Professional Documents
Culture Documents
Business
Introduction . . . . . . . . . . . . . . . . . . 1
Department
of the What's New for 2019 . . . . . . . . . . . . . 2
Expenses
Treasury
Internal What's New for 2020 . . . . . . . . . . . . . 2
Revenue
Service Reminders . . . . . . . . . . . . . . . . . . . 2
Chapter 1. Deducting
For use in preparing Business Expenses .......... 3
2019 Returns
Chapter 2. Employees' Pay . . . . . . . . 7
Chapter 4. Interest . . . . . . . . . . . . 12
Chapter 5. Taxes . . . . . . . . . . . . . 17
Chapter 6. Insurance . . . . . . . . . . . 20
Chapter 8. Amortization . . . . . . . . . 28
Chapter 9. Depletion . . . . . . . . . . . 35
Index . . . . . . . . . . . . . . . . . . . . . 55
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.
Mar 4, 2020
Tax questions. If you have a tax question Qualified business income deduction. For National Center for Missing & Exploited
not answered by this publication or How To Get tax years beginning after 2017, individual tax- Children® (NCMEC). Photographs of missing
Tax Help at the end of this publication, go to the payers and some trusts and estates may be en- children selected by the Center may appear in
IRS Interactive Tax Assistant page at IRS.gov/ titled to a deduction of up to 20% of their quali- this publication on pages that would otherwise
Help/ITA where you can find topics using the fied business income (QBI) from a qualified be blank. You can help bring these children
search feature or by viewing the categories lis- trade or business, including income from a home by looking at the photographs and calling
ted. pass-through entity, but not from a C corpora- 800-THE-LOST (800-843-5678) (24 hours a
tion, plus 20% of qualified real estate invest- day, 7 days a week) if you recognize a child.
Getting tax forms, instructions, and pub- ment trust (REIT) dividends and qualified pub-
lications. Visit IRS.gov/Forms to download Preventing slavery and human trafficking.
licly traded partnership (PTP) income. Human trafficking is a form of modern-day slav-
current and prior-year forms, instructions, and Depending on the taxpayer's taxable income,
publications. ery, and involves the use of force, fraud, or co-
the deduction may be subject to multiple limita- ercion to exploit human beings for some type of
Ordering tax forms, instructions, and tions based on the type of trade or business, labor or commercial sex purpose. The United
publications. Go to IRS.gov/OrderForms to the amount of W-2 wages paid in the trade or States is a source, transit, and destination
order current forms, instructions, and publica- business, and the unadjusted basis immedi- country for men, women, and children, both
tions; call 800-829-3676 to order prior-year ately after acquisition (UBIA) of qualified prop- U.S. citizens and foreign nationals, who are
forms and instructions. Your order should arrive erty held by the trade or business. The deduc- subjected to the injustices of slavery and hu-
within 10 business days. tion can be taken in addition to the standard or man trafficking, including forced labor, debt
itemized deductions. The chapter on QBI found bondage, involuntary servitude, “mail-order”
in the 2018 Pub. 535 has been removed. See marriages, and sex trafficking. Trafficking in
the Instructions for Form 8995 and the Instruc- persons can occur in both lawful and illicit in-
Future Developments tions for Form 8995-A for more information. dustries or markets, including in hotel services,
hospitality, agriculture, manufacturing, janitorial
For the latest information about developments
services, construction, health and elder care,
related to Pub. 535, such as legislation enacted
after it was published, go to IRS.gov/Pub535. What's New for 2020 domestic service, brothels, massage parlors,
and street prostitution, among others.
The following item highlights a change in the tax The President’s Interagency Task Force to
law for 2020. Monitor and Combat Trafficking in Persons
What's New for 2019 Standard mileage rate. Beginning in 2020, (PITF) brings together federal departments and
agencies to ensure a whole-of-government ap-
the standard mileage rate for the cost of operat-
The following items highlight some changes in ing your car, van, pickup, or panel truck for proach that addresses all aspects of human
the tax law for 2019. each mile of business use is 57.5 cents per trafficking. Online resources for recognizing and
New Gig Economy Tax Center. The IRS mile. reporting trafficking activities, and assisting vic-
launched a new Gig Economy Tax Center on tims include the Department of Homeland Se-
IRS.gov to help people in this growing area curity (DHS) Blue Campaign at DHS.gov/blue-
meet their tax obligations through more stream- campaign, the Department of State Office to
lined information. Reminders Monitor and Combat Trafficking in Persons at
The gig economy is also known as the shar- State.gov/j/tip, and the National Human Traf-
ing, on-demand, or access economy. It usually The following reminders and other items may ficking Resource Center (NHTRC) at
includes businesses that operate an app or help you file your tax return. humantraffickinghotline.org. DHS is responsible
website to connect people to provide services for investigating human trafficking, arresting
to customers. While there are many types of gig IRS e-file (Electronic Filing) traffickers, and protecting victims. DHS also
economy businesses, ride-sharing and home provides immigration relief to non-U.S. citizen
rentals are two of the most popular. victims of human trafficking. DHS uses a victim-
The Gig Economy Tax Center streamlines centered approach to combating human traf-
various resources, making it easier for taxpay- ficking, which places equal value on identifying
ers to find information about the tax implications and stabilizing victims and on investigating and
for the companies that provide the services and prosecuting traffickers. Victims are crucial to in-
the individuals who perform them. It offers tips You can file your tax returns electronically vestigations and prosecutions; each case and
and resources on a variety of topics including: using an IRS e-file option. The benefits of IRS every conviction changes lives. DHS under-
• Filing requirements; e-file include faster refunds, increased stands how difficult it can be for victims to come
• Making quarterly estimated income tax accuracy, and acknowledgment of IRS receipt forward and work with law enforcement due to
payments; of your return. You can use one of the following their trauma. DHS is committed to helping vic-
• Paying self-employment taxes; IRS e-file options. tims feel stable, safe, and secure.
• Paying FICA, Medicare, and Additional • Use an authorized IRS e-file provider. To report suspected human trafficking, call
Medicare taxes; • Use a personal computer. the DHS domestic 24-hour toll-free number at
• Deductible business expenses; and • Visit a Volunteer Income Tax Assistance 866-DHS-2-ICE (866-347-2423) or
• Special rules for reporting vacation home (VITA) or Tax Counseling for the Elderly 802-872-6199 (non-toll-free international). For
rentals. (TCE) site. help from the NHTRC, call the National Human
For details on these fast filing methods, see Trafficking Hotline toll free at 888-373-7888 or
For more information, go to the new Gig
your income tax package. text HELP or INFO to BeFree (233733).
Economy Tax Center at IRS.gov/Gig.
Form 1099-MISC. File Form 1099-MISC, Mis- The Department of Treasury’s Financial
Film and television and live theatrical pro-
cellaneous Income, for each person to whom Crimes Enforcement Network (FinCEN) has is-
duction costs. The election to expense cer-
you have paid during the year in the course of sued a public advisory to financial institutions
tain costs of qualified film, television, and live
your trade or business at least $600 in rents, that contains red flag indicators for potential
theatrical productions has been extended to in-
services (including parts and materials), prizes suspicious financial activity associated with hu-
clude costs of productions that begin before
and awards, other income payments, medical man trafficking. If warranted, financial institu-
January 1, 2021. For more information, see
and health care payments, and crop insurance tions should file a Suspicious Activity Report
chapter 7.
proceeds. See the Instructions for Form (FinCEN 112) with FinCEN to report these ac-
Standard mileage rate. Beginning in 2019,
1099-MISC for more information and additional tivities. For more information, go to Fincen.gov/
the standard mileage rate for the cost of operat-
reporting requirements. Sites/default/files/advisory/FIN-2014-A008.pdf.
ing your car, van, pickup, or panel truck for
each mile of business use is 58 cents per mile. Photographs of missing children. The Inter-
For more information, see chapter 11. nal Revenue Service is a proud partner with the
463 Travel, Gift, and Car Expenses penses for advertising, travel, or wages for
463
536 Net Operating Losses (NOLs) for must capitalize the direct costs and part of the business started as capital expenses.
indirect costs for certain production or resale Usually, you recover costs for a particular
536
taxes, storage, purchasing, processing, repack- not recover other costs until you sell the busi-
542 Corporations aging, handling, and administrative costs. ness or otherwise go out of business. However,
you can choose to amortize certain costs for
542
547 Casualties, Disasters, and Thefts This rule does not apply to small business
setting up your business. See Starting a Busi-
taxpayers. You qualify as a small business tax-
547
How Much Can I ity. For more information, see Pub. 925. priate period.
However, you do not have to capitalize
Net operating loss (NOL). If your deduc-
Deduct? tions are more than your income for the year,
amounts for creating an intangible asset if the
right or benefit created does not extend beyond
you may have an NOL. You can use an NOL to
the earlier of 12 months after the date that you
Generally, you can deduct the full amount of a lower your taxes in other years. See Pub. 536
first receive the right or benefit or the end of the
business expense if it meets the criteria of ordi- for more information.
tax year following the year in which you made
nary and necessary and it is not a capital ex- See Pub. 542 for information about NOLs of
the advance payment. If you are a cash method
pense. corporations.
taxpayer and your advance payment qualifies
Recovery of amount deducted (tax benefit for this exception, then you can generally de-
rule). If you recover part of an expense in the
same tax year in which you would have claimed
When Can I duct the amount when paid. If you are an ac-
crual method taxpayer, you cannot deduct the
a deduction, reduce your current year expense Deduct an Expense? amount until the all-events test has been met
and economic performance has occurred.
by the amount of the recovery. If you have a re-
covery in a later year, include the recovered When you can deduct an expense depends on
Example 1. In 2019, you sign a 10-year
amount in income in that year. However, if part your accounting method. An accounting
lease and immediately pay your rent for the first
of the deduction for the expense did not reduce method is a set of rules used to determine when
3 years. Even though you paid the rent for
your tax, you do not have to include that part of and how income and expenses are reported.
2019, 2020, and 2021, you can only deduct the
the recovered amount in income. The two basic methods are the cash method
rent for 2019 on your 2019 tax return. You can
For more information on recoveries and the and the accrual method. Whichever method
deduct the rent for 2020 and 2021 on your tax
tax benefit rule, see Pub. 525. you choose must clearly reflect income.
returns for those years.
For more information on accounting meth-
Payments in kind. If you provide services to
ods, see Pub. 538. Example 2. You are a cash method calen-
pay a business expense, the amount you can
dar year taxpayer. On December 1, 2019, you
deduct is limited to your out-of-pocket costs.
Cash method. Under the cash method of ac- sign a 12-month lease, effective beginning Jan-
You cannot deduct the cost of your own labor.
counting, you generally deduct business expen- uary 1, 2020, and immediately pay your rent for
Similarly, if you pay a business expense in ses in the tax year you pay them. the entire 12-month period that begins on Janu-
goods or other property, you can deduct only ary 1, 2020. The right or benefit attributable to
what the property costs you. If these costs are Accrual method. Under an accrual method of the payment neither extends more than 12
included in the cost of goods sold, do not de- accounting, you generally deduct business ex- months beyond January 1, 2020 (the first day
duct them again as a business expense. penses when both of the following apply. that you are entitled to use the property) nor be-
yond the tax year ending December 31, 2020
Limits on losses. If your deductions for an in- 1. The all-events test has been met. The test
(the year following the year in which you made
vestment or business activity are more than the is met when:
the advance payment). Therefore, your prepay-
income it brings in, you have a loss. There may a. All events have occurred that fix the ment does not have to be capitalized, and you
be limits on how much of the loss you can de- fact of liability, and can deduct the entire payment in the year you
duct. pay it.
b. The liability can be determined with
Not-for-profit limits. If you carry on your reasonable accuracy.
business activity without the intention of making Contested liability. Under the cash method,
a profit, you cannot use a loss from it to offset 2. Economic performance has occurred. you can deduct a contested liability only in the
other income. For more information, see year you pay the liability. Under the accrual
Economic performance. You generally
Not-for-Profit Activities, later. method, you can deduct contested liabilities
cannot deduct or capitalize a business expense
such as taxes (except foreign or U.S. posses-
At-risk limits. Generally, a deductible loss until economic performance occurs. If your ex-
sion income, war profits, and excess profits
from a trade or business or other income-pro- pense is for property or services provided to
taxes) either in the tax year you pay the liability
ducing activity is limited to the investment you you, or for your use of property, economic per-
(or transfer money or other property to satisfy
have “at risk” in the activity. You are at risk in formance occurs as the property or services are
the obligation) or in the tax year you settle the
any activity for the following. provided, or the property is used. If your ex-
contest. However, to take the deduction in the
pense is for property or services you provide to
1. The money and adjusted basis of property year of payment or transfer, you must meet cer-
others, economic performance occurs as you
you contribute to the activity. tain conditions. See Regulations section
provide the property or services.
1.461-2.
2. Amounts you borrow for use in the activity
if: Example. Your tax year is the calendar Related person. Under an accrual method of
year. In December 2019, the Field Plumbing accounting, you generally deduct expenses
a. You are personally liable for repay- Company did some repair work at your place of when you incur them, even if you have not yet
ment, or business and sent you a bill for $600. You paid paid them. However, if you and the person you
b. You pledge property (other than prop- it by check in January 2020. If you use the ac- owe are related and that person uses the cash
erty used in the activity) as security for crual method of accounting, deduct the $600 on method of accounting, you must pay the ex-
the loan. your tax return for 2019 because all events pense before you can deduct it. Your deduction
have occurred to “fix” the fact of liability (in this is allowed when the amount is includible in in-
For more information, see Pub. 925. case, the work was completed), the liability can come by the related cash method payee. For
be determined, and economic performance oc-
Passive activities. Generally, you are in a more information, see Related Persons in Pub.
curred in that year.
passive activity if you have a trade or business 538.
If you use the cash method of accounting,
activity in which you do not materially partici- deduct the expense on your 2020 tax return.
pate, or a rental activity. In general, deductions
for losses from passive activities only offset in- Prepayment. You generally cannot deduct ex- Not-for-Profit Activities
come from passive activities. You cannot use penses in advance, even if you pay them in ad-
any excess deductions to offset other income. vance. This applies to prepaid interest, prepaid If you do not carry on your business or invest-
In addition, passive activity credits can only off- insurance premiums, and any other prepaid ex- ment activity to make a profit, you cannot use a
set the tax on net passive income. Any excess pense that creates an intangible asset. If you loss from the activity to offset other income. Ac-
loss or credits are carried over to later years. pay an amount that creates an intangible asset, tivities you do as a hobby, or mainly for sport or
Suspended passive losses are fully deductible then you must capitalize the amounts paid and recreation, are often not entered into for profit.
15-A Employer's Supplemental Tax Guide ployees. ther of the following applies.
• The history of pay for each employee.
15-A
15-B Employer's Tax Guide to Fringe • The employee receives the award after his
or her first 5 years of employment.
15-B
Benefits Compensation in excess of $1 million. Pub- • The employee didn't receive another
licly held corporations can't deduct compensa- length-of-service award (other than one of
Form (and Instructions)
tion to a “covered employee” to the extent that very small value) during the same year or
1099-MISC Miscellaneous Income the compensation exceeds $1 million. For more in any of the prior 4 years.
information, including the definition of a “cov-
1099-MISC
8844 Empowerment Zone Employment 1125-E. Also see Notice 2018-68, 2018-36 safety achievement will qualify as an achieve-
I.R.B. 418, available at IRS.gov/irb/ ment award unless one of the following applies.
8844
Credit
2018-36_IRB#NOT-2018-68.
8845 Indian Employment Credit 1. It is given to a manager, administrator,
clerical employee, or other professional
8845
disability, medical, or life insurance bene- ployee for travel expenses incurred on your 544 Sales and Other Dispositions of
fits. behalf, deduct this payment as a travel ex-
544
Assets
For more information, see sections 419(c) pense. If you make the payment under a nonac-
countable plan, deduct it as wages and include 946 How To Depreciate Property
and 419A and the related regulations.
946
it in the employee's Form W-2. See chapter 12 for information about getting
publications and forms.
Loans or Advances See Reimbursement of Travel and Non-En-
tertainment Related Meals, in chapter 11, for
more information about deducting reimburse-
You can generally deduct as wages an advance
you make to an employee for services to be ments and an explanation of accountable and Rent
performed if you don't expect the employee to nonaccountable plans.
repay the advance. However, if the employee Rent is any amount you pay for the use of prop-
erty you do not own. In general, you can deduct
performs no services, treat the amount you ad- Sick and Vacation Pay rent as an expense only if the rent is for prop-
vanced as a loan; if the employee doesn't repay
the loan, treat it as income to the employee. erty you use in your trade or business. If you
Sick pay. You can deduct amounts you pay to
have or will receive equity in or title to the prop-
your employees for sickness and injury, includ-
Below-market interest rate loans. On cer- erty, the rent is not deductible.
ing lump-sum amounts, as wages. However,
tain loans you make to an employee or share- your deduction is limited to amounts not com-
holder, you’re treated as having received inter- Unreasonable rent. You can’t take a rental
pensated by insurance or other means. deduction for unreasonable rent. Ordinarily, the
est income and as having paid compensation or
dividends equal to that interest. See Be- issue of reasonableness arises only if you and
Vacation pay. Vacation pay is an employee
low-Market Loans in chapter 4. the lessor are related. Rent paid to a related
benefit. It includes amounts paid for unused va-
person is reasonable if it is the same amount
cation leave. You can deduct vacation pay only
you would pay to a stranger for use of the same
Property in the tax year in which the employee actually
property. Rent isn’t unreasonable just because
receives it. This rule applies regardless of
it is figured as a percentage of gross sales. For
If you transfer property (including your compa- whether you use the cash or accrual method of
examples of related persons, see Related per-
ny's stock) to an employee as payment for serv- accounting.
sons in chapter 2 of Pub. 544.
ices, you can generally deduct it as wages. The
amount you can deduct is the property's fair Rent on your home. If you rent your home
market value (FMV) on the date of the transfer and use part of it as your place of business, you
less any amount the employee paid for the may be able to deduct the rent you pay for that
property. part. You must meet the requirements for busi-
You can claim the deduction only for the tax
year in which your employee includes the prop-
3. ness use of your home. For more information,
see Business use of your home in chapter 1.
erty's value in income. Your employee is
Rent paid in advance. Generally, rent paid for
deemed to have included the value in income if
you report it on Form W-2 in a timely manner. Rent Expense use of property in your trade or business is de-
ductible in the year paid or incurred. If you are
You treat the deductible amount as received an accrual method taxpayer and pay rent in ad-
in exchange for the property, and you must rec- vance, you can deduct only the amount of rent
ognize any gain or loss realized on the transfer, Reminder that applies to your use of rented property dur-
ing the tax year. You can deduct the rest of the
unless it is the company's stock transferred as
payment for services. Your gain or loss is the rent payment only over the period to which it
Small business taxpayers. P.L. 115-97, Tax applies. If you are a cash method taxpayer, you
difference between the FMV of the property and Cuts and Jobs Act, made changes to uniform
its adjusted basis on the date of transfer. may deduct the entire amount of rent you paid
capitalization rules for small business taxpay- in advance in the year of payment if the pay-
These rules also apply to property transfer- ers. See Uniform capitalization rules, later. ment applies to the right to use property that
red to an independent contractor for services, does not extend beyond the earlier of 12
generally reported on Form 1099-MISC. months after the first date you have the right to
Introduction use the property or the end of the tax year fol-
Restricted property. If the property you lowing the year in which you paid the advance
This chapter discusses the tax treatment of rent
transfer for services is subject to restrictions rent. If your payment applies to the right to use
or lease payments you make for property you
that affect its value, you generally can't deduct it property beyond this period, then you must cap-
use in your business but do not own. It also dis-
and don't report gain or loss until it is substan- italize the rent payment and deduct it over the
cusses how to treat other kinds of payments
tially vested in the recipient. However, if the re- period to which it applies.
you make that are related to your use of this
cipient pays for the property, you must report
property. These include payments you make for
any gain at the time of the transfer up to the Example 1. You are an accrual method
taxes on the property.
amount paid. calendar year taxpayer and you lease a building
“Substantially vested” means the property at a monthly rental rate of $1,000 beginning
isn't subject to a substantial risk of forfeiture. Topics July 1, 2019. On June 30, 2019, you pay ad-
This means that the recipient isn't likely to have This chapter discusses: vance rent of $12,000 for the last 6 months of
to give up his or her rights in the property in the 2019 and the first 6 months of 2020. You can
future. • The definition of rent deduct only $6,000 for 2019, for the right to use
Cost of Getting a Lease lease the excess space from the original lease.
In exchange, you agree to pay an additional
cover the costs through depreciation, amortiza-
tion, or cost of goods sold when you use, sell,
rent amount of $3,000, payable in 60 monthly or otherwise dispose of the property.
You may either enter into a new lease with the installments of $50 each.
lessor of the property or get an existing lease Indirect costs include amounts incurred for
You must capitalize the $3,000 and amortize
from another lessee. Very often when you get renting or leasing equipment, facilities, or land.
it over the 20-year term of the lease. Your amor-
an existing lease from another lessee, you must tization deduction each year will be $150
pay the previous lessee money to get the lease, Uniform capitalization rules. You may be
($3,000 ÷ 20). You can’t deduct the $600 (12 ×
besides having to pay the rent on the lease. subject to the uniform capitalization rules if you
$50) that you will pay during each of the first 5
do any of the following, unless the property is
years as rent.
If you get an existing lease on property or produced for your use other than in a business
equipment for your business, you must gener- or an activity carried on for profit.
Commissions, bonuses, and fees. Commis-
ally amortize any amount you pay to get that sions, bonuses, fees, and other amounts you 1. Produce real property or tangible personal
lease over the remaining term of the lease. For pay to get a lease on property you use in your property.
example, if you pay $10,000 to get a lease and business are capital costs. You must amortize
there are 10 years remaining on the lease with 2. Acquire property for resale. However, this
these costs over the term of the lease.
no option to renew, you can deduct $1,000 rule does not apply to personal property if
each year. Loss on merchandise and fixtures. If you your average annual gross receipts are
sell at a loss merchandise and fixtures that you $10 million or less.
The cost of getting an existing lease of tan- bought solely to get a lease, the loss is a cost of Effective for tax years beginning after 2017,
gible property is not subject to the amortization getting the lease. You must capitalize the loss if you are a small business taxpayer (see Cost
rules for section 197 intangibles discussed in and amortize it over the remaining term of the of Goods Sold in chapter 1), you are not re-
chapter 8. lease. quired to capitalize costs under section 263A.
Option to renew. The term of the lease for See section 263A(i).
amortization includes all renewal options plus
any other period for which you and the lessor
Improvements Producing property. You produce prop-
erty if you construct, build, install, manufacture,
reasonably expect the lease to be renewed. by Lessee develop, improve, create, raise, or grow the
However, this applies only if less than 75% of property. Property produced for you under a
the cost of getting the lease is for the term re- If you add buildings or make other permanent contract is treated as produced by you to the
maining on the purchase date (not including improvements to leased property, depreciate extent you make payments or otherwise incur
any period for which you may choose to renew, the cost of the improvements using the modified costs in connection with the property.
extend, or continue the lease). Allocate the accelerated cost recovery system (MACRS).
lease cost to the original term and any option Depreciate the property over its appropriate re- Example 1. You rent construction equip-
term based on the facts and circumstances. In covery period. You can’t amortize the cost over ment to build a storage facility. If you are sub-
some cases, it may be appropriate to make the the remaining term of the lease. ject to the uniform capitalization rules, you must
allocation using a present value calculation. For capitalize as part of the cost of the building the
more information, see Regulations section If you don’t keep the improvements when rent you paid for the equipment. You recover
1.178-1(b)(5). you end the lease, figure your gain or loss your cost by claiming a deduction for deprecia-
based on your adjusted basis in the improve- tion on the building.
Example 1. You paid $10,000 to get a ments at that time.
lease with 20 years remaining on it and two op- Example 2. You rent space in a facility to
tions to renew for 5 years each. Of this cost, For more information, see the discussion of conduct your business of manufacturing tools. If
you paid $7,000 for the original lease and MACRS in chapter 4 of Pub. 946. you are subject to the uniform capitalization
$3,000 for the renewal options. Because rules, you must include the rent you paid to oc-
$7,000 is less than 75% of the total $10,000 Assignment of a lease. If a long-term lessee cupy the facility in the cost of the tools you pro-
cost of the lease (or $7,500), you must amortize who makes permanent improvements to land duce.
the $10,000 over 30 years. That is the remain- later assigns all lease rights to you for money
ing life of your present lease plus the periods for and you pay the rent required by the lease, the More information. For exceptions and more
renewal. amount you pay for the assignment is a capital information on these rules, see Uniform Capital-
investment. If the rental value of the leased land ization Rules in Pub. 538 and the regulations
Example 2. The facts are the same as in increased since the lease began, part of your under section 263A.
Example 1, except that you paid $8,000 for the capital investment is for that increase in the
original lease and $2,000 for the renewal op- rental value. The rest is for your investment in
tions. You can amortize the entire $10,000 over the permanent improvements.
the 20-year remaining life of the original lease. The part that is for the increased rental value
The $8,000 cost of getting the original lease of the land is a cost of getting a lease, and you
was not less than 75% of the total cost of the amortize it over the remaining term of the lease.
lease (or $7,500). You can depreciate the part that is for your in- 4.
vestment in the improvements over the recov-
Cost of a modification agreement. You may ery period of the property as discussed earlier,
have to pay an additional “rent” amount over
part of the lease period to change certain provi-
sions in your lease. You must capitalize these
without regard to the lease term.
Interest
payments and amortize them over the remain-
ing period of the lease. You can’t deduct the
Capitalizing
payments as additional rent, even if they are Rent Expenses Introduction
described as rent in the agreement.
This chapter discusses the tax treatment of
Under the uniform capitalization rules, you must business interest expense. Business interest
Example. You are a calendar year tax- capitalize the direct costs and part of the indi- expense is an amount charged for the use of
payer and sign a 20-year lease to rent part of a rect costs for certain production or resale activi- money you borrowed for business activities.
building starting on January 1. However, before ties. Include these costs in the basis of property
you occupy it, you decide that you really need you produce or acquire for resale, rather than
less space. The lessor agrees to reduce your
CAUTION home equity loans and line of credit. June 19 $1,000 proceeds of Loan C
deposited
936 Home Mortgage Interest Deduction For more information, see Pub. 936.
November 20 $800 used for an investment
936
Form (and Instructions) Allocation period. The period for which a loan December 18 $600 used for personal purposes
is allocated to a particular use begins on the
Schedule A (Form 1040 or 1040-SR) Schedule A (Form 1040 or 1040-SR)
date the proceeds are used and ends on the Olena treats the $800 used for personal pur-
Itemized Deductions earlier of the following dates. poses as made from the $500 proceeds of Loan
• The date the loan is repaid. A and $300 of the proceeds of Loan B. She
Schedule E (Form 1040 or 1040-SR) treats the $700 used for a passive activity as
• The date the loan is reallocated to another
Schedule E (Form 1040 or 1040-SR)
Supplemental Income and Loss made from the remaining $200 proceeds of
use.
Schedule K-1 (Form 1065) Partner's Loan B and $500 of unborrowed funds. She
Proceeds not disbursed to borrower. Even treats the $800 used for an investment as made
Schedule K-1 (Form 1065)
Share of Income,
Deductions, Credits, etc. if the lender disburses the loan proceeds to a entirely from the proceeds of Loan C. She treats
third party, the allocation of the loan is still the $600 used for personal purposes as made
Schedule K-1 (Form 1120-S) based on your use of the funds. This applies from the remaining $200 proceeds of Loan C
whether you pay for property, services, or any- and $400 of unborrowed funds.
Schedule K-1 (Form 1120-S)
Refunds of taxes. If you receive a refund for to but not including the date of sale. Treat the
538 Accounting Periods and Methods any taxes you deducted in an earlier year, in- buyer as paying the taxes beginning with the
clude the refund in income to the extent the de- date of sale. You can usually find this informa-
538
duction reduced your federal income tax in the tion on the settlement statement you received at
earlier year. For more information, see Recov- closing.
Form (and Instructions) ery of amount deducted (tax benefit rule) in If you (the seller) use an accrual method and
1040 or 1040-SR U.S. Individual Income
1040 or 1040-SR
chapter 1. have not elected to ratably accrue real estate
Tax Return You must include in income any inter- taxes, you are considered to have accrued your
TIP est you receive on tax refunds. part of the tax on the date you sell the property.
Schedule A (Form 1040 or 1040-SR) Schedule A (Form 1040 or 1040-SR)
Itemized Deductions
Example. Alberto Verde, a calendar year
Schedule SE (Form 1040 or 1040-SR) accrual method taxpayer, owns real estate in
Real Estate Taxes
Schedule SE (Form 1040 or 1040-SR)
Accounting Method Deductible real estate taxes are any state, local, real property tax year, which is the calendar
8959 Additional Medicare Tax or foreign taxes on real estate levied for the year. He sold the property on June 30, 2019.
general public welfare. The taxing authority
8959
sence of an overt act of protest, you or local government. Also, do not include these
can deduct the tax in the prior year. Also, you Self-employment tax. You can deduct part of
taxes in gross receipts or sales.
can deduct any additional taxes in the prior year your self-employment tax as a business ex-
if you do not show some affirmative evidence of pense in figuring your adjusted gross income.
denial of the liability. This deduction only affects your income tax. It
does not affect your net earnings from self-em-
However, if you consistently deduct addi- ployment or your self-employment tax.
tional assessments in the year they are paid or To deduct the tax, enter on Schedule 1
finally determined (including those for which (Form 1040 or 1040-SR), line 14, the amount
there was no contest), you must continue to do shown on the Deduction for one-half of self-em-
so. You cannot take a deduction in the earlier ployment tax line of Schedule SE (Form 1040 or
year unless you receive permission to change 1040-SR).
your method of accounting. For more
See chapter 12 for information about getting for lost profits if your business is shut
Self-Employed Health
Deductible Premiums Insurance Deduction
Reminder You generally can deduct premiums you pay for You may be able to deduct the amount you paid
the following kinds of insurance related to your for medical and dental insurance and qualified
Premium tax credit. You may have to use the
trade or business. long-term care insurance for yourself, your
worksheets in Pub. 974 instead of the work-
sheet in this chapter if the insurance plan estab- 1. Insurance that covers fire, storm, theft, ac- spouse, and your dependents. The insurance
lished, or considered to be established, under cident, or similar losses. also can cover your child who was under age
your business was obtained through the Health 27 at the end of 2019, even if the child wasn’t
2. Credit insurance that covers losses from your dependent. A child includes your son,
Insurance Marketplace and you are claiming
business bad debts. daughter, stepchild, adopted child, or foster
the premium tax credit. See Pub. 974 for de-
tails. 3. Group hospitalization and medical insur- child. A foster child is any child placed with you
ance for employees, including long-term by an authorized placement agency or by judg-
care insurance. ment, decree, or other order of any court of
Introduction a. If a partnership pays accident and
competent jurisdiction.
You generally can deduct the ordinary and nec- health insurance premiums for its One of the following statements must be
essary cost of insurance as a business expense partners, it generally can deduct them true.
if it is for your trade, business, or profession. as guaranteed payments to partners. • You were self-employed and had a net
However, you may have to capitalize certain in- profit for the year reported on Schedule C
b. If an S corporation pays accident and
surance costs under the uniform capitalization (Form 1040 or 1040-SR) or Schedule F
health insurance premiums for its
rules. For more information, see Capitalized (Form 1040 or 1040-SR).
more-than-2% shareholder-employ-
Premiums, later. • You were a partner with net earnings from
ees, it generally can deduct them, but
self-employment for the year reported on
also must include them in the share-
Schedule K-1 (Form 1065), box 14, code
Topics holder's wages subject to federal in-
A.
This chapter discusses: come tax withholding. See Pub.15-B.
• You used one of the optional methods to
4. Liability insurance. figure your net earnings from self-employ-
• Deductible premiums ment on Schedule SE.
• 5. Malpractice insurance that covers your
Nondeductible premiums • You received wages in 2019 from an S cor-
• Capitalized premiums personal liability for professional negli-
poration in which you were a
• When to deduct premiums gence resulting in injury or damage to pa-
more-than-2% shareholder. Health insur-
tients or clients.
ance premiums paid or reimbursed by the
Useful Items 6. Workers' compensation insurance set by S corporation are shown as wages on
You may want to see: state law that covers any claims for bodily Form W-2.
injuries or job-related diseases suffered by
The insurance plan must be established, or
Publication employees in your business, regardless of
considered to be established as discussed in
fault.
15-B Employer's Tax Guide to Fringe the following bullets, under your business.
a. If a partnership pays workers' com- • For self-employed individuals filing a
15-B
Benefits
pensation premiums for its partners, it Schedule C or F, a policy can be either in
525 Taxable and Nontaxable Income
525
generally can deduct them as guaran- the name of the business or in the name of
teed payments to partners. the individual.
538 Accounting Periods and Methods
• For partners, a policy can be either in the
538
holder's wages.
1040-NR U.S. Nonresident Alien Income
1040-NR
Itemized Deductions
report the premium amounts on Sched-
8. Overhead insurance that pays for busi-
Schedule C (Form 1040 or 1040-SR) ule K-1 (Form 1065) as guaranteed pay-
ness overhead expenses you have during
Schedule C (Form 1040 or 1040-SR)
ers vehicles used in your business for lia- • For more-than-2% shareholders, a policy
Self-Employment Tax bility, damages, and other losses. If you can be either in the name of the S corpora-
operate a vehicle partly for personal use, tion or in the name of the shareholder. You
Schedule K-1 (Form 1065) Partner's
deduct only the part of the insurance pre- can either pay the premiums yourself or
Schedule K-1 (Form 1065)
Chronically ill individual. A chronically ill days, to perform at least two activities of (general mobility), bathing, dressing, and
individual is a person who has been certified as daily living without substantial assistance continence.
one of the following. from another individual. Activities of daily • An individual who requires substantial su-
• An individual who has been unable, due to living are eating, toileting, transferring pervision to be protected from threats to
loss of functional capacity for at least 90
Health coverage tax credit. You elect to proceeds of the policy. A person has a. Your indirect costs of producing the
take this credit only if you were an eligible trade a financial interest in your business if property are $200,000 or less.
adjustment assistance (TAA) recipient, alterna- the person is an owner or part owner
of the business or has lent money to b. You use the cash method of account-
tive TAA (ATAA) recipient, reemployment trade ing and don't account for inventories.
adjustment assistance (RTAA) recipient, or the business.
Pension Benefit Guaranty Corporation (PBGC) b. For contracts issued after June 8, More information. For more information on
pension recipient. Use Form 8885 to figure the 1997, you generally can’t deduct the these rules, see Uniform Capitalization Rules in
amount, if any, of this credit. When figuring the premiums on any life insurance policy, Pub. 538 and the regulations under section
amount to enter on line 1 of Worksheet 6-A, endowment contract, or annuity con- 263A.
don’t include any amounts you included on tract if you are directly or indirectly a
Form 8885, line 4. beneficiary. The disallowance applies
There is coordination of tax benefits be- without regard to whom the policy
tween advance monthly payments of the HCTC covers.
and the HCTC. In general, you can’t claim the
Premiums
7. Publication
544 Sales and Other Dispositions of
You can usually deduct insurance premiums in
Costs You Can
544
Assets
the tax year to which they apply.
Form (and Instructions)
Cash method. If you use the cash method of
accounting, you generally deduct insurance
Deduct or Schedule C (Form 1040 or 1040-SR) Schedule C (Form 1040 or 1040-SR)
premiums in the tax year you actually paid Profit or Loss From Business
them, even if you incurred them in an earlier
year. However, see Prepayment, later.
Capitalize 3468 Investment Credit
3468
Activities
method of accounting, you can't deduct insur- What’s New
ance premiums before the tax year in which you 8826 Disabled Access Credit
8826
incur a liability for them. In addition, you can't Film and television production costs. The T (Timber) Forest Activities Schedule
deduct insurance premiums before the tax year election to expense certain costs of qualified
T (Timber)
in which you actually pay them (unless the ex- film, television, and live theatrical productions See chapter 12 for information about getting
ception for recurring items applies). For more has been extended to include costs of produc- publications and forms.
information about the accrual method of ac- tions that begin before January 1, 2021. See
counting, see chapter 1. For information about Film and Television Production Costs, later.
the exception for recurring items, see Pub. 538. Carrying Charges
Prepayment. You can't deduct expenses in
advance, even if you pay them in advance. This
Introduction Carrying charges include the taxes and interest
you pay to carry or develop real property or to
rule applies to any expense paid far enough in This chapter discusses costs you can elect to carry, transport, or install personal property.
advance to, in effect, create an asset with a deduct or capitalize. Certain carrying charges must be capitalized
useful life extending substantially beyond the You generally deduct a cost as a current under the uniform capitalization rules. (For infor-
end of the current tax year. business expense by subtracting it from your in- mation on capitalization of interest, see chap-
Expenses such as insurance are generally come in either the year you incur it or the year ter 4.) You can elect to capitalize carrying
allocable to a period of time. You can deduct in- you pay it. charges not subject to the uniform capitalization
surance expenses for the year to which they are If you capitalize a cost, you may be able to rules, but only if they are otherwise deductible.
allocable. recover it over a period of years through peri-
odic deductions for amortization, depletion, or You can elect to capitalize carrying charges
Example. In 2019, you signed a 3-year in- depreciation. When you capitalize a cost, you separately for each project you have and for
surance contract. Even though you paid the add it to the basis of property to which it relates. each type of carrying charge. Your election is
premiums for 2019, 2020, and 2021 when you A partnership, corporation, estate, or trust good for only 1 year for unimproved and unpro-
signed the contract, you can only deduct the makes the election to deduct or capitalize the ductive real property. You must decide whether
premium for 2019 on your 2019 tax return. You costs discussed in this chapter except for ex- to capitalize carrying charges each year the
can deduct in 2020 and 2021 the premium allo- ploration costs for mineral deposits. Each indi- property remains unimproved and unproduc-
cable to those years. vidual partner, shareholder, or beneficiary tive. For other real property, your election to
elects whether to deduct or capitalize explora- capitalize carrying charges remains in effect un-
Dividends received. If you receive dividends tion costs. til construction or development is completed.
from business insurance and you deducted the For personal property, your election is effective
Individuals, estates, and trusts may be
premiums in prior years, at least part of the divi- until the date you install or first use it, whichever
! subject to AMT if they deduct certain
dends generally are income. For more informa- is later.
CAUTION research and experimental, intangible
tion, see Recovery of amount deducted (tax
drilling, exploration, development, circulation, or
benefit rule) in chapter 1 under How Much Can I How to make the election. To make the elec-
business organizational costs.
Deduct. tion to capitalize a carrying charge, attach a
For more information on the AMT, see the statement to your original tax return for the year
Instructions for Form 6251 and the Instructions the election is to be effective indicating which
for Schedule I (Form 1041). charges you are electing to capitalize. However,
if you timely filed your return for the year without
Topics making the election, you can still make the elec-
This chapter discusses: tion by filing an amended return within 6 months
of the due date of the return (excluding exten-
sions). Attach the statement to the amended re-
• Carrying charges
turn and write “Filed pursuant to section
• Research and experimental costs
301.9100-2” on the statement. File the amen-
• Intangible drilling costs
ded return at the same address you filed the
• Exploration costs
original return.
• Development costs
• Circulation costs
•
•
Business start-up and organizational costs
Reforestation costs Research and
•
•
Retired asset removal costs
Barrier removal costs
Experimental Costs
• Film and television production costs
The costs of research and experimentation are
• Repair and maintenance costs
generally capital expenses. However, you can
elect to deduct these costs as a current busi-
ness expense. Your election to deduct these
costs is binding for the year it is made and for
abled or the elderly, claim the deduction on tion to treat repairs and maintenance as capital 6251 Alternative Minimum
6251
your income tax return (partnership return for expenditures, attach a statement titled “Section Tax—Individuals
partnerships) for the tax year the expenses 1.263(a)-3(n) Election” to your timely filed return
See chapter 12 for information about getting
were paid or incurred. Identify the deduction as (including extensions). For more information on
publications and forms.
a separate item. The election applies to all the what to include in the statement, see Regula-
qualifying costs you have during the year, up to tions section 1.263(a)-3(n). If you timely filed
the $15,000 limit. If you make this election, you
must maintain adequate records to support your
your return without making the election, you can
still make the election by filing an amended re- How To Deduct
deduction. turn within 6 months of the due date of the re-
turn (excluding extensions). Attach the state-
Amortization
For your election to be valid, you must gen-
erally file your return by its due date, including ment to the amended return and write “Filed
To deduct amortization that begins during the
extensions. However, if you timely filed your re- pursuant to section 301.9100-2” on the state-
current tax year, complete Part VI of Form 4562
turn for the year without making the election, ment. File the amended return at the same ad-
and attach it to your income tax return.
you can still make the election by filing an dress you filed the original return.
amended return within 6 months of the due date To report amortization from previous years,
of the return (excluding extensions). Clearly in- in addition to amortization that begins in the cur-
dicate the election on your amended return and rent year, list on Form 4562 each item sepa-
write “Filed pursuant to section 301.9100-2.” rately. For example, in 2018, you began to am-
File the amended return at the same address ortize a lease. In 2019, you began to amortize a
you filed the original return. Your election is ir- second lease. Report amortization from the new
revocable after the due date, including exten-
sions, of your return.
8. lease on line 42 of your 2019 Form 4562. Re-
port amortization from the 2018 lease on line 43
of your 2019 Form 4562.
Disabled access credit. If you make your
business accessible to persons with disabilities Amortization If you don't have any new amortizable ex-
penses for the current year, you aren't required
and your business is an eligible small business,
you may be able to claim the disabled access to complete Form 4562 (unless you are claim-
ing depreciation). Report the current year's de-
credit. If you choose to claim the credit, you
must reduce the amount you deduct or capital- Introduction duction for amortization that began in a prior
ize by the amount of the credit. year directly on the “Other deduction” or “Other
Amortization is a method of recovering (deduct-
For more information, see Form 8826. expense ” line of your return.
ing) certain capital costs over a fixed period of
time. It is similar to the straight line method of
before September 9, 2008, and after October other than a start-up cost. You can file the re- change in ownership or use. See Anti-Churning
22, 2004, unless you choose to apply Regula- vised statement with a return filed after the re- Rules, later.
tions sections 1.195-1, 1.248-1, and 1.709-1, turn on which you elected to amortize your
you must also attach an accompanying state- start-up costs.
Your amortization deduction each year is
ment to elect to amortize the costs. the applicable part of the intangible's adjusted
Organizational costs election statement. If
basis (for purposes of determining gain), fig-
you elect to amortize your corporation's or part-
If you have both start-up and organizational ured by amortizing it ratably over 15 years (180
nership's organizational costs, attach a sepa-
costs, attach a separate statement (if required) months). The 15-year period begins with the
rate statement (if required) that contains the fol-
to your return for each type of cost. See Starting later of:
lowing information.
a Business, earlier, for more information. • The month the intangible is acquired, or
• A description of each cost. • The month the trade or business or activity
• The amount of each cost. engaged in for the production of income
Generally, you must file the return by the • The date each cost was incurred.
due date (including any extensions). However, begins.
• The month your corporation or partnership
if you timely filed your return for the year without began active business (or acquired the You can't deduct amortization for the month you
making the election, you can still make the elec- business). dispose of the intangible.
tion by filing an amended return within 6 months • The number of months in your amortization
of the due date of the return (excluding exten- period (which is generally 180 months). If you pay or incur an amount that increases
sions). For more information, see the instruc- the basis of an amortizable section 197 intangi-
tions for Part VI of Form 4562. Partnerships. The statement prepared for ble after the 15-year period begins, amortize it
a cash basis partnership must also indicate the over the remainder of the 15-year period begin-
You can choose to forgo the election to am- amount paid before the end of the year for each ning with the month the basis increase occurs.
ortize by affirmatively electing to capitalize your cost.
You don't need to separately list any part- You aren't allowed any other depreciation or
start-up or organizational costs on your income amortization deduction for an amortizable sec-
tax return filed by the due date (including exten- nership organizational cost that is less than
$10. Instead, you can list the total amount of tion 197 intangible.
sions) for the tax year in which the active trade
or business begins. these costs with the dates the first and last
costs were incurred. Tax-exempt use property subject to a lease.
After a partnership makes the election to The amortization period for any section 197 in-
Note. The election to either amortize or tangible leased under a lease agreement en-
capitalize start-up or organizational costs is ir- amortize organizational costs, it can later file an
amended return to include additional organiza- tered into after March 12, 2004, to a tax-exempt
revocable and applies to all start-up and organi- organization, governmental unit, or foreign per-
zational costs that are related to the trade or tional costs not included in the partnership's
original return and statement. son or entity (other than a partnership), shall not
business. be less than 125% of the lease term.
Assets
tach a statement containing the following infor-
Experimental Costs mation to your return for the tax year in which
the election begins.
551 Basis of Assets
551
You can elect to amortize your research and ex- • Your name, address, and taxpayer identifi- Form (and Instructions)
perimental costs, deduct them as current busi- cation number. Schedule E (Form 1040 or 1040-SR)
• The type of cost and the specific amount of
Schedule E (Form 1040 or 1040-SR)
ness expenses, or write them off over a 10-year Supplemental Income and Loss
period (see Optional write-off method below). the cost for which you are making the elec-
tion. Schedule K-1 (Form 1065) Partner's Schedule K-1 (Form 1065)
first receive an economic benefit from the costs. ever, if you timely filed your return for the year Shareholder's Share of Income,
without making the election, you can still make Deductions, Credits, etc.
For a definition of “research and experimen- the election by filing an amended return within 6
6198 At-Risk Limitations
tal costs” and information on deducting them as months of the due date of the return (excluding
6198
current business expenses, see chapter 7. extensions). Attach Form 4562 to the amended 8582 Passive Activity Loss Limitations
8582
ortize these costs or deduct them as a current return at the same address you filed the original See chapter 12 for information about getting
expense, you have the option of deducting return. publications and forms.
(writing off) research and experimental costs
ratably over a 10-year period beginning with the Revoking the election. You must obtain con-
tax year in which you incurred the costs. For
more information, see Optional Write-off of Cer-
sent from the IRS to revoke your election. Your Who Can Claim
request to revoke the election must be submit-
tain Tax Preferences , later, and section 59(e). ted to the IRS in the form of a letter ruling before Depletion?
the end of the tax year in which the optional re-
Costs you can amortize. You can amortize covery period ends. The request must contain If you have an economic interest in mineral
costs chargeable to a capital account (see all of the information necessary to demonstrate property or standing timber, you can take a de-
chapter 1) if you meet both of the following re- the rare and unusual circumstances that would duction for depletion. More than one person
quirements. justify granting revocation. If the request for rev- can have an economic interest in the same min-
• You paid or incurred the costs in your trade ocation is approved, any unamortized costs are eral deposit or timber. In the case of leased
or business. deductible in the year the revocation is effec- property, the depletion deduction is divided
• You aren't deducting the costs currently. tive. between the lessor and the lessee.
To figure cost depletion, you must first deter- Figuring the cost depletion deduction. No. of units sold in the tax year
×
Bonus
mine the following. Recoverable units from the property Payments
Once you have figured your property's basis for
• The property's basis for depletion. depletion, the total recoverable units, and the For oil and gas wells and geothermal depos-
• The total recoverable units of mineral in the number of units sold during the tax year, you its, more information about the definition of
property's natural deposit. can figure your cost depletion deduction by tak- gross income from the property is under Oil and
• The number of units of mineral sold during ing the following steps. Gas Wells, later. For other property, more infor-
the tax year. mation about the definition of gross income
Step Action Result
from the property is under Mines and Geother-
Basis for depletion. To figure the property's mal Deposits, later.
basis for depletion, subtract all the following 1 Divide your property's Depletion unit.
from the property's adjusted basis. basis for depletion by
Taxable income limit. The percentage deple-
total recoverable units.
1. Amounts recoverable through: tion deduction generally cannot be more than
2 Multiply the depletion Cost depletion 50% (100% for oil and gas property) of your tax-
a. Depreciation deductions, unit by units sold deduction.
able income from the property figured without
during the tax year.
b. Deferred expenses (including defer- the depletion deduction and the domestic pro-
red exploration and development duction activities deduction.
You must keep accounts for the depletion of
costs), and Taxable income from the property means
each property and adjust these accounts each
gross income from the property minus all allow-
c. Deductions other than depletion. year for units sold and depletion claimed.
able deductions (except any deduction for de-
2. The residual value of land and improve- pletion or domestic production activities) attrib-
ments at the end of operations. utable to mining processes, including mining
Example. You have both oil and natural quantity for the year. ted basis in each oil and gas property of the
gas production. To figure your depletable natu- partnership or S corporation. The partner or
ral gas quantity, you choose to apply 360 bar- 3. Figure depletion for all oil or natural gas shareholder must reduce his or her adjusted
rels of your 1,000-barrel depletable oil quantity. produced from the property using a per- basis by the depletion allowed or allowable on
Your depletable natural gas quantity is 2.16 mil- centage depletion rate of 15% (0.15). the property each year. The partner or share-
lion cubic feet of gas (360 × 6,000). You must 4. Multiply the result figured in (3) by a frac- holder must use that reduced adjusted basis to
reduce your depletable oil quantity to 640 bar- tion, the numerator of which is the result figure cost depletion, or his or her gain or loss, if
rels (1,000 – 360). figured in (2) and the denominator of the partnership or S corporation disposes of the
If you have production from marginal wells, which is the result figured in (1). This is property.
see section 613A(c)(6) to figure your depletable your depletion allowance for that property
oil or natural gas quantity. Also, see Notice for the year. Reporting the deduction. Information that
2019-38, available at IRS.gov/irb/
you, as a partner or shareholder, use to figure
2019-23_IRB#NOT-2019-38. Taxable income limit. If you are an independ- your depletion deduction on oil and gas proper-
ent producer or royalty owner of oil and gas, ties is reported by the partnership or S corpora-
Business entities and family members.
your deduction for percentage depletion is limi- tion on Schedule K-1 (Form 1065) or on Sched-
You must allocate the depletable oil or gas
ted to the smaller of the following. ule K-1 (Form 1120-S). Deduct oil and gas
quantity among the following related persons in
proportion to each business entity's or family
• 100% of your taxable income from the depletion for your partnership or S corporation
property figured without the deduction for interest on Schedule E (Form 1040 or
member's production of domestic oil or gas for
depletion and the deduction for qualified 1040-SR). The depletion deducted on Sched-
the year.
business income under section 199A. For ule E is included in figuring income or loss from
• Corporations, trusts, and estates if 50% or a definition of taxable income from the
more of the beneficial interest is owned by rental real estate or royalty properties. The In-
property, see Taxable income limit, earlier, structions for Schedule E (Form 1040 or
the same or related persons (considering
under Mineral Property. 1040-SR) explain where to report this income or
only persons that own at least 5% of the
beneficial interest).
• 65% of your taxable income for the year loss and whether you need to file either of the
figured without the deduction for depletion, following forms.
• You and your spouse and minor children. the deduction for qualified business in- • Form 6198.
A related person is anyone mentioned in the re- come, any net operating loss carryback to • Form 8582.
lated persons discussion under Nondeductible the tax year under section 172, any capital
loss in chapter 2 of Pub. 544, except that for loss carryback to the tax year under sec-
purposes of this allocation, item (1) in that dis- tion 1212, and in the case of a trust, any Natural Gas Wells
cussion includes only an individual, his or her distribution to its beneficiary (with certain
spouse, and minor children. You can use percentage depletion for a well
exceptions).
that produces natural gas that is either:
Controlled group of corporations. Mem- You can carry over to the following year any • Regulated natural gas,
bers of the same controlled group of amount you cannot deduct because of the • Sold under a fixed contract, or
65%-of-taxable-income limit. Add it to your de-
held for more than 1 year as a sale or ex- 536 Net Operating Losses (NOLs) for
Figuring cost depletion. To figure your cost change. You must make the election on your in-
536
quantity of marketable timber reasonably cutting. You generally report the gain as 556 Examination of Returns, Appeal
known, or on good evidence believed to exist long-term capital gain. The FMV then becomes
556
unit each year by taking the following steps. more information. 1065 U.S. Return of Partnership Income
1065
1. Determine your cost or adjusted basis of Form T (Timber). Complete and attach Form 1065-X Amended Return or
the timber on hand at the beginning of the
1065-X
T (Timber) to your income tax return if you claim Administrative Adjustment Request
year. Adjusted basis is defined under Cost a deduction for timber depletion, choose to treat (AAR)
Depletion in the discussion on Mineral the cutting of timber as a sale or exchange, or
Property, earlier. 1120-S U.S. Income Tax Return for an S
make an outright sale of timber.
1120-S
Corporation
2. Add to the amount determined in (1) the
cost of any timber units acquired during 1120-X Amended U.S. Corporation
1120-X
Accounting Method
count at the beginning of the year and
then adding (or subtracting) any correction See chapter 12 for information about getting
to the estimate of the number of timber
units remaining in the account.
Business Bad publications and forms.
Benefits you can deduct the allowable amount on your statement of expenses, an account book, a
463 Travel, Gift, and Car Expenses tax return. Because of differences between ac- day-planner, or similar record in which the em-
counting methods and tax law, the amount you
463
529 Miscellaneous Deductions same as the amount you deduct on your busi-
ness books and records. For example, you can
529
deduct 100% of the cost of meals on your busi- excess reimbursement or allowance is any
Assets ness books and records. However, only 50% of amount you pay to an employee that is more
946 How To Depreciate Property these costs are allowed by law as a tax deduc- than the business-related expenses for which
tion.
946
970 Tax Benefits for Education the employee adequately accounted. The em-
ployee must return any excess reimbursement
970
How you deduct a business expense under or other expense allowance to you within a rea-
Form (and Instructions) a reimbursement or allowance arrangement de- sonable period of time.
Schedule A (Form 1040 or 1040-SR) pends on whether you have:
• An accountable plan, or
Schedule A (Form 1040 or 1040-SR)
1120 U.S. Corporation Income Tax time the employee pays or incurs the ex-
ments as wages on Form W-2, and deduct
pense.
1120
expense reimbursement, you must specify the penses were paid or incurred.
Capital Assets amount of the reimbursement and report it ac-
3. Your employees return any excess reim-
8995 Qualified Business Income cordingly. See Table 11-1.
8995
See chapter 12 for information about getting comply within 120 days of the date of the
publications and forms. 1. Have paid or incurred deductible expen- statement.
ses while performing services as your em-
ployee, How to deduct. You can claim a deduction for
Reimbursement of 2. Adequately account to you for these ex- travel and non-entertainment related meals ex-
penses if you reimburse your employees for
Travel and penses within a reasonable period of time,
and these expenses under an accountable plan.
Non-Entertainment 3. Return any excess reimbursement or al-
Generally, the amount you can deduct for
non-entertainment related meals is subject to a
Related Meals lowance within a reasonable period of
time.
50% limit, discussed later. If you are a sole pro-
prietor, or are filing as a single member limited
The following discussion explains how to han- liability company, deduct the travel reimburse-
dle any reimbursements or allowances you may An arrangement under which you advance ment on line 24a and the deductible part of the
provide to your employees under a reimburse- money to employees is treated as meeting (3) non-entertainment related meals reimburse-
ment or allowance arrangement for travel and above only if the following requirements are ment on line 24b of Schedule C (Form 1040 or
non-entertainment related meals expenses. If also met. 1040-SR).
you are self-employed and report your income • The advance is reasonably calculated not If you are filing an income tax return for a
and expenses on Schedule C (Form 1040 or to exceed the amount of anticipated ex- corporation, include the reimbursement on the
1040-SR), see Pub. 463. penses. Other deductions line of Form 1120. If you are