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Irs easy form 5. Irs easy form   Business Income Table of Contents Introduction Kinds of IncomeBartering for Property or Services Real Estate Rents Personal Property Rents Interest and Dividend Income Canceled Debt Other Income Items That Are Not IncomeAmount you can exclude. Irs easy form Short-term lease. Irs easy form Retail space. Irs easy form Qualified long-term real property. Irs easy form Guidelines for Selected Occupations Accounting for Your Income Introduction This chapter primarily explains business income and how to account for it on your tax return, what items are not considered income, and gives guidelines for selected occupations. Irs easy form If there is a connection between any income you receive and your business, the income is business income. Irs easy form A connection exists if it is clear that the payment of income would not have been made if you did not have the business. Irs easy form You can have business income even if you are not involved in the activity on a regular full-time basis. Irs easy form Income from work you do on the side in addition to your regular job can be business income. Irs easy form You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. Irs easy form But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C or C-EZ. Irs easy form For information on selling business assets, see chapter 3. Irs easy form Nonemployee compensation. Irs easy form Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. Irs easy form This includes amounts reported as nonemployee compensation in box 7 of the form. Irs easy form You can find more information in the instructions on the back of the Form 1099-MISC you received. Irs easy form Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. Irs easy form In most cases, your business income will be in the form of cash, checks, and credit card charges. Irs easy form But business income can be in other forms, such as property or services. Irs easy form These and other types of income are explained next. Irs easy form If you are a U. Irs easy form S. Irs easy form citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U. Irs easy form S. Irs easy form law. Irs easy form If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. Irs easy form For details, see Publication 54, Tax Guide for U. Irs easy form S. Irs easy form Citizens and Resident Aliens Abroad. Irs easy form Bartering for Property or Services Bartering is an exchange of property or services. Irs easy form You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. Irs easy form If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise. Irs easy form Example 1. Irs easy form You are a self-employed lawyer. Irs easy form You perform legal services for a client, a small corporation. Irs easy form In payment for your services, you receive shares of stock in the corporation. Irs easy form You must include the fair market value of the shares in income. Irs easy form Example 2. Irs easy form You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. Irs easy form You must include the fair rental value of the apartment in your gross receipts. Irs easy form Your landlord must include the fair market value of the work of art in his or her rental income. Irs easy form Example 3. Irs easy form You are a self-employed accountant. Irs easy form Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. Irs easy form Members get in touch with other members directly and bargain for the value of the services to be performed. Irs easy form In return for accounting services you provided for the house painter's business, the house painter painted your home. Irs easy form You must include in gross receipts the fair market value of the services you received from the house painter. Irs easy form The house painter must include the fair market value of your accounting services in his or her gross receipts. Irs easy form Example 4. Irs easy form You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. Irs easy form As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. Irs easy form You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account. Irs easy form The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. Irs easy form It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. Irs easy form See Publication 15 (Circular E), Employer's Tax Guide. Irs easy form Example 5. Irs easy form You operate a plumbing business and use the cash method of accounting. Irs easy form You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Irs easy form Each member has access to a directory that lists the members of the club and the services available. Irs easy form Members contact each other directly and request services to be performed. Irs easy form You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. Irs easy form You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members. Irs easy form Information returns. Irs easy form   If you are involved in a bartering transaction, you may have to file either of the following forms. Irs easy form Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Irs easy form Form 1099-MISC, Miscellaneous Income. Irs easy form For information about these forms, see the General Instructions for Certain Information Returns. Irs easy form Real Estate Rents If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. Irs easy form , who provides services (maid services, etc. Irs easy form ) for guests, report the rental income and expenses on Schedule C or C-EZ. Irs easy form If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. Irs easy form For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Irs easy form Real estate dealer. Irs easy form   You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Irs easy form Rent you receive from real estate held for sale to customers is subject to SE tax. Irs easy form However, rent you receive from real estate held for speculation or investment is not subject to SE tax. Irs easy form Trailer park owner. Irs easy form   Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. Irs easy form    You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and normally are not provided to maintain the lots in a condition for occupancy. Irs easy form Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. Irs easy form   Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers. Irs easy form   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. Irs easy form Hotels, boarding houses, and apartments. Irs easy form   Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. Irs easy form   Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. Irs easy form An example of a service that is not normally provided for the convenience of the occupants is maid service. Irs easy form However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. Irs easy form Prepaid rent. Irs easy form   Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. Irs easy form This is true no matter what accounting method or period you use. Irs easy form Lease bonus. Irs easy form   A bonus you receive from a lessee for granting a lease is an addition to the rent. Irs easy form Include it in your gross receipts in the year received. Irs easy form Lease cancellation payments. Irs easy form   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. Irs easy form Payments to third parties. Irs easy form   If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. Irs easy form A common example of this kind of income is a lessee's payment of your property taxes on leased real property. Irs easy form Settlement payments. Irs easy form   Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee. Irs easy form Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. Irs easy form ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. Irs easy form Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. Irs easy form If you receive any of those payments, include them in your gross receipts as explained in that discussion. Irs easy form Interest and Dividend Income Interest and dividends may be considered business income. Irs easy form Interest. Irs easy form   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Irs easy form Interest received on loans is business income if you are in the business of lending money. Irs easy form Uncollectible loans. Irs easy form   If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. Irs easy form If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. Irs easy form See Bad Debts in chapter 8. Irs easy form Unstated interest. Irs easy form   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. Irs easy form See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Irs easy form Dividends. Irs easy form   Generally, dividends are business income to dealers in securities. Irs easy form For most sole proprietors and statutory employees, however, dividends are nonbusiness income. Irs easy form If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. Irs easy form   If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. Irs easy form To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. Irs easy form Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. Irs easy form General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Irs easy form Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. Irs easy form If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. Irs easy form Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Irs easy form Price reduced after purchase. Irs easy form   If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. Irs easy form Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. Irs easy form Deductible debt. Irs easy form   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. Irs easy form Example. Irs easy form You get accounting services for your business on credit. Irs easy form Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Irs easy form Your accountant forgives part of the amount you owe for the accounting services. Irs easy form How you treat the canceled debt depends on your method of accounting. Irs easy form Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Irs easy form Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Irs easy form   For information on the cash and accrual methods of accounting, see chapter 2. Irs easy form Exclusions Do not include canceled debt in income in the following situations. Irs easy form However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Irs easy form For more information, see Form 982. Irs easy form The cancellation takes place in a bankruptcy case under title 11 of the U. Irs easy form S. Irs easy form Code (relating to bankruptcy). Irs easy form See Publication 908, Bankruptcy Tax Guide. Irs easy form The cancellation takes place when you are insolvent. Irs easy form You can exclude the canceled debt to the extent you are insolvent. Irs easy form See Publication 908. Irs easy form The canceled debt is a qualified farm debt owed to a qualified person. Irs easy form See chapter 3 in Publication 225, Farmer's Tax Guide. Irs easy form The canceled debt is a qualified real property business debt. Irs easy form This situation is explained later. Irs easy form The canceled debt is qualified principal residence indebtedness which is discharged after 2006. Irs easy form See Form 982. Irs easy form If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. Irs easy form If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. Irs easy form Debt. Irs easy form   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. Irs easy form Qualified real property business debt. Irs easy form   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. Irs easy form If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Irs easy form Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. Irs easy form However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. Irs easy form Cancellation of qualified real property business debt. Irs easy form   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. Irs easy form It was incurred or assumed in connection with real property used in a trade or business. Irs easy form It was secured by such real property. Irs easy form It was incurred or assumed at either of the following times. Irs easy form Before January 1, 1993. Irs easy form After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. Irs easy form It is debt to which you choose to apply these rules. Irs easy form   Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced. Irs easy form   You cannot exclude more than either of the following amounts. Irs easy form The excess (if any) of: The outstanding principal of qualified real property business debt (immediately before the cancellation), over The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation. Irs easy form The total adjusted bases of depreciable real property held by you immediately before the cancellation. Irs easy form These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Irs easy form Do not take into account depreciable real property acquired in contemplation of the cancellation. Irs easy form Election. Irs easy form   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. Irs easy form You must file your return by the due date (including extensions). Irs easy form If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Irs easy form For more information, see When To File in the form instructions. Irs easy form Other Income The following discussion explains how to treat other types of business income you may receive. Irs easy form Restricted property. Irs easy form   Restricted property is property that has certain restrictions that affect its value. Irs easy form If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C or C-EZ when the restriction is lifted. Irs easy form However, you can choose to be taxed in the year you receive the property. Irs easy form For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. Irs easy form Gains and losses. Irs easy form   Do not report on Schedule C or C-EZ a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Irs easy form Instead, you must report these gains and losses on other forms. Irs easy form For more information, see chapter 3. Irs easy form Promissory notes. Irs easy form   Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C or C-EZ. Irs easy form In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. Irs easy form Lost income payments. Irs easy form   If you reduce or stop your business activities, report on Schedule C or C-EZ any payment you receive for the lost income of your business from insurance or other sources. Irs easy form Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. Irs easy form Damages. Irs easy form   You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. Irs easy form Patent infringement. Irs easy form Breach of contract or fiduciary duty. Irs easy form Antitrust injury. Irs easy form Economic injury. Irs easy form   You may be entitled to a deduction against the income if it compensates you for actual economic injury. Irs easy form Your deduction is the smaller of the following amounts. Irs easy form The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount. Irs easy form Your loss from the injury that you have not yet deducted. Irs easy form Punitive damages. Irs easy form   You must also include punitive damages in income. Irs easy form Kickbacks. Irs easy form   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. Irs easy form However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold. Irs easy form Recovery of items previously deducted. Irs easy form   If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C or C-EZ. Irs easy form However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. Irs easy form If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. Irs easy form Example. Irs easy form Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. Irs easy form He also had 2 personal exemptions for a total of $7,800. Irs easy form He would not pay income tax even if he did not deduct the bad debt. Irs easy form Therefore, he will not report as income any part of the $300 he may recover in any future year. Irs easy form Exception for depreciation. Irs easy form   This rule does not apply to depreciation. Irs easy form You recover depreciation using the rules explained next. Irs easy form Recapture of depreciation. Irs easy form   In the following situations, you have to recapture the depreciation deduction. Irs easy form This means you include in income part or all of the depreciation you deducted in previous years. Irs easy form Listed property. Irs easy form   If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. Irs easy form You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Irs easy form Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. Irs easy form For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. Irs easy form That chapter explains how to determine whether property is used more than 50% in your business. Irs easy form Section 179 property. Irs easy form   If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. Irs easy form You do this by including in income on Schedule C part of the deduction you took. Irs easy form Use Part IV of Form 4797 to figure the amount to include on Schedule C. Irs easy form See chapter 2 in Publication 946 to find out when you recapture the deduction. Irs easy form Sale or exchange of depreciable property. Irs easy form   If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. Irs easy form You figure the income due to depreciation recapture in Part III of Form 4797. Irs easy form For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. Irs easy form Items That Are Not Income In some cases the property or money you receive is not income. Irs easy form Appreciation. Irs easy form   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. Irs easy form Consignments. Irs easy form   Consignments of merchandise to others to sell for you are not sales. Irs easy form The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Irs easy form Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Irs easy form Merchandise you have shipped out on consignment is included in your inventory until it is sold. Irs easy form   Do not include merchandise you receive on consignment in your inventory. Irs easy form Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use. Irs easy form Construction allowances. Irs easy form   If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions. Irs easy form Under a short-term lease of retail space. Irs easy form For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Irs easy form Amount you can exclude. Irs easy form   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Irs easy form Short-term lease. Irs easy form   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. Irs easy form The following rules apply in determining whether the lease is for 15 years or less. Irs easy form Take into account options to renew when figuring whether the lease is for 15 years or less. Irs easy form But do not take into account any option to renew at fair market value determined at the time of renewal. Irs easy form Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease. Irs easy form Retail space. Irs easy form   Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public. Irs easy form Qualified long-term real property. Irs easy form   Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends. Irs easy form Exchange of like-kind property. Irs easy form   If you exchange your business property or property you hold for investment solely for property of a like kind to be used in your business or to be held for investment, no gain or loss is recognized. Irs easy form This means that the gain is not taxable and the loss is not deductible. Irs easy form A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. Irs easy form For more information, see Form 8824. Irs easy form Leasehold improvements. Irs easy form   If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. Irs easy form However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. Irs easy form Loans. Irs easy form   Money borrowed through a bona fide loan is not income. Irs easy form Sales tax. Irs easy form   State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. Irs easy form Guidelines for Selected Occupations This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040) or C-EZ (Form 1040). Irs easy form Direct seller. Irs easy form   You must report all income you receive as a direct seller on Schedule C or C-EZ. Irs easy form This includes any of the following. Irs easy form Income from sales—payments you receive from customers for products they buy from you. Irs easy form Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. Irs easy form Prizes, awards, and gifts you receive from your selling business. Irs easy form You must report this income regardless of whether it is reported to you on an information return. Irs easy form   You are a direct seller if you meet all the following conditions. Irs easy form You are engaged in one of the following trades or businesses. Irs easy form Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment. Irs easy form Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). Irs easy form Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked. Irs easy form Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes. Irs easy form Executor or administrator. Irs easy form   If you administer a deceased person's estate, your fees are reported on Schedule C or C-EZ if you are one of the following: A professional fiduciary. Irs easy form A nonprofessional fiduciary (personal representative) and both of the following apply. Irs easy form The estate includes an active trade or business in which you actively participate. Irs easy form Your fees are related to the operation of that trade or business. Irs easy form A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business. Irs easy form    If the fees do not meet the above requirements, report them on line 21 of Form 1040. Irs easy form Fishing crew member. Irs easy form    If you are a member of the crew that catches fish or other water life, your earnings are reported on Schedule C or C-EZ if you meet all the requirements shown in chapter 10 under Fishing crew member . Irs easy form Insurance agent, former. Irs easy form   Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C or C-EZ if all the following conditions are met. Irs easy form You received payments after your agreement to perform services for the company ended. Irs easy form You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment. Irs easy form You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended. Irs easy form The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both. Irs easy form The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service). Irs easy form Insurance agent, retired. Irs easy form   Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. Irs easy form Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. Irs easy form   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. Irs easy form Newspaper carrier or distributor. Irs easy form   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Irs easy form You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). Irs easy form Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. Irs easy form You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Irs easy form   This rule applies whether or not you hire others to help you make deliveries. Irs easy form It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. Irs easy form Newspaper or magazine vendor. Irs easy form   If you are 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Irs easy form You sell newspapers or magazines to ultimate consumers. Irs easy form You sell them at a fixed price. Irs easy form Your earnings are based on the difference between the sales price and your cost of goods sold. Irs easy form   This rule applies whether or not you are guaranteed a minimum amount of earnings. Irs easy form It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. Irs easy form Notary public. Irs easy form   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. Irs easy form These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). Irs easy form Public official. Irs easy form   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. Irs easy form This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Irs easy form Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these. Irs easy form   Public officials of state or local governments report their fees on Schedule C or C-EZ if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement. Irs easy form Real estate agent or direct seller. Irs easy form   If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C or C-EZ if both the following apply. Irs easy form Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work. Irs easy form You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Irs easy form Securities dealer. Irs easy form   If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C or C-EZ. Irs easy form For more information, see sections 1256 and 1402(i). Irs easy form Securities trader. Irs easy form   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. Irs easy form As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. Irs easy form However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. Irs easy form For more information about securities traders, see Publication 550, Investment Income and Expenses. Irs easy form Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. Irs easy form This section discusses some of the more common differences that may affect business transactions. Irs easy form Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). Irs easy form If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. Irs easy form Dealers in real estate are not allowed to use inventories. Irs easy form For more information on inventories, see chapter 2. Irs easy form Income paid to a third party. Irs easy form   All income you earn is taxable to you. Irs easy form You cannot avoid tax by having the income paid to a third party. Irs easy form Example. Irs easy form You rent out your property and the rental agreement directs the lessee to pay the rent to your son. Irs easy form The amount paid to your son is gross income to you. Irs easy form Cash discounts. Irs easy form   These are amounts the seller permits you to deduct from the invoice price for prompt payment. Irs easy form For income tax purposes, you can use either of the following two methods to account for cash discounts. Irs easy form Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). Irs easy form Credit the cash discount to a discount income account. Irs easy form You must use the chosen method every year for all your purchase discounts. Irs easy form   If you use the second method, the credit balance in the account at the end of your tax year is business income. Irs easy form Under this method, you do not reduce the cost of goods sold by the cash discounts you received. Irs easy form When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise. Irs easy form Trade discounts. Irs easy form   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. Irs easy form Do not enter these discounts on your books of account. Irs easy form Instead, use only the net amount as the cost of the merchandise purchased. Irs easy form For more information, see Trade discounts in chapter 6. Irs easy form Payment placed in escrow. Irs easy form   If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. Irs easy form However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year. Irs easy form Sales returns and allowances. Irs easy form   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. Irs easy form Advance payments. Irs easy form   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. Irs easy form Insurance proceeds. Irs easy form   If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. Irs easy form You cannot deduct the reimbursed part of a casualty or theft loss. Irs easy form   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. 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Circular 230 Tax Professionals

Circular No. 230 (Rev. 8-2011)
Rules Governing Practice Before the Internal Revenue Service

The Office of Professional Responsibility (OPR) At-A-Glance
Understand the Office of Professional Responsibility's mission and operations as it pertains to the standards of practice for tax professionals.

Frequently Asked Questions (FAQ's)
The Office of Professional Responsibility: Frequently Asked Questions.

OPR's Disciplinary Stats
Information regarding OPR's calendar year(s) disciplinary stats

Office of Professional Responsibility Webinars
Learn more about Practice by viewing IRS/OPR webinars from the OPR's Director.

Latest News from Office of Professional Responsibility (OPR)
The latest news from OPR.

Rights and responsibilities of practitioners in Circular 230 disciplinary cases
Rules and procedures for practitioners who fail to comply with Circular 230.

Restrictions on Practitioners Disciplined by OPR
What tax practice activities are prohibited while under suspension/disbarment.

Circular 230 Disciplinary Proceedings
An Overview.

Announcements of Disciplinary Sanctions
Office of Professional Responsibility's Final Agency Decisions in disciplinary cases, and the Internal Revenue Bulletins List of Announcements for Disbarments, Suspensions, Resignations, and Censures Since 1998 taken Against Tax Professionals.

Information for Tax Professionals
Office of Professional Responsibility/Circular 230 - related issues.

Contingent Fees Under Circular 230
Contingent Fees Under Circular 230 - Notice 2008–43.

OPR 9/11/09 Discipline Policy on FBAR Violations by Practitioners
Statement from 9/11/09 re: Discipline Policy on FBAR Violations by Practitioners

Make a Complaint About a Tax Return Preparer
Taxpayers can use this site to find out how to file a complaint about a tax preparer.

Enrolled Agent Program
Special competencies are required to represent your client for audits and related tax matters before the IRS. Find out about the Special Enrollment Examination and how to become an enrolled agent.

Joint Board for the Enrollment of Actuaries
Information for Enrolled Actuaries, or for individuals who wish to become Enrolled Actuaries.

Enrolled Retirement Plan Agent Program
Information for enrolled retirement plan agents and individuals who wish to become enrolled retirement plan agents.

Page Last Reviewed or Updated: 26-Feb-2014

The Irs Easy Form

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