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Turbotax 2008Turbotax 2008 1. Turbotax 2008 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. Turbotax 2008 At-risk limits. Turbotax 2008 Passive activities. Turbotax 2008 Net operating loss. Turbotax 2008 When Can I Deduct an Expense?Economic performance. Turbotax 2008 Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Turbotax 2008 Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Turbotax 2008 See Optional safe harbor method under Business use of your home , later. Turbotax 2008 Introduction This chapter covers the general rules for deducting business expenses. Turbotax 2008 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. Turbotax 2008 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. Turbotax 2008 What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Turbotax 2008 An ordinary expense is one that is common and accepted in your industry. Turbotax 2008 A necessary expense is one that is helpful and appropriate for your trade or business. Turbotax 2008 An expense does not have to be indispensable to be considered necessary. Turbotax 2008 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. Turbotax 2008 In some cases you may not be allowed to deduct the expense at all. Turbotax 2008 Therefore, it is important to distinguish usual business expenses from expenses that include the following. Turbotax 2008 The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Turbotax 2008 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. Turbotax 2008 Some of your business expenses may be included in figuring cost of goods sold. Turbotax 2008 Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Turbotax 2008 If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Turbotax 2008 The following are types of expenses that go into figuring cost of goods sold. Turbotax 2008 The cost of products or raw materials, including freight. Turbotax 2008 Storage. Turbotax 2008 Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Turbotax 2008 Factory overhead. Turbotax 2008 Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Turbotax 2008 Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Turbotax 2008 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. Turbotax 2008 For more information, see the following sources. Turbotax 2008 Cost of goods sold—chapter 6 of Publication 334. Turbotax 2008 Inventories—Publication 538. Turbotax 2008 Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Turbotax 2008 Capital Expenses You must capitalize, rather than deduct, some costs. Turbotax 2008 These costs are a part of your investment in your business and are called “capital expenses. Turbotax 2008 ” Capital expenses are considered assets in your business. Turbotax 2008 In general, you capitalize three types of costs. Turbotax 2008 Business start-up costs (See Tip below). Turbotax 2008 Business assets. Turbotax 2008 Improvements. Turbotax 2008 You can elect to deduct or amortize certain business start-up costs. Turbotax 2008 See chapters 7 and 8. Turbotax 2008 Cost recovery. Turbotax 2008 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. Turbotax 2008 These recovery methods allow you to deduct part of your cost each year. Turbotax 2008 In this way, you are able to recover your capital expense. Turbotax 2008 See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Turbotax 2008 A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Turbotax 2008 A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Turbotax 2008 See Publication 946 for details. Turbotax 2008 Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Turbotax 2008 These costs may include expenses for advertising, travel, or wages for training employees. Turbotax 2008 If you go into business. Turbotax 2008 When you go into business, treat all costs you had to get your business started as capital expenses. Turbotax 2008 Usually you recover costs for a particular asset through depreciation. Turbotax 2008 Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Turbotax 2008 However, you can choose to amortize certain costs for setting up your business. Turbotax 2008 See Starting a Business in chapter 8 for more information on business start-up costs. Turbotax 2008 If your attempt to go into business is unsuccessful. Turbotax 2008 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. Turbotax 2008 The costs you had before making a decision to acquire or begin a specific business. Turbotax 2008 These costs are personal and nondeductible. Turbotax 2008 They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Turbotax 2008 The costs you had in your attempt to acquire or begin a specific business. Turbotax 2008 These costs are capital expenses and you can deduct them as a capital loss. Turbotax 2008 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. Turbotax 2008 The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Turbotax 2008 You cannot take a deduction for these costs. Turbotax 2008 You will recover the costs of these assets when you dispose of them. Turbotax 2008 Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Turbotax 2008 You must fully capitalize the cost of these assets, including freight and installation charges. Turbotax 2008 Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Turbotax 2008 See Regulations section 1. Turbotax 2008 263A-2 for information on these rules. Turbotax 2008 Improvements Improvements are generally major expenditures. Turbotax 2008 Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Turbotax 2008 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. Turbotax 2008 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. Turbotax 2008 Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Turbotax 2008 However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Turbotax 2008 Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Turbotax 2008 Restoration plan. Turbotax 2008 Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Turbotax 2008 This applies even if some of the work would by itself be classified as repairs. Turbotax 2008 Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Turbotax 2008 Motor vehicles. Turbotax 2008 You usually capitalize the cost of a motor vehicle you use in your business. Turbotax 2008 You can recover its cost through annual deductions for depreciation. Turbotax 2008 There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Turbotax 2008 See Publication 463. Turbotax 2008 Generally, repairs you make to your business vehicle are currently deductible. Turbotax 2008 However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Turbotax 2008 Roads and driveways. Turbotax 2008 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. Turbotax 2008 The cost of maintaining a private road on your business property is a deductible expense. Turbotax 2008 Tools. Turbotax 2008 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. Turbotax 2008 Machinery parts. Turbotax 2008 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. Turbotax 2008 Heating equipment. Turbotax 2008 The cost of changing from one heating system to another is a capital expense. Turbotax 2008 Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Turbotax 2008 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. Turbotax 2008 You can deduct the business part. Turbotax 2008 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. Turbotax 2008 The remaining 30% is personal interest and generally is not deductible. Turbotax 2008 See chapter 4 for information on deducting interest and the allocation rules. Turbotax 2008 Business use of your home. Turbotax 2008 If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Turbotax 2008 These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Turbotax 2008 To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Turbotax 2008 The business part of your home must be used exclusively and regularly for your trade or business. Turbotax 2008 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. Turbotax 2008 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. Turbotax 2008 Your home office qualifies as your principal place of business if you meet the following requirements. Turbotax 2008 You use the office exclusively and regularly for administrative or management activities of your trade or business. Turbotax 2008 You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Turbotax 2008 If you have more than one business location, determine your principal place of business based on the following factors. Turbotax 2008 The relative importance of the activities performed at each location. Turbotax 2008 If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Turbotax 2008 Optional safe harbor method. Turbotax 2008 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. Turbotax 2008 This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Turbotax 2008 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. Turbotax 2008 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). Turbotax 2008 You are not required to allocate these deductions between personal and business use, as is required under the regular method. Turbotax 2008 If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Turbotax 2008 Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Turbotax 2008 All of the requirements discussed earlier under Business use of your home still apply. Turbotax 2008 For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Turbotax 2008 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. Turbotax 2008 Business use of your car. Turbotax 2008 If you use your car exclusively in your business, you can deduct car expenses. Turbotax 2008 If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Turbotax 2008 Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Turbotax 2008 You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Turbotax 2008 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. Turbotax 2008 Beginning in 2013, the standard mileage rate is 56. Turbotax 2008 5 cents per mile. Turbotax 2008 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. Turbotax 2008 For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Turbotax 2008 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. Turbotax 2008 Recovery of amount deducted (tax benefit rule). Turbotax 2008 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. Turbotax 2008 If you have a recovery in a later year, include the recovered amount in income in that year. Turbotax 2008 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. Turbotax 2008 For more information on recoveries and the tax benefit rule, see Publication 525. Turbotax 2008 Payments in kind. Turbotax 2008 If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Turbotax 2008 You cannot deduct the cost of your own labor. Turbotax 2008 Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Turbotax 2008 If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Turbotax 2008 Limits on losses. Turbotax 2008 If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Turbotax 2008 There may be limits on how much of the loss you can deduct. Turbotax 2008 Not-for-profit limits. Turbotax 2008 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. Turbotax 2008 See Not-for-Profit Activities , later. Turbotax 2008 At-risk limits. Turbotax 2008 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. Turbotax 2008 You are at risk in any activity for the following. Turbotax 2008 The money and adjusted basis of property you contribute to the activity. Turbotax 2008 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. Turbotax 2008 For more information, see Publication 925. Turbotax 2008 Passive activities. Turbotax 2008 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. Turbotax 2008 In general, deductions for losses from passive activities only offset income from passive activities. Turbotax 2008 You cannot use any excess deductions to offset other income. Turbotax 2008 In addition, passive activity credits can only offset the tax on net passive income. Turbotax 2008 Any excess loss or credits are carried over to later years. Turbotax 2008 Suspended passive losses are fully deductible in the year you completely dispose of the activity. Turbotax 2008 For more information, see Publication 925. Turbotax 2008 Net operating loss. Turbotax 2008 If your deductions are more than your income for the year, you may have a “net operating loss. Turbotax 2008 ” You can use a net operating loss to lower your taxes in other years. Turbotax 2008 See Publication 536 for more information. Turbotax 2008 See Publication 542 for information about net operating losses of corporations. Turbotax 2008 When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Turbotax 2008 An accounting method is a set of rules used to determine when and how income and expenses are reported. Turbotax 2008 The two basic methods are the cash method and the accrual method. Turbotax 2008 Whichever method you choose must clearly reflect income. Turbotax 2008 For more information on accounting methods, see Publication 538. Turbotax 2008 Cash method. Turbotax 2008 Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Turbotax 2008 Accrual method. Turbotax 2008 Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Turbotax 2008 The all-events test has been met. Turbotax 2008 The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Turbotax 2008 Economic performance has occurred. Turbotax 2008 Economic performance. Turbotax 2008 You generally cannot deduct or capitalize a business expense until economic performance occurs. Turbotax 2008 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. Turbotax 2008 If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Turbotax 2008 Example. Turbotax 2008 Your tax year is the calendar year. Turbotax 2008 In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Turbotax 2008 You paid it by check in January 2014. Turbotax 2008 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. Turbotax 2008 If you use the cash method of accounting, deduct the expense on your 2014 return. Turbotax 2008 Prepayment. Turbotax 2008 You generally cannot deduct expenses in advance, even if you pay them in advance. Turbotax 2008 This rule applies to both the cash and accrual methods. Turbotax 2008 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. Turbotax 2008 Example. Turbotax 2008 In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Turbotax 2008 Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Turbotax 2008 You can deduct the rent for 2014 and 2015 on your tax returns for those years. Turbotax 2008 Contested liability. Turbotax 2008 Under the cash method, you can deduct a contested liability only in the year you pay the liability. Turbotax 2008 Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Turbotax 2008 S. Turbotax 2008 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. Turbotax 2008 However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Turbotax 2008 See Regulations section 1. Turbotax 2008 461-2. Turbotax 2008 Related person. Turbotax 2008 Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Turbotax 2008 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. Turbotax 2008 Your deduction is allowed when the amount is includible in income by the related cash method payee. Turbotax 2008 See Related Persons in Publication 538. Turbotax 2008 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. Turbotax 2008 Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Turbotax 2008 The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Turbotax 2008 It does not apply to corporations other than S corporations. Turbotax 2008 In determining whether you are carrying on an activity for profit, several factors are taken into account. Turbotax 2008 No one factor alone is decisive. Turbotax 2008 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. Turbotax 2008 Presumption of profit. Turbotax 2008 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. Turbotax 2008 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. Turbotax 2008 The activity must be substantially the same for each year within this period. Turbotax 2008 You have a profit when the gross income from an activity exceeds the deductions. Turbotax 2008 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. Turbotax 2008 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. Turbotax 2008 This means the limits discussed here will not apply. Turbotax 2008 You can take all your business deductions from the activity, even for the years that you have a loss. Turbotax 2008 You can rely on this presumption unless the IRS later shows it to be invalid. Turbotax 2008 Using the presumption later. Turbotax 2008 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. Turbotax 2008 You can elect to do this by filing Form 5213. Turbotax 2008 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. Turbotax 2008 The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Turbotax 2008 Accordingly, it will not restrict your deductions. Turbotax 2008 Rather, you will gain time to earn a profit in the required number of years. Turbotax 2008 If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Turbotax 2008 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. Turbotax 2008 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. Turbotax 2008 The period is extended only for deductions of the activity and any related deductions that might be affected. Turbotax 2008 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. Turbotax 2008 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. Turbotax 2008 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. Turbotax 2008 You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Turbotax 2008 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. Turbotax 2008 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. Turbotax 2008 If you are an individual, these deductions may be taken only if you itemize. Turbotax 2008 These deductions may be taken on Schedule A (Form 1040). Turbotax 2008 Category 1. Turbotax 2008 Deductions you can take for personal as well as for business activities are allowed in full. Turbotax 2008 For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Turbotax 2008 Deduct them on the appropriate lines of Schedule A (Form 1040). Turbotax 2008 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). Turbotax 2008 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. Turbotax 2008 The reduction amount returns to $100 for tax years beginning after December 31, 2009. Turbotax 2008 See Publication 547 for more information on casualty losses. Turbotax 2008 For the limits that apply to home mortgage interest, see Publication 936. Turbotax 2008 Category 2. Turbotax 2008 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. Turbotax 2008 Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Turbotax 2008 Category 3. Turbotax 2008 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. Turbotax 2008 Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Turbotax 2008 Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Turbotax 2008 Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Turbotax 2008 They are subject to the 2%-of-adjusted-gross-income limit. Turbotax 2008 See Publication 529 for information on this limit. Turbotax 2008 Example. Turbotax 2008 Adriana is engaged in a not-for-profit activity. Turbotax 2008 The income and expenses of the activity are as follows. Turbotax 2008 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. Turbotax 2008 The limit is reached in category (3), as follows. Turbotax 2008 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. Turbotax 2008 $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. Turbotax 2008 Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Turbotax 2008 The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Turbotax 2008 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. Turbotax 2008 Partnerships and S corporations. Turbotax 2008 If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Turbotax 2008 They are reflected in the individual shareholder's or partner's distributive shares. Turbotax 2008 More than one activity. Turbotax 2008 If you have several undertakings, each may be a separate activity or several undertakings may be combined. Turbotax 2008 The following are the most significant facts and circumstances in making this determination. Turbotax 2008 The degree of organizational and economic interrelationship of various undertakings. Turbotax 2008 The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Turbotax 2008 The similarity of the undertakings. Turbotax 2008 The IRS will generally accept your characterization if it is supported by facts and circumstances. Turbotax 2008 If you are carrying on two or more different activities, keep the deductions and income from each one separate. Turbotax 2008 Figure separately whether each is a not-for-profit activity. Turbotax 2008 Then figure the limit on deductions and losses separately for each activity that is not for profit. Turbotax 2008 Prev Up Next Home More Online Publications
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