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Form 1040ez Instructions

How To File Back Income TaxesIrsWhere Can I Do State Taxes For FreeReview Tax Act 20102011 Income Tax Forms 1040ez2012 Tax Return BookletBack Tax HelpTaxes For StudentsWhere Can I File 2012 Taxes Online2012 Tax Forms 10401040 Us Individual Income Tax Return2010 E File TaxesFree State Tax Returns OnlineCan I File My 2012 Taxes LateFile My State Taxes Online FreeH&r Block 2011 Tax Software1041 Ez FormHow To Do State Tax ReturnHow To File 1040xFile State For FreeForm 1040ez 2012 InstructionsHow To File An Amended Tax Return For 2012File State And Federal Taxes For FreeTax Online FreePrint 2011 Tax FormsFree Tax PrepFile 1040x Online FreeOnline State Tax FilingFile 2005 Tax Return FreeFree State TaxsAmended Kansas Tax ReturnH&r Block Free Tax ReturnsHow Do I Efile My State TaxesHappens If I Didn't File Taxes Last YearTax Form 1040ezFile State And Federal Taxes FreeHow To File A Tax Extension1040ez Tax FormsAmending 2011 Tax ReturnForm 1040x

Form 1040ez Instructions

Form 1040ez instructions Publication 3920 - Introductory Material Table of Contents Introduction Useful Items - You may want to see: Introduction This publication explains some of the provisions of the Victims of Terrorism Tax Relief Act of 2001. Form 1040ez instructions Under this Act, the federal income tax liability of those killed in the following attacks is forgiven for certain tax years. Form 1040ez instructions The April 19, 1995, attack on the Alfred P. Form 1040ez instructions Murrah Federal Building (Oklahoma City attack). Form 1040ez instructions The September 11, 2001, attacks on the World Trade Center, the Pentagon, and United Airlines Flight 93 in Somerset County, Pennsylvania (September 11 attacks). Form 1040ez instructions Terrorist attacks involving anthrax occurring after September 10, 2001, and before January 1, 2002 (anthrax attacks). Form 1040ez instructions The Act also provides other types of relief. Form 1040ez instructions For example, it provides that the following amounts are not included in income. Form 1040ez instructions Payments from the September 11th Victim Compensation Fund of 2001. Form 1040ez instructions Qualified disaster relief payments made after September 10, 2001, to cover personal, family, living, or funeral expenses incurred because of a terrorist attack. Form 1040ez instructions Certain disability payments received in tax years ending after September 10, 2001, for injuries sustained in a terrorist attack. Form 1040ez instructions Death benefits paid by an employer to the survivor of an employee if the benefits are paid because the employee died as a result of a terrorist attack. Form 1040ez instructions Debt cancellations made after September 10, 2001, and before January 1, 2002, because an individual died as a result of the September 11 attacks or anthrax attacks. Form 1040ez instructions Worksheet A. Form 1040ez instructions Figuring the Tax To Be Forgiven (For Decedents Who Filed a Return as Single, Married Filing Separately, Head of Household, or Qualifying Widow(er))         (A) First Eligible Year (1994 or 2000) (B) Second Eligible Year (1995 or 2001) (C) Third Eligible Year (1996 or 2002) 1 Enter the years eligible for tax forgiveness. Form 1040ez instructions 1       2 Enter the total tax from the decedent's income tax return. Form 1040ez instructions See Table 1 on page 5 for the line number for years before 2002. Form 1040ez instructions 2       3 Enter the following taxes, if any, shown on the decedent's income tax return. Form 1040ez instructions (These taxes are not eligible for forgiveness. Form 1040ez instructions )           a Self-employment tax. Form 1040ez instructions 3a         b Social security and Medicare tax on tip income not reported to employer. Form 1040ez instructions 3b         c Tax on excess contributions to IRAs, Coverdell education savings accounts (formerly Ed IRAs), or Archer MSAs (formerly medical savings accounts). Form 1040ez instructions 3c         d Tax on excess accumulation in qualified retirement plans. Form 1040ez instructions 3d         e Household employment taxes. Form 1040ez instructions 3e         f Uncollected social security and Medicare or RRTA tax on tips or group-term life insurance. Form 1040ez instructions 3f         g Tax on golden parachute payments. Form 1040ez instructions 3g       4 Add lines 3a through 3g. Form 1040ez instructions 4       5 Tax to be forgiven. Form 1040ez instructions Subtract line 4 from line 2. Form 1040ez instructions 5       Note. Form 1040ez instructions If the total of columns (A), (B), and (C) of line 5 (including any amounts shown on line 15 of Worksheet B) is less than $10,000, also complete Worksheet C. Form 1040ez instructions Attach the computation of the tax to be forgiven or a copy of this worksheet to the decedent's final income tax return or amended tax return (Form 1040X) for each year listed on line 1. Form 1040ez instructions If filing Form 1040X for an eligible year, enter the amount from line 5 above on Form 1040X in column B of line 10 as a decrease in tax. Form 1040ez instructions The IRS will determine the amount to be refunded. Form 1040ez instructions Worksheet A. Form 1040ez instructions Figuring the Tax To Be Forgiven (For Decedents Who Filed a Return as Single, Married Filing Separately, Head of Household, or Qualifying Widow(er))         (A) First Eligible Year (1994 or 2000) (B) Second Eligible Year (1995 or 2001) (C) Third Eligible Year (1996 or 2002) 1 Enter the years eligible for tax forgiveness. Form 1040ez instructions 1       2 Enter the total tax from the decedent's income tax return. Form 1040ez instructions See Table 1 on page 5 for the line number for years before 2002. Form 1040ez instructions 2       3 Enter the following taxes, if any, shown on the decedent's income tax return. Form 1040ez instructions (These taxes are not eligible for forgiveness. Form 1040ez instructions )           a Self-employment tax. Form 1040ez instructions 3a         b Social security and Medicare tax on tip income not reported to employer. Form 1040ez instructions 3b         c Tax on excess contributions to IRAs, Coverdell education savings accounts (formerly Ed IRAs), or Archer MSAs (formerly medical savings accounts). Form 1040ez instructions 3c         d Tax on excess accumulation in qualified retirement plans. Form 1040ez instructions 3d         e Household employment taxes. Form 1040ez instructions 3e         f Uncollected social security and Medicare or RRTA tax on tips or group-term life insurance. Form 1040ez instructions 3f         g Tax on golden parachute payments. Form 1040ez instructions 3g       4 Add lines 3a through 3g. Form 1040ez instructions 4       5 Tax to be forgiven. Form 1040ez instructions Subtract line 4 from line 2. Form 1040ez instructions 5       Note. Form 1040ez instructions If the total of columns (A), (B), and (C) of line 5 (including any amounts shown on line 15 of Worksheet B) is less than $10,000, also complete Worksheet C. Form 1040ez instructions Attach the computation of the tax to be forgiven or a copy of this worksheet to the decedent's final income tax return or amended tax return (Form 1040X) for each year listed on line 1. Form 1040ez instructions If filing Form 1040X for an eligible year, enter the amount from line 5 above on Form 1040X in column B of line 10 as a decrease in tax. Form 1040ez instructions The IRS will determine the amount to be refunded. Form 1040ez instructions Useful Items - You may want to see: Publication 547 Casualties, Disasters, and Thefts 559 Survivors, Executors, and Administrators Form (and Instructions) 706 United States Estate (and Generation- Skipping Transfer) Tax Return 1040 U. Form 1040ez instructions S. Form 1040ez instructions Individual Income Tax Return 1040NR U. Form 1040ez instructions S. Form 1040ez instructions Nonresident Alien Income Tax Return 1040X Amended U. Form 1040ez instructions S. Form 1040ez instructions Individual Income Tax Return 1041 U. Form 1040ez instructions S. Form 1040ez instructions Income Tax Return for Estates and Trusts 1310 Statement of Person Claiming Refund Due a Deceased Taxpayer 4506 Request for Copy or Transcript of Tax Form Prev  Up  Next   Home   More Online Publications
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Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

State Consumer Protection Offices

Office of the Attorney General

Website: Office of the Attorney General

Address: Office of the Attorney General
Consumer Protection Division
PO Box 1789
Charleston, WV 25326-1789

Phone Number: 304-558-8986

Toll-free: 1-800-368-8808 (WV)

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Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

Division of Banking

Website: Division of Banking

Address: Division of Banking
900 Pennsylvania Ave.
Suite 306
Charleston, WV 25302

Phone Number: 304-558-2294

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Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

Offices of the Insurance Commissioner

Website: Offices of the Insurance Commissioner

Address: Offices of the Insurance Commissioner
PO Box 50540
Charleston, WV 25305-0540

Phone Number: 304-558-3386

Toll-free: 1-888-879-9842 (WV)

TTY: 1-800-435-7381

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Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

State Auditors Office

Website: State Auditors Office

Address: State Auditors Office
Securities Commission
1900 Kanawha Blvd., E
Building 1, Room W-100
Charleston, WV 25305

Phone Number: 304-558-2251

Toll-free: 1-888-509-6567

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Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

Consumer Advocate Division

Website: Consumer Advocate Division

Address: Consumer Advocate Division
723 Kanawha Blvd., E
Union Building, Suite 700
Charleston, WV 25301

Phone Number: 304-558-0526

Public Service Commission

Website: Public Service Commission

Address: Public Service Commission
Customer Assistance
PO Box 812
201 Brooks St.
Charleston, WV 25323

Toll-free: 1-800-642-8544

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The Form 1040ez Instructions

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