Professional Documents
Culture Documents
Business Expenses
Business Expenses
Business
Introduction . . . . . . . . . . . . . . . . . . 1
Department
of the What's New for 2022 . . . . . . . . . . . . . 2
Expenses
Treasury
Internal What's New for 2023 . . . . . . . . . . . . . 2
Revenue
Service Reminders . . . . . . . . . . . . . . . . . . . 2
Chapter 1. Deducting
For use in preparing Business Expenses .......... 3
2022 Returns
Chapter 2. Employees' Pay . . . . . . . . 8
Chapter 4. Interest . . . . . . . . . . . . 13
Chapter 5. Taxes . . . . . . . . . . . . . 18
Chapter 6. Insurance . . . . . . . . . . . 21
Chapter 8. Amortization . . . . . . . . . 29
Chapter 9. Depletion . . . . . . . . . . . 36
Index . . . . . . . . . . . . . . . . . . . . . 56
Introduction
This publication discusses common business
expenses and explains what is and is not de-
ductible. The general rules for deducting busi-
ness expenses are discussed in the opening
chapter. The chapters that follow cover specific
expenses and list other publications and forms
you may need.
Note. Section references within this publica-
tion are to the Internal Revenue Code and regu-
lation references are to the Income Tax Regula-
tions under the Code.
Feb 2, 2023
publication or the How To Get Tax Help section 2020, and before July 1, 2021. The employee
at the end of this publication, go to the IRS In-
teractive Tax Assistant page at IRS.gov/
retention credit under section 3134 of the Inter-
nal Revenue Code, as enacted by the ARP and
What's New for 2023
Help/ITA where you can find topics by using the amended by the Infrastructure Investment and The following item highlights a change in the tax
search feature or viewing the categories listed. Jobs Act, was limited to wages paid after June law for 2023.
30, 2021, and before October 1, 2021, unless
Getting tax forms, instructions, and pub- Most current standard mileage rate. For the
the employer was a recovery startup business.
lications. Go to IRS.gov/Forms to download most current standard mileage rates, go to
An employer that was a recovery startup busi-
current and prior-year forms, instructions, and IRS.gov/Tax-Professionals/Standard-Mileage-
ness could also claim the employee retention
publications. Rates.
credit for wages paid after September 30, 2021,
The following item highlights a change
Ordering tax forms, instructions, and and before January 1, 2022. For more informa-
regarding this publication.
publications. Go to IRS.gov/OrderForms to tion, see chapter 2.
order current forms, instructions, and publica- Final revision. Pub. 535 will no longer be re-
Credit for COBRA premium assistance pay-
tions; call 800-829-3676 to order prior-year vised and published. The 2022 edition will be
ments is limited to periods of coverage be-
forms and instructions. The IRS will process the final revision available.
ginning on or after April 1, 2021, through
your order for forms and publications as soon periods of coverage beginning on or before
as possible. Don’t resubmit requests you've al- September 30, 2021. Section 9501 of the
ready sent us. You can get forms and publica-
tions faster online.
ARP provides for COBRA premium assistance
in the form of a full reduction in the premium
Reminders
otherwise payable by certain individuals and The following reminders and other items may
their families who elect COBRA continuation help you file your tax return.
coverage due to a loss of coverage as the result
Future Developments of a reduction in hours or an involuntary termi- IRS e-file (Electronic Filing)
For the latest information about developments nation of employment (assistance eligible indi-
related to Pub. 535, such as legislation enacted viduals). This COBRA premium assistance is
after it was published, go to IRS.gov/Pub535. available for periods of coverage beginning on
or after April 1, 2021, through periods of cover-
age beginning on or before September 30,
2021. For more information, see chapter 2.
What's New for 2022 Advance payment of COVID-19 credits ex- You can file your tax returns electronically
tended. You may no longer request an ad- using an IRS e-file option. The benefits of IRS
The following items highlight some changes in e-file include faster refunds, increased
vance payment of any credit on Form 7200, Ad-
the tax law for 2022. accuracy, and acknowledgment of IRS receipt
vance Payment of Employer Credits Due to
Form 1099-K reporting transition period. COVID-19. For more information, see chap- of your return. You can use one of the following
The transition period described in Notice ter 2. IRS e-file options.
2023-10 delays the reporting of transactions in • Use an authorized IRS e-file provider.
Research and experimental costs. Begin- • Use a personal computer.
excess of $600 to transactions that occur after
ning January 1, 2022, research and experimen- • Visit a Volunteer Income Tax Assistance
calendar year 2022. The transition period is in-
tal expenditures, generally, have to be amor- (VITA) or Tax Counseling for the Elderly
tended to facilitate an orderly transition for
tized over a 5-year period. A business cannot (TCE) site.
TPSO tax compliance, as well as individual
elect to deduct their total research expenses in
payee compliance with income tax reporting. A For details on these fast filing methods, see
the current year. For more information, see
participating payee, in the case of a third-party your income tax package.
chapter 7.
network transaction, is any person who accepts
payment from a third-party settlement organiza- Amortization of research and experimental Form 1099-MISC. File Form 1099-MISC, Mis-
tion for a business transaction. expenditures. Specified research or experi- cellaneous Income, for each person to whom
mental costs paid or incurred in tax years begin- you have paid during the year in the course of
The COVID-19 related credit for qualified your trade or business at least $600 in rents,
sick and family leave wages is limited to ning after 2021 must be capitalized and amor-
tized ratably over a 5-year period (15-year prizes and awards, other income payments,
leave taken after March 31, 2020, and be- medical and health care payments, and crop in-
fore October 1, 2021. Generally, the credit period for any expenditures related to foreign
research). For more information, see chapter 8. surance proceeds. See the Instructions for
for qualified sick and family leave wages, as Forms 1099-MISC and 1099-NEC for more in-
enacted under the Families First Coronavirus Corporate alternative minimum tax reinsta- formation and additional reporting require-
Response Act (FFCRA) and amended and ex- ted in 2023. P.L. 117-169, dated August 16, ments.
tended by the COVID-related Tax Relief Act of 2022, amended section 55 to impose a corpo-
2020, for leave taken after March 31, 2020, and rate alternative minimum tax. The amendment Form 1099-NEC. File Form 1099-NEC, Non-
before April 1, 2021, and the credit for qualified applies to tax years beginning after 2022. For employee Compensation, for each person to
sick and family leave wages under sections more information, see chapter 9. whom you have paid during the year in the
3131, 3132, and 3133 of the Internal Revenue course of your trade or business at least $600 in
Excise tax on Black Lung Benefits now per- services (including parts and materials), who is
Code, as enacted under the American Rescue
manent. P.L. 117-169 also amended section not your employee. See the Instructions for
Plan Act of 2021 (the ARP), for leave taken after
4121 to eliminate the reduction in tax on coal Forms 1099-MISC and 1099-NEC for more in-
March 31, 2021, and before October 1, 2021,
from mines located in the United States sold by formation and additional reporting require-
have expired. However, employers that pay
the producer. The amendment applies to sales ments.
qualified sick and family leave wages in 2022
in calendar quarters beginning after August 17,
for leave taken after March 31, 2020, and be- Gig Economy Tax Center. The IRS Gig Econ-
2022. For more information, see chapter 9.
fore October 1, 2021, are eligible to claim a omy Tax Center on IRS.gov can help people in
credit for qualified sick and family leave wages Standard mileage rate. For tax year 2022, the this growing area meet their tax obligations
in 2022. For more information, see chapter 2. standard mileage rate for the cost of operating through more streamlined information.
your car, van, pickup, or panel truck for each
The COVID-19 related employee retention The gig economy is also known as the shar-
mile of business use is:
credit has expired. The employee retention ing, on-demand, or access economy. It usually
credit enacted under the Coronavirus Aid, Re- • 58.5 cents per mile from January 1, 2022, includes businesses that operate an app or
through June 30, 2022; and
lief, and Economic Security (CARES) Act and website to connect people to provide services
amended and extended by the Taxpayer Cer- • 62.5 cents per mile from July 1, 2022, to customers. While there are many types of gig
through December 31, 2022.
tainty and Disaster Tax Relief Act of 2020 was economy businesses, ride-sharing and home
limited to qualified wages paid after March 12, For more information, see chapter 11. rentals are two of the most popular.
various resources, making it easier for taxpay- the DHS domestic 24-hour toll-free number at
936 Home Mortgage Interest
ers to find information about the tax implications 866-DHS-2-ICE (866-347-2423) or
936
Deduction
for the companies that provide the services and 802-872-6199 (non-toll-free international). For
the individuals who perform them. It offers tips help from the NHTRC, call the National Human 946 How To Depreciate Property
and resources on a variety of topics including: Trafficking Hotline toll free at 888-373-7888 or
946
• Filing requirements; text HELP or INFO to BeFree (233733). Form (and Instructions)
• Making quarterly estimated income tax The U.S. Department of the Treasury’s Fi-
payments; Schedule A (Form 1040) Itemized
nancial Crimes Enforcement Network (FinCEN)
Schedule A (Form 1040)
humantraffickinghotline.org. DHS is responsible 463 Travel, Gift, and Car Expenses • Storage.
• Direct labor (including contributions to pen-
463
for investigating human trafficking, arresting 525 Taxable and Nontaxable Income
traffickers, and protecting victims. DHS also sion or annuity plans) for workers who pro-
525
provides immigration relief to non-U.S. citizen 529 Miscellaneous Deductions duce the products.
• Factory overhead.
529
victims of human trafficking. DHS uses a victim- 536 Net Operating Losses (NOLs) for
centered approach to combating human traf-
536
Individuals, Estates, and Trusts Under the uniform capitalization rules, you
ficking, which places equal value on identifying must capitalize the direct costs and part of the
and stabilizing victims and on investigating and 538 Accounting Periods and Methods
indirect costs for certain production or resale
538
prosecuting traffickers. Victims are crucial to in- 542 Corporations activities. Indirect costs include rent, interest,
vestigations and prosecutions; each case and taxes, storage, purchasing, processing, repack-
542
every conviction changes lives. DHS under- 547 Casualties, Disasters, and Thefts
547
Records
their trauma. DHS is committed to helping vic- taxpayers. You qualify as a small business tax-
tims feel stable, safe, and secure. 587 Business Use of Your Home
587 payer if you (a) have average annual gross
the obligation) or in the tax year you settle the If a taxpayer dies before the end of the deductions that would have been subject to the
contest. However, to take the deduction in the 5-year (or 7-year) period, the “test” period ends 2%-of-adjusted-gross-income limitation. You
year of payment or transfer, you must meet cer- on the date of the taxpayer's death. can still claim certain expenses as itemized de-
tain conditions. See Regulations section ductions on Schedule A (Form 1040).
If your business or investment activity
1.461-2. passes this 3- (or 2-) years-of-profit test, the
IRS will presume it is carried on for profit. This Deductions you can take for personal as
Related person. Under the accrual method of
means the limits discussed here will not apply. well as for business activities are allowed in full.
accounting, you generally deduct expenses
You can take all your business deductions from For individuals, all nonbusiness deductions,
when you incur them, even if you have not yet
the activity, even for the years that you have a such as those for home mortgage interest,
paid them. However, if you and the person you
loss. You can rely on this presumption unless taxes, and casualty losses, may also be deduc-
owe are related and that person uses the cash
the IRS later shows it to be invalid. ted. Deduct them on the appropriate lines of
method of accounting, you must pay the ex-
Schedule A (Form 1040).
pense before you can deduct it. Your deduction Using the presumption later. If you are start-
is allowed when the amount is includible in in- For the limits that apply to home mortgage
ing an activity and do not have 3 (or 2) years
come by the related cash method payee. For interest, see Pub. 936.
showing a profit, you can elect to have the pre-
more information, see Related Persons in Pub. sumption made after you have the 5 (or 7) years Generally, you can deduct a casualty loss
538. of experience allowed by the test. on property you own for personal use only to
You can elect to do this by filing Form 5213. the extent each casualty loss is more than
Filing this form postpones any determination $100, and the total of all casualty losses ex-
that your activity is not carried on for profit until ceeds 10% of your adjusted gross income
5 (or 7) years have passed since you started (AGI). See Pub. 547 for more information on
the activity. casualty losses.
September 30, 2021. Section 9501 of the 15-A Employer's Supplemental Tax Guide
The IRS will generally accept your charac- ARP provides for COBRA premium assistance
15-A
terization if it is supported by facts and circum- in the form of a full reduction in the premium 15-B Employer's Tax Guide to Fringe
15-B
Figure separately whether each is a viduals). This COBRA premium assistance is W-2 Wage and Tax Statement
not-for-profit activity. Then figure the limit on de-
W-2
Assets
or reimburse employees for business expenses Example 3. You are either a cash or ac-
946 How To Depreciate Property crual calendar year taxpayer. Last January, you
incurred for your business. However, your de-
946
duction may be limited. leased property for 3 years for $6,000 per year.
See chapter 12 for information about getting
You pay the full $18,000 (3 x $6,000) during the
If you make the payment under an account- publications and forms.
first year of the lease. Because this amount is a
able plan, deduct it in the category of the ex- prepaid expense that must be capitalized, you
pense paid. For example, if you pay an em-
ployee for travel expenses incurred on your Rent can deduct only $6,000 per year, the amount al-
locable to your use of the property in each year.
behalf, deduct this payment as a travel ex-
pense. If you make the payment under a nonac- Rent is any amount you pay for the use of prop- Canceling a lease. You can generally deduct
countable plan, deduct it as wages and include erty you do not own. In general, you can deduct as rent an amount you pay to cancel a business
it on the employee's Form W-2. rent as an expense only if the rent is for prop- lease.
erty you use in your trade or business. If you
See Reimbursement of Travel and Non-En-
have or will receive equity in or title to the prop- Lease or purchase. There may be instances
tertainment Related Meals in chapter 11 for
erty, the rent is not deductible. in which you must determine whether your pay-
more information about deducting reimburse-
ments and an explanation of accountable and ments are for rent or for the purchase of the
Unreasonable rent. You can’t take a rental property. You must first determine whether your
nonaccountable plans.
deduction for unreasonable rent. Ordinarily, the agreement is a lease or a conditional sales con-
issue of reasonableness arises only if you and tract. Payments made under a conditional sales
Sick and Vacation Pay the lessor are related. Rent paid to a related contract are not deductible as rent expense.
person is reasonable if it is the same amount
Sick pay. You can deduct amounts you pay to you would pay to a stranger for use of the same Conditional sales contract. Whether an
your employees for sickness and injury, includ- property. Rent isn’t unreasonable just because agreement is a conditional sales contract de-
ing lump-sum amounts, as wages. However, it is figured as a percentage of gross sales. For pends on the intent of the parties. Determine in-
your deduction is limited to amounts not com- examples of related persons, see Related per- tent based on the provisions of the agreement
pensated by insurance or other means. sons in chapter 2 of Pub. 544. and the facts and circumstances that exist
when you make the agreement. No single test,
Vacation pay. Vacation pay is an employee Rent on your home. If you rent your home or special combination of tests, always applies.
benefit. It includes amounts paid for unused va- and use part of it as your place of business, you However, in general, an agreement may be
2. Acquire property for resale. However, this 550 Investment Income and Expenses
these costs over the term of the lease. rule does not apply to personal property if
550
your average annual gross receipts are 936 Home Mortgage Interest Deduction
Loss on merchandise and fixtures. If you
936
and amortize it over the remaining term of the of Goods Sold in chapter 1), you are not re- Deductions
lease. quired to capitalize costs under section 263A. Schedule E (Form 1040) Supplemental
See section 263A(i).
Schedule E (Form 1040)
by Lessee develop, improve, create, raise, or grow the Deductions, Credits, etc.
property. Property produced for you under a
contract is treated as produced by you to the Schedule K-1 (Form 1120-S)
If you add buildings or make other permanent
Schedule K-1 (Form 1120-S)
Deduction
you end the lease, figure your gain or loss your cost by claiming a deduction for
depreciation on the building. 8582 Passive Activity Loss Limitations
8582
taxes.
The rules for below-market loans do not apply 1. Designed to provide services under con-
to any day on which the total outstanding loans tinuing care contracts (defined below).
between the borrower and lender is $10,000 or
2. Includes an independent living unit, and
Topics
less. This exception applies only to the follow- This chapter discusses:
ing. either an assisted living or nursing facility,
or both.
1. Gift loans between individuals if the loan is • When to deduct taxes
not directly used to buy or carry in- 3. Substantially all of the independent living • Real estate taxes
come-producing assets. unit residents are covered by continuing • Income taxes
care contracts. • Employment taxes
2. Compensation-related loans or corpora-
A “continuing care contract” is a written con- • Other taxes
tion-shareholder loans if the avoidance of
any federal tax is not a principal purpose tract between an individual and a qualified con-
of the interest arrangement. tinuing care facility that includes all of the fol- Useful Items
lowing conditions. You may want to see:
This exception does not apply to a term loan
described in (2) above that was previously sub- 1. The individual or individual's spouse must
be entitled to use the facility for the rest of Publication
ject to the below-market loan rules. Those rules
will continue to apply even if the outstanding their life or lives. 15 15 (Circular E), Employer's Tax Guide
balance is reduced to $10,000 or less. 2. The individual or individual's spouse will 334 Tax Guide for Small Business
be provided with housing, as appropriate
334
Exceptions for loans without significant tax for the health of the individual or individu- 510 Excise Taxes
510
effect. The following loans are specifically ex- al's spouse in an: 538 Accounting Periods and Methods
empted from the rules for below-market loans
538
because their interest arrangements do not a. Independent living unit (which has ad- 551 Basis of Assets
ditional available facilities outside the
551
Deductions
2. Loans subsidized by a federal, state, or be provided with assisted living or nursing
care available in the continuing care fa- Schedule SE (Form 1040)
municipal government that are made avail-
Schedule SE (Form 1040)
Accounting Method
3. Certain employee-relocation loans. For more information, see section 7872(h).
8959 Additional Medicare Tax
4. Certain loans to or from a foreign person, Sale or exchange of property. Different rules
8959
unless the interest income would be effec- generally apply to a loan connected with the See chapter 12 for information about getting
tively connected with the conduct of a U.S. sale or exchange of property. If the loan does publications and forms.
trade or business and not exempt from not provide adequate stated interest, part of the
U.S. tax under an income tax treaty. principal payment may be considered interest.
5. Any other loan if the taxpayer can show However, there are exceptions that may require When To Deduct Taxes
that the interest arrangement has no sig- you to apply the below-market interest rate
nificant effect on the federal tax liability of rules to these loans. See Unstated Interest and Generally, you can only deduct taxes in the
the lender or the borrower. Whether an in- Original Issue Discount (OID) in Pub. 537. year you pay them. This applies whether you
terest arrangement has a significant effect use the cash method or an accrual method of
on the federal tax liability of the lender or More information. For more information on accounting.
the borrower will be determined by all the below-market loans, see section 7872 and Reg-
ulations section 1.7872-5. Under an accrual method, you can deduct a
facts and circumstances. Consider all the tax before you pay it if you meet the exception
following factors. for recurring items discussed under Economic
a. Whether items of income and deduc- Performance in Pub. 538. You can also elect to
tion generated by the loan offset each ratably accrue real estate taxes as discussed
other. later under Real Estate Taxes. See also Foreign
income taxes, discussed later.
2022, the state changed the assessment and of the assessment. accrue in 2023.
lien dates from July 1, 2023, to December 31, You can deduct taxes for these local bene-
2022, for property tax year 2023. Use the origi- Separate elections. You can elect to rata-
fits only if the taxes are for maintenance, re-
nal accrual date (July 1, 2023) to determine bly accrue the taxes for each separate trade or
pairs, or interest charges related to those bene-
when you can deduct the tax. You must also business and for nonbusiness activities if you
fits. If part of the tax is for maintenance, repairs,
use the July 1 accrual date for all future years to account for them separately. Once you elect to
or interest, you must be able to show how much
determine when you can deduct the tax. ratably accrue real estate taxes, you must use
of the tax is for these expenses to claim a de-
that method unless you get permission from the
duction for that part of the tax.
Uniform capitalization rules. Uniform capital- IRS to change your accounting method. See
ization rules apply to certain taxpayers who pro- Form 3115, later.
Example. To improve downtown commer-
duce real property or tangible personal property cial business, Waterfront City converted a Making the election. If you elect to ratably
for use in a trade or business or for sale to cus- downtown business area street into an en- accrue the taxes for the first year in which you
tomers. They also apply to certain taxpayers closed pedestrian mall. The city assessed the incur real estate taxes, attach a statement to
who acquire property for resale. Under these full cost of construction, financed with 10-year your income tax return for that year. The state-
rules, you either include certain costs in inven- bonds, against the affected properties. The city ment should show all the following items.
tory or capitalize certain expenses related to the is paying the principal and interest with the an- • The trades or businesses to which the
property, such as taxes. For more information, nual payments made by the property owners. election applies and the accounting
see chapter 1. The assessments for construction costs are method or methods used.
not deductible as taxes or as business expen- • The period to which the taxes relate.
Carrying charges. Carrying charges include ses, but are depreciable capital expenses. The • The calculation of the real estate tax de-
taxes you pay to carry or develop real estate or part of the payments used to pay the interest duction for that first year.
to carry, transport, or install personal property. charges on the bonds is deductible as taxes.
You can elect to capitalize carrying charges not Generally, you must file your return by the
subject to the uniform capitalization rules if they Charges for services. Water bills, sewerage, due date (including extensions). However, if
are otherwise deductible. For more information, and other service charges assessed against you timely filed your return for the year without
see chapter 7. your business property are not real estate electing to ratably accrue, you can still make the
taxes, but are deductible as business expen- election by filing an amended return within 6
Refunds of taxes. If you receive a refund for ses. months after the due date of the return (exclud-
any taxes you deducted in an earlier year, in- ing extensions). Attach the statement to the
clude the refund in income to the extent the de- Purchase or sale of real estate. If real estate amended return and write “Filed pursuant to
duction reduced your federal income tax in the is sold, the real estate taxes must be allocated section 301.9100-2” on the statement. File the
earlier year. For more information, see Recov- between the buyer and the seller. amended return at the same address where you
ery of amount deducted (tax benefit rule) in The buyer and seller must allocate the real filed the original return.
chapter 1. estate taxes according to the number of days in Form 3115. If you elect to ratably accrue
You must include in income any inter- the real property tax year (the period to which real estate taxes for a year after the first year in
TIP est you receive on tax refunds. the tax imposed relates) that each owned the which you incur real estate taxes, or if you want
property. Treat the seller as paying the taxes up to revoke your election to ratably accrue real
to but not including the date of sale. Treat the estate taxes, file Form 3115. For more informa-
buyer as paying the taxes beginning with the tion, including applicable time frames for filing,
Real Estate Taxes date of sale. You can usually find this informa-
tion on the settlement statement you received at
see the Instructions for Form 3115.
closing.
Deductible real estate taxes are any state or lo-
cal taxes, including taxes imposed by U.S. pos-
If you (the seller) use an accrual method and
have not elected to ratably accrue real estate
Income Taxes
sessions, on real estate levied for the general
taxes, you are considered to have accrued your
public welfare. The taxing authority must base This section discusses federal, state, local, and
part of the tax on the date you sell the property.
the taxes on the assessed value of the real es- foreign income taxes.
tate and charge them uniformly against all prop- Example. Lynn and Curt are calendar year
erty under its jurisdiction. Deductible real estate Federal income taxes. You cannot deduct
accrual method taxpayers who own real estate
taxes generally do not include taxes charged for federal income taxes.
in Olmo County. They have not elected to rata-
local benefits and improvements that increase bly accrue property taxes. November 30 of
the value of the property. See Taxes for local State and local income taxes. A corporation
each year is the assessment and lien date for or partnership can deduct state and local in-
benefits, later. the current real property tax year, which is the come taxes imposed on the corporation or part-
Real estate taxes imposed by a foreign calendar year. They sold the property on June nership as business expenses.
country are not deductible unless paid or ac- 30, 2022. Under their accounting method, they
An individual can deduct state and local in-
crued in connection with the conduct of a trade would not be able to claim a deduction for the
come taxes only as an itemized deduction on
or business or for the production of income. For taxes because the sale occurred before No-
Schedule A (Form 1040), subject to limitations.
individual tax filers, the amount of deductible vember 30. They are treated as having accrued
The deduction is limited to $10,000 as a total of
state and local real estate taxes may be subject their part of the tax, 181/365 (January 1–June
the following taxes.
to a $10,000 limitation. See State and local in- 29), on June 30, and they can deduct it for
come taxes, later. 2022.
You can generally deduct the ordinary and nec- partners, it can generally deduct them One of the following statements must be
essary cost of insurance as a business expense as guaranteed payments to partners. true.
if it is for your trade, business, or profession. • You were self-employed and had a net
b. If an S corporation pays accident and
However, you may have to capitalize certain in- profit for the year reported on Schedule C
health insurance premiums for its
surance costs under the uniform capitalization (Form 1040) or Schedule F (Form 1040).
more-than-2% shareholder-employ-
rules. For more information, see Capitalized • You were a partner with net earnings from
ees, it can generally deduct them, but
Premiums, later. self-employment for the year reported on
must also include them in the share-
Schedule K-1 (Form 1065), box 14,
holder's wages subject to federal in-
code A.
Topics come tax withholding. See Pub.15-B.
• You used one of the optional methods to
This chapter discusses: figure your net earnings from self-employ-
4. Liability insurance.
ment on Schedule SE.
• 5. Malpractice insurance that covers your
Deductible premiums • You received wages in 2022 from an S cor-
• Nondeductible premiums personal liability for professional negli-
poration in which you were a
• Capitalized premiums gence resulting in injury or damage to pa-
more-than-2% shareholder. Health insur-
• When to deduct premiums tients or clients.
ance premiums paid or reimbursed by the
6. Workers' compensation insurance set by S corporation are shown as wages on
Useful Items state law that covers any claims for bodily Form W-2.
You may want to see: injuries or job-related diseases suffered by
The insurance plan must be established, or
employees in your business, regardless of
considered to be established, as discussed in
Publication fault.
the following bullets, under your business.
15-B Employer's Tax Guide to Fringe a. If a partnership pays workers' com- • For self-employed individuals filing a
pensation premiums for its partners, it Schedule C (Form 1040) or Schedule F
15-B
Benefits
can generally deduct them as guaran- (Form 1040), a policy can be either in the
525 Taxable and Nontaxable Income
525
Income and Adjustments to Income 8. Overhead insurance that pays for busi-
report the premium amounts on Sched-
ness overhead expenses you have during
Schedule A (Form 1040) Itemized ule K-1 (Form 1065) as guaranteed pay-
long periods of disability caused by your
Schedule A (Form 1040)
From Business
ers vehicles used in your business for lia- business.
Schedule F (Form 1040) Profit or Loss Schedule F (Form 1040)
bility, damages, and other losses. If you • For more-than-2% shareholders, a policy
From Farming operate a vehicle partly for personal use can be either in the name of the S corpora-
and partly for business use, deduct only tion or in the name of the shareholder. You
Schedule SE (Form 1040)
the part of the insurance premium that ap- can either pay the premiums yourself or
Schedule SE (Form 1040)
Self-Employment Tax
plies to the business use of the vehicle. If the S corporation can pay them and report
Schedule K-1 (Form 1065) Partner's Schedule K-1 (Form 1065) you use the standard mileage rate to fig- the premium amounts on Form W-2 as wa-
Share of Income, Deductions, ure your car expenses, you can’t deduct ges to be included in your gross income.
Credits, etc. any car insurance premiums. However, if the policy is in your name and
Chronically ill individual. A chronically ill (general mobility), bathing, dressing, and Benefits received. For information on ex-
individual is a person who has been certified as continence. cluding benefits you receive from a long-term
one of the following. • An individual who requires substantial su- care contract from gross income, see Pub. 525.
• An individual who has been unable, due to pervision to be protected from threats to
loss of functional capacity for at least 90 health and safety due to severe cognitive Other coverage. You can’t take the deduction
days, to perform at least two activities of impairment. for any month you were eligible to participate in
daily living without substantial assistance any employer (including your spouse's) subsi-
The certification must have been made by a li-
from another individual. Activities of daily dized health plan at any time during that month,
censed health care practitioner within the previ-
living are eating, toileting, transferring even if you didn’t actually participate. In addi-
ous 12 months.
tion, if you were eligible for any month or part of
7. Publication
544 Sales and Other Dispositions of
ter 8.
544
Activities
exists if the information available to you does
8826 Disabled Access Credit
8826
Repair and Maintenance This chapter discusses: ness or otherwise go out of business. For a dis-
cussion on how to treat these costs, see If your
Costs • Deducting amortization attempt to go into business is unsuccessful un-
der Capital Expenses in chapter 1.
• Amortizing costs of starting a business
Generally, you can deduct amounts paid for re- • Amortizing costs of getting a lease For costs paid or incurred after September
pairs and maintenance to tangible property if • Amortizing costs of section 197 intangibles 8, 2008, you can deduct a limited amount of
the amounts paid are not otherwise required to • Amortizing reforestation costs startup and organizational costs. The costs that
be capitalized. However, you may elect to capi- • Amortizing costs of geological and aren't deducted currently can be amortized rat-
talize amounts paid for repair and maintenance geophysical costs ably over a 180-month period. The amortization
consistent with the treatment on your books and • Amortizing costs of pollution control period starts with the month you begin operat-
records. If you make this election, it applies to facilities ing your active trade or business. You aren't re-
all amounts paid for repair and maintenance to • Amortizing costs of research and quired to attach a statement to make this elec-
tangible property that you treat as capital ex- experimentation tion. You can choose to forgo this election by
penditures on your books and records for the • Amortizing costs of certain tax preferences affirmatively electing to capitalize your startup
tax year. costs on your income tax return filed by the due
Useful Items date (including extensions) for the tax year in
How to make the election. To make the elec- You may want to see: which the active trade or business begins. Once
tion to treat repairs and maintenance as capital made, the election to either amortize or capital-
expenditures, attach a statement titled “Section ize startup costs is irrevocable and applies to all
Publication
1.263(a)-3(n) Election” to your timely filed return startup costs that are related to your trade or
(including extensions). For more information on 544 Sales and Other Dispositions of
544
still make the election by filing an amended re- 946 How To Depreciate Property 2004, and before September 9, 2008, you can
turn within 6 months of the due date of the re- elect to deduct a limited amount of business
946
turn (excluding extensions). Attach the state- Form (and Instructions) startup and organizational costs in the year your
ment to the amended return and write “Filed active trade or business begins. Any costs not
pursuant to section 301.9100-2” on the state- 3115 Application for Change in
3115
Costs of Organizing a Nonqualifying costs. The following costs If you have both startup and organizational
costs, attach a separate statement (if required)
Corporation can't be amortized.
• The cost of acquiring assets for the part- to your return for each type of cost. See Starting
nership or transferring assets to the part- a Business, earlier, for more information.
Amounts paid to organize a corporation are the
nership.
direct costs of creating the corporation.
Generally, you must file the return by the
due date (including any extensions). However,
Assets
You can elect to amortize certain tax preference
items over an optional period beginning in the 9. 551 Basis of Assets
551
• The number of units of mineral sold during can figure your cost depletion deduction by tak-
the tax year. ing the following steps.
T (Timber) Forest Activities Schedule
T (Timber)
See chapter 12 for information about getting Basis for depletion. To figure the property's
Step Action Result
publications and forms. basis for depletion, subtract all the following
from the property's adjusted basis. 1 Divide your property's Depletion unit.
basis for depletion by
a. Depreciation deductions,
Depletion?
2 Multiply the depletion Cost depletion
unit by units sold deduction.
b. Deferred expenses (including defer- during the tax year.
red exploration and development
If you have an economic interest in mineral
costs), and You must keep accounts for the depletion of
property or standing timber, you can take a de-
each property and adjust these accounts each
duction for depletion. More than one person c. Deductions other than depletion.
year for units sold and depletion claimed.
can have an economic interest in the same min-
eral deposit or timber. In the case of leased 2. The residual value of land and improve-
ments at the end of operations. Elective safe harbor for owners of oil and
property, the depletion deduction is divided be-
gas property. Instead of using the method de-
tween the lessor and the lessee. 3. The cost or value of land acquired for pur-
scribed earlier to determine the total recovera-
poses other than mineral production.
You have an economic interest if both the ble units, you can use an elective safe harbor to
following apply. Adjusted basis. The adjusted basis of determine the property’s recoverable reserves
• You have acquired by investment any in- your property is your original cost or other ba- for purposes of figuring cost depletion. If you
terest in mineral deposits or standing tim- sis, plus certain additions and improvements, choose the elective safe harbor, the total recov-
ber. and minus certain deductions such as depletion erable units equal 105% of a property's proved
• You have a legal right to income from the allowed or allowable and casualty losses. Your reserves (both developed and undeveloped).
extraction of the mineral or cutting of the adjusted basis can never be less than zero. See For details, see Revenue Procedure 2004-19
timber to which you must look for a return Pub. 551 for more information on adjusted ba- on page 563 of I.R.B. 2004-10, available at
of your capital investment. sis. IRS.gov/irb/2004-10_IRB#RP-2004-19.
A contractual relationship that allows you an To make the election, attach a statement to
economic or monetary advantage from prod- Total recoverable units. The total recovera- your timely filed (including extensions) original
ucts of the mineral deposit or standing timber is ble units is the sum of the following. return for the first tax year for which the safe
not, in itself, an economic interest. • The number of units of mineral remaining harbor is elected. The statement must indicate
at the end of the year (including units re- that you are electing the safe harbor provided
Depletion is an item of tax preference covered but not sold). by Revenue Procedure 2004-19. The election, if
! under the Alternative Minimum Tax • The number of units of mineral sold during made, is effective for the tax year in which it is
CAUTION (AMT). See section 57. the tax year (determined under your made and all later years. It cannot be revoked
method of accounting, as explained next). for the tax year in which it is elected, but it may
Basis adjustment for depletion. You must be revoked in a later year. Once revoked, it
You must estimate or determine recoverable
reduce the basis of your property by the deple- cannot be re-elected for the next 5 years.
units (tons, pounds, ounces, barrels, thousands
tion allowed or allowable, whichever is greater, of cubic feet, or other measure) of mineral prod-
but not below zero. ucts using the current industry method and the Percentage Depletion
most accurate and reliable information you can
obtain. You must include ores and minerals that To figure percentage depletion, you multiply a
Mineral Property are developed, in sight, blocked out, or as- certain percentage, specified for each mineral,
sured. You must also include probable or pro- by your gross income from the property during
Mineral property includes oil and gas wells, spective ores or minerals that are believed to the tax year.
mines, and other natural deposits (including ge- exist based on good evidence. But see Elective
The rates to be used and other rules for oil
othermal deposits). For this purpose, the term safe harbor for owners of oil and gas property,
and gas wells are discussed later under Inde-
“property” means each separate interest you later.
pendent Producers and Royalty Owners and
own in each mineral deposit in each separate
under Natural Gas Wells. Rates and other rules
tract or parcel of land. You can treat two or Number of units sold during the tax year.
for percentage depletion of other specific miner-
more separate interests as one property or as You determine the number of units sold during
als are found later under Mines and Geothermal
separate properties. See section 614 and the the tax year based on your method of account-
Deposits.
related regulations for rules on how to treat sep- ing. Use the following table to make this deter-
arate mineral interests. mination.
Gross income. When figuring percentage de-
There are two ways of figuring depletion on pletion, subtract from your gross income from
mineral property. IF you THEN the units sold during the property the following amounts.
• Cost depletion. use ... the tax year are ... • Any rents or royalties you paid or incurred
• Percentage depletion. the cash method the units sold for which you for the property.
of accounting receive payment during the tax • The part of any bonus you paid for a lease
Generally, you must use the method that gives
year (regardless of the year of on the property allocable to the product
you the larger deduction. However, unless you sale). sold (or that otherwise gives rise to gross
are an independent producer or royalty owner,
an accrual the units sold based on your income) for the tax year.
you generally cannot use percentage depletion
method of inventories and method of A bonus payment includes amounts you paid as
for oil and gas wells. See Oil and Gas Wells, accounting accounting for inventory.
later. a lessee to satisfy a production payment re-
tained by the lessor.
The number of units sold during the tax year
Use the following fraction to figure the part
Cost Depletion does not include any for which depletion deduc-
of the bonus you must subtract.
tions were allowed or allowable in earlier years.
To figure cost depletion, you must first deter-
mine the following. Figuring the cost depletion deduction. No. of units sold in the tax year
×
Bonus
• The property's basis for depletion. Once you have figured your property's basis for Recoverable units from the property Payments
• The total recoverable units of mineral in the depletion, the total recoverable units, and the For oil and gas wells and geothermal depos-
property's natural deposit. number of units sold during the tax year, you its, more information about the definition of
Timber you sell the timber products. iness bad debts, see Pub. 550.
timber units cut by your depletion unit. amended return. If you make this election, sub- 536 Net Operating Losses (NOLs) for
536
tract the adjusted basis for depletion from the Individuals, Estates, and Trusts
Timber units. When you acquire timber
fair market value (FMV) of the timber on the first
property, you must make an estimate of the 544 Sales and Other Dispositions of
day of the tax year in which you cut it to figure
quantity of marketable timber reasonably
544
feet board measure (FBM), log scale, cords, or 556 Examination of Returns, Appeal
ordinary gain or loss on the sale or other dispo-
other units. If you later determine that you have
556
sition of the products cut from the timber. For Rights, and Claims for Refund
more or less units of timber, you must adjust the
more information, see Timber in chapter 2 of
original estimate. Form (and Instructions)
Pub. 544.
The term “timber property” means your eco-
You may revoke an election to treat the cut- Schedule C (Form 1040) Profit or Loss
nomic interest in standing timber in each tract or
ting of timber as a sale or exchange, without the
Schedule C (Form 1040)
unit each year by taking the following steps. ocation) is disregarded for purposes of making Tax Return
a subsequent election. See Form T (Timber, 1045 Application for Tentative Refund
1. Determine your cost or adjusted basis of
Forest Activities Schedule) for more informa-
1045
the timber on hand at the beginning of the 1065 U.S. Return of Partnership Income
tion.
year. Adjusted basis is defined under Cost
1065
Tentative Refund
ceivables subsequently become worthless, the • You have a legal duty to pay the debt.
3115 Application for Change in
3115
loss is still a business bad debt. • You made the guarantee before the debt
Accounting Method became worthless. You meet this require-
Debt acquired from a decedent. The ment if you reasonably expected you
See chapter 12 for information about getting character of a loss from debts of a business ac-
publications and forms. wouldn’t have to pay the debt without full
quired from a decedent is determined in the reimbursement from the borrower.
same way as debts acquired on the purchase of • You received reasonable consideration for
Definition of Business a business. The executor of the decedent's es-
tate treats any loss from the debts as a busi-
making the guarantee. You meet this re-
quirement if you made the guarantee ac-
Bad Debt ness bad debt if the debts were closely related
to the decedent's trade or business when they
cording to normal business practice or for
a good faith business purpose.
became worthless. Otherwise, a loss from
A business bad debt is a loss from the worth-
these debts becomes a nonbusiness bad debt Example. Jane Zayne owns the Zayne
lessness of a debt that was either:
for the decedent's estate. Dress Company. She guaranteed payment of a
• Created or acquired in your trade or busi-
ness, or Liquidation. If you liquidate your business $20,000 note for Elegant Fashions, a dress out-
• Closely related to your trade or business and some of the accounts receivable that you let. Elegant Fashions is one of Zayne's largest
when it became partly or totally worthless. retain become worthless, they’re treated as clients. Elegant Fashions later defaulted on the
business bad debts. loan. As a result, Ms. Zayne paid the remaining
A debt is closely related to your trade or balance of the loan in full to the bank.
business if your primary motive for incurring the She can claim a business bad debt deduc-
debt is business related. Bad debts of a corpo- Types of Business Bad tion only for the amount she paid because her
ration (other than an S corporation) are always Debts guarantee was made in the course of her trade
business bad debts. or business for a good faith business purpose.
Business bad debts may result from the follow- She was motivated by the desire to retain one
Credit sales. Business bad debts are mainly ing. of her better clients and keep a sales outlet.
the result of credit sales to customers. Goods
Loans to clients and suppliers. If you loan Deductible in the year paid. If you make
that have been sold, but not yet paid for, and
money to a client, supplier, employee, or distrib- a payment on a loan you guaranteed, you can
services that have been performed, but not yet
utor for a business reason and you’re unable to deduct it in the year paid, unless you have
paid for, are recorded in your books as either
collect the loan after attempting to do so, you rights against the borrower.
accounts receivable or notes receivable. After a
reasonable period of time, if you have tried to have a business bad debt. Rights against a borrower. When you
collect the amount due, but are unable to do so, make payment on a loan you guaranteed, you
the uncollectible part of the receivables be- Debts owed by political parties. If a political may have the right to take the place of the
comes a business bad debt. party (or other organization that accepts contri- lender. The debt is then owed to you. If you
Accounts or notes receivable valued at fair butions or spends money to influence elections) have this right, or some other right to demand
market value (FMV) when received are deducti- owes you money and the debt becomes worth- payment from the borrower, you can’t claim a
ble only at that value, even though the FMV less, you can claim a bad debt deduction only if bad debt deduction until these rights become
may be less than the face value. If you pur- all of the following requirements are met. partly or totally worthless.
chased an account receivable for less than its 1. You use an accrual method of accounting.
face value, and the receivable subsequently be- Joint debtor. If two or more debtors jointly
comes worthless, the most you’re allowed to 2. The debt arose from the sale of goods or owe you money, your inability to collect from
deduct is the amount you paid to acquire it. services in the ordinary course of your one doesn’t enable you to deduct a proportion-
trade or business. ate amount as a bad debt.
You can claim a business bad debt de-
duction only if the amount owed to you 3. More than 30% of your receivables ac-
!
CAUTION was previously included in gross in-
crued in the year of the sale were from Sale of mortgaged property. If mortgaged or
sales to political parties. pledged property is sold for less than the debt,
come. This applies to amounts owed to you the unpaid, uncollectible balance of the debt is
from all sources of taxable income, including 4. You made substantial and continuing ef- a bad debt.
sales, services, rents, and interest. forts to collect on the debt.
Accountable Plans
eral, entertainment expenses are no longer de- Deduction Simplified Computation
ductible. For more information on travel and An accountable plan requires your employees
non-entertainment-related meals, including de- 8995-A Qualified Business Income
8995-A
a settlement or payment aren’t allowed as a de- Travel and 3. Return any excess reimbursement or al-
lowance within a reasonable period of
duction.
Non-Entertainment-Relat time.
• Travel and non-entertainment-related To be deductible for tax purposes, expen- If any expenses reimbursed under this ar-
meals ses incurred for travel and non-entertain- rangement aren’t substantiated, or an excess
• Bribes and kickbacks ment-related meals must be ordinary and nec- reimbursement isn’t returned within a reasona-
• Charitable contributions essary expenses incurred while carrying on ble period of time by an employee, you can’t
• Education expenses your trade or business. For more information on treat these expenses as reimbursed under an
• Lobbying expenses travel and non-entertainment-related meals, in- accountable plan. Instead, treat the reimbursed
• Penalties and fines cluding deductibility, see Pub. 463. expenses as paid under a nonaccountable
• Repayments (claim of right) plan, discussed later.
• Other miscellaneous expenses
Reimbursements Adequate accounting. Your employees must
Useful Items A “reimbursement or allowance arrangement”
adequately account to you for their travel and
You may want to see: non-entertainment-related meals expenses.
provides for payment of advances, reimburse- They must give you documentary evidence of
ments, and allowances for travel and non-enter- their travel, mileage, and other employee busi-
Publication tainment-related meals expenses incurred by ness expenses. This evidence should include
15-B Employer's Tax Guide to Fringe your employees during the ordinary course of items such as receipts, along with either a
business. If the expenses are substantiated, statement of expenses, an account book, a day
15-B
Benefits
you can deduct the allowable amount on your planner, or similar record in which the employee
463 Travel, Gift, and Car Expenses tax return. Because of differences between ac- entered each expense at or near the time the
counting methods and tax law, the amount you
463
deduct 100% of the cost of meals on your busi- amount you pay to an employee that is more
Assets ness books and records. However, only 50% of than the business-related expenses for which
these costs are allowed by law as a tax deduc- the employee adequately accounted. The em-
946 How To Depreciate Property tion. ployee must return any excess reimbursement
946
970 Tax Benefits for Education or other expense allowance to you within a rea-
How you deduct a business expense under
970
From Business
non-entertainment-related meals expenses. period of time.
Schedule F (Form 1040) Profit or Loss
1. You give an advance within 30 days of the
Schedule F (Form 1040)
From Farming If you reimburse these expenses under a time the employee pays or incurs the ex-
nonaccountable plan, report the reimburse- pense.
1099-MISC Miscellaneous Information
ments as wages on Form W-2, and deduct
1099-MISC
1120 U.S. Corporation Income Tax them as wages on the appropriate line of your 2. Your employees adequately account for
tax return. If you make a single payment to your their expenses within 60 days after the ex-
1120
Return
employees and it includes both wages and an penses were paid or incurred.
4562 Depreciation and Amortization expense reimbursement, you must specify the 3. Your employees return any excess reim-
4562
beyond the completion date stipulated in the • Advertising in a convention program of a tion 67(a), you aren’t able to deduct the
contract. These additional costs are deductible political party, or in any other publication if repayment as an itemized deduction if it is
business expenses. any of the proceeds from the publication $3,000 or less.
On the other hand, generally, no deduction are for, or intended for, the use of a politi-
is allowed for penalties and fines paid to a gov- cal party or candidate. Repayment—$3,000 or less. If the
ernment or specified nongovernmental entity for • Admission to a dinner or program (includ- amount you repaid was $3,000 or less, deduct it
the violation of any law except the following. ing, but not limited to, galas, dances, film from your income in the year you repaid it.
• Amounts that constitute restitution. presentations, parties, and sporting
Repayment—Over $3,000. If the amount
• Amounts paid to come into compliance events) if any of the proceeds from the
function are for, or intended for, the use of you repaid was more than $3,000, you can de-
with the law.
duct the repayment as an other itemized deduc-
• Amounts paid or incurred as the result of a political party or candidate.
certain court orders in which no govern- • Admission to an inaugural ball, gala, pa- tion on Schedule A (Form 1040), line 16, if you
ment or specified nongovernmental rade, concert, or similar event if identified included the income under a “claim of right.”
agency is a party. with a political party or candidate. This means that at the time you included the in-
come, it appeared that you had an unrestricted
• Amounts paid or incurred for taxes due.
Repairs. The cost of repairing or improving right to it. However, you can choose to take a
On or after December 22, 2017, no deduc- credit for the year of repayment. Figure your tax
property used in your trade or business is either
tion is allowed for the restitution amount or under both methods and use the method that
a deductible or capital expense. Routine main-
amount paid to come into compliance with the results in less tax.
tenance that keeps your property in a normal ef-
law unless the amounts are specifically identi- ficient operating condition, but that doesn’t ma- Method 1. Figure your tax for 2022 claim-
fied in the settlement agreement or court order. terially increase the value or substantially ing a deduction for the repaid amount.
Also, any amount paid or incurred as reim- prolong the useful life of the property, is deduc-
bursement to a government for the costs of any tible in the year that it is incurred. Otherwise, Method 2. Figure your tax for 2022 claim-
investigation or litigation aren’t eligible for the the cost must be capitalized and depreciated. ing a credit for the repaid amount. Follow these
exceptions and are nondeductible. See Form 4562 and its instructions for how to steps.
See section 162(f), as amended by P.L. figure and claim the depreciation deduction.
115-97, section 13306. 1. Figure your tax for 2022 without deducting
The cost of repairs includes the costs of la- the repaid amount.
Examples of nondeductible penalties and bor, supplies, and certain other items. The
fines include the following. value of your own labor isn’t deductible. Exam- 2. Refigure your tax from the earlier year
• Amounts paid because of a conviction for ples of repairs include: without including in income the amount
a crime or after a plea of guilty or no con- • Reconditioning floors (but not replace- you repaid in 2022.
test in a criminal proceeding. ment),
• Amounts paid as a penalty imposed by 3. Subtract the tax in (2) from the tax shown
• Repainting the interior and exterior walls of on your return for the earlier year. This is
federal, state, or local law in a civil action, a building,
including certain additions to tax and addi- the amount of your credit.
• Cleaning and repairing roofs and gutters,
tional amounts and assessable penalties and 4. Subtract the answer in (3) from the tax for
imposed by the Internal Revenue Code. • Fixing plumbing leaks (but not replacement 2022 figured without the deduction (step
• Amounts paid in settlement of actual or of fixtures). 1).
possible liability for a fine or penalty,
whether civil or criminal. Repayments. If you had to repay an amount If Method 1 results in less tax, deduct the
• Amounts forfeited as collateral posted for a you included in your income in an earlier year, amount repaid as discussed earlier under Type
proceeding that could result in a fine or you may be able to deduct the amount repaid of deduction.
penalty. for the year in which you repaid it. Or, if the If Method 2 results in less tax, claim the
• Fines paid for violating city housing codes. amount you repaid is more than $3,000, you credit on Schedule 3 (Form 1040), line 13z, and
• Fines paid by truckers for violating state may be able to take a credit against your tax for write “I.R.C. 1341” next to line 13z.
maximum highway weight laws. the year in which you repaid it. In most cases,
• Fines paid for violating air quality laws. Example. For 2021, you filed a return and
you can claim a deduction or credit only if the
• Civil penalties paid for violating federal reported your income on the cash method. In
repayment qualifies as an expense or loss in-
laws regarding mining safety standards 2022, you repaid $5,000 included in your 2021
curred in your trade or business or in a for-profit
and discharges into navigable waters. gross income under a claim of right. Your filing
transaction.
status in 2022 and 2021 is single. Your income
A fine or penalty doesn’t include any of the and tax for both years are as follows:
Type of deduction. The type of deduction
following.
you are allowed in the year of repayment de-
• Legal fees and related expenses to defend pends on the type of income you included in the
yourself in a prosecution or civil action for a 2021 2021
earlier year. For instance, if you repay an
violation of the law imposing the fine or civil With Income Without
amount you previously reported as a capital
penalty. Income
gain, deduct the repayment as a capital loss as
• Court costs or stenographic and printing explained in the Instructions for Schedule D
Taxable
charges. Income $15,000 $10,000
(Form 1040). If you reported it as self-employ-
• Compensatory damages paid to a govern- ment income, deduct it as a business expense
ment. Tax $ 1,604 $ 1,004
on Schedule C (Form 1040), or a farm expense
on Schedule F (Form 1040). 2022 2022
Political contributions. Contributions or gifts
If you reported the amount as wages, unem- Without With Deduction
paid to political parties or candidates aren’t de-
ployment compensation, or other nonbusiness Deduction
ductible. In addition, expenses paid or incurred
ordinary income, you may be able to deduct it Taxable
to take part in any political campaign of a candi-
as an other itemized deduction if the amount re- Income $49,950 $44,950
date for public office aren’t deductible.
paid is over $3,000.
Indirect political contributions. You Tax $6,606 $5,506
can’t deduct indirect political contributions and
Your tax under Method 1 is $5,506. Your tax un-
der Method 2 is $6,006, figured as follows:
Accessibility Helpline available for taxpay- Using direct deposit. The fastest way to re-
ers with disabilities. Taxpayers who need in- ceive a tax refund is to file electronically and