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Frequently Asked Tax Questions And Answers
Keyword: Business Use/Expense
11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture
Can the entire acquisition cost of a computer that I purchased for
my business be deducted as a business expense or do I have to use depreciation?
A deduction for depreciation of a computer for business use can be expensed
in the first year if qualified, or depreciated over the recovery period. To
claim the expense in the first year, the property must be used more than 50%
for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 raised the
aggregate cost that can be expensed for any tax year after 2002 and before
2006 to $100,000. The new law also expanded the definition of Code Section
179 property to include off-the shelf computer software. See Code Section 179 for the expanded definition.
If you make a choice to depreciate the property you can claim a special
depreciation allowance for qualified property you acquired in service after
September 10, 2001 and before January 1, 2005. The allowance is a depreciation
deduction equal to 30% of the property's depreciable basis. The special depreciation
is figured before you calculate your regular depreciation. To qualify for
the special deduction the property must:
Be new property this is depreciated under MACRS with a recovery period
of 20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service and before January 1, 2005.
Be property the original use of which began after September 10, 2001
See Publication 946, How to Depreciate Property for
additional information on the special deduction.
The 2003 Jobs and Growth Tax Relief Reconciliation Act of 2003 modified
the bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation is not eligible
for the 30% additional first-year depreciation. However, an election can be
made to have the 30% additional first-year depreciation deduction apply to
the 50% depreciation property instead of the 50% additional firs-year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation.
References:
What kinds of property can be depreciated for tax purposes?
Only property used in a trade or business or in an income production activity
can be depreciated. Additionally, the property must be something that wears
out or becomes obsolete and it must have a determinable useful life substantially
beyond the tax year. The kinds of property that can be depreciated include,
but are not limited to, machinery, equipment, buildings, vehicles, and furniture.
Depreciation is a complex topic. For more information, refer to Tax Topic 704, Depreciation,
or Publication 946, How to Depreciate Property ,
or Publication 534 (PDF) , Depreciating Property
Placed in Service Before 1987.
References:
I purchased a computer last year to do online day trading part-time
from home for additional income. Can I deduct or depreciate the cost of the
computer or internet connection from my investment income?
You may deduct investment expenses (other than interest expenses) as miscellaneous
itemized deductions on Form 1040, Schedule A (PDF),
line 22, Itemized Deductions. This would include depreciation on
the portion of your computer used for investment purposes, and the portion
of your internet access charges used for investment purposes.
A deduction for depreciation of a computer for business use can be expensed
in the first year if qualified, or depreciated over the recovery period. To
claim the expense in the first year, the property must be used more than 50%
for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Act raised the aggregate cost that can be expensed
for any tax year beginning after 2002 and before 2006 to $100,000. The new
law also expanded the definition of Code Section 179 property to include off-the-shelf
computer software. See Code Section 179 for the expanded definition. If the business use falls
to 50% or less in a later year, these tax benefits may be subject to recapture.
See Publication 946 , How to Depreciate Property for
additional information on the special deduction.
These deductions must be reduced by 2% of your adjusted gross income. Use Form 4562 (PDF), Depreciation and Amortization,
to compute the depreciation for the portion of your computer used for investment
purposes.
Note: Unless the computer is used more than 50% for business purpose (as
opposed to investment purposes), you cannot claim section 179 expensing of
the computer or claim accelerated depreciation for it. For more information,
refer to "Listed Property" in Publication 946, How to Depreciate Property.
References:
I purchased a computer to support my job-related activities. As
an employee, can I write-off the entire allowed cost or will I have to depreciate
it over a few years?
You can claim a depreciation deduction for a computer that you use in your
work as an employee if its use is:
For the convenience of your employer, and
Required as a condition of your employment.
Use Form 4562 (PDF) , Depreciation and
Amortization , to compute the depreciation. There have been recent changes
to the percentage of depreciation claimed in the first year you place the
property in service.
The cost of a computer purchased for business use can be expensed under
section 179 in the first year if qualified, or depreciated over the recovery
period. To claim the expense in the first year, the property must be used
more than 50% for business use, and meet the other requirements for expensing.
The 2003 Jobs and Growth Act raised the aggregate cost that can be expensed
for any tax year after 2002 and before 2006 to $100,000. The new law also
expanded the definition of Code Section 179 property to include off-the shelf computer software.
See Code Section 179 for the expanded definition.
If you make a choice to depreciate the property you can claim a special
depreciation allowance for qualified property you acquired after September
10, 2001 and before January 1, 2005. The allowance is figured before you calculate
your regular depreciation. See Publication 946 , How to
Depreciate Property for additional information on the special deduction.
You cannot take a section 179 deduction for the item or claim accelerated
depreciation unless your use of the computer is more than 50% business or
job-related use (and you meet the two conditions listed above).
Section 179 deductions and accelerated depreciation methods are explained
in Publication 946, How to Depreciate Property.
References:
I need to know the maximum deduction allowed for depreciation on
a passenger automobile purchased in 2003?
The maximum deduction (including any amounts deducted under section 179)
that can be claimed for a used passenger automobile or one that is Liberty
Zone property that was placed in service in 2003 is $3,060 for the first year,
$4,900 for the second year, $2,950 for the third year, and $1,775 for the
fourth and following years. For a new passenger automobile acquired on or
before May 5, 2003 (and not Liberty Zone property), the first year deduction
is limited to $7,660 (or $3,060 if the owner elects not to take the 30 percent
additional bonus depreciation allowance. The 2003 Jobs and Growth Tax Relief
and Reconciliation Act provided that for qualified vehicles purchased after
May 5, 2003, the first-year depreciation deduction is limited to $10,710 (or
$3,060 if the owner elects not to take either the 30% or the 50% bonus depreciation
allowance). Subsequent year limits are the same as for used vehicles. Some
what higher limits apply to owners of trucks and vans. For more information
refer to Publication 946, How to Depreciate Property and Publication 463, Travel, Entertainment, Gift, and Car Expenses
References:
What form and line do I deduct the 36 cents per mile on for my business
travel and do I need to figure depreciation of the vehicle, too?
A Sole Proprietor's business use of a car or truck is claimed on line 10
of Form 1040, Schedule C (PDF), Schedule C, Profit or
Loss from Business or, if eligible, line 2 of Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You may use
either the actual expense method in calculating your car or truck expense
or, if eligible, the 2003 standard mileage rate of 36 cents per mile. Depreciation
expense is already included in this standard mileage rate. Depreciation is
only calculated as a separate expense when using the actual expense method.
Deductible employee business use of a car or truck may be taken on Form 2106 (PDF), Employee Business Expenses , or
if, eligible, line 1 of Form 2106-EZ (PDF), Unreimbursed
Employee Business Expenses. The car and truck expenses are then taken
with other employee business expenses on line 20, Form 1040, Schedule A&B (PDF) Itemized Deductions . For more information,
refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses ,
and Publication 535, Business Expenses .
References:
- Publication 535, Business Expenses
- Publication 463, Travel, Entertainment, Gift, and Car
Expenses
- Form 1040, Schedule C (PDF), Profit
or Loss from Business (Sole Proprietorship)
- Form 1040, Schedule C-EZ (PDF), Unreimbursed
Employee Business Expenses.
- Form 2106 (PDF), Employee Business
Expenses
- Form 2106EZ (PDF), Unreimbursed
Employee Business Expenses
I have a home office. Can I deduct expenses like mortgage, utilities,
etc., but not deduct depreciation so that when I sell this house, the basis
won't be affected?
If you have qualified business use of your home and enough gross income
from that business use to that entitle you to a depreciation deduction, you
are required to reduce your basis in the home by the amount of depreciation
allowed (deducted) or allowable (could have been deducted).
Whether you choose to deduct the depreciation on your current return(s)
will not matter. For tax purposes, you will still be treated as if you had
taken the allowable deduction, and your basis will have to be reduced. For
more information, refer to Publication 946, How to Depreciate Property, Publication 544, Sales and Other Dispositions of Assets, and Publication 587, Business Use of Your Home.
References:
I have a rental property. Do I have to take depreciation on it?
You do not have to claim depreciation on your rental property on your tax
return. However, when reporting the sale of the rental property you are required
to reduce the basis of the property for allowable depreciation regardless
of whether the depreciation deduction was taken or not. For more information,
refer to Publication 544, Sale or Other Dispositions of Assets,
the
Instructions for Form 4797, Sale of Business Property,
and Publication 527, Residential Rental Property (including
vacation homes).
References:
In calculating depreciation on both my rental apartment building
and its furniture, what depreciation type, asset class, depreciation method,
and recovery period should be used?
You can claim a special depreciation allowance for qualified property you
acquired after September 10, 2001 and before January 1, 2005. The allowance
is a depreciation deduction equal to 30% of the property's depreciable basis.
The special depreciation is figured before you calculate your regular depreciation.
To qualify for the special deduction the property must:
Be new property that is depreciated under MACRS with recovery period of
20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service Before January 1, 2005.
Be property that the original use began after September 10, 2001.
See Publication 946, How to Depreciate Property for
additional information on the special deduction.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 modified the
bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation is not eligible
for the 30% additional first-year depreciation. However, an election can be
made to have the 30% additional first-year depreciation deduction apply to
50% depreciation property instead of the 50% additional first year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation deduction.
References:
We replaced the roof on a residential rental property and need to
know what to use for the classification and recovery period to calculate depreciation?
Replacement of a roof on a residential rental property is a capital improvement
to the structure. The roof is in the same class of property as the property
to which it is attached. Since the property is residential rental property,
the roof is generally depreciated over a residential rental property recovery
period of 27.5 years using the straight line method of depreciation and a
mid-month convention. You cannot write off (or take a loss on) any remaining
basis in the replaced roof. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
On residential rental property, would new windows and siding be
considered a repair that could be deducted against income, or would they be
capitalized as an improvement?
Replacement of windows and siding on a residential rental property is a
capital improvement to the structure, provided the replacement improves the
value of this property or substantiality prolongs its life. The windows and
siding, in that event, are in the same class of property as the property to
which they are affixed. In this case, the windows and siding are generally
depreciated over a recovery period of 27.5 years using the straight line method
of depreciation and a mid-month convention. For more information, refer to Publication 527, Residential Rental Property, and Publication 946, How
to Depreciate Property.
References:
We have incurred substantial repairs to our rental property: new
roof, gutters, windows, furnace, and outside paint. What are the IRS rules
concerning depreciation?
Replacements of roof, rain gutters, windows, and furnace on a residential
rental property are capital improvements to the structure because they materially
add to the value of your property or substantially prolong its life. The items
would be in the same class of property as the rental property to which to
which they are attached. Since the property is residential rental property,
the items are generally depreciated over 27.5 years using the straight line
method of depreciation and a mid-month convention.
Repairs, such as repainting the house, are currently deductible expenses.
A repair keeps your property in good operating condition. It does not materially
add to the value of your property or substantially prolong its life. Repainting
your property inside or out, fixing gutters or floors, fixing leaks, plastering,
and replacing broken windows are examples of repairs. If you make repairs
as part of an extensive remodeling or restoration of your property, the whole
job is an improvement. In that case, you should capitalize and depreciate
the repair costs as the same class of property that you have restored or remodeled
as discussed above. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
How many years do I depreciate a new furnace installed as an improvement
on residential rental property and what method do I use to compute the depreciation?
Replacement of a furnace in a residential rental property is a capital
improvement to the structure. The furnace is in the same class of property
as the property in which it is installed. Since the property is residential
rental property, the furnace is, generally, depreciated over a recovery period
of 27.5 years using the straight line method of depreciation and a mid-month
convention. For more information, refer to Publication 527, Residential
Rental Property, and Publication 946, How to Depreciate Property.
References:
I purchased a snowblower and a lawn mower strictly for use at a
residential apartment building I own. Can I elect the section 179 deduction
to fully deduct the costs of the snowblower and lawn mower?
You cannot claim section 179 expense for property held to produce rental
income (since it is use in connection with the furnishing of lodging). These
assets are classified as 5-year property and must be depreciated under MACRS
(Modified Accelerated Cost Recovery System).
You can claim a special depreciation allowance for qualified property you
acquired service after September 10, 2001 and before January 1, 2005. The
allowance is a depreciation deduction equal to 30% of the property's depreciable
basis. The special depreciation is figured before you calculate your regular
depreciation. To qualify for the special deduction the property must:
Be new property that is depreciated under MACRS with a recovery period
of 20 years or less.
Be property that was acquired after September 10, 2001 and before January
1, 2005.
Be property that was placed in service Before January 1, 2005.
Be property that the original use began after September 10, 2001.
See Publication 946 , How to Depreciate Property for
additional information on the special deduction.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 modified the
bonus depreciation rule by substituting a 50% special depreciation allowance
for the 30%, for property acquired after May 5, 2003 and before January 1,
2005. No binding contract for acquisition can be in effect before May 6, 2003.
Property eligible for the 50% additional first-year depreciation deduction
is not eligible for the 30% additional first-year depreciation deduction apply
to 50% depreciation property instead of the 50% additional first-year depreciation
deduction. It is also possible to elect not to claim the additional first-year
depreciation.
References:
I expensed equipment and furniture (not used for residential rental
property) two years ago under section 179, but stopped doing business last
year. Does any of this have to be recaptured and claimed as income, even though
the items have not been sold?
If you claim a section 179 deduction for the cost of property in the year
you place the property in service, and in a subsequent year, you do not use
it more than 50 percent for business, you may have to recapture part of the
section 179 deduction. This can occur in any year during the recovery period
for the property even though the items have not been sold. Refer to Publication 946, How to Depreciate Property, on how to calculate the recapture
amount. The recapture amount is computed on part IV of Form 4797 (PDF), Sale of Business Property, and is included as other
income on line 6 of Form 1040, Schedule C (PDF), Profit
or Loss from Business (Sole Proprietorship).
References:
12.7 Small Business/Self-Employed/Other Business : Income & Expenses
I gave my friend a loan to do business, but the business went bankrupt and
she did not pay me back. Can I deduct this bad loan?
If someone owes you money that you cannot collect, you have a bad debt. Bad debts
are deductible only if the amount owed has been previously included in your income.
For a discussion of what constitutes a valid debt, see Publication 535, Business
Expenses and Publication 550, Investment Income and Expenses .
If you are a cash basis taxpayer, as most individuals are, you may not take a bad
debt deduction for expected income you have not received, since it was never included
in your income. There are two kinds of bad debts - business and nonbusiness.
A business bad debt, generally, is one that comes from operating your trade or
business. A business deducts its bad debts from gross income when figuring its taxable
income. Business bad debts may be deducted in part or in full.
All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless
to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You
must establish that you have taken reasonable steps to collect the debt and that the
debt is worthless. It is not necessary to go to court if you can show that a judgment
from the court would be uncollectible. You may take the deduction only in the year
the debt becomes worthless. A debt becomes worthless when the surrounding facts and
circumstances indicate there is no longer any chance the amount owed will be paid.
You do not have to wait until the debt comes due.
A nonbusiness bad debt is reported on Form 1040, Schedule D (PDF) , Capital
Gains and Losses, as a short-term capital loss. It is subject to the capital
loss limit of $3,000 per year. This limit is $1,500 if you are married filing a separate
return. A nonbusiness bad debt requires a separate detailed statement attached to
the schedule D. For more information on nonbusiness bad debts, refer to Publication 550, Investment
Income and Expenses . For more information on business bad debts, refer to Publication 535, Business Expenses .
References:
How do you distinguish between a business and a hobby?
Since hobby expenses are deductible only to the extent of hobby income, it is important
to distinquish hobby expenses from expenses incurred in an activity engaged in for
profit. In making this distinction, all facts and circumstances with respect to the
activity are taken into account and no one factor is determinative. Among the factors
which should normally be taken into account are the following:
Whether you carry on the activity in a businesslike manner
Whether the time and effort you put into the activity indicate you intend to make
it profitable
Whether you depend on income from the activity for your livelihood
Whether your losses are due to circumstances beyond your control (or are normal
in the startup phase of your type of business)
Whether you change your methods of operation in an attempt to improve profitability
Whether you, or your advisors, have the knowledge needed to carry on the activity
as a successful business
Whether you were successful in making a profit in similar activities in the past
Whether the activity makes a profit in some years, and how much profit it makes
Whether you can expect to make a future profit from the appreciation of the assets
used in the activity
Additional information on this topic is available in section 1.183-2 (b) of the
federal tax regulations.
References:
If I pay personal expenses out of my business bank account, should I count
the money used as part of my income, or can I write these expenses off?
You would include the money in income and you would not write the amounts off as
expenses. Only business related expenses can be deducted from your business income.
It is recommended that you not mix business and personal accounts. This makes it easier
to keep records.
References:
For business travel, are there limits on the amounts deductible for meals?
Meal expenses are deductible only if your trip is overnight or long enough that
you need to stop for sleep or rest to properly perform your duties. The amount of
the meal expenses must be substantiated, but instead of keeping records of the actual
cost of your meal expenses you can generally use a standard meal allowance ranging
from $30 to $50 in 2003 depending on where and when you travel.
Generally, the deduction for unreimbursed business meals is limited to 50% of the
cost that would otherwise be deductible.
For more information on business travel expenses and restrictions, refer to Tax Topic 511 , or Publication 463, Travel, Entertainment, Gift, and Car Expenses,
and Publication 1542, Per Diem Rates .
References:
Where can I find the per diem rates for foreign countries?
The federal per diem rates for foreign locations (outside the continental United
States, abbreviated as OCONUS, and including the per diem rates for Alaska, Hawaii,
Puerto Rica, the Northern Mariana Islands, U. S. possessions, and all foreign locates)
are published monthly in the Maximum Travel Per Diem Allowances for Foreign Areas.
Your employer may have these rates available, or you can purchase the publication
from the:
Superintendent of Documents
U.S. Government Printing
Office
P.O. Box 371954
Pittsburgh, PA 15250-7954
You can also access the federal per diem rates for CONUS localities on the Internet
at http://www.policyworks.gov/perdiem .
This website also provides a link to rates for localities OCONUS..
References:
I use my home for business. Can I deduct the expenses?
To deduct expenses related to the business use of part of your home, you must meet
specific requirements. Even then, your deduction may be limited.
Your use of the business part of your home must be:
Exclusive (see *exceptions below),
Regular,
For your trade or business, AND
The business part of your home must be one of the following:
Your principal place of business,
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) you use in connection with your
trade or business.
Additional tests for employee use. If you are an employee and
you use a part of your home for business, you may qualify for a deduction use. You
must meet the tests discussed above plus:
Your business use must be for the convenience of your employer, and
You do notrent any part of your home to your employer and
use the rented portion to perform services as an employee.
Whether the business use of your home is for your employer's convenience depends
on all the facts and circumstances. However, business use is not considered to be
for your employer's convenience merely because it is appropriate and helpful.
*exceptions
You do not have to meet the exclusive use test if either of the following applies.
You use part of your home for the storage of inventory of product samples.
You use part of your home as a day-care facility.
Form 1040, Schedule C (PDF) filers calculate the business
use of home expenses and limits on Form 8829 (PDF) . The
deduction is claimed on line 30 of Schedule C. Employees claim deduction for business
use of home as an itemized deduction on Form 1040, Schedule A (PDF) .
For more information refer to Tax Topic 509 , Business Use of Home,
or Publication 587 , Business Use of Your Home (Including Use
by Day-Care Providers).
References:
I use part of my living room as an office. Can I take a deduction for business
use of my home?
In general, if you use a part of your home for both personal and business purposes,
no expenses for business use of that part are deductible. Exceptions apply for qualified
day-care providers and for the storage of inventory or product samples used in your
business. For additional information on business use of your home, refer to Tax Topic 509, or Publication 587, Business Use of Your Home (Including Use
by Day-Care Providers).
References:
If you lease a vehicle, can you deduct the cost of the lease payments plus
the standard mileage rate?
No, if you lease a car you use in business, you may use either the standard mileage
rate or claim actual expenses, which would include lease payments. You cannot use
both the standard mileage rate and the lease payments.
References:
Is the state sales tax paid on the purchase of an automobile an allowed
deduction?
State and local sales tax paid on personal items is no longer an allowable itemized
deduction on Form 1040, Schedule A (PDF), Itemized
Deductions. If the auto is a business asset it is generally added to the basis
and recovered through depreciation.
References:
Are excise taxes for a vehicle deductible?
It has to be a personal property tax, not an excise tax, in order to deduct it.
Deductible personal property taxes are only those based on the value of personal property
such as a boat or car. The tax must be charged to you on a yearly basis, even if it
is collected more than once a year or less than once a year. To be deductible, the
tax must be charged to you and must have been paid during your tax year. Taxes may
be claimed only as an itemized deduction on Form 1040, Schedule A (PDF), Itemized
Deductions.
References:
We leased an auto for a small business. How much (if any) of the down payment
is tax deductible in the year the automobile is leased?
You must spread any advance lease payments over the entire lease period. You cannot
deduct any payments you make to buy a car even if the payments are called lease payments.
If you lease a car that you use in your business, you can deduct the part of each
lease payment that is for the use of the car in your business. You cannot deduct any
part of a lease payment that is for commuting to your regular job or for any other
personal use of the car.
References:
If I buy down the lease (pay a lump sum up-front) of a vehicle for my new
business, how would this up-front payment be treated for tax purposes?
You must spread any advance lease payments over the entire lease period. You cannot
deduct any payments you make to buy a car even if the payments are called lease payments.
If you lease a car that you use in your business, you can deduct the part of each
lease payment that is for the use of the car in your business. You cannot deduct any
part of a lease payment that is for commuting to your regular job or for any other
personal use of the car.
References:
If you lease purchase a piece of equipment, like a forklift or boom truck,
do you deduct the lease or do you depreciate it?
There may be instances in which you must determine whether your payments are for
rent or for the purchase of the property. You must first determine whether your agreement
is a lease or a conditional sales contract. If, under the agreement, you acquired
or will acquire title to or equity in the property, you should treat the agreement
as a conditional sales contract. Payments made under a conditional sales contract
are not deductible as rent expense.
Whether the agreement is a conditional sales contract depends on the intent of
the parties. Determine intent based on the facts and circumstances that exist when
you make the agreement.
In general, an agreement may be considered a conditional sales contract rather
than a lease if any of the following is true:
The agreement applies part of each payment toward an equity interest that you
will receive.
You get title to the property upon the payment of a stated amount required under
the contract.
The amount you pay to use the property for a short time is a large part of the
amount you would pay to get title to the property.
You pay much more than the current fair rental value for the property.
You have an option to buy the property at a nominal price compared to the value
of the property when you may exercise the option. Determine this value when you make
the agreement.
You have an option to buy the property at a nominal price compared to the total
amount you have to pay under the lease.
The lease designates some part of the payments as interest, or part of the payments
are easy to recognize as interest.
References:
If you lease office equipment and machinery with the option to buy, when
do you depreciate the purchase price?
If you lease equipment with the option to later buy the equipment, you must first
determine whether your agreement is a lease agreement or a conditional sales contract.
If, under the agreement, you acquired or will acquire title to or equity in the property,
you should treat the agreement as a conditional sales contract. Payments made under
a conditional sales contract are not deductible as rent expense. You would start depreciating
the equipment on the date you acquired the equipment.
Whether the agreement is a conditional sales contract depends on the intent of
the parties. Determine intent based on the facts and circumstances that exist when
you make the agreement
In general, an agreement may be considered a conditional sales contract rather
than a lease if any of the following is true.
The agreement applies part of each payment toward an equity interest that you
will receive.
You get title to the property upon the payment of a stated amount required under
the contract.
The amount you pay to use the property for a short time is a large part of the
amount you would pay to get title to the property.
You pay much more than the current fair rental value for the property.
You have an option to buy the property at a nominal price compared to the value
of the property when you may exercise the option. Determine this value when you make
the agreement.
You have an option to buy the property at a nominal price compared to the total
amount you have to pay under the lease.
The lease designates some part of the payments as interest, or part of the payments
are easy to recognize as interest.
References:
Are business gifts deductible?
If you give business gifts in the course of your trade or business, you can deduct
the cost subject to special limits and rules. In general, you can deduct no more than
$25 for business gifts you give directly or indirectly to any one person during your
tax year. Exceptions may apply. For additional information, refer to Tax Topic 512 and
Chapter 28 of Publication 17, Your Federal Income Tax .
For additional information on this subject seeGifts.
References:
Can I deduct my investment expenses as business expenses?
In order to properly determine the correct treatment income and expenses, it is
first necessary to classify the type of investment activity occurring.
An Investor buys and sells securities solely for their own
account. They are not engaged in a trade or business. An investor's investment expenses
are taken as miscellaneous itemized deductions on Form 1040, Schedule A (PDF) , subject to the 2% AGI limitations (with the exception of
investment interest which is not a miscellaneous deduction but subject to its own
special limitations). An investor's sale of securities results in capital gains and
losses.
A Dealer in securities has inventories of securities that
they hold for sale to customers in the ordinary course of their trade or business.
Their business expenses are deductible as ordinary business expenses. A dealer doing
business as a sole proprietor would deduct their expenses on 1040 Schedule C. A Dealer's
sale of securities is reported as ordinary income.
A third classification is Trader . A Trader is in the trade
or business of buying and selling securities for their own account. You are a trader
in securities if you meet all of the following conditions:
You must seek to profit from daily market movements in the prices of securities
and not from dividends, interest, or capital appreciation.
Your activity must be substantial.
You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining if your
activity is a securities trading business:
Typical holding periods for securities bought and sold.
The frequency and dollar amount of your trades during the year.
The extent to which you pursue the activity to produce income for a livelihood
The amount of time you devote to the activity.
:
A trader's business expense are reported on Form 1040, Schedule C (PDF) ,
not as itemized deductions on 1040 Schedule A. The deductions are not subject to the
limitations that apply to Schedule A (2% AGI limitation and special limits on investment
interest). A trader gain or loss on sale of securities is reported as capital gain
or loss on Form 1040, Schedule D (PDF) unless they have
made the mark-to-market election.
If a trader has made a mark-to-market election, gains and losses are reported on
part II of Form 4797 (PDF) as ordinary income. For information
regarding the manner and timing of making the mark-to-market election, see Publication 550 , Investment Income and Expense or Revenue
Procedure 99-17, 1999-1 CB 503.
The proper classification of your investment activities is important to determine
how income and expenses are to be reported. Investors trade solely for their own account
and do not carry on a trade or business. Their securities sales result in capital
gain or loss and their deductible expenses are itemized deductions. Dealers sell securities
to customers in the ordinary course of trade or business. Their sales result in ordinary
gain or loss and their deductible expenses are trade or business expenses. Traders
buy and sell securities frequently but have no customers. Their purchases and sales
result in capital gain and loss, and their deductible expenses are trade or business
expenses.
Even if you engage in extensive securities activities, you are an investor, not
a dealer or trader, if you do not seek profit primarily in swings in daily market
movements, and do not personally engage in or direct the purchases or sales. An investor
trades for profit-motivated reasons such as long-term appreciation, dividends and
interest. Whether the activities of an individual constitute trade or business or
investment is determined from the facts in each case. These distinctions have been
established through court cases.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however,
would be reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses, unless you file an election to change your method of accounting.
If your trading activity is a business and you elect to change to the mark-to-market
method of accounting, you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property .
A change in your method of accounting requires the consent of the Commissioner
and can not be revoked without the consent of the Secretary. Though there is no publication
specific to day traders, the details for traders in securities and commodities are
covered in Internal Revenue Code Section 475 (f) and Revenue Procedure 99-17.
References:
12.8 Small Business/Self-Employed/Other Business : Schedule C & Schedule SE
I buy and sell stocks as a day trader using an online brokerage firm. Can
I treat this as a business and report my gains and losses on Schedule C?
A business is generally an activity carried on for a livelihood or in good faith
to make a profit. Rather than defined in the tax code, exactly what activities are
considered business activities has long been the subject of court cases. The facts
and circumstances of each case determine whether or not an activity is a trade or
business. Basically, if your day trading activity goal is to profit from short-term
swings in the market rather than from long-term capital appreciation of assets, if
your income is primarily from the sale of securities rather than from dividends and
interest paid on securities, and if you expect this income to be your primary income
for meeting your personal living expenses, i.e. you do not have another regular job,
then your trading activity might be a business.
For details about not-for-profit activities, refer to Publication 535, Business
Expenses. That chapter explains how to determine whether your activity is carried
on to make a profit and how to figure the amount of loss you can deduct.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) , instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however,
would be reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses , unless you file an election to change you method of accounting.
If your trading activity is a business and you elect to change to the mark-to-market
method of accounting, you would report both your gains or losses and your trading
expenses in Part II of Form 4797, Sale of Business Property. See Publication 550, Investment Income and Expenses , for details.
A change in your method of accounting requires the consent of the Commissioner
and can not be revoked without the consent of the Secretary. Though there is no publication
specific to day traders, the details for traders in securities and commodities are
covered in Internal Revenue Code Section 475 (f) and Revenue Procedure 99-17.
References:
If you have run a small business in the past, but this year there is no
income or expenses, is it necessary to file a Schedule C?
If your sole proprietorship business is inactive during the full year, it is not
necessary to file a Form 1040, Schedule C (PDF), Profit
or Loss from Business, for that year.
References:
12.9 Small Business/Self-Employed/Other Business : Starting or Ending a Business
I went out of business this year and still have inventory on hand. Can I
take a deduction for inventory that I cannot sell?
Generally inventory losses and gains must be run through the business (shown as
sold on Form 1040, Schedule C (PDF), Profit or Loss
from Business) when sold even after the business closes. If you cannot sell inventory
because it has become obsolete or you have formed the intent to give up possession
of the inventory without passing it on to someone else and suffer a loss, you may
deduct such losses. If you use any remaining inventory for personal use after you
go out of business, you cannot take a deduction for that inventory. If you give the
remaining inventory away to a nonprofit organization, claim your deduction on Form 1040, Schedule A (PDF), Itemized Deductions. When
you have business related expenses after your business has closed, you still may deduct
these expenses.
References:
Which form do I use to file my business income tax return?
To determine which form you should file for your business entity, select one of
the following links:
. Publication 541, Partnerships
. Publication 542, Corporations
. Publication 3402 (PDF), Tax Issues for LLCs
. Publication 334, Tax Guide for Small Business
. Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership
(LLC/LLP), Corporation, Subchapter S Corporation
References:
What deductions can I take on my partnership or S Corporation return
In general, ordinary and necessary business expenses are deductible on business
return. However, there are some items that partnership and S Corporation do not deduct
at the business entity level but rather at the partner or shareholder level. These
are referred to as separately stated items. For a more complete explanation of business
in general, see Publication 535 , Business Expenses Publication 541, Partnerships, and
Instructions for Form 1120S.
References:
Where is a loss reported on my return and how much can I deduct?
The place where your loss is reported depends on how much is deductible, the type
of loss, and the type of return you are filing. If your business deductions are more
than your business income for the year, you may have a Net Operating
Loss (NOL). You can use an NOL by deducting it from your income in another year
or years. Partnerships and S Corporations generally cannot use an NOL. But partners
or shareholders can use their separate shares of the partnership's of S Corporation's
business deductions to their individual NOLs. For additional help, see Publication 541, Partnership, Publication 542, Corporation, Publication 925, Passive Activities and At-Risk Rules, and Publication 536, Net Operating Losses (NOLs) for individuals, Estates,
and Trusts.
If you have a Capital Loss, it is generally from the sale
or loss of investment property, a business, or a capital asset used in a business. Publication 544, on Sales and Other Disposition of Assets, will provide
additional information on this subject.
Special Situations
S Corporations
In general, if an S corporation purchases a C Corporation at the end of the year
and the C Corporation has a loss, the S Corporation does not get to claim the C Corporation
loss. A C Corporation is a taxable entity in itself and gains and losses do not flow
through to the shareholders.
S Corporation shareholder who hold stock at any time during the year may claim
their proportionate share of corporate losses on their individual tax returns subject
to certain limits. For more information about the limitations, see the instruction
for
Instructions for Form 1120S, Schedule K-1.
Partnerships
In general, a partner loss is allocated base on his/her percentage of ownership
of the year. This percentage is referred to as the partner's distributive share. The
partners' distributive share of items is reported to the partner on Schedule K-1 (Form
1065). A partner's distributive share of partnership loss is allowed only to the extent
of the adjusted basis of the partner's partnership interest. A loss that is more than
the partner's adjusted basis is not deductible. For additional deductibility of partnership
losses, see Publication 541, Partnership, and Publication 925, Passive Activities and At-Risk Rules
References:
How is the withdrawal of a partner handled?
Unfortunately, the answer to this question has many variables. Publication 541, Partnerships "Disposition of Partner's Interest" on Partnerships
should provide the information needed.
References:
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