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Do State Taxes

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Compliance & Enforcement News

Offshore Tax-Avoidance and IRS Compliance Efforts
The IRS continues to uncover abusive tax-avoidance schemes involving offshore activity. Find information here pertaining to Union Bank of Switzerland (UBS).

Fiscal Year 2013 Enforcement and Service Results
The Fiscal Year 2013 Enforcement and Service Results provide the dollars collected from the examination (audit) and collection functions of the IRS. The results also tally various taxpayer assistance program results.

FY 2011 Enforcement Results
FY 2011 IRS Enforcement and Service Results.

FY 2009 Enforcement Results
The IRS FY 2009 Enforcement and Service Results detail the agency's audit, collection and taxpayer service efforts.

Tips for Choosing a Tax Return Preparer
FS-2012-5, January 2012 — If you pay someone to prepare your tax return, the IRS urges you to choose that preparer wisely.

IRS Releases New Tax Gap Estimates; Compliance Rates Remain Statistically Unchanged From Previous Study
IR-2012-4, Jan. 6, 2012 — The Internal Revenue Service today released a new set of tax gap estimates for tax year 2006. The tax gap is defined as the amount of tax liability faced by taxpayers that is not paid on time.

IRS Office of Professional Responsibility Prevails on Appeal Against CPA
IR-2011-48, April 25, 2011 — IRS Office of Professional Responsibility prevailed in an agency appeal against a Florida certified public accountant, according to the published Decision on Appeal.

IRS Begins Enforcement of New Return Preparer Rules
IR-2011-47, April 25, 2011 — The IRS is taking steps to stop tax preparers with criminal tax convictions or permanent injunctions from preparing tax returns.

How to Choose a Tax Return Preparer and Avoid Preparer Fraud
FS-2010-03, January 2010 — IRS fact sheet on how to choose a tax return preparer and avoid preparer fraud.

How to Choose a Tax Preparer and Avoid Preparer Fraud
FS-2009-7, January 2009 — Taxpayers should put as much care in choosing a preparer as they would a doctor or lawyer.

Tax Return Preparer Fraud
FS-2008-10, January 2008 — Get hints from IRS on how to choose a reputable tax preparer.

Fraudulent Telephone Tax Refunds, Abusive Roth IRAs Top Off 2007 “Dirty Dozen” Tax Scams
IR-2007-37, Feb. 20, 2007 –– Also new to the "Dirty Dozen" are abuses involving the American Indian Employment Credit, domestic shell companies and structured entities.

IRS Moves to Prevent Telephone Tax Refund Abuse; Help Taxpayers Make Accurate Requests
IR-2007-27, Feb. 7, 2007 — The Internal Revenue Service announced today it is taking additional steps to prevent abuse by tax preparers and help taxpayers make accurate requests for the one-time telephone excise tax refund.

Statement of IRS Commissioner Mark W. Everson on the FY 2008 Budget
Feb. 5, 2007 — The president’s 2008 budget request for the IRS, together with the accompanying legislative proposals concerning tax administration... will do much to promote compliance with our tax law.

Tax Return Preparer Fraud
FS-2007-12, January 2007 — Taxpayers should use caution when engaging professional tax return preparers and learn the warning signs of potential fraud.

IRS Accepts Settlement Offer in Largest Transfer Pricing Dispute
IR-2006-142, Sept. 11, 2006 — IRS has reached a satisfactory settlement in a transfer pricing dispute with Glaxo SmithKline in the largest tax dispute in the IRS's history.

IRS and States Join Forces to Combat Money Laundering
IR-2006-70, April 27, 2006 — Thirty-three states and Puerto Rico have signed agreements with the IRS to share Bank Secrecy Act information on money services businesses.

IRS Debunks Frivolous Arguments on Paying Taxes
IR-2006-45, March 16, 2006 — The IRS today issued updated guidance describing and rebutting frivolous arguments taxpayers should avoid when filing their tax returns

IRS Updates Tax Gap Estimates
IR-2006-28, Feb. 14, 2006 — The revised tax gap estimate is $345 billion for tax year 2001. The tax gap is the difference between what taxpayers timely and voluntarily should have paid and what they did pay.

IRS Improves Enforcement and Services in 2005
Prepared remarks by IRS Commissioner Mark W. Everson reqarding new Fiscal Year 2005 data that show improvements in enforcement and services to taxpayers.

IRS Launches Abusive Transaction Settlement Initiative
IR-2005-129, Oct. 27, 2005 — Internal Revenue Service officials today announced a broad-based, limited-in-time opportunity for taxpayers to come forward and settle an array of transactions the IRS considers abusive.

KPMG to Pay $456 Million for Criminal Violations
IR-2005-83, Aug. 29, 2005 — KPMG LLP (KPMG) has admitted to criminal wrongdoing and agreed to pay $456 million in fines, restitution and penalties as part of an agreement to defer prosecution of the firm, the Justice Department and the Internal Revenue Service announced today.

Robust Response for Executive Stock Option Initiative; Son of Boss Settlement Heading for $4 Billion
IR-2005-72, July 11, 2005 — IRS officials announced today that they received a strong turnout for the executive stock option settlement initiative launched in February.

IRS Collects $3.2 Billion from Son of Boss; Final Figure Should Top $3.5 Billion
IR-2005-37 — Abusive transaction aggressively marketed to wealthy individuals. Settlement required taxpayers to concede 100 percent of claimed tax losses.

IRS Obtains More Than 100 Injunctions Against Tax Scheme Promoters
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States See Son of Boss Benefits; Tax Administrators Praise Efforts
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Understanding the Tax Gap
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Report on IRS Review of Alleged Political Campaign Intervention 2005
The Treasury Inspector General reports that IRS properly ran its program for investigating claims of inappropriate political campaign actions by tax-exempt organizations.

Page Last Reviewed or Updated: 28-Mar-2014

The Do State Taxes

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