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Filing 2012 Taxes

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Filing 2012 Taxes

Filing 2012 taxes Index A Absence, temporary, Temporary absence from work. Filing 2012 taxes , Temporary absence from work. Filing 2012 taxes Accountable plans, Accountable Plans Address, change of, Reminders Adequate accounting, Adequate accounting. Filing 2012 taxes Armed Forces, Retirees, survivors, and Armed Forces members. Filing 2012 taxes , Members of the Armed Forces Distance test, special rule, Armed Forces. Filing 2012 taxes Form 3903, how to complete, How to complete Form 3903 for members of the Armed Forces. Filing 2012 taxes Services or reimbursements provided by government, Services or reimbursements provided by government. Filing 2012 taxes Spouse and dependents, Spouse and dependents. Filing 2012 taxes Assistance (see Tax help) C Change of address, Reminders Closely related in place, Closely related in place. Filing 2012 taxes Closely related in time, Closely related in time. Filing 2012 taxes D Deductible moving expenses, Deductible Moving Expenses, Moving expenses allocable to excluded foreign income. Filing 2012 taxes Household goods, Household goods and personal effects. Filing 2012 taxes Moving to and from storage, Moving goods and effects to and from storage. Filing 2012 taxes Member of your household, Member of your household. Filing 2012 taxes Moves in U. Filing 2012 taxes S. Filing 2012 taxes , Moves to Locations in the United States Moves outside U. Filing 2012 taxes S. Filing 2012 taxes , Moves to Locations Outside the United States Moving expenses allocable to excluded foreign income, Moving expenses allocable to excluded foreign income. Filing 2012 taxes Personal effects, Household goods and personal effects. Filing 2012 taxes Moving to and from storage, Moving goods and effects to and from storage. Filing 2012 taxes Reasonable expenses, Reasonable expenses. Filing 2012 taxes Storage expenses, Storage expenses. Filing 2012 taxes , Storage expenses. Filing 2012 taxes Travel by car, Travel by car. Filing 2012 taxes Travel expenses, Travel expenses. Filing 2012 taxes Distance test, Distance Test Armed Forces, special rule, Armed Forces. Filing 2012 taxes First job, First job or return to full-time work. Filing 2012 taxes Illustration of (Figure A), Main job location, Main job location. Filing 2012 taxes Return to full-time work, First job or return to full-time work. Filing 2012 taxes Worksheet 1, Distance Test E Employees Time test for, Time Test for Employees Estimated tax, Tax Withholding and Estimated Tax, Estimated tax. Filing 2012 taxes Excess reimbursements, Excess reimbursement. Filing 2012 taxes Excluded foreign income Moving expenses allocable to, Moving expenses allocable to excluded foreign income. Filing 2012 taxes F Figures (see Tables and figures) First job, First job or return to full-time work. Filing 2012 taxes Form 1040 Moving expense deduction, Where to deduct. Filing 2012 taxes Form 3903 Armed Forces members, how to complete, How to complete Form 3903 for members of the Armed Forces. Filing 2012 taxes Completing form, Completing Form 3903. Filing 2012 taxes Moving expense deduction calculation, Form 3903 Form W-2 Reimbursements, You meet accountable plan rules. Filing 2012 taxes , Expenses deducted in earlier year. Filing 2012 taxes Government provided for Armed Forces members, Services or reimbursements provided by government. Filing 2012 taxes Form W-4 Withholding allowance, Amount of income tax withheld. Filing 2012 taxes Free tax services, Free help with your tax return. Filing 2012 taxes Full-time work, defined, Full-time work. Filing 2012 taxes H Help (see Tax help) Home, defined, Home defined. Filing 2012 taxes Household goods, Household goods and personal effects. Filing 2012 taxes Moving to and from storage, Moving goods and effects to and from storage. Filing 2012 taxes I Important reminders, Reminders J Joint returns, Joint Return M Main job location Defined, Main job location. Filing 2012 taxes More than one job, More than one job. Filing 2012 taxes Union members, Union members. Filing 2012 taxes Member of household, Member of your household. Filing 2012 taxes Members of Armed Forces (see Armed Forces) Mileage rate, What's New Missing children, photographs of, Reminders Moves In U. Filing 2012 taxes S. Filing 2012 taxes , Moves to Locations in the United States Outside U. Filing 2012 taxes S. Filing 2012 taxes , Moves to Locations Outside the United States To and from storage, Moving goods and effects to and from storage. Filing 2012 taxes Moving expenses, Who Can Deduct Moving Expenses, Deductible Moving Expenses (see also Deductible moving expenses) (see also Who can deduct) N Nonaccountable plans, Nonaccountable Plans Nondeductible expenses, Nondeductible Expenses Reimbursements of, Reimbursement of nondeductible expenses. Filing 2012 taxes , Reimbursement for deductible and nondeductible expenses. Filing 2012 taxes P Permanently retired, defined, Retirees who were working abroad. Filing 2012 taxes Personal effects, Household goods and personal effects. Filing 2012 taxes Moving to and from storage, Moving goods and effects to and from storage. Filing 2012 taxes Publications (see Tax help) R Reasonable expenses, Reasonable expenses. Filing 2012 taxes Reasonable period of time, Reasonable period of time. Filing 2012 taxes Reimbursements, Reimbursements, Estimated tax. Filing 2012 taxes Accountable plans, Accountable Plans Adequate accounting, Adequate accounting. Filing 2012 taxes Armed Forces members, Services or reimbursements provided by government. Filing 2012 taxes Estimated tax, Estimated tax. Filing 2012 taxes Excess, Excess reimbursement. Filing 2012 taxes Excluded from income, Reimbursements excluded from income. Filing 2012 taxes Included in income, Reimbursements included in income. Filing 2012 taxes Nonaccountable plans, Nonaccountable Plans Nondeductible expenses, Reimbursement of nondeductible expenses. Filing 2012 taxes , Reimbursement for deductible and nondeductible expenses. Filing 2012 taxes Reasonable period of time, Reasonable period of time. Filing 2012 taxes Reporting moving expenses and reimbursements (Table 2), How and When To Report Types of plans, Types of Reimbursement Plans Reporting expenses, How and When To Report Expenses equal to or less than reimbursement, Expenses equal to or less than reimbursement. Filing 2012 taxes Expenses greater than reimbursement, Expenses greater than reimbursement. Filing 2012 taxes Form 3903, deduction calculation, Form 3903 Moving expenses and reimbursements (Table 2), How and When To Report Retirees who move to U. Filing 2012 taxes S. Filing 2012 taxes , Retirees, survivors, and Armed Forces members. Filing 2012 taxes , Retirees or survivors. Filing 2012 taxes Permanently retired, defined, Retirees who were working abroad. Filing 2012 taxes Return to full-time work, First job or return to full-time work. Filing 2012 taxes S Seasonal trade or business, Seasonal trade or business. Filing 2012 taxes Seasonal work, Seasonal work. Filing 2012 taxes Self-employed persons Time test, Time Test for Self-Employed Persons, Self-employment. Filing 2012 taxes Table 1, Time Test for Employees Spouse of Armed Forces member, Spouse and dependents. Filing 2012 taxes Standard mileage rate, What's New Storage expenses, Storage expenses. Filing 2012 taxes , Storage expenses. Filing 2012 taxes Survivors who move to U. Filing 2012 taxes S. Filing 2012 taxes , Retirees, survivors, and Armed Forces members. Filing 2012 taxes , Retirees or survivors. Filing 2012 taxes , Retirees or Survivors Who Move to the United States, Survivors of decedents who were working abroad. Filing 2012 taxes When move begins, When a move begins. Filing 2012 taxes T Tables and figures Distance test, Distance Test Nonmilitary move within U. Filing 2012 taxes S. Filing 2012 taxes , can you deduct expenses (Figure B), Seasonal work. Filing 2012 taxes Reporting moving expenses and reimbursements (Table 2), How and When To Report Time test, satisfying for employees and self-employed persons (Table 1), Time Test for Employees Tax help, How To Get Tax Help Temporary absence, Temporary absence from work. Filing 2012 taxes , Temporary absence from work. Filing 2012 taxes Time test, Time Test Employees, Time Test for Employees Exceptions to, Exceptions to the Time Test Full-time work, Full-time work. Filing 2012 taxes Joint return, Joint Return Not yet met, Time Test Not Yet Met Satisfying for employees and self-employed persons (Table 1), Time Test for Employees Seasonal trade or business, Seasonal trade or business. Filing 2012 taxes Seasonal work, Seasonal work. Filing 2012 taxes Self-employed persons, Time Test for Self-Employed Persons, Self-employment. Filing 2012 taxes Temporary absence from work, Temporary absence from work. Filing 2012 taxes , Temporary absence from work. Filing 2012 taxes Travel by car, Travel by car. Filing 2012 taxes Travel expenses, Travel expenses. Filing 2012 taxes TTY/TDD information, How To Get Tax Help U Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 Unions Main job location of member, Union members. Filing 2012 taxes W When to deduct expenses, When To Deduct Expenses, Illustrated Example Choosing when to deduct, Choosing when to deduct. Filing 2012 taxes Expenses not reimbursed, Expenses not reimbursed. Filing 2012 taxes Expenses reimbursed, Expenses reimbursed. Filing 2012 taxes How to make choice, How to make the choice. Filing 2012 taxes Who can deduct, Who Can Deduct Moving Expenses, When a move begins. Filing 2012 taxes Armed Forces, members of, Retirees, survivors, and Armed Forces members. Filing 2012 taxes Distance test, Distance Test Nonmilitary move within U. Filing 2012 taxes S. Filing 2012 taxes (Figure B), Seasonal work. Filing 2012 taxes Related to start of work, Move Related to Start of Work Retirees who move to U. Filing 2012 taxes S. Filing 2012 taxes , Retirees, survivors, and Armed Forces members. Filing 2012 taxes , Retirees or survivors. Filing 2012 taxes , Retirees or Survivors Who Move to the United States Survivors who move to U. Filing 2012 taxes S. Filing 2012 taxes , Retirees, survivors, and Armed Forces members. Filing 2012 taxes , Retirees or survivors. Filing 2012 taxes , Retirees or Survivors Who Move to the United States, Survivors of decedents who were working abroad. Filing 2012 taxes Time test, Time Test Withholding, Tax Withholding and Estimated Tax Worksheet Distance test (Worksheet 1), Distance Test Prev  Up     Home   More Online Publications
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The Filing 2012 Taxes

Filing 2012 taxes 1. Filing 2012 taxes   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. Filing 2012 taxes At-risk limits. Filing 2012 taxes Passive activities. Filing 2012 taxes Net operating loss. Filing 2012 taxes When Can I Deduct an Expense?Economic performance. Filing 2012 taxes Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Filing 2012 taxes  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Filing 2012 taxes See Optional safe harbor method under Business use of your home , later. Filing 2012 taxes Introduction This chapter covers the general rules for deducting business expenses. Filing 2012 taxes 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. Filing 2012 taxes 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. Filing 2012 taxes What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Filing 2012 taxes An ordinary expense is one that is common and accepted in your industry. Filing 2012 taxes A necessary expense is one that is helpful and appropriate for your trade or business. Filing 2012 taxes An expense does not have to be indispensable to be considered necessary. Filing 2012 taxes 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. Filing 2012 taxes In some cases you may not be allowed to deduct the expense at all. Filing 2012 taxes Therefore, it is important to distinguish usual business expenses from expenses that include the following. Filing 2012 taxes The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Filing 2012 taxes 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. Filing 2012 taxes Some of your business expenses may be included in figuring cost of goods sold. Filing 2012 taxes Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Filing 2012 taxes If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Filing 2012 taxes The following are types of expenses that go into figuring cost of goods sold. Filing 2012 taxes The cost of products or raw materials, including freight. Filing 2012 taxes Storage. Filing 2012 taxes Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Filing 2012 taxes Factory overhead. Filing 2012 taxes Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Filing 2012 taxes Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Filing 2012 taxes 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. Filing 2012 taxes For more information, see the following sources. Filing 2012 taxes Cost of goods sold—chapter 6 of Publication 334. Filing 2012 taxes Inventories—Publication 538. Filing 2012 taxes Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Filing 2012 taxes Capital Expenses You must capitalize, rather than deduct, some costs. Filing 2012 taxes These costs are a part of your investment in your business and are called “capital expenses. Filing 2012 taxes ” Capital expenses are considered assets in your business. Filing 2012 taxes In general, you capitalize three types of costs. Filing 2012 taxes Business start-up costs (See Tip below). Filing 2012 taxes Business assets. Filing 2012 taxes Improvements. Filing 2012 taxes You can elect to deduct or amortize certain business start-up costs. Filing 2012 taxes See chapters 7 and 8. Filing 2012 taxes Cost recovery. Filing 2012 taxes   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. Filing 2012 taxes These recovery methods allow you to deduct part of your cost each year. Filing 2012 taxes In this way, you are able to recover your capital expense. Filing 2012 taxes See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Filing 2012 taxes A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Filing 2012 taxes A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Filing 2012 taxes See Publication 946 for details. Filing 2012 taxes Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Filing 2012 taxes These costs may include expenses for advertising, travel, or wages for training employees. Filing 2012 taxes If you go into business. Filing 2012 taxes   When you go into business, treat all costs you had to get your business started as capital expenses. Filing 2012 taxes   Usually you recover costs for a particular asset through depreciation. Filing 2012 taxes Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Filing 2012 taxes However, you can choose to amortize certain costs for setting up your business. Filing 2012 taxes See Starting a Business in chapter 8 for more information on business start-up costs. Filing 2012 taxes If your attempt to go into business is unsuccessful. Filing 2012 taxes   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. Filing 2012 taxes The costs you had before making a decision to acquire or begin a specific business. Filing 2012 taxes These costs are personal and nondeductible. Filing 2012 taxes They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Filing 2012 taxes The costs you had in your attempt to acquire or begin a specific business. Filing 2012 taxes These costs are capital expenses and you can deduct them as a capital loss. Filing 2012 taxes   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. Filing 2012 taxes   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Filing 2012 taxes You cannot take a deduction for these costs. Filing 2012 taxes You will recover the costs of these assets when you dispose of them. Filing 2012 taxes Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Filing 2012 taxes You must fully capitalize the cost of these assets, including freight and installation charges. Filing 2012 taxes Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Filing 2012 taxes See Regulations section 1. Filing 2012 taxes 263A-2 for information on these rules. Filing 2012 taxes Improvements Improvements are generally major expenditures. Filing 2012 taxes Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Filing 2012 taxes 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. Filing 2012 taxes 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. Filing 2012 taxes Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Filing 2012 taxes However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Filing 2012 taxes Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Filing 2012 taxes Restoration plan. Filing 2012 taxes   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Filing 2012 taxes This applies even if some of the work would by itself be classified as repairs. Filing 2012 taxes Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Filing 2012 taxes Motor vehicles. Filing 2012 taxes   You usually capitalize the cost of a motor vehicle you use in your business. Filing 2012 taxes You can recover its cost through annual deductions for depreciation. Filing 2012 taxes   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Filing 2012 taxes See Publication 463. Filing 2012 taxes   Generally, repairs you make to your business vehicle are currently deductible. Filing 2012 taxes However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Filing 2012 taxes Roads and driveways. Filing 2012 taxes    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. Filing 2012 taxes The cost of maintaining a private road on your business property is a deductible expense. Filing 2012 taxes Tools. Filing 2012 taxes   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. Filing 2012 taxes Machinery parts. Filing 2012 taxes   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. Filing 2012 taxes Heating equipment. Filing 2012 taxes   The cost of changing from one heating system to another is a capital expense. Filing 2012 taxes Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Filing 2012 taxes 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. Filing 2012 taxes You can deduct the business part. Filing 2012 taxes 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. Filing 2012 taxes The remaining 30% is personal interest and generally is not deductible. Filing 2012 taxes See chapter 4 for information on deducting interest and the allocation rules. Filing 2012 taxes Business use of your home. Filing 2012 taxes   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Filing 2012 taxes These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Filing 2012 taxes   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Filing 2012 taxes The business part of your home must be used exclusively and regularly for your trade or business. Filing 2012 taxes 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. Filing 2012 taxes   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. Filing 2012 taxes   Your home office qualifies as your principal place of business if you meet the following requirements. Filing 2012 taxes You use the office exclusively and regularly for administrative or management activities of your trade or business. Filing 2012 taxes You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Filing 2012 taxes   If you have more than one business location, determine your principal place of business based on the following factors. Filing 2012 taxes The relative importance of the activities performed at each location. Filing 2012 taxes If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Filing 2012 taxes Optional safe harbor method. Filing 2012 taxes   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. Filing 2012 taxes This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Filing 2012 taxes   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. Filing 2012 taxes 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). Filing 2012 taxes You are not required to allocate these deductions between personal and business use, as is required under the regular method. Filing 2012 taxes If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Filing 2012 taxes   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Filing 2012 taxes All of the requirements discussed earlier under Business use of your home still apply. Filing 2012 taxes   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Filing 2012 taxes    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. Filing 2012 taxes Business use of your car. Filing 2012 taxes   If you use your car exclusively in your business, you can deduct car expenses. Filing 2012 taxes If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Filing 2012 taxes Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Filing 2012 taxes   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Filing 2012 taxes 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. Filing 2012 taxes Beginning in 2013, the standard mileage rate is 56. Filing 2012 taxes 5 cents per mile. Filing 2012 taxes   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. Filing 2012 taxes   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Filing 2012 taxes 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. Filing 2012 taxes Recovery of amount deducted (tax benefit rule). Filing 2012 taxes   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. Filing 2012 taxes If you have a recovery in a later year, include the recovered amount in income in that year. Filing 2012 taxes 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. Filing 2012 taxes   For more information on recoveries and the tax benefit rule, see Publication 525. Filing 2012 taxes Payments in kind. Filing 2012 taxes   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Filing 2012 taxes You cannot deduct the cost of your own labor. Filing 2012 taxes   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Filing 2012 taxes If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Filing 2012 taxes Limits on losses. Filing 2012 taxes   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Filing 2012 taxes There may be limits on how much of the loss you can deduct. Filing 2012 taxes Not-for-profit limits. Filing 2012 taxes   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. Filing 2012 taxes See Not-for-Profit Activities , later. Filing 2012 taxes At-risk limits. Filing 2012 taxes   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. Filing 2012 taxes You are at risk in any activity for the following. Filing 2012 taxes The money and adjusted basis of property you contribute to the activity. Filing 2012 taxes 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. Filing 2012 taxes For more information, see Publication 925. Filing 2012 taxes Passive activities. Filing 2012 taxes   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. Filing 2012 taxes In general, deductions for losses from passive activities only offset income from passive activities. Filing 2012 taxes You cannot use any excess deductions to offset other income. Filing 2012 taxes In addition, passive activity credits can only offset the tax on net passive income. Filing 2012 taxes Any excess loss or credits are carried over to later years. Filing 2012 taxes Suspended passive losses are fully deductible in the year you completely dispose of the activity. Filing 2012 taxes For more information, see Publication 925. Filing 2012 taxes Net operating loss. Filing 2012 taxes   If your deductions are more than your income for the year, you may have a “net operating loss. Filing 2012 taxes ” You can use a net operating loss to lower your taxes in other years. Filing 2012 taxes See Publication 536 for more information. Filing 2012 taxes   See Publication 542 for information about net operating losses of corporations. Filing 2012 taxes When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Filing 2012 taxes An accounting method is a set of rules used to determine when and how income and expenses are reported. Filing 2012 taxes The two basic methods are the cash method and the accrual method. Filing 2012 taxes Whichever method you choose must clearly reflect income. Filing 2012 taxes For more information on accounting methods, see Publication 538. Filing 2012 taxes Cash method. Filing 2012 taxes   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Filing 2012 taxes Accrual method. Filing 2012 taxes   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Filing 2012 taxes The all-events test has been met. Filing 2012 taxes The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Filing 2012 taxes Economic performance has occurred. Filing 2012 taxes Economic performance. Filing 2012 taxes   You generally cannot deduct or capitalize a business expense until economic performance occurs. Filing 2012 taxes 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. Filing 2012 taxes If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Filing 2012 taxes Example. Filing 2012 taxes Your tax year is the calendar year. Filing 2012 taxes In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Filing 2012 taxes You paid it by check in January 2014. Filing 2012 taxes 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. Filing 2012 taxes If you use the cash method of accounting, deduct the expense on your 2014 return. Filing 2012 taxes Prepayment. Filing 2012 taxes   You generally cannot deduct expenses in advance, even if you pay them in advance. Filing 2012 taxes This rule applies to both the cash and accrual methods. Filing 2012 taxes 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. Filing 2012 taxes Example. Filing 2012 taxes In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Filing 2012 taxes Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Filing 2012 taxes You can deduct the rent for 2014 and 2015 on your tax returns for those years. Filing 2012 taxes Contested liability. Filing 2012 taxes   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Filing 2012 taxes Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Filing 2012 taxes S. Filing 2012 taxes 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. Filing 2012 taxes However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Filing 2012 taxes See Regulations section 1. Filing 2012 taxes 461-2. Filing 2012 taxes Related person. Filing 2012 taxes   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Filing 2012 taxes 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. Filing 2012 taxes Your deduction is allowed when the amount is includible in income by the related cash method payee. Filing 2012 taxes See Related Persons in Publication 538. Filing 2012 taxes 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. Filing 2012 taxes Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Filing 2012 taxes The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Filing 2012 taxes It does not apply to corporations other than S corporations. Filing 2012 taxes In determining whether you are carrying on an activity for profit, several factors are taken into account. Filing 2012 taxes No one factor alone is decisive. Filing 2012 taxes 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. Filing 2012 taxes Presumption of profit. Filing 2012 taxes   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. Filing 2012 taxes 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. Filing 2012 taxes The activity must be substantially the same for each year within this period. Filing 2012 taxes You have a profit when the gross income from an activity exceeds the deductions. Filing 2012 taxes   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. Filing 2012 taxes   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. Filing 2012 taxes This means the limits discussed here will not apply. Filing 2012 taxes You can take all your business deductions from the activity, even for the years that you have a loss. Filing 2012 taxes You can rely on this presumption unless the IRS later shows it to be invalid. Filing 2012 taxes Using the presumption later. Filing 2012 taxes   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. Filing 2012 taxes   You can elect to do this by filing Form 5213. Filing 2012 taxes 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. Filing 2012 taxes   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Filing 2012 taxes Accordingly, it will not restrict your deductions. Filing 2012 taxes Rather, you will gain time to earn a profit in the required number of years. Filing 2012 taxes If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Filing 2012 taxes 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. Filing 2012 taxes   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. Filing 2012 taxes The period is extended only for deductions of the activity and any related deductions that might be affected. Filing 2012 taxes    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. Filing 2012 taxes 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. Filing 2012 taxes 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. Filing 2012 taxes You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Filing 2012 taxes 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. Filing 2012 taxes 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. Filing 2012 taxes If you are an individual, these deductions may be taken only if you itemize. Filing 2012 taxes These deductions may be taken on Schedule A (Form 1040). Filing 2012 taxes Category 1. Filing 2012 taxes   Deductions you can take for personal as well as for business activities are allowed in full. Filing 2012 taxes For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Filing 2012 taxes Deduct them on the appropriate lines of Schedule A (Form 1040). Filing 2012 taxes 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). Filing 2012 taxes 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. Filing 2012 taxes The reduction amount returns to $100 for tax years beginning after December 31, 2009. Filing 2012 taxes See Publication 547 for more information on casualty losses. Filing 2012 taxes For the limits that apply to home mortgage interest, see Publication 936. Filing 2012 taxes Category 2. Filing 2012 taxes   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. Filing 2012 taxes Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Filing 2012 taxes Category 3. Filing 2012 taxes   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. Filing 2012 taxes Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Filing 2012 taxes Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Filing 2012 taxes    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Filing 2012 taxes They are subject to the 2%-of-adjusted-gross-income limit. Filing 2012 taxes See Publication 529 for information on this limit. Filing 2012 taxes Example. Filing 2012 taxes Adriana is engaged in a not-for-profit activity. Filing 2012 taxes The income and expenses of the activity are as follows. Filing 2012 taxes 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. Filing 2012 taxes The limit is reached in category (3), as follows. Filing 2012 taxes 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. Filing 2012 taxes $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. Filing 2012 taxes Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Filing 2012 taxes The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Filing 2012 taxes 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. Filing 2012 taxes Partnerships and S corporations. Filing 2012 taxes   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Filing 2012 taxes They are reflected in the individual shareholder's or partner's distributive shares. Filing 2012 taxes More than one activity. Filing 2012 taxes   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Filing 2012 taxes The following are the most significant facts and circumstances in making this determination. Filing 2012 taxes The degree of organizational and economic interrelationship of various undertakings. Filing 2012 taxes The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Filing 2012 taxes The similarity of the undertakings. Filing 2012 taxes   The IRS will generally accept your characterization if it is supported by facts and circumstances. Filing 2012 taxes    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Filing 2012 taxes Figure separately whether each is a not-for-profit activity. Filing 2012 taxes Then figure the limit on deductions and losses separately for each activity that is not for profit. Filing 2012 taxes Prev  Up  Next   Home   More Online Publications