxes    If you are an employee, you generally must complete Form 2106 to deduct your travel, transportation, and entertainment expenses. H&r block taxes However, you can use the shorter Form 2106-EZ instead of Form 2106 if you meet all of the following conditions. H&r block taxes You are an employee deducting expenses attributable to your job. H&r block taxes You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements). H&r block taxes If you claim car expenses, you use the standard mileage rate. H&r block taxes   For more information on how to report your expenses on Forms 2106 and 2106-EZ, see Completing Forms 2106 and 2106-EZ , later. H&r block taxes Gifts. H&r block taxes   If you did not receive any reimbursements (or the reimbursements were all included in box 1 of your Form W-2), the only business expense you are claiming is for gifts, and the Special Rules discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. H&r block taxes Instead, claim the amount of your deductible gifts directly on line 21 of Schedule A (Form 1040). H&r block taxes Statutory employees. H&r block taxes    If you received a Form W-2 and the “Statutory employee” box in box 13 was checked, report your income and expenses related to that income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040). H&r block taxes Do not complete Form 2106 or 2106-EZ. H&r block taxes   Statutory employees include full-time life insurance salespersons, certain agent or commission drivers, traveling salespersons, and certain homeworkers. H&r block taxes If you are entitled to a reimbursement from your employer but you do not claim it, you cannot claim a deduction for the expenses to which that unclaimed reimbursement applies. H&r block taxes Reimbursement for personal expenses. H&r block taxes    If your employer reimburses you for nondeductible personal expenses, such as for vacation trips, your employer must report the reimbursement as wage income in box 1 of your Form W-2. H&r block taxes You cannot deduct personal expenses. H&r block taxes Income-producing property. H&r block taxes   If you have travel or transportation expenses related to income-producing property, report your deductible expenses on the form appropriate for that activity. H&r block taxes   For example, if you have rental real estate income and expenses, report your expenses on Schedule E (Form 1040), Supplemental Income and Loss. H&r block taxes See Publication 527, Residential Rental Property, for more information on the rental of real estate. H&r block taxes If you have deductible investment-related transportation expenses, report them on Schedule A (Form 1040), line 23. H&r block taxes Vehicle Provided by Your Employer If your employer provides you with a car, you may be able to deduct the actual expenses of operating that car for business purposes. H&r block taxes The amount you can deduct depends on the amount that your employer included in your income and the business and personal miles you drove during the year. H&r block taxes You cannot use the standard mileage rate. H&r block taxes Value reported on Form W-2. H&r block taxes   Your employer can figure and report either the actual value of your personal use of the car or the value of the car as if you used it only for personal purposes (100% income inclusion). H&r block taxes Your employer must separately state the amount if 100% of the annual lease value was included in your income. H&r block taxes If you are unsure of the amount included on your Form W-2, ask your employer. H&r block taxes Full value included in your income. H&r block taxes   You can deduct the value of the business use of an employer-provided car if your employer reported 100% of the value of the car in your income. H&r block taxes On your 2013 Form W-2, the amount of the value will be included in box 1, Wages, tips, other compensation, and box 14. H&r block taxes    To claim your expenses, complete Form 2106, Part II, Sections A and C. H&r block taxes Enter your actual expenses on line 23 of Section C and include the entire value of the employer-provided car on line 25. H&r block taxes Complete the rest of the form. H&r block taxes Less than full value included in your income. H&r block taxes   If less than the full annual lease value of the car was included on your Form W-2, this means that your Form W-2 only includes the value of your personal use of the car. H&r block taxes Do not enter this value on your Form 2106 because it is not deductible. H&r block taxes   If you paid any actual costs (that your employer did not provide or reimburse you for) to operate the car, you can deduct the business portion of those costs. H&r block taxes Examples of costs that you may have are gas, oil, and repairs. H&r block taxes Complete Form 2106, Part II, Sections A and C. H&r block taxes Enter your actual costs on line 23 of Section C and leave line 25 blank. H&r block taxes Complete the rest of the form. H&r block taxes Reimbursements This section explains what to do when you receive an advance or are reimbursed for any of the employee business expenses discussed in this publication. H&r block taxes If you received an advance, allowance, or reimbursement for your expenses, how you report this amount and your expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. H&r block taxes This section explains the two types of plans, how per diem and car allowances simplify proving the amount of your expenses, and the tax treatment of your reimbursements and expenses. H&r block taxes It also covers rules for independent contractors. H&r block taxes No reimbursement. H&r block taxes   You are not reimbursed or given an allowance for your expenses if you are paid a salary or commission with the understanding that you will pay your own expenses. H&r block taxes In this situation, you have no reimbursement or allowance arrangement, and you do not have to read this section on reimbursements. H&r block taxes Instead, see Completing Forms 2106 and 2106-EZ , later, for information on completing your tax return. H&r block taxes Reimbursement, allowance, or advance. H&r block taxes   A reimbursement or other expense allowance arrangement is a system or plan that an employer uses to pay, substantiate, and recover the expenses, advances, reimbursements, and amounts charged to the employer for employee business expenses. H&r block taxes Arrangements include per diem and car allowances. H&r block taxes    A per diem allowance is a fixed amount of daily reimbursement your employer gives you for your lodging, meals, and incidental expenses when you are away from home on business. H&r block taxes (The term “ incidental expenses ” is defined in chapter 1 under Standard Meal Allowance. H&r block taxes ) A car allowance is an amount your employer gives you for the business use of your car. H&r block taxes   Your employer should tell you what method of reimbursement is used and what records you must provide. H&r block taxes Employers. H&r block taxes   If you are an employer and you reimburse employee business expenses, how you treat this reimbursement on your employee's Form W-2 depends in part on whether you have an accountable plan. H&r block taxes Reimbursements treated as paid under an accountable plan, as explained next, are not reported as pay. H&r block taxes Reimbursements treated as paid under nonaccountable plans , as explained later, are reported as pay. H&r block taxes See Publication 15 (Circular E), Employer's Tax Guide, for information on employee pay. H&r block taxes Accountable Plans To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules: Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. H&r block taxes You must adequately account to your employer for these expenses within a reasonable period of time. H&r block taxes You must return any excess reimbursement or allowance within a reasonable period of time. H&r block taxes “ Adequate accounting ” and “ returning excess reimbursements ” are discussed later. H&r block taxes An excess reimbursement or allowance is any amount you are paid that is more than the business-related expenses that you adequately accounted for to your employer. H&r block taxes Reasonable period of time. H&r block taxes   The definition of reasonable period of time depends on the facts and circumstances of your situation. H&r block taxes However, regardless of the facts and circumstances of your situation, 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 taxes You receive an advance within 30 days of the time you have an expense. H&r block taxes You adequately account for your expenses within 60 days after they were paid or incurred. H&r block taxes You return any excess reimbursement within 120 days after the expense was paid or incurred. H&r block taxes You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement. H&r block taxes Employee meets accountable plan rules. H&r block taxes   If you meet the three rules for accountable plans, your employer should not include any reimbursements in your income in box 1 of your Form W-2. H&r block taxes If your expenses equal your reimbursements, you do not complete Form 2106. H&r block taxes You have no deduction since your expenses and reimbursement are equal. H&r block taxes    If your employer included reimbursements in box 1 of your Form W-2 and you meet all the rules for accountable plans, ask your employer for a corrected Form W-2. H&r block taxes Accountable plan rules not met. H&r block taxes   Even though you are reimbursed under an accountable plan, some of your expenses may not meet all three rules. H&r block taxes All reimbursements that fail to meet all three rules for accountable plans are generally treated as having been reimbursed under a nonaccountable plan (discussed later). H&r block taxes Failure to return excess reimbursements. H&r block taxes   If you are reimbursed under an accountable plan, but you fail to return, within a reasonable time, any amounts in excess of the substantiated amounts, the amounts paid in excess of the substantiated expenses are treated as paid under a nonaccountable plan. H&r block taxes See Reasonable period of time , earlier, and Returning Excess Reimbursements , later. H&r block taxes Reimbursement of nondeductible expenses. H&r block taxes   You may be reimbursed under your employer's accountable plan for expenses related to that employer's business, some of which are deductible as employee business expenses and some of which are not deductible. H&r block taxes The reimbursements you receive for the nondeductible expenses do not meet rule (1) for accountable plans, and they are treated as paid under a nonaccountable plan. H&r block taxes Example. H&r block taxes Your employer's plan reimburses you for travel expenses while away from home on business and also for meals when you work late at the office, even though you are not away from home. H&r block taxes The part of the arrangement that reimburses you for the nondeductible meals when you work late at the office is treated as paid under a nonaccountable plan. H&r block taxes The employer makes the decision whether to reimburse employees under an accountable plan or a nonaccountable plan. H&r block taxes If you are an employee who receives payments under a nonaccountable plan, you cannot convert these amounts to payments under an accountable plan by voluntarily accounting to your employer for the expenses and voluntarily returning excess reimbursements to the employer. H&r block taxes Adequate Accounting One of the rules for an accountable plan is that you must adequately account to your employer for your expenses. H&r block taxes You adequately account by giving your employer a statement of expense, an account book, a diary, or a similar record in which you entered each expense at or near the time you had it, along with documentary evidence (such as receipts) of your travel, mileage, and other employee business expenses. H&r block taxes (See Table 5-1 in chapter 5 for details you need to enter in your record and documents you need to prove certain expenses. H&r block taxes ) A per diem or car allowance satisfies the adequate accounting requirement under certain conditions. H&r block taxes See Per Diem and Car Allowances , later. H&r block taxes You must account for all amounts you received from your employer during the year as advances, reimbursements, or allowances. H&r block taxes This includes amounts you charged to your employer by credit card or other method. H&r block taxes You must give your employer the same type of records and supporting information that you would have to give to the IRS if the IRS questioned a deduction on your return. H&r block taxes You must pay back the amount of any reimbursement or other expense allowance for which you do not adequately account or that is more than the amount for which you accounted. H&r block taxes Per Diem and Car Allowances If your employer reimburses you for your expenses using a per diem or a car allowance, you can generally use the allowance as proof for the amount of your expenses. H&r block taxes A per diem or car allowance satisfies the adequate accounting requirements for the amount of your expenses only if all the following conditions apply. H&r block taxes Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade or business. H&r block taxes The allowance is similar in form to and not more than the federal rate (defined later). H&r block taxes You prove the time (dates), place, and business purpose of your expenses to your employer (as explained in Table 5-1 ) within a reasonable period of time. H&r block taxes You are not related to your employer (as defined next). H&r block taxes If you are related to your employer, you must be able to prove your expenses to the IRS even if you have already adequately accounted to your employer and returned any excess reimbursement. H&r block taxes If the IRS finds that an employer's travel allowance practices are not based on reasonably accurate estimates of travel costs (including recognition of cost differences in different areas for per diem amounts), you will not be considered to have accounted to your employer. H&r block taxes In this case, you must be able to prove your expenses to the IRS. H&r block taxes Related to employer. H&r block taxes   You are related to your employer if: Your employer is your brother or sister, half brother or half sister, spouse, ancestor, or lineal descendant, Your employer is a corporation in which you own, directly or indirectly, more than 10% in value of the outstanding stock, or Certain relationships (such as grantor, fiduciary, or beneficiary) exist between you, a trust, and your employer. H&r block taxes You may be considered to indirectly own stock, for purposes of (2), if you have an interest in a corporation, partnership, estate, or trust that owns the stock or if a member of your family or your partner owns the stock. H&r block taxes The federal rate. H&r block taxes   The federal rate can be figured using any one of the following methods. H&r block taxes For per diem amounts: The regular federal per diem rate. H&r block taxes The standard meal allowance. H&r block taxes The high-low rate. H&r block taxes For car expenses: The standard mileage rate. H&r block taxes A fixed and variable rate (FAVR). H&r block taxes    For per diem amounts, use the rate in effect for the area where you stop for sleep or rest. H&r block taxes Regular federal per diem rate. H&r block taxes   The regular federal per diem rate is the highest amount that the federal government will pay to its employees for lodging, meals, and incidental expenses (or meals and incidental expenses only) while they are traveling away from home in a particular area. H&r block taxes The rates are different for different locations. H&r block taxes Your employer should have these rates available. H&r block taxes You can also find federal per diem rates at www. H&r block taxes gsa. H&r block taxes gov/perdiem. H&r block taxes The standard meal allowance. H&r block taxes   The standard meal allowance (discussed in chapter 1) is the federal rate for meals and incidental expenses (M&IE). H&r block taxes The rate for most small localities in the United States is $46 a day. H&r block taxes Most major cities and many other localities qualify for higher rates. H&r block taxes You can find this information on the Internet at www. H&r block taxes gsa. H&r block taxes gov/perdiem. H&r block taxes   You receive an allowance only for meals and incidental expenses when your employer does one of the following. H&r block taxes Provides you with lodging (furnishes it in kind). H&r block taxes Reimburses you, based on your receipts, for the actual cost of your lodging. H&r block taxes Pays the hotel, motel, etc. H&r block taxes , directly for your lodging. H&r block taxes Does not have a reasonable belief that you had (or will have) lodging expenses, such as when you stay with friends or relatives or sleep in the cab of your truck. H&r block taxes Figures the allowance on a basis similar to that used in computing your compensation, such as number of hours worked or miles traveled. H&r block taxes High-low rate. H&r block taxes   This is a simplified method of computing the federal per diem rate for travel within the continental United States. H&r block taxes It eliminates the need to keep a current list of the per diem rates for each city. H&r block taxes   Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 (including $65 for M&IE) for certain high-cost locations. H&r block taxes All other areas have a per diem amount of $163 (including $52 for M&IE). H&r block taxes For more information, see Notice 2012-63, which can be found on the Internet at www. H&r block taxes irs. H&r block taxes gov/irb/2012-42_IRB/ar12. H&r block taxes html. H&r block taxes    Effective October 1, 2013, the per diem rate for certain high-cost locations increased to $251 (including $65 for M&IE). H&r block taxes The rate for all other locations increased to $170 (including $52 for M&IE). H&r block taxes Employers who did not use the high-low method during the first 9 months of 2013 cannot begin to use it before 2014. H&r block taxes For more information, see Notice 2013-65, which can be found on the Internet at www. H&r block taxes irs. H&r block taxes gov/pub/irs-drop/n-13–65. H&r block taxes pdf and Revenue Procedure 2011-47 at www. H&r block taxes irs. H&r block taxes gov/irb/2011-42_IRB/ar12. H&r block taxes html. H&r block taxes Prorating the standard meal allowance on partial days of travel. H&r block taxes   The standard meal allowance is for a full 24-hour day of travel. H&r block taxes If you travel for part of a day, such as on the days you depart and return, you must prorate the full-day M&IE rate. H&r block taxes This rule also applies if your employer uses the regular federal per diem rate or the high-low rate. H&r block taxes   You can use either of the following methods to figure the federal M&IE for that day. H&r block taxes Method 1: For the day you depart, add 3/4 of the standard meal allowance amount for that day. H&r block taxes For the day you return, add 3/4 of the standard meal allowance amount for the preceding day. H&r block taxes Method 2: Prorate the standard meal allowance using any method you consistently apply in accordance with reasonable business practice. H&r block taxes For example, an employer can treat 2 full days of per diem (that includes M&IE) paid for travel away from home from 9 a. H&r block taxes m. H&r block taxes of one day to 5 p. H&r block taxes m. H&r block taxes of the next day as being no more than the federal rate. H&r block taxes This is true even though a federal employee would be limited to a reimbursement of M&IE for only 1½ days of the federal M&IE rate. H&r block taxes The standard mileage rate. H&r block taxes   This is a set rate per mile that you can use to compute your deductible car expenses. H&r block taxes For 2013, the standard mileage rate for the cost of operating your car for business use is 56½ cents per mile. H&r block taxes Fixed and variable rate (FAVR). H&r block taxes   This is an allowance your employer may use to reimburse your car expenses. H&r block taxes Under this method, your employer pays an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your variable operating costs (such as gas, oil, etc. H&r block taxes ) plus a flat amount to cover your fixed costs (such as depreciation (or lease payments), insurance, etc. H&r block taxes ). H&r block taxes If your employer chooses to use this method, your employer will request the necessary records from you. H&r block taxes Reporting your expenses with a per diem or car allowance. H&r block taxes   If your reimbursement is in the form of an allowance received under an accountable plan, the following facts affect your reporting. H&r block taxes The federal rate. H&r block taxes Whether the allowance or your actual expenses were more than the federal rate. H&r block taxes The following discussions explain where to report your expenses depending upon how the amount of your allowance compares to the federal rate. H&r block taxes Allowance less than or equal to the federal rate. H&r block taxes   If your allowance is less than or equal to the federal rate, the allowance will not be included in box 1 of your Form W-2. H&r block taxes You do not need to report the related expenses or the allowance on your return if your expenses are equal to or less than the allowance. H&r block taxes   However, if your actual expenses are more than your allowance, you can complete Form 2106 and deduct the excess amount on Schedule A (Form 1040). H&r block taxes If you are using actual expenses, you must be able to prove to the IRS the total amount of your expenses and reimbursements for the entire year. H&r block taxes If you are using the standard meal allowance or the standard mileage rate, you do not have to prove that amount. H&r block taxes Example 1. H&r block taxes In April, Jeremy takes a 2-day business trip to Denver. H&r block taxes The federal rate for Denver is $215 per day. H&r block taxes As required by his employer's accountable plan, he accounts for the time (dates), place, and business purpose of the trip. H&r block taxes His employer reimburses him $215 a day ($430 total) for living expenses. H&r block taxes Jeremy's living expenses in Denver are not more than $215 a day. H&r block taxes Jeremy's employer does not include any of the reimbursement on his Form W-2 and Jeremy does not deduct the expenses on his return. H&r block taxes Example 2. H&r block taxes In June, Matt takes a 2-day business trip to Boston. H&r block taxes Matt's employer uses the high-low method to reimburse employees. H&r block taxes Since Boston is a high-cost area, Matt is given an advance of $242 a day ($484 total) for his lodging, meals, and incidental expenses. H&r block taxes Matt's actual expenses totaled $700. H&r block taxes Since Matt's $700 of expenses are more than his $484 advance, he includes the excess expenses when he itemizes his deductions. H&r block taxes Matt completes Form 2106 (showing all of his expenses and reimbursements). H&r block taxes He must also allocate his reimbursement between his meals and other expenses as discussed later under Completing Forms 2106 and 2106-EZ . H&r block taxes Example 3. H&r block taxes Nicole drives 10,000 miles in 2013 for business. H&r block taxes Under her employer's accountable plan, she accounts for the time (dates), place, and business purpose of each trip. H&r block taxes Her employer pays her a mileage allowance of 40 cents a mile. H&r block taxes Since Nicole's $5,650 expense computed under the standard mileage rate (10,000 miles x 56½ cents) is more than her $4,000 reimbursement (10,000 miles × 40 cents), she itemizes her deductions to claim the excess expense. H&r block taxes Nicole completes Form 2106 (showing all her expenses and reimbursements) and enters $1,650 ($5,650 − $4,000) as an itemized deduction. H&r block taxes Allowance more than the federal rate. H&r block taxes   If your allowance is more than the federal rate, your employer must include the allowance amount up to the federal rate in box 12 of your Form W-2. H&r block taxes This amount is not taxable. H&r block taxes However, the excess allowance will be included in box 1 of your Form W-2. H&r block taxes You must report this part of your allowance as if it were wage income. H&r block taxes   If your actual expenses are less than or equal to the federal rate, you do not complete Form 2106 or claim any of your expenses on your return. H&r block taxes   However, if your actual expenses are more than the federal rate, you can complete Form 2106 and deduct those excess expenses. H&r block taxes You must report on Form 2106 your reimbursements up to the federal rate (as shown in box 12 of your Form W-2) and all your expenses. H&r block taxes You should be able to prove these amounts to the IRS. H&r block taxes Example 1. H&r block taxes Laura lives and works in Austin. H&r block taxes In July her employer sent her to Albuquerque for 4 days on business. H&r block taxes Laura's employer paid the hotel directly for her lodging and reimbursed Laura $65 a day ($260 total) for meals and incidental expenses. H&r block taxes Laura's actual meal expenses were not more than the federal rate for Albuquerque, which is $56 per day. H&r block taxes Table 6-1. H&r block taxes Reporting Travel, Entertainment, Gift, and Car Expenses and Reimbursements IF the type of reimbursement (or  other expense allowance)  arrangement is under: THEN the employer reports on Form W-2: AND the employee reports on  Form 2106: * An accountable plan with: Actual expense reimbursement: Adequate accounting made and excess returned. H&r block taxes No amount. H&r block taxes No amount. H&r block taxes Actual expense reimbursement: Adequate accounting and return of excess both required but excess not returned. H&r block taxes The excess amount as wages in box 1. H&r block taxes No amount. H&r block taxes Per diem or mileage allowance up to the federal rate: Adequate accounting made and excess returned. H&r block taxes No amount. H&r block taxes All expenses and reimbursements only if excess expenses are claimed. H&r block taxes Otherwise, form is not filed. H&r block taxes Per diem or mileage allowance up to the federal rate: Adequate accounting and return of excess both required but excess not returned. H&r block taxes The excess amount as wages in box 1. H&r block taxes The amount up to the federal rate is reported only in box 12—it is not reported in box 1. H&r block taxes No amount. H&r block taxes Per diem or mileage allowance exceeds the federal rate: Adequate accounting up to the federal rate only and excess not returned. H&r block taxes The excess amount as wages in box 1. H&r block taxes The amount up to the federal rate is reported only in box 12—it is not reported in box 1. H&r block taxes All expenses (and reimbursements reported on Form W-2, box 12) only if expenses in excess of the federal rate are claimed. H&r block taxes Otherwise, form is not filed. H&r block taxes A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan. H&r block taxes The entire amount as wages in box 1. H&r block taxes All expenses. H&r block taxes No reimbursement plan: The entire amount as wages in box 1. H&r block taxes All expenses. H&r block taxes * You may be able to use Form 2106-EZ. H&r block taxes See Completing Forms 2106 and 2106-EZ . H&r block taxes Her employer included the $36 that was more than the federal rate (($65 − $56) × 4) in box 1 of Laura's Form W-2. H&r block taxes Her employer shows $224 ($56 a day × 4) in box 12 of her Form W-2. H&r block taxes This amount is not included in Laura's income. H&r block taxes Laura does not have to complete Form 2106; however, she must include the $36 in her gross income as wages (by reporting the total amount shown in box 1 of her Form W-2). H&r block taxes Example 2. H&r block taxes Joe also lives in Austin and works for the same employer as Laura. H&r block taxes In May the employer sent Joe to San Diego for 4 days and paid the hotel directly for Joe's hotel bill. H&r block taxes The employer reimbursed Joe $75 a day for his meals and incidental expenses. H&r block taxes The federal rate for San Diego is $71 a day. H&r block taxes Joe can prove that his actual meal expenses totaled $380. H&r block taxes His employer's accountable plan will not pay more than $75 a day for travel to San Diego, so Joe does not give his employer the records that prove that he actually spent $380. H&r block taxes However, he does account for the time, place, and business purpose of the trip. H&r block taxes This is Joe's only business trip this year. H&r block taxes Joe was reimbursed $300 ($75 × 4 days), which is $16 more than the federal rate of $284 ($71 × 4 days). H&r block taxes The employer includes the $16 as income on Joe's Form W-2 in box 1. H&r block taxes The employer also enters $284 in box 12 of Joe's Form W-2. H&r block taxes Joe completes Form 2106 to figure his deductible expenses. H&r block taxes He enters the total of his actual expenses for the year ($380) on Form 2106. H&r block taxes He also enters the reimbursements that were not included in his income ($284). H&r block taxes His total deductible expense, before the 50% limit, is $96. H&r block taxes After he figures the 50% limit on his unreimbursed meals and entertainment, he will include the balance, $48, as an itemized deduction. H&r block taxes Example 3. H&r block taxes Debbie drives 10,000 miles in 2013 for business. H&r block taxes Under her employer's accountable plan, she gets reimbursed 60 cents a mile, which is more than the standard mileage rate. H&r block taxes Her total reimbursement is $6,000. H&r block taxes Debbie's employer must include the reimbursement amount up to the standard mileage rate, $5,650 (10,000 × 56½ cents), in box 12 of her Form W-2. H&r block taxes That amount is not taxable. H&r block taxes Her employer must also include $350 ($6,000 − $5,650) in box 1 of her Form W-2. H&r block taxes This is the reimbursement that is more than the standard mileage rate. H&r block taxes If Debbie's expenses are equal to or less than the standard mileage rate, she would not complete Form 2106. H&r block taxes If her expenses are more than the standard mileage rate, she would complete Form 2106 and report her total expenses and reimbursement (shown in box 12 of her Form W-2). H&r block taxes She would then claim the excess expenses as an itemized deduction. H&r block taxes Returning Excess Reimbursements Under an accountable plan, you are required to return any excess reimbursement or other expense allowances for your business expenses to the person paying the reimbursement or allowance. H&r block taxes Excess reimbursement means any amount for which you did not adequately account within a reasonable period of time. H&r block taxes For example, if you received a travel advance and you did not spend all the money on business-related expenses or you do not have proof of all your expenses, you have an excess reimbursement. H&r block taxes “ Adequate accounting ” and “ reasonable period of time ” were discussed earlier in this chapter. H&r block taxes Travel advance. H&r block taxes   You receive a travel advance if your employer provides you with an expense allowance before you actually have the expense, and the allowance is reasonably expected to be no more than your expense. H&r block taxes Under an accountable plan, you are required to adequately account to your employer for this advance and to return any excess within a reasonable period of time. H&r block taxes   If you do not adequately account for or do not return any excess advance within a reasonable period of time, the amount you do not account for or return will be treated as having been paid under a nonaccountable plan (discussed later). H&r block taxes Unproved amounts. H&r block taxes   If you do not prove that you actually traveled on each day for which you received a per diem or car allowance (proving the elements described in Table 5-1 ), you must return this unproved amount of the travel advance within a reasonable period of time. H&r block taxes If you do not do this, the unproved amount will be considered paid under a nonaccountable plan (discussed later). H&r block taxes Per diem allowance more than federal rate. H&r block taxes   If your employer's accountable plan pays you an allowance that is higher than the federal rate, you do not have to return the difference between the two rates for the period you can prove business-related travel expenses. H&r block taxes However, the difference will be reported as wages on your Form W-2. H&r block taxes This excess amount is considered paid under a nonaccountable plan (discussed later). H&r block taxes Example. H&r block taxes Your employer sends you on a 5-day business trip to Phoenix in March 2013 and gives you a $400 ($80 × 5 days) advance to cover your meals and incidental expenses. H&r block taxes The federal per diem for meals and incidental expenses for Phoenix is $71. H&r block taxes Your trip lasts only 3 days. H&r block taxes Under your employer's accountable plan, you must return the $160 ($80 × 2 days) advance for the 2 days you did not travel. H&r block taxes For the 3 days you did travel you do not have to return the $27 difference between the allowance you received and the federal rate for Phoenix (($80 − $71) × 3 days). H&r block taxes However, the $27 will be reported on your Form W-2 as wages. H&r block taxes Nonaccountable Plans A nonaccountable plan is a reimbursement or expense allowance arrangement that does not meet one or more of the three rules listed earlier under Accountable Plans. H&r block taxes In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan: Excess reimbursements you fail to return to your employer, and Reimbursement of nondeductible expenses related to your employer's business. H&r block taxes See Reimbursement of nondeductible expenses , earlier, under Accountable Plans. H&r block taxes An arrangement that repays you for business expenses by reducing the amount reported as your wages, salary, or other pay will be treated as a nonaccountable plan. H&r block taxes This is because you are entitled to receive the full amount of your pay whether or not you have any business expenses. H&r block taxes If you are not sure if the reimbursement or expense allowance arrangement is an accountable or nonaccountable plan, ask your employer. H&r block taxes Reporting your expenses under a nonaccountable plan. H&r block taxes   Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other pay. H&r block taxes Your employer will report the total in box 1 of your Form W-2. H&r block taxes    You must complete Form 2106 or 2106-EZ and itemize your deductions to deduct your expenses for travel, transportation, meals, or entertainment. H&r block taxes Your meal and entertainment expenses will be subject to the 50% limit discussed in chapter 2. H&r block taxes Also, your total expenses will be subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions. H&r block taxes Example 1. H&r block taxes Kim's employer gives her $1,000 a month ($12,000 total for the year) for her business expenses. H&r block taxes Kim does not have to provide any proof of her expenses to her employer, and Kim can keep any funds that she does not spend. H&r block taxes Kim is being reimbursed under a nonaccountable plan. H&r block taxes Her employer will include the $12,000 on Kim's Form W-2 as if it were wages. H&r block taxes If Kim wants to deduct her business expenses, she must complete Form 2106 or 2106-EZ and itemize her deductions. H&r block taxes Example 2. H&r block taxes Kevin is paid $2,000 a month by his employer. H&r block taxes On days that he travels away from home on business, his employer designates $50 a day of his salary as paid to reimburse his travel expenses. H&r block taxes Because his employer would pay Kevin his monthly salary whether or not he was traveling away from home, the arrangement is a nonaccountable plan. H&r block taxes No part of the $50 a day designated by his employer is treated as paid under an accountable plan. H&r block taxes Rules for Independent Contractors and Clients This section provides rules for independent contractors who incur expenses on behalf of a client or customer. H&r block taxes The rules cover the reporting and substantiation of certain expenses discussed in this publication, and they affect both independent contractors and their clients or customers. H&r block taxes You are considered an independent contractor if you are self-employed and you perform services for a customer or client. H&r block taxes Accounting to Your Client If you received a reimbursement or an allowance for travel, entertainment, or gift expenses that you incurred on behalf of a client, you should provide an adequate accounting of these expenses to your client. H&r block taxes If you do not account to your client for these expenses, you must include any reimbursements or allowances in income. H&r block taxes You must keep adequate records of these expenses whether or not you account to your client for these expenses. H&r block taxes If you do not separately account for and seek reimbursement for meals and entertainment in connection with providing services for a client, you are subject to the 50% limit on those expenses. H&r block taxes See 50% Limit in chapter 2. H&r block taxes Adequate accounting. H&r block taxes   As a self-employed person, you adequately account by reporting your actual expenses. H&r block taxes You should follow the recordkeeping rules in chapter 5 . H&r block taxes How to report. H&r block taxes   For information on how to report expenses on your tax return, see Self-employed at the beginning of this chapter. H&r block taxes Required Records for Clients or Customers If you are a client or customer, you generally do not have to keep records to prove the reimbursements or allowances you give, in the course of your business, to an independent contractor for travel or gift expenses incurred on your behalf. H&r block taxes However, you must keep records if: You reimburse the contractor for entertainment expenses incurred on your behalf, and The contractor adequately accounts to you for these expenses. H&r block taxes Contractor adequately accounts. H&r block taxes   If the contractor adequately accounts to you for entertainment expenses, you (the client or customer) must keep records documenting each element of the expense, as explained in chapter 5 . H&r block taxes Use your records as proof for a deduction on your tax return. H&r block taxes If entertainment expenses are accounted for separately, you are subject to the 50% limit on entertainment. H&r block taxes If the contractor adequately accounts to you for reimbursed amounts, you do not have to report the amounts on an information return. H&r block taxes Contractor does not adequately account. H&r block taxes    If the contractor does not adequately account to you for allowances or reimbursements of entertainment expenses, you do not have to keep records of these items. H&r block taxes You are not subject to the 50% limit on entertainment in this case. H&r block taxes You can deduct the reimbursements or allowances as payment for services if they are ordinary and necessary business expenses. H&r block taxes However, you must file Form 1099-MISC to report amounts paid to the independent contractor if the total of the reimbursements and any other fees is $600 or more during the calendar year. H&r block taxes How To Use Per Diem Rate Tables This section contains information about the per diem rate substantiation methods available and the choice of rates you must make for the last 3 months of the year. H&r block taxes The Two Substantiation Methods High-low method. H&r block taxes   IRS notices list the localities that are treated under the high-low substantiation method as high-cost localities for all or part of the year. H&r block taxes Notice 2012–63, available at www. H&r block taxes irs. H&r block taxes gov/irb/2012–42_IRB/ar12. H&r block taxes html, lists the localities that are eligible for $242 ($65 meals and incidental expenses (M&IE)) per diem, effective October 1, 2012. H&r block taxes For travel on or after October 1, 2012, all other localities within CONUS are eligible for $163 ($52 M&IE) per diem under the high-low method. H&r block taxes   Notice 2013–65, available at www. H&r block taxes irs. H&r block taxes gov/pub/irs-drop/n-13–65. H&r block taxes pdf, lists the localities that are eligible for $251 ($65 M&IE) per diem, effective October 1, 2013. H&r block taxes For travel on or after October 1, 2013, the per diem for all other localities increased to $170 ($52 M&IE). H&r block taxes Regular federal per diem rate method. H&r block taxes   Regular federal per diem rates are published by the General Services Administration (GSA). H&r block taxes Both tables include the separate rate for meals and incidental expenses (M&IE) for each locality. H&r block taxes The rates listed for FY2013 at www. H&r block taxes gsa. H&r block taxes gov/perdiem are effective October 1, 2012 and those listed for FY2014 are effective October 1, 2013. H&r block taxes The standard rate for all locations within CONUS not specifically listed for FY2013 is $123 ($77 for lodging and $46 for M&IE). H&r block taxes For FY2014, this rate increased to $129 ($83 for lodging and $46 for M&IE). H&r block taxes Transition Rules The transition period covers the last 3 months of the calendar year, from the time that new rates are effective (generally October 1) through December 31. H&r block taxes During this period, you generally may change to the new rates or finish out the year with the rates you had been using. H&r block taxes High-low method. H&r block taxes   If you use the high-low substantiation method, when new rates become effective (generally October 1) you can either continue with the rates you used for the first part of the year or change to the new rates. H&r block taxes However, you must continue using the high-low method for the rest of the calendar year (through December 31). H&r block taxes If you are an employer, you must use the same rates for all employees reimbursed under the high-low method during that calendar year. H&r block taxes   The new rates and localities for the high-low method are included each year in a notice that is generally published in mid-to-late-September. H&r block taxes You can find the notice in the weekly Internal Revenue Bulletin (IRB) on the Internet at www. H&r block taxes irs. H&r block taxes gov/irb. H&r block taxes Federal per diem rate method. H&r block taxes   New CONUS per diem rates become effective on October 1 of each year and remain in effect through September 30 of the following year. H&r block taxes Employees being reimbursed under the per diem rate method during the first 9 months of a year (January 1–September 30) must continue under the same method through the end of that calendar year (December 31). H&r block taxes However, for travel by these employees from October 1 through December 31, you can choose to continue using the same per diem rates or use the new rates. H&r block taxes   The new federal CONUS per diem rates are published each year, generally early in September, on the Internet. H&r block taxes Go to www. H&r block taxes gsa. H&r block taxes gov/perdiem. H&r block taxes Per diem rates for localities listed for FY2014 may change at any time. H&r block taxes To be sure you have the most current rate, check www. H&r block taxes gsa. H&r block taxes gov/perdiem. H&r block taxes Completing Forms 2106 and 2106-EZ This section briefly describes how employees complete Forms 2106 and 2106-EZ. H&r block taxes Table 6-1 explains what the employer reports on Form W-2 and what the employee reports on Form 2106. H&r block taxes The instructions for the forms have more information on completing them. H&r block taxes If you are self-employed, do not file Form 2106 or 2106-EZ. H&r block taxes Report your expenses on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040). H&r block taxes See the instructions for the form that you must file. H&r block taxes Form 2106-EZ. H&r block taxes   You may be able to use the shorter Form 2106-EZ to claim your employee business expenses. H&r block taxes You can use this form if you meet all the following conditions. H&r block taxes You are an employee deducting ordinary and necessary expenses attributable to your job. H&r block taxes You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements). H&r block taxes If you are claiming car expenses, you are using the standard mileage rate. H&r block taxes Car expenses. H&r block taxes   If you used a car to perform your job as an employee, you may be able to deduct certain car expenses. H&r block taxes These are generally figured on Form 2106, Part II, and then claimed on Form 2106, Part I, line 1, Column A. H&r block taxes Car expenses using the standard mileage rate can also be figured on Form 2106-EZ by completing Part II and Part I, line 1. H&r block taxes Information on use of cars. H&r block taxes   If you claim any deduction for the business use of a car, you must answer certain questions and provide information about the use of the car. H&r block taxes The information relates to the following items. H&r block taxes Date placed in service. H&r block taxes Mileage (total, business, commuting, and other personal mileage). H&r block taxes Percentage of business use. H&r block taxes After-work use. H&r block taxes Use of other vehicles. H&r block taxes Whether you have evidence to support the deduction. H&r block taxes Whether or not the evidence is written. H&r block taxes Employees must complete Form 2106, Part II, Section A, or Form 2106-EZ, Part II, to provide this information. H&r block taxes Standard mileage rate. H&r block taxes   If you claim a deduction based on the standard mileage rate instead of your actual expenses, you must complete Form 2106, Part II, Section B. H&r block taxes The amount on line 22 (Section B) is carried to Form 2106, Part I, line 1. H&r block taxes In addition, on Part 1, line 2, you can deduct parking fees and tolls that apply to the business use of the car. H&r block taxes If you file Form 2106-EZ, complete Part I, line 1, for the standard mileage rate and line 2 for parking fees and tolls. H&r block taxes See Standard Mileage Rate in chapter 4 for information on using this rate. H&r block taxes Actual expenses. H&r block taxes   If you claim a deduction based on actual car expenses, you cannot use Form 2106-EZ. H&r block taxes You must complete Form 2106, Part II, Section C. H&r block taxes In addition, unless you lease your car, you must complete Section D to show your depreciation deduction and any section 179 deduction you claim. H&r block taxes   If you are still using a car that is fully depreciated, continue to complete Section C. H&r block taxes Since you have no depreciation deduction, enter zero on line 28. H&r block taxes In this case, do not complete Section D. H&r block taxes Car rentals. H&r block taxes   If you claim car rental expenses on Form 2106, line 24a, you may have to reduce that expense by an inclusion amount as described in chapter 4. H&r block taxes If so, you can show your car expenses and any inclusion amount as follows. H&r block taxes Compute the inclusion amount without taking into account your business use percentage for the tax year. H&r block taxes Report the inclusion amount from (1) on Form 2106, Part II, line 24b. H&r block taxes Report on line 24c the net amount of car rental expenses (total car rental expenses minus the inclusion amount computed in (1)). H&r block taxes The net amount of car rental expenses will be adjusted on Form 2106, Part II, line 27, to reflect the percentage of business use for the tax year. H&r block taxes Transportation expenses. H&r block taxes   Show your transportation expenses that did not involve overnight travel on Form 2106, line 2, Column A, or on Form 2106-EZ, Part I, line 2. H&r block taxes Also include on this line business expenses you have for parking fees and tolls. H&r block taxes Do not include expenses of operating your car or expenses of commuting between your home and work. H&r block taxes Employee business expenses other than meals and entertainment. H&r block taxes   Show your other employee business expenses on Form 2106, lines 3 and 4, Column A, or Form 2106-EZ, lines 3 and 4. H&r block taxes Do not include expenses for meals and entertainment on those lines. H&r block taxes Line 4 is for expenses such as gifts, educational expenses (tuition and books), office-in-the-home expenses, and trade and professional publications. H&r block taxes    If line 4 expenses are the only ones you are claiming, you received no reimbursements (or the reimbursements were all included in box 1 of your Form W-2), and the Special Rules discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. H&r block taxes Claim these amounts directly on Schedule A (Form 1040), line 21. H&r block taxes List the type and amount of each expense on the dotted lines and include the total on line 21. H&r block taxes Meal and entertainment expenses. H&r block taxes   Show the full amount of your expenses for business-related meals and entertainment on Form 2106, line 5, Column B. H&r block taxes Include meals while away from your tax home overnight and other business meals and entertainment. H&r block taxes Enter 50% of the line 8, Column B, meal and entertainment expenses on line 9, Column B. H&r block taxes   If you file Form 2106-EZ, enter the full amount of your meals and entertainment on the line to the left of line 5 and multiply the total by 50%. H&r block taxes Enter the result on line 5. H&r block taxes Hours of service limits. H&r block taxes   If you are subject to the Department of Transportation's “hours of service” limits (as explained earlier under Individuals subject to “hours of service” limits in chapter 2), use 80% instead of 50% for meals while away from your tax home. H&r block taxes Reimbursements. H&r block taxes   Enter on Form 2106, line 7 (you cannot use Form 2106-EZ) the amounts your employer (or third party) reimbursed you that were not reported to you in box 1 of your Form W-2. H&r block taxes This includes any amount reported under code L in box 12 of Form W-2. H&r block taxes Allocating your reimbursement. H&r block taxes   If you were reimbursed under an accountable plan and want to deduct excess expenses that were not reimbursed, you may have to allocate your reimbursement. H&r block taxes This is necessary when your employer pays your reimbursement in the following manner: Pays you a single amount that covers meals and/or entertainment, as well as other business expenses, and Does not clearly identify how much is for deductible meals and/or entertainment. H&r block taxes You must allocate that single payment so that you know how much to enter on Form 2106, line 7, Column A and Column B. H&r block taxes Example. H&r block taxes Rob's employer paid him an expense allowance of $12,000 this year under an accountable plan. H&r block taxes The $12,000 payment consisted of $5,000 for airfare and $7,000 for meals, entertainment, and car expenses. H&r block taxes The employer did not clearly show how much of the $7,000 was for the cost of deductible meals and entertainment. H&r block taxes Rob actually spent $14,000 during the year ($5,500 for airfare, $4,500 for meals and entertainment, and $4,000 for car expenses). H&r block taxes Since the airfare allowance was clearly identified, Rob knows that $5,000 of the payment goes in Column A, line 7, of Form 2106. H&r block taxes To allocate the remaining $7,000, Rob uses the worksheet from the Instructions for Form 2106. H&r block taxes His completed worksheet follows. H&r block taxes Reimbursement Allocation Worksheet (Keep for your records)   1. H&r block taxes Enter the total amount of reimbursements your employer gave you that were not reported to you in box 1 of Form W-2 $7,000   2. H&r block taxes Enter the total amount of your expenses for the periods covered by this reimbursement 8,500   3. H&r block taxes Of the amount on line 2, enter your total expense for meals and entertainment 4,500   4. H&r block taxes Divide line 3 by line 2. H&r block taxes Enter the result as a decimal (rounded to at least three places) . H&r block taxes 529   5. H&r block taxes Multiply line 1 by line 4. H&r block taxes Enter the result here and in Column B, line 7 3,703   6. H&r block taxes Subtract line 5 from line 1. H&r block taxes Enter the result here and in Column A, line 7 $3,297 On line 7 of Form 2106, Rob enters $8,297 ($5,000 airfare and $3,297 of the $7,000) in Column A and $3,703 (of the $7,000) in Column B. H&r block taxes After you complete the form. H&r block taxes   After you have completed your Form 2106 or 2106-EZ, follow the directions on that form to deduct your expenses on the appropriate line of your tax return. H&r block taxes For most taxpayers, this is line 21 of Schedule A (Form 1040). H&r block taxes However, if you are a government official paid on a fee basis, a performing artist, an Armed Forces reservist, or a disabled employee with impairment-related work expenses, see Special Rules , later. H&r block taxes Limits on employee business expenses. H&r block taxes   Your employee business expenses may be subject to either of the limits described next. H&r block taxes They are figured in the following order on the specified form. H&r block taxes 1. H&r block taxes Limit on meals and entertainment. H&r block taxes   Certain meal and entertainment expenses are subject to a 50% limit. H&r block taxes If you are an employee, you figure this limit on line 9 of Form 2106 or line 5 of Form 2106-EZ. H&r block taxes (See 50% Limit in chapter 2. H&r block taxes ) 2. H&r block taxes Limit on miscellaneous itemized deductions. H&r block taxes   If you are an employee, deduct your employee business expenses (as figured on Form 2106 or 2106-EZ) on line 21 of Schedule A (Form 1040). H&r block taxes Most miscellaneous itemized deductions, including employee business expenses, are subject to a 2%-of-adjusted-gross-income limit. H&r block taxes This limit is figured on line 26 of Schedule A (Form 1040). H&r block taxes 3. H&r block taxes Limit on total itemized deductions. H&r block taxes   If your adjusted gross income (line 38 of Form 1040) is more than $300,000 ($150,000 if you are married filing separately), the total of certain itemized deductions, including employee business expenses, may be limited. H&r block taxes See your form instructions for information on how to figure this limit. H&r block taxes Special Rules This section discusses special rules that apply only to Armed Forces reservists, government officials who are paid on a fee basis, performing artists, and disabled employees with impairment-related work expenses. H&r block taxes Armed Forces Reservists Traveling More Than 100 Miles From Home If you are a member of a reserve component of the Armed Forces of the United States and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct your travel expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. H&r block taxes The amount of expenses you can deduct as an adjustment to gross income is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. H&r block taxes See Per Diem and Car Allowances , earlier, for more information. H&r block taxes Any expenses in excess of these amounts can be claimed only as a miscellaneous itemized deduction subject to the 2% limit. H&r block taxes Member of a reserve component. H&r block taxes   You are a member of a reserve component of the Armed Forces of the United States if you are in the Army, Navy, Marine Corps, Air Force, or Coast Guard Reserve; the Army National Guard of the United States; the Air National Guard of the United States; or the Reserve Corps of the Public Health Service. H&r block taxes How to report. H&r block taxes   If you have reserve-related travel that takes you more than 100 miles from home, you should first complete Form 2106 or Form 2106-EZ. H&r block taxes Then include your expenses for reserve travel over 100 miles from home, up to the federal rate, from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. H&r block taxes Subtract this amount from the total on Form 2106, line 10, or Form 2106-EZ, line 6, and deduct the balance as an itemized deduction on Schedule A (Form 1040), line 21. H&r block taxes   You cannot deduct expenses of travel that does not take you more than 100 miles from home as an adjustment to gross income. H&r block taxes Instead, you must complete Form 2106 or 2106-EZ and deduct those expenses as an itemized deduction on Schedule A (Form 1040), line 21. H&r block taxes Officials Paid on a Fee Basis Certain fee-basis officials can claim their employee business expenses whether or not they itemize their other deductions on Schedule A (Form 1040). H&r block taxes Fee-basis officials are persons who are employed by a state or local government and who are paid in whole or in part on a fee basis. H&r block taxes They can deduct their business expenses in performing services in that job as an adjustment to gross income rather than as a miscellaneous itemized deduction. H&r block taxes If you are a fee-basis official, include your employee business expenses from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. H&r block taxes Expenses of Certain Performing Artists If you are a performing artist, you may qualify to deduct your employee business expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. H&r block taxes To qualify, you must meet all of the following requirements. H&r block taxes During the tax year, you perform services in the performing arts as an employee for at least two employers. H&r block taxes You receive at least $200 each from any two of these employers. H&r block taxes Your related performing-arts business expenses are more than 10% of your gross income from the performance of those services. H&r block taxes Your adjusted gross income is not more than $16,000 before deducting these business expenses. H&r block taxes Special rules for married persons. H&r block taxes   If you are married, you must file a joint return unless you lived apart from your spouse at all times during the tax year. H&r block taxes If you file a joint return, you must figure requirements (1), (2), and (3) separately for both you and your spouse. H&r block taxes However, requirement (4) applies to your and your spouse's combined adjusted gross income. H&r block taxes Where to report. H&r block taxes   If you meet all of the above requirements, you should first complete Form 2106 or 2106-EZ. H&r block taxes Then you include your performing-arts-related expenses from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. H&r block taxes   If you do not meet all of the above requirements, you do not qualify to deduct your expenses as an adjustment to gross income. H&r block taxes Instead, you must complete Form 2106 or 2106-EZ and deduct your employee business expenses as an itemized deduction on Schedule A (Form 1040), line 21. H&r block taxes Impairment-Related Work Expenses of Disabled Employees If you are an employee with a physical or mental disability, your impairment-related work expenses are not subject to the 2%-of-adjusted-gross-income limit that applies to most other employee business expenses. H&r block taxes After you complete Form 2106 or 2106-EZ, enter your impairment-related work expenses from Form 2106, line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 28, and identify the type and amount of this expense on the dotted line next to line 28. H&r block taxes Enter your employee business expenses that are unrelated to your disability from Form 2106, line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 21. H&r block taxes Impairment-related work expenses are your allowable expenses for attendant care at your workplace and other expenses in connection with your workplace that are necessary for you to be able to work. H&r block taxes You are disabled if you have: A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed, or A physical or mental impairment (for example, a sight or hearing impairment) that substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, or working. H&r block taxes You can deduct impairment-related expenses as business expenses if they are: Necessary for you to do your work satisfactorily, For goods and services not required or used, other than incidentally, in your personal activities, and Not specifically covered under other income tax laws. H&r block taxes Example 1. H&r block taxes You are blind. H&r block taxes You must use a reader to do your work. H&r block taxes You use the reader both during your regular working hours at your place of work and outside your regular working hours away from your place of work. H&r block taxes The reader's services are only for your work. H&r block taxes You can deduct your expenses for the reader as business expenses. H&r block taxes Example 2. H&r block taxes You are deaf. H&r block taxes You must use a sign language interpreter during meetings while you are at work. H&r block taxes The interpreter's services are used only for your work. H&r block taxes You can deduct your expenses for the interpreter as business expenses. H&r block taxes Prev  Up  Next   Home   More Online Publications