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Www freefile dor gov Publication 525 - Main Content Table of Contents Employee CompensationBabysitting. Www freefile dor gov Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain EmployeesClergy Members of Religious Orders Foreign Employer Military Volunteers Business and Investment IncomeRents From Personal Property Royalties Partnership Income S Corporation Income Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Miscellaneous IncomeBartering Canceled Debts Host or Hostess Life Insurance Proceeds Recoveries Survivor Benefits Unemployment Benefits Welfare and Other Public Assistance Benefits Other Income RepaymentsMethod 1. Www freefile dor gov Method 2. Www freefile dor gov How To Get Tax HelpLow Income Taxpayer Clinics Employee Compensation In most cases, you must include in gross income everything you receive in payment for personal services. Www freefile dor gov In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. Www freefile dor gov You should receive a Form W-2 from your employer or former employer showing the pay you received for your services. Www freefile dor gov Include all your pay on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ, even if you do not receive Form W-2, or you receive a Form W-2 that does not include all pay that should be included on the Form W-2. Www freefile dor gov If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. Www freefile dor gov These wages must be included on line 7 of Form 1040. Www freefile dor gov See Form 8919 for more information. Www freefile dor gov Childcare providers. Www freefile dor gov   If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. Www freefile dor gov If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Www freefile dor gov You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it. Www freefile dor gov Babysitting. Www freefile dor gov   If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. Www freefile dor gov Bankruptcy. Www freefile dor gov   If you filed for bankruptcy under Chapter 11 of the Bankruptcy Code, you must allocate your wages and withheld income tax. Www freefile dor gov Your W-2 will show your total wages and withheld income tax for the year. Www freefile dor gov On your tax return, you report the wages and withheld income tax for the period before you filed for bankruptcy. Www freefile dor gov Your bankruptcy estate reports the wages and withheld income tax for the period after you filed for bankruptcy. Www freefile dor gov If you receive other information returns (such as Form 1099-DIV, Dividends and Distributions, or 1099-INT, Interest Income) that report gross income to you, rather than to the bankruptcy estate, you must allocate that income. Www freefile dor gov   The only exception is for purposes of figuring your self-employment tax, if you are self-employed. Www freefile dor gov For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case. Www freefile dor gov   You must file a statement with your income tax return stating you filed a Chapter 11 bankruptcy case. Www freefile dor gov The statement must show the allocation and describe the method used to make the allocation. Www freefile dor gov For a sample of this statement and other information, see Notice 2006-83, 2006-40 I. Www freefile dor gov R. Www freefile dor gov B. Www freefile dor gov 596, available at www. Www freefile dor gov irs. Www freefile dor gov gov/irb/2006-40_IRB/ar12. Www freefile dor gov html. Www freefile dor gov Miscellaneous Compensation This section discusses many types of employee compensation. Www freefile dor gov The subjects are arranged in alphabetical order. Www freefile dor gov Advance commissions and other earnings. Www freefile dor gov   If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them. Www freefile dor gov    If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. Www freefile dor gov If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), Itemized Deductions, or you may be able to take a credit for that year. Www freefile dor gov See Repayments , later. Www freefile dor gov Allowances and reimbursements. Www freefile dor gov    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Www freefile dor gov If you are reimbursed for moving expenses, see Publication 521, Moving Expenses. Www freefile dor gov Back pay awards. Www freefile dor gov   Include in income amounts you are awarded in a settlement or judgment for back pay. Www freefile dor gov These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. Www freefile dor gov They should be reported to you by your employer on Form W-2. Www freefile dor gov Bonuses and awards. Www freefile dor gov    Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. Www freefile dor gov These include prizes such as vacation trips for meeting sales goals. Www freefile dor gov If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. Www freefile dor gov However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you. Www freefile dor gov Employee achievement award. Www freefile dor gov   If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. Www freefile dor gov However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. Www freefile dor gov Your employer can tell you whether your award is a qualified plan award. Www freefile dor gov Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay. Www freefile dor gov   However, the exclusion does not apply to the following awards. Www freefile dor gov A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years. Www freefile dor gov A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year. Www freefile dor gov Example. Www freefile dor gov Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Www freefile dor gov Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. Www freefile dor gov However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 − $1,600) in his income. Www freefile dor gov Differential wage payments. Www freefile dor gov   This is any payment made by an employer to an individual for any period during which the individual is, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages the individual would have received from the employer for that period. Www freefile dor gov These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. Www freefile dor gov The payments are reported as wages on Form W-2. Www freefile dor gov Government cost-of-living allowances. Www freefile dor gov   Most payments received by U. Www freefile dor gov S. Www freefile dor gov Government civilian employees for working abroad are taxable. Www freefile dor gov However, certain cost-of-living allowances are tax free. Www freefile dor gov Publication 516, U. Www freefile dor gov S. Www freefile dor gov Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. Www freefile dor gov Nonqualified deferred compensation plans. Www freefile dor gov   Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. Www freefile dor gov This amount is shown on Form W-2, box 12, using code Y. Www freefile dor gov This amount is not included in your income. Www freefile dor gov   However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. Www freefile dor gov This amount is included in your wages shown on Form W-2, box 1. Www freefile dor gov It is also shown on Form W-2, box 12, using code Z. Www freefile dor gov Nonqualified deferred compensation plans of nonqualified entities. Www freefile dor gov   In most cases, any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is included in gross income when there is no substantial risk of forfeiture of the rights to such compensation. Www freefile dor gov For this purpose, a nonqualified entity is: A foreign corporation unless substantially all of its income is: Effectively connected with the conduct of a trade or business in the United States, or Subject to a comprehensive foreign income tax. Www freefile dor gov A partnership unless substantially all of its income is allocated to persons other than: Foreign persons for whom the income is not subject to a comprehensive foreign income tax, and Tax-exempt organizations. Www freefile dor gov Note received for services. Www freefile dor gov   If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. Www freefile dor gov When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. Www freefile dor gov Do not include that part again in your income. Www freefile dor gov Include the rest of the payment in your income in the year of payment. Www freefile dor gov   If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them. Www freefile dor gov Severance pay. Www freefile dor gov   You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. Www freefile dor gov Accrued leave payment. Www freefile dor gov   If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2. Www freefile dor gov   If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. Www freefile dor gov You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Www freefile dor gov Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on your return and the wages on your Forms W-2. Www freefile dor gov Outplacement services. Www freefile dor gov   If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income. Www freefile dor gov    However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040). Www freefile dor gov Sick pay. Www freefile dor gov   Pay you receive from your employer while you are sick or injured is part of your salary or wages. Www freefile dor gov In addition, you must include in your income sick pay benefits received from any of the following payers. Www freefile dor gov A welfare fund. Www freefile dor gov A state sickness or disability fund. Www freefile dor gov An association of employers or employees. Www freefile dor gov An insurance company, if your employer paid for the plan. Www freefile dor gov However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. Www freefile dor gov For more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, later. Www freefile dor gov Social security and Medicare taxes paid by employer. Www freefile dor gov   If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. Www freefile dor gov The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. Www freefile dor gov However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. Www freefile dor gov Stock appreciation rights. Www freefile dor gov   Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. Www freefile dor gov When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. Www freefile dor gov You include the cash payment in income in the year you use the right. Www freefile dor gov Fringe Benefits Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. Www freefile dor gov Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules. Www freefile dor gov See Valuation of Fringe Benefits , later in this discussion, for information on how to determine the amount to include in income. Www freefile dor gov Recipient of fringe benefit. Www freefile dor gov   You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. Www freefile dor gov You are considered to be the recipient even if it is given to another person, such as a member of your family. Www freefile dor gov An example is a car your employer gives to your spouse for services you perform. Www freefile dor gov The car is considered to have been provided to you and not to your spouse. Www freefile dor gov   You do not have to be an employee of the provider to be a recipient of a fringe benefit. Www freefile dor gov If you are a partner, director, or independent contractor, you also can be the recipient of a fringe benefit. Www freefile dor gov Provider of benefit. Www freefile dor gov   Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. Www freefile dor gov The provider can be a client or customer of an independent contractor. Www freefile dor gov Accounting period. Www freefile dor gov   You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Www freefile dor gov Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. Www freefile dor gov The general rule: benefits are reported for a full calendar year (January 1–December 31). Www freefile dor gov The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. Www freefile dor gov For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year. Www freefile dor gov Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit. Www freefile dor gov   You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example). Www freefile dor gov Form W-2. Www freefile dor gov   Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. Www freefile dor gov Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). Www freefile dor gov However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement). Www freefile dor gov Accident or Health Plan In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income. Www freefile dor gov Benefits you receive from the plan may be taxable, as explained, later, under Sickness and Injury Benefits . Www freefile dor gov For information on the items covered in this section, other than Long-term care coverage , see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Www freefile dor gov Long-term care coverage. Www freefile dor gov   Contributions by your employer to provide coverage for long-term care services generally are not included in your income. Www freefile dor gov However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. Www freefile dor gov This amount will be reported as wages in box 1 of your Form W-2. Www freefile dor gov Archer MSA contributions. Www freefile dor gov    Contributions by your employer to your Archer MSA generally are not included in your income. Www freefile dor gov Their total will be reported in box 12 of Form W-2, with code R. Www freefile dor gov You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. Www freefile dor gov File the form with your return. Www freefile dor gov Health flexible spending arrangement (health FSA). Www freefile dor gov   If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, are not included in your income. Www freefile dor gov   Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. Www freefile dor gov The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. Www freefile dor gov For more information, see Notice 2012-40, 2012-26 I. Www freefile dor gov R. Www freefile dor gov B. Www freefile dor gov 1046, available at www. Www freefile dor gov irs. Www freefile dor gov gov/irb/2012-26 IRB/ar09. Www freefile dor gov html. Www freefile dor gov Health reimbursement arrangement (HRA). Www freefile dor gov   If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally are not included in your income. Www freefile dor gov Health savings accounts (HSA). Www freefile dor gov   If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. Www freefile dor gov Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Www freefile dor gov Contributions made by your employer are not included in your income. Www freefile dor gov Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. Www freefile dor gov Distributions not used for qualified medical expenses are included in your income. Www freefile dor gov See Publication 969 for the requirements of an HSA. Www freefile dor gov   Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. Www freefile dor gov The contributions are treated as a distribution of money and are not included in the partner's gross income. Www freefile dor gov Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. Www freefile dor gov In both situations, the partner can deduct the contribution made to the partner's HSA. Www freefile dor gov   Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. Www freefile dor gov The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. Www freefile dor gov Qualified HSA funding distribution. Www freefile dor gov   You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally will not include any of the distribution in your income. Www freefile dor gov See Publication 590, Individual Retirement Arrangements (IRAs), for the requirements for these qualified HSA funding distributions. Www freefile dor gov Failure to maintain eligibility. Www freefile dor gov   If your HSA received qualified HSA distributions from a health FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must be an eligible individual for HSA purposes for the period beginning with the month in which the qualified distribution was made and ending on the last day of the 12th month following that month. Www freefile dor gov If you fail to be an eligible individual during this period, other than because of death or disability, you must include the distribution in your income for the tax year in which you become ineligible. Www freefile dor gov This income is also subject to an additional 10% tax. Www freefile dor gov Adoption Assistance You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. Www freefile dor gov See Instructions for Form 8839, Qualified Adoption Expenses, for more information. Www freefile dor gov Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. Www freefile dor gov They also are included as social security and Medicare wages in boxes 3 and 5. Www freefile dor gov However, they are not included as wages in box 1. Www freefile dor gov To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. Www freefile dor gov File the form with your return. Www freefile dor gov Athletic Facilities If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the value is not included in your compensation. Www freefile dor gov The gym must be used primarily by employees, their spouses, and their dependent children. Www freefile dor gov If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation. Www freefile dor gov De Minimis (Minimal) Benefits If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. Www freefile dor gov In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income. Www freefile dor gov Also see Employee Discounts , later. Www freefile dor gov Holiday gifts. Www freefile dor gov   If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. Www freefile dor gov However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved. Www freefile dor gov Dependent Care Benefits If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Www freefile dor gov Dependent care benefits include: Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and The fair market value of care in a daycare facility provided or sponsored by your employer. Www freefile dor gov The amount you can exclude is limited to the lesser of: The total amount of dependent care benefits you received during the year, The total amount of qualified expenses you incurred during the year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). Www freefile dor gov Your employer must show the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form W-2. Www freefile dor gov Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2. Www freefile dor gov To claim the exclusion, you must complete Part III of Form 2441, Child and Dependent Care Expenses. Www freefile dor gov See the Instructions for Form 2441 for more information. Www freefile dor gov Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. Www freefile dor gov For more information, see Publication 970. Www freefile dor gov Employee Discounts If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. Www freefile dor gov The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. Www freefile dor gov However, it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds). Www freefile dor gov The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage. Www freefile dor gov For a discount on property, your employer's gross profit percentage (gross profit divided by gross sales) on all property sold during the employer's previous tax year. Www freefile dor gov (Ask your employer for this percentage. Www freefile dor gov ) For a discount on services, 20%. Www freefile dor gov Financial Counseling Fees Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. Www freefile dor gov If the fees are for tax or investment counseling, they can be deducted on Schedule A (Form 1040) as a miscellaneous deduction (subject to the 2%-of-AGI limit). Www freefile dor gov Qualified retirement planning services paid for you by your employer may be excluded from your income. Www freefile dor gov For more information, see Retirement Planning Services , later. Www freefile dor gov Group-Term Life Insurance In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. Www freefile dor gov However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance. Www freefile dor gov For exceptions to this rule, see Entire cost excluded , and Entire cost taxed , later. Www freefile dor gov If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. Www freefile dor gov Also, it is shown separately in box 12 with code C. Www freefile dor gov Group-term life insurance. Www freefile dor gov   This insurance is term life insurance protection (insurance for a fixed period of time) that: Provides a general death benefit, Is provided to a group of employees, Is provided under a policy carried by the employer, and Provides an amount of insurance to each employee based on a formula that prevents individual selection. Www freefile dor gov Permanent benefits. Www freefile dor gov   If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Www freefile dor gov Your employer should be able to tell you the amount to include in your income. Www freefile dor gov Accidental death benefits. Www freefile dor gov   Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance. Www freefile dor gov Former employer. Www freefile dor gov   If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. Www freefile dor gov Also, it is shown separately in box 12 with code C. Www freefile dor gov Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. Www freefile dor gov You must pay these taxes with your income tax return. Www freefile dor gov Include them on line 60, Form 1040, and follow the instructions forline 60. Www freefile dor gov For more information, see the Instructions for Form 1040. Www freefile dor gov Two or more employers. Www freefile dor gov   Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. Www freefile dor gov If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. Www freefile dor gov You must figure how much to include in your income. Www freefile dor gov Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. Www freefile dor gov Figuring the taxable cost. Www freefile dor gov    Use the following worksheet to figure the amount to include in your income. Www freefile dor gov   If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you otherwise would include in your income. Www freefile dor gov However, you cannot reduce the amount to include in your income by: Payments for coverage in a different tax year, Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded . Www freefile dor gov Worksheet 1. Www freefile dor gov Figuring the Cost of Group-Term Life Insurance To Include in Income 1. Www freefile dor gov Enter the total amount of your insurance coverage from your employer(s) 1. Www freefile dor gov   2. Www freefile dor gov Limit on exclusion for employer-provided group-term life insurance coverage 2. Www freefile dor gov 50,000 3. Www freefile dor gov Subtract line 2 from line 1 3. Www freefile dor gov   4. Www freefile dor gov Divide line 3 by $1,000. Www freefile dor gov Figure to the nearest tenth 4. Www freefile dor gov   5. Www freefile dor gov Go to Table 1. Www freefile dor gov Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Www freefile dor gov   6. Www freefile dor gov Multiply line 4 by line 5 6. Www freefile dor gov     7. Www freefile dor gov Enter the number of full months of coverage at this cost 7. Www freefile dor gov   8. Www freefile dor gov Multiply line 6 by line 7 8. Www freefile dor gov   9. Www freefile dor gov Enter the premiums you paid per month 9. Www freefile dor gov       10. Www freefile dor gov Enter the number of months you paid the  premiums 10. Www freefile dor gov       11. Www freefile dor gov Multiply line 9 by line 10. Www freefile dor gov 11. Www freefile dor gov   12. Www freefile dor gov Subtract line 11 from line 8. Www freefile dor gov Include this amount in your income as wages 12. Www freefile dor gov   Table 1. Www freefile dor gov Cost of $1,000 of Group-Term Life Insurance for One Month   Age Cost     Under 25 $ . Www freefile dor gov 05     25 through 29 . Www freefile dor gov 06     30 through 34 . Www freefile dor gov 08     35 through 39 . Www freefile dor gov 09     40 through 44 . Www freefile dor gov 10     45 through 49 . Www freefile dor gov 15     50 through 54 . Www freefile dor gov 23     55 through 59 . Www freefile dor gov 43     60 through 64 . Www freefile dor gov 66     65 through 69 1. Www freefile dor gov 27     70 and older 2. Www freefile dor gov 06   Example. Www freefile dor gov You are 51 years old and work for employers A and B. Www freefile dor gov Both employers provide group-term life insurance coverage for you for the entire year. Www freefile dor gov Your coverage is $35,000 with employer A and $45,000 with employer B. Www freefile dor gov You pay premiums of $4. Www freefile dor gov 15 a month under the employer B group plan. Www freefile dor gov You figure the amount to include in your income as follows. Www freefile dor gov   Worksheet 1. Www freefile dor gov Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated 1. Www freefile dor gov Enter the total amount of your insurance coverage from your employer(s) 1. Www freefile dor gov 80,000 2. Www freefile dor gov Limit on exclusion for employer-provided group-term life insurance coverage 2. Www freefile dor gov 50,000 3. Www freefile dor gov Subtract line 2 from line 1 3. Www freefile dor gov 30,000 4. Www freefile dor gov Divide line 3 by $1,000. Www freefile dor gov Figure to the nearest tenth 4. Www freefile dor gov 30. Www freefile dor gov 0 5. Www freefile dor gov Go to Table 1. Www freefile dor gov Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Www freefile dor gov . Www freefile dor gov 23 6. Www freefile dor gov Multiply line 4 by line 5 6. Www freefile dor gov 6. Www freefile dor gov 90 7. Www freefile dor gov Enter the number of full months of coverage at this cost. Www freefile dor gov 7. Www freefile dor gov 12 8. Www freefile dor gov Multiply line 6 by line 7 8. Www freefile dor gov 82. Www freefile dor gov 80 9. Www freefile dor gov Enter the premiums you paid per month 9. Www freefile dor gov 4. Www freefile dor gov 15     10. Www freefile dor gov Enter the number of months you paid the premiums 10. Www freefile dor gov 12     11. Www freefile dor gov Multiply line 9 by line 10. Www freefile dor gov 11. Www freefile dor gov 49. Www freefile dor gov 80 12. Www freefile dor gov Subtract line 11 from line 8. Www freefile dor gov Include this amount in your income as wages 12. Www freefile dor gov 33. Www freefile dor gov 00 The total amount to include in income for the cost of excess group-term life insurance is $33. Www freefile dor gov Neither employer provided over $50,000 insurance coverage, so the wages shown on your Forms W-2 do not include any part of that $33. Www freefile dor gov You must add it to the wages shown on your Forms W-2 and include the total on your return. Www freefile dor gov Entire cost excluded. Www freefile dor gov   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. Www freefile dor gov You are permanently and totally disabled and have ended your employment. Www freefile dor gov Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. Www freefile dor gov A charitable organization to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. Www freefile dor gov (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy. Www freefile dor gov ) The plan existed on January 1, 1984, and: You retired before January 2, 1984, and were covered by the plan when you retired, or You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983. Www freefile dor gov Entire cost taxed. Www freefile dor gov   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply. Www freefile dor gov The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. Www freefile dor gov You are a key employee and your employer's plan discriminates in favor of key employees. Www freefile dor gov Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. Www freefile dor gov The meals are: Furnished on the business premises of your employer, and Furnished for the convenience of your employer. Www freefile dor gov The lodging is: Furnished on the business premises of your employer, Furnished for the convenience of your employer, and A condition of your employment. Www freefile dor gov (You must accept it in order to be able to properly perform your duties. Www freefile dor gov ) You also do not include in your income the value of meals or meal money that qualifies as a de minimis fringe benefit. Www freefile dor gov See De Minimis (Minimal) Benefits , earlier. Www freefile dor gov Faculty lodging. Www freefile dor gov   If you are an employee of an educational institution or an academic health center and you are provided with lodging that does not meet the three conditions given earlier, you still may not have to include the value of the lodging in income. Www freefile dor gov However, the lodging must be qualified campus lodging, and you must pay an adequate rent. Www freefile dor gov Academic health center. Www freefile dor gov   This is an organization that meets the following conditions. Www freefile dor gov Its principal purpose or function is to provide medical or hospital care or medical education or research. Www freefile dor gov It receives payments for graduate medical education under the Social Security Act. Www freefile dor gov One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty. Www freefile dor gov Qualified campus lodging. Www freefile dor gov   Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use as a home. Www freefile dor gov The lodging must be located on or near a campus of the educational institution or academic health center. Www freefile dor gov Adequate rent. Www freefile dor gov   The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of: 5% of the appraised value of the lodging, or The average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution. Www freefile dor gov If the amount you pay is less than the lesser of these amounts, you must include the difference in your income. Www freefile dor gov   The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis. Www freefile dor gov Example. Www freefile dor gov Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. Www freefile dor gov The house is appraised at $200,000. Www freefile dor gov The average rent paid for comparable university lodging by persons other than employees or students is $14,000 a year. Www freefile dor gov Carl pays an annual rent of $11,000. Www freefile dor gov Carl does not include in his income any rental value because the rent he pays equals at least 5% of the appraised value of the house (5% × $200,000 = $10,000). Www freefile dor gov If Carl paid annual rent of only $8,000, he would have to include $2,000 in his income ($10,000 − $8,000). Www freefile dor gov Moving Expense Reimbursements In most cases, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid them yourself, the value is not included in your income. Www freefile dor gov See Publication 521 for more information. Www freefile dor gov No-Additional-Cost Services The value of services you receive from your employer for free, at cost, or for a reduced price is not included in your income if your employer: Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and Does not have a substantial additional cost (including any sales income given up) to provide you with the service (regardless of what you paid for the service). Www freefile dor gov In most cases, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services. Www freefile dor gov Example. Www freefile dor gov You are employed as a flight attendant for a company that owns both an airline and a hotel chain. Www freefile dor gov Your employer allows you to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. Www freefile dor gov The value of the personal flight is not included in your income. Www freefile dor gov However, the value of the hotel room is included in your income because you do not work in the hotel business. Www freefile dor gov Retirement Planning Services If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. Www freefile dor gov Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. Www freefile dor gov You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. Www freefile dor gov Also, see Financial Counseling Fees , earlier. Www freefile dor gov Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. Www freefile dor gov A qualified transportation fringe benefit is: Transportation in a commuter highway vehicle (such as a van) between your home and work place, A transit pass, Qualified parking, or Qualified bicycle commuting reimbursement. Www freefile dor gov Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. Www freefile dor gov However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you. Www freefile dor gov Exclusion limit. Www freefile dor gov   The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than $245 a month. Www freefile dor gov   The exclusion for the qualified parking fringe benefit cannot be more than $245 a month. Www freefile dor gov   The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. Www freefile dor gov   If the benefits have a value that is more than these limits, the excess must be included in your income. Www freefile dor gov You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement. Www freefile dor gov Commuter highway vehicle. Www freefile dor gov   This is a highway vehicle that seats at least six adults (not including the driver). Www freefile dor gov At least 80% of the vehicle's mileage must reasonably be expected to be: For transporting employees between their homes and work place, and On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver). Www freefile dor gov Transit pass. Www freefile dor gov   This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation. Www freefile dor gov Qualified parking. Www freefile dor gov   This is parking provided to an employee at or near the employer's place of business. Www freefile dor gov It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. Www freefile dor gov It does not include parking at or near the employee's home. Www freefile dor gov Qualified bicycle commuting. Www freefile dor gov   This is reimbursement based on the number of qualified bicycle commuting months for the year. Www freefile dor gov A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you do not receive any of the other qualified transportation fringe benefits. Www freefile dor gov The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. Www freefile dor gov Tuition Reduction You can exclude a qualified tuition reduction from your income. Www freefile dor gov This is the amount of a reduction in tuition: For education (below graduate level) furnished by an educational institution to an employee, former employee who retired or became disabled, or his or her spouse and dependent children. Www freefile dor gov For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research activities for that institution. Www freefile dor gov Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program. Www freefile dor gov For more information, see Publication 970. Www freefile dor gov Working Condition Benefits If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost is not included in your income. Www freefile dor gov Example. Www freefile dor gov You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. Www freefile dor gov The cost of the subscription is not included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself. Www freefile dor gov Valuation of Fringe Benefits If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. Www freefile dor gov For an exception, see Group-Term Life Insurance , earlier. Www freefile dor gov General valuation rule. Www freefile dor gov   You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of: The amount, if any, you paid for the benefit, plus The amount, if any, specifically excluded from your income by law. Www freefile dor gov If you pay fair market value for a fringe benefit, no amount is included in your income. Www freefile dor gov Fair market value. Www freefile dor gov   The fair market value of a fringe benefit is determined by all the facts and circumstances. Www freefile dor gov It is the amount you would have to pay a third party to buy or lease the benefit. Www freefile dor gov This is determined without regard to: Your perceived value of the benefit, or The amount your employer paid for the benefit. Www freefile dor gov Employer-provided vehicles. Www freefile dor gov   If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit. Www freefile dor gov   Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. Www freefile dor gov An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. Www freefile dor gov The value cannot be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis. Www freefile dor gov Flights on employer-provided aircraft. Www freefile dor gov   Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party. Www freefile dor gov   If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. Www freefile dor gov The division must be based on all the facts, including which employee or employees control the use of the aircraft. Www freefile dor gov Special valuation rules. Www freefile dor gov   You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. Www freefile dor gov If your employer uses a special valuation rule, you cannot use a different special rule to value that benefit. Www freefile dor gov You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule. Www freefile dor gov   If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of: Any amount you repaid your employer, plus Any amount specifically excluded from income by law. Www freefile dor gov The special valuation rules are the following. Www freefile dor gov The automobile lease rule. Www freefile dor gov The vehicle cents-per-mile rule. Www freefile dor gov The commuting rule. Www freefile dor gov The unsafe conditions commuting rule. Www freefile dor gov The employer-operated eating-facility rule. Www freefile dor gov   For more information on these rules, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Www freefile dor gov    For information on the non-commercial flight and commercial flight valuation rules, see sections 1. Www freefile dor gov 61-21(g) and 1. Www freefile dor gov 61-21(h) of the regulations. Www freefile dor gov Retirement Plan Contributions Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. Www freefile dor gov (Your employer can tell you whether your retirement plan is qualified. Www freefile dor gov ) However, the cost of life insurance coverage included in the plan may have to be included. Www freefile dor gov See Group-Term Life Insurance , earlier, under Fringe Benefits. Www freefile dor gov If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. Www freefile dor gov However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture. Www freefile dor gov For information on distributions from retirement plans, see Publication 575 (or Publication 721, Tax Guide to U. Www freefile dor gov S. Www freefile dor gov Civil Service Retirement Benefits, if you are a federal employee or retiree). Www freefile dor gov Elective Deferrals If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. Www freefile dor gov The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. Www freefile dor gov An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. Www freefile dor gov However, it is included in wages subject to social security and Medicare taxes. Www freefile dor gov Elective deferrals include elective contributions to the following retirement plans. Www freefile dor gov Cash or deferred arrangements (section 401(k) plans). Www freefile dor gov The Thrift Savings Plan for federal employees. Www freefile dor gov Salary reduction simplified employee pension plans (SARSEP). Www freefile dor gov Savings incentive match plans for employees (SIMPLE plans). Www freefile dor gov Tax-sheltered annuity plans (403(b) plans). Www freefile dor gov Section 501(c)(18)(D) plans. Www freefile dor gov (But see Reporting by employer , later. Www freefile dor gov ) Section 457 plans. Www freefile dor gov Qualified automatic contribution arrangements. Www freefile dor gov   Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. Www freefile dor gov You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. Www freefile dor gov The notice must explain: Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and How contributions made will be invested in the absence of any investment decision by you. Www freefile dor gov   You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions. Www freefile dor gov Overall limit on deferrals. Www freefile dor gov   For 2013, in most cases, you should not have deferred more than a total of $17,500 of contributions to the plans listed in (1) through (3), earlier. Www freefile dor gov The specific plan limits for the plans listed in (4) through (7), earlier, are discussed later. Www freefile dor gov Amounts deferred under specific plan limits are part of the overall limit on deferrals. Www freefile dor gov   Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. Www freefile dor gov However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. Www freefile dor gov Catch-up contributions. Www freefile dor gov   You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. Www freefile dor gov For more information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans. Www freefile dor gov   For more information about additional elective deferrals to: SEPs (SARSEPs), see Salary Reduction Simplified Employee Pension in chapter 2 of Publication 560, Retirement Plans for Small Business. Www freefile dor gov SIMPLE plans, see How Much Can Be Contributed on Your Behalf? in chapter 3 of Publication 590. Www freefile dor gov Section 457 plans, see Limit for deferrals under section 457 plans , later. Www freefile dor gov Limit for deferrals under SIMPLE plans. Www freefile dor gov   If you are a participant in a SIMPLE plan, you generally should not have deferred more than $12,000 in 2013. Www freefile dor gov Amounts you defer under a SIMPLE plan count toward the overall limit ($17,500 for 2013) and may affect the amount you can defer under other elective deferral plans. Www freefile dor gov Limit for tax-sheltered annuities. Www freefile dor gov   If you are a participant in a tax-sheltered annuity plan (403(b) plan), the limit on elective deferrals for 2013 generally is $17,500. Www freefile dor gov However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the least of the following amounts. Www freefile dor gov $3,000, $15,000, reduced by the sum of: The additional pre-tax elective deferrals made in earlier years because of this rule, plus The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years. Www freefile dor gov   If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $20,500 for 2013. Www freefile dor gov   For more information, see Publication 571. Www freefile dor gov Limit for deferral under section 501(c)(18) plans. Www freefile dor gov   If you are a participant in a section 501(c)(18) plan (a trust created before June 25, 1959, funded only by employee contributions), you should have deferred no more than the lesser of $7,000 or 25% of your compensation. Www freefile dor gov Amounts you defer under a section 501(c)(18) plan count toward the overall limit ($17,500 in 2013) and may affect the amount you can defer under other elective deferral plans. Www freefile dor gov Limit for deferrals under section 457 plans. Www freefile dor gov   If you are a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $17,500 in 2013. Www freefile dor gov However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. Www freefile dor gov See Increased limit , later. Www freefile dor gov Includible compensation. Www freefile dor gov   This is the pay you received for the year from the employer who maintained the section 457 plan. Www freefile dor gov In most cases, it includes all the following payments. Www freefile dor gov Wages and salaries. Www freefile dor gov Fees for professional services. Www freefile dor gov The value of any employer-provided qualified transportation fringe benefit (defined under Transportation , earlier) that is not included in your income. Www freefile dor gov Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items. Www freefile dor gov Commissions and tips. Www freefile dor gov Fringe benefits. Www freefile dor gov Bonuses. Www freefile dor gov Employer contributions (elective deferrals) to: The section 457 plan. Www freefile dor gov Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income. Www freefile dor gov A salary reduction simplified employee pension (SARSEP). Www freefile dor gov A tax-sheltered annuity (section 403(b) plan). Www freefile dor gov A savings incentive match plan for employees (SIMPLE plan). Www freefile dor gov A section 125 cafeteria plan. Www freefile dor gov   Instead of using the amounts listed earlier to determine your includible compensation, your employer can use any of the following amounts. Www freefile dor gov Your wages as defined for income tax withholding purposes. Www freefile dor gov Your wages as reported in box 1 of Form W-2. Www freefile dor gov Your wages that are subject to social security withholding (including elective deferrals). Www freefile dor gov Increased limit. Www freefile dor gov   During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of: Twice the annual limit ($35,000 for 2013), or The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions). Www freefile dor gov Catch-up contributions. Www freefile dor gov   You generally can have additional elective deferrals made to your governmental section 457 plan if: You reached age 50 by the end of the year, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions. Www freefile dor gov If you qualify, your limit can be the lesser of your includible compensation or $17,500, plus $5,500. Www freefile dor gov However, if you are within 3 years of retirement age and your plan provides the increased limit, discussed earlier, that limit may be higher. Www freefile dor gov Designated Roth contributions. Www freefile dor gov   Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. Www freefile dor gov Designated Roth contributions are treated as elective deferrals, except that they are included in income. Www freefile dor gov Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions. Www freefile dor gov   Qualified distributions from a Roth plan are not included in income. Www freefile dor gov In most cases, a distribution made before the end of the 5-tax-year period beginning with the first tax year for which you made a designated Roth contribution to the plan is not a qualified distribution. Www freefile dor gov Reporting by employer. Www freefile dor gov   Your employer generally should not include elective deferrals in your wages in box 1 of Form W-2. Www freefile dor gov Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box 12. Www freefile dor gov Section 501(c)(18)(D) contributions. Www freefile dor gov   Wages shown in box 1 of your Form W-2 should not have been reduced for contributions you made to a section 501(c)(18)(D) retirement plan. Www freefile dor gov The amount you contributed should be identified with code “H” in box 12. Www freefile dor gov You may deduct the amount deferred subject to the limits that apply. Www freefile dor gov Include your deduction in the total on Form 1040, line 36. Www freefile dor gov Enter the amount and “501(c)(18)(D)” on the dotted line next to line 36. Www freefile dor gov Designated Roth contributions. Www freefile dor gov    These contributions are elective deferrals but are included in your wages in box 1 of Form W-2. Www freefile dor gov Designated Roth contributions to a section 401(k) plan are reported using code AA in box 12, or, for section 403(b) plans, code BB in box 12. Www freefile dor gov Excess deferrals. Www freefile dor gov   If your deferrals exceed the limit, you must notify your plan by the date required by the plan. Www freefile dor gov If the plan permits, the excess amount will be distributed to you. Www freefile dor gov If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. Www freefile dor gov You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. Www freefile dor gov The plan then must pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year. Www freefile dor gov   You must include the excess deferral in your income for the year of the deferral unless you have an excess deferral of a designated Roth contribution. Www freefile dor gov File Form 1040 to add the excess deferral amount to your wages on line 7. Www freefile dor gov Do not use Form 1040A or Form 1040EZ to report excess deferral amounts. Www freefile dor gov Excess not distributed. Www freefile dor gov   If you do not take out the excess amount, you cannot include it in the cost of the contract even though you included it in your income. Www freefile dor gov Therefore, you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution. Www freefile dor gov Excess distributed to you. Www freefile dor gov   If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, do not include it in income again in the year you receive it. Www freefile dor gov If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. Www freefile dor gov Any income on the excess deferral taken out is taxable in the tax year in which you take it out. Www freefile dor gov If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income. Www freefile dor gov    You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. Www freefile dor gov Use the following rules to report a corrective distribution shown on Form 1099-R for 2013. Www freefile dor gov If the distribution was for a 2013 excess deferral, your Form 1099-R should have the code “8” in box 7. Www freefile dor gov Add the excess deferral amount to your wages on your 2013 tax return. Www freefile dor gov If the distribution was for a 2013 excess deferral to a designated Roth account, your Form 1099-R should have code “B” in box 7. Www freefile dor gov Do not add this amount to your wages on your 2013 return. Www freefile dor gov If the distribution was for a 2012 excess deferral, your Form 1099-R should have the code “P” in box 7. Www freefile dor gov If you did not add the excess deferral amount to your wages on your 2012 tax return, you must file an amended return on Form 1040X, Amended U. Www freefile dor gov S. Www freefile dor gov Individual Income Tax Return. Www freefile dor gov If you did not receive the distribution by April 15, 2013, you also must add it to your wages on your 2013 tax return. Www freefile dor gov If the distribution was for the income earned on an excess deferral, your Form 1099-R should have the code “8” in box 7. Www freefile dor gov Add the income amount to your wages on your 2013 income tax return, regardless of when the excess deferral was made. Www freefile dor gov Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Www freefile dor gov Include the loss as a negative amount on Form 1040, line 21 and identify it as “Loss on Excess Deferral Distribution. Www freefile dor gov ”    Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Www freefile dor gov It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Www freefile dor gov Excess Contributions If you are a highly compensated employee, the total of your elective deferrals and other contributions made for you for any year under a section 401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees. Www freefile dor gov If the total contributed to the plan is more than the amount allowed under the ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as distributed to you and then contributed by you to the plan. Www freefile dor gov You must include the excess contributions in your income as wages on Form 1040, line 7. Www freefile dor gov You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts. Www freefile dor gov If you receive a corrective distribution of excess contributions (and allocable income), it is included in your income in the year of the distribution. Www freefile dor gov The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions. Www freefile dor gov You should receive a Form 1099-R for the year the excess contributions are distributed to you. Www freefile dor gov Add the distribution to your wages for that year. Www freefile dor gov Even though a corrective distribution of excess contributions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Www freefile dor gov It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Www freefile dor gov Excess Annual Additions The amount contributed in 2013 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $51,000. Www freefile dor gov Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions. Www freefile dor gov A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. Www freefile dor gov A corrective payment consisting of your after-tax contributions is not taxable. Www freefile dor gov If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with the code “E” in box 7. Www freefile dor gov Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or line 12a of Form 1040A. Www freefile dor gov Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A. Www freefile dor gov Even though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Www freefile dor gov It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Www freefile dor gov Stock Options If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option or property acquired through exercise of the option. Www freefile dor gov The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. Www freefile dor gov Your employer can tell you which kind of option you hold. Www freefile dor gov Nonstatutory Stock Options Grant of option. Www freefile dor gov   If you are granted a nonstatutory stock option, you may have income when you receive the option. Www freefile dor gov The amount of income to include and the time to include it depend on whether the fair market value of the option can be readily determined. Www freefile dor gov The fair market value of an option can be readily determined if it is actively traded on an established market. Www freefile dor gov    The fair market value of an option that is not traded on an established market can be readily determined only if all of the following conditions exist. Www freefile dor gov You can transfer the option. Www freefile dor gov You can exercise the option immediately in full. Www freefile dor gov The option or the property subject to the option is not subject to any condition or restriction (other than a condition to secure payment of the purchase price) that has a significant effect on the fair market value of the option. Www freefile dor gov The fair market value of the option privilege can be readily determined. Www freefile dor gov The option privilege for an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of property subject to the option without risking any capital. Www freefile dor gov For example, if during the exercise period the fair market value of stock subject to an option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the stock at its higher value. Www freefile dor gov The option privilege for an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of the property subject to the option. Www freefile dor gov If you or a member of your family is an officer, director, or more-than-10% owner of an expatriated corporation, you may owe an excise tax on the value of nonstatutory options and other stock-based compensation from that corporation. Www freefile dor gov For more information on the excise tax, see Internal Revenue Code section 4985. Www freefile dor gov Option with readily determinable value. Www freefile dor gov   If you receive a nonstatutory stock option that has a readily determinable fair market value at the time it is granted to you, the option is treated like other property received as compensation. Www freefile dor gov See Restricted Property , later, for rules on how much income to include and when to include it. Www freefile dor gov However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer does not apply to a nonstatutory option. Www freefile dor gov Option without readily determinable value. Www freefile dor gov   If the fair market value of the option is not readily determinable at the time it is granted to you (even if it is determined later), you do not have income until you exercise or transfer the option. Www freefile dor gov    Exercise or transfer of option. Www freefile dor gov   When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value. Www freefile dor gov Option with readily determinable value. Www freefile dor gov   When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you do not have to include any amount in income. Www freefile dor gov Option without readily determinable value. Www freefile dor gov   When you exercise a nonstatutory stock option that did not have a readily determinable value at the time the option was granted, the restricted prope
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The Www Freefile Dor Gov

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