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Amending Tax Returns Online

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Amending Tax Returns Online

Amending tax returns online 1. Amending tax returns online   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. Amending tax returns online At-risk limits. Amending tax returns online Passive activities. Amending tax returns online Net operating loss. Amending tax returns online When Can I Deduct an Expense?Economic performance. Amending tax returns online Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Amending tax returns online  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Amending tax returns online See Optional safe harbor method under Business use of your home , later. Amending tax returns online Introduction This chapter covers the general rules for deducting business expenses. Amending tax returns online Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. Amending tax returns online Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. Amending tax returns online What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Amending tax returns online An ordinary expense is one that is common and accepted in your industry. Amending tax returns online A necessary expense is one that is helpful and appropriate for your trade or business. Amending tax returns online An expense does not have to be indispensable to be considered necessary. Amending tax returns online Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. Amending tax returns online In some cases you may not be allowed to deduct the expense at all. Amending tax returns online Therefore, it is important to distinguish usual business expenses from expenses that include the following. Amending tax returns online The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Amending tax returns online Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Amending tax returns online Some of your business expenses may be included in figuring cost of goods sold. Amending tax returns online Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Amending tax returns online If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Amending tax returns online The following are types of expenses that go into figuring cost of goods sold. Amending tax returns online The cost of products or raw materials, including freight. Amending tax returns online Storage. Amending tax returns online Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Amending tax returns online Factory overhead. Amending tax returns online Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Amending tax returns online Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Amending tax returns online This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. Amending tax returns online For more information, see the following sources. Amending tax returns online Cost of goods sold—chapter 6 of Publication 334. Amending tax returns online Inventories—Publication 538. Amending tax returns online Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Amending tax returns online Capital Expenses You must capitalize, rather than deduct, some costs. Amending tax returns online These costs are a part of your investment in your business and are called “capital expenses. Amending tax returns online ” Capital expenses are considered assets in your business. Amending tax returns online In general, you capitalize three types of costs. Amending tax returns online Business start-up costs (See Tip below). Amending tax returns online Business assets. Amending tax returns online Improvements. Amending tax returns online You can elect to deduct or amortize certain business start-up costs. Amending tax returns online See chapters 7 and 8. Amending tax returns online Cost recovery. Amending tax returns online   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. Amending tax returns online These recovery methods allow you to deduct part of your cost each year. Amending tax returns online In this way, you are able to recover your capital expense. Amending tax returns online See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Amending tax returns online A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Amending tax returns online A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Amending tax returns online See Publication 946 for details. Amending tax returns online Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Amending tax returns online These costs may include expenses for advertising, travel, or wages for training employees. Amending tax returns online If you go into business. Amending tax returns online   When you go into business, treat all costs you had to get your business started as capital expenses. Amending tax returns online   Usually you recover costs for a particular asset through depreciation. Amending tax returns online Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Amending tax returns online However, you can choose to amortize certain costs for setting up your business. Amending tax returns online See Starting a Business in chapter 8 for more information on business start-up costs. Amending tax returns online If your attempt to go into business is unsuccessful. Amending tax returns online   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. Amending tax returns online The costs you had before making a decision to acquire or begin a specific business. Amending tax returns online These costs are personal and nondeductible. Amending tax returns online They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Amending tax returns online The costs you had in your attempt to acquire or begin a specific business. Amending tax returns online These costs are capital expenses and you can deduct them as a capital loss. Amending tax returns online   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. Amending tax returns online   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Amending tax returns online You cannot take a deduction for these costs. Amending tax returns online You will recover the costs of these assets when you dispose of them. Amending tax returns online Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Amending tax returns online You must fully capitalize the cost of these assets, including freight and installation charges. Amending tax returns online Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Amending tax returns online See Regulations section 1. Amending tax returns online 263A-2 for information on these rules. Amending tax returns online Improvements Improvements are generally major expenditures. Amending tax returns online Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Amending tax returns online The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. Amending tax returns online Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Amending tax returns online Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Amending tax returns online However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Amending tax returns online Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Amending tax returns online Restoration plan. Amending tax returns online   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Amending tax returns online This applies even if some of the work would by itself be classified as repairs. Amending tax returns online Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Amending tax returns online Motor vehicles. Amending tax returns online   You usually capitalize the cost of a motor vehicle you use in your business. Amending tax returns online You can recover its cost through annual deductions for depreciation. Amending tax returns online   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Amending tax returns online See Publication 463. Amending tax returns online   Generally, repairs you make to your business vehicle are currently deductible. Amending tax returns online However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Amending tax returns online Roads and driveways. Amending tax returns online    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. Amending tax returns online The cost of maintaining a private road on your business property is a deductible expense. Amending tax returns online Tools. Amending tax returns online   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. Amending tax returns online Machinery parts. Amending tax returns online   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. Amending tax returns online Heating equipment. Amending tax returns online   The cost of changing from one heating system to another is a capital expense. Amending tax returns online Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Amending tax returns online However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. Amending tax returns online You can deduct the business part. Amending tax returns online For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. Amending tax returns online The remaining 30% is personal interest and generally is not deductible. Amending tax returns online See chapter 4 for information on deducting interest and the allocation rules. Amending tax returns online Business use of your home. Amending tax returns online   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Amending tax returns online These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Amending tax returns online   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Amending tax returns online The business part of your home must be used exclusively and regularly for your trade or business. Amending tax returns online The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. Amending tax returns online   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. Amending tax returns online   Your home office qualifies as your principal place of business if you meet the following requirements. Amending tax returns online You use the office exclusively and regularly for administrative or management activities of your trade or business. Amending tax returns online You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Amending tax returns online   If you have more than one business location, determine your principal place of business based on the following factors. Amending tax returns online The relative importance of the activities performed at each location. Amending tax returns online If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Amending tax returns online Optional safe harbor method. Amending tax returns online   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. Amending tax returns online This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Amending tax returns online   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. Amending tax returns online Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). Amending tax returns online You are not required to allocate these deductions between personal and business use, as is required under the regular method. Amending tax returns online If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Amending tax returns online   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Amending tax returns online All of the requirements discussed earlier under Business use of your home still apply. Amending tax returns online   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Amending tax returns online    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. Amending tax returns online Business use of your car. Amending tax returns online   If you use your car exclusively in your business, you can deduct car expenses. Amending tax returns online If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Amending tax returns online Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Amending tax returns online   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Amending tax returns online Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Amending tax returns online Beginning in 2013, the standard mileage rate is 56. Amending tax returns online 5 cents per mile. Amending tax returns online   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. Amending tax returns online   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Amending tax returns online How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. Amending tax returns online Recovery of amount deducted (tax benefit rule). Amending tax returns online   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. Amending tax returns online If you have a recovery in a later year, include the recovered amount in income in that year. Amending tax returns online However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. Amending tax returns online   For more information on recoveries and the tax benefit rule, see Publication 525. Amending tax returns online Payments in kind. Amending tax returns online   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Amending tax returns online You cannot deduct the cost of your own labor. Amending tax returns online   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Amending tax returns online If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Amending tax returns online Limits on losses. Amending tax returns online   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Amending tax returns online There may be limits on how much of the loss you can deduct. Amending tax returns online Not-for-profit limits. Amending tax returns online   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. Amending tax returns online See Not-for-Profit Activities , later. Amending tax returns online At-risk limits. Amending tax returns online   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. Amending tax returns online You are at risk in any activity for the following. Amending tax returns online The money and adjusted basis of property you contribute to the activity. Amending tax returns online Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Amending tax returns online For more information, see Publication 925. Amending tax returns online Passive activities. Amending tax returns online   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. Amending tax returns online In general, deductions for losses from passive activities only offset income from passive activities. Amending tax returns online You cannot use any excess deductions to offset other income. Amending tax returns online In addition, passive activity credits can only offset the tax on net passive income. Amending tax returns online Any excess loss or credits are carried over to later years. Amending tax returns online Suspended passive losses are fully deductible in the year you completely dispose of the activity. Amending tax returns online For more information, see Publication 925. Amending tax returns online Net operating loss. Amending tax returns online   If your deductions are more than your income for the year, you may have a “net operating loss. Amending tax returns online ” You can use a net operating loss to lower your taxes in other years. Amending tax returns online See Publication 536 for more information. Amending tax returns online   See Publication 542 for information about net operating losses of corporations. Amending tax returns online When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Amending tax returns online An accounting method is a set of rules used to determine when and how income and expenses are reported. Amending tax returns online The two basic methods are the cash method and the accrual method. Amending tax returns online Whichever method you choose must clearly reflect income. Amending tax returns online For more information on accounting methods, see Publication 538. Amending tax returns online Cash method. Amending tax returns online   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Amending tax returns online Accrual method. Amending tax returns online   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Amending tax returns online The all-events test has been met. Amending tax returns online The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Amending tax returns online Economic performance has occurred. Amending tax returns online Economic performance. Amending tax returns online   You generally cannot deduct or capitalize a business expense until economic performance occurs. Amending tax returns online If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. Amending tax returns online If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Amending tax returns online Example. Amending tax returns online Your tax year is the calendar year. Amending tax returns online In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Amending tax returns online You paid it by check in January 2014. Amending tax returns online If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. Amending tax returns online If you use the cash method of accounting, deduct the expense on your 2014 return. Amending tax returns online Prepayment. Amending tax returns online   You generally cannot deduct expenses in advance, even if you pay them in advance. Amending tax returns online This rule applies to both the cash and accrual methods. Amending tax returns online It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Amending tax returns online Example. Amending tax returns online In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Amending tax returns online Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Amending tax returns online You can deduct the rent for 2014 and 2015 on your tax returns for those years. Amending tax returns online Contested liability. Amending tax returns online   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Amending tax returns online Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Amending tax returns online S. Amending tax returns online possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. Amending tax returns online However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Amending tax returns online See Regulations section 1. Amending tax returns online 461-2. Amending tax returns online Related person. Amending tax returns online   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Amending tax returns online However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. Amending tax returns online Your deduction is allowed when the amount is includible in income by the related cash method payee. Amending tax returns online See Related Persons in Publication 538. Amending tax returns online Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Amending tax returns online Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Amending tax returns online The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Amending tax returns online It does not apply to corporations other than S corporations. Amending tax returns online In determining whether you are carrying on an activity for profit, several factors are taken into account. Amending tax returns online No one factor alone is decisive. Amending tax returns online Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. Amending tax returns online Presumption of profit. Amending tax returns online   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Amending tax returns online Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Amending tax returns online The activity must be substantially the same for each year within this period. Amending tax returns online You have a profit when the gross income from an activity exceeds the deductions. Amending tax returns online   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. Amending tax returns online   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. Amending tax returns online This means the limits discussed here will not apply. Amending tax returns online You can take all your business deductions from the activity, even for the years that you have a loss. Amending tax returns online You can rely on this presumption unless the IRS later shows it to be invalid. Amending tax returns online Using the presumption later. Amending tax returns online   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. Amending tax returns online   You can elect to do this by filing Form 5213. Amending tax returns online Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. Amending tax returns online   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Amending tax returns online Accordingly, it will not restrict your deductions. Amending tax returns online Rather, you will gain time to earn a profit in the required number of years. Amending tax returns online If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Amending tax returns online If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. Amending tax returns online   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. Amending tax returns online The period is extended only for deductions of the activity and any related deductions that might be affected. Amending tax returns online    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Amending tax returns online Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. Amending tax returns online Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. Amending tax returns online You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Amending tax returns online However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. Amending tax returns online Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. Amending tax returns online If you are an individual, these deductions may be taken only if you itemize. Amending tax returns online These deductions may be taken on Schedule A (Form 1040). Amending tax returns online Category 1. Amending tax returns online   Deductions you can take for personal as well as for business activities are allowed in full. Amending tax returns online For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Amending tax returns online Deduct them on the appropriate lines of Schedule A (Form 1040). Amending tax returns online For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). Amending tax returns online The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. Amending tax returns online The reduction amount returns to $100 for tax years beginning after December 31, 2009. Amending tax returns online See Publication 547 for more information on casualty losses. Amending tax returns online For the limits that apply to home mortgage interest, see Publication 936. Amending tax returns online Category 2. Amending tax returns online   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. Amending tax returns online Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Amending tax returns online Category 3. Amending tax returns online   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. Amending tax returns online Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Amending tax returns online Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Amending tax returns online    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Amending tax returns online They are subject to the 2%-of-adjusted-gross-income limit. Amending tax returns online See Publication 529 for information on this limit. Amending tax returns online Example. Amending tax returns online Adriana is engaged in a not-for-profit activity. Amending tax returns online The income and expenses of the activity are as follows. Amending tax returns online Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. Amending tax returns online The limit is reached in category (3), as follows. Amending tax returns online Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. Amending tax returns online $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. Amending tax returns online Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Amending tax returns online The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Amending tax returns online Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. Amending tax returns online Partnerships and S corporations. Amending tax returns online   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Amending tax returns online They are reflected in the individual shareholder's or partner's distributive shares. Amending tax returns online More than one activity. Amending tax returns online   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Amending tax returns online The following are the most significant facts and circumstances in making this determination. Amending tax returns online The degree of organizational and economic interrelationship of various undertakings. Amending tax returns online The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Amending tax returns online The similarity of the undertakings. Amending tax returns online   The IRS will generally accept your characterization if it is supported by facts and circumstances. Amending tax returns online    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Amending tax returns online Figure separately whether each is a not-for-profit activity. Amending tax returns online Then figure the limit on deductions and losses separately for each activity that is not for profit. Amending tax returns online Prev  Up  Next   Home   More Online Publications
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Tax Relief for Victims of June 19 Severe Storms in Kentucky

IN-2011-12, Sept. 2, 2011

INDIANAPOLIS — Victims of severe storms, tornadoes, and flooding that began on June 19, 2011 in parts of Kentucky may qualify for tax relief from the Internal Revenue Service.

The President has declared the following counties a federal disaster area: Bell, Knox, and Perry. Individuals who reside or have a business in these counties may qualify for tax relief.

The declaration permits the IRS to postpone until August 18 certain deadlines falling on or after June 19 and on or before August 18 for taxpayers who reside or have a business in the disaster area.

In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after June 19 and on or before July 5, 2011, as long as the deposits were made by July 5, 2011.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief.

Covered Disaster Area

The counties listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS gives affected taxpayers until August 18 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after June 19 and on or before August 18.

The IRS also gives affected taxpayers until August 18 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (August 20, 2007), that are due to be performed on or after June 19 and on or before August 18.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after June 19 and on or before July 5 provided the taxpayer made these deposits by July 5.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.
Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation “Kentucky/Severe Storms, Tornadoes, and Flooding” at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications from the official IRS website, irs.gov, or order them by calling 1-800-TAX-FORM (1-800-829-3676). The IRS toll-free number for general tax questions is 1-800-829-1040.

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