Table of Contents
Standard mileage rate. For 2008, the standard mileage rate for the cost of operating your car for business use is:
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50½ cents per mile for the period January 1 through June 30, 2008, and
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58½ cents per mile for the period July 1 through December 31, 2008.
Car expenses and use of the standard mileage rate are explained under Transportation Expenses, later.
Depreciation limits on cars, trucks, and vans. For 2008, the first-year limit on the total section 179 deduction, special depreciation allowance, and depreciation deduction for cars has increased to $10,960 ($2,960 if you elect not to claim the special depreciation allowance). For trucks and vans the first-year limit has increased to $11,160 ($3,160 if you elect not to claim the special depreciation allowance). For more information see Depreciation limits in Publication 463.
Special depreciation allowance. Generally, new cars, trucks, and vans, purchased and placed in service in 2008 qualify for the special depreciation allowance. The special allowance is a depreciation deduction equal to 50% of the adjusted basis of the vehicle. For more information see Special Depreciation Allowance in Publication 463.
Meal expenses when subject to “hours of service” limits. Generally, you can deduct 50% of your business-related meal expenses while traveling away from home for business purposes. You can deduct a higher percentage if the meals take place during or incident to the Department of Transportation's (DOT) “hours of service” limits. (These limits apply to certain workers who are subject to certain federal regulations.) For 2008, the percentage is increased to 80%. See Exceptions to the 50% limit, under 50% Limit, later.
You may be able to deduct the ordinary and necessary business-related expenses you have for:
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Travel,
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Entertainment,
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Gifts, or
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Transportation.
An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.
This chapter explains the following.
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What expenses are deductible.
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How to report your expenses on your return.
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What records you need to prove your expenses.
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How to treat any expense reimbursements you may receive.
Publication
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463 Travel, Entertainment, Gift, and Car Expenses
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535 Business Expenses
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1542 Per Diem Rates
Form (and Instructions)
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Schedule A (Form 1040) Itemized Deductions
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Schedule C (Form 1040) Profit or Loss From Business
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Schedule C-EZ (Form 1040) Net Profit From Business
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Schedule F (Form 1040) Profit or Loss From Farming
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Form 2106 Employee Business Expenses
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Form 2106-EZ Unreimbursed Employee Business Expenses
If you temporarily travel away from your tax home, you can use this section to determine if you have deductible travel expenses. This section discusses:
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Traveling away from home,
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Tax home,
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Temporary assignment or job, and
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What travel expenses are deductible.
It also discusses the standard meal allowance, rules for travel inside and outside the United States, and deductible convention expenses.
You are traveling away from home if:
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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, and
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You need to sleep or rest to meet the demands of your work while away from home.
This rest requirement is not satisfied by merely napping in your car. You do not have to be away from your tax home for a whole day or from dusk to dawn as long as your relief from duty is long enough to get necessary sleep or rest.
Example 1.
You are a railroad conductor. You leave your home terminal on a regularly scheduled round-trip run between two cities and return home 16 hours later. During the run, you have 6 hours off at your turnaround point where you eat two meals and rent a hotel room to get necessary sleep before starting the return trip. You are considered to be away from home.
Example 2.
You are a truck driver. You leave your terminal and return to it later the same day. You get an hour off at your turnaround point to eat. Because you are not off to get necessary sleep and the brief time off is not an adequate rest period, you are not traveling away from home.
To determine whether you are traveling away from home, you must first determine the location of your tax home.
Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.
If you have more than one regular place of business, your tax home is your main place of business. See Main place of business or work, later.
If you do not have a regular or a main place of business because of the nature of your work, then your tax home may be the place where you regularly live. See No main place of business or work, later.
If you do not have a regular or a main place of business or post of duty and there is no place where you regularly live, you are considered an itinerant (a transient) and your tax home is wherever you work. As an itinerant, you cannot claim a travel expense deduction because you are never considered to be traveling away from home.
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The total time you ordinarily spend in each place.
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The level of your business activity in each place.
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Whether your income from each place is significant or insignificant.
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You perform part of your business in the area of your main home and use that home for lodging while doing business in the area.
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You have living expenses at your main home that you duplicate because your business requires you to be away from that home.
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You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or you often use that home for lodging.
Example.
You are single and live in Boston in an apartment you rent. You have worked for your employer in Boston for a number of years. Your employer enrolls you in a 12-month executive training program. You do not expect to return to work in Boston after you complete your training.
During your training, you do not do any work in Boston. Instead, you receive classroom and on-the-job training throughout the United States. You keep your apartment in Boston and return to it frequently. You use your apartment to conduct your personal business. You also keep up your community contacts in Boston. When you complete your training, you are transferred to Los Angeles.
You do not satisfy factor (1) because you did not work in Boston. You satisfy factor (2) because you had duplicate living expenses. You also satisfy factor (3) because you did not abandon your apartment in Boston as your main home, you kept your community contacts, and you frequently returned to live in your apartment. You have a tax home in Boston.
Example 1.
You are a truck driver and you and your family live in Tucson. You are employed by a trucking firm that has its terminal in Phoenix. At the end of your long runs, you return to your home terminal in Phoenix and spend one night there before returning home. You cannot deduct any expenses you have for meals and lodging in Phoenix or the cost of traveling from Phoenix to Tucson. This is because Phoenix is your tax home.
Example 2.
Your family home is in Pittsburgh, where you work 12 weeks a year. The rest of the year you work for the same employer in Baltimore. In Baltimore, you eat in restaurants and sleep in a rooming house. Your salary is the same whether you are in Pittsburgh or Baltimore.
Because you spend most of your working time and earn most of your salary in Baltimore, that city is your tax home. You cannot deduct any expenses you have for meals and lodging there. However, when you return to work in Pittsburgh, you are away from your tax home even though you stay at your family home. You can deduct the cost of your round trip between Baltimore and Pittsburgh. You can also deduct your part of your family's living expenses for meals and lodging while you are living and working in Pittsburgh.
You may regularly work at your tax home and also work at another location. It may not be practical to return to your tax home from this other location at the end of each work day.
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For the federal government,
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In a temporary duty status, and
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To investigate or prosecute, or provide support services for the investigation or prosecution of a federal crime.
Once you have determined that you are traveling away from your tax home, you can determine what travel expenses are deductible.
You can deduct ordinary and necessary expenses you have when you travel away from home on business. The type of expense you can deduct depends on the facts and your circumstances.
Table 26-1 summarizes travel expenses you may be able to deduct. You may have other deductible travel expenses that are not covered there, depending on the facts and your circumstances.
When you travel away from home on business, you should keep records of all the expenses you have and any advances you receive from your employer. You can use a log, diary, notebook, or any other written record to keep track of your expenses. The types of expenses you need to record, along with supporting documentation, are described in Table 26-2, later.-
Is your employee,
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Has a bona fide business purpose for the travel, and
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Would otherwise be allowed to deduct the travel expenses.
Example.
Jerry drives to Chicago on business and takes his wife, Linda, with him. Linda is not Jerry's employee. Linda occasionally types notes, performs similar services, and accompanies Jerry to luncheons and dinners. The performance of these services does not establish that her presence on the trip is necessary to the conduct of Jerry's business. Her expenses are not deductible.
Jerry pays $199 a day for a double room. A single room costs $149 a day. He can deduct the total cost of driving his car to and from Chicago, but only $149 a day for his hotel room. If he uses public transportation, he can deduct only his fare.
IF you have expenses for... | THEN you can deduct the cost of... |
transportation | travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship, see Luxury Water Travel and Cruise ships (under Conventions) in Publication 463 for additional rules and limits. |
taxi, commuter bus, and airport limousine | fares for these and other types of transportation that take you between:
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baggage and shipping | sending baggage and sample or display material between your regular and temporary work locations. |
car | operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. |
lodging and meals | your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. See Meals and Incidental Expenses for additional rules and limits. |
cleaning | dry cleaning and laundry. |
telephone | business calls while on your business trip. This includes business communication by fax machine or other communication devices. |
tips | tips you pay for any expenses in this chart. |
other | other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer. |
You can deduct the cost of meals in either of the following situations.
Business-related entertainment is discussed under Entertainment Expenses, later. The following discussion deals only with meals (and incidental expenses) that are not business-related entertainment.
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Fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and hotel servants in foreign countries,
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Transportation between places of lodging or business and places where meals are taken, if suitable meals can be obtained at the temporary duty site, and
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Mailing costs associated with filing travel vouchers and payment of employer-sponsored charge card billings.
www.gsa.gov. Click on “Federal Travel Regulation (FTR)” for changes affecting claims for reimbursement of these expenses.
http://perdiem.hqda.pentagon.mil/perdiem/perdiemrates.html. You can access all other foreign per diem rates at:
www.state.gov/travelandbusiness.
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Directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and
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Regularly requires you to travel away from home and, during any single trip, usually involves travel to areas eligible for different standard meal allowance rates.
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Method 1: You can claim of the standard meal allowance.
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Method 2: You can prorate using any method that you consistently apply and that is in accordance with reasonable business practice.
Example.
Jen is employed in New Orleans as a convention planner. In March, her employer sent her on a 3-day trip to Washington, DC, to attend a planning seminar. She left her home in New Orleans at 10 a.m. on Wednesday and arrived in Washington, DC, at 5:30 p.m. After spending two nights there, she flew back to New Orleans on Friday and arrived back home at 8:00 p.m. Jen's employer gave her a flat amount to cover her expenses and included it with her wages.
Under Method 1, Jen can claim 2½ days of the standard meal allowance for Washington, DC: of the daily rate for Wednesday and Friday (the days she departed and returned), and the full daily rate for Thursday.
Under Method 2, Jen could also use any method that she applies consistently and that is in accordance with reasonable business practice. For example, she could claim 3 days of the standard meal allowance even though a federal employee would have to use method 1 and be limited to only 2½ days.
The following discussion applies to travel in the United States. For this purpose, the United States includes the 50 states and the District of Columbia. The treatment of your travel expenses depends on how much of your trip was business related and on how much of your trip occurred within the United States. See Part of Trip Outside the United States, later.
You can deduct all your travel expenses if your trip was entirely business related. If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct your business-related travel expenses. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination.
Example.
You work in Atlanta and take a business trip to New Orleans. On your way home, you stop in Mobile to visit your parents. You spend $1,920 for the 9 days you are away from home for travel, meals, lodging, and other travel expenses. If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $1,620. You can deduct $1,620 for your trip, including the cost of round-trip transportation to and from New Orleans. The deduction for your meals is subject to the 50% limit on meals mentioned earlier.
If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. However, you can deduct any expenses you have while at your destination that are directly related to your business.
A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business. The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip.
If part of your trip is outside the United States, use the rules described later under Travel Outside the United States for that part of the trip. For the part of your trip that is inside the United States, use the rules for travel in the United States. Travel outside the United States does not include travel from one point in the United States to another point in the United States. The following discussion can help you determine whether your trip was entirely within the United States.
Example.
You fly from New York to Puerto Rico with a scheduled stop in Miami. You return to New York nonstop. The flight from New York to Miami is in the United States, so only the flight from Miami to Puerto Rico is outside the United States. Because there are no scheduled stops between Puerto Rico and New York, all of the return trip is outside the United States.
Example.
You travel by car from Denver to Mexico City and return. Your travel from Denver to the border and from the border back to Denver is travel in the United States, and the rules in this section apply. The rules under Travel Outside the United States apply to your trip from the border to Mexico City and back to the border.
If any part of your business travel is outside the United States, some of your deductions for the cost of getting to and from your destination may be limited. For this purpose, the United States includes the 50 states and the District of Columbia.
How much of your travel expenses you can deduct depends in part upon how much of your trip outside the United States was business related.
See chapter 1 of Publication 463 for information on luxury water travel.
You can deduct all your travel expenses of getting to and from your business destination if your trip is entirely for business or considered entirely for business.
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Are an employee who was reimbursed or paid a travel expense allowance,
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Are not related to your employer, and
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Are not a managing executive.
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You were outside the United States for more than a week, and
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You spent less than 25% of the total time you were outside the United States on nonbusiness activities.
If you travel outside the United States primarily for business but spend some of your time on nonbusiness activities, you generally cannot deduct all of your travel expenses. You can only deduct the business portion of your cost of getting to and from your destination. You must allocate the costs between your business and nonbusiness activities to determine your deductible amount. These travel allocation rules are discussed in chapter 1 of Publication 463.
You do not have to allocate your travel expense deduction if you meet one of the four exceptions listed earlier under Travel considered entirely for business. In those cases, you can deduct the total cost of getting to and from your destination.If you travel outside the United States primarily for vacation or for investment purposes, the entire cost of the trip is a nondeductible personal expense. If you spend some time attending brief professional seminars or a continuing education program, you can deduct your registration fees and other expenses you have that are directly related to your business.
You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade or business. You cannot deduct the travel expenses for your family.
If the convention is for investment, political, social, or other purposes unrelated to your trade or business, you cannot deduct the expenses.
Your appointment or election as a delegate does not, in itself, determine whether you can deduct travel expenses. You can deduct your travel expenses only if your attendance is connected to your own trade or business.You may be able to deduct business-related entertainment expenses you have for entertaining a client, customer, or employee.
You can deduct entertainment expenses only if they are both ordinary and necessary (defined earlier in the Introduction) and meet one of the following tests.
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Directly-related test.
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Associated test.
Both of these tests are explained in chapter 2 of Publication 463.
The amount you can deduct for entertainment expenses may be limited. Generally, you can deduct only 50% of your unreimbursed entertainment expenses. This limit is discussed next.In general, you can deduct only 50% of your business-related meal and entertainment expenses. (If you are subject to the Department of Transportation's “hours of service” limits, you can deduct a higher percentage. See Individuals subject to “hours of service” limits, later.)
The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed.
Figure 26-A summarizes the general rules explained in this section.
The 50% limit applies to business meals or entertainment expenses you have while:
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Traveling away from home (whether eating alone or with others) on business,
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Entertaining customers at your place of business, a restaurant, or other location, or
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Attending a business convention or reception, business meeting, or business luncheon at a club.
Generally, business-related meal and entertainment expenses are subject to the 50% limit. Figure 26-A can help you determine if the 50% limit applies to you.
Your meal or entertainment expense is not subject to the 50% limit if the expense meets one of the following exceptions.
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Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations.
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Interstate truck operators and bus drivers who are under Department of Transportation regulations.
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Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations.
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Certain merchant mariners who are under Coast Guard regulations.
This section explains different types of entertainment expenses that you my be able to deduct.
This section explains different types of entertainment expenses that you generally may not be able to deduct.
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Business,
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Pleasure,
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Recreation, or
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Other social purpose.
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To conduct entertainment activities for members or their guests, or
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To provide members or their guests with access to entertainment facilities.
If you give gifts in the course of your trade or business, you can deduct all or part of the cost. This section explains the limits and rules for deducting the costs of gifts.
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An item that costs $4 or less and:
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Signs, display racks, or other promotional material to be used on the business premises of the recipient.
This section discusses expenses you can deduct for business transportation when you are not traveling away from home as defined earlier under Travel Expenses. These expenses include the cost of transportation by air, rail, bus, taxi, etc., and the cost of driving and maintaining your car.
Transportation expenses include the ordinary and necessary costs of all of the following.
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Getting from one workplace to another in the course of your business or profession when you are traveling within the area of your tax home. (Tax home is defined earlier under Travel Expenses.)
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Visiting clients or customers.
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Going to a business meeting away from your regular workplace.
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Getting from your home to a temporary workplace when you have one or more regular places of work. These temporary workplaces can be either within the area of your tax home or outside that area.
Transportation expenses do not include expenses you have while traveling away from home overnight. Those expenses are travel expenses, which are discussed earlier. However, if you use your car while traveling away from home overnight, use the rules in this section to figure your car expense deduction. See Car Expenses, later.
Example.
You had a telephone installed in your car. You sometimes use that telephone to make business calls while commuting to and from work. Sometimes business associates ride with you to and from work, and you have a business discussion in the car. These activities do not change the trip from personal to business. You cannot deduct your commuting expenses.
Example 1.
You regularly work in an office in the city where you live. Your employer sends you to a one-week training session at a different office in the same city. You travel directly from your home to the training location and return each day. You can deduct the cost of your daily round-trip transportation between your home and the training location.
Example 2.
Your principal place of business is in your home. You can deduct the cost of round-trip transportation between your qualifying home office and your client's or customer's place of business.
Example 3.
You have no regular office, and you do not have an office in your home. In this case, the location of your first business contact is considered your office. Transportation expenses between your home and this first contact are nondeductible commuting expenses. Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. Although you cannot deduct the costs of these first and last trips, you can deduct the costs of going from one client or customer to another.
If you use your car for business purposes, you may be able to deduct car expenses. You generally can use one of the two following methods to figure your deductible expenses.
If you use actual car expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments that you can deduct. See Leasing a car under Actual Car Expenses, later.
In this chapter, “car” includes a van, pickup, or panel truck.
You may be entitled to a tax credit for an alternative motor vehicle that you place in service during the year. The vehicle must meet certain requirements, and you do not have to use it in your business to qualify for the credit. For more information, see chapter 37.-
It is given as an equipment maintenance allowance (EMA) to employees of the U.S. Postal Service.
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It is at the rate contained in the 1991 collective bargaining agreement. Any later agreement cannot increase the qualified reimbursement amount by more than the rate of inflation.
You may be able to use the standard mileage rate to figure the deductible costs of operating your car for business purposes. For 2008, the standard mileage rate for each mile of business use is:
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50½ cents per mile for the period January 1 through June 30, 2008, and
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58½ cents per mile for the period July 1 through December 31, 2008.
If you use the standard mileage rate for a year, you cannot deduct your actual car expenses for that year, but see Parking fees and tolls, later.
You generally can use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. See Reimbursements under How To Report, later.
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Use the car for hire (such as a taxi),
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Use five or more cars at the same time (as in fleet operations),
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Claimed a depreciation deduction for the car using any method other than straight line depreciation,
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Claimed a section 179 deduction on the car,
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Claimed the special depreciation allowance on the car,
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Claimed actual car expenses after 1997 for a car you leased, or
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Are a rural mail carrier who received a qualified reimbursement. (See Rural mail carriers, earlier.)
If you do not use the standard mileage rate, you may be able to deduct your actual car expenses.
If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction.
Actual car expenses include:
Depreciation | Lease | Registration |
Garage rent | payments | fees |
Gas | Licenses | Repairs |
Insurance | Oil | Tires |
Parking fees | Tolls |
If you sell, trade in, or otherwise dispose of your car, you may have a taxable gain or a deductible loss. This is true whether you used the standard mileage rate or actual car expenses to deduct the business use of your car. Publication 544 has information on sales of property used in a trade or business, and details on how to report the disposition.
If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove (substantiate) certain elements of the expense. This section discusses the records you need to keep to prove these expenses.
If you keep timely and accurate records, you will have support to show the IRS if your tax return is ever examined. You will also have proof of expenses that your employer may require if you are reimbursed under an accountable plan. These plans are discussed later under Reimbursements.Table 26-2 is a summary of records you need to prove each expense discussed in this chapter. You must be able to prove the elements listed across the top portion of the chart. You prove them by having the information and receipts (where needed) for the expenses listed in the first column.
You cannot deduct amounts that you approximate or estimate.You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You must generally prepare a written record for it to be considered adequate. This is because written evidence is more reliable than oral evidence alone. However, if you prepare a record on a computer it is considered an adequate record.
You should keep the proof you need in an account book, diary, statement of expense, or similar record. You should also keep documentary evidence that, together with your records, will support each element of an expense.
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You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan and you use a per diem allowance method that includes meals and/or lodging. (Accountable plans and per diem allowances are discussed later under Reimbursements. )
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Your expense, other than lodging, is less than $75.
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You have a transportation expense for which a receipt is not readily available.
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The name and location of the hotel.
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The dates you stayed there.
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Separate amounts for charges such as lodging, meals, and telephone calls.
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The name and location of the restaurant.
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The number of people served.
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The date and amount of the expense.
If you do not have complete records to prove an element of an expense, then you must prove the element with:
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Your own written or oral statement, containing specific information about the element, and
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Other supporting evidence that is sufficient to establish the element.
This section explains when expenses must be kept separate and when expenses can be combined.
You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep your records that support your deduction (or an item of income) for 3 years from the date you file the income tax return on which the deduction is claimed. A return filed early is considered filed on the due date. For a more complete explanation, get Publication 583, Starting a Business and Keeping Records.
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You claim deductions for expenses that are more than reimbursements.
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Your expenses are reimbursed under a nonaccountable plan.
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Your employer does not use adequate accounting procedures to verify expense accounts.
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You are related to your employer, as defined later under Related to employer.
This section explains where and how to report the expenses discussed in this chapter. It discusses reimbursements and how to treat them under accountable and nonaccountable plans. It also explains rules for independent contractors and clients, fee-basis officials, certain performing artists, Armed Forces reservists, and certain disabled employees. This section ends with an illustration of how to report travel, entertainment, gift, and car expenses on Form 2106-EZ.
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You are an employee deducting expenses attributable to your job.
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You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements).
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If you claim car expenses, you use the standard mileage rate.
This section explains what to do when you receive an advance or are reimbursed for any of the employee business expenses discussed in this chapter.
IF you have expenses for... | THEN you must keep records that show details of the following elements... | |||
Amount | Time | Place or Description | Business Purpose and Business Relationship |
|
Travel | Cost of each separate expense for travel, lodging, and meals. Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. | Dates you left and returned for each trip and number of days spent on business. | Destination or area of your travel (name of city, town, or other designation). | Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Relationship: N/A |
Entertainment | Cost of each separate expense. Incidental expenses such as taxis, telephones, etc., may be totaled on a daily basis. | Date of entertainment. (Also see Business Purpose.) | Name and address or location of place of entertainment. Type of entertainment if not otherwise apparent. (Also see Business Purpose.) | Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. For entertainment, the nature of
the business discussion or activity. If the entertainment was directly before or after a business discussion: the date, place,
nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion
and the entertainment activity. Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal. |
Gifts |
Cost of the gift. |
Date of the gift. |
Description of the gift. |
|
Transportation | Cost of each separate expense. For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year. | Date of the expense. For car expenses, the date of the use of the car. | Your business destination. | Purpose: Business purpose for the expense. Relationship: N/A |
If you received an advance, allowance, or reimbursement for your expenses, how you report this amount and your expenses depends on whether the reimbursement was paid to you under an accountable plan or a nonaccountable plan.
This section explains the two types of plans, how per diem and car allowances simplify proving the amount of your expenses, and the tax treatment of your reimbursements and expenses.
To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules.
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Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
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You must adequately account to your employer for these expenses within a reasonable period of time.
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You must return any excess reimbursement or allowance within a reasonable period of time.
See Adequate Accounting and Returning Excess Reimbursements , later.
An excess reimbursement or allowance is any amount you are paid that is more than the business-related expenses that you adequately accounted for to your employer.
The definition of a reasonable period of time depends on the facts and circumstances of your situation. However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time.
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You receive an advance within 30 days of the time you have an expense.
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You adequately account for your expenses within 60 days after they were paid or incurred.
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You return any excess reimbursement within 120 days after the expense was paid or incurred.
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You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement.
Example.
Your employer's plan reimburses you for travel expenses while away from home on business and also for meals when you work late at the office, even though you are not away from home. The part of the arrangement that reimburses you for the nondeductible meals when you work late at the office is treated as paid under a nonaccountable plan.
One of the rules for an accountable plan is that you must adequately account to your employer for your expenses. You adequately account by giving your employer a statement of expense, an account book, a diary, or a similar record in which you entered each expense at or near the time you had it, along with documentary evidence (such as receipts) of your travel, mileage, and other employee business expenses. (See Table 26-2, earlier, for details you need to enter in your record and documents you need to prove certain expenses.) A per diem or car allowance satisfies the adequate accounting requirement under certain conditions. See Per Diem and Car Allowances , later.
You must account for all amounts you received from your employer during the year as advances, reimbursements, or allowances. This includes amounts you charged to your employer by credit card or other method. You must give your employer the same type of records and supporting information that you would have to give to the IRS if the IRS questioned a deduction on your return. You must pay back the amount of any reimbursement or other expense allowance for which you do not adequately account or that is more than the amount for which you accounted.
If your employer reimburses you for your expenses using a per diem or car allowance, you can generally use the allowance as proof of the amount of your expenses. A per diem or car allowance satisfies the adequate accounting requirements for the amount of your expenses only if all of the following conditions apply.
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Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade or business.
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The allowance is similar in form to and not more than the federal rate (discussed later).
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You prove the time (dates), place, and business purpose of your expenses to your employer (as explained in Table 26-2) within a reasonable period of time.
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You are not related to your employer (as defined next). If you are related to your employer, you must be able to prove your expenses to the IRS even if you have already adequately accounted to your employer and returned any excess reimbursement.
If the IRS finds that an employer's travel allowance practices are not based on reasonably accurate estimates of travel costs (including recognition of cost differences in different areas for per diem amounts), you will not be considered to have accounted to your employer. In this case, you must be able to prove your expenses to the IRS.
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Your employer is your brother or sister, half brother or half sister, spouse, ancestor, or lineal descendant,
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Your employer is a corporation in which you own, directly or indirectly, more than 10% in value of the outstanding stock, or
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Certain relationships (such as grantor, fiduciary, or beneficiary) exist between you, a trust, and your employer.
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Provides you with lodging (furnishes it in kind).
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Reimburses you, based on your receipts, for the actual cost of your lodging.
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Pays the hotel, motel, etc., directly for your lodging.
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Does not have a reasonable belief that you had (or will have) lodging expenses, such as when you stay with friends or relatives or sleep in the cab of your truck.
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Figures the allowance on a basis similar to that used in computing your compensation, such as number of hours worked or miles traveled.
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Method 1:
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For the day you depart, add of the standard meal allowance amount for that day.
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For the day you return, add of the standard meal allowance amount for the preceding day.
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Method 2: Prorate the standard meal allowance using any method that you consistently apply and that is in accordance with reasonable business practice.
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50½ cents per mile for the period January 1 through June 30, 2008, and
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58½ cents per mile for the period July 1 through December 31, 2008.
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The federal rate.
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Whether the allowance or your actual expenses were more than the federal rate.
Example.
Nicole drives 10,000 miles in 2008 for business (4,500 miles from January 1 through June 30, 2008, and 5,500 miles from July 1 through December 31, 2008). Under her employer's accountable plan, she accounts for the time (dates), place, and business purpose of each trip. Her employer pays her a mileage allowance of 40 cents a mile.
Since Nicole's $5,491 expense computed under the standard mileage rate (4,500 miles × 50½ cents + 5,500 miles × 58½ cents) is more than her $4,000 reimbursement (10,000 miles × 40 cents), she itemizes her deductions to claim the excess expense. Nicole completes Form 2106 (showing all of her expenses and reimbursements) and enters $1,491 ($5,491 − $4,000) as an itemized deduction.
Example.
Joe lives and works in Austin. In May his employer sent him to San Diego for 4 days and paid the hotel directly for Joe's hotel bill. The employer reimbursed Joe $75 a day for his meals and incidental expenses. The federal rate for San Diego is $64 a day.
Joe can prove that his actual meal expenses totaled $380. His employer's accountable plan will not pay more than $75 a day for travel to San Diego, so Joe does not give his employer the records that prove that he actually spent $380. However, he does account for the time, place, and business purpose of the trip. This is Joe's only business trip this year.
Joe was reimbursed $300 ($75 × 4 days), which is $44 more than the federal rate of $256 ($64 × 4 days). His employer includes the $44 as income on Joe's Form W-2 in box 1. His employer also enters $256 in box 12 of Joe's Form W-2.
Joe completes Form 2106 to figure his deductible expenses. He enters the total of his actual expenses for the year ($380) on Form 2106. He also enters the reimbursements that were not included in his income ($256). His total deductible expense, before the 50% limit, is $124. After he figures the 50% limit on his unreimbursed meals and entertainment, he will include the balance, $62, as an itemized deduction on Schedule A (Form 1040).
Under an accountable plan, you are required to return any excess reimbursement or other expense allowances for your business expenses to the person paying the reimbursement or allowance. Excess reimbursement means any amount for which you did not adequately account within a reasonable period of time. For example, if you received a travel advance and you did not spend all the money on business-related expenses, or you do not have proof of all your expenses, you have an excess reimbursement.
“Adequate accounting” and “reasonable period of time” were discussed earlier in this chapter.
Example.
Your employer sends you on a 5-day business trip to Phoenix in March 2008 and gives you a $400 ($80 × 5 days) advance to cover your meals and incidental expenses. The federal per diem for meals and incidental expenses for Phoenix is $59. Your trip lasts only 3 days. Under your employer's accountable plan, you must return the $160 ($80 × 2 days) advance for the 2 days you did not travel. For the 3 days you did travel you do not have to return the $63 difference between the allowance you received and the federal rate for Phoenix (($80 − $59) × 3 days). However, the $63 will be reported on your Form W-2 as wages.
A nonaccountable plan is a reimbursement or expense allowance arrangement that does not meet one or more of the three rules listed earlier under Accountable Plans.
In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan.
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Excess reimbursements you fail to return to your employer.
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Reimbursement of nondeductible expenses related to your employer's business. See Reimbursement of nondeductible expenses earlier under Accountable Plans.
If you are not sure if the reimbursement or expense allowance arrangement is an accountable or nonaccountable plan, ask your employer.
Example.
Kim's employer gives her $1,000 a month ($12,000 for the year) for her business expenses. Kim does not have to provide any proof of her expenses to her employer, and Kim can keep any funds that she does not spend.
Kim is being reimbursed under a nonaccountable plan. Her employer will include the $12,000 on Kim's Form W-2 as if it were wages. If Kim wants to deduct her business expenses, she must complete Form 2106 or 2106-EZ and itemize her deductions.
This section briefly describes how employees complete Forms 2106 and 2106-EZ. Table 26-3 explains what the employer reports on Form W-2 and what the employee reports on Form 2106. The instructions for the forms have more information on completing them.
If you are self-employed, do not file Form 2106 or 2106-EZ. Report your expenses on Schedule C, C-EZ, or F (Form 1040). See the instructions for the form that you must file.-
You are an employee deducting expenses attributable to your job.
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You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements).
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If you are claiming car expenses, you use the standard mileage rate.
IF the type of reimbursement (or other expense allowance) arrangement is under: | THEN the employer reports on Form W-2: | AND the employee reports on Form 2106: * |
An accountable plan with: | ||
Actual expense reimbursement: Adequate accounting made and excess returned. |
No amount. | No amount. |
Actual expense reimbursement: Adequate accounting and return of excess both required but excess not returned. |
The excess amount as wages in box 1. | No amount. |
Per diem or mileage allowance up to the federal rate: Adequate accounting made and excess returned. |
No amount. | All expenses and reimbursements only if excess expenses are claimed. Otherwise, form is not filed. |
Per diem or mileage allowance up to the federal rate: Adequate accounting and return of excess both required but excess not returned. |
The excess amount as wages in box 1. The amount up to the federal rate is reported only in box 12—it is not reported in box 1. | No amount. |
Per diem or mileage allowance exceeds the federal rate: Adequate accounting up to the federal rate only and excess not returned. |
The excess amount as wages in box 1. The amount up to the federal rate is reported only in box 12—it is not reported in box 1. | All expenses (and reimbursement reported on Form W-2, box 12) only if expenses in excess of the federal rate are claimed. Otherwise, form is not required. |
A nonaccountable plan with: | ||
Either adequate accounting or return of excess, or both, not required by plan | The entire amount as wages in box 1. | All expenses. |
No reimbursement plan: | The entire amount as wages in box 1. | All expenses. |
* You may be able to use Form 2106-EZ. See Completing Forms 2106 and 2106-EZ . |
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Pays you a single amount that covers meals and/or entertainment, as well as other business expenses, and
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Does not clearly identify how much is for deductible meals and/or entertainment.
Example.
Rob's employer paid him an expense allowance of $12,000 this year under an accountable plan. The $12,000 payment consisted of $5,000 for airfare and $7,000 for entertainment and car expenses. Rob's employer did not clearly show how much of the $7,000 was for the cost of deductible entertainment. Rob actually spent $14,000 during the year ($5,500 for airfare, $4,500 for entertainment, and $4,000 for car expenses).
Since the airfare allowance was clearly identified, Rob knows that $5,200 of the payment goes in Column A, line 7 of Form 2106. To allocate the remaining $7,000, Rob uses the worksheet from the instructions for Form 2106. His completed worksheet follows.
1. | Enter the total amount of reimbursements your employer gave you that were not reported to you in box 1 of Form W-2 | $7,000 |
2. | Enter the total amount of your expenses for the periods covered by this reimbursement | 8,500 |
3. | Of the amount on line 2, enter your total expense for meals and entertainment | 4,500 |
4. | Divide line 3 by line 2. Enter the result as a decimal (rounded to at least three places) | .529 |
5. | Multiply line 1 by line 4. Enter the result here and in Column B, line 7 | 3,703 |
6. | Subtract line 5 from line 1. Enter the result here and in Column A, line 7 | $3,297 |
On line 7 of Form 2106, Rob enters $8,297 ($5,000 airfare and $3,297 of the $7,000) in Column A and $3,703 (of the $7,000) in Column B.
This section discusses special rules that apply to Armed Forces reservists, government officials who are paid on a fee basis, performing artists, and disabled employees with impairment-related work expenses.
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During the tax year, you perform services in the performing arts as an employee for at least two employers.
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You receive at least $200 each from any two of these employers.
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Your related performing-arts business expenses are more than 10% of your gross income from the performance of those services.
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Your adjusted gross income is not more than $16,000 before deducting these business expenses.
Bill Wilson is an employee of Fashion Clothing Co. in Manhattan, NY. In a typical travel week, Bill leaves his home on Long Island on Monday morning and drives to Albany to exhibit the Fashion line for 3 days to prospective customers. Then he drives to Troy to show Fashion's new line of merchandise to Town Department Store, an old customer. While in Troy, he talks with Tom Brown, purchasing agent for Town Department Store, to discuss the new line. He later takes John Smith of Attire Co. out to dinner to discuss Attire Co.'s buying Fashion's new line of clothing.
Bill purchased his car on January 3, 2005. He uses the standard mileage rate for car expense purposes. He records his total mileage, business mileage, parking fees, and tolls for the year. Bill records his expenses and other pertinent information in a travel expense log (not shown). He obtains receipts for his expenses for lodging and for any other expenses of $75 or more.
During the year, Bill drove a total of 25,000 miles of which 20,000 miles were for business (11,000 miles from January 1 through June 30, and 9,000 miles from July 1 through December 31, 2008). He answers all the questions in Part II of Form 2106-EZ and figures his car expense to be $10,820 (11,000 × 50½ cents per mile ($5,555) + 9,000 × 58½ cents per mile ($5,265)).
His total employee business expenses are shown in the following table.
Type of Expense | Amount |
Parking fees and tolls | $520 |
Car expenses | 10,820 |
Meals | 3,861 |
Lodging, laundry, dry cleaning |
18,318 |
Entertainment | 3,250 |
Gifts, education, etc. | 650 |
Total | $37,419 |
Bill received an allowance of $33,000 ($2,750 per month) to help offset his expenses. Bill did not have to account to his employer for the reimbursement, and the $33,000 was included as income in box 1 of his Form W-2.
Because Bill's reimbursement was included in his income and he is using the standard mileage rate for his car expenses, he files Form 2106-EZ with his tax return. His filled-in form is shown on the next page.
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