If you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.
You can generally figure the amount of your deductible car expense using one of two methods:
the standard mileage rate method or
the actual expense method.
If you qualify to use both methods, before choosing a method, you may want to figure your deduction both ways to see which gives you a larger deduction. Please refer to Publication 463, Travel, Entertainment, Gift and Car Expenses, for the current standard mileage rate. If you use the standard mileage rate, you can add to your deduction any parking fees and tolls incurred for business purposes.
To use the standard mileage rate, you must own or lease the car; the car must not be used for hire, for example as a taxi; you must not operate five or more cars at the same time, as in a fleet operation; you must not have claimed a depreciation deduction using the Modified Accelerated Cost Recovery System (MACRS) on the car in an earlier year or any method other than straight-line for its estimated useful life; you must not have claimed a Section 179 deduction or the special depreciation allowance on the car; and you must not have claimed actual expenses after 1997 for a car you leased. You cannot use the standard mileage rate if you are a rural mail carrier who received a "qualified reimbursement".
Further, to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.
However, for a car you lease, you must use the standard mileage rate method for the entire lease period. For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that are after 1997.
To use the actual expense method, you must determine what it actually costs to operate the car for business purposes. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to business miles driven.
Other car expenses for parking fees, and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.
Generally, the Modified Accelerated Cost Recovery System is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you used the standard mileage rate in the year you place the car in service, and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight–line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct.
Travel, Entertainment, Gift, and Car Expenses, explains the depreciation limits, and it discusses special rules applicable to leased cars.
The law requires that you substantiate your expenses by adequate records or by sufficient evidence to support your own statement.
If you are an employee whose deductible business expenses are fully reimbursed under an accountable plan, i.e., a plan that meets the 3 accountable plan requirements, the reimbursements should not be included in your wages on your Form W-2, and you should not deduct the expenses.
If your employer uses a non–accountable plan to reimburse you for the expenses, the reimbursements are includable in your wages. Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a non–accountable plan with your wages, salary, or other compensation and report the total on your Form W–2. Your employee business expenses may be deductible as an itemized deduction. For a definition of Accountable and Non–Accountable plans, refer to Publication 463 and Topic 514.
Showing posts with label Business Expenses. Show all posts
Showing posts with label Business Expenses. Show all posts
Thursday, October 16, 2008
Business Travel Expenses
Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.
You cannot deduct expenses that are lavish or extravagant or that are for personal purposes.
You are traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away.
Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals, or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.
In determining which is your main place of business, take into account the length of time you are normally required to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time spent at each location.
Travel expenses paid or incurred in connection with a temporary work assignment away from home are deductible. However, travel expenses paid in connection with an indefinite work assignment are not deductible. Any work assignment in excess of one year is considered indefinite.
Also, you may not deduct travel expenses at a work location if it is realistically expected that you will work there for more than one year, whether or not you actually work there that long. If you realistically expect to work at a temporary location for less than one year, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.
You may deduct travel expenses, including meals and lodging, you had in looking for a new job in your present trade or business. You may not deduct these expenses if you had them while looking for work in a new trade or business or while looking for work for the first time. If you are unemployed and there is a substantial break between the time of your past work and your looking for new work, you may not deduct these expenses, even if the new work is in the same trade or business as your previous work.
Travel expenses for conventions are deductible if you can show that your attendance benefits your trade or business. Special rules apply to conventions held outside the North American area.
Deductible travel expenses while away from home include, but are not limited to, the costs of:
Travel by airplane, train, bus, or car between your home and your business destination
Using your car while at your business destination
Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another
Meals and lodging
Tips you pay for services related to any of these expenses
Generally, employees deduct these expenses using Form 2106 (PDF) or Form 2106-EZ (PDF) and on Form 1040, Schedule A (PDF).
Instead of keeping records of your meal expenses and deducting the actual cost, you can generally use a standard meal allowance, which varies depending on where you travel.
The deduction for business meals is generally limited to 50% of the unreimbursed cost.
If you are an employee, your allowable travel expenses are figured on Form 2106 or Form 2106–EZ. Your allowable unreimbursed expenses are carried from Form 2106 or Form 2106–EZ to Form l040 Schedule A, and are subject to a limit based on 2% of adjusted gross income. Refer to Topic 508 for information on the 2% limit. If you do not itemize your deductions, you cannot deduct these expenses. If you are self–employed, travel expenses are deductible on Form 1040, Schedule C (PDF), Form 1040, Schedule C-EZ (PDF) or, if you are a farmer, Form 1040, Schedule F (PDF).
Good records are essential. Refer to Topic 305 for information on record keeping.
For more information on travel expenses, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses. If you are a member of the National Guard or military reserve you may be able to claim a deduction from income rather than an itemized deduction on Form 1040, Schedule A, for unreimbursed travel expense. To qualify the travel must be: overnight, more than 100 miles from your home, and for drill or meetings. Expenses must be ordinary and necessary. This deduction is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. These expenses are claimed on Form 2106/Form 2106-EZ and carried to the appropriate line on Form 1040. Expenses in excess of the limit can be claimed only as an itemized deduction on Form 1040, Schedule A.
You cannot deduct expenses that are lavish or extravagant or that are for personal purposes.
You are traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away.
Generally, your tax home is the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. For example, you live with your family in Chicago but work in Milwaukee where you stay in a hotel and eat in restaurants. You return to Chicago every weekend. You may not deduct any of your travel, meals, or lodging in Milwaukee because that is your tax home. Your travel on weekends to your family home in Chicago is not for your work, so these expenses are also not deductible. If you regularly work in more than one place, your tax home is the general area where your main place of business or work is located.
In determining which is your main place of business, take into account the length of time you are normally required to spend at each location for business purposes, the degree of business activity in each area, and the relative significance of the financial return from each area. However, the most important consideration is the length of time spent at each location.
Travel expenses paid or incurred in connection with a temporary work assignment away from home are deductible. However, travel expenses paid in connection with an indefinite work assignment are not deductible. Any work assignment in excess of one year is considered indefinite.
Also, you may not deduct travel expenses at a work location if it is realistically expected that you will work there for more than one year, whether or not you actually work there that long. If you realistically expect to work at a temporary location for less than one year, and the expectation changes so that at some point you realistically expect to work there for more than one year, travel expenses become nondeductible when your expectation changes.
You may deduct travel expenses, including meals and lodging, you had in looking for a new job in your present trade or business. You may not deduct these expenses if you had them while looking for work in a new trade or business or while looking for work for the first time. If you are unemployed and there is a substantial break between the time of your past work and your looking for new work, you may not deduct these expenses, even if the new work is in the same trade or business as your previous work.
Travel expenses for conventions are deductible if you can show that your attendance benefits your trade or business. Special rules apply to conventions held outside the North American area.
Deductible travel expenses while away from home include, but are not limited to, the costs of:
Travel by airplane, train, bus, or car between your home and your business destination
Using your car while at your business destination
Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another
Meals and lodging
Tips you pay for services related to any of these expenses
Generally, employees deduct these expenses using Form 2106 (PDF) or Form 2106-EZ (PDF) and on Form 1040, Schedule A (PDF).
Instead of keeping records of your meal expenses and deducting the actual cost, you can generally use a standard meal allowance, which varies depending on where you travel.
The deduction for business meals is generally limited to 50% of the unreimbursed cost.
If you are an employee, your allowable travel expenses are figured on Form 2106 or Form 2106–EZ. Your allowable unreimbursed expenses are carried from Form 2106 or Form 2106–EZ to Form l040 Schedule A, and are subject to a limit based on 2% of adjusted gross income. Refer to Topic 508 for information on the 2% limit. If you do not itemize your deductions, you cannot deduct these expenses. If you are self–employed, travel expenses are deductible on Form 1040, Schedule C (PDF), Form 1040, Schedule C-EZ (PDF) or, if you are a farmer, Form 1040, Schedule F (PDF).
Good records are essential. Refer to Topic 305 for information on record keeping.
For more information on travel expenses, refer to Publication 463, Travel, Entertainment, Gift and Car Expenses. If you are a member of the National Guard or military reserve you may be able to claim a deduction from income rather than an itemized deduction on Form 1040, Schedule A, for unreimbursed travel expense. To qualify the travel must be: overnight, more than 100 miles from your home, and for drill or meetings. Expenses must be ordinary and necessary. This deduction is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. These expenses are claimed on Form 2106/Form 2106-EZ and carried to the appropriate line on Form 1040. Expenses in excess of the limit can be claimed only as an itemized deduction on Form 1040, Schedule A.
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