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1040x 2013 4. 1040x 2013   Foreign Earned Income and Housing: Exclusion – Deduction Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Who Qualifies for the Exclusions and the Deduction? RequirementsTax Home in Foreign Country Bona Fide Residence Test Physical Presence Test Waiver of Time Requirements U. 1040x 2013 S. 1040x 2013 Travel Restrictions Foreign Earned Income Foreign Earned Income ExclusionLimit on Excludable Amount Choosing the Exclusion Foreign Housing Exclusion and DeductionHousing Amount Foreign Housing Exclusion Foreign Housing Deduction Married Couples Form 2555 and Form 2555-EZForm 2555-EZ Form 2555 Topics - This chapter discusses: Who qualifies for the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, The requirements that must be met to claim either exclusion or the deduction, How to figure the foreign earned income exclusion, and How to figure the foreign housing exclusion and the foreign housing deduction. 1040x 2013 Useful Items - You may want to see: Publication 519 U. 1040x 2013 S. 1040x 2013 Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. 1040x 2013 S. 1040x 2013 Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. 1040x 2013 S. 1040x 2013 Individual Income Tax Return 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion See chapter 7 for information about getting these publications and forms. 1040x 2013 Who Qualifies for the Exclusions and the Deduction? If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. 1040x 2013 If you are a U. 1040x 2013 S. 1040x 2013 citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. 1040x 2013 However, you may qualify to exclude from income up to $97,600 of your foreign earnings. 1040x 2013 In addition, you can exclude or deduct certain foreign housing amounts. 1040x 2013 See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. 1040x 2013 You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. 1040x 2013 See Exclusion of Meals and Lodging, later. 1040x 2013 Requirements To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements. 1040x 2013 Your tax home must be in a foreign country. 1040x 2013 You must have foreign earned income. 1040x 2013 You must be one of the following. 1040x 2013 A U. 1040x 2013 S. 1040x 2013 citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 1040x 2013 A U. 1040x 2013 S. 1040x 2013 resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 1040x 2013 A U. 1040x 2013 S. 1040x 2013 citizen or a U. 1040x 2013 S. 1040x 2013 resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. 1040x 2013 See Publication 519 to find out if you are a U. 1040x 2013 S. 1040x 2013 resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. 1040x 2013 If you are a nonresident alien married to a U. 1040x 2013 S. 1040x 2013 citizen or resident alien, and both you and your spouse choose to treat you as a resident alien, you are a resident alien for tax purposes. 1040x 2013 For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . 1040x 2013 Waiver of minimum time requirements. 1040x 2013   The minimum time requirements for bona fide residence and physical presence can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. 1040x 2013 This is fully explained under Waiver of Time Requirements , later. 1040x 2013   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. 1040x 2013 Tax Home in Foreign Country To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad. 1040x 2013 Bona fide residence and physical presence are explained later. 1040x 2013 Tax Home Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. 1040x 2013 Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. 1040x 2013 Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. 1040x 2013 If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. 1040x 2013 If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work. 1040x 2013 You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. 1040x 2013 However, your abode is not necessarily in the United States while you are temporarily in the United States. 1040x 2013 Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling. 1040x 2013 “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. 1040x 2013 It does not mean your principal place of business. 1040x 2013 “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. 1040x 2013 ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. 1040x 2013 Example 1. 1040x 2013 You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day off schedule. 1040x 2013 You return to your family residence in the United States during your off periods. 1040x 2013 You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. 1040x 2013 You cannot claim either of the exclusions or the housing deduction. 1040x 2013 Example 2. 1040x 2013 For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. 1040x 2013 In November of last year, your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. 1040x 2013 Before you left, you distributed business cards showing your business and home addresses in London. 1040x 2013 You kept ownership of your home in Toledo but rented it to another family. 1040x 2013 You placed your car in storage. 1040x 2013 In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. 1040x 2013 Shortly after moving, you leased a car and you and your spouse got British driving licenses. 1040x 2013 Your entire family got library cards for the local public library. 1040x 2013 You and your spouse opened bank accounts with a London bank and secured consumer credit. 1040x 2013 You joined a local business league and both you and your spouse became active in the neighborhood civic association and worked with a local charity. 1040x 2013 Your abode is in London for the time you live there. 1040x 2013 You satisfy the tax home test in the foreign country. 1040x 2013 Please click here for the text description of the image. 1040x 2013 Figure 4–A Can I Claim the Exclusion or Deduction? Temporary or Indefinite Assignment The location of your tax home often depends on whether your assignment is temporary or indefinite. 1040x 2013 If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away-from-home expenses (for travel, meals, and lodging), but you would not qualify for the foreign earned income exclusion. 1040x 2013 If your new work assignment is for an indefinite period, your new place of employment becomes your tax home and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. 1040x 2013 If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion. 1040x 2013 If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. 1040x 2013 If you expect it to last for more than 1 year, it is indefinite. 1040x 2013 If you expect it to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes. 1040x 2013 Once your expectation changes, it is indefinite. 1040x 2013 Foreign Country To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country. 1040x 2013 A foreign country includes any territory under the sovereignty of a government other than that of the United States. 1040x 2013 The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. 1040x 2013 It also includes the seabed and subsoil of those submarine areas adjacent to the country's territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources. 1040x 2013 The term “foreign country” does not include Antarctica or U. 1040x 2013 S. 1040x 2013 possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. 1040x 2013 S. 1040x 2013 Virgin Islands, and Johnston Island. 1040x 2013 For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States and those areas listed or described in the previous sentence. 1040x 2013 American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. 1040x 2013 S. 1040x 2013 possession does not qualify you for the foreign earned income exclusion. 1040x 2013 You may, however, qualify for an exclusion of your possession income on your U. 1040x 2013 S. 1040x 2013 return. 1040x 2013 American Samoa. 1040x 2013   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. 1040x 2013 Gross income from sources within American Samoa may be eligible for this exclusion. 1040x 2013 Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. 1040x 2013 Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. 1040x 2013 Guam and the Commonwealth of the Northern Mariana Islands. 1040x 2013   An exclusion will be available to residents of Guam and the Commonwealth of the Northern Mariana Islands if, and when, new implementation agreements take effect between the United States and those possessions. 1040x 2013   For more information, see Publication 570. 1040x 2013 Puerto Rico and U. 1040x 2013 S. 1040x 2013 Virgin Islands Residents of Puerto Rico and the U. 1040x 2013 S. 1040x 2013 Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. 1040x 2013 Puerto Rico. 1040x 2013   Generally, if you are a U. 1040x 2013 S. 1040x 2013 citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. 1040x 2013 S. 1040x 2013 tax on income from Puerto Rican sources. 1040x 2013 This does not include amounts paid for services performed as an employee of the United States. 1040x 2013 However, you are subject to U. 1040x 2013 S. 1040x 2013 tax on your income from sources outside Puerto Rico. 1040x 2013 In figuring your U. 1040x 2013 S. 1040x 2013 tax, you cannot deduct expenses allocable to income not subject to tax. 1040x 2013 Bona Fide Residence Test You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 1040x 2013 You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. 1040x 2013 S. 1040x 2013 citizen, or A U. 1040x 2013 S. 1040x 2013 resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. 1040x 2013 You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. 1040x 2013 If you go to a foreign country to work on a particular job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. 1040x 2013 The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test. 1040x 2013 Bona fide residence. 1040x 2013   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. 1040x 2013   Your bona fide residence is not necessarily the same as your domicile. 1040x 2013 Your domicile is your permanent home, the place to which you always return or intend to return. 1040x 2013 Example. 1040x 2013 You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. 1040x 2013 The fact that you go to Scotland does not automatically make Scotland your bona fide residence. 1040x 2013 If you go there as a tourist, or on a short business trip, and return to the United States, you have not established bona fide residence in Scotland. 1040x 2013 But if you go to Scotland to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country, even though you intend to return eventually to the United States. 1040x 2013 You are clearly not a resident of Scotland in the first instance. 1040x 2013 However, in the second, you are a resident because your stay in Scotland appears to be permanent. 1040x 2013 If your residency is not as clearly defined as either of these illustrations, it may be more difficult to decide whether you have established a bona fide residence. 1040x 2013 Determination. 1040x 2013   Questions of bona fide residence are determined according to each individual case, taking into account factors such as your intention, the purpose of your trip, and the nature and length of your stay abroad. 1040x 2013   To meet the bona fide residence test, you must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 1040x 2013 The IRS decides whether you are a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555. 1040x 2013 IRS cannot make this determination until you file Form 2555. 1040x 2013 Statement to foreign authorities. 1040x 2013   You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country, and the authorities: Hold that you are not subject to their income tax laws as a resident, or Have not made a final decision on your status. 1040x 2013 Special agreements and treaties. 1040x 2013   An income tax exemption provided in a treaty or other international agreement will not in itself prevent you from being a bona fide resident of a foreign country. 1040x 2013 Whether a treaty prevents you from becoming a bona fide resident of a foreign country is determined under all provisions of the treaty, including specific provisions relating to residence or privileges and immunities. 1040x 2013 Example 1. 1040x 2013 You are a U. 1040x 2013 S. 1040x 2013 citizen employed in the United Kingdom by a U. 1040x 2013 S. 1040x 2013 employer under contract with the U. 1040x 2013 S. 1040x 2013 Armed Forces. 1040x 2013 You are not subject to the North Atlantic Treaty Status of Forces Agreement. 1040x 2013 You may be a bona fide resident of the United Kingdom. 1040x 2013 Example 2. 1040x 2013 You are a U. 1040x 2013 S. 1040x 2013 citizen in the United Kingdom who qualifies as an “employee” of an armed service or as a member of a “civilian component” under the North Atlantic Treaty Status of Forces Agreement. 1040x 2013 You are not a bona fide resident of the United Kingdom. 1040x 2013 Example 3. 1040x 2013 You are a U. 1040x 2013 S. 1040x 2013 citizen employed in Japan by a U. 1040x 2013 S. 1040x 2013 employer under contract with the U. 1040x 2013 S. 1040x 2013 Armed Forces. 1040x 2013 You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. 1040x 2013 Being subject to the agreement does not make you a bona fide resident of Japan. 1040x 2013 Example 4. 1040x 2013 You are a U. 1040x 2013 S. 1040x 2013 citizen employed as an “official” by the United Nations in Switzerland. 1040x 2013 You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. 1040x 2013 This does not prevent you from being a bona fide resident of Switzerland. 1040x 2013 Effect of voting by absentee ballot. 1040x 2013   If you are a U. 1040x 2013 S. 1040x 2013 citizen living abroad, you can vote by absentee ballot in any election held in the United States without risking your status as a bona fide resident of a foreign country. 1040x 2013   However, if you give information to the local election officials about the nature and length of your stay abroad that does not match the information you give for the bona fide residence test, the information given in connection with absentee voting will be considered in determining your status, but will not necessarily be conclusive. 1040x 2013 Uninterrupted period including entire tax year. 1040x 2013   To meet the bona fide residence test, you must reside in a foreign country or countries for an uninterrupted period that includes an entire tax year. 1040x 2013 An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. 1040x 2013   During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business. 1040x 2013 To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country. 1040x 2013 Example 1. 1040x 2013 You arrived with your family in Lisbon, Portugal, on November 1, 2011. 1040x 2013 Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. 1040x 2013 You immediately established residence there. 1040x 2013 You spent April of 2012 at a business conference in the United States. 1040x 2013 Your family stayed in Lisbon. 1040x 2013 Immediately following the conference, you returned to Lisbon and continued living there. 1040x 2013 On January 1, 2013, you completed an uninterrupted period of residence for a full tax year (2012), and you meet the bona fide residence test. 1040x 2013 Example 2. 1040x 2013 Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. 1040x 2013 You would not meet the bona fide residence test because your bona fide residence in the foreign country, although it lasted more than a year, did not include a full tax year. 1040x 2013 You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). 1040x 2013 Bona fide resident for part of a year. 1040x 2013   Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you are a bona fide resident of that country for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. 1040x 2013 Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. 1040x 2013 Example. 1040x 2013 You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. 1040x 2013 On September 15, 2013, you returned to the United States. 1040x 2013 Since you were a bona fide resident of a foreign country for all of 2012, you were also a bona fide resident of a foreign country from March 1, 2011, through the end of 2011 and from January 1, 2013, through September 14, 2013. 1040x 2013 Reassignment. 1040x 2013   If you are assigned from one foreign post to another, you may or may not have a break in foreign residence between your assignments, depending on the circumstances. 1040x 2013 Example 1. 1040x 2013 You were a resident of Pakistan from October 1, 2012, through November 30, 2013. 1040x 2013 On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. 1040x 2013 Your household goods also were returned to the United States. 1040x 2013 Your foreign residence ended on November 30, 2013, and did not begin again until after you were assigned to another foreign country and physically entered that country. 1040x 2013 Since you were not a bona fide resident of a foreign country for the entire tax year of 2012 or 2013 you do not meet the bona fide residence test in either year. 1040x 2013 You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. 1040x 2013 Example 2. 1040x 2013 Assume the same facts as in Example 1, except that upon completion of your assignment in Pakistan you were given a new assignment to Turkey. 1040x 2013 On December 1, 2013, you and your family returned to the United States for a month's vacation. 1040x 2013 On January 2, 2014, you arrived in Turkey for your new assignment. 1040x 2013 Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. 1040x 2013 Physical Presence Test You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. 1040x 2013 The 330 days do not have to be consecutive. 1040x 2013 Any U. 1040x 2013 S. 1040x 2013 citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. 1040x 2013 The physical presence test is based only on how long you stay in a foreign country or countries. 1040x 2013 This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. 1040x 2013 330 full days. 1040x 2013   Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. 1040x 2013 You can count days you spent abroad for any reason. 1040x 2013 You do not have to be in a foreign country only for employment purposes. 1040x 2013 You can be on vacation. 1040x 2013   You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time. 1040x 2013 Exception. 1040x 2013   You can be physically present in a foreign country or countries for less than 330 full days and still meet the physical presence test if you are required to leave a country because of war or civil unrest. 1040x 2013 See Waiver of Time Requirements, later. 1040x 2013 Full day. 1040x 2013   A full day is a period of 24 consecutive hours, beginning at midnight. 1040x 2013 Travel. 1040x 2013    When you leave the United States to go directly to a foreign country or when you return directly to the United States from a foreign country, the time you spend on or over international waters does not count toward the 330-day total. 1040x 2013 Example. 1040x 2013 You leave the United States for France by air on June 10. 1040x 2013 You arrive in France at 9:00 a. 1040x 2013 m. 1040x 2013 on June 11. 1040x 2013 Your first full day of physical presence in France is June 12. 1040x 2013 Passing over foreign country. 1040x 2013   If, in traveling from the United States to a foreign country, you pass over a foreign country before midnight of the day you leave, the first day you can count toward the 330-day total is the day following the day you leave the United States. 1040x 2013 Example. 1040x 2013 You leave the United States by air at 9:30 a. 1040x 2013 m. 1040x 2013 on June 10 to travel to Kenya. 1040x 2013 You pass over western Africa at 11:00 p. 1040x 2013 m. 1040x 2013 on June 10 and arrive in Kenya at 12:30 a. 1040x 2013 m. 1040x 2013 on June 11. 1040x 2013 Your first full day in a foreign country is June 11. 1040x 2013 Change of location. 1040x 2013   You can move about from one place to another in a foreign country or to another foreign country without losing full days. 1040x 2013 If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel. 1040x 2013 Example 1. 1040x 2013 You leave Ireland by air at 11:00 p. 1040x 2013 m. 1040x 2013 on July 6 and arrive in Sweden at 5:00 a. 1040x 2013 m. 1040x 2013 on July 7. 1040x 2013 Your trip takes less than 24 hours and you lose no full days. 1040x 2013 Example 2. 1040x 2013 You leave Norway by ship at 10:00 p. 1040x 2013 m. 1040x 2013 on July 6 and arrive in Portugal at 6:00 a. 1040x 2013 m. 1040x 2013 on July 8. 1040x 2013 Since your travel is not within a foreign country or countries and the trip takes more than 24 hours, you lose as full days July 6, 7, and 8. 1040x 2013 If you remain in Portugal, your next full day in a foreign country is July 9. 1040x 2013 In United States while in transit. 1040x 2013   If you are in transit between two points outside the United States and are physically present in the United States for less than 24 hours, you are not treated as present in the United States during the transit. 1040x 2013 You are treated as traveling over areas not within any foreign country. 1040x 2013    Please click here for the text description of the image. 1040x 2013 Figure 4-B How to figure the 12-month period. 1040x 2013   There are four rules you should know when figuring the 12-month period. 1040x 2013 Your 12-month period can begin with any day of the month. 1040x 2013 It ends the day before the same calendar day, 12 months later. 1040x 2013 Your 12-month period must be made up of consecutive months. 1040x 2013 Any 12-month period can be used if the 330 days in a foreign country fall within that period. 1040x 2013 You do not have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. 1040x 2013 You can choose the 12-month period that gives you the greatest exclusion. 1040x 2013 In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. 1040x 2013 Example 1. 1040x 2013 You are a construction worker who works on and off in a foreign country over a 20-month period. 1040x 2013 You might pick up the 330 full days in a 12-month period only during the middle months of the time you work in the foreign country because the first few and last few months of the 20-month period are broken up by long visits to the United States. 1040x 2013 Example 2. 1040x 2013 You work in New Zealand for a 20-month period from January 1, 2012, through August 31, 2013, except that you spend 28 days in February 2012 and 28 days in February 2013 on vacation in the United States. 1040x 2013 You are present in New Zealand for at least 330 full days during each of the following two 12-month periods: January 1, 2012 – December 31, 2012 and September 1, 2012 – August 31, 2013. 1040x 2013 By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. 1040x 2013 See Figure 4-B, on the previous page. 1040x 2013 Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. 1040x 2013 The minimum time requirements can be waived, however, if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. 1040x 2013 You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. 1040x 2013 To qualify for the waiver, you must actually have your tax home in the foreign country and be a bona fide resident of, or be physically present in, the foreign country on or before the beginning date of the waiver. 1040x 2013 Early in 2014, the IRS will publish in the Internal Revenue Bulletin a list of the only countries that qualify for the waiver for 2013 and the effective dates. 1040x 2013 If you left one of the countries on or after the date listed for each country, you can meet the bona fide residence test or physical presence test for 2013 without meeting the minimum time requirement. 1040x 2013 However, in figuring your exclusion, the number of your qualifying days of bona fide residence or physical presence includes only days of actual residence or presence within the country. 1040x 2013 U. 1040x 2013 S. 1040x 2013 Travel Restrictions If you are present in a foreign country in violation of U. 1040x 2013 S. 1040x 2013 law, you will not be treated as a bona fide resident of a foreign country or as physically present in a foreign country while you are in violation of the law. 1040x 2013 Income that you earn from sources within such a country for services performed during a period of violation does not qualify as foreign earned income. 1040x 2013 Your housing expenses within that country (or outside that country for housing your spouse or dependents) while you are in violation of the law cannot be included in figuring your foreign housing amount. 1040x 2013 For 2013, the only country to which travel restrictions applied was Cuba. 1040x 2013 The restrictions applied for the entire year. 1040x 2013 However, individuals working at the U. 1040x 2013 S. 1040x 2013 Naval Base at Guantanamo Bay in Cuba are not in violation of U. 1040x 2013 S. 1040x 2013 law. 1040x 2013 Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. 1040x 2013 Foreign Earned Income To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income. 1040x 2013 Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. 1040x 2013 Your tax home is in a foreign country. 1040x 2013 You meet either the bona fide residence test or the physical presence test. 1040x 2013 To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. 1040x 2013 To determine whether you meet either the bona fide residence test or the physical presence test, see Bona Fide Residence Test and Physical Presence Test, earlier. 1040x 2013 Foreign earned income does not include the following amounts. 1040x 2013 The value of meals and lodging that you exclude from your income because the meals and lodging were furnished for the convenience of your employer. 1040x 2013 Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). 1040x 2013 Pay you receive as an employee of the U. 1040x 2013 S. 1040x 2013 Government. 1040x 2013 (See U. 1040x 2013 S. 1040x 2013 Government Employees, later. 1040x 2013 ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. 1040x 2013 Any unallowable moving expense deduction that you choose to recapture as explained under Moving Expense Attributable to Foreign Earnings in 2 Years in chapter 5. 1040x 2013 Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. 1040x 2013 Earned income. 1040x 2013   This is pay for personal services performed, such as wages, salaries, or professional fees. 1040x 2013 The list that follows classifies many types of income into three categories. 1040x 2013 The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. 1040x 2013 For more information on earned and unearned income, see Earned and Unearned Income, later. 1040x 2013 Earned Income Unearned Income Variable Income Salaries and wages Dividends Business profits Commissions Interest Royalties Bonuses Capital gains Rents Professional fees Gambling winnings Scholarships and fellowships Tips Alimony     Social security benefits     Pensions     Annuities     In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned income. 1040x 2013 Noncash income. 1040x 2013   The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income. 1040x 2013 Allowances or reimbursements. 1040x 2013   Earned income includes allowances or reimbursements you receive, such as the following amounts. 1040x 2013    Cost-of-living allowances. 1040x 2013 Overseas differential. 1040x 2013 Family allowance. 1040x 2013 Reimbursement for education or education allowance. 1040x 2013 Home leave allowance. 1040x 2013 Quarters allowance. 1040x 2013 Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). 1040x 2013 Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. 1040x 2013 Foreign earned income is income you receive for working in a foreign country. 1040x 2013 Where or how you are paid has no effect on the source of the income. 1040x 2013 For example, income you receive for work done in Austria is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City. 1040x 2013 Example. 1040x 2013 You are a U. 1040x 2013 S. 1040x 2013 citizen, a bona fide resident of Canada, and working as a mining engineer. 1040x 2013 Your salary is $76,800 per year. 1040x 2013 You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. 1040x 2013 Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. 1040x 2013 Your total income is $88,800. 1040x 2013 You work a 5-day week, Monday through Friday. 1040x 2013 After subtracting your vacation, you have a total of 240 workdays in the year. 1040x 2013 You worked in the United States during the year for 6 weeks (30 workdays). 1040x 2013 The following shows how to figure the part of your income that is for work done in Canada during the year. 1040x 2013   Number of days worked in Canada during the year (210) × Total income ($88,800) = $77,700     Number of days of work during the year for which payment was made (240)   Your foreign source earned income is $77,700. 1040x 2013 Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. 1040x 2013 Some types of income are not easily identified as earned or unearned income. 1040x 2013 Some of these types of income are further explained here. 1040x 2013 Income from a sole proprietorship or partnership. 1040x 2013   Income from a business in which capital investment is an important part of producing the income may be unearned income. 1040x 2013 If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned income. 1040x 2013 Capital a factor. 1040x 2013   If capital investment is an important part of producing income, no more than 30% of your share of the net profits of the business is earned income. 1040x 2013   If you have no net profits, the part of your gross profit that represents a reasonable allowance for personal services actually performed is considered earned income. 1040x 2013 Because you do not have a net profit, the 30% limit does not apply. 1040x 2013 Example 1. 1040x 2013 You are a U. 1040x 2013 S. 1040x 2013 citizen and meet the bona fide residence test. 1040x 2013 You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. 1040x 2013 You perform no services for the partnership. 1040x 2013 At the end of the tax year, your share of the net profits is $80,000. 1040x 2013 The entire $80,000 is unearned income. 1040x 2013 Example 2. 1040x 2013 Assume that in Example 1 you spend time operating the business. 1040x 2013 Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. 1040x 2013 If the value of your services for the year is $15,000, your earned income is limited to the value of your services, $15,000. 1040x 2013 Capital not a factor. 1040x 2013   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. 1040x 2013 The entire amount of business income is earned income. 1040x 2013 Example. 1040x 2013 You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. 1040x 2013 Because capital is not an income- producing factor, all the income from the partnership is considered earned income. 1040x 2013 Income from a corporation. 1040x 2013   The salary you receive from a corporation is earned income only if it represents a reasonable allowance as compensation for work you do for the corporation. 1040x 2013 Any amount over what is considered a reasonable salary is unearned income. 1040x 2013 Example 1. 1040x 2013 You are a U. 1040x 2013 S. 1040x 2013 citizen and an officer and stockholder of a corporation in Honduras. 1040x 2013 You perform no work or service of any kind for the corporation. 1040x 2013 During the tax year you receive a $10,000 “salary” from the corporation. 1040x 2013 The $10,000 clearly is not for personal services and is unearned income. 1040x 2013 Example 2. 1040x 2013 You are a U. 1040x 2013 S. 1040x 2013 citizen and work full time as secretary-treasurer of your corporation. 1040x 2013 During the tax year you receive $100,000 as salary from the corporation. 1040x 2013 If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. 1040x 2013 Stock options. 1040x 2013   You may have earned income if you disposed of stock that you got by exercising a stock option granted to you under an employee stock purchase plan. 1040x 2013   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. 1040x 2013   However, if you disposed of the stock less than 2 years after you were granted the option or less than 1 year after you got the stock, part of the gain on the disposition may be earned income. 1040x 2013 It is considered received in the year you disposed of the stock and earned in the year you performed the services for which you were granted the option. 1040x 2013 Any part of the earned income that is due to work you did outside the United States is foreign earned income. 1040x 2013   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. 1040x 2013 Pensions and annuities. 1040x 2013    For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, amounts received as pensions or annuities are unearned income. 1040x 2013 Royalties. 1040x 2013   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. 1040x 2013   Royalties received by a writer are earned income if they are received: For the transfer of property rights of the writer in the writer's product, or Under a contract to write a book or series of articles. 1040x 2013 Rental income. 1040x 2013   Generally, rental income is unearned income. 1040x 2013 If you perform personal services in connection with the production of rent, up to 30% of your net rental income can be considered earned income. 1040x 2013 Example. 1040x 2013 Larry Smith, a U. 1040x 2013 S. 1040x 2013 citizen living in Australia, owns and operates a rooming house in Sydney. 1040x 2013 If he is operating the rooming house as a business that requires capital and personal services, he can consider up to 30% of net rental income as earned income. 1040x 2013 On the other hand, if he just owns the rooming house and performs no personal services connected with its operation, except perhaps making minor repairs and collecting rents, none of his net income from the house is considered earned income. 1040x 2013 It is all unearned income. 1040x 2013 Professional fees. 1040x 2013   If you are engaged in a professional occupation (such as a doctor or lawyer), all fees received in the performance of these services are earned income. 1040x 2013 Income of an artist. 1040x 2013   Income you receive from the sale of paintings you created is earned income. 1040x 2013 Scholarships and fellowships. 1040x 2013   Any portion of a scholarship or fellowship grant that is paid to you for teaching, research or other services is considered earned income if you must include it in your gross income. 1040x 2013 If the payer of the grant is required to provide you with a Form W-2, Wage and Tax Statement, these amounts will be listed as wages. 1040x 2013    Certain scholarship and fellowship income may be exempt under other provisions. 1040x 2013 See Publication 970, Tax Benefits for Education, chapter 1. 1040x 2013 Use of employer's property or facilities. 1040x 2013   If you receive fringe benefits in the form of the right to use your employer's property or facilities, the fair market value of that right is earned income. 1040x 2013 Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being required to buy or sell, and both having reasonable knowledge of all the necessary facts. 1040x 2013 Example. 1040x 2013 You are privately employed and live in Japan all year. 1040x 2013 You are paid a salary of $6,000 a month. 1040x 2013 You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. 1040x 2013 The house is not provided for your employer's convenience. 1040x 2013 You report on the calendar-year, cash basis. 1040x 2013 You received $72,000 salary from foreign sources plus $36,000 fair rental value of the house, or a total of $108,000 of earned income. 1040x 2013 Reimbursement of employee expenses. 1040x 2013   If you are reimbursed under an accountable plan (defined below) for expenses you incur on your employer's behalf and you have adequately accounted to your employer for the expenses, do not include the reimbursement for those expenses in your earned income. 1040x 2013   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. 1040x 2013 If expenses and reimbursement are equal, there is nothing to allocate to excluded income. 1040x 2013 If expenses are more than the reimbursement, the unreimbursed expenses are considered to have been incurred in producing earned income and must be divided between your excluded and included income in determining the amount of unreimbursed expenses you can deduct. 1040x 2013 (See chapter 5. 1040x 2013 ) If the reimbursement is more than the expenses, no expenses remain to be divided between excluded and included income and the excess reimbursement must be included in earned income. 1040x 2013   These rules do not apply to the following individuals. 1040x 2013 Straight-commission salespersons. 1040x 2013 Employees who have arrangements with their employers under which taxes are not withheld on a percentage of the commissions because the employers consider that percentage to be attributable to the employees' expenses. 1040x 2013 Accountable plan. 1040x 2013   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. 1040x 2013 The expenses covered under the plan must have a business connection. 1040x 2013 The employee must adequately account to the employer for these expenses within a reasonable period of time. 1040x 2013 The employee must return any excess reimbursement or allowance within a reasonable period of time. 1040x 2013 Reimbursement of moving expenses. 1040x 2013   Reimbursement of moving expenses may be earned income. 1040x 2013 You must include as earned income: Any reimbursements of, or payments for, nondeductible moving expenses, Reimbursements that are more than your deductible expenses and that you do not return to your employer, Any reimbursements made (or treated as made) under a nonaccountable plan (any plan that does not meet the rules listed above for an accountable plan), even if they are for deductible expenses, and Any reimbursement of moving expenses you deducted in an earlier year. 1040x 2013 This section discusses reimbursements that must be included in earned income. 1040x 2013 Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. 1040x 2013   The rules for determining when the reimbursement is considered earned or where the reimbursement is considered earned may differ somewhat from the general rules previously discussed. 1040x 2013   Although you receive the reimbursement in one tax year, it may be considered earned for services performed, or to be performed, in another tax year. 1040x 2013 You must report the reimbursement as income on your return in the year you receive it, even if it is considered earned during a different year. 1040x 2013 Move from U. 1040x 2013 S. 1040x 2013 to foreign country. 1040x 2013   If you move from the United States to a foreign country, your moving expense reimbursement is generally considered pay for future services to be performed at the new location. 1040x 2013 The reimbursement is considered earned solely in the year of the move if you qualify for the exclusion for a period that includes at least 120 days during that tax year. 1040x 2013   If you are neither a bona fide resident of nor physically present in a foreign country or countries for a period that includes 120 days during the year of the move, a portion of the reimbursement is considered earned in the year of the move and a portion is considered earned in the year following the year of the move. 1040x 2013 To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. 1040x 2013 The numerator (top number) is the number of days in your qualifying period that fall within the year of the move, and the denominator (bottom number) is the total number of days in the year of the move. 1040x 2013   The difference between the total reimbursement and the amount considered earned in the year of the move is the amount considered earned in the year following the year of the move. 1040x 2013 The part earned in each year is figured as shown in the following example. 1040x 2013 Example. 1040x 2013 You are a U. 1040x 2013 S. 1040x 2013 citizen working in the United States. 1040x 2013 You were told in October 2012 that you were being transferred to a foreign country. 1040x 2013 You arrived in the foreign country on December 15, 2012, and you are a bona fide resident for the remainder of 2012 and all of 2013. 1040x 2013 Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. 1040x 2013 Because you did not qualify for the exclusion under the bona fide residence test for at least 120 days in 2012 (the year of the move), the reimbursement is considered pay for services performed in the foreign country for both 2012 and 2013. 1040x 2013 You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. 1040x 2013 The fraction is the number of days during which you were a bona fide resident in 2012 (the year of the move) divided by 366. 1040x 2013 The remaining part of the reimbursement is for services performed in the foreign country in 2013. 1040x 2013 This computation is used only to determine when the reimbursement is considered earned. 1040x 2013 You would include the amount of the reimbursement in income in 2013, the year you received it. 1040x 2013 Move between foreign countries. 1040x 2013   If you move between foreign countries, any moving expense reimbursement that you must include in income will be considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days in the year of the move. 1040x 2013 Move to U. 1040x 2013 S. 1040x 2013   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. 1040x 2013 S. 1040x 2013 source income. 1040x 2013   However, if under either an agreement between you and your employer or a statement of company policy that is reduced to writing before your move to the foreign country, your employer will reimburse you for your move back to the United States regardless of whether you continue to work for the employer, the includible reimbursement is considered compensation for past services performed in the foreign country. 1040x 2013 The includible reimbursement is considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days during that year. 1040x 2013 Otherwise, you treat the includible reimbursement as received for services performed in the foreign country in the year of the move and the year immediately before the year of the move. 1040x 2013   See the discussion under Move from U. 1040x 2013 S. 1040x 2013 to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. 1040x 2013 The amount earned in the year before the year of the move is the difference between the total includible reimbursement and the amount earned in the year of the move. 1040x 2013 Example. 1040x 2013 You are a U. 1040x 2013 S. 1040x 2013 citizen employed in a foreign country. 1040x 2013 You retired from employment with your employer on March 31, 2013, and returned to the United States after having been a bona fide resident of the foreign country for several years. 1040x 2013 A written agreement with your employer entered into before you went abroad provided that you would be reimbursed for your move back to the United States. 1040x 2013 In April 2013, your former employer reimbursed you $4,000 for the part of the cost of your move back to the United States that you were not allowed to deduct. 1040x 2013 Because you were not a bona fide resident of a foreign country or countries for a period that included at least 120 days in 2013 (the year of the move), the includible reimbursement is considered pay for services performed in the foreign country for both 2013 and 2012. 1040x 2013 You figure the part of the moving expense reimbursement for services performed in the foreign country for 2013 by multiplying the total includible reimbursement by a fraction. 1040x 2013 The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). 1040x 2013 The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. 1040x 2013 You report the amount of the includible reimbursement in 2013, the year you received it. 1040x 2013    In this example, if you met the physical presence test for a period that included at least 120 days in 2013, the moving expense reimbursement would be considered earned entirely in the year of the move. 1040x 2013 Storage expense reimbursements. 1040x 2013   If you are reimbursed for storage expenses, the reimbursement is for services you perform during the period of time for which the storage expenses are incurred. 1040x 2013 U. 1040x 2013 S. 1040x 2013 Government Employees For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. 1040x 2013 This includes amounts paid from both appropriated and nonappropriated funds. 1040x 2013 The following organizations (and other organizations similarly organized and operated under United States Army, Navy, or Air Force regulations) are integral parts of the Armed Forces, agencies, or instrumentalities of the United States. 1040x 2013 United States Armed Forces exchanges. 1040x 2013 Commissioned and noncommissioned officers' messes. 1040x 2013 Armed Forces motion picture services. 1040x 2013 Kindergartens on foreign Armed Forces installations. 1040x 2013 Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. 1040x 2013 If you are a U. 1040x 2013 S. 1040x 2013 Government employee paid by a U. 1040x 2013 S. 1040x 2013 agency that assigned you to a foreign government to perform specific services for which the agency is reimbursed by the foreign government, your pay is from the U. 1040x 2013 S. 1040x 2013 Government and does not qualify for exclusion or deduction. 1040x 2013 If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. 1040x 2013 American Institute in Taiwan. 1040x 2013   Amounts paid by the American Institute in Taiwan are not foreign earned income for purposes of the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 1040x 2013 If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. 1040x 2013 S. 1040x 2013 tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. 1040x 2013 S. 1040x 2013 Government. 1040x 2013 Allowances. 1040x 2013   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. 1040x 2013 S. 1040x 2013 civilian officers and employees stationed in Alaska and Hawaii or elsewhere outside the 48 contiguous states and the District of Columbia can be excluded from gross income. 1040x 2013 Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. 1040x 2013 More information. 1040x 2013   Publication 516, U. 1040x 2013 S. 1040x 2013 Government Civilian Employees Stationed Abroad, has more information for U. 1040x 2013 S. 1040x 2013 Government employees abroad. 1040x 2013 Exclusion of Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. 1040x 2013 The meals are furnished: On the business premises of your employer, and For the convenience of your employer. 1040x 2013 The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. 1040x 2013 If these conditions are met, do not include the value of the meals or lodging in your income, even if a law or your employment contract says that they are provided as compensation. 1040x 2013 Amounts you do not include in income because of these rules are not foreign earned income. 1040x 2013 If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. 1040x 2013 Family. 1040x 2013   Your family, for this purpose, includes only your spouse and your dependents. 1040x 2013 Lodging. 1040x 2013   The value of lodging includes the cost of heat, electricity, gas, water, sewer service, and similar items needed to make the lodging fit to live in. 1040x 2013 Business premises of employer. 1040x 2013   Generally, the business premises of your employer is wherever you work. 1040x 2013 For example, if you work as a housekeeper, meals and lodging provided in your employer's home are provided on the business premises of your employer. 1040x 2013 Similarly, meals provided to cowhands while herding cattle on land leased or owned by their employer are considered provided on the premises of their employer. 1040x 2013 Convenience of employer. 1040x 2013   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. 1040x 2013 Meals furnished at no charge are considered provided for your employer's convenience if there is a good business reason for providing them, other than to give you more pay. 1040x 2013   On the other hand, if your employer provides meals to you or your family as a means of giving you more pay, and there is no other business reason for providing them, their value is extra income to you because they are not furnished for the convenience of your employer. 1040x 2013 Condition of employment. 1040x 2013   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. 1040x 2013 You must accept lodging to properly carry out your duties if, for example, you must be available for duty at all times or you could not perform your duties if the lodging was not furnished. 1040x 2013 Foreign camps. 1040x 2013   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. 1040x 2013 The camp must be: Provided for your employer's convenience because the place where you work is in a remote area where satisfactory housing is not available to you on the open market within a reasonable commuting distance, Located as close as reasonably possible in the area where you work, and Provided in a common area or enclave that is not available to the general public for lodging or accommodations and that normally houses at least ten employees. 1040x 2013 Foreign Earned Income Exclusion If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income a limited amount of your foreign earned income. 1040x 2013 Foreign earned income was defined earlier in this chapter. 1040x 2013 You also can choose to exclude from your income a foreign housing amount. 1040x 2013 This is explained later under Foreign Housing Exclusion. 1040x 2013 If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. 1040x 2013 Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. 1040x 2013 If you choose to exclude foreign earned income, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 1040x 2013 This includes any expenses, losses, and other normally deductible items allocable to the excluded income. 1040x 2013 For more information about deductions and credits, see chapter 5 . 1040x 2013 Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. 1040x 2013 You cannot exclude more than the smaller of: $97,600, or Your foreign earned income (discussed earlier) for the tax year minus your foreign housing exclusion (discussed later). 1040x 2013 If both you and your spouse work abroad and each of you meets either the bona fide residence test or the physical presence test, you can each choose the foreign earned income exclusion. 1040x 2013 You do not both need to meet the same test. 1040x 2013 Together, you and your spouse can exclude as much as $195,200. 1040x 2013 Paid in year following work. 1040x 2013   Generally, you are considered to have earned income in the year in which you do the work for which you receive the income, even if you work in one year but are not paid until the following year. 1040x 2013 If you report your income on a cash basis, you report the income on your return for the year you receive it. 1040x 2013 If you work one year, but are not paid for that work until the next year, the amount you can exclude in the year you are paid is the amount you could have excluded in the year you did the work if you had been paid in that year. 1040x 2013 For an exception to this general rule, see Year-end payroll period, later. 1040x 2013 Example. 1040x 2013 You were a bona fide resident of Brazil for all of 2012 and 2013. 1040x 2013 You report your income on the cash basis. 1040x 2013 In 2012, you were paid $84,200 for work you did in Brazil during that year. 1040x 2013 You excluded all of the $84,200 from your income in 2012. 1040x 2013 In 2013, you were paid $117,300 for your work in Brazil. 1040x 2013 $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. 1040x 2013 You can exclude $10,900 of the $18,800 from your income in 2013. 1040x 2013 This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. 1040x 2013 You must include the remaining $7,900 in income in 2013 because you could not have excluded that income in 2012 if you had received it that year. 1040x 2013 You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. 1040x 2013 Your total foreign earned income exclusion for 2013 is $108,500 ($10,900 for work you did in 2012 and $97,600 for work you did in 2013). 1040x 2013 You would include in your 2013 income $8,800 ($7,900 for the work you did in 2012 and $900 for the work you did in 2013). 1040x 2013 Year-end payroll period. 1040x 2013   There is an exception to the general rule that income is considered earned in the year you do the work for which you receive the income. 1040x 2013 If you are a cash-basis taxpayer, any salary or wage payment you receive after the end of the year in which you do the work for which you receive the pay is considered earned entirely in the year you receive it if all four of the following apply. 1040x 2013 The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. 1040x 2013 The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). 1040x 2013 The payroll period is not longer than 16 days. 1040x 2013 The payday comes at the same time in relation to the payroll period that it would normally come and it comes before the end of the next payroll period. 1040x 2013 Example. 1040x 2013 You are paid twice a month. 1040x 2013 For the normal payroll period that begins on the first of the month and ends on the fifteenth of the month, you are paid on the sixteenth day of the month. 1040x 2013 For the normal payroll period that begins on the sixteenth of the month and ends on the last day of the month, you are paid on the first day of the following month. 1040x 2013 Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. 1040x 2013 Income earned over more than 1 year. 1040x 2013   Regardless of when you actually receive income, you must apply it to the year in which you earned it in figuring your excludable amount for that year. 1040x 2013 For example, a bonus may be based on work you did over several years. 1040x 2013 You determine the amount of the bonus that is considered earned in a particular year in two steps. 1040x 2013 Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. 1040x 2013 Multiply the result of (1) by the number of months you did the work during the year. 1040x 2013 This is the amount that is subject to the exclusion limit for that tax year. 1040x 2013 Income received more than 1 year after it was earned. 1040x 2013   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. 1040x 2013 Example. 1040x 2013   You were a bona fide resident of Sweden for 2011, 2012, and 2013. 1040x 2013 You report your income on the cash basis. 1040x 2013 In 2011, you were paid $69,000 for work you did in Sweden that year and in 2012 you were paid $74,000 for that year's work in Sweden. 1040x 2013 You excluded all the income on your 2011 and 2012 returns. 1040x 2013   In 2013, you were paid $92,000; $82,000 for your work in Sweden during 2013, and $10,000 for work you did in Sweden in 2011. 1040x 2013 You cannot exclude any of the $10,000 for work done in 2011 because you received it after the end of the year following the year in which you earned it. 1040x 2013 You must include the $10,000 in income. 1040x 2013 You can exclude all of the $82,000 received for work you did in 2013. 1040x 2013 Community income. 1040x 2013   The maximum exclusion applies separately to the earnings of spouses. 1040x 2013 Ignore any community property laws when you figure your limit on the foreign earned income exclusion. 1040x 2013 Part-year exclusion. 1040x 2013   If the period for which you qualify for the foreign earned income exclusion includes only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. 1040x 2013 The number of qualifying days is the number of days in the year within the period on which you both: Have your tax home in a foreign country, and Meet either the bona fide residence test or the physical presence test. 1040x 2013   For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. 1040x 2013 To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year. 1040x 2013 Example. 1040x 2013 You report your income on the calendar-year basis and you qualified for the foreign earned income exclusion under the bona fide residence test for 75 days in 2013. 1040x 2013 You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. 1040x 2013 If you qualify under the bona fide residence test for all of 2014, you can exclude your foreign earned income up to the 2014 limit. 1040x 2013 Physical presence test. 1040x 2013   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. 1040x 2013 If you qualify for the foreign earned income exclusion under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year. 1040x 2013 Example. 1040x 2013 You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2012, through September 30, 2013, except for 16 days in December 2012 when you were on vacation in the United States. 1040x 2013 You figure the maximum exclusion for 2012 as follows. 1040x 2013 Beginning with June 1, 2012, count forward 330 full days. 1040x 2013 Do not count the 16 days you spent in the United States. 1040x 2013 The 330th day, May 12, 2013, is the last day of a 12-month period. 1040x 2013 Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. 1040x 2013 This 12-month period runs from May 12, 2012, through May 11, 2013. 1040x 2013 Count the total days during 2012 that fall within this 12-month period. 1040x 2013 This is 234 days (May 12, 2012 – December 31, 2012). 1040x 2013 Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). 1040x 2013 You figure the maximum exclusion for 2013 in the opposite manner. 1040x 2013 Beginning with your last full day, September 30, 2013, count backward 330 full days. 1040x 2013 Do not count the 16 days you spent in the United States. 1040x 2013 That day, October 20, 2012, is the first day of a 12-month period. 1040x 2013 Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. 1040x 2013 This 12-month period runs from October 20, 2012, through October 19, 2013. 1040x 2013 Count the total days during 2013 that fall within this 12-month period. 1040x 2013 This is 292 days (January 1, 2013 – October 19, 2013). 1040x 2013 Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). 1040x 2013 Choosing the Exclusion The foreign earned income exclusion is voluntary. 1040x 2013 You can choose the exclusion by completing the appropriate parts of Form 2555. 1040x 2013 When You Can Choose the Exclusion Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns. 1040x 2013 A return filed by the due date (including any extensions). 1040x 2013 A return amending a timely-filed return. 1040x 2013 Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid. 1040x 2013 A return filed within 1 year from the original due date of the return (determined without regard to any extensions). 1040x 2013 Filing after the above periods. 1040x 2013   You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion. 1040x 2013 If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described earlier if you file before the IRS discovers that you failed to choose the exclusion. 1040x 2013 Whether or not you owe federal income tax after taking the exclusion into account, if you file your return after the periods described earlier, you must type or legibly print at the top of the first page of the Form 1040 “Filed pursuant to section 1. 1040x 2013 911-7(a)(2)(i)(D). 1040x 2013 ” If you owe federal income tax after taking into account the foreign earned income exclusion and the IRS discovered that you failed to choose the exclusion, you may still be able to choose the exclusion. 1040x 2013 You must request a private letter ruling under Income Tax Regulation 301. 1040x 2013 9100-3 and Revenue Procedure 2013-1, 2013-1 I. 1040x 2013 R. 1040x 2013 B. 1040x 2013 1, available at www. 1040x 2013 irs. 1040x 2013 gov/irb/2013-01_IRB/ar06. 1040x 2013 html. 1040x 2013 Effect of Choosing the Exclusion Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it. 1040x 2013 Foreign tax credit or deduction. 1040x 2013  
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The 1040x 2013

1040x 2013 8. 1040x 2013   Business Expenses Table of Contents Introduction Useful Items - You may want to see: Bad DebtsAccrual method. 1040x 2013 Cash method. 1040x 2013 Car and Truck ExpensesOffice in the home. 1040x 2013 Methods for Deducting Car and Truck Expenses Reimbursing Your Employees for Expenses Depreciation Employees' PayFringe benefits. 1040x 2013 InsuranceHow to figure the deduction. 1040x 2013 Interest Legal and Professional FeesTax preparation fees. 1040x 2013 Pension Plans Rent Expense Taxes Travel, Meals, and EntertainmentTransportation. 1040x 2013 Taxi, commuter bus, and limousine. 1040x 2013 Baggage and shipping. 1040x 2013 Car or truck. 1040x 2013 Meals and lodging. 1040x 2013 Cleaning. 1040x 2013 Telephone. 1040x 2013 Tips. 1040x 2013 More information. 1040x 2013 Business Use of Your HomeExceptions to exclusive use. 1040x 2013 Other Expenses You Can Deduct Expenses You Cannot Deduct Introduction You can deduct the costs of operating your business. 1040x 2013 These costs are known as business expenses. 1040x 2013 These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year. 1040x 2013 To be deductible, a business expense must be both ordinary and necessary. 1040x 2013 An ordinary expense is one that is common and accepted in your field of business. 1040x 2013 A necessary expense is one that is helpful and appropriate for your business. 1040x 2013 An expense does not have to be indispensable to be considered necessary. 1040x 2013 For more information about the general rules for deducting business expenses, see chapter 1 in Publication 535, Business Expenses. 1040x 2013 If you have an expense that is partly for business and partly personal, separate the personal part from the business part. 1040x 2013 The personal part is not deductible. 1040x 2013 Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 946 How To Depreciate Property See chapter 12 for information about getting publications and forms. 1040x 2013 Bad Debts If someone owes you money you cannot collect, you have a bad debt. 1040x 2013 There are two kinds of bad debts, business bad debts and nonbusiness bad debts. 1040x 2013 A business bad debt is generally one that comes from operating your trade or business. 1040x 2013 You may be able to deduct business bad debts as an expense on your business tax return. 1040x 2013 Business bad debt. 1040x 2013   A business bad debt is a loss from the worthlessness of a debt that was either of the following. 1040x 2013 Created or acquired in your business. 1040x 2013 Closely related to your business when it became partly or totally worthless. 1040x 2013 A debt is closely related to your business if your primary motive for incurring the debt is a business reason. 1040x 2013   Business bad debts are mainly the result of credit sales to customers. 1040x 2013 They can also be the result of loans to suppliers, clients, employees, or distributors. 1040x 2013 Goods and services customers have not paid for are shown in your books as either accounts receivable or notes receivable. 1040x 2013 If you are unable to collect any part of these accounts or notes receivable, the uncollectible part is a business bad debt. 1040x 2013    You can take a bad debt deduction for these accounts and notes receivable only if the amount you were owed was included in your gross income either for the year the deduction is claimed or for a prior year. 1040x 2013 Accrual method. 1040x 2013   If you use an accrual method of accounting, you normally report income as you earn it. 1040x 2013 You can take a bad debt deduction for an uncollectible receivable if you have included the uncollectible amount in income. 1040x 2013 Cash method. 1040x 2013   If you use the cash method of accounting, you normally report income when you receive payment. 1040x 2013 You cannot take a bad debt deduction for amounts owed to you that you have not received and cannot collect if you never included those amounts in income. 1040x 2013 More information. 1040x 2013   For more information about business bad debts, see chapter 10 in Publication 535. 1040x 2013 Nonbusiness bad debts. 1040x 2013   All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses on Form 8949 and Schedule D (Form 1040). 1040x 2013 For more information on nonbusiness bad debts, see Publication 550, Investment Income and Expenses. 1040x 2013 Car and Truck Expenses If you use your car or truck in your business, you may be able to deduct the costs of operating and maintaining your vehicle. 1040x 2013 You also may be able to deduct other costs of local transportation and traveling away from home overnight on business. 1040x 2013 You may qualify for a tax credit for qualified plug-in electric vehicles, qualified plug-in electric drive motor vehicles, and alternative motor vehicles you place in service during the year. 1040x 2013 See Form 8936 and Form 8910 for more information. 1040x 2013 Local transportation expenses. 1040x 2013   Local transportation expenses include the ordinary and necessary costs of all the following. 1040x 2013 Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. 1040x 2013 Tax home is defined later. 1040x 2013 Visiting clients or customers. 1040x 2013 Going to a business meeting away from your regular workplace. 1040x 2013 Getting from your home to a temporary workplace when you have one or more regular places of work. 1040x 2013 These temporary workplaces can be either within the area of your tax home or outside that area. 1040x 2013 Local business transportation does not include expenses you have while traveling away from home overnight. 1040x 2013 Those expenses are deductible as travel expenses and are discussed later under Travel, Meals, and Entertainment. 1040x 2013 However, if you use your car while traveling away from home overnight, use the rules in this section to figure your car expense deduction. 1040x 2013   Generally, your tax home is your regular place of business, regardless of where you maintain your family home. 1040x 2013 It includes the entire city or general area in which your business or work is located. 1040x 2013 Example. 1040x 2013 You operate a printing business out of rented office space. 1040x 2013 You use your van to deliver completed jobs to your customers. 1040x 2013 You can deduct the cost of round-trip transportation between your customers and your print shop. 1040x 2013    You cannot deduct the costs of driving your car or truck between your home and your main or regular workplace. 1040x 2013 These costs are personal commuting expenses. 1040x 2013 Office in the home. 1040x 2013   Your workplace can be your home if you have an office in your home that qualifies as your principal place of business. 1040x 2013 For more information, see Business Use of Your Home, later. 1040x 2013 Example. 1040x 2013 You are a graphics designer. 1040x 2013 You operate your business out of your home. 1040x 2013 Your home qualifies as your principal place of business. 1040x 2013 You occasionally have to drive to your clients to deliver your completed work. 1040x 2013 You can deduct the cost of the round-trip transportation between your home and your clients. 1040x 2013 Methods for Deducting Car and Truck Expenses For local transportation or overnight travel by car or truck, you generally can use one of the following methods to figure your expenses. 1040x 2013 Standard mileage rate. 1040x 2013 Actual expenses. 1040x 2013 Standard mileage rate. 1040x 2013   You may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. 1040x 2013 For 2013, the standard mileage rate is 56. 1040x 2013 5 cents per mile. 1040x 2013    If you choose to use the standard mileage rate for a year, you cannot deduct your actual expenses for that year except for business-related parking fees and tolls. 1040x 2013 Choosing the standard mileage rate. 1040x 2013   If you want to use the standard mileage rate for a car or truck you own, you must choose to use it in the first year the car is available for use in your business. 1040x 2013 In later years, you can choose to use either the standard mileage rate or actual expenses. 1040x 2013   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). 1040x 2013 Standard mileage rate not allowed. 1040x 2013   You cannot use the standard mileage rate if you: Operate five or more cars at the same time, Claimed a depreciation deduction using any method other than straight line, for example, ACRS or MACRS, Claimed a section 179 deduction on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. 1040x 2013 Parking fees and tolls. 1040x 2013   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. 1040x 2013 (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. 1040x 2013 ) Actual expenses. 1040x 2013   If you do not choose to use the standard mileage rate, you may be able to deduct your actual car or truck expenses. 1040x 2013    If you qualify to use both methods, figure your deduction both ways to see which gives you a larger deduction. 1040x 2013   Actual car expenses include the costs of the following items. 1040x 2013 Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. 1040x 2013 You can divide your expenses based on the miles driven for each purpose. 1040x 2013 Example. 1040x 2013 You are the sole proprietor of a flower shop. 1040x 2013 You drove your van 20,000 miles during the year. 1040x 2013 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use (including commuting miles). 1040x 2013 You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. 1040x 2013 More information. 1040x 2013   For more information about the rules for claiming car and truck expenses, see Publication 463. 1040x 2013 Reimbursing Your Employees for Expenses You generally can deduct the amount you reimburse your employees for car and truck expenses. 1040x 2013 The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. 1040x 2013 For details, see chapter 11 in Publication 535. 1040x 2013 That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. 1040x 2013 Depreciation If property you acquire to use in your business is expected to last more than 1 year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. 1040x 2013 You must spread the cost over more than 1 tax year and deduct part of it each year on Schedule C. 1040x 2013 This method of deducting the cost of business property is called depreciation. 1040x 2013 The discussion here is brief. 1040x 2013 You will find more information about depreciation in Publication 946. 1040x 2013 What property can be depreciated?   You can depreciate property if it meets all the following requirements. 1040x 2013 It must be property you own. 1040x 2013 It must be used in business or held to produce income. 1040x 2013 You never can depreciate inventory (explained in chapter 2) because it is not held for use in your business. 1040x 2013 It must have a useful life that extends substantially beyond the year it is placed in service. 1040x 2013 It must have a determinable useful life, which means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. 1040x 2013 You never can depreciate the cost of land because land does not wear out, become obsolete, or get used up. 1040x 2013 It must not be excepted property. 1040x 2013 This includes property placed in service and disposed of in the same year. 1040x 2013 Repairs. 1040x 2013    You cannot depreciate repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life. 1040x 2013 You can deduct these amounts on line 21 of Schedule C or line 2 of Schedule C-EZ. 1040x 2013 Depreciation method. 1040x 2013   The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). 1040x 2013 MACRS is discussed in detail in Publication 946. 1040x 2013 Section 179 deduction. 1040x 2013   You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. 1040x 2013 This deduction is known as the “section 179 deduction. 1040x 2013 ” The maximum amount you can elect to deduct during 2013 is generally $500,000 (higher limits apply to certain property). 1040x 2013 See IRC 179(e). 1040x 2013   This limit is generally reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. 1040x 2013 The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2013 is $3,160 ($11,160 if you take the special depreciation allowance for qualified passenger automobiles placed in service in 2013). 1040x 2013 Special rules apply to trucks and vans. 1040x 2013 For more information, see Publication 946. 1040x 2013 It explains what property qualifies for the deduction, what limits apply to the deduction, and when and how to recapture the deduction. 1040x 2013    Your section 179 election for the cost of any sport utility vehicle (SUV) and certain other vehicles is limited to $25,000. 1040x 2013 For more information, see the Instructions for Form 4562 or Publication 946. 1040x 2013 Listed property. 1040x 2013   You must follow special rules and recordkeeping requirements when depreciating listed property. 1040x 2013 Listed property is any of the following. 1040x 2013 Most passenger automobiles. 1040x 2013 Most other property used for transportation. 1040x 2013 Any property of a type generally used for entertainment, recreation, or amusement. 1040x 2013 Certain computers and related peripheral equipment. 1040x 2013   For more information about listed property, see Publication 946. 1040x 2013 Form 4562. 1040x 2013   Use Form 4562, Depreciation and Amortization, if you are claiming any of the following. 1040x 2013 Depreciation on property placed in service during the current tax year. 1040x 2013 A section 179 deduction. 1040x 2013 Depreciation on any listed property (regardless of when it was placed in service). 1040x 2013    If you have to use Form 4562, you must file Schedule C. 1040x 2013 You cannot use Schedule C-EZ. 1040x 2013   Employees' Pay You can generally deduct on Schedule C the pay you give your employees for the services they perform for your business. 1040x 2013 The pay may be in cash, property, or services. 1040x 2013 To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. 1040x 2013 In addition, the pay must meet both the following tests. 1040x 2013 The pay must be reasonable. 1040x 2013 The pay must be for services performed. 1040x 2013 Chapter 2 in Publication 535 explains and defines these requirements. 1040x 2013 You cannot deduct your own salary or any personal withdrawals you make from your business. 1040x 2013 As a sole proprietor, you are not an employee of the business. 1040x 2013 If you had employees during the year, you must use Schedule C. 1040x 2013 You cannot use Schedule C-EZ. 1040x 2013 Kinds of pay. 1040x 2013   Some of the ways you may provide pay to your employees are listed below. 1040x 2013 For an explanation of each of these items, see chapter 2 in Publication 535. 1040x 2013 Awards. 1040x 2013 Bonuses. 1040x 2013 Education expenses. 1040x 2013 Fringe benefits (discussed later). 1040x 2013 Loans or advances you do not expect the employee to repay if they are for personal services actually performed. 1040x 2013 Property you transfer to an employee as payment for services. 1040x 2013 Reimbursements for employee business expenses. 1040x 2013 Sick pay. 1040x 2013 Vacation pay. 1040x 2013 Fringe benefits. 1040x 2013   A fringe benefit is a form of pay for the performance of services. 1040x 2013 The following are examples of fringe benefits. 1040x 2013 Benefits under qualified employee benefit programs. 1040x 2013 Meals and lodging. 1040x 2013 The use of a car. 1040x 2013 Flights on airplanes. 1040x 2013 Discounts on property or services. 1040x 2013 Memberships in country clubs or other social clubs. 1040x 2013 Tickets to entertainment or sporting events. 1040x 2013   Employee benefit programs include the following. 1040x 2013 Accident and health plans. 1040x 2013 Adoption assistance. 1040x 2013 Cafeteria plans. 1040x 2013 Dependent care assistance. 1040x 2013 Educational assistance. 1040x 2013 Group-term life insurance coverage. 1040x 2013 Welfare benefit funds. 1040x 2013   You can generally deduct the cost of fringe benefits you provide on your Schedule C in whatever category the cost falls. 1040x 2013 For example, if you allow an employee to use a car or other property you lease, deduct the cost of the lease as a rent or lease expense. 1040x 2013 If you own the property, include your deduction for its cost or other basis as a section 179 deduction or a depreciation deduction. 1040x 2013    You may be able to exclude all or part of the fringe benefits you provide from your employees' wages. 1040x 2013 For more information about fringe benefits and the exclusion of benefits, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. 1040x 2013 Insurance You can generally deduct premiums you pay for the following kinds of insurance related to your business. 1040x 2013 Fire, theft, flood, or similar insurance. 1040x 2013 Credit insurance that covers losses from business bad debts. 1040x 2013 Group hospitalization and medical insurance for employees, including long-term care insurance. 1040x 2013 Liability insurance. 1040x 2013 Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients. 1040x 2013 Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault. 1040x 2013 Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law. 1040x 2013 Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness. 1040x 2013 Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. 1040x 2013 If you operate a vehicle partly for personal use, deduct only the part of the insurance premium that applies to the business use of the vehicle. 1040x 2013 If you use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums. 1040x 2013 Life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract. 1040x 2013 Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause. 1040x 2013 Nondeductible premiums. 1040x 2013   You cannot deduct premiums on the following kinds of insurance. 1040x 2013 Self-insurance reserve funds. 1040x 2013 You cannot deduct amounts credited to a reserve set up for self-insurance. 1040x 2013 This applies even if you cannot get business insurance coverage for certain business risks. 1040x 2013 However, your actual losses may be deductible. 1040x 2013 For more information, see Publication 547, Casualties, Disasters, and Thefts. 1040x 2013 Loss of earnings. 1040x 2013 You cannot deduct premiums for a policy that pays for your lost earnings due to sickness or disability. 1040x 2013 However, see item (8) in the previous list. 1040x 2013 Certain life insurance and annuities. 1040x 2013 For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. 1040x 2013 You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. 1040x 2013 A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business. 1040x 2013 For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. 1040x 2013 The disallowance applies without regard to whom the policy covers. 1040x 2013 Insurance to secure a loan. 1040x 2013 If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. 1040x 2013 Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. 1040x 2013 In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. 1040x 2013 Self-employed health insurance deduction. 1040x 2013   You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for you and your family. 1040x 2013 How to figure the deduction. 1040x 2013   Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. 1040x 2013 However, if any of the following apply, you must use the worksheet in chapter 6 of Publication 535. 1040x 2013 You have more than one source of income subject to self-employment tax. 1040x 2013 You file Form 2555 or Form 2555-EZ (relating to foreign earned income). 1040x 2013 You are using amounts paid for qualified long-term care insurance to figure the deduction. 1040x 2013 Prepayment. 1040x 2013   You cannot deduct expenses in advance, even if you pay them in advance. 1040x 2013 This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 1040x 2013 Example. 1040x 2013 In 2013, you signed a 3-year insurance contract. 1040x 2013 Even though you paid the premiums for 2013, 2014, and 2015 when you signed the contract, you can only deduct the premium for 2013 on your 2013 tax return. 1040x 2013 You can deduct in 2014 and 2015 the premium allocable to those years. 1040x 2013 More information. 1040x 2013   For more information about deducting insurance, see chapter 6 in Publication 535. 1040x 2013 Interest You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your business. 1040x 2013 Interest relates to your business if you use the proceeds of the loan for a business expense. 1040x 2013 It does not matter what type of property secures the loan. 1040x 2013 You can deduct interest on a debt only if you meet all of the following requirements. 1040x 2013 You are legally liable for that debt. 1040x 2013 Both you and the lender intend that the debt be repaid. 1040x 2013 You and the lender have a true debtor-creditor relationship. 1040x 2013 You cannot deduct on Schedule C or C-EZ the interest you paid on personal loans. 1040x 2013 If a loan is part business and part personal, you must divide the interest between the personal part and the business part. 1040x 2013 Example. 1040x 2013 In 2013, you paid $600 interest on a car loan. 1040x 2013 During 2013, you used the car 60% for business and 40% for personal purposes. 1040x 2013 You are claiming actual expenses on the car. 1040x 2013 You can only deduct $360 (60% × $600) for 2013 on Schedule C or C-EZ. 1040x 2013 The remaining interest of $240 is a nondeductible personal expense. 1040x 2013 More information. 1040x 2013   For more information about deducting interest, see chapter 4 in Publication 535. 1040x 2013 That chapter explains the following items. 1040x 2013 Interest you can deduct. 1040x 2013 Interest you cannot deduct. 1040x 2013 How to allocate interest between personal and business use. 1040x 2013 When to deduct interest. 1040x 2013 The rules for a below-market interest rate loan. 1040x 2013 (This is generally a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. 1040x 2013 ) Legal and Professional Fees Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on Schedule C or C-EZ. 1040x 2013 However, you usually cannot deduct legal fees you pay to acquire business assets. 1040x 2013 Add them to the basis of the property. 1040x 2013 If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business. 1040x 2013 The personal part of legal fees for producing or collecting taxable income, doing or keeping your job, or for tax advice may be deductible on Schedule A (Form 1040) if you itemize deductions. 1040x 2013 For more information, see Publication 529, Miscellaneous Deductions. 1040x 2013 Tax preparation fees. 1040x 2013   You can deduct on Schedule C or C-EZ the cost of preparing that part of your tax return relating to your business as a sole proprietor or statutory employee. 1040x 2013 You can deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. 1040x 2013   You can also deduct on Schedule C or C-EZ the amount you pay or incur in resolving asserted tax deficiencies for your business as a sole proprietor or statutory employee. 1040x 2013 Pension Plans You can set up and maintain the following small business retirement plans for yourself and your employees. 1040x 2013 SEP (Simplified Employee Pension) plans. 1040x 2013 SIMPLE (Savings Incentive Match Plan for Employees) plans. 1040x 2013 Qualified plans (including Keogh or H. 1040x 2013 R. 1040x 2013 10 plans). 1040x 2013 SEP, SIMPLE, and qualified plans offer you and your employees a tax favored way to save for retirement. 1040x 2013 You can deduct contributions you make to the plan for your employees on line 19 of Schedule C. 1040x 2013 If you are a sole proprietor, you can deduct contributions you make to the plan for yourself on line 28 of Form 1040. 1040x 2013 You can also deduct trustees' fees if contributions to the plan do not cover them. 1040x 2013 Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. 1040x 2013 You may also be able to claim a tax credit of 50% of the first $1,000 of qualified startup costs if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. 1040x 2013 Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. 1040x 2013 These amounts (and earnings on them) are generally tax free until your employees receive distributions from the plan. 1040x 2013 For more information on retirement plans for small business, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). 1040x 2013 Publication 590, Individual Retirement Arrangements (IRAs), discusses other tax favored ways to save for retirement. 1040x 2013 Rent Expense Rent is any amount you pay for the use of property you do not own. 1040x 2013 In general, you can deduct rent as a business expense only if the rent is for property you use in your business. 1040x 2013 If you have or will receive equity in or title to the property, you cannot deduct the rent. 1040x 2013 Unreasonable rent. 1040x 2013   You cannot take a rental deduction for unreasonable rents. 1040x 2013 Ordinarily, the issue of reasonableness arises only if you and the lessor are related. 1040x 2013 Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. 1040x 2013 Rent is not unreasonable just because it is figured as a percentage of gross receipts. 1040x 2013   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. 1040x 2013 For a list of the other related persons, see section 267 of the Internal Revenue Code. 1040x 2013 Rent on your home. 1040x 2013   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. 1040x 2013 You must meet the requirements for business use of your home. 1040x 2013 For more information, see Business Use of Your Home , later. 1040x 2013 Rent paid in advance. 1040x 2013   Generally, rent paid in your business is deductible in the year paid or accrued. 1040x 2013 If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. 1040x 2013 You can deduct the rest of your payment only over the period to which it applies. 1040x 2013 More information. 1040x 2013   For more information about rent, see chapter 3 in Publication 535. 1040x 2013 Taxes You can deduct on Schedule C or C-EZ various federal, state, local, and foreign taxes directly attributable to your business. 1040x 2013 Income taxes. 1040x 2013   You can deduct on Schedule C or C-EZ a state tax on gross income (as distinguished from net income) directly attributable to your business. 1040x 2013 You can deduct other state and local income taxes on Schedule A (Form 1040) if you itemize your deductions. 1040x 2013 Do not deduct federal income tax. 1040x 2013 Employment taxes. 1040x 2013   You can deduct the social security, Medicare, and federal unemployment (FUTA) taxes you paid out of your own funds as an employer. 1040x 2013 Employment taxes are discussed briefly in chapter 1. 1040x 2013 You can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund. 1040x 2013 Deduct these payments as taxes. 1040x 2013 Self-employment tax. 1040x 2013   You can deduct one-half of your self-employment tax on line 27 of Form 1040. 1040x 2013 Self-employment tax is discussed in chapters 1 and 10. 1040x 2013 Personal property tax. 1040x 2013   You can deduct on Schedule C or C-EZ any tax imposed by a state or local government on personal property used in your business. 1040x 2013   You can also deduct registration fees for the right to use property within a state or local area. 1040x 2013 Example. 1040x 2013 May and Julius Winter drove their car 7,000 business miles out of a total of 10,000 miles. 1040x 2013 They had to pay $25 for their annual state license tags and $20 for their city registration sticker. 1040x 2013 They also paid $235 in city personal property tax on the car, for a total of $280. 1040x 2013 They are claiming their actual car expenses. 1040x 2013 Because they used the car 70% for business, they can deduct 70% of the $280, or $196, as a business expense. 1040x 2013 Real estate taxes. 1040x 2013   You can deduct on Schedule C or C-EZ the real estate taxes you pay on your business property. 1040x 2013 Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. 1040x 2013 The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. 1040x 2013   For more information about real estate taxes, see chapter 5 in Publication 535. 1040x 2013 That chapter explains special rules for deducting the following items. 1040x 2013 Taxes for local benefits, such as those for sidewalks, streets, water mains, and sewer lines. 1040x 2013 Real estate taxes when you buy or sell property during the year. 1040x 2013 Real estate taxes if you use an accrual method of accounting and choose to accrue real estate tax related to a definite period ratably over that period. 1040x 2013 Sales tax. 1040x 2013   Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. 1040x 2013 If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. 1040x 2013 If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. 1040x 2013 If the property is depreciable, add the sales tax to the basis for depreciation. 1040x 2013 For information on the basis of property, see Publication 551, Basis of Assets. 1040x 2013    Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. 1040x 2013 Do not include these taxes in gross receipts or sales. 1040x 2013 Excise taxes. 1040x 2013   You can deduct on Schedule C or C-EZ all excise taxes that are ordinary and necessary expenses of carrying on your business. 1040x 2013 Excise taxes are discussed briefly in chapter 1. 1040x 2013 Fuel taxes. 1040x 2013   Taxes on gasoline, diesel fuel, and other motor fuels you use in your business are usually included as part of the cost of the fuel. 1040x 2013 Do not deduct these taxes as a separate item. 1040x 2013   You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. 1040x 2013 For more information, see Publication 510, Excise Taxes. 1040x 2013 Travel, Meals, and Entertainment This section briefly explains the kinds of travel and entertainment expenses you can deduct on Schedule C or C-EZ. 1040x 2013 Table 8-1. 1040x 2013 When Are Entertainment Expenses Deductible? (Note. 1040x 2013 The following is a summary of the rules for deducting entertainment expenses. 1040x 2013 For more details about these rules, see Publication 463. 1040x 2013 ) General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. 1040x 2013 Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. 1040x 2013 An ordinary expense is one that is common and accepted in your field of business, trade, or profession. 1040x 2013 A necessary expense is one that is helpful and appropriate, although not necessarily required, for your business. 1040x 2013 Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. 1040x 2013   Associated test Entertainment is associated with your trade or business, and Entertainment directly precedes or follows a substantial business discussion. 1040x 2013 Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. 1040x 2013 You cannot deduct expenses that are lavish or extravagant under the circumstances. 1040x 2013 You generally can deduct only 50% of your unreimbursed entertainment expenses. 1040x 2013 Travel expenses. 1040x 2013   These are the ordinary and necessary expenses of traveling away from home for your business. 1040x 2013 You are traveling away from home if both the following conditions are met. 1040x 2013 Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work. 1040x 2013 You need to get sleep or rest to meet the demands of your work while away from home. 1040x 2013 Generally, your tax home is your regular place of business, regardless of where you maintain your family home. 1040x 2013 It includes the entire city or general area in which your business is located. 1040x 2013 See Publication 463 for more information. 1040x 2013   The following is a brief discussion of the expenses you can deduct. 1040x 2013 Transportation. 1040x 2013   You can deduct the cost of travel by airplane, train, bus, or car between your home and your business destination. 1040x 2013 Taxi, commuter bus, and limousine. 1040x 2013   You can deduct fares for these and other types of transportation between the airport or station and your hotel, or between the hotel and your work location away from home. 1040x 2013 Baggage and shipping. 1040x 2013   You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations. 1040x 2013 Car or truck. 1040x 2013   You can deduct the costs of operating and maintaining your vehicle when traveling away from home on business. 1040x 2013 You can deduct actual expenses or the standard mileage rate (discussed earlier under Car and Truck Expenses), as well as business-related tolls and parking. 1040x 2013 If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. 1040x 2013 Meals and lodging. 1040x 2013   You can deduct the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. 1040x 2013 In most cases, you can deduct only 50% of your meal expenses. 1040x 2013 Cleaning. 1040x 2013   You can deduct the costs of dry cleaning and laundry while on your business trip. 1040x 2013 Telephone. 1040x 2013   You can deduct the cost of business calls while on your business trip, including business communication by fax machine or other communication devices. 1040x 2013 Tips. 1040x 2013   You can deduct the tips you pay for any expense in this list. 1040x 2013 More information. 1040x 2013   For more information about travel expenses, see Publication 463. 1040x 2013 Entertainment expenses. 1040x 2013   You may be able to deduct business-related entertainment expenses for entertaining a client, customer, or employee. 1040x 2013 In most cases, you can deduct only 50% of these expenses. 1040x 2013   The following are examples of entertainment expenses. 1040x 2013 Entertaining guests at nightclubs, athletic clubs, theaters, or sporting events. 1040x 2013 Providing meals, a hotel suite, or a car to business customers or their families. 1040x 2013 To be deductible, the expenses must meet the rules listed in Table 8-1. 1040x 2013 For details about these rules, see Publication 463. 1040x 2013 Reimbursing your employees for expenses. 1040x 2013   You generally can deduct the amount you reimburse your employees for travel and entertainment expenses. 1040x 2013 The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. 1040x 2013 For details, see chapter 11 in Publication 535. 1040x 2013 That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. 1040x 2013 Business Use of Your Home To deduct expenses related to the part of your home used for business, you must meet specific requirements. 1040x 2013 Even then, your deduction may be limited. 1040x 2013 To qualify to claim expenses for business use of your home, you must meet the following tests. 1040x 2013 Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use , later), Regular, For your business, and The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your business, or A separate structure (not attached to your home) you use in connection with your business. 1040x 2013 Exclusive use. 1040x 2013   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. 1040x 2013 The area used for business can be a room or other separately identifiable space. 1040x 2013 The space does not need to be marked off by a permanent partition. 1040x 2013   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. 1040x 2013 Example. 1040x 2013 You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. 1040x 2013 Your family also uses the den for recreation. 1040x 2013 The den is not used exclusively in your profession, so you cannot claim a business deduction for its use. 1040x 2013 Exceptions to exclusive use. 1040x 2013   You do not have to meet the exclusive use test if you use part of your home in either of the following ways. 1040x 2013 For the storage of inventory or product samples. 1040x 2013 As a daycare facility. 1040x 2013 For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). 1040x 2013 Regular use. 1040x 2013   To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. 1040x 2013 You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose. 1040x 2013 Principal place of business. 1040x 2013   You can have more than one business location, including your home, for a single trade or business. 1040x 2013 To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. 1040x 2013 To determine your principal place of business, you must consider all the facts and circumstances. 1040x 2013   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. 1040x 2013 You use it exclusively and regularly for administrative or management activities of your business. 1040x 2013 You have no other fixed location where you conduct substantial administrative or management activities of your business. 1040x 2013   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. 1040x 2013 The relative importance of the activities performed at each location. 1040x 2013 If the relative importance factor does not determine your principal place of business, you can also consider the time spent at each location. 1040x 2013   If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. 1040x 2013 However, for other ways to qualify to deduct home office expenses, see Publication 587. 1040x 2013 Deduction limit. 1040x 2013   If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. 1040x 2013 If your gross income from the business use is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. 1040x 2013   Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), allocable to the business is limited to the gross income from the business use of your home minus the sum of the following. 1040x 2013 The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). 1040x 2013 The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. 1040x 2013 Do not include in (2) above your deduction for one-half of your self-employment tax. 1040x 2013   Use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. 1040x 2013 New simplified method. 1040x 2013    The IRS now provides a simplified method to determine your expenses for business use of your home. 1040x 2013 The simplified method is an alternative to calculating and substantiating actual expenses. 1040x 2013 In most cases, you will figure your deduction by multiplying $5 by the area of your home used for a qualified business use. 1040x 2013 The area you use to figure your deduction is limited to 300 square feet. 1040x 2013 For more information, see the Instructions for Schedule C. 1040x 2013 More information. 1040x 2013   For more information on deducting expenses for the business use of your home, see Publication 587. 1040x 2013 Other Expenses You Can Deduct You may also be able to deduct the following expenses. 1040x 2013 See Publication 535 to find out whether you can deduct them. 1040x 2013 Advertising. 1040x 2013 Bank fees. 1040x 2013 Donations to business organizations. 1040x 2013 Education expenses. 1040x 2013 Energy efficient commercial buildings deduction expenses. 1040x 2013 Impairment-related expenses. 1040x 2013 Interview expense allowances. 1040x 2013 Licenses and regulatory fees. 1040x 2013 Moving machinery. 1040x 2013 Outplacement services. 1040x 2013 Penalties and fines you pay for late performance or nonperformance of a contract. 1040x 2013 Repairs that keep your property in a normal efficient operating condition. 1040x 2013 Repayments of income. 1040x 2013 Subscriptions to trade or professional publications. 1040x 2013 Supplies and materials. 1040x 2013 Utilities. 1040x 2013 Expenses You Cannot Deduct You usually cannot deduct the following as business expenses. 1040x 2013 For more information, see Publication 535. 1040x 2013 Bribes and kickbacks. 1040x 2013 Charitable contributions. 1040x 2013 Demolition expenses or losses. 1040x 2013 Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs. 1040x 2013 Lobbying expenses. 1040x 2013 Penalties and fines you pay to a governmental agency or instrumentality because you broke the law. 1040x 2013 Personal, living, and family expenses. 1040x 2013 Political contributions. 1040x 2013 Repairs that add to the value of your property or significantly increase its life. 1040x 2013 Prev  Up  Next   Home   More Online Publications