Contents

Introduction .................. 1

What's New for 2021 ............. 2

What's New for 2022 ............. 2

Reminders ................... 2

Chapter 1. Deducting 

Business Expenses .......... 3

Chapter 2. Employees' Pay ........ 7

Chapter 3. Rent Expense ........ 11

Chapter 4. Interest ............ 13

Chapter 5. Taxes ............. 18

Chapter 6. Insurance ........... 20

Chapter 7. Costs You Can Deduct 

or Capitalize .............. 25

Chapter 8. Amortization ......... 29

Chapter 9. Depletion ........... 36

Chapter 10. Business Bad Debts .... 41

Chapter 11. Other Expenses ...... 43

Chapter 12. How To Get Tax Help ... 50

The Taxpayer Advocate Service 

(TAS) Is Here To Help You ..... 54

Index ..................... 56

Introduction

This publication discusses common business 

expenses and explains what is and is not deductible. The general rules for deducting business expenses are discussed in the opening 

chapter. The chapters that follow cover specific 

expenses and list other publications and forms 

you may need.

Note. Section references within this publication are to the Internal Revenue Code and regulation references are to the Income Tax Regulations under the Code.

Comments and suggestions. We welcome 

your comments about this publication and your 

suggestions for future editions.

You can send us comments through 

IRS.gov/FormComments. Or you can write to 

the Internal Revenue Service, Tax Forms and 

Publications, 1111 Constitution Ave. NW, 

IR-6526, Washington, DC 20224.

Although we cannot respond individually to 

each comment received, we do appreciate your 

feedback and will consider your comments and 

suggestions as we revise our tax forms, instructions, and publications. Don’t send tax questions, tax returns, or payments to the above address.

Getting answers to your tax questions. 

If you have a tax question not answered by this 

Department 

of the 

Treasury

Internal 

Revenue 

Service

Publication 535

Cat. No. 15065Z

Business 

Expenses

For use in preparing

2021 Returns

Get forms and other information faster and easier at:

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Feb 17, 2022
publication or the How To Get Tax Help section 

at the end of this publication, go to the IRS Interactive Tax Assistant page at IRS.gov/

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Future Developments

For the latest information about developments 

related to Pub. 535, such as legislation enacted 

after it was published, go to IRS.gov/Pub535.

What's New for 2021

The following items highlight some changes in 

the tax law for 2021.

Coronavirus (COVID-19) related employment tax credits have been extended and 

amended.

• The Families First Coronavirus Response 

Act (FFCRA) was amended by recent legislation. The FFCRA requirement that employers provide paid sick and family leave 

for reasons related to COVID-19 (the employer mandate) was extended per the 

COVID-related Tax Relief Act of 2020.

• The American Rescue Plan Act of 2021 

(the ARP) adds new sections 3131, 3132, 

and 3133 to the Internal Revenue Code to 

provide credits for qualified sick and family 

leave wages similar to the credits that were 

previously enacted under the FFCRA and 

amended and extended by the COVID-related Tax Relief Act of 2020.

• The Coronavirus Aid, Relief, and Economic Security (CARES) Act was amended by recent legislation.

• The ARP adds new section 3134 to the Internal Revenue Code to provide an employee retention credit similar to the credit 

that was previously enacted under the 

CARES Act and amended and extended 

by the Taxpayer Certainty and Disaster 

Tax Relief Act of 2020.

For more information, see chapter 2.

New credit for COBRA premium assistance 

payments. Section 9501 of the ARP provides 

for COBRA premium assistance in the form of a 

full reduction in the premium otherwise payable 

by certain individuals and their families who 

elect COBRA continuation coverage due to a 

loss of coverage as the result of a reduction in 

hours or an involuntary termination of employment (assistance eligible individuals).

For more information, see chapter 2.

Advance payment of COVID-19 credits extended. Based on the extensions of the credit 

for qualified sick and family leave wages and 

the employee retention credit, and the new 

credit for COBRA premium assistance payments, discussed above, Form 7200, Advance 

Payment of Employer Credits Due to 

COVID-19, may be filed to request an advance 

payment.

For the latest guidance and information 

about COVID-19 tax relief, go to IRS.gov/

Coronavirus.

For more information, see chapter 2.

Standard mileage rate. For tax year 2021, the 

standard mileage rate for the cost of operating 

your car, van, pickup, or panel truck for each 

mile of business use is 56 cents per mile. For 

more information, see chapter 11.

What's New for 2022

The following item highlights a change in the tax 

law for 2022.

Standard mileage rate. For tax year 2022, the 

standard mileage rate for the cost of operating 

your car, van, pickup, or panel truck for each 

mile of business use is 58.5 cents per mile.

Reminders

The following reminders and other items may 

help you file your tax return.

IRS e-file (Electronic Filing)

You can file your tax returns electronically 

using an IRS e-file option. The benefits of IRS 

e-file include faster refunds, increased 

accuracy, and acknowledgment of IRS receipt 

of your return. You can use one of the following 

IRS e-file options.

• Use an authorized IRS e-file provider.

• Use a personal computer.

• Visit a Volunteer Income Tax Assistance 

(VITA) or Tax Counseling for the Elderly 

(TCE) site.

For details on these fast filing methods, see 

your income tax package.

Form 1099-MISC. File Form 1099-MISC, Miscellaneous Income, for each person to whom 

you have paid during the year in the course of 

your trade or business at least $600 in rents, 

prizes and awards, other income payments, 

medical and health care payments, and crop insurance proceeds. See the Instructions for 

Forms 1099-MISC and 1099-NEC for more information and additional reporting requirements.

Form 1099-NEC. File Form 1099-NEC, Nonemployee Compensation, for each person to 

whom you have paid during the year in the 

course of your trade or business at least $600 in 

services (including parts and materials), who is 

not your employee. See the Instructions for 

Forms 1099-MISC and 1099-NEC for more information and additional reporting requirements.

Gig Economy Tax Center. The IRS Gig Economy Tax Center on IRS.gov can help people in 

this growing area meet their tax obligations 

through more streamlined information.

The gig economy is also known as the sharing, on-demand, or access economy. It usually 

includes businesses that operate an app or 

website to connect people to provide services 

to customers. While there are many types of gig 

economy businesses, ride-sharing and home 

rentals are two of the most popular.

The Gig Economy Tax Center streamlines 

various resources, making it easier for taxpayers to find information about the tax implications 

for the companies that provide the services and 

the individuals who perform them. It offers tips 

and resources on a variety of topics including:

• Filing requirements;

• Making quarterly estimated income tax 

payments;

• Paying self-employment taxes;

• Paying FICA, Medicare, and Additional 

Medicare taxes;

• Deductible business expenses; and

• Special rules for reporting vacation home 

rentals.

For more information, go to the Gig 

Economy Tax Center at IRS.gov/Gig.

Photographs of missing children. The Internal Revenue Service is a proud partner with the 

National Center for Missing & Exploited 

Children® (NCMEC). Photographs of missing 

children selected by the Center may appear in 

this publication on pages that would otherwise 

be blank. You can help bring these children 

home by looking at the photographs and calling 

1-800-THE-LOST (1-800-843-5678) (24 hours 

a day, 7 days a week) if you recognize a child.

Preventing slavery and human trafficking. 

Human trafficking is a form of modern-day slavery, and involves the use of force, fraud, or coercion to exploit human beings for some type of 

labor or commercial sex purpose. The United 

States is a source, transit, and destination 

country for men, women, and children, both 

U.S. citizens and foreign nationals, who are 

subjected to the injustices of slavery and human trafficking, including forced labor, debt 

bondage, involuntary servitude, “mail-order” 

marriages, and sex trafficking. Trafficking in 

persons can occur in both lawful and illicit industries or markets, including in hotel services, 

hospitality, agriculture, manufacturing, janitorial 

services, construction, health and elder care, 

domestic service, brothels, massage parlors, 

and street prostitution, among others.

The President’s Interagency Task Force to 

Monitor and Combat Trafficking in Persons 

(PITF) brings together federal departments and 

agencies to ensure a whole-of-government approach that addresses all aspects of human 

trafficking. Online resources for recognizing and 

reporting trafficking activities, and assisting victims include the Department of Homeland Security (DHS) Blue Campaign at DHS.gov/bluecampaign, the Department of State Office to 

Monitor and Combat Trafficking in Persons at 

State.gov/j/tip, and the National Human Trafficking Resource Center (NHTRC) at 

Page 2 Publication 535 (2021)
humantraffickinghotline.org. DHS is responsible 

for investigating human trafficking, arresting 

traffickers, and protecting victims. DHS also 

provides immigration relief to non-U.S. citizen 

victims of human trafficking. DHS uses a victimcentered approach to combating human trafficking, which places equal value on identifying 

and stabilizing victims and on investigating and 

prosecuting traffickers. Victims are crucial to investigations and prosecutions; each case and 

every conviction changes lives. DHS understands how difficult it can be for victims to come 

forward and work with law enforcement due to 

their trauma. DHS is committed to helping victims feel stable, safe, and secure.

To report suspected human trafficking, call 

the DHS domestic 24-hour toll-free number at 

866-DHS-2-ICE (866-347-2423) or 

802-872-6199 (non-toll-free international). For 

help from the NHTRC, call the National Human 

Trafficking Hotline toll free at 888-373-7888 or 

text HELP or INFO to BeFree (233733).

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) 

has issued a public advisory to financial institutions that contains red flag indicators for potential suspicious financial activity associated with 

human trafficking. If warranted, financial institutions should file a Suspicious Activity Report 

(FinCEN 112) with FinCEN to report these activities. For more information, go to Fincen.gov/

Sites/default/files/advisory/FIN-2014-A008.pdf.

1.

Deducting 

Business 

Expenses

Introduction

This chapter covers the general rules for deducting business expenses. Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the 

business is operated to make a profit.

Topics

This chapter discusses:

• What you can deduct

• How much you can deduct

• When you can deduct

• Not-for-profit activities

Useful Items

You may want to see:

Publication

 334 334 Tax Guide for Small Business

Travel, Gift, and Car Expenses

Taxable and Nontaxable Income

Miscellaneous Deductions

Net Operating Losses (NOLs) for 

Individuals, Estates, and Trusts

Accounting Periods and Methods

Corporations

Casualties, Disasters, and Thefts

Starting a Business and Keeping 

Records

Business Use of Your Home

Passive Activity and At-Risk Rules

Home Mortgage Interest

Deduction

How To Depreciate Property

Form (and Instructions)

Itemized 

Deductions

Election To Postpone

Determination as To Whether the 

Presumption Applies That an

Activity Is Engaged in for Profit

See chapter 12 for information about getting 

publications and forms.

What Can I Deduct?

To be deductible, a business expense must be 

both ordinary and necessary. An ordinary expense is one that is common and accepted in 

your industry. A necessary expense is one that 

is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

Even though an expense may be ordinary 

and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. In some cases, you may not be allowed 

to deduct the expense at all. Therefore, it is important to distinguish usual business expenses 

from expenses that include the following.

• The expenses used to figure cost of goods 

sold.

• Capital expenses.

• Personal expenses.

Cost of Goods Sold

If your business manufactures products or purchases them for resale, you must generally 

value inventory at the beginning and end of 

each tax year to determine your cost of goods 

sold. Some of your business expenses may be 

included in figuring cost of goods sold. Cost of 

goods sold is deducted from your gross receipts to figure your gross profit for the year. If 

you include an expense in the cost of goods 

sold, you cannot deduct it again as a business 

expense.

The following are types of expenses that go 

into figuring cost of goods sold.

• The cost of products or raw materials, including freight.

 463 

 525 

 529 

 536 

 538 

 542 

 547 

 583 

 587 

 925 

 936 

 946 

 Schedule A (Form 1040)

 5213 

• Storage.

• Direct labor (including contributions to pension or annuity plans) for workers who produce the products.

• Factory overhead.

Under the uniform capitalization rules, you 

must capitalize the direct costs and part of the 

indirect costs for certain production or resale 

activities. Indirect costs include rent, interest, 

taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.

This rule does not apply to small business 

taxpayers. You qualify as a small business taxpayer if you (a) have average annual gross receipts of $26 million or less for the 3 prior tax 

years, and (b) are not a tax shelter (as defined 

in section 448(d)(3)). If your business has not 

been in existence for all of the 3-tax-year period 

used in figuring average gross receipts, base 

your average on the period it has existed, and if 

your business has a predecessor entity, include 

the gross receipts of the predecessor entity 

from the 3-tax-year period when figuring average gross receipts. If your business (or predecessor entity) had short tax years for any of the 

3-tax-year period, annualize your business’ 

gross receipts for the short tax years that are 

part of the 3-tax-year period. See Pub. 538 for 

more information.

For more information, see the following 

sources.

• Cost of goods sold—chapter 6 of Pub. 

334.

• Inventories—Pub. 538.

• Uniform capitalization rules—Pub. 538 and 

section 263A and the related regulations.

Capital Expenses

You must capitalize, rather than deduct, some 

costs. These costs are a part of your investment 

in your business and are called “capital expenses.” Capital expenses are considered assets 

in your business. In general, you capitalize 

three types of costs.

• Business startup costs (see Tip below).

• Business assets.

• Improvements.

You can elect to deduct or amortize 

certain business startup costs. See 

chapters 7 and 8.

Cost recovery. Although you generally cannot 

take a current deduction for a capital expense, 

you may be able to recover the amount you 

spend through depreciation, amortization, or 

depletion. These recovery methods allow you to 

deduct part of your cost each year. In this way, 

you are able to recover your capital expense. 

See Amortization (chapter 8) and Depletion 

(chapter 9) in this publication. A taxpayer can 

elect to deduct a portion of the costs of certain 

depreciable property as a section 179 deduction. A greater portion of these costs can be deducted if the property is qualified disaster assistance property. See Pub. 946 for details.

Going Into Business

The costs of getting started in business, before 

you actually begin business operations, are 

TIP

Chapter 1 Deducting Business Expenses Page 3
capital expenses. These costs may include expenses for advertising, travel, or wages for 

training employees.

If you go into business. When you go into 

business, treat all costs you had to get your 

business started as capital expenses.

Usually, you recover costs for a particular 

asset through depreciation. Generally, you cannot recover other costs until you sell the business or otherwise go out of business. However, 

you can choose to amortize certain costs for 

setting up your business. See Starting a Business in chapter 8 for more information on business startup costs.

If your attempt to go into business is unsuccessful. If you are an individual and your 

attempt to go into business is not successful, 

the expenses you had in trying to establish 

yourself in business fall into two categories.

1. The costs you had before making a decision to acquire or begin a specific business. These costs are personal and nondeductible. They include any costs 

incurred during a general search for, or 

preliminary investigation of, a business or 

investment possibility.

2. The costs you had in your attempt to acquire or begin a specific business. These 

costs are capital expenses and you can 

deduct them as a capital loss.

If you are a corporation and your attempt to 

go into a new trade or business is not successful, you may be able to deduct all investigatory 

costs as a loss.

The costs of any assets acquired during 

your unsuccessful attempt to go into business 

are a part of your basis in the assets. You cannot take a deduction for these costs. You will recover the costs of these assets when you dispose of them.

Business Assets

There are many different kinds of business assets, for example, land, buildings, machinery, 

furniture, trucks, patents, and franchise rights. 

You must fully capitalize the cost of these assets, including freight and installation charges.

Certain property you produce for use in your 

trade or business must be capitalized under the 

uniform capitalization rules. See Regulations 

section 1.263A-2 for information on these rules.

De Minimis Safe Harbor for 

Tangible Property

Although you must generally capitalize costs to 

acquire or produce real or tangible personal 

property used in your trade or business, such 

as buildings, equipment, or furniture, you can 

elect to use a de minimis safe harbor to deduct 

the costs of some tangible property. Under the 

de minimis safe harbor for tangible property, 

you can deduct de minimis amounts paid to acquire or produce certain tangible business property if these amounts are deducted by you for financial accounting purposes or in keeping your 

books and records. See the following for the requirements for the de minimis safe harbor.

You have an applicable financial statement. 

If you elect the de minimis safe harbor for the 

tax year, you can deduct amounts paid to acquire or produce certain tangible business property if:

• You have a trade or business or are a corporation, partnership, or S corporation that 

has an applicable financial statement;

• You have, at the beginning of the tax year, 

written accounting procedures treating as 

an expense for nontax purposes:

– Amounts paid for property costing 

less than a certain dollar amount, or

– Amounts paid for property with an 

economic useful life of 12 months or 

less;

• You treat the amount paid during the tax 

year for which you make the election as an 

expense on your applicable financial statements in accordance with your written accounting procedures;

• The amount paid for the property does not 

exceed $5,000 per invoice (or per item 

substantiated by invoice); and

• The uniform capitalization rules do not apply to the amount.

You do not have an applicable financial 

statement. If you elect the de minimis safe 

harbor for the tax year, you can deduct amounts 

paid to acquire or produce certain tangible business property if:

• You have a trade or business, partnership, 

or S corporation that does not have an applicable financial statement;

• You have, at the beginning of the tax year, 

accounting procedures treating as an expense for nontax purposes:

– Amounts paid for property costing 

less than a certain dollar amount, or

– Amounts paid for property with an 

economic useful life of 12 months or 

less;

• You treat the amounts paid for the property 

as an expense on your books and records 

in accordance with your accounting procedures;

• The amount paid for the property does not 

exceed $2,500 per invoice (or per item 

substantiated by invoice); and

• The uniform capitalization rules do not apply to the amounts.

How to make the de minimis safe harbor 

election. To elect the de minimis safe harbor 

for the tax year, attach a statement to the taxpayer’s timely filed original tax return (including 

extensions) for the tax year when qualifying 

amounts were paid. The statement must be titled “Section 1.263(a)-1(f) de minimis safe harbor election” and must include your name, address, taxpayer identification number (TIN), and 

a statement that you are making the de minimis 

safe harbor election under section 1.263(a)-1(f). 

In the case of a consolidated group filing a consolidated income tax return, the election is 

made for each member of the consolidated 

group.

In the case of a consolidated group filing a 

consolidated income tax return, the election is 

made for each member of the consolidated 

group. In the case of an S corporation or a partnership, the election is made by the S corporation or the partnership and not by the shareholders or partners. The election applies only 

for the tax year for which it is made.

Example. In 2021, you do not have an applicable financial statement and you purchase 

five laptop computers for use in your trade or 

business. You paid $2,000 each for a total cost 

of $10,000 and these amounts are substantiated in an invoice. You had an accounting procedure in place at the beginning of 2021 to expense the cost of tangible property if the 

property costs $2,000 or less. You treat each 

computer as an expense on your books and records for 2021 in accordance with this policy. If 

you elect the de minimis safe harbor in your tax 

returns for your 2021 tax year, you can deduct 

the cost of each $2,000 computer.

Improvements

Generally, you must capitalize the costs of making improvements to a business asset if the improvements result in a betterment to the unit of 

property, restore the unit of property, or adapt 

the unit of property to a new or different use.

Some examples of improvements include 

rewiring or replumbing of a building, replacing 

an entire roof, increasing the production output 

of your equipment, putting an addition on your 

building, strengthening the foundation of a 

building so you can use it for a new purpose, or 

replacing a major component or substantial 

structural part of a machine.

However, you may currently deduct the 

costs of repairs or maintenance that do not improve a unit of property. This generally includes 

the costs of routine repairs and maintenance to 

your property that result from your use of the 

property and that keep your property in an ordinary, efficient operating condition. For example, 

deductible repairs include costs such as painting exteriors or interiors of business buildings, 

repairing broken windowpanes, replacing 

worn-out minor parts, sealing cracks and leaks, 

and changing oil or other fluids to maintain business equipment.

Routine maintenance safe harbor. If you 

determine that your cost was for an improvement to a building or equipment, you can deduct your cost under the routine maintenance 

safe harbor. Under the routine maintenance 

safe harbor, you can deduct the costs of an improvement that meets all of the following criteria.

• It is paid for recurring activities performed 

on tangible property.

• It arises from the use of the property in 

your trade or business.

• It keeps your property in an ordinary, efficient operating condition.

• You reasonably expect, at the time the 

property is placed in service, to perform 

this activity:

– For buildings and building systems, 

more than once during the 10-year period after you place the building in 

service; or

Page 4 Chapter 1 Deducting Business Expenses
– For other property, more than once 

during the class life of the particular 

type of property. For class lives, see 

Revenue Procedure 88-57, 1987-2 

C.B. 674.

Costs incurred during an improvement. 

You must capitalize both the direct and indirect 

costs of an improvement. Indirect costs include 

repairs and other expenses that directly benefit 

or are incurred by reason of your improvement. 

For example, if you improve the electrical system in your building, you must also capitalize 

the costs of repairing the holes that you made in 

walls to install the new wiring. This rule applies 

even if this work, performed by itself, would otherwise be treated as currently deductible repair 

costs.

Election to capitalize repair and maintenance costs. You can elect to capitalize and 

depreciate certain amounts paid for repair and 

maintenance of tangible property, even if they 

do not improve your property. To qualify for this 

election, you must treat these amounts as capital expenditures on your books and records 

used in figuring your income. If you make this 

election, you must apply it to all repair and 

maintenance costs of tangible property that you 

treat as capital expenditures on your books and 

records for this tax year. To make the election 

to treat repairs and maintenance as capital expenditures, attach a statement titled “Section 

1.263(a)-3(n) Election” to your timely filed original tax return (including extensions) and include 

your name and address, TIN, and a statement 

that you elect to capitalize repair and maintenance costs under section 1.263(a)-3(n). You 

must treat these amounts as improvements to 

your tangible property and begin to depreciate 

these amounts when the improvement is placed 

in service.

Capital Versus Deductible 

Expenses

To help you distinguish between capital and deductible expenses, different examples are given 

below.

Motor vehicles. You usually capitalize the 

cost of a motor vehicle you use in your business. You can recover its cost through annual 

deductions for depreciation.

There are dollar limits on the depreciation 

you can claim each year on passenger automobiles used in your business. See Pub. 463 for 

more information.

Generally, repairs you make to your business vehicle are currently deductible. However, 

amounts you pay to improve your business vehicle are generally capital expenditures and are 

recovered through depreciation.

Roads and driveways. The cost of building a 

private road on your business property and the 

cost of replacing a gravel driveway with a concrete one are capital expenses you may be able 

to depreciate. The cost of maintaining a private 

road on your business property is a deductible 

expense.

Tools. Unless the uniform capitalization rules 

apply, amounts spent for tools used in your 

business are deductible expenses if the tools 

have a life expectancy of less than 1 year or 

they cost $200 or less per item or invoice.

Machinery parts. Unless the uniform capitalization rules apply, the cost of replacing 

short-lived parts of a machine to keep it in good 

working condition, but not to improve the machine, is a deductible expense.

Heating equipment. The cost of changing 

from one heating system to another is a capital 

expense.

Deduction for qualified business income. 

For tax years beginning after 2017, you may be 

entitled to take a deduction of up to 20% of your 

qualified business income from your qualified 

trade or business, plus 20% of the aggregate 

amount of qualified real estate investment trust 

(REIT) and qualified publicly traded partnership 

income. The deduction is subject to various limitations, such as limitations based on the type of 

your trade or business, your taxable income, 

the amount of W-2 wages paid with respect to 

the qualified trade or business, and the unadjusted basis of qualified property held by your 

trade or business. You will claim this deduction 

on Form 1040 or 1040-SR, not on Schedule C. 

Unlike other deductions, this deduction can be 

taken in addition to the standard or itemized deductions. For more information, see the Instructions for Form 1040.

Personal Versus Business 

Expenses

Generally, you cannot deduct personal, living, 

or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide 

the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 

70% of it for business and the other 30% for a 

family vacation, you can generally deduct 70% 

of the interest as a business expense. The remaining 30% is personal interest and is generally not deductible. See chapter 4 for information on deducting interest and the allocation 

rules.

Business use of your home. If you use part 

of your home for business, you may be able to 

deduct expenses for the business use of your 

home. These expenses may include mortgage 

interest, insurance, utilities, repairs, and depreciation.

To qualify to claim expenses for the business use of your home, you must meet both of 

the following tests.

1. The business part of your home must be 

used exclusively and regularly for your 

trade or business.

2. The business part of your home must be:

a. Your principal place of business;

b. A place where you meet or deal with 

patients, clients, or customers in the 

normal course of your trade or business; or

c. A separate structure (not attached to 

your home) used in connection with 

your trade or business.

You generally do not have to meet the exclusive use test for the part of your home that 

you regularly use either for the storage of inventory or product samples, or as a daycare facility.

Your home office qualifies as your principal 

place of business if you meet the following requirements.

• You use the office exclusively and regularly for administrative or management activities of your trade or business.

• You have no other fixed location where 

you conduct substantial administrative or 

management activities of your trade or 

business.

If you have more than one business location, determine your principal place of business 

based on the following factors.

• The relative importance of the activities 

performed at each location.

• If the relative importance factor does not 

determine your principal place of business, 

consider the time spent at each location.

Optional safe harbor method. Individual 

taxpayers can use the optional safe harbor 

method to determine the amount of deductible 

expenses attributable to certain business use of 

a residence during the tax year. This method is 

an alternative to the calculation, allocation, and 

substantiation of actual expenses.

The deduction under the optional method is 

limited to $1,500 per year based on $5 per 

square foot for up to 300 square feet. Under this 

method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on 

the home as itemized deductions on Schedule A (Form 1040). You are not required to allocate these deductions between personal and 

business use, as is required under the regular 

method. If you use the optional method, you 

cannot depreciate the portion of your home 

used in a trade or business.

Business expenses unrelated to the home, 

such as advertising, supplies, and wages paid 

to employees, are still fully deductible. All of the 

requirements discussed earlier under Business 

use of your home still apply.

For more information on the deduction for 

business use of your home, including the optional safe harbor method, see Pub. 587.

If you were entitled to deduct depreciation on the part of your home used for 

business, you cannot exclude the part 

of the gain from the sale of your home that 

equals any depreciation you deducted (or could 

have deducted) for periods after May 6, 1997.

Business use of your car. If you use your car 

exclusively in your business, you can deduct 

car expenses. If you use your car for both business and personal purposes, you must divide 

your expenses based on actual mileage. Generally, commuting expenses between your 

home and your business location, within the 

area of your tax home, are not deductible.

You can deduct actual car expenses, which 

include depreciation (or lease payments), gas 

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Chapter 1 Deducting Business Expenses Page 5
and oil, tires, repairs, tune-ups, insurance, and 

registration fees. Or, instead of figuring the 

business part of these actual expenses, you 

may be able to use the standard mileage rate to 

figure your deduction. For 2021, the standard 

mileage rate is 56 cents per mile. Beginning in 

2022, the standard mileage rate increased to 

58.5 cents per mile.

If you are self-employed, you can also deduct the business part of interest on your car 

loan, state and local personal property tax on 

the car, parking fees, and tolls, whether or not 

you claim the standard mileage rate.

For more information on car expenses and 

the rules for using the standard mileage rate, 

see Pub. 463.

How Much Can I 

Deduct?

Generally, you can deduct the full amount of a 

business expense if it meets the criteria of ordinary and necessary and it is not a capital expense.

Recovery of amount deducted (tax benefit 

rule). If you recover part of an expense in the 

same tax year in which you would have claimed 

a deduction, reduce your current year expense 

by the amount of the recovery. If you have a recovery in a later year, include the recovered 

amount in income in that year. However, if part 

of the deduction for the expense did not reduce 

your tax, you do not have to include that part of 

the recovered amount in income.

For more information on recoveries and the 

tax benefit rule, see Pub. 525.

Payments in kind. If you provide services to 

pay a business expense, the amount you can 

deduct is limited to your out-of-pocket costs. 

You cannot deduct the cost of your own labor.

Similarly, if you pay a business expense in 

goods or other property, you can deduct only 

what the property costs you. If these costs are 

included in the cost of goods sold, do not deduct them again as a business expense.

Limits on losses. If your deductions for an investment or business activity are more than the 

income it brings in, you have a loss. There may 

be limits on how much of the loss you can deduct.

Not-for-profit limits. If you carry on your 

business activity without the intention of making 

a profit, you cannot use a loss from it to offset 

other income. For more information, see 

Not-for-Profit Activities, later.

At-risk limits. Generally, a deductible loss 

from a trade or business or other income-producing activity is limited to the investment you 

have “at risk” in the activity. You are at risk in 

any activity for the following.

1. The money and adjusted basis of property 

you contribute to the activity.

2. Amounts you borrow for use in the activity 

if:

a. You are personally liable for repayment, or

b. You pledge property (other than property used in the activity) as security for 

the loan.

For more information, see Pub. 925.

Passive activities. Generally, you are in a 

passive activity if you have a trade or business 

activity in which you do not materially participate, or a rental activity. In general, deductions 

for losses from passive activities only offset income from passive activities. You cannot use 

any excess deductions to offset other income. 

In addition, passive activity credits can only offset the tax on net passive income. Any excess 

loss or credits are carried over to later years. 

Suspended passive losses are fully deductible 

in the year you completely dispose of the activity. For more information, see Pub. 925.

Net operating loss (NOL). If your deductions are more than your income for the year, 

you may have an NOL. You can use an NOL to 

lower your taxes in other years. See Pub. 536 

for more information.

See Pub. 542 for information about NOLs of 

corporations.

When Can I

Deduct an Expense?

When you can deduct an expense depends on 

your accounting method. An accounting 

method is a set of rules used to determine when 

and how income and expenses are reported. 

The two basic methods are the cash method 

and the accrual method. Whichever method 

you choose must clearly reflect income.

For more information on accounting methods, see Pub. 538.

Cash method. Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them.

Accrual method. Under the accrual method 

of accounting, you generally deduct business 

expenses when both of the following apply.

1. The all-events test has been met. The test 

is met when:

a. All events have occurred that fix the 

fact of liability, and

b. The liability can be determined with 

reasonable accuracy.

2. Economic performance has occurred.

Economic performance. You generally 

cannot deduct or capitalize a business expense 

until economic performance occurs. If your expense is for property or services provided to 

you, or for your use of property, economic performance occurs as the property or services are 

provided, or the property is used. If your expense is for property or services you provide to 

others, economic performance occurs as you 

provide the property or services.

Example. Your tax year is the calendar 

year. In December 2021, the Field Plumbing 

Company did some repair work at your place of 

business and sent you a bill for $600. You paid 

it by check in January 2022. If you use the accrual method of accounting, deduct the $600 on 

your tax return for 2021 because all events 

have occurred to “fix” the fact of liability (in this 

case, the work was completed), the liability can 

be determined, and economic performance occurred in that year.

If you use the cash method of accounting, 

deduct the expense on your 2022 tax return.

Prepayment. You generally cannot deduct expenses in advance, even if you pay them in advance. This applies to prepaid interest, prepaid 

insurance premiums, and any other prepaid expense that creates an intangible asset. If you 

pay an amount that creates an intangible asset, 

then you must capitalize the amounts paid and 

begin to amortize the payment over the appropriate period.

However, you do not have to capitalize 

amounts for creating an intangible asset if the 

right or benefit created does not extend beyond 

the earlier of 12 months after the date that you 

first receive the right or benefit or the end of the 

tax year following the year in which you made 

the advance payment. If you are a cash method 

taxpayer and your advance payment qualifies 

for this exception, then you can generally deduct the amount when paid. If you are an accrual method taxpayer, you cannot deduct the 

amount until the all-events test has been met 

and economic performance has occurred.

Example 1. In 2021, you sign a 10-year 

lease and immediately pay your rent for the first 

3 years. Even though you paid the rent for 

2021, 2022, and 2023, you can only deduct the 

rent for 2021 on your 2021 tax return. You can 

deduct the rent for 2022 and 2023 on your tax 

returns for those years.

Example 2. You are a cash method calendar year taxpayer. On December 1, 2021, you 

sign a 12-month lease, effective beginning January 1, 2022, and immediately pay your rent for 

the entire 12-month period that begins on January 1, 2022. The right or benefit attributable to 

the payment neither extends more than 12 

months beyond January 1, 2022 (the first day 

that you are entitled to use the property) nor beyond the tax year ending December 31, 2022 

(the year following the year in which you made 

the advance payment). Therefore, your prepayment does not have to be capitalized, and you 

can deduct the entire payment in the year you 

pay it.

Contested liability. Under the cash method, 

you can deduct a contested liability only in the 

year you pay the liability. Under the accrual 

method, you can deduct contested liabilities 

such as taxes (except foreign or U.S. possession income, war profits, and excess profits 

taxes) either in the tax year you pay the liability 

(or transfer money or other property to satisfy 

the obligation) or in the tax year you settle the 

contest. However, to take the deduction in the 

year of payment or transfer, you must meet certain conditions. See Regulations section 

1.461-2.

Related person. Under the accrual method of 

accounting, you generally deduct expenses 

when you incur them, even if you have not yet 

Page 6 Chapter 1 Deducting Business Expenses
paid them. However, if you and the person you 

owe are related and that person uses the cash 

method of accounting, you must pay the expense before you can deduct it. Your deduction 

is allowed when the amount is includible in income by the related cash method payee. For 

more information, see Related Persons in Pub. 

538.

Not-for-Profit Activities

If you do not carry on your business or investment activity to make a profit, you cannot use a 

loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or 

recreation, are often not entered into for profit.

The limit on not-for-profit losses applies to 

individuals, partnerships, estates, trusts, and S 

corporations. It does not apply to corporations 

other than S corporations.

In determining whether you are carrying on 

an activity for profit, several factors are taken 

into account. No one factor alone is decisive. 

Among the factors to consider are whether:

• You carry on the activity in a businesslike 

manner,

• The time and effort you put into the activity 

indicate you intend to make it profitable,

• You depend on the income for your livelihood,

• Your losses are due to circumstances beyond your control (or are normal in the 

startup phase of your type of business),

• You change your methods of operation in 

an attempt to improve profitability,

• You (or your advisors) have the knowledge 

needed to carry on the activity as a successful business,

• You were successful in making a profit in 

similar activities in the past,

• The activity makes a profit in some years, 

and

• You can expect to make a future profit from 

the appreciation of the assets used in the 

activity.

Presumption of profit. An activity is presumed carried on for profit if it produced a profit 

in at least 3 of the last 5 tax years, including the 

current year. Activities that consist primarily of 

breeding, training, showing, or racing horses 

are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax 

years, including the current year. The activity 

must be substantially the same for each year 

within this period. You have a profit when the 

gross income from an activity exceeds the deductions.

If a taxpayer dies before the end of the 

5-year (or 7-year) period, the “test” period ends 

on the date of the taxpayer's death.

If your business or investment activity 

passes this 3- (or 2-) years-of-profit test, the 

IRS will presume it is carried on for profit. This 

means the limits discussed here will not apply. 

You can take all your business deductions from 

the activity, even for the years that you have a 

loss. You can rely on this presumption unless 

the IRS later shows it to be invalid.

Using the presumption later. If you are starting an activity and do not have 3 (or 2) years 

showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years 

of experience allowed by the test.

You can elect to do this by filing Form 5213. 

Filing this form postpones any determination 

that your activity is not carried on for profit until 

5 (or 7) years have passed since you started 

the activity.

The benefit gained by making this election is 

that the IRS will not immediately question 

whether your activity is engaged in for profit. 

Accordingly, it will not restrict your deductions. 

Rather, you will gain time to earn a profit in the 

required number of years. If you show 3 (or 2) 

years of profit at the end of this period, your deductions are not limited under these rules. If you 

do not have 3 (or 2) years of profit, the limit can 

be applied retroactively to any year with a loss 

in the 5-year (or 7-year) period.

Filing Form 5213 automatically extends the 

period of limitations on any year in the 5-year 

(or 7-year) period to 2 years after the due date 

of the tax return for the last year of the period. 

The period is extended only for deductions of 

the activity and any related deductions that 

might be affected.

You must file Form 5213 within 3 years 

after the due date of your tax return 

(determined without extensions) for the 

year in which you first carried on the activity, or, 

if earlier, within 60 days after receiving written 

notice from the IRS proposing to disallow deductions attributable to the activity.

Gross Income

Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all 

other gross receipts derived from the activity. 

Gross income from the activity also includes 

capital gains and rents received for the use of 

property that is held in connection with the activity.

You can determine gross income from any 

not-for-profit activity by subtracting the cost of 

goods sold from your gross receipts. However, 

if you determine gross income by subtracting 

cost of goods sold from gross receipts, you 

must do so consistently, and in a manner that 

follows generally accepted methods of accounting.

Limit on Deductions

You can no longer claim any miscellaneous itemized deductions. Miscellaneous itemized deductions are those 

deductions that would have been subject to the 

2%-of-adjusted-gross-income limitation. You 

can still claim certain expenses as itemized deductions on Schedule A (Form 1040).

Deductions you can take for personal as well as 

for business activities are allowed in full. For individuals, all nonbusiness deductions, such as 

those for home mortgage interest, taxes, and 

casualty losses, may also be deducted. Deduct 

them on the appropriate lines of Schedule A 

(Form 1040).

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For the limits that apply to home mortgage 

interest, see Pub. 936.

Generally, you can deduct a casualty loss 

on property you own for personal use only to 

the extent each casualty loss is more than 

$100, and the total of all casualty losses exceeds 10% of your adjusted gross income 

(AGI). See Pub. 547 for more information on 

casualty losses.

Disaster tax relief. For personal casualty 

losses resulting from federally declared disasters that occurred before 2018, you may be entitled to disaster tax relief. As a result, you may 

be required to figure your casualty loss differently. For tax years beginning after 2017, casualty and theft losses are allowed only to the extent it is attributable to a federally declared 

disaster. For more information, see Pub. 976, 

Disaster Relief.

Partnerships and S corporations. If a partnership or S corporation carries on a 

not-for-profit activity, these limits apply at the 

partnership or S corporation level. They are reflected in the individual shareholder's or partner's distributive shares.

More than one activity. If you have several 

undertakings, each may be a separate activity 

or several undertakings may be combined. The 

following are the most significant facts and circumstances in making this determination.

• The degree of organizational and economic interrelationship of various undertakings.

• The business purpose that is (or might be) 

served by carrying on the various undertakings separately or together in a business or investment setting.

• The similarity of the undertakings.

The IRS will generally accept your characterization if it is supported by facts and circumstances.

If you are carrying on two or more different activities, keep the deductions 

and income from each one separate. 

Figure separately whether each is a 

not-for-profit activity. Then figure the limit on deductions and losses separately for each activity 

that is not for profit.

2.

Employees' Pay

What's New

Coronavirus (COVID-19) related employment tax credits have been extended and 

amended.

• The Families First Coronavirus Response 

Act (FFCRA) was amended by recent 

legislation. The FFCRA requirement that 

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Chapter 2 Employees' Pay Page 7
employers provide paid sick and family 

leave for reasons related to COVID-19 (the 

employer mandate) expired on December 

31, 2020; however, the COVID-related Tax 

Relief Act of 2020 extends the periods for 

which employers providing leave that otherwise meets the requirements of the 

FFCRA may continue to claim tax credits 

for qualified sick and family leave wages 

paid for leave taken before April 1, 2021.

• The American Rescue Plan Act of 2021 

(the ARP) adds new sections 3131, 3132, 

and 3133 to the Internal Revenue Code to 

provide credits for qualified sick and family 

leave wages similar to the credits that were 

previously enacted under the FFCRA and 

amended and extended by the COVID-related Tax Relief Act of 2020. The credits 

under sections 3131 and 3132 are available for qualified leave wages paid for leave 

taken after March 31, 2021, and before 

October 1, 2021. The credit for qualified 

sick and family leave wages is claimed on 

your 2021 employment tax return (typically 

Form 941, Employer's QUARTERLY Federal Tax Return). You must include the full 

amount (both the nonrefundable and refundable portions) of the credit for qualified 

sick and family leave wages in your gross 

income for the tax year that includes the 

last day of any calendar quarter in which a 

credit is allowed. For more information 

about the credit for qualified sick and family leave wages, see the instructions for 

your employment tax return and go to 

IRS.gov/PLC.

• The Coronavirus Aid, Relief, and Economic Security (CARES) Act was amended by recent legislation. The Taxpayer 

Certainty and Disaster Tax Relief Act of 

2020 modifies the calculation of the employee retention credit and extends the 

date through which the credit may be 

claimed to qualified wages paid before 

July 1, 2021.

• The ARP adds new section 3134 to the Internal Revenue Code to provide an employee retention credit similar to the credit 

that was previously enacted under the 

CARES Act and amended and extended 

by the Taxpayer Certainty and Disaster 

Tax Relief Act of 2020. The employee retention credit is claimed on your 2021 employment tax return (typically Form 941). 

For more information about the employee 

retention credit, including the dates for 

which the credit may be claimed, see the 

instructions for your employment tax return 

and go to IRS.gov/ERC.

New credit for COBRA premium assistance 

payments. Section 9501 of the ARP provides 

for COBRA premium assistance in the form of a 

full reduction in the premium otherwise payable 

by certain individuals and their families who 

elect COBRA continuation coverage due to a 

loss of coverage as the result of a reduction in 

hours or an involuntary termination of employment (assistance eligible individuals). For more 

information on COBRA premium assistance 

payments and the credit, see Notice 2021-31, 

2021-23 I.R.B. 1173, available at IRS.gov/irb/

2021-23_IRB#NOT-2021-31, and Notice 

2021-46, 2021-33 I.R.B. 303, available at 

IRS.gov/irb/2021-33_IRB#NOT-2021-46.

Advance payment of COVID-19 credits extended. Based on the extensions of the credit 

for qualified sick and family leave wages and 

the employee retention credit, and the new 

credit for COBRA premium assistance payments, discussed above, Form 7200, Advance 

Payment of Employer Credits Due to 

COVID-19, may be filed to request an advance 

payment. For more information, including information on which employers are eligible to request an advance payment, the deadlines for 

requesting an advance, and the amount that 

can be advanced, see the Instructions for Form 

7200.

For the latest guidance and information 

about COVID-19 tax relief, go to IRS.gov/

Coronavirus.

Introduction

You can generally deduct the amount you pay 

your employees for the services they perform. 

The pay may be in cash, property, or services. It 

may include wages, salaries, bonuses, commissions, or other noncash compensation such as 

vacation allowances and fringe benefits. For information about deducting employment taxes, 

see chapter 5.

You may be able to claim employment 

credits, such as the credits listed below, if you meet certain requirements. 

You must reduce your deduction for employee 

wages by the amount of employment credits 

that you claim. For more information about 

these credits, see the form on which the credit 

is claimed.

• Work opportunity credit (Form 5884).

• Empowerment zone employment credit 

(Form 8844).

• Indian employment credit (Form 8845).

• Credit for employer differential wage payments (Form 8932).

• Employer credit for paid family and medical leave (Form 8994).

Topics

This chapter discusses:

• Tests for deducting pay

• Kinds of pay

Useful Items

You may want to see:

Publication

1 Employer's Tax Guide

1-A Employer's Supplemental Tax Guide

1-B Employer's Tax Guide to Fringe 

Benefits

Form (and Instructions)

1099-NEConemployee Compensation

W-2age and Tax Statement

See chapter 12 for information about getting 

publications and forms.

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 15 

 15-A 

 15-B 

 1099-NEC 

 W-2 

Tests for Deducting Pay

To be deductible, your employees' pay must be 

an ordinary and necessary business expense 

and you must pay or incur it. These and other 

requirements that apply to all business expenses are explained in chapter 1.

In addition, the pay must meet both of the 

following tests.

• Test 1. It must be reasonable.

• Test 2. It must be for services performed.

The form or method of figuring the pay doesn't 

affect its deductibility. For example, bonuses 

and commissions based on sales or earnings, 

and paid under an agreement made before the 

services were performed, are both deductible.

Test 1—Reasonableness

You must be able to prove that the pay is reasonable. Whether the pay is reasonable depends on the circumstances that existed when 

you contracted for the services, not those that 

exist when reasonableness is questioned. If the 

pay is excessive, the excess pay is disallowed 

as a deduction.

Factors to consider. Determine the reasonableness of pay by the facts and circumstances. 

Generally, reasonable pay is the amount that a 

similar business would pay for the same or similar services.

To determine if pay is reasonable, also consider the following items and any other pertinent 

facts.

• The duties performed by the employee.

• The volume of business handled.

• The character and amount of responsibility.

• The complexities of your business.

• The amount of time required.

• The cost of living in the locality.

• The ability and achievements of the individual employee performing the service.

• The pay compared with the gross and net 

income of the business, as well as with distributions to shareholders if the business is 

a corporation.

• Your policy regarding pay for all your employees.

• The history of pay for each employee.

Compensation in excess of $1 million. Publicly held corporations can't deduct compensation to a “covered employee” to the extent that 

the compensation for the tax year exceeds $1 

million. For more information, including the definition of a “covered employee,” see the Instructions for Form 1125-E and Regulations section 

1.162-33.

Test 2—For Services 

Performed

You must be able to prove the payment was 

made for services actually performed.

Employee-shareholder salaries. If a corporation pays an employee who is also a shareholder a salary that is unreasonably high 

Page 8 Chapter 2 Employees' Pay
considering the services actually performed, the 

excessive part of the salary may be treated as a 

constructive dividend to the employee-shareholder. The excessive part of the salary 

wouldn't be allowed as a salary deduction by 

the corporation. For more information on corporate distributions to shareholders, see Pub. 542.

Kinds of Pay

Some of the ways you may provide pay to your 

employees in addition to regular wages or salaries are discussed next. For specialized and detailed information on employees' pay and the 

employment tax treatment of employees' pay, 

see Pubs. 15, 15-A, and 15-B.

Awards

You can generally deduct amounts you pay to 

your employees as awards, whether paid in 

cash or property. If you give property to an employee as an employee achievement award, 

your deduction may be limited.

Achievement awards. An achievement award 

is an item of tangible personal property that 

meets all the following requirements.

• It is given to an employee for length of 

service or safety achievement.

• It is awarded as part of a meaningful presentation.

• It is awarded under conditions and circumstances that don't create a significant likelihood of disguised pay.

Tangible personal property. An award 

isn't an item of tangible personal property if it is 

an award of cash, cash equivalents, gift cards, 

gift coupons, or gift certificates (other than arrangements granting only the right to select and 

receive tangible personal property from a limited assortment of items preselected or preapproved by you). Also, tangible personal property doesn't include vacations, meals, lodging, 

tickets to theater or sporting events, stocks, 

bonds, other securities, and other similar items.

Length-of-service award. An award will 

qualify as a length-of-service award only if either of the following applies.

• The employee receives the award after his 

or her first 5 years of employment.

• The employee didn't receive another 

length-of-service award (other than one of 

very small value) during the same year or 

in any of the prior 4 years.

Safety achievement award. An award for 

safety achievement will qualify as an achievement award unless one of the following applies.

1. It is given to a manager, administrator, 

clerical employee, or other professional 

employee.

2. During the tax year, more than 10% of 

your employees, excluding those listed in 

(1), have already received a safety achievement award (other than one of very 

small value).

Deduction limit. Your deduction for the 

cost of employee achievement awards given to 

any one employee during the tax year is limited 

to the following.

• $400 for awards that aren't qualified plan 

awards.

• $1,600 for all awards, whether or not qualified plan awards.

A qualified plan award is an achievement 

award given as part of an established written 

plan or program that doesn't favor highly compensated employees as to eligibility or benefits.

A highly compensated employee is an employee who meets either of the following tests.

1. The employee was a 5% owner at any 

time during the year or the preceding year.

2. The employee received more than 

$130,000 in pay for 2020.

You can choose to ignore test (2) if the employee wasn't also in the top 20% of employees 

ranked by pay for the preceding year.

An award isn't a qualified plan award if the 

average cost of all the employee achievement 

awards given during the tax year (that would be 

qualified plan awards except for this limit) is 

more than $400. To figure this average cost, ignore awards of nominal value.

Deduct achievement awards, up to the maximum amounts listed earlier, as a nonwage 

business expense on your return or business 

schedule.

You may not owe employment taxes on 

the value of some achievement awards 

you provide to an employee. See Pub. 

15-B.

Bonuses

You can generally deduct a bonus paid to an 

employee if you intended the bonus as additional pay for services, not as a gift, and the 

services were performed. However, the total 

bonuses, salaries, and other pay must be reasonable for the services performed. If the bonus 

is paid in property, see Property, later.

Gifts of nominal value. If, to promote employee goodwill, you distribute merchandise of 

nominal value or other de minimis items to your 

employees at holidays, you can deduct the cost 

of these items as a nonwage business expense. See Pub. 15-B for additional information 

on de minimis fringe benefits. If you provide 

food to your employees, your business deduction may be limited; see Meals and lodging, 

later.

Education Expenses

If you pay or reimburse education expenses for 

an employee, you can deduct the payments if 

they are part of a qualified educational assistance program. Deduct them on the “Employee 

benefit programs” or other appropriate line of 

your tax return. For information on educational 

assistance programs, see Educational Assistance in section 2 of Pub. 15-B.

Section 2206 of the CARES Act expands the definition of educational assistance to include certain employer 

payments of student loans paid after March 27, 

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2020. The exclusion applies to the payment by 

an employer, whether paid to the employee or 

to a lender, of principal or interest on any qualified education loan incurred by the employee 

for the education of the employee. Qualified education loans are defined in chapter 10 of Pub. 

970. This exclusion expires January 1, 2026, 

unless extended by future legislation.

Fringe Benefits

A fringe benefit is a form of pay for the performance of services. You can generally deduct the 

cost of fringe benefits.

You may be able to exclude all or part of the 

value of some fringe benefits from your employees' pay. You also may not owe employment 

taxes on the value of the fringe benefits. See 

Table 2-1 in Pub. 15-B for details.

Generally, no deduction is allowed for activities generally considered entertainment, 

amusement, or recreation, or for a facility used 

in connection with such activity. However, you 

may deduct these expenses if the goods, services, or facilities are treated as compensation to 

the recipient and reported on Form W-2 for an 

employee or on Form 1099-NEC for an independent contractor. If the recipient is an officer, 

director, beneficial owner (directly or indirectly), 

or other “specified individual” (as defined in 

section 274(e)(2)(B) and Regulations section 

1.274-9(b)), special rules apply. See section 

274(e)(2) and Regulations sections 1.274-9 and 

1.274-10.

Certain fringe benefits are discussed next. 

See Pub. 15-B for more details on these and 

other fringe benefits.

Meals and lodging. Generally, you can deduct 50% of certain meal expenses and 100% 

of certain lodging expenses provided to your 

employees. If the amounts are deductible, deduct the cost in whatever category the expense 

falls.

Deduction limit on meals. You can generally deduct only 50% of the cost of furnishing 

meals to your employees. However, you can 

deduct the full cost of certain meals; see section 274(n)(2) and Regulations section 

1.274-12(c) for more information. For example, 

you can deduct the full cost of the following 

meals.

• Meals whose value you include in an employee's wages.

• Meals you furnish to your employees as 

part of the expense of providing recreational or social activities, such as holiday 

parties or annual picnics, when made primarily for the benefit of your employees 

other than employees who are officers, 

shareholders or other owners who own a 

10% or greater interest in your business, or 

other highly compensated employees.

• Meals you furnish to your employees at the 

work site when you operate a restaurant or 

catering service.

• Meals you’re required by federal law to furnish to crew members of certain commercial vessels (or would be required to furnish if the vessels were operated at sea). 

This doesn't include meals you furnish on 

Chapter 2 Employees' Pay Page 9
vessels primarily providing luxury water 

transportation.

• Meals you furnish on an oil or gas platform 

or drilling rig located offshore or in Alaska. 

This includes meals you furnish at a support camp that is near and integral to an oil 

or gas drilling rig located in Alaska.

P.L. 115-97, Tax Cuts and Jobs Act, 

changed the rules for the deduction of 

food or beverage expenses that are excludable from employee income as a de minimis fringe benefit. For amounts incurred or paid 

after 2017, the 50% limit on deductions for food 

or beverage expenses also applies to food or 

beverage expenses excludable from employee 

income as a de minimis fringe benefit. While 

your business deduction may be limited, the 

rules that allow you to exclude certain de minimis meals and meals on your business premises from your employee's wages still apply. 

See Meals in section 2 of Pub. 15-B.

Food and beverage expense incurred together with entertainment expenses. P.L. 

115-97 changed the rules for the deduction of 

business entertainment expenses. For amounts 

incurred or paid after 2017, no business deduction is allowed for any item generally considered to be entertainment, amusement, or recreation. As discussed earlier, you can deduct 

50% of the cost of business meals. If food and 

beverages are provided during or at an entertainment activity, and the food and beverages 

are purchased separately from the entertainment, or the cost of the food and beverages is 

stated separately from the cost of the entertainment on one or more bills, invoices, or receipts, 

you may continue to deduct 50% of the business meal expenses. The amount charged for 

food or beverages on a bill, invoice, or receipt 

must reflect the venue's usual selling cost for 

those items if they were to be purchased separately from the entertainment or must approximate the reasonable value of those items. If you 

purchase food and beverages together with entertainment expenses and the cost of the food 

and beverages isn't stated separately on the invoice, the cost of the food and beverages is 

also an entertainment expense and none of the 

expenses are deductible. For more information, 

including details about additional requirements 

that must be met for a business meal to be deductible, see Regulations sections 1.274-11 

and 1.274-12(a).

Section 210 of the Taxpayer Certainty 

and Disaster Tax Relief Act of 2020 

provides for the temporary allowance 

of a 100% business meal deduction for food or 

beverages provided by a restaurant and paid or 

incurred after December 31, 2020, and before 

January 1, 2023. For more information, see Notice 2021-25, 2021-17 I.R.B. 1118, available at 

IRS.gov/irb/2021-17_IRB#NOT-2021-25; and 

Notice 2021-63, 2021-49 I.R.B. 835, available 

at IRS.gov/irb/2021-49_IRB#NOT-2021-63.

Transportation (commuting) benefits. If 

you provide your employees with qualified 

transportation benefits, such as transportation 

in a commuter highway vehicle, transit passes, 

or qualified parking, you may no longer deduct 

these amounts. P.L. 115-97 provides that no 

CAUTION

!

TIP

deduction is allowed for qualified transportation 

benefits (whether provided directly by you, 

through a bona fide reimbursement arrangement, or through a compensation reduction 

agreement) incurred or paid after 2017. Also, 

no deduction is allowed for any expense incurred for providing any transportation, or any payment or reimbursement to your employee, in 

connection with travel between your employee's 

residence and place of employment, except as 

necessary for ensuring the safety of your employee or for qualified bicycle commuting reimbursements as described in section 132(f)(5)

(F). While you may no longer deduct payments 

for qualified transportation benefits, the fringe 

benefit exclusion rules still apply and the payments, except for qualified bicycle commuting 

reimbursements, may be excluded from your 

employee's wages. Although the value of a 

qualified transportation fringe benefit is relevant 

in determining the fringe benefit exclusion and 

whether the section 274(e)(2) exception for expenses treated as compensation applies, the 

deduction that is disallowed relates to the expense of providing a qualified transportation 

fringe, not its value. For more information, see 

Regulations sections 1.274-13 and 1.274-14. 

See Pub. 15-B for more information about qualified transportation benefits.

Employee benefit programs. Employee benefit programs include the following.

• Accident and health plans.

• Adoption assistance.

• Cafeteria plans.

• Dependent care assistance.

• Education assistance.

• Life insurance coverage.

• Welfare benefit funds.

You can generally deduct amounts you 

spend on employee benefit programs on the 

applicable line of your tax return. For example, 

if you provide dependent care by operating a 

dependent care facility for your employees, deduct your costs in whatever categories they fall 

(utilities, salaries, etc.).

Life insurance coverage. You can't deduct the cost of life insurance coverage for you, 

an employee, or any person with a financial interest in your business if you’re directly or indirectly the beneficiary of the policy. See Regulations section 1.264-1 for more information.

Welfare benefit funds. A welfare benefit 

fund is a funded plan (or a funded arrangement 

having the effect of a plan) that provides welfare 

benefits to your employees, independent contractors, or their beneficiaries. Welfare benefits 

are any benefits other than deferred compensation or transfers of restricted property.

Your deduction for contributions to a welfare 

benefit fund is limited to the fund's qualified cost 

for the tax year. If your contributions to the fund 

are more than its qualified cost, carry the excess over to the next tax year.

Generally, the fund's “qualified cost” is the 

total of the following amounts, reduced by the 

after-tax income of the fund.

• The cost you would’ve been able to deduct 

using the cash method of accounting if you 

had paid for the benefits directly.

• The contributions added to a reserve account that are needed to fund claims incurred but not paid as of the end of the year. 

These claims can be for supplemental unemployment benefits, severance pay, or 

disability, medical, or life insurance benefits.

For more information, see sections 419(c) 

and 419A and the related regulations.

Loans or Advances

You can generally deduct as wages an advance 

you make to an employee for services to be 

performed if you don't expect the employee to 

repay the advance. However, if the employee 

performs no services, treat the amount you advanced as a loan; if the employee doesn't repay 

the loan, treat it as income to the employee.

Below-market interest rate loans. On certain loans you make to an employee or shareholder, you’re treated as having received interest income and as having paid compensation or 

dividends equal to that interest. See Below-Market Loans in chapter 4.

Property

If you transfer property (including your company's stock) to an employee as payment for services, you can generally deduct it as wages. The 

amount you can deduct is the property's fair 

market value (FMV) on the date of the transfer 

less any amount the employee paid for the 

property.

You can claim the deduction only for the tax 

year in which your employee includes the property's value in income. Your employee is 

deemed to have included the value in income if 

you report it on Form W-2 in a timely manner.

You treat the deductible amount as received 

in exchange for the property, and you must recognize any gain or loss realized on the transfer, 

unless it is the company's stock transferred as 

payment for services. Your gain or loss is the 

difference between the FMV of the property and 

its adjusted basis on the date of transfer.

These rules also apply to property transferred to an independent contractor for services, 

generally reported on Form 1099-NEC.

Restricted property. If the property you 

transfer for services is subject to restrictions 

that affect its value, you generally can't deduct it 

and don't report gain or loss until it is substantially vested in the recipient. However, if the recipient pays for the property, you must report 

any gain at the time of the transfer up to the 

amount paid.

“Substantially vested” means the property 

isn't subject to a substantial risk of forfeiture. 

This means that the recipient isn't likely to have 

to give up his or her rights in the property in the 

future.

Page 10 Chapter 2 Employees' Pay
Reimbursements for 

Business Expenses

You can generally deduct the amount you pay 

or reimburse employees for business expenses 

incurred for your business. However, your deduction may be limited.

If you make the payment under an accountable plan, deduct it in the category of the expense paid. For example, if you pay an employee for travel expenses incurred on your 

behalf, deduct this payment as a travel expense. If you make the payment under a nonaccountable plan, deduct it as wages and include 

it on the employee's Form W-2.

See Reimbursement of Travel and Non-Entertainment Related Meals in chapter 11 for 

more information about deducting reimbursements and an explanation of accountable and 

nonaccountable plans.

Sick and Vacation Pay

Sick pay. You can deduct amounts you pay to 

your employees for sickness and injury, including lump-sum amounts, as wages. However, 

your deduction is limited to amounts not compensated by insurance or other means.

Vacation pay. Vacation pay is an employee 

benefit. It includes amounts paid for unused vacation leave. You can deduct vacation pay only 

in the tax year in which the employee actually 

receives it. This rule applies regardless of 

whether you use the cash or accrual method of 

accounting.

3.

Rent Expense

Reminder

Small business taxpayers. P.L. 115-97, Tax 

Cuts and Jobs Act, made changes to uniform 

capitalization rules for small business taxpayers. See Uniform capitalization rules, later.

Introduction

This chapter discusses the tax treatment of rent 

or lease payments you make for property you 

use in your business but do not own. It also discusses how to treat other kinds of payments 

you make that are related to your use of this 

property. These include payments you make for 

taxes on the property.

Topics

This chapter discusses:

• The definition of rent

• Taxes on leased property

• The cost of getting a lease

• Improvements by the lessee

• Capitalizing rent expenses

Useful Items

You may want to see:

Publication

Accounting Periods and Methods

Sales and Other Dispositions of 

Assets

How To Depreciate Property

See chapter 12 for information about getting 

publications and forms.

Rent

Rent is any amount you pay for the use of property you do not own. In general, you can deduct 

rent as an expense only if the rent is for property you use in your trade or business. If you 

have or will receive equity in or title to the property, the rent is not deductible.

Unreasonable rent. You can’t take a rental 

deduction for unreasonable rent. Ordinarily, the 

issue of reasonableness arises only if you and 

the lessor are related. 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. Rent isn’t unreasonable just because 

it is figured as a percentage of gross sales. For 

examples of related persons, see Related persons in chapter 2 of Pub. 544.

Rent on your home. 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. You must meet the requirements for business use of your home. For more information, 

see Business use of your home in chapter 1.

Rent paid in advance. Generally, rent paid for 

use of property in your trade or business is deductible in the year paid or incurred. If you are 

an accrual method taxpayer and pay rent in advance, you can deduct only the amount of rent 

that applies to your use of rented property during the tax year. You can deduct the rest of the 

rent payment only over the period to which it 

applies. If you are a cash method taxpayer, you 

may deduct the entire amount of rent you paid 

in advance in the year of payment if the payment applies to the right to use property that 

does not extend beyond the earlier of 12 

months after the first date you have the right to 

use the property or the end of the tax year following the year in which you paid the advance 

rent. If your payment applies to the right to use 

property beyond this period, then you must capitalize the rent payment and deduct it over the 

period to which it applies.

Example 1. You are an accrual method 

calendar year taxpayer and you lease a building 

at a monthly rental rate of $1,000 beginning 

July 1, 2021. On June 30, 2021, you pay advance rent of $12,000 for the last 6 months of 

2021 and the first 6 months of 2022. You can 

deduct only $6,000 for 2021, for the right to use 

 538 

 544 

 946 

property in 2021. You deduct the other $6,000 

in 2022.

Example 2. Assume the same facts as Example 1, except you are a cash method calendar year taxpayer. You may deduct the entire 

$12,000 payment for 2021. The payment applies to your right to use the property that does 

not extend beyond 12 months after the date you 

received this right. If you deduct the $12,000 in 

2021, you should not deduct any part of this 

payment in 2022.

Example 3. You are either a cash or accrual calendar year taxpayer. Last January, you 

leased property for 3 years for $6,000 per year. 

You pay the full $18,000 (3 x $6,000) during the 

first year of the lease. Because this amount is a 

prepaid expense that must be capitalized, you 

can deduct only $6,000 per year, the amount allocable to your use of the property in each year.

Canceling a lease. You can generally deduct 

as rent an amount you pay to cancel a business 

lease.

Lease or purchase. There may be instances 

in which you must determine whether your payments are for rent or for the purchase of the 

property. You must first determine whether your 

agreement is a lease or a conditional sales contract. Payments made under a conditional sales 

contract are not deductible as rent expense.

Conditional sales contract. Whether an 

agreement is a conditional sales contract depends on the intent of the parties. Determine intent based on the provisions of the agreement 

and the facts and circumstances that exist 

when you make the agreement. No single test, 

or special combination of tests, always applies. 

However, in general, an agreement may be 

considered a conditional sales contract rather 

than a lease if any of the following is true.

• The agreement applies part of each payment toward an equity interest you will receive.

• You get title to the property after you make 

a stated amount of required payments.

• The amount you must pay to use the property for a short time is a large part of the 

amount you would pay to get title to the 

property.

• You pay much more than the current fair 

rental value of the property.

• You have an option to buy the property at a 

nominal price compared to the value of the 

property when you may exercise the option. Determine this value when you make 

the agreement.

• You have an option to buy the property at a 

nominal price compared to the total 

amount you have to pay under the agreement.

• The agreement designates part of the payments as interest, or that part is easy to 

recognize as interest.

Leveraged leases. Leveraged lease transactions may not be considered leases. Leveraged leases generally involve three parties: a 

lessor, a lessee, and a lender to the lessor. 

Usually, the lease term covers a large part of 

the useful life of the leased property, and the 

Chapter 3 Rent Expense Page 11
lessee's payments to the lessor are enough to 

cover the lessor's payments to the lender.

If you plan to take part in what appears to be 

a leveraged lease, you may want to get an advance ruling.

• Revenue Procedure 2001-28 contains the 

guidelines the IRS will use to determine if a 

leveraged lease is a lease for federal income tax purposes.

• Revenue Procedure 2001-29 provides the 

information required to be furnished in a 

request for an advance ruling on a leveraged lease transaction.

These two revenue procedures can be found in 

I.R.B. 2001-19, which is available at 

IRS.gov/pub/irs-irbs/irb01-19.pdf.

For advance ruling purposes only, the IRS 

will consider the lessor in a leveraged lease 

transaction to be the owner of the property and 

the transaction to be a valid lease if all the factors in the revenue procedure are met, including 

the following.

• The lessor must maintain a minimum unconditional “at risk” equity investment in 

the property (at least 20% of the cost of the 

property) during the entire lease term.

• The lessee may not have a contractual 

right to buy the property from the lessor at 

less than FMV when the right is exercised.

• The lessee may not invest in the property, 

except as provided by Revenue Procedure 

2001-28.

• The lessee may not lend any money to the 

lessor to buy the property or guarantee the 

loan used by the lessor to buy the property.

• The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes.

The IRS may charge you a user fee for issuing a tax ruling. For more information, see Revenue Procedure 2021-1, available at

IRS.gov/irb/2021-01_IRB#RP-2021-01.

Leveraged leases of limited-use property. The IRS won’t issue advance rulings on 

leveraged leases of so-called limited-use property. Limited-use property is property not expected to be either useful to or usable by a lessor at the end of the lease term except for 

continued leasing or transfer to a lessee. See 

Revenue Procedure 2001-28 for examples of 

limited-use property and property that isn’t limited-use property.

Leases over $250,000. Special rules are provided for certain leases of tangible property. 

The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply.

• Rents increase during the lease.

• Rents decrease during the lease.

• Rents are deferred (rent is payable after 

the end of the calendar year following the 

calendar year in which the use occurs and 

the rent is allocated).

• Rents are prepaid (rent is payable before 

the end of the calendar year preceding the 

calendar year in which the use occurs and 

the rent is allocated).

These rules do not apply if your lease specifies 

equal amounts of rent for each month in the 

lease term and all rent payments are due in the 

calendar year to which the rent relates (or in the 

preceding or following calendar year).

Generally, if the special rules apply, you 

must use an accrual method of accounting (and 

time value of money principles) for your rental 

expenses, regardless of your overall method of 

accounting. In addition, in certain cases in 

which the IRS has determined that a lease was 

designed to achieve tax avoidance, you must 

take rent and stated or imputed interest into account under a constant rental accrual method in 

which the rent is treated as accruing ratably 

over the entire lease term. For details, see section 467.

Taxes on

Leased Property

If you lease business property, you can deduct 

as additional rent any taxes you have to pay to 

or for the lessor. When you can deduct these 

taxes as additional rent depends on your accounting method.

Cash method. If you use the cash method of 

accounting, you can deduct the taxes as additional rent only for the tax year in which you pay 

them.

Accrual method. If you use an accrual 

method of accounting, you can deduct the 

taxes as additional rent for the tax year in which 

you can determine all the following.

• That you have a liability for taxes on the 

leased property.

• How much the liability is.

• That economic performance occurred.

The liability and amount of taxes are determined by state or local law and the lease agreement. Economic performance occurs as you 

use the property.

Example 1. Oak Corporation is a calendar 

year taxpayer that uses an accrual method of 

accounting. Oak leases land for use in its business. Under state law, owners of real property 

become liable (incur a lien on the property) for 

real estate taxes for the year on January 1 of 

that year. However, they don’t have to pay 

these taxes until July 1 of the next year (18 

months later) when tax bills are issued. Under 

the terms of the lease, Oak becomes liable for 

the real estate taxes in the later year when the 

tax bills are issued. If the lease ends before the 

tax bill for a year is issued, Oak isn’t liable for 

the taxes for that year.

Oak cannot deduct the real estate taxes as 

rent until the tax bill is issued. This is when 

Oak's liability under the lease becomes fixed.

Example 2. The facts are the same as in 

Example 1, except that, according to the terms 

of the lease, Oak becomes liable for the real estate taxes when the owner of the property becomes liable for them. As a result, Oak will deduct the real estate taxes as rent on its tax 

return for the earlier year. This is the year in 

which Oak's liability under the lease becomes 

fixed.

Cost of Getting a Lease

You may either enter into a new lease with the 

lessor of the property or get an existing lease 

from another lessee. Very often when you get 

an existing lease from another lessee, you must 

pay the previous lessee money to get the lease, 

besides having to pay the rent on the lease.

If you get an existing lease on property or 

equipment for your business, you must generally amortize any amount you pay to get that 

lease over the remaining term of the lease. For 

example, if you pay $10,000 to get a lease and 

there are 10 years remaining on the lease with 

no option to renew, you can deduct $1,000 

each year.

The cost of getting an existing lease of tangible property is not subject to the amortization 

rules for section 197 intangibles discussed in 

chapter 8.

Option to renew. The term of the lease for 

amortization includes all renewal options plus 

any other period for which you and the lessor 

reasonably expect the lease to be renewed. 

However, this applies only if less than 75% of 

the cost of getting the lease is for the term remaining on the purchase date (not including 

any period for which you may choose to renew, 

extend, or continue the lease). Allocate the 

lease cost to the original term and any option 

term based on the facts and circumstances. In 

some cases, it may be appropriate to make the 

allocation using a present value calculation. For 

more information, see Regulations section 

1.178-1(b)(5).

Example 1. You paid $10,000 to get a 

lease with 20 years remaining on it and two options to renew for 5 years each. Of this cost, 

you paid $7,000 for the original lease and 

$3,000 for the renewal options. Because 

$7,000 is less than 75% of the total $10,000 

cost of the lease (or $7,500), you must amortize 

the $10,000 over 30 years. That is the remaining life of your present lease plus the periods for 

renewal.

Example 2. The facts are the same as in 

Example 1, except that you paid $8,000 for the 

original lease and $2,000 for the renewal options. You can amortize the entire $10,000 over 

the 20-year remaining life of the original lease. 

The $8,000 cost of getting the original lease 

was not less than 75% of the total cost of the 

lease (or $7,500).

Cost of a modification agreement. You may 

have to pay an additional “rent” amount over 

part of the lease period to change certain provisions in your lease. You must capitalize these 

payments and amortize them over the remaining period of the lease. You can’t deduct the 

payments as additional rent, even if they are 

described as rent in the agreement.

Example. You are a calendar year taxpayer and sign a 20-year lease to rent part of a 

building starting on January 1. However, before 

you occupy it, you decide that you really need 

less space. The lessor agrees to reduce your 

Page 12 Chapter 3 Rent Expense
rent from $7,000 to $6,000 per year and to release the excess space from the original lease. 

In exchange, you agree to pay an additional 

rent amount of $3,000, payable in 60 monthly 

installments of $50 each.

You must capitalize the $3,000 and amortize 

it over the 20-year term of the lease. Your amortization deduction each year will be $150 

($3,000 ÷ 20). You can’t deduct the $600 (12 × 

$50) that you will pay during each of the first 5 

years as rent.

Commissions, bonuses, and fees. Commissions, bonuses, fees, and other amounts you 

pay to get a lease on property you use in your 

business are capital costs. You must amortize 

these costs over the term of the lease.

Loss on merchandise and fixtures. If you 

sell at a loss merchandise and fixtures that you 

bought solely to get a lease, the loss is a cost of 

getting the lease. You must capitalize the loss 

and amortize it over the remaining term of the 

lease.

Improvements

by Lessee

If you add buildings or make other permanent 

improvements to leased property, depreciate 

the cost of the improvements using the modified 

accelerated cost recovery system (MACRS). 

Depreciate the property over its appropriate recovery period. You can’t amortize the cost over 

the remaining term of the lease.

If you don’t keep the improvements when 

you end the lease, figure your gain or loss 

based on your adjusted basis in the improvements at that time.

For more information, see the discussion of 

MACRS in chapter 4 of Pub. 946.

Assignment of a lease. If a long-term lessee 

who makes permanent improvements to land 

later assigns all lease rights to you for money 

and you pay the rent required by the lease, the 

amount you pay for the assignment is a capital 

investment. If the rental value of the leased land 

increased since the lease began, part of your 

capital investment is for that increase in the 

rental value. The rest is for your investment in 

the permanent improvements.

The part that is for the increased rental value 

of the land is a cost of getting a lease, and you 

amortize it over the remaining term of the lease. 

You can depreciate the part that is for your investment in the improvements over the recovery period of the property as discussed earlier, 

without regard to the lease term.

Capitalizing

Rent Expenses

Under the uniform capitalization rules, you must 

capitalize the direct costs and part of the indirect costs for certain production or resale activities. Include these costs in the basis of property 

you produce or acquire for resale, rather than 

claiming them as a current deduction. You 

recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, 

or otherwise dispose of the property.

Indirect costs include amounts incurred for 

renting or leasing equipment, facilities, or land.

Uniform capitalization rules. You may be 

subject to the uniform capitalization rules if you 

do any of the following, unless the property is 

produced for your use other than in a business 

or an activity carried on for profit.

1. Produce real property or tangible personal 

property.

2. Acquire property for resale. However, this 

rule does not apply to personal property if 

your average annual gross receipts are 

$26 million or less.

Effective for tax years beginning after 2017, 

if you are a small business taxpayer (see Cost 

of Goods Sold in chapter 1), you are not required to capitalize costs under section 263A. 

See section 263A(i).

Producing property. You produce property if you construct, build, install, manufacture, 

develop, improve, create, raise, or grow the 

property. Property produced for you under a 

contract is treated as produced by you to the 

extent you make payments or otherwise incur 

costs in connection with the property.

Example 1. You rent construction equipment to build a storage facility. If you are subject to the uniform capitalization rules, you must 

capitalize as part of the cost of the building the 

rent you paid for the equipment. You recover 

your cost by claiming a deduction for depreciation on the building.

Example 2. You rent space in a facility to 

conduct your business of manufacturing tools. If 

you are subject to the uniform capitalization 

rules, you must include the rent you paid to occupy the facility in the cost of the tools you produce.

More information. For exceptions and more 

information on these rules, see Uniform Capitalization Rules in Pub. 538 and the regulations 

under section 263A.

4.

Interest

Introduction

This chapter discusses the tax treatment of 

business interest expense. Business interest 

expense is an amount charged for the use of 

money you borrowed for business activities.

Topics

This chapter discusses:

• Allocation of interest

• Interest expense limitation

• Interest you can deduct

• Interest you cannot deduct

• Capitalization of interest

• When to deduct interest

• Below-market loans

Useful Items

You may want to see:

Publication

Installment Sales

Investment Income and Expenses

Home Mortgage Interest Deduction

Form (and Instructions)

Itemized 

Deductions

cdu(o) Supplemental 

Income and Loss

cdu(o) Partner's 

Share of Income,

Deductions, Credits, etc.

cdu(o) 

Shareholder's Share of Income,

Deductions, Credits, etc.

Mortgage Interest Statement

Application for Change in 

Accounting Method

Investment Interest Expense 

Deduction

Passive Activity Loss Limitations

Limitation on Business Interest 

Expense Under Section 163(j)

See chapter 12 for information about getting 

publications and forms.

Allocation of Interest

The rules for deducting interest vary, depending 

on whether the loan proceeds are used for business, personal, or investment activities. If you 

use the proceeds of a loan for more than one 

type of expense, you must allocate the interest 

based on the use of the loan's proceeds.

Allocate your interest expense to the following categories.

• Nonpassive trade or business activity interest.

• Passive trade or business activity interest.

• Investment interest.

• Portfolio interest.

• Personal interest.

In general, you allocate interest on a loan the 

same way you allocate the loan proceeds. You 

allocate loan proceeds by tracing disbursements to specific uses.

 537

 550

 936

 Schedule A (Form 1040)

 Schedule E (Form 1040)

 Schedule K-1 (Form 1065)

 Schedule K-1 (Form 1120-S)

 1098

 3115

 4952

 8582

 8990

Chapter 4 Interest Page 13
The easiest way to trace disbursements to specific uses is to keep the 

proceeds of a particular loan separate 

from any other funds.

Secured loan. The allocation of loan proceeds 

and the related interest is generally not affected 

by the use of property that secures the loan.

Example. You secure a loan with property 

used in your business. You use the loan proceeds to buy an automobile for personal use. 

You must allocate interest expense on the loan 

to personal use (purchase of the automobile) 

even though the loan is secured by business 

property.

P.L. 115-97, section 11043, limited the 

deduction for mortgage interest paid on 

home equity loans and line of credit. 

For more information, see Pub. 936.

Allocation period. The period for which a loan 

is allocated to a particular use begins on the 

date the proceeds are used and ends on the 

earlier of the following dates.

• The date the loan is repaid.

• The date the loan is reallocated to another 

use.

Proceeds not disbursed to borrower. Even 

if the lender disburses the loan proceeds to a 

third party, the allocation of the loan is still 

based on your use of the funds. This applies 

whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt.

Proceeds deposited in borrower's account. 

Treat loan proceeds deposited in an account as 

property held for investment. It does not matter 

whether the account pays interest. Any interest 

you pay on the loan is investment interest expense. If you withdraw the proceeds of the loan, 

you must reallocate the loan based on the use 

of the funds.

Example. Celina, a calendar-year taxpayer, 

borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. No other amounts are deposited in the 

account during the year and no part of the loan 

principal is repaid during the year. On April 2, 

Celina uses $20,000 from the checking account 

for a passive activity expenditure. On September 4, Celina uses an additional $40,000 from 

the account for personal purposes.

Under the interest allocation rules, the entire 

$100,000 loan is treated as property held for investment for the period from January 4 through 

April 1. From April 2 through September 3, Celina must treat $20,000 of the loan as used in the 

passive activity and $80,000 of the loan as 

property held for investment. From September 

4 through December 31, she must treat 

$40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, 

and $40,000 as property held for investment.

Order of funds spent. Generally, you treat 

loan proceeds deposited in an account as used 

(spent) before either of the following amounts.

• Any unborrowed amounts held in the same 

account.

TIP

CAUTION

!

• Any amounts deposited after these loan 

proceeds.

Example. On January 9, Olena opened a 

checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed 

funds. The following table shows the transactions in her account during the tax year.

Date Transaction

January 9 $500 proceeds of Loan A and 

$1,000 unborrowed funds 

deposited

January 14 $500 proceeds of Loan B 

deposited

February 19 $800 used for personal purposes

February 27 $700 used for passive activity

June 19 $1,000 proceeds of Loan C 

deposited

November 20 $800 used for an investment

December 18 $600 used for personal purposes

Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan 

A and $300 of the proceeds of Loan B. She 

treats the $700 used for a passive activity as 

made from the remaining $200 proceeds of 

Loan B and $500 of unborrowed funds. She 

treats the $800 used for an investment as made 

entirely from the proceeds of Loan C. She treats 

the $600 used for personal purposes as made 

from the remaining $200 proceeds of Loan C 

and $400 of unborrowed funds.

For the periods during which loan proceeds 

are held in the account, Olena treats them as 

property held for investment.

Payments from checking accounts. 

Generally, you treat a payment from a checking 

or similar account as made at the time the 

check is written if you mail or deliver it to the 

payee within a reasonable period after you write 

it. You can treat checks written on the same day 

as written in any order.

Amounts paid within 30 days. If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can 

treat any payment (up to the amount of the proceeds) made from any account you own, or 

from cash, as made from those proceeds. This 

applies to any payment made within 30 days 

before or after the proceeds are received in 

cash or deposited in your account.

If the loan proceeds are deposited in an account, you can apply this rule even if the rules 

stated earlier under Order of funds spent would 

otherwise require you to treat the proceeds as 

used for other purposes. If you apply this rule to 

any payments, disregard those payments (and 

the proceeds from which they are made) when 

applying the rules stated earlier under Order of 

funds spent.

If you received the loan proceeds in cash, 

you can treat the payment as made on the date 

you received the cash instead of the date you 

actually made the payment.

Example. Giovanni gets a loan of $1,000 

on August 4 and receives the proceeds in cash. 

Giovanni deposits $1,500 in an account on August 8 and on August 18 writes a check on the 

account for a passive activity expense. Also, 

Giovanni deposits his paycheck, deposits other 

loan proceeds, and pays his bills during the 

same period. Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 8 as being paid on August 4 from the loan proceeds. In addition, 

Giovanni can treat the passive activity expense 

he paid on August 18 as made from the $1,000 

loan proceeds treated as deposited in the account.

Optional method for determining date of 

reallocation. You can use the following 

method to determine the date loan proceeds 

are reallocated to another use. You can treat all 

payments from loan proceeds in the account 

during any month as taking place on the later of 

the following dates.

• The first day of that month.

• The date the loan proceeds are deposited 

in the account.

However, you can use this optional method only 

if you treat all payments from the account during the same calendar month in the same way.

Interest on a segregated account. If you 

have an account that contains only loan proceeds and interest earned on the account, you 

can treat any payment from that account as being made first from the interest. When the interest earned is used up, any remaining payments 

are from loan proceeds.

Example. You borrowed $20,000 and used 

the proceeds of this loan to open a new savings 

account. When the account had earned interest 

of $867, you withdrew $20,000 for personal purposes. You can treat the withdrawal as coming 

first from the interest earned on the account, 

$867, and then from the loan proceeds, 

$19,133 ($20,000 − $867). All the interest 

charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. The interest charged on the part of the proceeds used 

for personal purposes ($19,133) from the time 

you withdrew it until you either repay it or reallocate it to another use is personal interest expense. The interest charged on the loan proceeds you left in the account ($867) continues 

to be investment interest expense until you either repay it or reallocate it to another use.

Loan repayment. When you repay any part of 

a loan allocated to more than one use, treat it as 

being repaid in the following order.

1. Personal use.

2. Investments and passive activities (other 

than those included in (3)).

3. Passive activities in connection with a 

rental real estate activity in which you actively participate.

4. Former passive activities.

5. Trade or business use and expenses for 

certain low-income housing projects.

Line of credit (continuous borrowings). The 

following rules apply if you have a line of credit 

or similar arrangement.

1. Treat all borrowed funds on which interest 

accrues at the same fixed or variable rate 

as a single loan.

Page 14 Chapter 4 Interest
2. Treat borrowed funds or parts of borrowed 

funds on which interest accrues at different fixed or variable rates as different 

loans. Treat these loans as repaid in the 

order shown on the loan agreement.

Loan refinancing. Allocate the replacement 

loan to the same uses to which the repaid loan 

was allocated. Make this allocation only to the 

extent you use the proceeds of the new loan to 

repay any part of the original loan.

Debt-financed distribution. A debt-financed 

distribution occurs when a partnership or S corporation borrows funds and allocates those 

funds to distributions made to partners or 

shareholders. The manner in which you report 

the interest expense associated with the distributed debt proceeds depends on your use of 

those proceeds.

How to report. If the proceeds were used 

in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), 

line 28; enter “interest expense” and the name 

of the partnership or S corporation in column (a) 

and the amount in column (i). If the proceeds 

were used in a passive activity, follow the Instructions for Form 8582 to determine the 

amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter 

“interest expense” and the name of the partnership in column (a) and the amount in column 

(g). If the proceeds were used in an investment 

activity, enter the interest on Form 4952. If the 

proceeds are used for personal purposes, the 

interest is generally not deductible.

Interest Expense 

Limitation

You must generally limit business interest expense you pay or accrue during the tax year, 

unless an exception to the limitation is met.

The business interest expense deduction allowed for a tax year is generally limited to the 

sum of:

1. Business interest income,

2. 30% of the adjustable taxable income, and

3. Floor plan financing interest.

If the section 163(j) limitation applies, generally the amount of any business interest expense that is not allowed as a deduction under 

section 163(j) for the tax year is carried forward 

to the following year as a disallowed business 

interest expense carryforward. See the Instructions for Form 8990, Limitation on Business Interest Expense Under Section 163(j), for more 

information.

Interest You Can Deduct

Your trade or business interest expense may be 

limited. See the Instructions for Form 8990 for 

more information. Interest relates to your trade 

or business if you use the proceeds of the loan 

for a trade or business expense. It does not 

matter what type of property secures the loan. 

You can deduct interest on a debt only if you 

meet all the following requirements.

• You are legally liable for that debt.

• Both you and the lender intend that the 

debt be repaid.

• You and the lender have a true debtor–

creditor relationship.

Partial liability. If you are liable for part of a 

business debt, only your share of the total interest paid or accrued is included in your interest 

limitation calculation.

Example. You and your brother borrow 

money. You are liable for 50% of the note. You 

use your half of the loan in your business, and 

you make one-half of the loan payments. Your 

business interest is half of the total interest payments. However, the current year interest expense deduction may be limited.

Mortgage. Generally, mortgage interest paid 

or accrued on real estate you own legally or 

equitably is deductible. However, rather than 

deducting the interest currently, you may have 

to add it to the cost basis of the property as explained later under Capitalization of Interest.

Statement. If you paid $600 or more of 

mortgage interest (including certain points) during the year on any one mortgage, you will generally receive a Form 1098 or a similar statement. You will receive the statement if you pay 

interest to a person (including a financial institution or a cooperative housing corporation) in the 

course of that person's trade or business. A 

governmental unit is a person for purposes of 

furnishing the statement.

If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 4 of Form 1098. You cannot deduct 

this amount. For information on how to report 

this refund, see Refunds of interest, later, in this 

chapter.

Expenses paid to obtain a mortgage.

Certain expenses you pay to obtain a mortgage 

cannot be deducted as interest. These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. If the property mortgaged is business 

or income-producing property, you can amortize the costs over the life of the mortgage.

Prepayment penalty. If you pay off your 

mortgage early and pay the lender a penalty for 

doing this, you can deduct the penalty as interest.

Interest on employment tax deficiency. Interest charged on employment taxes assessed 

on your business is deductible.

Original issue discount (OID). OID is a form 

of interest. A loan (mortgage or other debt) generally has OID when its proceeds are less than 

its principal amount. The OID is the difference 

between the stated redemption price at maturity 

and the issue price of the loan.

A loan's stated redemption price at maturity 

is the sum of all amounts (principal and interest) 

payable on it other than qualified stated interest. Qualified stated interest is stated interest 

that is unconditionally payable in cash or property (other than another loan of the issuer) at 

least annually over the term of the loan at a single fixed rate.

You generally deduct OID over the term of 

the loan. Figure the amount to deduct each year 

using the constant-yield method, unless the 

OID on the loan is de minimis.

De minimis OID. The OID is de minimis if it 

is less than one-fourth of 1% (0.0025) of the 

stated redemption price of the loan at maturity 

multiplied by the number of full years from the 

date of original issue to maturity (the term of the 

loan).

If the OID is de minimis, you can choose one 

of the following ways to figure the amount you 

can deduct each year.

• On a constant-yield basis over the term of 

the loan.

• On a straight-line basis over the term of the 

loan.

• In proportion to stated interest payments.

• In its entirety at maturity of the loan.

You make this choice by deducting the OID in a 

manner consistent with the method chosen on 

your timely filed tax return for the tax year in 

which the loan is issued.

Example. On January 1, 2021, you took out 

a $100,000 discounted loan and received 

$98,500 in proceeds. The loan will mature on 

January 1, 2031 (a 10-year term), and the 

$100,000 principal is payable on that date. Interest of $10,000 is payable on January 1 of 

each year, beginning January 1, 2022. The 

$1,500 OID on the loan is de minimis because it 

is less than $2,500 ($100,000 × 0.0025 × 10). 

You choose to deduct the OID on a straight-line 

basis over the term of the loan. Beginning in 

2021, you can deduct $150 each year for 10 

years.

Constant-yield method. If the OID is not 

de minimis, you must use the constant-yield 

method to figure how much you can deduct 

each year. You figure your deduction for the first 

year using the following steps.

1. Determine the issue price of the loan. 

Generally, this equals the proceeds of the 

loan. If you paid points on the loan (as discussed later), the issue price is generally 

the difference between the proceeds and 

the points.

2. Multiply the result in (1) by the yield to maturity.

3. Subtract any qualified stated interest payments from the result in (2). This is the 

OID you can deduct in the first year.

To figure your deduction in any subsequent 

year, follow the steps above, except determine 

the adjusted issue price in step 1. To get the 

adjusted issue price, add to the issue price any 

OID previously deducted. Then follow steps 2 

and 3 above.

The yield to maturity is generally shown in 

the literature you receive from your lender. If 

you do not have this information, consult your 

lender or tax advisor. In general, the yield to 

maturity is the discount rate that, when used in 

figuring the present value of all principal and interest payments, produces an amount equal to 

the principal amount of the loan.

Chapter 4 Interest Page 15
Example. The facts are the same as in the 

previous example, except that you deduct the 

OID on a constant-yield basis over the term of 

the loan. The yield to maturity on your loan is 

10.2467%, compounded annually. For 2021, 

you can deduct $93 [($98,500 × 0.102467) − 

$10,000]. For 2022, you can deduct $103 

[($98,593 × 0.102467) − $10,000].

Loan or mortgage ends. If your loan or 

mortgage ends, you may be able to deduct any 

remaining OID in the tax year in which the loan 

or mortgage ends. A loan or mortgage may end 

due to a refinancing, prepayment, foreclosure, 

or similar event.

If you refinance with the original lender, 

you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct 

it over the term of the new mortgage or loan. 

See Interest paid with funds borrowed from 

original lender under Interest You Cannot Deduct, later.

Points. The term “points” is used to describe 

certain charges paid, or treated as paid, by a 

borrower to obtain a loan or a mortgage. These 

charges are also called loan origination fees, 

maximum loan charges, discount points, or premium charges. If any of these charges (points) 

are solely for the use of money, they are interest.

Because points are prepaid interest, you 

generally cannot deduct the full amount in the 

year paid. However, you can choose to fully deduct points in the year paid if you meet certain 

tests. For exceptions to the general rule, see 

Pub. 936.

The points reduce the issue price of the loan 

and result in OID, deductible as explained in the 

preceding discussion.

Partial payments on a nontax debt. If you 

make partial payments on a debt (other than a 

debt owed to the IRS), the payments are applied, in general, first to interest and any remainder to principal. You can deduct only the 

interest. This rule does not apply when it can be 

inferred that the borrower and lender understood that a different allocation of the payments 

would be made.

Installment purchase. If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. If no interest 

or a low rate of interest is charged under the 

contract, a portion of the stated principal 

amount payable under the contract may be recharacterized as interest (unstated interest). 

The amount recharacterized as interest reduces 

your basis in the property and increases your 

interest expense. For more information on installment sales and unstated interest, see Pub. 

537.

Interest You Cannot 

Deduct

Certain interest payments cannot be deducted. 

In addition, certain other expenses that may 

CAUTION

!

seem to be interest, but are not, cannot be deducted as interest.

You cannot currently deduct interest that 

must be capitalized, and you generally cannot 

deduct personal interest.

Interest paid with funds borrowed from 

original lender. If you use the cash method of 

accounting, you cannot deduct interest you pay 

with funds borrowed from the original lender 

through a second loan, an advance, or any 

other arrangement similar to a loan. You can 

deduct the interest expense once you start 

making payments on the new loan.

When you make a payment on the new loan, 

you first apply the payment to interest and then 

to the principal. All amounts you apply to the interest on the first loan are deductible, along with 

any interest you pay on the second loan, subject to any limits that apply.

Capitalized interest. You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. See Capitalization of Interest, later. In addition, if you buy 

property and pay interest owed by the seller (for 

example, by assuming the debt and any interest 

accrued on the property), you cannot deduct 

the interest. Add this interest to the basis of the 

property.

Commitment fees or standby charges. Fees 

you incur to have business funds available on a 

standby basis, but not for the actual use of the 

funds, are not deductible as interest payments. 

You may be able to deduct them as business 

expenses.

If the funds are for inventory or certain property used in your business, the fees are indirect 

costs and you must generally capitalize them 

under the uniform capitalization rules. See Capitalization of Interest, later.

Interest on income tax. Interest charged on 

income tax assessed on your individual income 

tax return is not a business deduction even 

though the tax due is related to income from 

your trade or business. Treat this interest as a 

business deduction only in figuring a net operating loss deduction.

Penalties. Penalties on underpaid deficiencies and underpaid estimated tax are not interest. You cannot deduct them. Generally, you 

cannot deduct any fines or penalties.

Interest on loans with respect to life insurance policies. You generally cannot deduct 

interest on a debt incurred with respect to any 

life insurance, annuity, or endowment contract 

that covers any individual unless that individual 

is a key person.

If the policy or contract covers a key person, 

you can deduct the interest on up to $50,000 of 

debt for that person. However, the deduction for 

any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as 

Moody's Corporate Bond Yield Average—Monthly Average Corporates) (Moody's 

rate) for that month.

Who is a key person? A “key person” is 

an officer or 20% owner. However, the number 

of individuals you can treat as key persons is 

limited to the greater of the following.

• Five individuals.

• The lesser of 5% of the total officers and 

employees of the company or 20 individuals.

Exceptions for pre-June 1997 contracts. 

You can generally deduct the interest if the contract was issued before June 9, 1997, and the 

covered individual is someone other than an 

employee, officer, or someone financially interested in your business. If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is 

covered by the contract.

Interest allocated to unborrowed policy 

cash value. Corporations and partnerships 

generally cannot deduct any interest expense 

allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. This 

rule applies to contracts issued after June 8, 

1997, that cover someone other than an officer, 

director, employee, or 20% owner. For more information, see section 264(f).

Capitalization of Interest

Under the uniform capitalization rules, you must 

generally capitalize interest on debt equal to 

your expenditures to produce real property or 

certain tangible personal property. The property 

must be produced by you for use in your trade 

or business or for sale to customers. You cannot capitalize interest related to property that 

you acquire in any other manner.

Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Designated property is any of the following.

• Real property.

• Tangible personal property with a class life 

of 20 years or more.

• Tangible personal property with an estimated production period of more than 2 

years.

• Tangible personal property with an estimated production period of more than 1 year if 

the estimated cost of production is more 

than $1 million.

Property you produce. You produce property 

if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Treat 

property produced for you under a contract as 

produced by you up to the amount you pay or 

incur for the property.

Carrying charges. Carrying charges include 

taxes you pay to carry or develop real estate or 

to carry, transport, or install personal property. 

You can choose to capitalize carrying charges 

not subject to the uniform capitalization rules if 

they are otherwise deductible. For more information, see chapter 7.

Capitalized interest. Treat capitalized interest 

as a cost of the property produced. You recover 

your interest when you sell or use the property. 

If the property is inventory, recover capitalized 

interest through cost of goods sold. If the property is used in your trade or business, recover 

Page 16 Chapter 4 Interest
capitalized interest through an adjustment to 

basis, depreciation, amortization, or other 

method.

Partnerships and S corporations. The interest capitalization rules are applied first at the 

partnership or S corporation level. The rules are 

then applied at the partners' or shareholders' 

level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs.

If you are a partner or a shareholder, you 

may have to capitalize interest you incur during 

the tax year for the production costs of the partnership or S corporation. You may also have to 

capitalize interest incurred by the partnership or 

S corporation for your own production costs. To 

properly capitalize interest under these rules, 

you must be given the required information in 

an attachment to the Schedule K-1 you receive 

from the partnership or S corporation.

Additional information. The procedures for 

applying the uniform capitalization rules are beyond the scope of this publication. For more information, see Regulations sections 1.263A-8 

through 1.263A-15 and Notice 88-99, which is 

in Cumulative Bulletin 1988-2.

When To Deduct Interest

If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, and the 

business interest expense deduction limitation 

rules discussed under Interest Expense Limitation, earlier, do not apply, deduct interest as follows.

Cash method. Under the cash method, you 

can generally deduct only the interest you actually paid during the tax year. You cannot deduct a promissory note you gave as payment 

because it is a promise to pay and not an actual 

payment.

Prepaid interest. You generally cannot deduct any interest paid before the year it is due. 

Interest paid in advance can be deducted only 

in the tax year in which it is due.

Discounted loan. If interest or a discount 

is subtracted from your loan proceeds, it is not a 

payment of interest and you cannot deduct it 

when you get the loan. For more information, 

see Original issue discount (OID) under Interest 

You Can Deduct, earlier.

Refunds of interest. If you pay interest 

and then receive a refund in the same tax year 

of any part of the interest, reduce your interest 

deduction by the refund. If you receive the refund in a later tax year, include the refund in 

your income to the extent the deduction for the 

interest reduced your tax.

Accrual method. Under an accrual method, 

you can deduct only interest that has accrued 

during the tax year.

Prepaid interest. You generally cannot deduct any interest paid before the year it is due. 

Interest paid in advance can be deducted only 

in the tax year in which it is due.

Discounted loan. If interest or a discount 

is subtracted from your loan proceeds, it is not a 

payment of interest and you cannot deduct it 

when you get the loan. For more information, 

see Original issue discount (OID) under Interest 

You Can Deduct, earlier.

Tax deficiency. If you contest a federal income tax deficiency, interest does not accrue 

until the tax year the final determination of liability is made. If you do not contest the deficiency, 

then the interest accrues in the year the tax was 

asserted and agreed to by you.

However, if you contest but pay the proposed tax deficiency and interest, and you do 

not designate the payment as a cash bond, 

then the interest is deductible in the year paid.

Related person. If you use an accrual 

method, you cannot deduct interest owed to a 

related person who uses the cash method until 

payment is made and the interest is includible in 

the gross income of that person. The relationship is determined as of the end of the tax year 

for which the interest would otherwise be deductible. See section 267 for more information.

Below-Market Loans

If you receive a below-market gift or demand 

loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. See Treatment of gift and demand loans, 

later, in this discussion.

A “below-market loan” is a loan on which no 

interest is charged or on which interest is 

charged at a rate below the applicable federal 

rate (AFR). A gift or demand loan that is a below-market loan is generally considered an 

arm's-length transaction in which you, the borrower, are considered as having received both 

of the following.

• A loan in exchange for a note that requires 

the payment of interest at the AFR.

• An additional payment in an amount equal 

to the forgone interest.

The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the 

substance of the transaction.

Forgone interest. For any period, forgone interest is:

1. The interest that would be payable for that 

period if interest accrued on the loan at the 

AFR and was payable annually on December 31, minus

2. Any interest actually payable on the loan 

for the period.

AFRs are published by the IRS each 

month in the Internal Revenue Bulletin 

(I.R.B.), which is available on the IRS 

website at IRS.gov/IRB. You can also contact 

an IRS office to get these rates.

Loans subject to the rules. The rules for below-market loans apply to the following.

1. Gift loans (below-market loans where the 

forgone interest is in the nature of a gift).

TIP

2. Compensation-related loans (below-market loans between an employer and an 

employee or between an independent 

contractor and a person for whom the contractor provides services).

3. Corporation-shareholder loans.

4. Tax avoidance loans (below-market loans 

where the avoidance of federal tax is one 

of the main purposes of the interest arrangement).

5. Loans to qualified continuing care facilities 

under a continuing care contract (made after October 11, 1985).

Except as noted in (5) above, these rules 

apply to demand loans (loans payable in full at 

any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans 

that are not demand loans) made after that 

date.

Treatment of gift and demand loans. If you 

receive a below-market gift loan or demand 

loan, you are treated as receiving an additional 

payment (as a gift, dividend, etc.) equal to the 

forgone interest on the loan. You are then treated as transferring this amount back to the 

lender as interest. These transfers are considered to occur annually, generally on December 

31. If you use the loan proceeds in your trade or 

business, you can deduct the forgone interest 

each year as a business interest expense. The 

lender must report it as interest income.

Limit on forgone interest for gift loans of 

$100,000 or less. For gift loans between individuals, forgone interest treated as transferred 

back to the lender is limited to the borrower's 

net investment income for the year. This limit 

applies if the outstanding loans between the 

lender and borrower total $100,000 or less. If 

the borrower's net investment income is $1,000 

or less, it is treated as zero. This limit does not 

apply to a loan if the avoidance of any federal 

tax is one of the main purposes of the interest 

arrangement.

Treatment of term loans. If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc.) on 

the date the loan is made. This payment is 

equal to the loan amount minus the present 

value, at the AFR, of all payments due under 

the loan. The same amount is treated as OID on 

the loan. See Original issue discount (OID) under Interest You Can Deduct, earlier.

Exceptions for loans of $10,000 or less. 

The rules for below-market loans do not apply 

to any day on which the total outstanding loans 

between the borrower and lender is $10,000 or 

less. This exception applies only to the following.

1. Gift loans between individuals if the loan is 

not directly used to buy or carry income-producing assets.

2. Compensation-related loans or corporation-shareholder loans if the avoidance of 

any federal tax is not a principal purpose 

of the interest arrangement.

Chapter 4 Interest Page 17
This exception does not apply to a term loan 

described in (2) above that was previously subject to the below-market loan rules. Those rules 

will continue to apply even if the outstanding 

balance is reduced to $10,000 or less.

Exceptions for loans without significant tax 

effect. The following loans are specifically exempted from the rules for below-market loans 

because their interest arrangements do not 

have a significant effect on the federal tax liability of the borrower or the lender.

1. Loans made available by lenders to the 

general public on the same terms and 

conditions that are consistent with the 

lender's customary business practices.

2. Loans subsidized by a federal, state, or 

municipal government that are made available under a program of general application to the public.

3. Certain employee-relocation loans.

4. Certain loans to or from a foreign person, 

unless the interest income would be effectively connected with the conduct of a U.S. 

trade or business and not exempt from 

U.S. tax under an income tax treaty.

5. Any other loan if the taxpayer can show 

that the interest arrangement has no significant effect on the federal tax liability of 

the lender or the borrower. Whether an interest arrangement has a significant effect 

on the federal tax liability of the lender or 

the borrower will be determined by all the 

facts and circumstances. Consider all the 

following factors.

a. Whether items of income and deduction generated by the loan offset each 

other.

b. The amount of the items.

c. The cost of complying with the below-market loan provisions if they 

were to apply.

d. Any reasons, other than taxes, for 

structuring the transaction as a below-market loan.

Exception for loans to qualified continuing 

care facilities. The below-market interest 

rules do not apply to a loan owed by a qualified 

continuing care facility under a continuing care 

contract if the lender or lender's spouse is age 

62 or older by the end of the calendar year.

A qualified continuing care facility is one or 

more facilities (excluding nursing homes) meeting the requirements listed below.

1. Designed to provide services under continuing care contracts (defined below).

2. Includes an independent living unit, and 

either an assisted living or nursing facility, 

or both.

3. Substantially all of the independent living 

unit residents are covered by continuing 

care contracts.

A “continuing care contract” is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions.

1. The individual or individual's spouse must 

be entitled to use the facility for the rest of 

their life or lives.

2. The individual or individual's spouse will 

be provided with housing, as appropriate 

for the health of the individual or individual's spouse in an:

a. Independent living unit (which has additional available facilities outside the 

unit for the provision of meals and 

other personal care), and

b. Assisted living or nursing facility available in the continuing care facility.

3. The individual or individual's spouse will 

be provided with assisted living or nursing 

care available in the continuing care facility, as required for the health of the individual or the individual's spouse.

For more information, see section 7872(h).

Sale or exchange of property. Different rules 

generally apply to a loan connected with the 

sale or exchange of property. If the loan does 

not provide adequate stated interest, part of the 

principal payment may be considered interest. 

However, there are exceptions that may require 

you to apply the below-market interest rate 

rules to these loans. See Unstated Interest and 

Original Issue Discount (OID) in Pub. 537.

More information. For more information on 

below-market loans, see section 7872 and Regulations section 1.7872-5.

5.

Taxes

Introduction

You can deduct various federal, state, local, 

and foreign taxes directly attributable to your 

trade or business as business expenses.

You cannot deduct federal income 

taxes, estate and gift taxes, or state inheritance, legacy, and succession 

taxes.

Topics

This chapter discusses:

• When to deduct taxes

• Real estate taxes

• Income taxes

• Employment taxes

• Other taxes

CAUTION

!

Useful Items

You may want to see:

Publication

(Circular E), Employer's Tax Guide

Tax Guide for Small Business

Excise Taxes

Accounting Periods and Methods

Basis of Assets

Form (and Instructions)

U.S. Individual Income 

Tax Return

Itemized 

Deductions

Self-Employment Tax

Application for Change in 

Accounting Method

Additional Medicare Tax

See chapter 12 for information about getting 

publications and forms.

When To Deduct Taxes

Generally, you can only deduct taxes in the 

year you pay them. This applies whether you 

use the cash method or an accrual method of 

accounting.

Under an accrual method, you can deduct a 

tax before you pay it if you meet the exception 

for recurring items discussed under Economic 

Performance in Pub. 538. You can also elect to 

ratably accrue real estate taxes as discussed 

later under Real Estate Taxes. See also Foreign 

income taxes, discussed later.

Limit on accrual of taxes. A taxing jurisdiction can require the use of a date for accruing 

taxes that is earlier than the date it originally required. However, if you use an accrual method, 

and can deduct the tax before you pay it, use 

the original accrual date for the year of change 

and all future years to determine when you can 

deduct the tax.

Example. Your state imposes a tax on personal property used in a trade or business conducted in the state. This tax is assessed and 

becomes a lien as of July 1 (accrual date). In 

2021, the state changed the assessment and 

lien dates from July 1, 2022, to December 31, 

2021, for property tax year 2022. Use the original accrual date (July 1, 2022) to determine 

when you can deduct the tax. You must also 

use the July 1 accrual date for all future years to 

determine when you can deduct the tax.

Uniform capitalization rules. Uniform capitalization rules apply to certain taxpayers who produce real property or tangible personal property 

for use in a trade or business or for sale to customers. They also apply to certain taxpayers 

who acquire property for resale. Under these 

rules, you either include certain costs in inventory or capitalize certain expenses related to the 

 15

 334

 510

 538

 551

 1040 or 1040-SR

 Schedule A (Form 1040)

 Schedule SE (Form 1040)

 3115

 8959

Page 18 Chapter 5 Taxes
property, such as taxes. For more information, 

see chapter 1.

Carrying charges. Carrying charges include 

taxes you pay to carry or develop real estate or 

to carry, transport, or install personal property. 

You can elect to capitalize carrying charges not 

subject to the uniform capitalization rules if they 

are otherwise deductible. For more information, 

see chapter 7.

Refunds of taxes. If you receive a refund for 

any taxes you deducted in an earlier year, include the refund in income to the extent the deduction reduced your federal income tax in the 

earlier year. For more information, see Recovery of amount deducted (tax benefit rule) in 

chapter 1.

You must include in income any interest you receive on tax refunds.

Real Estate Taxes

Deductible real estate taxes are any state or local taxes, including taxes imposed by U.S. possessions, on real estate levied for the general 

public welfare. 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. Deductible real estate 

taxes generally do not include taxes charged for 

local benefits and improvements that increase 

the value of the property. See Taxes for local 

benefits, later.

Real estate taxes imposed by a foreign 

country are not deductible unless paid or accrued in connection with the conduct of a trade 

or business or for the production of income. 

Amounts of deductible state and local real estate taxes are included in the combined 

$10,000 limitation of itemized deductions. See 

State and local income taxes, later.

If you use an accrual method, you generally 

cannot accrue real estate taxes until you pay 

them to the government authority. However, 

you can elect to ratably accrue the taxes during 

the year. See Electing to ratably accrue, later.

Taxes for local benefits. Generally, you cannot deduct taxes charged for local benefits and 

improvements that tend to increase the value of 

your property. These include assessments for 

streets, sidewalks, water mains, sewer lines, 

and public parking facilities. You should increase the basis of your property by the amount 

of the assessment.

You can deduct taxes for these local benefits only if the taxes are for maintenance, repairs, or interest charges related to those benefits. If part of the tax is for maintenance, repairs, 

or interest, you must be able to show how much 

of the tax is for these expenses to claim a deduction for that part of the tax.

Example. To improve downtown commercial business, Waterfront City converted a 

downtown business area street into an enclosed pedestrian mall. The city assessed the 

full cost of construction, financed with 10-year 

bonds, against the affected properties. The city 

TIP

is paying the principal and interest with the annual payments made by the property owners.

The assessments for construction costs are 

not deductible as taxes or as business expenses, but are depreciable capital expenses. The 

part of the payments used to pay the interest 

charges on the bonds is deductible as taxes.

Charges for services. Water bills, sewerage, 

and other service charges assessed against 

your business property are not real estate 

taxes, but are deductible as business expenses.

Purchase or sale of real estate. If real estate 

is sold, the real estate taxes must be allocated 

between the buyer and the seller.

The buyer and seller must allocate the real 

estate taxes according to the number of days in 

the real property tax year (the period to which 

the tax imposed relates) that each owned the 

property. Treat the seller as paying the taxes up 

to but not including the date of sale. Treat the 

buyer as paying the taxes beginning with the 

date of sale. You can usually find this information on the settlement statement you received at 

closing.

If you (the seller) use an accrual method and 

have not elected to ratably accrue real estate 

taxes, you are considered to have accrued your 

part of the tax on the date you sell the property.

Example. Alberto Verde, a calendar year 

accrual method taxpayer, owns real estate in 

Olmo County. He has not elected to ratably accrue property taxes. November 30 of each year 

is the assessment and lien date for the current 

real property tax year, which is the calendar 

year. He sold the property on June 30, 2021. 

Under his accounting method, he would not be 

able to claim a deduction for the taxes because 

the sale occurred before November 30. He is 

treated as having accrued his part of the tax, 

181/365 (January 1–June 29), on June 30, and 

he can deduct it for 2021.

Electing to ratably accrue. If you use an accrual method, you can elect to accrue real estate tax related to a definite period ratably over 

that period.

Example. Juan Sanchez is a calendar year 

taxpayer who uses an accrual method. His real 

estate taxes for the real property tax year, July 

1, 2021, to June 30, 2022, are $1,200. July 1 is 

the assessment and lien date.

If Juan elects to ratably accrue the taxes, 

$600 will accrue in 2021 ($1,200 × 6/12, July 1–

December 31) and the balance will accrue in 

2022.

Separate elections. You can elect to ratably accrue the taxes for each separate trade or 

business and for nonbusiness activities if you 

account for them separately. Once you elect to 

ratably accrue real estate taxes, you must use 

that method unless you get permission from the 

IRS to change. See Form 3115, later.

Making the election. If you elect to ratably 

accrue the taxes for the first year in which you 

incur real estate taxes, attach a statement to 

your income tax return for that year. The statement should show all the following items.

• The trades or businesses to which the 

election applies and the accounting 

method or methods used.

• The period to which the taxes relate.

• The calculation of the real estate tax deduction for that first year.

Generally, you must file your return by the 

due date (including extensions). However, if 

you timely filed your return for the year without 

electing to ratably accrue, you can still make the 

election by filing an amended return within 6 

months after the due date of the return (excluding extensions). Attach the statement to the 

amended return and write “Filed pursuant to 

section 301.9100-2” on the statement. File the 

amended return at the same address where you 

filed the original return.

Form 3115. If you elect to ratably accrue 

real estate taxes for a year after the first year in 

which you incur real estate taxes, or if you want 

to revoke your election to ratably accrue real 

estate taxes, file Form 3115. For more information, including applicable time frames for filing, 

see the Instructions for Form 3115.

Income Taxes

This section discusses federal, state, local, and 

foreign income taxes.

Federal income taxes. You cannot deduct 

federal income taxes.

State and local income taxes. A corporation 

or partnership can deduct state and local income taxes imposed on the corporation or partnership as business expenses.

An individual can deduct state and local income taxes only as an itemized deduction on 

Schedule A (Form 1040), subject to limitations. 

The deduction is limited to $10,000 as a total of 

the following taxes.

1. State and local income taxes or general 

sales taxes. See the Schedule A (Form 

1040) instructions.

2. State and local real estate taxes. See the 

Schedule A (Form 1040) instructions. See 

also Real Estate Taxes, earlier.

3. State and local personal property taxes.

However, an individual can deduct a state 

tax on gross income (as distinguished from net 

income) directly attributable to a trade or business as a business expense.

Accrual of contested income taxes. If 

you use an accrual method, and you contest a 

state or local income tax liability, you must accrue and deduct any contested amount in the 

tax year in which the liability is finally determined.

If additional state or local income taxes for a 

prior year are assessed in a later year, you can 

deduct the taxes in the year in which they were 

originally imposed (the prior year) if the tax liability is not contested. You cannot deduct them 

in the year in which the liability is finally determined.

Chapter 5 Taxes Page 19
The filing of an income tax return is not 

considered a contest and, in the absence of an overt act of protest, you 

can deduct the tax in the prior year. Also, you 

can deduct any additional taxes in the prior year 

if you do not show some affirmative evidence of 

denial of the liability.

However, if you consistently deduct additional assessments in the year they are paid or 

finally determined (including those for which 

there was no contest), you must continue to do 

so. You cannot take a deduction in the earlier 

year unless you receive permission to change 

your method of accounting. For more information on accounting methods, see When Can I 

Deduct an Expense in chapter 1.

If you contest a state or local tax liability, and 

you transfer money or other property as a provisional payment of the contested tax liability, you 

can accrue and deduct the amount of the contested tax liability for which you made the provisional payment in the year in which you made 

the payment, even though the liability is not determined until a later year.

If any portion of the contested amount which 

was deducted in the year the provisional payment was made is later refunded when the contest is settled, you must include such portion in 

your gross income in the year the refund is received.

Notwithstanding the exception that allows 

accrual and deduction of contested state or local income tax liability upon payment, current 

accrual and deduction is not allowed for income, war profits, and excess profits taxes imposed by a foreign country or possession of the 

United States.

Foreign income taxes. Generally, you can 

take either a deduction or a credit for income 

taxes imposed on you by a foreign country or a 

U.S. possession, subject to limitations. However, an individual cannot take a deduction or 

credit for foreign income taxes paid on income 

that is exempt from U.S. tax under the foreign 

earned income exclusion or the foreign housing 

exclusion. For information on these exclusions, 

see Pub. 54. For information on the foreign tax 

credit, see Pub. 514.

Accrual of foreign income taxes. If you 

use an accrual method and choose to take a 

deduction (rather than a credit) for foreign income taxes, you can deduct the taxes in the 

year in which the fact of the liability becomes 

fixed and the amount of the liability can be determined with reasonable accuracy. Generally, 

this is the year with or within which the tax year 

that applies for foreign tax purposes ends or, in 

the case of a contested tax, the year in which 

the contest is resolved. Different rules may apply to determine when a foreign income tax is 

considered to accrue for purposes of the foreign tax credit. For more information on the foreign tax credit, see Pub. 514.

Employment Taxes

If you have employees, you must withhold various taxes from your employees' pay. Most employers must withhold their employees' share of 

social security, Medicare taxes, and Additional 

Medicare Tax (if applicable), along with state 

TIP

and federal income taxes. You may also need 

to pay certain employment taxes from your own 

funds. These include your share of social security and Medicare taxes as an employer, along 

with unemployment taxes.

Your deduction for wages paid is not reduced by the social security and Medicare 

taxes, Additional Medicare Tax, and income 

taxes you withhold from your employees. You 

can deduct the employment taxes you must pay 

from your own funds as taxes.

Example. You pay your employee $18,000 

a year. However, after you withhold various 

taxes, your employee receives $14,500. You 

also pay an additional $1,500 in employment 

taxes. You should deduct the full $18,000 as 

wages. You can deduct the $1,500 you pay 

from your own funds as taxes.

Additional Medicare Tax. You must withhold 

a 0.9% Additional Medicare Tax from wages 

you pay to an employee in excess of $200,000 

in a calendar year. The Additional Medicare Tax 

is only imposed on the employee. There is no 

employer share of Additional Medicare Tax.

For more information on the Additional Medicare Tax, see Form 8959 and its instructions.

For more information on employment 

taxes, see Pub. 15 (Circular E).

Unemployment fund taxes. As an employer, 

you may have to make payments to a state unemployment compensation fund or to a state 

disability benefit fund. Deduct these payments 

as taxes.

Self-employment tax. You can deduct part of 

your self-employment tax as a business expense in figuring your adjusted gross income. 

This deduction only affects your income tax. It 

does not affect your net earnings from self-employment or your self-employment tax.

To deduct the tax, enter on Schedule 1 

(Form 1040), line 14, the amount shown on the 

Deduction for one-half of self-employment tax 

line of Schedule SE (Form 1040).

For more information on self-employment 

tax, see Pub. 334.

Additional Medicare Tax. You may be required to pay Additional Medicare Tax on 

self-employment income. See Form 8959 and 

the Instructions for Form 8959 for more information on the Additional Medicare Tax.

Other Taxes

The following are other taxes you can deduct if 

you incur them in the ordinary course of your 

trade or business.

Excise taxes. Generally, you can deduct as a 

business expense all excise taxes that are ordinary and necessary expenses of carrying on 

your trade or business. However, see Fuel 

taxes, later.

For more information on excise taxes, see 

Pub. 510.

TIP

Franchise taxes. You can deduct corporate 

franchise taxes as a business expense.

Fuel taxes. Generally, taxes on gasoline, diesel fuel, and other motor fuels that you use in 

your business are included as part of the cost of 

the fuel. Do not deduct these taxes as a separate item.

You may be entitled to a credit or refund for 

federal excise tax you paid on fuels used for 

certain purposes. For more information, see 

Pub. 510.

Occupational taxes. You can deduct as a 

business expense an occupational tax charged 

at a flat rate by a locality for the privilege of 

working or conducting a business in the locality.

Personal property tax. You can deduct any 

tax imposed by a state or local government on 

personal property used in your trade or business.

Sales tax. Any sales tax you pay on a service 

for your business, or on the purchase or use of 

property in your business is treated as part of 

the cost of the service or property. 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. If the property is 

merchandise bought for resale, the sales tax is 

part of the cost of the merchandise. If the property is depreciable, add the sales tax to the basis for depreciation. For more information on 

basis, see Pub. 551.

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. Also, do not include these 

taxes in gross receipts or sales.

6.

Insurance

Reminder

Premium tax credit. You may have to use the 

worksheets in Pub. 974 instead of the worksheet in this chapter. Use the worksheets in 

Pub. 974 if the insurance plan established, or 

considered to be established, under your business was obtained through the Health Insurance Marketplace and you are claiming the premium tax credit. See Pub. 974 for details.

Introduction

You can generally deduct the ordinary and necessary cost of insurance as a business expense 

if it is for your trade, business, or profession. 

However, you may have to capitalize certain insurance costs under the uniform capitalization 

CAUTION

!

Page 20 Chapter 6 Insurance
rules. For more information, see Capitalized 

Premiums, later.

Topics

This chapter discusses:

• Deductible premiums

• Nondeductible premiums

• Capitalized premiums

• When to deduct premiums

Useful Items

You may want to see:

Publication

Employer's Tax Guide to Fringe 

Benefits

Taxable and Nontaxable Income

Accounting Periods and Methods

Casualties, Disasters, and Thefts

Form (and Instructions)

U.S. Individual Income Tax Return

U.S. Nonresident Alien Income 

Tax Return

cdu(o) Additional 

Income and Adjustments to Income

cdu(o) Itemized 

Deductions

cdu(o) Profit or Loss 

From Business

cdu(o) Profit or Loss 

From Farming

cdu(o) 

Self-Employment Tax

cdu(o) Partner's 

Share of Income, Deductions, 

Credits, etc.

ealth Coverage Tax Credit 

(HCTC) Advance Payments

Foreign Earned Income

Health Coverage Tax Credit

W-2age and Tax Statement

See chapter 12 for information about getting 

publications and forms.

Deductible Premiums

You can generally deduct premiums you pay for 

the following kinds of insurance related to your 

trade or business.

1. Insurance that covers fire, storm, theft, accident, or similar losses.

2. Credit insurance that covers losses from 

business bad debts.

3. Group hospitalization and medical insurance for employees, including long-term 

care insurance.

a. If a partnership pays accident and 

health insurance premiums for its 

 15-B 

 525 

 538 

 547 

 1040 

 1040-NR 

 Schedule 1 (Form 1040)

 Schedule A (Form 1040)

 Schedule C (Form 1040)

 Schedule F (Form 1040)

 Schedule SE (Form 1040)

 Schedule K-1 (Form 1065)

 1099-H 

 2555 

 8885 

 W-2 

partners, it can generally deduct them 

as guaranteed payments to partners.

b. If an S corporation pays accident and 

health insurance premiums for its 

more-than-2% shareholder-employees, it can generally deduct them, but 

must also include them in the shareholder's wages subject to federal income tax withholding. See Pub.15-B.

4. Liability insurance.

5. Malpractice insurance that covers your 

personal liability for professional negligence resulting in injury or damage to patients or clients.

6. 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.

a. If a partnership pays workers' compensation premiums for its partners, it 

can generally deduct them as guaranteed payments to partners.

b. If an S corporation pays workers' 

compensation premiums for its 

more-than-2% shareholder-employees, it can generally deduct them, but 

must also include them in the shareholder's wages.

7. Contributions to a state unemployment insurance fund are deductible as taxes if 

they are considered taxes under state law.

8. Overhead insurance that pays for business overhead expenses you have during 

long periods of disability caused by your 

injury or sickness.

9. Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. 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. If you use the standard mileage rate to figure your car expenses, you 

can’t deduct any car insurance premiums.

10. Life insurance covering your officers and 

employees if you aren’t directly or indirectly a beneficiary under the contract.

11. Business interruption insurance that pays 

for lost profits if your business is shut 

down due to a fire or other cause.

Self-Employed Health 

Insurance Deduction

You may be able to deduct the amount you paid 

for medical and dental insurance and qualified 

long-term care insurance for yourself, your 

spouse, and your dependents. The health insurance can cover your child who was under age 

27 at the end of 2021, even if the child wasn’t 

your dependent. A child includes your son, 

daughter, stepchild, adopted child, or foster 

child. A foster child is any child placed with you 

by an authorized placement agency or by judgment, decree, or other order of any court of 

competent jurisdiction.

One of the following statements must be 

true.

• You were self-employed and had a net 

profit for the year reported on Schedule C 

(Form 1040) or Schedule F (Form 1040).

• You were a partner with net earnings from 

self-employment for the year reported on 

Schedule K-1 (Form 1065), box 14,

code A.

• You used one of the optional methods to 

figure your net earnings from self-employment on Schedule SE.

• You received wages in 2021 from an S corporation in which you were a 

more-than-2% shareholder. Health insurance premiums paid or reimbursed by the 

S corporation are shown as wages on 

Form W-2.

The insurance plan must be established, or 

considered to be established as discussed in 

the following bullets, under your business.

• For self-employed individuals filing a 

Schedule C (Form 1040) or Schedule F 

(Form 1040), a policy can be either in the 

name of the business or in the name of the 

individual.

• For partners, a policy can be either in the 

name of the partnership or in the name of 

the partner. You can either pay the premiums yourself or the partnership can pay 

them and report the premium amounts on 

Schedule K-1 (Form 1065) as guaranteed 

payments to be included in your gross income. However, if the policy is in your 

name and you pay the premiums yourself, 

the partnership must reimburse you and 

report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. 

Otherwise, the insurance plan won’t be 

considered to be established under your 

business.

• For more-than-2% shareholders, a policy 

can be either in the name of the S corporation or in the name of the shareholder. You 

can either pay the premiums yourself or 

the S corporation can pay them and report 

the premium amounts on Form W-2 as wages to be included in your gross income. 

However, if the policy is in your name and 

you pay the premiums yourself, the S corporation must reimburse you and report 

the premium amounts in box 1 of Form 

W-2 as wages to be included in your gross 

income. Otherwise, the insurance plan 

won’t be considered to be established under your business.

Medicare premiums you voluntarily pay to 

obtain insurance in your name that is similar to 

qualifying private health insurance can be used 

to figure the deduction. Amounts paid for health 

insurance coverage from retirement plan distributions that were nontaxable because you are a 

retired public safety officer can’t be used to figure the deduction.

You can claim the deduction for self-employed health insurance on Schedule 1 (Form 

1040), line 17.

Qualified long-term care insurance. You 

can include premiums paid on a qualified 

long-term care insurance contract when figuring 

your deduction. But, for each person covered, 

Chapter 6 Insurance Page 21
you can include only the smaller of the following 

amounts.

1. The amount of premiums paid for that person.

2. The amount shown below. Use the person's age at the end of the tax year.

a. Age 40 or younger — $450

b. Age 41 to 50 — $850

c. Age 51 to 60 — $1,690

d. Age 61 to 70 — $4,520

e. Age 71 or older — $5,640

Qualified long-term care insurance contract. A qualified long-term care insurance 

contract is an insurance contract that only provides coverage of qualified long-term care services. The contract must meet all the following 

requirements.

• It must be guaranteed renewable.

• It must provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract 

may be used only to reduce future premiums or increase future benefits.

• It must not provide for a cash surrender 

value or other money that can be paid, assigned, pledged, or borrowed.

• It must generally not pay or reimburse expenses incurred for services or items that 

would be reimbursed under Medicare, except where Medicare is a secondary payer 

or the contract makes per diem or other 

periodic payments without regard to expenses.

Qualified long-term care services. Qualified long-term care services are:

• Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services; and

• Maintenance or personal care services.

The services must be required by a chronically 

ill individual and prescribed by a licensed health 

care practitioner.

Page 22 Chapter 6 Insurance
Worksheet 6-A. Self-Employed Health Insurance Deduction Worksheet Keep for Your Records

Caution. You may have to use the worksheets in Pub. 974 instead of this worksheet if the insurance plan established, or 

considered to be established, under your business was obtained through the Health Insurance Marketplace and you are 

claiming the premium tax credit. See Pub. 974 for details.

Note. Use a separate worksheet for each trade or business under which an insurance plan is established.

1. Enter the total amount paid in 2021 for health insurance coverage established under your 

business (or the S corporation in which you were a more-than-2% shareholder) for 2021 for you, 

your spouse, and your dependents. Your insurance can also cover your child who was under age 

27 at the end of 2021, even if the child was not your dependent. But don’t include the following.

• Amounts for any month you were eligible to participate in a health plan subsidized by your 

employer or your spouse’s employer or the employer of either your dependent or your child 

who was under the age of 27 at the end of 2021.

• Any amounts paid from retirement plan distributions that were nontaxable because you are a 

retired public safety officer.

• Any qualified health insurance coverage payments that you included on Form 8885, line 4, to 

claim the HCTC or on Form 14095 to receive a reimbursement of the HCTC during the year.

• Any advance monthly payments of the HCTC that your health plan administrator received 

from the IRS, as shown on Form 1099-H.

• Any qualified health insurance coverage payments you paid for eligible coverage months for 

which you received the benefit of the HCTC monthly advance payment program.

• Any payments for qualified long-term care insurance (see line 2) ........... ........... 1.

2. For coverage under a qualified long-term care insurance contract, enter for each person covered 

the smaller of the following amounts.

a) Total payments made for that person during the year.

b) The amount shown below. Use the person's age at the end of the tax year.

 $450— if that person is age 40 or younger 

$850— if age 41 to 50

$1,690— if age 51 to 60

$4,520— if age 61 to 70

$5,640— if age 71 or older

Don’t include payments for any month you were eligible to participate in a long-term care 

insurance plan subsidized by your or your spouse’s employer or the employer of either your 

dependent or your child who was under the age of 27 at the end of 2021. If more than one 

person is covered, figure separately the amount to enter for each person. Then enter the 

total of those amounts ......................................................... 2.

3. Add lines 1 and 2 ................................................................. 3.

4. Enter your net profit* and any other earned income** from the trade or business under which the 

insurance plan is established. Don’t include Conservation Reserve Program payments exempt 

from self-employment tax. If the business is an S corporation, skip to line 11 ................ 4.

5. Enter the total of all net profits* from Schedule C (Form 1040), line 31; Schedule F (Form 1040), 

line 34; or Schedule K-1 (Form 1065), box 14, code A, plus any other income allocable to the 

profitable businesses. Don’t include Conservation Reserve Program payments exempt from 

self-employment tax. See the Instructions for Schedule SE (Form 1040). Don’t include any net 

losses shown on these schedules ................................................... 5.

6. Divide line 4 by line 5 .............................................................. 6.

7. Multiply Schedule 1 (Form 1040), line 15, by the percentage on line 6 ...................... 7.

8. Subtract line 7 from line 4 .......................................................... 8.

9. Enter the amount, if any, from Schedule 1 (Form 1040), line 16, attributable to the same trade or 

business in which the insurance plan is established ..................................... 9.

10. Subtract line 9 from line 8 .......................................................... 10.

11. Enter your Medicare wages (box 5 of Form W-2) from an S corporation in which you are a 

more-than-2% shareholder and in which the insurance plan is established .................. 11.

12. Enter any amount from Form 2555, line 45, attributable to the amount entered on line 4 or 11 

above .......................................................................... 12.

13. Subtract line 12 from line 10 or 11, whichever applies ................................... 13.

14. Enter the smaller of line 3 or line 13 here and on Schedule 1 (Form 1040), line 17. Don’t include 

this amount when figuring any medical expense deduction on Schedule A (Form 1040) ....... 14.

* If you used either optional method to figure your net earnings from self-employment from any business, don’t enter your net profit from the 

business. Instead, enter the amount attributable to that business from Schedule SE (Form 1040), Part I, line 4b.

** Earned income includes net earnings and gains from the sale, transfer, or licensing of property you created. However, it doesn’t include capital 

gain income.

Chronically ill individual. A chronically ill 

individual is a person who has been certified as 

one of the following.

• An individual who has been unable, due to 

loss of functional capacity for at least 90 

days, to perform at least two activities of 

daily living without substantial assistance 

from another individual. Activities of daily 

living are eating, toileting, transferring 

(general mobility), bathing, dressing, and 

continence.

• An individual who requires substantial supervision to be protected from threats to 

health and safety due to severe cognitive 

impairment.

The certification must have been made by a licensed health care practitioner within the previous 12 months.

Benefits received. For information on excluding benefits you receive from a long-term 

care contract from gross income, see Pub. 525.

Chapter 6 Insurance Page 23
Other coverage. You can’t take the deduction 

for any month you were eligible to participate in 

any employer (including your spouse's) subsidized health plan at any time during that month, 

even if you didn’t actually participate. In addition, if you were eligible for any month or part of 

a month to participate in any subsidized health 

plan maintained by the employer of either your 

dependent or your child who was under age 27 

at the end of 2021, don’t use amounts paid for 

coverage for that month to figure the deduction.

These rules are applied separately to plans 

that provide long-term care insurance and plans 

that don’t provide long-term care insurance. 

However, any medical insurance payments not 

deductible on Schedule 1 (Form 1040), line 17, 

can be included as medical expenses on 

Schedule A (Form 1040) if you itemize deductions.

Effect on itemized deductions. Subtract the 

health insurance deduction from your medical 

insurance when figuring medical expenses on 

Schedule A (Form 1040) if you itemize deductions.

Effect on self-employment tax. You can’t 

subtract the self-employed health insurance deduction when figuring net earnings for your 

self-employment tax from the business under 

which the insurance plan is established, or considered to be established, as discussed earlier. 

For more information, see Schedule SE (Form 

1040).

How to figure the deduction. Generally, you 

can use the worksheet in the Form 1040 instructions to figure your deduction. However, if 

any of the following apply, you must use Worksheet 6-A in this chapter.

• You had more than one source of income 

subject to self-employment tax.

• You file Form 2555.

• You are using amounts paid for qualified 

long-term care insurance to figure the deduction.

If you are claiming the HCTC, complete 

Form 8885 before you figure this deduction.

Health coverage tax credit. You may 

elect to take this credit only if you were an eligible trade adjustment assistance (TAA) recipient, alternative TAA (ATAA) recipient, reemployment TAA (RTAA) recipient, or Pension 

Benefit Guaranty Corporation (PBGC) pension 

recipient. Use Form 8885 to figure the amount, 

if any, of this credit. When figuring the amount 

to enter on line 1 of Worksheet 6-A, don’t include any amounts you included on Form 8885, 

line 4.

There is coordination of tax benefits between advance monthly payments of the HCTC 

and the HCTC. In general, you can’t claim the 

HCTC for a payment you made for qualifying 

health insurance when you file your tax return if 

you previously received the benefit of the advance monthly payment program for that coverage month. If you benefited from the advance 

monthly payment program, you will receive a 

Form 1099-H that reports the amount of the 

payments that were forwarded directly to your 

health plan administrator for each coverage 

month. Don’t report these amounts on Form 

8885.

More than one health plan and business.

If you have more than one health plan during 

the year and each plan is established under a 

different business, you must use separate worksheets (Worksheet 6-A) to figure each plan's 

net earnings limit. Include the premium you paid 

under each plan on line 1 or line 2 of that separate worksheet and your net profit (or wages) 

from that business on line 4 (or line 11). For a 

plan that provides long-term care insurance, the 

total of the amounts entered for each person on 

line 2 of all worksheets can’t be more than the 

appropriate limit shown on line 2 for that person.

Nondeductible 

Premiums

You can’t deduct premiums on the following 

kinds of insurance.

1. Self-insurance reserve funds. You can’t 

deduct amounts credited to a reserve set 

up for self-insurance. This applies even if 

you can’t get business insurance coverage for certain business risks. However, 

your actual losses may be deductible. See 

Pub. 547.

2. Loss of earnings. You can’t deduct premiums for a policy that pays for lost earnings 

due to sickness or disability. However, see 

the discussion on overhead insurance, 

item (8), under Deductible Premiums, earlier.

3. Certain life insurance and annuities.

a. For contracts issued before June 9, 

1997, you can’t 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. 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. 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.

b. For contracts issued after June 8, 

1997, you generally can’t deduct the 

premiums on any life insurance policy, 

endowment contract, or annuity contract if you are directly or indirectly a 

beneficiary. The disallowance applies 

without regard to whom the policy 

covers.

c. Partners. If, as a partner in a partnership, you take out an insurance policy 

on your own life and name your partners as beneficiaries to induce them 

to retain their investments in the partnership, you are considered a beneficiary. You can't deduct the insurance 

premiums.

4. Insurance to secure a loan. 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 can't deduct the premiums as a 

business expense. Nor can you deduct 

the premiums as interest on business 

loans or as an expense of financing loans. 

In the event of death, the proceeds of the 

policy are generally not taxed as income 

even if they are used to liquidate the debt.

Capitalized Premiums

Under the uniform capitalization rules, you must 

capitalize the direct costs and part of the indirect costs for certain production or resale activities. Include these costs in the basis of property 

you produce or acquire for resale, rather than 

claiming them as a current deduction. You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, 

or otherwise dispose of the property.

Indirect costs include premiums for insurance on your plant or facility, machinery, equipment, materials, property produced, or property 

acquired for resale.

Uniform capitalization rules. You may be 

subject to the uniform capitalization rules if you 

do any of the following, unless the property is 

produced for your use other than in a business 

or an activity carried on for profit.

1. Produce real property or tangible personal 

property. For this purpose, tangible personal property includes a film, sound recording, videotape, book, or similar property.

2. Acquire property for resale.

However, these rules don't apply to the following property.

1. Personal property you acquire for resale if 

your average annual gross receipts are 

$26 million or less for the 3 prior tax years.

2. Property you produce if you meet either of 

the following conditions.

a. Your indirect costs of producing the 

property are $200,000 or less.

b. You use the cash method of accounting and don't account for inventories.

More information. For more information on 

these rules, see Uniform Capitalization Rules in 

Pub. 538 and the regulations under section 

263A.

When To Deduct 

Premiums

You can usually deduct insurance premiums in 

the tax year to which they apply.

Cash method. If you use the cash method of 

accounting, you generally deduct insurance 

premiums in the tax year you actually paid 

them, even if you incurred them in an earlier 

year. However, see Prepayment, later.

Accrual method. If you use an accrual 

method of accounting, you can't deduct insurance premiums before the tax year in which you 

Page 24 Chapter 6 Insurance
incur a liability for them. In addition, you can't 

deduct insurance premiums before the tax year 

in which you actually pay them (unless the exception for recurring items applies). For more 

information about the accrual method of accounting, see chapter 1. For information about 

the exception for recurring items, see Pub. 538.

Prepayment. You can't deduct expenses in 

advance, even if you pay them in advance. 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.

Expenses such as insurance are generally 

allocable to a period of time. You can deduct insurance expenses for the year to which they are 

allocable.

Example. In 2021, you signed a 3-year insurance contract. Even though you paid the 

premiums for 2021, 2022, and 2023 when you 

signed the contract, you can only deduct the 

premium for 2021 on your 2021 tax return. You 

can deduct in 2022 and 2023 the premiums allocable to those years.

Dividends received. If you receive dividends 

from business insurance and you deducted the 

premiums in prior years, at least part of the dividends are generally income. For more information, see Recovery of amount deducted (tax 

benefit rule) in chapter 1 under How Much Can I 

Deduct.

7.

Costs You Can 

Deduct or 

Capitalize

Introduction

This chapter discusses costs you can elect to 

deduct or capitalize.

You generally deduct a cost as a current 

business expense by subtracting it from your income in either the year you incur it or the year 

you pay it.

If you capitalize a cost, you may be able to 

recover it over a period of years through periodic deductions for amortization, depletion, or 

depreciation. When you capitalize a cost, you 

add it to the basis of property to which it relates.

A partnership, corporation, estate, or trust 

makes the election to deduct or capitalize the 

costs discussed in this chapter except for exploration costs for mineral deposits. Each individual partner, shareholder, or beneficiary 

elects whether to deduct or capitalize exploration costs.

Individuals, estates, and trusts may be 

subject to AMT if they deduct certain 

research and experimental, intangible 

drilling, exploration, development, circulation, or 

business organizational costs.

For more information on the AMT, see the 

Instructions for Form 6251 and the Instructions 

for Schedule I (Form 1041).

Topics

This chapter discusses:

• Carrying charges

• Research and experimental costs

• Intangible drilling costs

• Exploration costs

• Development costs

• Circulation costs

• Business start-up and organizational costs

• Reforestation costs

• Retired asset removal costs

• Barrier removal costs

• Film and television production costs

• Repair and maintenance costs

Useful Items

You may want to see:

Publication

Sales and Other Dispositions of 

Assets

Form (and Instructions)

cdu(o) Profit or Loss 

From Business

Investment Credit

Credit for Increasing Research 

Activities

Disabled Access Credit

(b) Forest Activities Schedule

See chapter 12 for information about getting 

publications and forms.

Carrying Charges

Carrying charges include the taxes and interest 

you pay to carry or develop real property or to 

carry, transport, or install personal property. 

Certain carrying charges must be capitalized 

under the uniform capitalization rules. (For information on capitalization of interest, see chapter 4.) You can elect to capitalize carrying 

charges not subject to the uniform capitalization 

rules, but only if they are otherwise deductible.

You can elect to capitalize carrying charges 

separately for each project you have and for 

each type of carrying charge. Your election is 

good for only 1 year for unimproved and unproductive real property. You must decide whether 

to capitalize carrying charges each year the 

property remains unimproved and unproductive. For other real property, your election to 

capitalize carrying charges remains in effect until construction or development is completed. 

For personal property, your election is effective 

until the date you install or first use it, whichever 

is later.

CAUTION

!

 544

 Schedule C (Form 1040)

 3468

 6765

 8826

 T (Timber)

How to make the election. To make the election to capitalize a carrying charge, attach a 

statement to your original tax return for the year 

the election is to be effective indicating which 

charges you are electing to capitalize. However, 

if you timely filed your return for the year without 

making the election, you can still make the election by filing an amended return within 6 months 

of the due date of the return (excluding extensions). Attach the statement to the amended return and write “Filed pursuant to section 

301.9100-2” on the statement. File the amended return at the same address you filed the 

original return.

Research and 

Experimental Costs

The costs of research and experimentation are 

generally capital expenses. However, you can 

elect to deduct your research and experimental 

costs as current business expenses, elect to 

amortize your research and experimental costs 

in equal amounts over a period of 60 months or 

more, or elect to amortize your research and 

experimental expenditures over a 10-year period. Your election to deduct these costs is 

binding for the year it is made and for all later 

years unless you get IRS approval to make a 

change.

For information on electing to defer and amortize these costs, see Research and Experimental Costs in chapter 8.

Research and experimental costs defined. 

Research and experimental costs are reasonable costs you incur in your trade or business for 

activities intended to provide information that 

would eliminate uncertainty about the development or improvement of a product. Uncertainty 

exists if the information available to you does 

not establish how to develop or improve a product or the appropriate design of a product. 

Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the 

nature of the product or improvement being developed or the level of technological advancement.

The costs of obtaining a patent, including attorneys' fees paid or incurred in making and 

perfecting a patent application, are research 

and experimental costs. However, costs paid or 

incurred to obtain another's patent are not research and experimental costs.

Product. The term “product” includes any 

of the following items.

• Formula.

• Invention.

• Patent.

• Pilot model.

• Process.

• Technique.

• Property similar to the items listed above.

It also includes products used by you in your 

trade or business or held for sale, lease, or license.

Chapter 7 Costs You Can Deduct or Capitalize Page 25
Costs not included. Research and experimental costs do not include expenses for any of 

the following activities.

• Advertising or promotions.

• Consumer surveys.

• Efficiency surveys.

• Management studies.

• Quality control testing.

• Research in connection with literary, historical, or similar projects.

• The acquisition of another's patent, model, 

production, or process.

When and how to elect. You make the election to deduct research and experimental costs 

by deducting them on your tax return for the 

year in which you first pay or incur research and 

experimental costs. If you do not make the election to deduct research and experimental costs 

in the first year in which you pay or incur the 

costs, you can deduct the costs in a later year 

only with approval from the IRS.

Research credit. If you pay or incur qualified 

research expenses, you may be able to take the 

research credit. For more information, see Form 

6765 and its instructions.

Payroll tax credit. The payroll tax credit is an 

annual election made by a qualified small business specifying the amount of research credit, 

not to exceed $250,000, that may be used 

against the employer portion of social security 

liability. The credit is the smallest of the current 

year research credit, an elected amount not to 

exceed $250,000, or the general business 

credit carryforward for the tax year (before the 

application of the payroll tax credit election for 

the tax year). The election must be made on or 

before the due date of the originally filed return 

(including extensions). An election cannot be 

made for a tax year if an election was made for 

5 or more preceding tax years. The election 

made by a partnership or S corporation is made 

at the entity level.

A qualified small business that elects to 

claim the payroll tax credit will claim the payroll 

tax credit against the employer's portion of social security tax on its employment tax return for 

the first quarter that begins after it files the return reflecting the payroll tax election. For more 

information, see the Instructions for Form 6765.

Intangible Drilling Costs

The costs of developing oil, gas, or geothermal 

wells are ordinarily capital expenditures. You 

can usually recover them through depreciation 

or depletion. However, you can elect to deduct 

intangible drilling costs (IDCs) as a current business expense. These are certain drilling and 

development costs for wells in the United 

States in which you hold an operating or working interest. You can deduct only costs for drilling or preparing a well for the production of oil, 

gas, or geothermal steam or hot water.

You can elect to deduct only the costs of 

items with no salvage value. These include wages, fuel, repairs, hauling, and supplies related 

to drilling wells and preparing them for production. Your cost for any drilling or development 

work done by contractors under any form of 

contract is also an IDC. However, see Amounts 

paid to contractor that must be capitalized, 

later.

You can also elect to deduct the cost of drilling exploratory bore holes to determine the location and delineation of offshore hydrocarbon 

deposits if the shaft is capable of conducting 

hydrocarbons to the surface on completion. It 

does not matter whether there is any intent to 

produce hydrocarbons.

If you do not elect to deduct your IDCs as a 

current business expense, you can elect to deduct them over the 60-month period beginning 

with the month they were paid or incurred.

Amounts paid to contractor that must be 

capitalized. Amounts paid to a contractor 

must be capitalized if they are either:

• Amounts properly allocable to the cost of 

depreciable property, or

• Amounts paid only out of production or 

proceeds from production if these amounts 

are depletable income to the recipient.

How to make the election. You elect to deduct IDCs as a current business expense by 

taking the deduction on your income tax return 

for the first tax year you have eligible costs. No 

formal statement is required. If you file Schedule C (Form 1040), enter these costs under 

“Other expenses.”

For oil and gas wells, your election is binding for the year it is made and for all later years. 

For geothermal wells, your election can be revoked by the filing of an amended return on 

which you do not take the deduction. You can 

file the amended return for the year up to the 

normal time of expiration for filing a claim for 

credit or refund, generally, within 3 years after 

the date you filed the original return or within 2 

years after the date you paid the tax, whichever 

is later.

Energy credit for costs of geothermal wells. 

If you capitalize the drilling and development 

costs of geothermal wells that you place in service during the tax year, you may be able to 

claim a business energy credit. See the Instructions for Form 3468 for more information.

Nonproductive well. If you capitalize your 

IDCs, you have another option if the well is nonproductive. You can deduct the IDCs of the 

nonproductive well as an ordinary loss. You 

must indicate and clearly state your election on 

your tax return for the year the well is completed. Once made, the election for oil and gas 

wells is binding for all later years. You can revoke your election for a geothermal well by filing 

an amended return that does not claim the loss.

Costs incurred outside the United States. 

You cannot deduct as a current business expense all the IDCs paid or incurred for an oil, 

gas, or geothermal well located outside the United States. However, you can elect to include 

the costs in the adjusted basis of the well to figure depletion or depreciation. If you do not 

make this election, you can deduct the costs 

over the 10-year period beginning with the tax 

year in which you paid or incurred them. These 

rules do not apply to a nonproductive well.

Exploration Costs

The costs of determining the existence, location, extent, or quality of any mineral deposit are 

ordinarily capital expenditures if the costs lead 

to the development of a mine. You recover 

these costs through depletion as the mineral is 

removed from the ground. However, you can 

elect to deduct domestic exploration costs paid 

or incurred before the beginning of the development stage of the mine (except those for oil and 

gas wells).

How to make the election. You elect to deduct exploration costs by taking the deduction 

on your income tax return, or on an amended 

income tax return, for the first tax year for which 

you wish to deduct the costs paid or incurred 

during the tax year. Your return must adequately describe and identify each property or 

mine, and clearly state how much is being deducted for each one. The election applies to the 

tax year you make this election and all later tax 

years.

Partnerships and S corporations. Each 

partner, not the partnership, elects whether to 

capitalize or to deduct that partner's share of 

exploration costs. Each shareholder, not the S 

corporation, elects whether to capitalize or to 

deduct that shareholder's share of exploration 

costs.

Reduced corporate deductions for exploration costs. A corporation (other than an S corporation) can deduct only 70% of its domestic 

exploration costs. It must capitalize the remaining 30% of costs and amortize them over the 

60-month period starting with the month the exploration costs are paid or incurred. A corporation may also elect to capitalize and amortize 

mining exploration costs over a 10-year period. 

For more information on this method of amortization, see section 59(e).

The 30% that the corporation capitalizes 

cannot be added to its basis in the property to 

figure cost depletion. However, the amount 

amortized is treated as additional depreciation 

and is subject to recapture as ordinary income 

on a disposition of the property. See Section 

1250 Property under Depreciation Recapture in 

chapter 3 of Pub. 544.

These rules also apply to the deduction of 

development costs by corporations. See Development Costs, later.

Recapture of exploration expenses. When 

your mine reaches the producing stage, you 

must recapture any exploration costs you elected to deduct. Use either of the following methods.

Method 1—Include the deducted costs in 

gross income for the tax year the mine reaches the producing stage. Your election 

must be clearly indicated on the return. Increase your adjusted basis in the mine by 

the amount included in income. Generally, 

you must elect this recapture method by 

the due date (including extensions) of your 

return. However, if you timely filed your return for the year without making the election, you can still make the election by filing 

Page 26 Chapter 7 Costs You Can Deduct or Capitalize
an amended return within 6 months of the 

due date of the return (excluding extensions). Make the election on your amended 

return and write “Filed pursuant to section 

301.9100-2” on the form where you are including the income. File the amended return at the same address you filed the original return.

Method 2—Do not claim any depletion deduction for the tax year the mine reaches 

the producing stage and any later tax years 

until the depletion you would have deducted equals the exploration costs you deducted.

You must also recapture deducted exploration costs if you receive a bonus or royalty from 

mine property before it reaches the producing 

stage. Do not claim any depletion deduction for 

the tax year you receive the bonus or royalty 

and any later tax years until the depletion you 

would have deducted equals the exploration 

costs you deducted.

Generally, if you dispose of the mine before 

you have fully recaptured the exploration costs 

you deducted, recapture the balance by treating 

all or part of your gain as ordinary income. Under these circumstances, you generally treat as 

ordinary income all of your gain if it is less than 

your adjusted exploration costs with respect to 

the mine. If your gain is more than your adjusted 

exploration costs, treat as ordinary income only 

a part of your gain, up to the amount of your adjusted exploration costs.

Foreign exploration costs. If you pay or incur 

exploration costs for a mine or other natural deposit located outside the United States, you 

cannot deduct all the costs in the current year. 

You can elect to include the costs (other than 

for an oil, gas, or geothermal well) in the adjusted basis of the mineral property to figure cost 

depletion. (Cost depletion is discussed in chapter 9.) If you do not make this election, you must 

deduct the costs over the 10-year period beginning with the tax year in which you pay or incur 

them. These rules also apply to foreign development costs.

Development Costs

You can deduct costs paid or incurred during 

the tax year for developing a mine or any other 

natural deposit (other than an oil or gas well) located in the United States. These costs must be 

paid or incurred after the discovery of ores or 

minerals in commercially marketable quantities. 

Development costs also include depreciation 

on improvements used in the development of 

ores or minerals and costs incurred for you by a 

contractor. Development costs do not include 

the costs for the acquisition or improvement of 

depreciable property.

Instead of deducting development costs in 

the year paid or incurred, you can elect to treat 

the costs as deferred expenses and deduct 

them ratably as the units of produced ores or 

minerals benefited by the expenses are sold. 

This election applies each tax year to expenses 

paid or incurred in that year. Once made, the 

election is binding for the year and cannot be 

revoked for any reason.

How to make the election. The election to 

deduct development costs ratably as the ores 

or minerals are sold must be made for each 

mine or other natural deposit by a clear indication on your return or by a statement filed with 

the IRS office where you file your return. Generally, you must make the election by the due 

date of the return (including extensions). However, if you timely filed your return for the year 

without making the election, you can still make 

the election by filing an amended return within 6 

months of the due date of the return (excluding 

extensions). Clearly indicate the election on 

your amended return and write “Filed pursuant 

to section 301.9100-2.” File the amended return 

at the same address you filed the original return.

Foreign development costs. The rules discussed earlier for Foreign exploration costs apply to foreign development costs.

Reduced corporate deductions for development costs. The rules discussed earlier for 

Reduced corporate deductions for exploration 

costs also apply to corporate deductions for development costs.

Circulation Costs

A publisher can deduct as a current business 

expense the costs of establishing, maintaining, 

or increasing the circulation of a newspaper, 

magazine, or other periodical. For example, a 

publisher can deduct the cost of hiring extra 

employees for a limited time to get new subscriptions through telephone calls. Circulation 

costs may be deducted even if they would normally be capitalized.

This rule does not apply to the following 

costs that must be capitalized.

• The purchase of land or depreciable property.

• The acquisition of circulation through the 

purchase of any part of the business of another publisher of a newspaper, magazine, 

or other periodical, including the purchase 

of another publisher's list of subscribers.

Other treatment of circulation costs. If you 

do not want to deduct circulation costs as a current business expense, you can elect one of the 

following ways to recover these costs.

• Capitalize all circulation costs that are 

properly chargeable to a capital account 

(see chapter 1).

• Amortize circulation costs over the 3-year 

period beginning with the tax year they 

were paid or incurred.

How to make the election. You elect to capitalize circulation costs by attaching a statement 

to your return for the first tax year the election 

applies. Your election is binding for the year it is 

made and for all later years, unless you get IRS 

approval to revoke it.

Business Start-up and 

Organizational Costs

Business start-up and organizational costs are 

generally capital expenditures. However, you 

can elect to deduct up to $5,000 of business 

start-up and $5,000 of organizational costs paid 

or incurred after October 22, 2004. The $5,000 

deduction is reduced by the amount your total 

start-up or organizational costs exceed 

$50,000. Any remaining costs must be amortized. For information about amortizing start-up 

and organizational costs, see chapter 8.

Start-up costs include any amounts paid or 

incurred in connection with creating an active 

trade or business or investigating the creation 

or acquisition of an active trade or business. Organizational costs include the costs of creating 

a corporation or partnership.

How to make the election. You elect to deduct the start-up or organizational costs by 

claiming the deduction on your income tax return (filed by the due date including extensions) 

for the tax year in which the active trade or business begins. For costs paid or incurred after 

September 8, 2008, you are not required to attach a statement to your return to elect to deduct such costs. However, for start-up or organizational costs paid or incurred before 

September 9, 2008, you may be required to attach a statement to your return to elect to deduct such costs. If you timely filed your return 

for the year without making the election, you 

can still make the election by filing an amended 

return within 6 months of the due date of the return (excluding extensions). Clearly indicate the 

election on your amended return and write 

“Filed pursuant to section 301.9100-2.”

File the amended return at the same address you filed the original return. The election 

applies when figuring taxable income for the 

current tax year and all subsequent years. Once 

made, the election is irrevocable. For more information on start-up and organizational costs, 

see chapter 8.

Reforestation Costs

Reforestation costs are generally capital expenditures. However, you can elect to deduct up to 

$10,000 ($5,000 if married filing separately; $0 

for a trust) of qualifying reforestation costs paid 

or incurred after October 22, 2004, for each 

qualified timber property. The remaining costs 

can be amortized over an 84-month period. For 

information about amortizing reforestation 

costs, see chapter 8.

Qualifying reforestation costs are the direct 

costs of planting or seeding for forestation or reforestation. Qualified timber property is property 

that contains trees in significant commercial 

quantities. See chapter 8 for more information 

on qualifying reforestation costs and qualified 

timber property.

If you elect to deduct qualified reforestation 

costs, create and maintain separate timber accounts for each qualified timber property and include all reforestation costs and the dates each 

Chapter 7 Costs You Can Deduct or Capitalize Page 27
was applied. Do not include this qualified timber 

property in any account (for example, depletion 

block) for which depletion is allowed.

How to make the election. You elect to deduct qualifying reforestation costs by claiming 

the deduction on your timely filed income tax return (including extensions) for the tax year the 

expenses were paid or incurred. If Form T (Timber) is required, complete Part IV of the form. If 

Form T (Timber) is not required, attach a statement containing the following information for 

each qualified timber property for which an 

election is being made.

• The unique stand identification numbers.

• The total number of acres reforested during the tax year.

• The nature of the reforestation treatments.

• The total amounts of qualified reforestation 

expenditures eligible to be amortized or 

deducted.

If you timely filed your return for the year 

without making the election, you can still make 

the election by filing an amended return within 6 

months of the due date of the return (excluding 

extensions). Clearly indicate the election on 

your amended return and write “Filed pursuant 

to section 301.9100-2.” File the amended return 

at the same address you filed the original return. The election applies when figuring taxable 

income for the current tax year and all subsequent years.

For additional information on reforestation 

costs, see chapter 8.

Recapture. This deduction may have to be recaptured as ordinary income under section 

1245 when you sell or otherwise dispose of the 

property that would have received an addition 

to basis if you had not elected to deduct the expenditure. For more information on recapturing 

the deduction, see Depreciation Recapture in 

Pub. 544.

Retired Asset Removal 

Costs

If you retire and remove a depreciable asset in 

connection with the installation or production of 

a replacement asset, you can deduct the costs 

of removing the retired asset. However, if you 

replace a component (part) of a depreciable asset, capitalize the removal costs if the replacement is an improvement and deduct the costs if 

the replacement is a repair.

Barrier Removal Costs

The cost of an improvement to a business asset 

is normally a capital expense. However, you 

can elect to deduct the costs of making a facility 

or public transportation vehicle more accessible 

to and usable by those who are disabled or elderly. You must own or lease the facility or vehicle for use in connection with your trade or business.

A facility is all or any part of buildings, structures, equipment, roads, walks, parking lots, or 

similar real or personal property. A public transportation vehicle is a vehicle, such as a bus or 

railroad car, that provides transportation service 

to the public (including service for your customers, even if you are not in the business of providing transportation services).

You cannot deduct any costs that you paid 

or incurred to completely renovate or build a facility or public transportation vehicle or to replace depreciable property in the normal course 

of business.

Deduction limit. The most you can deduct as 

a cost of removing barriers to the disabled and 

the elderly for any tax year is $15,000. However, you can add any costs over this limit to the 

basis of the property and depreciate these excess costs.

Partners and partnerships. The $15,000 limit 

applies to a partnership and also to each partner in the partnership. A partner can allocate 

the $15,000 limit in any manner among the partner's individually incurred costs and the partner's distributive share of partnership costs. If 

the partner cannot deduct the entire share of 

partnership costs, the partnership can add any 

costs not deducted to the basis of the improved 

property.

A partnership must be able to show that any 

amount added to basis was not deducted by 

the partner and that it was over a partner's 

$15,000 limit (as determined by the partner). If 

the partnership cannot show this, it is presumed 

that the partner was able to deduct the distributive share of the partnership's costs in full.

Example. Emilio Azul's distributive share of 

ABC partnership's deductible expenses for the 

removal of architectural barriers was $14,000. 

Emilio had $12,000 of similar expenses in his 

sole proprietorship. He elected to deduct 

$7,000 of them. Emilio allocated the remaining 

$8,000 of the $15,000 limit to his share of 

ABC's expenses. Emilio can add the excess 

$5,000 of his own expenses to the basis of the 

property used in his business. Also, if ABC can 

show that Emilio could not deduct $6,000 

($14,000 – $8,000) of his share of the partnership's expenses because of how Emilio applied 

the limit, ABC can add $6,000 to the basis of its 

property.

Qualification standards. You can deduct 

your costs as a current expense only if the barrier removal meets the guidelines and requirements issued by the Architectural and Transportation Barriers Compliance Board under the 

Americans with Disabilities Act (ADA) of 1990. 

You can view the ADA at ADA.gov/pubs/

ada.htm.

The following is a list of some architectural 

barrier removal costs that can be deducted.

• Ground and floor surfaces.

• Walks.

• Parking lots.

• Ramps.

• Entrances.

• Doors and doorways.

• Stairs.

• Floors.

• Toilet rooms.

• Water fountains.

• Public telephones.

• Elevators.

• Controls.

• Signage.

• Alarms.

• Protruding objects.

• Symbols of accessibility.

You can find the ADA guidelines and requirements for architectural barrier removal at 

USDOJ.gov/crt/ada/reg3a.html.

The costs for removal of transportation barriers from rail facilities, buses, and rapid and light 

rail vehicles are deductible. You can find the 

guidelines and requirements for transportation 

barrier removal at transit.dot.gov.

Also, you can access the ADA website at 

ADA.gov for additional information.

Other barrier removals. To be deductible, 

expenses of removing any barrier not covered 

by the above standards must meet all three of 

the following tests.

1. The removed barrier must be a substantial 

barrier to access or use of a facility or public transportation vehicle by persons who 

have a disability or are elderly.

2. The removed barrier must have been a 

barrier for at least one major group of persons who have a disability or are elderly 

(such as people who are blind, deaf, or 

wheelchair users).

3. The barrier must be removed without creating any new barrier that significantly impairs access to or use of the facility or vehicle by a major group of persons who 

have a disability or are elderly.

How to make the election. If you elect to deduct your costs for removing barriers to the disabled or the elderly, claim the deduction on 

your income tax return (partnership return for 

partnerships) for the tax year the expenses 

were paid or incurred. Identify the deduction as 

a separate item. The election applies to all the 

qualifying costs you have during the year, up to 

the $15,000 limit. If you make this election, you 

must maintain adequate records to support your 

deduction.

For your election to be valid, you must generally file your return by its due date, including 

extensions. However, if you timely filed your return for the year without making the election, 

you can still make the election by filing an 

amended return within 6 months of the due date 

of the return (excluding extensions). Clearly indicate the election on your amended return and 

write “Filed pursuant to section 301.9100-2.” 

File the amended return at the same address 

you filed the original return. Your election is irrevocable after the due date, including extensions, of your return.

Disabled access credit. If you make your 

business accessible to persons with disabilities 

and your business is an eligible small business, 

you may be able to claim the disabled access 

credit. If you choose to claim the credit, you 

must reduce the amount you deduct or capitalize by the amount of the credit.

For more information, see Form 8826.

Page 28 Chapter 7 Costs You Can Deduct or Capitalize
Film, Television, and 

Live Theatrical 

Production Costs

Film, television, and theatrical production costs 

are generally capital expenses. However, you 

can elect to deduct certain costs of a qualified 

film, television, or live theatrical production 

commencing before January 1, 2026 (after December 31, 2015, and before January 1, 2026, 

for a live theatrical production), if the aggregate 

cost of the production doesn't exceed $15 million. There is a higher dollar limitation for productions in certain areas. The deduction is subject to recapture under section 1245 if the 

election is voluntarily revoked or the production 

fails to meet the requirements for the deduction. 

For more information, see section 181 and the 

related regulations.

Certain qualified film, television, or live theatrical productions acquired and placed in service after September 27, 2017, may be eligible 

for the special depreciation allowance under 

section 168(k). For more information, see Pub. 

946, How To Depreciate Property.

Note. No other depreciation or amortization 

deduction is allowed for costs of qualified film or 

television production or any qualified live theatrical production if an election is made to deduct 

such costs.

Repair and Maintenance 

Costs

Generally, you can deduct amounts paid for repairs and maintenance to tangible property if 

the amounts paid are not otherwise required to 

be capitalized. However, you may elect to capitalize amounts paid for repair and maintenance 

consistent with the treatment on your books and 

records. If you make this election, it applies to 

all amounts paid for repair and maintenance to 

tangible property that you treat as capital expenditures on your books and records for the 

tax year.

How to make the election. To make the election to treat repairs and maintenance as capital 

expenditures, attach a statement titled “Section 

1.263(a)-3(n) Election” to your timely filed return 

(including extensions). For more information on 

what to include in the statement, see Regulations section 1.263(a)-3(n). If you timely filed 

your return without making the election, you can 

still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach the statement to the amended return and write “Filed 

pursuant to section 301.9100-2” on the statement. File the amended return at the same address you filed the original return. 

8.

Amortization

Introduction

Amortization is a method of recovering (deducting) certain capital costs over a fixed period of 

time. It is similar to the straight line method of 

depreciation.

The various amortizable costs covered in 

this chapter are included in the list below. However, this chapter doesn't discuss amortization 

of bond premium. For information on that topic, 

see chapter 3 of Pub. 550, Investment Expenses.

Topics

This chapter discusses:

• Deducting amortization

• Amortizing costs of starting a business

• Amortizing costs of getting a lease

• Amortizing costs of section 197 intangibles

• Amortizing reforestation costs

• Amortizing costs of geological and 

geophysical costs

• Amortizing costs of pollution control 

facilities

• Amortizing costs of research and 

experimentation

• Amortizing costs of certain tax preferences

Useful Items

You may want to see:

Publication

Sales and Other Dispositions of 

Assets

Investment Income and Expenses

How To Depreciate Property

Form (and Instructions)

311 Application for Change in 

Accounting Method

462 Depreciation and Amortization

621 Alternative Minimum 

Tax—Individuals

See chapter 12 for information about getting 

publications and forms.

How To Deduct 

Amortization

To deduct amortization that begins during the 

current tax year, complete Part VI of Form 4562 

and attach it to your income tax return.

To report amortization from previous years, 

in addition to amortization that begins in the current year, list on Form 4562 each item separately. For example, in 2020, you began to 

 544 

 550 

 946 

 3115 

 4562 

 6251 

amortize a lease. In 2021, you began to amortize a second lease. Report amortization from 

the new lease on line 42 of your 2021 Form 

4562. Report amortization from the 2020 lease 

on line 43 of your 2021 Form 4562.

If you don't have any new amortizable expenses for the current year, you aren't required 

to complete Form 4562 (unless you are claiming depreciation). Report the current year's deduction for amortization that began in a prior 

year directly on the “Other deduction” or “Other 

expense ” line of your return.

Starting a Business

When you start a business, treat all eligible 

costs you incur before you begin operating the 

business as capital expenditures that are part of 

your basis in the business. Generally, you recover costs for particular assets through depreciation deductions. However, you generally 

can't recover other costs until you sell the business or otherwise go out of business. For a discussion on how to treat these costs, see If your 

attempt to go into business is unsuccessful under Capital Expenses in chapter 1.

For costs paid or incurred after September 

8, 2008, you can deduct a limited amount of 

start-up and organizational costs. The costs 

that aren't deducted currently can be amortized 

ratably over a 180-month period. The amortization period starts with the month you begin operating your active trade or business. You aren't 

required to attach a statement to make this 

election. You can choose to forgo this election 

by affirmatively electing to capitalize your 

start-up costs on your income tax return filed by 

the due date (including extensions) for the tax 

year in which the active trade or business begins. Once made, the election to either amortize 

or capitalize start-up costs is irrevocable and 

applies to all start-up costs that are related to 

your trade or business. See Regulations sections 1.195-1, 1.248-1, and 1.709-1.

For costs paid or incurred after October 22, 

2004, and before September 9, 2008, you can 

elect to deduct a limited amount of business 

start-up and organizational costs in the year 

your active trade or business begins. Any costs 

not deducted can be amortized ratably over a 

180-month period, beginning with the month 

you begin business. If the election is made, you 

must attach any statement required by Regulations sections 1.195-1(b), 1.248-1(c), and 

1.709-1(c), as in effect before September 9, 

2008.

Note. You can apply the provisions of Regulations sections 1.195-1, 1.248-1, and 1.709-1 

to all business start-up and organizational costs 

paid or incurred after October 22, 2004, provided the period of limitations on assessment 

hasn't expired for the year of the election. Otherwise, for business start-up and organizational 

costs paid or incurred after October 22, 2004, 

and before September 9, 2008, the provisions 

under Regulations sections 1.195-1(b), 

1.248-1(c), and 1.709-1(c), as in effect before 

September 9, 2008, will apply.

For costs paid or incurred before October 

23, 2004, you can elect to amortize business 

Chapter 8 Amortization Page 29
start-up and organizational costs over an amortization period of 60 months or more. See How 

To Make the Election, later.

The cost must qualify as one of the following.

• A business start-up cost.

• An organizational cost for a corporation.

• An organizational cost for a partnership.

Business Start-up Costs

Start-up costs are amounts paid or incurred for 

(a) creating an active trade or business, or (b) 

investigating the creation or acquisition of an 

active trade or business. Start-up costs include 

amounts paid or incurred in connection with an 

existing activity engaged in for profit, and for the 

production of income in anticipation of the activity becoming an active trade or business.

Qualifying costs. A start-up cost is amortizable if it meets both of the following tests.

• It is a cost you could deduct if you paid or 

incurred it to operate an existing active 

trade or business (in the same field as the 

one you entered into).

• It is a cost you pay or incur before the day 

your active trade or business begins.

Start-up costs include amounts paid for the 

following.

• An analysis or survey of potential markets, 

products, labor supply, transportation facilities, etc.

• Advertisements for the opening of the business.

• Salaries and wages for employees who are 

being trained and their instructors.

• Travel and other necessary costs for securing prospective distributors, suppliers, 

or customers.

• Salaries and fees for executives and consultants, or for similar professional services.

Nonqualifying costs. Start-up costs don't include deductible interest, taxes, or research 

and experimental costs. See Research and Experimental Costs, later.

Purchasing an active trade or business. 

Amortizable start-up costs for purchasing an active trade or business include only investigative 

costs incurred in the course of a general search 

for or preliminary investigation of the business. 

These are costs that help you decide whether 

to purchase a business. Costs you incur in an 

attempt to purchase a specific business are 

capital expenses that you can't amortize.

Example. On June 1, you hired an accounting firm and a law firm to assist you in the 

potential purchase of XYZ, Inc. They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. In September, 

the law firm prepared and submitted a letter of 

intent to XYZ, Inc. The letter stated that a binding commitment would result only after a purchase agreement was signed. The law firm and 

accounting firm continued to provide services, 

including a review of XYZ's books and records 

and the preparation of a purchase agreement. 

On October 22, you signed a purchase agreement with XYZ, Inc.

All amounts paid or incurred to investigate 

the business before October 22 are amortizable 

investigative costs. Amounts paid on or after 

that date relate to the attempt to purchase the 

business and therefore must be capitalized.

Disposition of business. If you completely 

dispose of your business before the end of the 

amortization period, you can deduct any remaining deferred start-up costs. However, you 

can deduct these deferred start-up costs only to 

the extent they qualify as a loss from a business.

Costs of Organizing a 

Corporation

Amounts paid to organize a corporation are the 

direct costs of creating the corporation.

Qualifying costs. To qualify as an organizational cost, it must be:

• For the creation of the corporation,

• Chargeable to a capital account (see chapter 1),

• Amortized over the life of the corporation if 

the corporation had a fixed life, and

• Incurred before the end of the first tax year 

in which the corporation is in business.

A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it doesn't 

pay them in that year.

Examples of organizational costs include 

the following.

• The cost of temporary directors.

• The cost of organizational meetings.

• State incorporation fees.

• The cost of legal services.

Nonqualifying costs. The following items are 

capital expenses that can't be amortized.

• Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs.

• Costs associated with the transfer of assets to the corporation.

Costs of Organizing a 

Partnership

The costs to organize a partnership are the direct costs of creating the partnership.

Qualifying costs. A partnership can amortize 

an organizational cost only if it meets all the following tests.

• It is for the creation of the partnership and 

not for starting or operating the partnership 

trade or business.

• It is chargeable to a capital account (see 

chapter 1).

• It could be amortized over the life of the 

partnership if the partnership had a fixed 

life.

• It is incurred by the due date of the partnership return (excluding extensions) for the 

first tax year in which the partnership is in 

business. However, if the partnership uses 

the cash method of accounting and pays 

the cost after the end of its first tax year, 

see Cash method partnership under How 

To Amortize, later.

• It is for a type of item normally expected to 

benefit the partnership throughout its entire 

life.

Organizational costs include the following 

fees.

• Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement.

• Accounting fees for services incident to the 

organization of the partnership.

• Filing fees.

Nonqualifying costs. The following costs 

can't be amortized.

• The cost of acquiring assets for the partnership or transferring assets to the partnership.

• The cost of admitting or removing partners, 

other than at the time the partnership is 

first organized.

• The cost of making a contract concerning 

the operation of the partnership trade or 

business, including a contract between a 

partner and the partnership.

• The costs for issuing and marketing interests in the partnership such as brokerage, 

registration, and legal fees and printing 

costs. These “syndication fees” are capital 

expenses that can't be depreciated or 

amortized.

Liquidation of partnership. If a partnership 

is liquidated before the end of the amortization 

period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. However, these costs 

can be deducted only to the extent they qualify 

as a loss from a business.

How To Amortize

Deduct start-up and organizational costs in 

equal amounts over the applicable amortization 

period (discussed earlier under Business 

Start-up Costs). You can choose an amortization period for start-up costs that is different 

from the period you choose for organizational 

costs, as long as both aren't less than the applicable amortization period. Once you choose an 

amortization period, you can't change it.

To figure your deduction, divide your total 

start-up or organizational costs by the months in 

the amortization period. The result is the 

amount you can deduct for each month.

Cash method partnership. A partnership using the cash method of accounting can deduct 

an organizational cost only if it has been paid by 

the end of the tax year. However, any cost the 

partnership could have deducted as an organizational cost in an earlier tax year (if it had been 

paid that year) can be deducted in the tax year 

of payment.

How To Make the Election

To elect to amortize start-up or organizational 

costs, you must complete and attach Form 

4562 to your return for the first tax year you are 

in business. You may also be required to attach 

Page 30 Chapter 8 Amortization
an organizational costs election statement (described later) to your return.

For start-up or organizational costs paid or 

incurred after September 8, 2008, an accompanying statement isn't required. Generally, for 

start-up or organizational costs paid or incurred 

before September 9, 2008, and after October 

22, 2004, unless you choose to apply Regulations sections 1.195-1, 1.248-1, and 1.709-1, 

you must also attach an accompanying statement to elect to amortize the costs.

If you have both start-up and organizational 

costs, attach a separate statement (if required) 

to your return for each type of cost. See Starting 

a Business, earlier, for more information.

Generally, you must file the return by the 

due date (including any extensions). However, 

if you timely filed your return for the year without 

making the election, you can still make the election by filing an amended return within 6 months 

of the due date of the return (excluding extensions). For more information, see the instructions for Part VI of Form 4562.

You can choose to forgo the election to amortize by affirmatively electing to capitalize your 

start-up or organizational costs on your income 

tax return filed by the due date (including extensions) for the tax year in which the active trade 

or business begins.

Note. The election to either amortize or 

capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or 

business.

If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. A shareholder or partner 

can't make this election. You, as a shareholder 

or partner, can't amortize any costs you incur in 

setting up your corporation or partnership. Only 

the corporation or partnership can amortize 

these costs.

However, you, as an individual, can elect to 

amortize costs you incur to investigate an interest in an existing partnership. These costs qualify as business start-up costs if you acquire the 

partnership interest.

Start-up costs election statement. If you 

elect to amortize your start-up costs, attach a 

separate statement (if required) that contains 

the following information.

• A description of the business to which the 

start-up costs relate.

• A description of each start-up cost incurred.

• The month your active business began (or 

was acquired).

• The number of months in your amortization 

period (which is generally 180 months).

Filing the statement early. You can elect 

to amortize your start-up costs by filing the 

statement with a return for any tax year before 

the year your active business begins. If you file 

the statement early, the election becomes effective in the month of the tax year your active 

business begins.

Revised statement. You can file a revised 

statement to include any start-up costs not included in your original statement. However, you 

can't include on the revised statement any cost 

you previously treated on your return as a cost 

other than a start-up cost. You can file the revised statement with a return filed after the return on which you elected to amortize your 

start-up costs.

Organizational costs election statement. If 

you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information.

• A description of each cost.

• The amount of each cost.

• The date each cost was incurred.

• The month your corporation or partnership 

began active business (or acquired the 

business).

• The number of months in your amortization 

period (which is generally 180 months).

Partnerships. The statement prepared for 

a cash basis partnership must also indicate the 

amount paid before the end of the year for each 

cost.

You don't need to separately list any partnership organizational cost that is less than 

$10. Instead, you can list the total amount of 

these costs with the dates the first and last 

costs were incurred.

After a partnership makes the election to 

amortize organizational costs, it can later file an 

amended return to include additional organizational costs not included in the partnership's 

original return and statement.

Getting a Lease

If you get a lease for business property, you 

may recover the cost of acquiring the lease by 

amortizing it over the term of the lease. The 

term of the lease for amortization purposes generally includes all renewal options (and any 

other period for which you and the lessor reasonably expect the lease to be renewed). However, renewal periods aren't included if 75% or 

more of the cost of acquiring the lease is for the 

term of the lease remaining on the acquisition 

date (not including any period for which you 

may choose to renew, extend, or continue the 

lease).

For more information on the costs of getting 

a lease, see Cost of Getting a Lease in

chapter 3.

How to amortize. Enter your deduction in 

Part VI of Form 4562 if you are deducting amortization that begins during the current year, or 

on the appropriate line of your tax return if you 

aren't otherwise required to file Form 4562.

Section 197 Intangibles

Generally, you may amortize the capitalized 

costs of “section 197 intangibles” (see Section 

197 Intangibles Defined, later) ratably over a 

15-year period. You must amortize these costs 

if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income.

You may not be able to amortize section 197 intangibles acquired in a transaction that didn't result in a significant 

change in ownership or use. See Anti-Churning 

Rules, later.

Your amortization deduction each year is 

the applicable part of the intangible's adjusted 

basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 

months). The 15-year period begins with the 

later of:

• The month the intangible is acquired, or

• The month the trade or business or activity 

engaged in for the production of income 

begins.

You can't deduct amortization for the month you 

dispose of the intangible.

If you pay or incur an amount that increases 

the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it 

over the remainder of the 15-year period beginning with the month the basis increase occurs.

You aren't allowed any other depreciation or 

amortization deduction for an amortizable section 197 intangible.

Tax-exempt use property subject to a lease. 

The amortization period for any section 197 intangible leased under a lease agreement entered into after March 12, 2004, to a tax-exempt 

organization, governmental unit, or foreign person or entity (other than a partnership), shall not 

be less than 125% of the lease term.

Cost attributable to other property. The 

rules for section 197 intangibles don't apply to 

any amount that is included in determining the 

cost of property that isn't a section 197 intangible. For example, if the cost of computer software isn't separately stated from the cost of 

hardware or other tangible property and you 

consistently treat it as part of the cost of the 

hardware or other tangible property, these rules 

don't apply. Similarly, none of the cost of acquiring real property held for the production of 

rental income is considered the cost of goodwill, going concern value, or any other section 

197 intangible.

Section 197 Intangibles 

Defined

The following assets are section 197 intangibles 

and must be amortized over 180 months.

1. Goodwill.

2. Going concern value.

3. Workforce in place.

4. Business books and records, operating 

systems, or any other information base, including lists or other information concerning current or prospective customers.

5. A patent, copyright, formula, process, design, pattern, know-how, format, or similar 

item.

CAUTION

!

Chapter 8 Amortization Page 31
6. A customer-based intangible.

7. A supplier-based intangible.

8. Any item similar to items 3 through 7.

9. A license, permit, or other right granted by 

a governmental unit or agency (including 

issuances and renewals).

10. A covenant not to compete entered into in 

connection with the acquisition of an interest in a trade or business.

11. Any franchise, trademark, or trade name.

12. A contract for the use of, or a term interest 

in, any item in this list.

You can't amortize any of the intangibles listed in items 1 through 8 that you 

created rather than acquired unless 

you created them in acquiring assets that make 

up a trade or business or a substantial part of a 

trade or business.

Goodwill. This is the value of a trade or business based on expected continued customer 

patronage due to its name, reputation, or any 

other factor.

Going concern value. This is the additional 

value of a trade or business that attaches to 

property because the property is an integral 

part of an ongoing business activity. It includes 

value based on the ability of a business to continue to function and generate income even 

though there is a change in ownership (but 

doesn't include any other section 197 intangible). It also includes value based on the immediate use or availability of an acquired trade or 

business, such as the use of earnings during 

any period in which the business wouldn't otherwise be available or operational.

Workforce in place, etc. This includes the 

composition of a workforce (for example, its experience, education, or training). It also includes 

the terms and conditions of employment, 

whether contractual or otherwise, and any other 

value placed on employees or any of their attributes.

For example, you must amortize the part of 

the purchase price of a business that is for the 

existence of a highly skilled workforce. Also, 

you must amortize the cost of acquiring an existing employment contract or relationship with 

employees or consultants.

Business books and records, etc. This includes the intangible value of technical manuals, training manuals or programs, data files, 

and accounting or inventory control systems. It 

also includes the cost of customer lists; subscription lists; insurance expirations; patient or 

client files; and lists of newspaper, magazine, 

radio, and television advertisers.

Patents, copyrights, etc. This includes package design, computer software, and any interest in a film, sound recording, videotape, book, 

or other similar property, except as discussed 

later under Assets That Aren't Section 197 Intangibles.

Customer-based intangible. This is the 

composition of market, market share, and any 

CAUTION

!

other value resulting from the future provision of 

goods or services because of relationships with 

customers in the ordinary course of business. 

For example, you must amortize the part of the 

purchase price of a business that is for the existence of the following intangibles.

• A customer base.

• A circulation base.

• An undeveloped market or market growth.

• Insurance in force.

• A mortgage servicing contract.

• An investment management contract.

• Any other relationship with customers involving the future provision of goods or 

services.

Accounts receivable or other similar rights to 

income for goods or services provided to customers before the acquisition of a trade or business aren't section 197 intangibles.

Supplier-based intangible. A supplier-based 

intangible is the value resulting from the future 

acquisitions (through contract or other relationships with suppliers in the ordinary course of 

business) of goods or services that you will sell 

or use. The amount you pay or incur for supplier-based intangibles includes, for example, 

any portion of the purchase price of an acquired 

trade or business that is attributable to the existence of a favorable relationship with persons 

providing distribution services (such as a favorable shelf or display space or a retail outlet), or 

the existence of favorable supply contracts. 

Don't include any amount required to be paid 

for the goods or services to honor the terms of 

the agreement or other relationship. Also, see 

Assets That Aren't Section 197 Intangibles, 

later.

Government-granted license, permit, etc.

This is any right granted by a governmental unit 

or an agency or instrumentality of a governmental unit. For example, you must amortize the 

capitalized costs of acquiring (including issuing 

or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license.

Covenant not to compete. Section 197 intangibles include a covenant not to compete (or 

similar arrangement) entered into in connection 

with the acquisition of an interest in a trade or 

business, or a substantial portion of a trade or 

business. An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business.

An arrangement that requires the former 

owner to perform services (or to provide property or the use of property) isn't similar to a covenant not to compete to the extent the amount 

paid under the arrangement represents reasonable compensation for those services or for that 

property or its use.

Franchise, trademark, or trade name. A 

franchise, trademark, or trade name is a section 

197 intangible. You must amortize its purchase 

or renewal costs, other than certain contingent 

payments that you can deduct currently. For information on currently deductible contingent 

payments, see chapter 11.

Professional sports franchise. A franchise engaged in professional sports and any 

intangible assets acquired in connection with 

acquiring the franchise (including player contracts) is a section 197 intangible amortizable 

over a 15-year period.

Contract for the use of, or a term interest in, 

a section 197 intangible. Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use 

of any section 197 intangible. It also includes 

any term interest in any section 197 intangible, 

whether the interest is outright or in trust.

Assets That Aren't Section 

197 Intangibles

The following assets aren't section 197 intangibles.

1. Any interest in a corporation, partnership, 

trust, or estate.

2. Any interest under an existing futures contract, foreign currency contract, notional 

principal contract, interest rate swap, or 

similar financial contract.

3. Any interest in land.

4. Most computer software. (See Computer 

software, later.)

5. Any of the following assets not acquired in 

connection with the acquisition of a trade 

or business or a substantial part of a trade 

or business.

a. An interest in a film, sound recording, 

videotape, book, or similar property.

b. A right to receive tangible property or 

services under a contract or from a 

governmental agency.

c. An interest in a patent or copyright.

d. Certain rights that have a fixed duration or amount. (See Rights of fixed 

duration or amount, later.)

6. An interest under either of the following.

a. An existing lease or sublease of tangible property.

b. A debt that was in existence when the 

interest was acquired.

7. A right to service residential mortgages 

unless the right is acquired in connection 

with the acquisition of a trade or business 

or a substantial part of a trade or business.

8. Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss 

isn't recognized.

Intangible property that isn't amortizable under the rules for section 197 intangibles can be 

depreciated if it meets certain requirements. 

You must generally use the straight line method 

over its useful life. For certain intangibles, the 

depreciation period is specified in the law and 

regulations. For example, the depreciation period for computer software that isn't a section 

197 intangible is generally 36 months.

For more information on depreciating intangible property, see Intangible Property under 

What Method Can You Use To Depreciate Your 

Property? in chapter 1 of Pub. 946.

Page 32 Chapter 8 Amortization
Computer software. Section 197 intangibles 

don’t include the following types of computer 

software.

1. Software that meets all the following requirements.

a. It is, or has been, readily available for 

purchase by the general public.

b. It is subject to a nonexclusive license.

c. It hasn't been substantially modified. 

This requirement is considered met if 

the cost of all modifications isn't more 

than the greater of 25% of the price of 

the publicly available unmodified software or $2,000.

2. Software that isn't acquired in connection 

with the acquisition of a trade or business 

or a substantial part of a trade or business.

Computer software defined. Computer 

software includes all programs designed to 

cause a computer to perform a desired function. 

It also includes any database or similar item that 

is in the public domain and is incidental to the 

operation of qualifying software.

Rights of fixed duration or amount. Section 

197 intangibles don't include any right under a 

contract or from a governmental agency if the 

right is acquired in the ordinary course of a 

trade or business (or in an activity engaged in 

for the production of income) but not as part of a 

purchase of a trade or business and either:

• Has a fixed life of less than 15 years; or

• Is of a fixed amount that, except for the 

rules for section 197 intangibles, would be 

recovered under a method similar to the 

unit-of-production method of cost recovery.

However, this doesn't apply to the following intangibles.

• Goodwill.

• Going concern value.

• A covenant not to compete.

• A franchise, trademark, or trade name.

• A customer-related information base, customer-based intangible, or similar item.

Safe Harbor for Creative 

Property Costs

If you are engaged in the trade or business of 

film production, you may be able to amortize the 

creative property costs for properties not set for 

production within 3 years of the first capitalized 

transaction. You may amortize these costs ratably over a 15-year period beginning on the first 

day of the second half of the tax year in which 

you properly write off the costs for financial accounting purposes. If, during the 15-year period, you dispose of the creative property rights, 

you must continue to amortize the costs over 

the remainder of the 15-year period.

Creative property costs include costs paid or 

incurred to acquire and develop screenplays, 

scripts, story outlines, motion picture production 

rights to books and plays, and other similar 

properties for purposes of potential future film 

development, production, and exploitation.

Amortize these costs using the rules of Revenue Procedure 2004-36. For more information, 

see Revenue Procedure 2004-36, 2004-24 

I.R.B. 1063, available at IRS.gov/irb/

2004-24_IRB#RP-2004-36.

A change in the treatment of creative 

property costs is a change in method of 

accounting.

Anti-Churning Rules

Anti-churning rules prevent you from amortizing 

most section 197 intangibles if the transaction 

in which you acquired them didn't result in a significant change in ownership or use. These 

rules apply to goodwill and going concern 

value, and to any other section 197 intangible 

that isn't otherwise depreciable or amortizable.

Under the anti-churning rules, you can't use 

15-year amortization for the intangible if any of 

the following conditions apply.

1. You or a related person (defined later) 

held or used the intangible at any time 

from July 25, 1991, through August 10, 

1993.

2. You acquired the intangible from a person 

who held it at any time during the period in 

(1) and, as part of the transaction, the user 

didn't change.

3. You granted the right to use the intangible 

to a person (or a person related to that 

person) who held or used it at any time 

during the period in (1). This applies only if 

the transaction in which you granted the 

right and the transaction in which you acquired the intangible are part of a series of 

related transactions. See Related person, 

later, for more information.

Exceptions. The anti-churning rules don't apply in the following situations.

• You acquired the intangible from a decedent and its basis was stepped up to its 

FMV.

• The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. This exception 

doesn't apply if the transaction in which 

you acquired the intangible and the transaction in which the seller or transferor acquired it are part of a series of related 

transactions.

• The gain-recognition exception, discussed 

later, applies.

Related person. For purposes of the 

anti-churning rules, the following are related 

persons.

• An individual and his or her brothers, sisters, half brothers, half sisters, spouse, ancestors (parents, grandparents, etc.), and 

lineal descendants (children, grandchildren, etc.).

• A corporation and an individual who owns, 

directly or indirectly, more than 20% of the 

value of the corporation's outstanding 

stock.

• Two corporations that are members of the 

same controlled group as defined in section 1563(a), except that “more than 20%” 

is substituted for “at least 80%” in that definition and the determination is made without regard to subsections (a)(4) and (e)(3)

CAUTION

!

(C) of section 1563. For an exception, see 

section 1.197-2(h)(6)(iv) of the regulations.

• A trust fiduciary and a corporation if more 

than 20% of the value of the corporation's 

outstanding stock is owned, directly or indirectly, by or for the trust or grantor of the 

trust.

• The grantor and fiduciary, and the fiduciary 

and beneficiary, of any trust.

• The fiduciaries of two different trusts, and 

the fiduciaries and beneficiaries of two different trusts, if the same person is the 

grantor of both trusts.

• The executor and beneficiary of an estate.

• A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose 

family members control it).

• A corporation and a partnership if the 

same persons own more than 20% of the 

value of the outstanding stock of the corporation and more than 20% of the capital 

or profits interest in the partnership.

• Two S corporations, and an S corporation 

and a regular corporation, if the same persons own more than 20% of the value of 

the outstanding stock of each corporation.

• Two partnerships if the same persons own, 

directly or indirectly, more than 20% of the 

capital or profits interests in both partnerships.

• A partnership and a person who owns, directly or indirectly, more than 20% of the 

capital or profits interests in the partnership.

• Two persons who are engaged in trades or 

businesses under common control (as described in section 41(f)(1)).

When to determine relationship. Persons are treated as related if the relationship 

existed at the following time.

• In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired.

• In the case of a series of related transactions (or a series of transactions that comprise a qualified stock purchase under section 338(d)(3)), immediately before the 

earliest transaction or immediately after the 

last transaction.

Ownership of stock. In determining 

whether an individual directly or indirectly owns 

any of the outstanding stock of a corporation, 

the following rules apply.

Rule 1. Stock directly or indirectly owned 

by or for a corporation, partnership, estate, or 

trust is considered owned proportionately by or 

for its shareholders, partners, or beneficiaries.

Rule 2. An individual is considered to own 

the stock directly or indirectly owned by or for 

his or her family. Family includes only brothers 

and sisters, half brothers and half sisters, 

spouse, ancestors, and lineal descendants.

Rule 3. An individual owning (other than by 

applying Rule 2) any stock in a corporation is 

considered to own the stock directly or indirectly owned by or for his or her partner.

Chapter 8 Amortization Page 33
Rule 4. For purposes of applying Rule 1, 2, 

or 3, treat stock constructively owned by a person under Rule 1 as actually owned by that person. Don't treat stock constructively owned by 

an individual under Rule 2 or 3 as owned by the 

individual for reapplying Rule 2 or 3 to make another person the constructive owner of the 

stock.

Gain-recognition exception. This exception 

to the anti-churning rules applies if the person 

you acquired the intangible from (the transferor) 

meets both of the following requirements.

• That person wouldn't be related to you (as 

described under Related person, earlier) if 

the 20% test for ownership of stock and 

partnership interests were replaced by a 

50% test.

• That person chose to recognize gain on 

the disposition of the intangible and pay income tax on the gain at the highest tax 

rate. See chapter 2 in Pub. 544 for information on making this choice.

If this exception applies, the anti-churning 

rules apply only to the amount of your adjusted 

basis in the intangible that is more than the gain 

recognized by the transferor.

Notification. If the person you acquired 

the intangible from chooses to recognize gain 

under the rules for this exception, that person 

must notify you in writing by the due date of the 

return on which the choice is made.

Anti-abuse rule. You can't amortize any section 197 intangible acquired in a transaction for 

which the principal purpose was either of the 

following.

• To avoid the requirement that the intangible be acquired after August 10, 1993.

• To avoid any of the anti-churning rules.

More information. For more information 

about the anti-churning rules, including additional rules for partnerships, see Regulations 

section 1.197-2(h).

Incorrect Amount of 

Amortization Deducted

If you later discover that you deducted an incorrect amount for amortization for a section 197 

intangible in any year, you may be able to make 

a correction for that year by filing an amended 

return. See Amended Return next. If you aren't 

allowed to make the correction on an amended 

return, you can change your accounting method 

to claim the correct amortization. See Changing 

Your Accounting Method, later.

Amended Return

If you deducted an incorrect amount for amortization, you can file an amended return to correct the following.

• A mathematical error made in any year.

• A posting error made in any year.

• An amortization deduction for a section 

197 intangible for which you haven't adopted a method of accounting.

When to file. If an amended return is allowed, 

you must file it by the later of the following 

dates.

• 3 years from the date you filed your original 

return for the year in which you didn't deduct the correct amount. (A return filed 

early is considered filed on the due date.)

• 2 years from the time you paid your tax for 

that year.

Changing Your Accounting Method

Generally, you must get IRS approval to change 

your method of accounting. File Form 3115 to 

request a change to a permissible method of 

accounting for amortization.

The following are examples of a change in 

method of accounting for amortization.

• A change in the amortization method, period of recovery, or convention of an amortizable asset.

• A change in the accounting for amortizable 

assets from a single asset account to a 

multiple asset account (pooling), or vice 

versa.

• A change in the accounting for amortizable 

assets from one type of multiple asset account to a different type of multiple asset 

account.

Changes in amortization that aren't a 

change in method of accounting include the following.

• A change in figuring amortization in the tax 

year in which your use of the asset 

changes.

• An adjustment in the useful life of an amortizable asset.

• Generally, the making of a late amortization election or the revocation of a timely 

valid amortization election.

• Any change in the placed-in-service date 

of an amortizable asset.

See Regulations section 1.446-1(e)(2)(ii)(a) 

for more information and examples.

Automatic approval. In some instances, you 

may be able to get automatic approval from the 

IRS to change your method of accounting for 

amortization. For a list of automatic accounting 

method changes, see the Instructions for Form 

3115. Also, see the Instructions for Form 3115 

for more information on getting approval, automatic approval procedures, and a list of exceptions to the automatic approval process.

Disposition of Section 197 

Intangibles

A section 197 intangible is treated as depreciable property used in your trade or business. If 

you held the intangible for more than 1 year, 

any gain on its disposition, up to the amount of 

allowable amortization, is ordinary income (section 1245 gain). If multiple section 197 intangibles are disposed of in a single transaction or a 

series of related transactions, treat all of the 

section 197 intangibles as if they were a single 

asset for purposes of determining the amount of 

gain that is ordinary income. Any remaining 

gain, or any loss, is a section 1231 gain or loss. 

If you held the intangible 1 year or less, any 

gain or loss on its disposition is an ordinary gain 

or loss. For more information on ordinary or 

capital gain or loss on business property, see 

chapter 3 in Pub. 544.

Nondeductible loss. You can't deduct any 

loss on the disposition or worthlessness of a 

section 197 intangible that you acquired in the 

same transaction (or series of related transactions) as other section 197 intangibles you still 

have. Instead, increase the adjusted basis of 

each remaining amortizable section 197 intangible by a proportionate part of the nondeductible 

loss. Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction.

• The numerator is the adjusted basis of 

each remaining intangible on the date of 

the disposition.

• The denominator is the total adjusted basis 

of all remaining amortizable section 197 intangibles on the date of the disposition.

Covenant not to compete. A covenant not to 

compete, or similar arrangement, isn't considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant.

Nonrecognition transfers. If you acquire a 

section 197 intangible in a nonrecognition transfer, you are treated as the transferor with respect to the part of your adjusted basis in the intangible that isn't more than the transferor's 

adjusted basis. You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. 

Nonrecognition transfers include transfers to a 

corporation, partnership contributions and distributions, like-kind exchanges, and involuntary 

conversions.

In a like-kind exchange or involuntary conversion of a section 197 intangible, you must 

continue to amortize the part of your adjusted 

basis in the acquired intangible that isn't more 

than your adjusted basis in the exchanged or 

converted intangible over the remaining amortization period of the exchanged or converted intangible. Amortize over a new 15-year period 

the part of your adjusted basis in the acquired 

intangible that is more than your adjusted basis 

in the exchanged or converted intangible.

Example. You own a section 197 intangible you have amortized for 4 full years. It has a 

remaining unamortized basis of $30,000. You 

exchange the asset plus $10,000 for a like-kind 

section 197 intangible. The nonrecognition provisions of like-kind exchanges apply. You amortize $30,000 of the $40,000 adjusted basis of 

the acquired intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset. You amortize the 

other $10,000 of adjusted basis over a new 

15-year period. For more information, see Regulations section 1.197-2(g).

Reforestation Costs

You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax 

year. See Reforestation Costs in chapter 7. You 

Page 34 Chapter 8 Amortization
can elect to amortize the qualifying costs that 

aren't deducted currently over an 84-month period. There is no limit on the amount of your amortization deduction for reforestation costs paid 

or incurred during the tax year.

The election to amortize reforestation costs 

incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. A partner, shareholder, or beneficiary can't make that election.

A partner's or shareholder's share of amortizable costs is figured under the general rules 

for allocating items of income, loss, deduction, 

etc., of a partnership or S corporation. The amortizable costs of an estate are divided between 

the estate and the income beneficiary based on 

the income of the estate allocable to each.

Qualifying costs. Reforestation costs are the 

direct costs of planting or seeding for forestation or reforestation. Qualifying costs include 

only those costs you must capitalize and include in the adjusted basis of the property. 

They include costs for the following items.

• Site preparation.

• Seeds or seedlings.

• Labor.

• Tools.

• Depreciation on equipment used in planting and seeding.

Qualifying costs don't include costs for 

which the government reimburses you under a 

cost-sharing program, unless you include the 

reimbursement in your income.

Qualified timber property. Qualified timber 

property is property that contains trees in significant commercial quantities. It can be a woodlot 

or other site that you own or lease. The property 

qualifies only if it meets all of the following requirements.

• It is located in the United States.

• It is held for the growing and cutting of timber you will either use in, or sell for use in, 

the commercial production of timber products.

• It consists of at least one acre planted with 

tree seedlings in the manner normally used 

in forestation or reforestation.

Qualified timber property doesn't include 

property on which you have planted shelter 

belts or ornamental trees, such as Christmas 

trees.

Amortization period. The 84-month amortization period starts on the first day of the first 

month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. You can claim amortization 

deductions for no more than 6 months of the 

first and last (eighth) tax years of the period.

Life tenant and remainderman. If one person holds the property for life with the remainder going to another person, the life tenant is 

entitled to the full amortization for qualifying reforestation costs incurred by the life tenant. Any 

remainder interest in the property is ignored for 

amortization purposes.

Recapture. If you dispose of qualified timber 

property within 10 years after the tax year you 

incur qualifying reforestation expenses, report 

any gain as ordinary income up to the amortization you took. See chapter 3 of Pub. 544 for 

more information.

How to make the election. To elect to amortize qualifying reforestation costs, complete Part 

VI of Form 4562 and attach a statement that 

contains the following information.

• A description of the costs and the dates 

you incurred them.

• A description of the type of timber being 

grown and the purpose for which it is 

grown.

Attach a separate statement for each property 

for which you amortize reforestation costs.

Generally, you must make the election on a 

timely filed return (including extensions) for the 

tax year in which you incurred the costs. However, if you timely filed your return for the year 

without making the election, you can still make 

the election by filing an amended return within 6 

months of the due date of the return (excluding 

extensions). Attach Form 4562 and the statement to the amended return and write “Filed 

pursuant to section 301.9100-2” on Form 4562. 

File the amended return at the same address 

you filed the original return.

Revoking the election. You must get IRS approval to revoke your election to amortize qualifying reforestation costs. Your application to revoke the election must include your name, 

address, the years for which your election was 

in effect, and your reason for revoking it. Please 

provide your daytime telephone number (optional), in case we need to contact you. You, or 

your duly authorized representative, must sign 

the application and file it at least 90 days before 

the due date (without extensions) for filing your 

income tax return for the first tax year for which 

your election is to end.

Send the application to:

Internal Revenue Service

Associate Chief Counsel

Passthroughs and Special Industries

CC:PSI:6

1111 Constitution Ave. NW, IR-5300

Washington, DC 20224

Geological and 

Geophysical Costs

You can amortize the cost of geological and geophysical expenses paid or incurred in connection with oil and gas exploration or development 

within the United States. These costs can be 

amortized ratably over a 24-month period beginning on the midpoint of the tax year in which 

the expenses were paid or incurred. For major 

integrated oil companies (as defined in section 

167(h)(5)), these costs must be amortized ratably over a 7-year period for costs paid or incurred after December 19, 2007 (a 5-year period 

for costs paid or incurred after May 17, 2006, 

and before December 20, 2007).

If you retire or abandon the property during 

the amortization period, no amortization deduction is allowed in the year of retirement or abandonment.

Pollution Control 

Facilities

You can elect to amortize the cost of a certified 

pollution control facility over 60 months. However, see Atmospheric pollution control facilities, later, for an exception. The cost of a pollution control facility that isn't eligible for 

amortization can be depreciated under the regular rules for depreciation. Also, you can claim a 

special depreciation allowance on a certified 

pollution control facility that is qualified property 

even if you elect to amortize its cost. You must 

reduce its cost (amortizable basis) by the 

amount of any special allowance you claim. 

See chapter 3 of Pub. 946.

A certified pollution control facility is a new 

identifiable treatment facility used in connection 

with a plant or other property in operation before 1976 to reduce or control water or atmospheric pollution or contamination. The facility 

must do so by removing, changing, disposing, 

storing, or preventing the creation or emission 

of pollutants, contaminants, wastes, or heat. 

The facility must be certified by state and federal certifying authorities.

The facility must not significantly increase 

the output or capacity, extend the useful life, or 

reduce the total operating costs of the plant or 

other property. Also, it must not significantly 

change the nature of the manufacturing or production process or facility.

The federal certifying authority won't certify 

your property to the extent it appears you will 

recover (over the property's useful life) all or 

part of its cost from the profit based on its operation (such as through sales of recovered 

wastes). The federal certifying authority will describe the nature of the potential cost recovery. 

You must then reduce the amortizable basis of 

the facility by this potential recovery.

New identifiable treatment facility. A 

new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. It doesn't include a building and its 

structural components unless the building is exclusively a treatment facility.

Atmospheric pollution control facilities. 

Certain atmospheric pollution control facilities 

can be amortized over 84 months. To qualify, 

the following must apply.

• The facility must be acquired and placed in 

service after April 11, 2005. If acquired, the 

original use must begin with you after April 

11, 2005.

• The facility must be used in connection 

with an electric generation plant or other 

property placed in operation after December 31, 1975, that is primarily coal fired.

• If you construct, reconstruct, or erect the 

facility, only the basis attributable to the 

construction, reconstruction, or erection 

completed after April 11, 2005, qualifies.

Chapter 8 Amortization Page 35
Basis reduction for corporations. A corporation must reduce the amortizable basis of a 

pollution control facility by 20% before figuring 

the amortization deduction.

More information. For more information on 

the amortization of pollution control facilities, 

see sections 169 and 291(c) and the related 

regulations.

Research and 

Experimental Costs

You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year 

period (see Optional write-off method below).

If you elect to amortize these costs, deduct 

them in equal amounts over 60 months or more. 

The amortization period begins the month you 

first receive an economic benefit from the costs.

For a definition of “research and experimental costs” and information on deducting them as 

current business expenses, see chapter 7.

Optional write-off method. Rather than amortize these costs or deduct them as a current 

expense, you have the option of deducting 

(writing off) research and experimental costs 

ratably over a 10-year period beginning with the 

tax year in which you incurred the costs. For 

more information, see Optional Write-off of Certain Tax Preferences, later, and section 59(e).

Costs you can amortize. You can amortize 

costs chargeable to a capital account (see 

chapter 1) if you meet both of the following requirements.

• You paid or incurred the costs in your trade 

or business.

• You aren't deducting the costs currently.

How to make the election. To elect to amortize research and experimental costs, complete 

Part VI of Form 4562 and attach it to your income tax return. Generally, you must file the return by the due date (including extensions). 

However, if you timely filed your return for the 

year without making the election, you can still 

make the election by filing an amended return 

within 6 months of the due date of the return 

(excluding extensions). Attach Form 4562 to 

the amended return and write “Filed pursuant to 

section 301.9100-2” on Form 4562. File the 

amended return at the same address you filed 

the original return.

Your election is binding for the year it is 

made and for all later years unless you obtain 

approval from the IRS to change to a different 

method.

Optional Write-off of 

Certain Tax Preferences

You can elect to amortize certain tax preference 

items over an optional period beginning in the 

tax year in which you incurred the costs. If you 

make this election, there is no AMT adjustment. 

The applicable costs and the optional recovery 

periods are as follows.

• Circulation costs—3 years.

• Intangible drilling and development 

costs—60 months.

• Mining exploration and development 

costs—10 years.

• Research and experimental costs—10 

years.

How to make the election. To elect to amortize qualifying costs over the optional recovery 

period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which 

the election begins.

• Your name, address, and taxpayer identification number.

• The type of cost and the specific amount of 

the cost for which you are making the election.

Generally, the election must be made on a 

timely filed return (including extensions) for the 

tax year in which you incurred the costs. However, if you timely filed your return for the year 

without making the election, you can still make 

the election by filing an amended return within 6 

months of the due date of the return (excluding 

extensions). Attach Form 4562 to the amended 

return and write “Filed pursuant to section 

301.9100-2” on Form 4562. File the amended 

return at the same address you filed the original 

return.

Revoking the election. You must obtain consent from the IRS to revoke your election. Your 

request to revoke the election must be submitted to the IRS in the form of a letter ruling before 

the end of the tax year in which the optional recovery period ends. The request must contain 

all of the information necessary to demonstrate 

the rare and unusual circumstances that would 

justify granting revocation. If the request for revocation is approved, any unamortized costs are 

deductible in the year the revocation is effective.

9.

Depletion

Introduction

Depletion is the using up of natural resources 

extracted from a mineral property by mining, 

drilling, quarrying stone, or cutting timber. The 

depletion deduction allows an owner or operator to account for the reduction of the mineral 

property’s value or basis as a result of the extraction of the natural resource.

There are two ways of figuring depletion: 

cost depletion and percentage depletion. For oil 

and gas wells, mines, other natural deposits (including geothermal deposits), and mineral 

property, you must generally use the method 

that gives you the larger deduction. For standing timber, you must use cost depletion.

Topics

This chapter discusses:

• Who can claim depletion

• Mineral property

• Timber

Useful Items

You may want to see:

Publication

Sales and Other Dispositions of 

Assets

Basis of Assets

Form (and Instructions)

Supplemental 

Income and Loss

cdu(o) Partner’s 

Share of Income, Deductions, 

Credits, etc.

cdu(o) 

Shareholder's Share of Income, 

Deductions, Credits, etc.

At-Risk Limitations

Passive Activity Loss Limitations

(b) Forest Activities Schedule

See chapter 12 for information about getting 

publications and forms.

Who Can Claim 

Depletion?

If you have an economic interest in mineral 

property or standing timber, you can take a deduction for depletion. More than one person 

can have an economic interest in the same mineral deposit or timber. In the case of leased 

property, the depletion deduction is divided between the lessor and the lessee.

You have an economic interest if both the 

following apply.

• You have acquired by investment any interest in mineral deposits or standing timber.

• You have a legal right to income from the 

extraction of the mineral or cutting of the 

timber to which you must look for a return 

of your capital investment.

A contractual relationship that allows you an 

economic or monetary advantage from products of the mineral deposit or standing timber is 

not, in itself, an economic interest.

Individuals, estates, and trusts who 

claim depletion deductions may be liable for the Alternative Minimum Tax 

(AMT). For tax years beginning after 2017, the 

Tax Cuts and Jobs Act, section 12001, repealed the corporate AMT.

 544

 551

 Schedule E (Form 1040)

 Schedule K-1 (Form 1065)

 Schedule K-1 (Form 1120-S)

 6198

 8582

 T (Timber)

CAUTION

!

Page 36 Chapter 9 Depletion
Basis adjustment for depletion. You must 

reduce the basis of your property by the depletion allowed or allowable, whichever is greater, 

but not below zero.

Mineral Property

Mineral property includes oil and gas wells, 

mines, and other natural deposits (including geothermal deposits). For this purpose, the term 

“property” means each separate interest you 

own in each mineral deposit in each separate 

tract or parcel of land. You can treat two or 

more separate interests as one property or as 

separate properties. See section 614 and the 

related regulations for rules on how to treat separate mineral interests.

There are two ways of figuring depletion on 

mineral property.

• Cost depletion.

• Percentage depletion.

Generally, you must use the method that gives 

you the larger deduction. However, unless you 

are an independent producer or royalty owner, 

you generally cannot use percentage depletion 

for oil and gas wells. See Oil and Gas Wells, 

later.

Cost Depletion

To figure cost depletion, you must first determine the following.

• The property's basis for depletion.

• The total recoverable units of mineral in the 

property's natural deposit.

• The number of units of mineral sold during 

the tax year.

Basis for depletion. To figure the property's 

basis for depletion, subtract all the following 

from the property's adjusted basis.

1. Amounts recoverable through:

a. Depreciation deductions,

b. Deferred expenses (including deferred exploration and development 

costs), and

c. Deductions other than depletion.

2. The residual value of land and improvements at the end of operations.

3. The cost or value of land acquired for purposes other than mineral production.

Adjusted basis. The adjusted basis of 

your property is your original cost or other basis, plus certain additions and improvements, 

and minus certain deductions such as depletion 

allowed or allowable and casualty losses. Your 

adjusted basis can never be less than zero. See 

Pub. 551 for more information on adjusted basis.

Total recoverable units. The total recoverable units is the sum of the following.

• The number of units of mineral remaining 

at the end of the year (including units recovered but not sold).

• The number of units of mineral sold during 

the tax year (determined under your 

method of accounting, as explained next).

You must estimate or determine recoverable 

units (tons, pounds, ounces, barrels, thousands 

of cubic feet, or other measure) of mineral products using the current industry method and the 

most accurate and reliable information you can 

obtain. You must include ores and minerals that 

are developed, in sight, blocked out, or assured. You must also include probable or prospective ores or minerals that are believed to 

exist based on good evidence. But see Elective 

safe harbor for owners of oil and gas property, 

later.

Number of units sold during the tax year. 

You determine the number of units sold during 

the tax year based on your method of accounting. Use the following table to make this determination.

IF you 

use ...

THEN the units sold during 

the tax year are ...

the cash method 

of accounting

the units sold for which you 

receive payment during the tax 

year (regardless of the year of 

sale).

an accrual 

method of 

accounting

the units sold based on your 

inventories and method of 

accounting for inventory.

The number of units sold during the tax year 

does not include any for which depletion deductions were allowed or allowable in earlier years.

Figuring the cost depletion deduction. 

Once you have figured your property's basis for 

depletion, the total recoverable units, and the 

number of units sold during the tax year, you 

can figure your cost depletion deduction by taking the following steps.

Step Action Result

 1 Divide your property's

basis for depletion by

total recoverable units.

Depletion unit.

 2 Multiply the depletion

unit by units sold

during the tax year.

Cost depletion 

deduction.

You must keep accounts for the depletion of 

each property and adjust these accounts each 

year for units sold and depletion claimed.

Elective safe harbor for owners of oil and 

gas property. Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. If 

you choose the elective safe harbor, the total 

recoverable units equal 105% of a property's 

proved reserves (both developed and undeveloped). For details, see Revenue Procedure 

2004-19 on page 563 of I.R.B. 2004-10, available at IRS.gov/irb/2004-10_IRB/RP-2004-19.

To make the election, attach a statement to 

your timely filed (including extensions) original 

return for the first tax year for which the safe 

harbor is elected. The statement must indicate 

that you are electing the safe harbor provided 

by Revenue Procedure 2004-19. The election, if 

made, is effective for the tax year in which it is 

made and all later years. It cannot be revoked 

for the tax year in which it is elected, but it may 

be revoked in a later year. Once revoked, it 

cannot be re-elected for the next 5 years.

Percentage Depletion

To figure percentage depletion, you multiply a 

certain percentage, specified for each mineral, 

by your gross income from the property during 

the tax year.

The rates to be used and other rules for oil 

and gas wells are discussed later under Independent Producers and Royalty Owners and 

under Natural Gas Wells. Rates and other rules 

for percentage depletion of other specific minerals are found later under Mines and Geothermal 

Deposits.

Gross income. When figuring percentage depletion, subtract from your gross income from 

the property the following amounts.

• Any rents or royalties you paid or incurred 

for the property.

• The part of any bonus you paid for a lease 

on the property allocable to the product 

sold (or that otherwise gives rise to gross 

income) for the tax year.

A bonus payment includes amounts you paid as 

a lessee to satisfy a production payment retained by the lessor.

Use the following fraction to figure the part 

of the bonus you must subtract.

No. of units sold in the tax year

Recoverable units from the property ×

Bonus 

Payments

For oil and gas wells and geothermal deposits, more information about the definition of 

gross income from the property is under Oil and 

Gas Wells, later. For other property, more information about the definition of gross income 

from the property is under Mines and Geothermal Deposits, later.

Taxable income limit. The percentage depletion deduction generally cannot be more than 

50% (100% for oil and gas property) of your taxable income from the property figured without 

the depletion deduction and the domestic production activities deduction.

Taxable income from the property means 

gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to mining processes, including limited 

mining transportation. These deductible items 

include, but are not limited to, the following.

• Operating expenses.

• Certain selling expenses.

• Administrative and financial overhead.

• Depreciation.

• Intangible drilling and development costs.

• Exploration and development expenditures.

• Deductible taxes (see chapter 5), but not 

taxes that you capitalize or take as a credit.

• Losses sustained.

The following rules apply when figuring your 

taxable income from the property for purposes 

of the taxable income limit.

• Do not deduct any net operating loss 

(NOL) deduction from the gross income 

from the property.

• Corporations do not deduct charitable contributions from the gross income from the 

property.

Chapter 9 Depletion Page 37
• If, during the year, you dispose of an item 

of section 1245 property that was used in 

connection with mineral property, reduce 

any allowable deduction for mining expenses by the part of any gain you must report 

as ordinary income that is allocable to the 

mineral property. See Regulations section 

1.613-5(b)(1) for information on how to figure the ordinary gain allocable to the property.

Oil and Gas Wells

You cannot claim percentage depletion for an 

oil or gas well unless at least one of the following applies.

• You are either an independent producer or 

a royalty owner.

• The well produces one of the following: 

regulated natural gas, natural gas sold under a fixed contract, or natural gas from geopressured brine.

If you are an independent producer or royalty owner, see Independent Producers and 

Royalty Owners next.

For information on the depletion deduction 

for wells that produce regulated natural gas, 

natural gas sold under a fixed contract, or natural gas from geopressured brine, see Natural 

Gas Wells, later.

Independent Producers and 

Royalty Owners

If you are an independent producer or royalty 

owner, you figure percentage depletion using a 

rate of 15% of the gross income from the property based on your average daily production of 

domestic crude oil or domestic natural gas up to 

your depletable oil or natural gas quantity. However, an independent producer or royalty owner 

that also acts as a retailer or refiner may be excluded from claiming percentage depletion. For 

information on figuring the deduction, see Figuring percentage depletion, later.

Refiners who cannot claim percentage depletion. You cannot claim percentage depletion if you or a related person refines crude oil 

and you and the related person refined more 

than 75,000 barrels on any day during the tax 

year based on average (rather than actual) daily 

refinery runs for the tax year. The average daily 

refinery run is figured by dividing total refinery 

runs for the tax year by the total number of days 

in the tax year.

Related person. You and another person 

are related persons if either of you holds a significant ownership interest in the other person 

or if a third person holds a significant ownership 

interest in both of you.

For example, a corporation, partnership, estate, or trust and anyone who holds a significant 

ownership interest in it are related persons. A 

partnership and a trust are related persons if 

one person holds a significant ownership interest in each of them.

For purposes of the related person rules, 

significant ownership interest means direct or 

indirect ownership of 5% or more in any one of 

the following.

• The value of the outstanding stock of a 

corporation.

• The interest in the profits or capital of a 

partnership.

• The beneficial interests in an estate or 

trust.

Any interest owned by or for a corporation, 

partnership, trust, or estate is considered to be 

owned directly both by itself and proportionately 

by its shareholders, partners, or beneficiaries.

Retailers who cannot claim percentage depletion. You cannot claim percentage depletion if both the following apply.

1. You sell oil or natural gas or their byproducts directly or through a related person in 

any of the following situations.

a. Through a retail outlet operated by 

you or a related person.

b. To any person who is required under 

an agreement with you or a related 

person to use a trademark, trade 

name, or service mark or name 

owned by you or a related person in 

marketing or distributing oil, natural 

gas, or their byproducts.

c. To any person given authority under 

an agreement with you or a related 

person to occupy any retail outlet 

owned, leased, or controlled by you or 

a related person.

2. The combined gross receipts from sales 

(not counting resales) of oil, natural gas, or 

their byproducts by all retail outlets taken 

into account in (1) are more than $5 million 

for the tax year.

For the purpose of determining if this rule 

applies, do not count the following.

• Bulk sales (sales in very large quantities) 

of oil or natural gas to commercial or industrial users.

• Bulk sales of aviation fuels to the Department of Defense.

• Sales of oil or natural gas or their byproducts outside the United States if none of 

your domestic production or that of a related person is exported during the tax year 

or the prior tax year.

Related person. To determine if you and 

another person are related persons, see Related person under Refiners who cannot claim 

percentage depletion, earlier.

Sales through a related person. You are 

considered to be selling oil or natural gas (or a 

product derived therefrom) through a related 

person if any sale by the related person produces gross income from which you may benefit 

because of your direct or indirect ownership interest in the related person.

You are not considered to be selling oil or 

natural gas (or a product derived therefrom) 

through a related person who is a retailer if all of 

the following apply.

• You do not own a significant ownership interest in the retailer.

• You sell your production to persons who 

are not related to either you or the retailer.

• The retailer does not buy oil or natural gas 

from your customers or persons related to 

your customers.

• There are no arrangements for the retailer 

to acquire oil or natural gas you produced 

for resale or made available for purchase 

by the retailer.

• Neither you nor the retailer knows of, or 

controls, the final disposition of the oil or 

natural gas you sold or the original source 

of the petroleum products the retailer acquired for resale.

Transferees who cannot claim percentage 

depletion. You cannot claim percentage depletion if you received your interest in a proven 

oil or gas property by transfer after 1974 and 

before October 12, 1990. For a definition of the 

term “transfer,” see Regulations section 

1.613A-7(n). For a definition of the term “interest in proven oil or gas property,” see Regulations section 1.613A-7(p).

Figuring percentage depletion. Generally, 

as an independent producer or royalty owner, 

you figure your percentage depletion by figuring 

your average daily production of domestic oil or 

gas and comparing it to your depletable oil or 

gas quantity. If your average daily production 

does not exceed your depletable oil or gas 

quantity, you figure your percentage depletion 

by multiplying the gross income from the oil or 

gas property (as defined under Gross income 

from the property, later) by 15% (0.15). If your 

average daily production of domestic oil or gas 

exceeds your depletable oil or gas quantity, you 

must make an allocation as explained later under Average daily production.

In addition, there is a limit on the percentage 

depletion deduction. See Taxable income limit, 

later.

Average daily production. Figure your average daily production by dividing your total domestic production of oil or gas for the tax year 

by the number of days in your tax year.

Partial interest. If you have a partial interest in the production from a property, figure 

your share of the production by multiplying total 

production from the property by your percentage participation in the revenues from the property.

You have a partial interest in the production 

from a property if you have a net profits interest 

in the property. To figure the share of production for your net profits interest, you must first 

determine your percentage participation (as 

measured by the net profits) in the gross revenue from the property. To figure this percentage, you divide the income you receive for your 

net profits interest by the gross revenue from 

the property. Then multiply the total production 

from the property by your percentage participation to figure your share of the production.

Example. Javier Robles owns oil property 

in which Pablo Olmos owns a 20% net profits 

interest. During the year, the property produced 

10,000 barrels of oil, which Javier sold for 

$200,000. Javier had expenses of $90,000 attributable to the property. The property 

Page 38 Chapter 9 Depletion
generated a net profit of $110,000 ($200,000 − 

$90,000). Pablo received income of $22,000 

($110,000 × 20% (0.20)) for his net profits interest.

Pablo determined his percentage participation to be 11% by dividing $22,000 (the income 

he received) by $200,000 (the gross revenue 

from the property). Pablo determined his share 

of the oil production to be 1,100 barrels (10,000 

barrels × 11% (0.11)).

Depletable oil or natural gas quantity. Generally, your depletable oil quantity is 1,000 barrels. Your depletable natural gas quantity is 

6,000 cubic feet multiplied by the number of 

barrels of your depletable oil quantity that you 

choose to apply. If you claim depletion on both 

oil and natural gas, you must reduce your depletable oil quantity (1,000 barrels) by the number of barrels you use to figure your depletable 

natural gas quantity.

Example. You have both oil and natural 

gas production. To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1,000-barrel depletable oil quantity. 

Your depletable natural gas quantity is 2.16 million cubic feet of gas (360 × 6,000). You must 

reduce your depletable oil quantity to 640 barrels (1,000 – 360).

If you have production from marginal wells, 

see section 613A(c)(6) to figure your depletable 

oil or natural gas quantity. Also, see Notice 

2021-30, available at IRS.gov/irb/

2021-19_IRB#NOT-2021-30.

Business entities and family members. 

You must allocate the depletable oil or gas 

quantity among the following related persons in 

proportion to each business entity's or family 

member's production of domestic oil or gas for 

the year.

• Corporations, trusts, and estates if 50% or 

more of the beneficial interest is owned by 

the same or related persons (considering 

only persons that own at least 5% of the 

beneficial interest).

• You and your spouse and minor children.

A related person is anyone mentioned in the related persons discussion under Nondeductible 

loss in chapter 2 of Pub. 544, except that for 

purposes of this allocation, item (1) in that discussion includes only an individual, his or her 

spouse, and minor children.

Controlled group of corporations. Members of the same controlled group of corporations are treated as one taxpayer when figuring 

the depletable oil or natural gas quantity. They 

share the depletable quantity. A controlled 

group of corporations is defined in section 

1563(a), except that, for this purpose, the stock 

ownership requirement is “more than 50%” 

rather than “at least 80%,” as described in section 1563(a).

Gross income from the property. For purposes of percentage depletion, gross income from 

the property (in the case of oil and gas wells) is 

the amount you receive from the sale of the oil 

or gas in the immediate vicinity of the well. If 

you do not sell the oil or gas on the property but 

manufacture or convert it into a refined product 

before sale, or transport it before sale, the gross 

income from the property is the representative 

market or field price (RMFP) of the oil or gas 

before conversion or transportation.

However, if you sold gas after you removed 

it from the premises for a price that is lower than 

the RMFP, determine gross income from the 

property for percentage depletion purposes 

without regard to the RMFP.

Gross income from the property does not include lease bonuses, advance royalties, or 

other amounts payable without regard to production from the property.

Average daily production exceeds depletable quantities. If your average daily production for the year is more than your depletable oil 

or natural gas quantity, figure your allowance for 

depletion for each domestic oil or natural gas 

property as follows.

1. Figure your average daily production of oil 

or natural gas for the year.

2. Figure your depletable oil or natural gas 

quantity for the year.

3. Figure depletion for all oil or natural gas 

produced from the property using a percentage depletion rate of 15% (0.15).

4. Multiply the result figured in (3) by a fraction, the numerator of which is the result 

figured in (2) and the denominator of 

which is the result figured in (1). This is 

your depletion allowance for that property 

for the year.

Taxable income limit. If you are an independent producer or royalty owner of oil and gas, 

your deduction for percentage depletion is limited to the smaller of the following.

• 100% of your taxable income from the 

property figured without the deduction for 

depletion and the deduction for qualified 

business income under section 199A. For 

a definition of taxable income from the 

property, see Taxable income limit, earlier, 

under Mineral Property.

• 65% of your taxable income for the year 

figured without the deduction for depletion, 

the deduction for qualified business income under section 199A, any net operating loss carryback to the tax year under 

section 172, any capital loss carryback to 

the tax year under section 1212, and in the 

case of a trust, any distribution to its beneficiary (with certain exceptions).

You can carry over to the following year any 

amount you cannot deduct because of the 

65%-of-taxable-income limit. Add it to your depletion allowance (before applying any limits) 

for the following year.

Partnerships and S Corporations

Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. 

Each partner or shareholder must decide 

whether to use cost or percentage depletion. If 

a partner or shareholder uses percentage depletion, he or she must apply the 65%-of-taxable-income limit using his or her taxable income 

from all sources.

Partner's or shareholder's adjusted basis. 

The partnership or S corporation must allocate 

to each partner or shareholder his or her share 

of the adjusted basis of each oil or gas property 

held by the partnership or S corporation. The 

partnership or S corporation makes the allocation as of the date it acquires the oil or gas 

property.

Each partner's share of the adjusted basis of 

the oil or gas property is generally figured according to that partner's interest in partnership 

capital. However, in some cases, it is figured 

according to the partner's interest in partnership 

income.

The partnership or S corporation adjusts the 

partner's or shareholder's share of the adjusted 

basis of the oil and gas property for any capital 

expenditures made for the property and for any 

change in partnership or S corporation interests.

Recordkeeping. Each partner or 

shareholder must separately keep records of his or her share of the adjusted basis in each oil and gas property of the 

partnership or S corporation. The partner or 

shareholder must reduce his or her adjusted 

basis by the depletion allowed or allowable on 

the property each year. The partner or shareholder must use that reduced adjusted basis to 

figure cost depletion, or his or her gain or loss, if 

the partnership or S corporation disposes of the 

property.

Reporting the deduction. Information that 

you, as a partner or shareholder, use to figure 

your depletion deduction on oil and gas properties is reported by the partnership or S corporation on Schedule K-1 (Form 1065) or on Schedule K-1 (Form 1120-S). Deduct oil and gas 

depletion for your partnership or S corporation 

interest on Schedule E (Form 1040). The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or 

royalty properties. The Instructions for Schedule E (Form 1040) explain where to report this 

income or loss and whether you need to file either of the following forms.

• Form 6198.

• Form 8582.

Natural Gas Wells

You can use percentage depletion for a well 

that produces natural gas that is either:

• Regulated natural gas,

• Sold under a fixed contract, or

• Produced from geopressured brine.

Regulated natural gas. Regulated natural gas 

qualifies for a percentage depletion rate of 22%. 

Regulated natural gas is domestic natural gas 

produced and sold by the producer before July 

1, 1976, and is regulated by the Federal Power 

Commission. The price for regulated gas cannot be adjusted to reflect any increase in the 

seller’s tax liability because of the repeal of percentage depletion for gas. Price increases after 

February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing 

evidence.

RECORDS

Chapter 9 Depletion Page 39
Natural gas sold under a fixed contract. 

Natural gas sold under a fixed contract qualifies 

for a percentage depletion rate of 22%. Natural 

gas sold under a fixed contract is domestic natural gas sold by the producer under a contract 

that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for 

gas. The contract must have been in effect from 

February 1, 1975, until the date of sale of the 

gas. Price increases after February 1, 1975, are 

presumed to take the increase in tax liability into 

account unless demonstrated otherwise by 

clear and convincing evidence.

Natural gas from geopressured brine. 

Qualified natural gas from geopressured brine 

is eligible for a percentage depletion rate of 

10%. This is natural gas that meets both of the 

following conditions.

• Produced from a well you began to drill after September 1978 and before 1984.

• Determined in accordance with section 

503 of the Natural Gas Policy Act of 1978 

to be produced from geopressured brine.

Mines and Geothermal 

Deposits

Certain mines, oil and gas wells, and other natural deposits, including geothermal deposits, 

qualify for percentage depletion.

Mines, oil and gas wells, and other natural 

deposits. The percentage of your gross income from the property that you can deduct as 

depletion depends on the type of deposit.

See section 613(b) for the percentage depletion rates.

Corporate deduction for iron ore and 

coal. The percentage depletion deduction of a 

corporation for iron ore and coal (including lignite) is reduced by 20% (0.20) of:

• The percentage depletion deduction for 

the tax year (figured without this reduction), minus

• The adjusted basis of the property at the 

close of the tax year (figured without the 

depletion deduction for the tax year).

Gross income from the property. For property other than a geothermal deposit or an oil or 

gas well, gross income from the property 

means the gross income from mining. Mining 

includes all of the following.

• Extracting ores or minerals from the 

ground.

• Applying certain treatment processes described below.

• Transporting ores or minerals (generally, 

not more than 50 miles) from the point of 

extraction to the plants or mills in which the 

treatment processes are applied.

Excise tax. Gross income from mining includes the separately stated excise tax received by a mine operator from the sale of coal 

to compensate the operator for the excise tax 

the mine operator must pay to finance the benefits provided under the Black Lung Benefits 

Revenue Act of 1977.

Extraction. Extracting ores or minerals 

from the ground includes extraction by mine 

owners or operators of ores or minerals from 

the waste or residue of prior mining. This does 

not apply to extraction from waste or residue of 

prior mining by the purchaser of the waste or 

residue or the purchaser of the rights to extract 

ores or minerals from the waste or residue.

Treatment processes. The processes included as mining depend on the ore or mineral 

mined. To qualify as mining, the treatment processes must be applied by the mine owner or 

operator. For a listing of treatment processes 

considered as mining, see section 613(c)(4) 

and the related regulations.

Transportation of more than 50 miles. If 

ore or mineral must be transported more than 

50 miles to plants or mills to be treated because 

of physical and other requirements, the additional authorized transportation may be considered mining and included in the calculation of 

gross income from mining if authorized by the 

IRS.

If you wish to include transportation of 

more than 50 miles in the calculation of 

gross income from mining, request an 

advance ruling from the IRS. Include in the request the facts about the physical and other requirements that prevented the construction and 

operation of the plant (in which mining processes are applied) within 50 miles of the point 

of extraction. For more information about requesting an advance ruling, see Revenue Procedure 2021-1, available at IRS.gov/irb/

2021-01_IRB#REV-PROC-2021-1.

Disposal of coal or iron ore. You cannot take 

a percentage depletion deduction for coal (including lignite) or iron ore mined in the United 

States if both of the following apply.

• You disposed of it after holding it for more 

than 1 year.

• You disposed of it under a contract under 

which you retain an economic interest in 

the coal or iron ore.

Treat any gain on the disposition as a capital 

gain.

Disposal to related person. This rule 

does not apply if you dispose of the coal or iron 

ore to one of the following persons.

• A related person (as listed in chapter 2 of 

Pub. 544).

• A person owned or controlled by the same 

interests that own or control you.

Geothermal deposits. Geothermal deposits 

located in the United States or its possessions 

qualify for a percentage depletion rate of 15%. 

A geothermal deposit is a geothermal reservoir 

of natural heat stored in rocks or in a watery liquid or vapor (whether or not under pressure). 

For percentage depletion purposes, a geothermal deposit is not considered a gas well.

Figure gross income from the property for a 

geothermal steam well in the same way as for 

oil and gas wells. See Gross income from the 

property, earlier, under Oil and Gas Wells. Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income 

from the property.

Lessor's Gross Income

In the case of leased property, the depletion deduction is divided between the lessor and the 

lessee.

A lessor's gross income from the property 

that qualifies for percentage depletion is usually 

the total of the royalties received from the lease.

Bonuses and advanced royalties. Bonuses 

and advanced royalties are payments a lessee 

makes before production to a lessor for the 

grant of rights in a lease or for minerals, gas, or 

oil to be extracted from leased property. If you 

are the lessor, your income from bonuses and 

advanced royalties received is subject to an allowance for depletion, as explained in the next 

two paragraphs.

Figuring cost depletion. To figure cost 

depletion on a bonus, multiply your adjusted basis in the property by a fraction, the numerator 

of which is the bonus and the denominator of 

which is the total bonus and royalties expected 

to be received. To figure cost depletion on advanced royalties, use the calculation explained 

earlier under Cost Depletion, treating the number of units for which the advanced royalty is received as the number of units sold.

Figuring percentage depletion. In the 

case of mines, wells, and other natural deposits 

other than gas, oil, or geothermal property, you 

may use the percentage rates discussed earlier 

under Mines and Geothermal Deposits. Any bonus or advanced royalty payments are generally part of the gross income from the property 

to which the rates are applied in making the calculation. However, for oil, gas, or geothermal 

property, gross income does not include lease 

bonuses, advanced royalties, or other amounts 

payable without regard to production from the 

property.

Ending the lease. If you receive a bonus 

on a lease that ends or is abandoned before 

you derive any income from mineral extraction 

or the cutting of timber, include in income the 

depletion deduction you took on the bonus. Do 

this for the year the lease ends or is abandoned. Also, increase your adjusted basis in the 

property to restore the depletion deduction you 

previously subtracted.

For advanced royalties, include in income 

the depletion claimed on minerals for which the 

advanced royalties were paid if the minerals 

were not produced or any timber cut before the 

lease ended. Include this amount in income for 

the year the lease ends. Increase your adjusted 

basis in the property by the amount you include 

in income.

Delay rentals. These are payments for deferring development of the property. Since delay 

rentals are ordinary rent, they are ordinary income to the payee that is not subject to depletion. These rentals can be avoided by either 

abandoning the lease, beginning development 

operations, or obtaining production.

Page 40 Chapter 9 Depletion
Timber

You can figure timber depletion only by the cost 

method. Percentage depletion does not apply 

to timber. Base your depletion on your cost or 

other basis in the timber. Your cost does not include the cost of land or any amounts recoverable through depreciation.

Depletion takes place when you cut standing timber. You can figure your depletion deduction when the quantity of cut timber is first 

accurately measured in the process of exploitation.

Figuring cost depletion. To figure your cost 

depletion allowance, you multiply the number of 

timber units cut by your depletion unit.

Timber units. When you acquire timber 

property, you must make an estimate of the 

quantity of marketable timber reasonably 

known, or on good evidence believed to exist 

on the property. You measure the timber using 

feet board measure (FBM), log scale, cords, or 

other units. If you later determine that you have 

more or less units of timber, you must adjust the 

original estimate.

The term “timber property” means your economic interest in standing timber in each tract or 

block representing a separate timber account.

Depletion unit. You figure your depletion 

unit each year by taking the following steps.

1. Determine your cost or adjusted basis of 

the timber on hand at the beginning of the 

year. Adjusted basis is defined under Cost 

Depletion in the discussion on Mineral 

Property, earlier.

2. Add to the amount determined in (1) the 

cost of any timber units acquired during 

the year and any additions to capital.

3. Figure the number of timber units to take 

into account by adding the number of timber units acquired during the year to the 

number of timber units on hand in the account at the beginning of the year and 

then adding (or subtracting) any correction 

to the estimate of the number of timber 

units remaining in the account.

4. Divide the result of (2) by the result of (3). 

This is your depletion unit.

Example. You bought a timber tract for 

$160,000 and the land was worth as much as 

the timber. Your basis for the timber is $80,000. 

Based on an estimated 1 million feet, board 

measure (FBM) or 1,000 “thousand board feet” 

(MFBM) of standing timber, you figure your depletion unit to be $80 per MFBM ($80,000 ÷ 

1,000). If you cut 500 MFBM of timber, your depletion allowance would be $40,000 (500 

MFBM × $80).

When to claim depletion. Claim your depletion allowance as a deduction in the year of sale 

or other disposition of the products cut from the 

timber, unless you choose to treat the cutting of 

timber as a sale or exchange (explained below). 

Include allowable depletion for timber products 

not sold during the tax year the timber is cut as 

a cost item in the closing inventory of timber 

products for the year. The inventory is your basis for determining gain or loss in the tax year 

you sell the timber products.

Example. The facts are the same as in the 

previous example, except that you sold only 

half of the timber products in the cutting year. 

You would deduct $20,000 of the $40,000 depletion that year. You would add the remaining 

$20,000 depletion to your closing inventory of 

timber products.

Electing to treat the cutting of timber as a 

sale or exchange. You can elect, under certain circumstances, to treat the cutting of timber 

held for more than 1 year as a sale or exchange. You must make the election on your income tax return for the tax year to which it applies. If you make this election, subtract the 

adjusted basis for depletion from the fair market 

value (FMV) of the timber on the first day of the 

tax year in which you cut it to figure the gain or 

loss on the cutting. You generally report the 

gain as long-term capital gain. The FMV then 

becomes your basis for figuring your ordinary 

gain or loss on the sale or other disposition of 

the products cut from the timber. For more information, see Timber in chapter 2 of Pub. 544.

You may revoke an election to treat the cutting of timber as a sale or exchange without the 

IRS's consent. The prior election (and revocation) is disregarded for purposes of making a 

subsequent election. See Form T (Timber, Forest Activities Schedule) for more information.

Form T (Timber, Forest Activities Schedule). Complete and attach Form T (Timber, 

Forest Activities Schedule) to your income tax 

return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a 

sale or exchange, or make an outright sale of 

timber.

10.

Business Bad 

Debts

Introduction

You have a bad debt if you cannot collect 

money owed to you. A bad debt is either a business bad debt or a nonbusiness bad debt. This 

chapter discusses only business bad debts.

Generally, a business bad debt is one that 

comes from operating your trade or business. 

You can deduct business bad debts on Schedule C (Form 1040) or your applicable business 

income tax return.

All other bad debts are nonbusiness bad 

debts and are deductible only as short-term 

capital losses. For more information on nonbusiness bad debts, see Pub. 550.

Topics

This chapter discusses:

• Definition of business bad debt

• When a debt becomes worthless

• How to claim a business bad debt

• Recovery of a bad debt

Useful Items

You may want to see:

Publication

Taxable and Nontaxable Income

Net Operating Losses (NOLs) for 

Individuals, Estates, and Trusts

Sales and Other Dispositions of 

Assets

Investment Income and Expenses

Examination of Returns, Appeal 

Rights, and Claims for Refund

Form (and Instructions)

cdu(o) Profit or Loss 

From Business

Amended U.S. Individual Income 

Tax Return

Application for Tentative Refund

U.S. Return of Partnership Income

Amended Return or 

Administrative Adjustment Request 

(AAR)

U.S. Income Tax Return for an S 

Corporation

Amended U.S. Corporation 

Income Tax Return

Corporation Application for 

Tentative Refund

Application for Change in 

Accounting Method

See chapter 12 for information about getting 

publications and forms.

Definition of Business 

Bad Debt

A business bad debt is a loss from the worthlessness of a debt that was either:

• Created or acquired in your trade or business, or

• Closely related to your trade or business 

when it became partly or totally worthless.

A debt is closely related to your trade or 

business if your primary motive for incurring the 

debt is business related. Bad debts of a corporation (other than an S corporation) are always 

business bad debts.

Credit sales. Business bad debts are mainly 

the result of credit sales to customers. Goods 

that have been sold, but not yet paid for, and 

services that have been performed, but not yet 

paid for, are recorded in your books as either 

 525 

 536 

 544 

 550 

 556 

 Schedule C (Form 1040) 

 1040-X 

 1045 

 1065 

 1065-X 

 1120-S 

 1120-X 

 1139 

 3115 

Chapter 10 Business Bad Debts Page 41
accounts receivable or notes receivable. After a 

reasonable period of time, if you have tried to 

collect the amount due, but are unable to do so, 

the uncollectible part becomes a business bad 

debt.

Accounts or notes receivable valued at fair 

market value (FMV) when received are deductible only at that value, even though the FMV 

may be less than the face value. If you purchased an account receivable for less than its 

face value, and the receivable subsequently becomes worthless, the most you’re allowed to 

deduct is the amount you paid to acquire it.

You can claim a business bad debt deduction only if the amount owed to you 

was previously included in gross income. This applies to amounts owed to you 

from all sources of taxable income, including 

sales, services, rents, and interest.

Accrual method. If you use an accrual 

method of accounting, you generally report income as you earn it. You can only claim a bad 

debt deduction for an uncollectible receivable if 

you have previously included the uncollectible 

amount in income.

If you qualify, you can use the nonaccrual-experience method of accounting, discussed later. Under this method, you don’t have 

to accrue income that, based on your experience, you don’t expect to collect.

Cash method. If you use the cash method 

of accounting, you generally report income 

when you receive payment. You can’t claim a 

bad debt deduction for amounts owed to you 

because you never included those amounts in 

income. For example, a cash basis architect 

can’t claim a bad debt deduction if a client fails 

to pay the bill because the architect's fee was 

never included in income.

Debts from a former business. If you sell 

your business but retain its receivables, these 

debts are business debts because they arose 

out of your trade or business. If any of these receivables subsequently become worthless, the 

loss is still a business bad debt.

Debt acquired from a decedent. The 

character of a loss from debts of a business acquired from a decedent is determined in the 

same way as debts acquired on the purchase of 

a business. The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related 

to the decedent's trade or business when they 

became worthless. Otherwise, a loss from 

these debts becomes a nonbusiness bad debt 

for the decedent's estate.

Liquidation. If you liquidate your business 

and some of the accounts receivable that you 

retain become worthless, they’re treated as 

business bad debts.

Types of Business Bad 

Debts

Business bad debts may result from the following.

Loans to clients and suppliers. If you loan 

money to a client, supplier, employee, or distribCAUTION

!

utor for a business reason and you’re unable to 

collect the loan after attempting to do so, you 

have a business bad debt.

Debts owed by political parties. If a political 

party (or other organization that accepts contributions or spends money to influence elections) 

owes you money and the debt becomes worthless, you can claim a bad debt deduction only if 

all of the following requirements are met.

1. You use an accrual method of accounting.

2. The debt arose from the sale of goods or 

services in the ordinary course of your 

trade or business.

3. More than 30% of your receivables accrued in the year of the sale were from 

sales to political parties.

4. You made substantial and continuing efforts to collect on the debt.

Loan or capital contribution. You cannot 

claim a bad debt deduction for a loan you made 

to a corporation if, based on the facts and circumstances, the loan is actually a contribution 

to capital.

Debts of an insolvent partner. If your business partnership breaks up and one of your former partners becomes insolvent, you may have 

to pay more than your pro rata share of the partnership's debts. If you pay any part of the insolvent partner's share of the debts, you can claim 

a bad debt deduction for the amount you paid 

that is attributable to the insolvent partner's 

share.

Business loan guarantee. If you guarantee a 

debt that subsequently becomes worthless, the 

debt can qualify as a business bad debt if all of 

the following requirements are met.

• You made the guarantee in the course of 

your trade or business.

• You have a legal duty to pay the debt.

• You made the guarantee before the debt 

became worthless. You meet this requirement if you reasonably expected you 

wouldn’t have to pay the debt without full 

reimbursement from the borrower.

• You received reasonable consideration for 

making the guarantee. You meet this requirement if you made the guarantee according to normal business practice or for 

a good faith business purpose.

Example. Jane Zayne owns the Zayne 

Dress Company. She guaranteed payment of a 

$20,000 note for Elegant Fashions, a dress outlet. Elegant Fashions is one of Zayne's largest 

clients. Elegant Fashions later defaulted on the 

loan. As a result, Ms. Zayne paid the remaining 

balance of the loan in full to the bank.

She can claim a business bad debt deduction only for the amount she paid because her 

guarantee was made in the course of her trade 

or business for a good faith business purpose. 

She was motivated by the desire to retain one 

of her better clients and keep a sales outlet.

Deductible in the year paid. If you make 

a payment on a loan you guaranteed, you can 

deduct it in the year paid, unless you have 

rights against the borrower.

Rights against a borrower. When you 

make payment on a loan you guaranteed, you 

may have the right to take the place of the 

lender. The debt is then owed to you. If you 

have this right, or some other right to demand 

payment from the borrower, you can’t claim a 

bad debt deduction until these rights become 

partly or totally worthless.

Joint debtor. If two or more debtors jointly 

owe you money, your inability to collect from 

one doesn’t enable you to deduct a proportionate amount as a bad debt.

Sale of mortgaged property. If mortgaged or 

pledged property is sold for less than the debt, 

the unpaid, uncollectible balance of the debt is 

a bad debt.

When a Debt Becomes 

Worthless

A debt becomes worthless when there is no 

longer any chance the amount owed will be 

paid. This may occur on the date the debt is 

due or prior to that date.

To demonstrate worthlessness, you must 

only show that you have taken reasonable 

steps to collect the debt but were unable to do 

so. It isn’t necessary to go to court if you can 

show that a judgment from the court would be 

uncollectible. Bankruptcy of your debtor is generally good evidence of the worthlessness of at 

least a part of an unsecured and unpreferred 

debt.

Property received for debt. If you receive 

property in partial settlement of a debt, reduce 

the debt by the property's FMV, which becomes 

the property's basis. You can deduct the remaining debt as a bad debt if and when it becomes worthless.

If you later sell the property for more than its 

basis, any gain on the sale is due to the appreciation of the property. It isn’t a recovery of a 

bad debt. For information on the sale of an asset, see Pub. 544.

How To Claim a 

Business Bad Debt

There are two methods to claim a business bad 

debt.

• The specific charge-off method.

• The nonaccrual-experience method.

Generally, you must use the specific charge-off 

method. However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method.

Specific Charge-off Method

If you use the specific charge-off method, you 

can deduct specific business bad debts that become either partly or totally worthless during the 

tax year. However, with respect to partly worthless bad debts, your deduction is limited to the 

Page 42 Chapter 10 Business Bad Debts
amount you charged off on your books during 

the year.

Partly worthless debts. You can deduct specific bad debts that become partly uncollectible 

during the tax year. Your tax deduction is limited to the amount you charge off on your books 

during the year. You don’t have to charge off 

and deduct your partly worthless debts annually. You can delay the charge-off until a later 

year. However, you can’t deduct any part of a 

debt after the year it becomes totally worthless.

Significantly modified debt. An exception to the charge-off rule exists for debt that 

has been significantly modified and on which 

the holder recognized gain. For more information, see Regulations section 1.166-3(a)(3).

Deduction disallowed. Generally, you 

can claim a partial bad debt deduction only in 

the year you make the charge-off on your 

books. If, under audit, the IRS doesn’t allow 

your deduction and the debt becomes partly 

worthless in a later tax year, you can deduct the 

amount you charged off in that year plus the 

disallowed amount charged off in the earlier 

year. The charge-off in the earlier year, unless 

reversed on your books, fulfills the charge-off 

requirement for the later year.

Totally worthless debts. If a debt becomes 

totally worthless in the current tax year, you can 

deduct the entire amount minus any amount deducted in an earlier tax year when the debt was 

only partly worthless.

You don’t have to make an actual charge-off 

on your books to claim a bad debt deduction for 

a totally worthless debt. However, you may 

want to do so. If you don’t and the IRS later 

rules the debt is only partly worthless, you will 

not be allowed a deduction for the debt in that 

tax year because a deduction of a partly worthless bad debt is limited to the amount actually 

charged off. See Partly worthless debts, earlier.

Filing a claim for refund. If you didn’t deduct 

a bad debt on your original return for the year it 

became worthless, you can file a claim for a 

credit or refund. If the bad debt was totally 

worthless, you must file the claim by the later of 

the following dates.

• 7 years from the date your original return 

was due (not including extensions).

• 2 years from the date you paid the tax.

If the claim is for a partly worthless bad debt, 

you must file the claim by the later of the following dates.

• 3 years from the date you filed your original 

return.

• 2 years from the date you paid the tax.

You may have longer to file the claim if you 

were unable to manage your financial affairs 

due to a physical or mental impairment. Such 

an impairment requires proof of existence.

For details and more information about filing 

a claim, see Pub. 556. Use one of the following 

forms to file a claim. For more information, see 

the instructions for the applicable form.

Table 10-1. Forms Used To File a

Claim

IF you filed as 

a...

THEN file...

sole proprietor 

or farmer Form 1040-X.

corporation Form 1120-X.

S corporation Form 1120-S and check 

box H(4).

partnership Form 1065-X if filing on 

paper or 

Form 1065 and check box 

G(5) if filing electronically.

Nonaccrual-Experience 

Method

Generally, a person using accrual accounting 

isn’t required to accrue a service-provided receivable that experience shows won't be collected if:

• The service provided is health, law, engineering, architecture, accounting, actuarial 

science, performing arts, or consulting; or

• The person's average annual gross receipts for all previous 3-tax-year periods 

don’t exceed $26 million.

See section 448 for details and exceptions.

Recovery of a Bad Debt

If you claim a deduction for a bad debt on your 

income tax return and later recover (collect) all 

or part of it, you may have to include all or part 

of the recovery in gross income. The amount 

you include is limited to the amount you actually 

deducted. However, you can exclude the 

amount deducted that did not reduce your tax. 

Report the recovery as “Other income” on the 

appropriate business form or schedule.

See Recoveries in Pub. 525 for more information.

NOL carryover. If a bad debt deduction increases an NOL carryover that has not expired 

before the beginning of the tax year in which the 

recovery takes place, you treat the deduction as 

having reduced your tax. A bad debt deduction 

that contributes to an NOL helps lower taxes in 

the year to which you carry the NOL. For more 

information about NOLs for individuals, see 

Pub. 536. Also, see the Instructions for Form 

1045, and the Instructions for Form 1139.

11.

Other Expenses

What's New

Standard mileage rate. For tax year 2021, the 

standard mileage rate for the cost of operating 

your car, van, pickup, or panel truck for business use is 56 cents per mile. For more information, see Car and truck expenses under Miscellaneous Expenses, later.

Reminders

No miscellaneous itemized deductions allowed. You can no longer claim any miscellaneous itemized deductions, including the deduction for repayments (claim of right). 

Miscellaneous itemized deductions are those 

deductions that would have been subject to the 

2%-of-adjusted-gross-income limitation.

Qualified business income deduction. For 

tax years beginning after 2017, individual taxpayers and some trusts and estates may be entitled to a deduction of up to 20% of their Qualified Business Income (QBI) from a trade or 

business, including income from a pass-through 

entity, but not from a C corporation, plus 20% of 

qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership 

(PTP) income. The deduction is subject to multiple limitations, such as the type of trade or 

business, the taxpayer’s taxable income, the 

amount of W-2 wages paid in the trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held 

by the trade or business. The deduction can be 

taken in addition to the standard or itemized deductions. See the Instructions for Form 8995 

and the Instructions for Form 8995-A for more 

information.

Travel, meals, and entertainment. In general, entertainment expenses are no longer deductible. For more information on travel and 

non-entertainment-related meals, including deductibility, see Pub. 463.

Certain payments made in sexual harassment or sexual abuse cases. For amounts 

paid or incurred after December 22, 2017, new 

section 162(q) provides that no deduction is allowed under section 162 for any settlement or 

payment related to sexual harassment or sexual 

abuse if it is subject to a nondisclosure agreement. In addition, attorney’s fees related to such 

a settlement or payment aren’t allowed as a deduction.

Introduction

This chapter covers business expenses that 

may not have been explained to you, as a business owner, in previous chapters of this publication.

Chapter 11 Other Expenses Page 43
Topics

This chapter discusses:

• Travel and non-entertainment-related 

meals

• Bribes and kickbacks

• Charitable contributions

• Education expenses

• Lobbying expenses

• Penalties and fines

• Repayments (claim of right)

• Other miscellaneous expenses

Useful Items

You may want to see:

Publication

Employer's Tax Guide to Fringe 

Benefits

Travel, Gift, and Car Expenses

Charitable Contributions

Miscellaneous Deductions

Sales and Other Dispositions of 

Assets

How To Depreciate Property

Tax Benefits for Education

Form (and Instructions)

cdu(o) Itemized 

Deductions

cdu(o) Profit or Loss 

From Business

cdu(o) Profit or Loss 

From Farming

iscellaneous Information

U.S. Corporation Income Tax 

Return

Depreciation and Amortization

Sales and Other Dispositions of 

Capital Assets

Qualified Business Income 

Deduction Simplified Computation

Qualified Business Income 

Deduction

W-2age and Tax Statement

See chapter 12 for information about getting 

publications and forms.

Reimbursement of 

Travel and 

Non-Entertainment-Relat

ed Meals

The following discussion explains how to handle any reimbursements or allowances you may 

provide to your employees under a reimbursement or allowance arrangement for travel and 

non-entertainment-related meals expenses. If 

you are self-employed and report your income 

and expenses on Schedule C (Form 1040), see 

Pub. 463.

 15-B 

 463 

 526 

 529 

 544 

 946 

 970 

 Schedule A (Form 1040)

 Schedule C (Form 1040)

 Schedule F (Form 1040)

 1099-MISC 

 1120 

 4562 

 8949 

 8995 

 8995-A 

 W-2 

To be deductible for tax purposes, expenses incurred for travel and non-entertainment-related meals must be ordinary and necessary expenses incurred while carrying on 

your trade or business. For more information on 

travel and non-entertainment-related meals, including deductibility, see Pub. 463.

Reimbursements

A “reimbursement or allowance arrangement” 

provides for payment of advances, reimbursements, and allowances for travel and non-entertainment-related meals expenses incurred by 

your employees during the ordinary course of 

business. If the expenses are substantiated, 

you can deduct the allowable amount on your 

tax return. Because of differences between accounting methods and tax law, the amount you 

can deduct for tax purposes may not be the 

same as the amount you deduct on your business books and records. For example, you can 

deduct 100% of the cost of meals on your business books and records. However, only 50% of 

these costs are allowed by law as a tax deduction.

How you deduct a business expense under 

a reimbursement or allowance arrangement depends on whether you have:

• An accountable plan, or

• A nonaccountable plan.

If you reimburse these expenses under an accountable plan, deduct them as travel and 

non-entertainment-related meals expenses.

If you reimburse these expenses under a 

nonaccountable plan, report the reimbursements as wages on Form W-2, and deduct 

them as wages on the appropriate line of your 

tax return. If you make a single payment to your 

employees and it includes both wages and an 

expense reimbursement, you must specify the 

amount of the reimbursement and report it accordingly. See Table 11-1.

Accountable Plans

An accountable plan requires your employees 

to meet all of the following requirements. Each 

employee must:

1. Have paid or incurred deductible expenses while performing services as your employee,

2. Adequately account to you for these expenses within a reasonable period of time, 

and

3. Return any excess reimbursement or allowance within a reasonable period of 

time.

An arrangement under which you advance 

money to employees is treated as meeting (3) 

above only if the following requirements are 

also met.

• The advance is reasonably calculated not 

to exceed the amount of anticipated expenses.

• You make the advance within a reasonable 

period of time of your employee paying or 

incurring the expense.

If any expenses reimbursed under this arrangement aren’t substantiated, or an excess 

reimbursement isn’t returned within a reasonable period of time by an employee, you can’t 

treat these expenses as reimbursed under an 

accountable plan. Instead, treat the reimbursed 

expenses as paid under a nonaccountable 

plan, discussed later.

Adequate accounting. Your employees must 

adequately account to you for their travel and 

non-entertainment-related meals expenses. 

They must give you documentary evidence of 

their travel, mileage, and other employee business expenses. This evidence should include 

items such as receipts, along with either a 

statement of expenses, an account book, a day 

planner, or similar record in which the employee 

entered each expense at or near the time the 

expense was incurred.

Table 11-1. Reporting Reimbursements

IF the type of reimbursement (or other expense 

allowance) arrangement is under THEN the employer reports on Form W-2

An accountable plan with:

Actual expense reimbursement:

Adequate accounting made and excess returned

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.

Per diem or mileage allowance up to the federal rate:

Adequate accounting made and excess returned

No amount.

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 isn’t 

reported in box 1.

Per diem or mileage allowance exceeds the federal rate:

Adequate accounting made 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 isn’t 

reported in box 1.

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.

No reimbursement plan The entire amount as wages in box 1.

Page 44 Chapter 11 Other Expenses
Excess reimbursement or allowance. An 

excess reimbursement or allowance is any 

amount you pay to an employee that is more 

than the business-related expenses for which 

the employee adequately accounted. The employee must return any excess reimbursement 

or other expense allowance to you within a reasonable period of time.

Reasonable period of time. A reasonable 

period of time depends on the facts and circumstances. Generally, actions that take place 

within the times specified in the following list will 

be treated as taking place within a reasonable 

period of time.

1. You give an advance within 30 days of the 

time the employee pays or incurs the expense.

2. Your employees adequately account for 

their expenses within 60 days after the expenses were paid or incurred.

3. Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred.

4. You give a periodic statement (at least 

quarterly) to your employees that asks 

them to either return or adequately account for outstanding advances and they 

comply within 120 days of the date of the 

statement.

How to deduct. You can claim a deduction for 

travel and non-entertainment-related meals expenses if you reimburse your employees for 

these expenses under an accountable plan. 

Generally, the amount you can deduct for 

non-entertainment-related meals is subject to a 

50% limit, discussed later. If you are a sole proprietor, or are filing as a single member limited 

liability company, deduct the travel reimbursement on line 24a and the deductible part of the 

non-entertainment-related meals reimbursement on line 24b of Schedule C (Form 1040).

If you are filing an income tax return for a 

corporation, include the reimbursement on the 

Other deductions line of Form 1120. If you are 

filing any other business income tax return, 

such as a partnership or S corporation return, 

deduct the reimbursement on the appropriate 

line of the return as provided in the instructions 

for that return.

Per Diem and Car Allowances

You can reimburse your employees under an 

accountable plan based on travel days, miles, 

or some other fixed allowance. In these cases, 

your employee is considered to have accounted 

to you for the amount of the expense that 

doesn’t exceed the rates established by the 

federal government. Your employee must actually substantiate to you the other elements of 

the expense, such as time, place, and business 

purpose.

Federal rate. The federal rate can be figured 

using any one of the following methods.

1. For car expenses:

a. The standard mileage rate.

b. A fixed and variable rate (FAVR).

2. For per diem amounts:

a. The regular federal per diem rate.

b. The standard meal allowance.

c. The high-low rate.

Car allowance. Your employee is considered 

to have accounted to you for car expenses that 

don’t exceed the standard mileage rate. For tax 

year 2021, the standard business mileage rate 

is 56 cents per mile.

You can choose to reimburse your employees using an FAVR allowance. This is an allowance that includes a combination of payments 

covering fixed and variable costs, such as a 

cents-per-mile rate to cover your employees' 

variable operating costs (such as gas, oil, etc.) 

plus a flat amount to cover your employees' 

fixed costs (such as depreciation, insurance, 

etc.). For information on using an FAVR allowance, see Revenue Procedure 2019-46, available at IRS.gov/irb/2019-49_IRB#RP-2019-46, 

and Notice 2021-02, available at IRS.gov/irb/

2021-02_IRB#NOT-2021-2.

Per diem allowance. If your employee actually substantiates to you the other elements 

(discussed earlier) of the expenses reimbursed 

using the per diem allowance, how you report 

and deduct the allowance depends on whether 

the allowance is for lodging and meal expenses 

or for meal expenses only and whether the allowance is more than the federal rate.

Regular federal per diem rate. The regular federal per diem rate is the highest amount 

the federal government will pay to its employees while away from home on travel. It has the 

following two components.

1. Lodging expense.

2. Meal and incidental expense (M&IE).

The rates are different for different locations. 

See GSA.gov/perdiem for the per diem rates in 

the continental United States.

Standard meal allowance. The federal 

rate for M&IE is the standard meal allowance. 

You can pay only an M&IE allowance to employees who travel away from home if:

• You pay the employee for actual expenses 

for lodging based on receipts submitted to 

you,

• You provide for the lodging,

• You pay for the actual expense of the lodging directly to the provider,

• You don’t have a reasonable belief that 

lodging expenses were incurred by the 

employee, or

• The allowance is figured on a basis similar 

to that used in figuring the employee's wages (that is, number of hours worked or 

miles traveled).

Per diem rates online. You can access 

per diem rates at GSA.gov/perdiem.

High-low method. This is a simplified 

method of figuring the federal per diem rate for 

travel within the continental United States. It 

eliminates the need to keep a current list of the 

per diem rate for each city.

Under the high-low method, the per diem 

amount for travel during January through September of 2021 is $292 ($71 for M&IE) for certain high-cost locations. All other areas have a 

per diem amount of $198 ($60 for M&IE). The 

high-cost localities eligible for the higher per 

diem amount under the high-low method are listed in Notice 2020-71, available at IRS.gov/irb/

2020-40_IRB#NOT-2020-71.

Effective October 1, 2021, the per diem rate 

for high-cost locations increased to $296 ($74 

for M&IE). The rate for all other locations increased to $202 ($64 for M&IE). For October, 

November, and December 2021, you can either 

continue to use the rates described in the preceding paragraph or change to the new rates. 

However, you must use the same rate for all 

employees reimbursed under the high-low 

method.

For more information about the high-low 

method, see Notice 2021-52, available at 

IRS.gov/irb/2021-38_IRB#NOT-2021-52. See 

GSA.gov/perdiem for the current per diem rates 

for all locations.

Reporting per diem and car allowances. 

The following discussion explains how to report 

per diem and car allowances. The manner in 

which you report them depends on how the allowance compares to the federal rate. See Table 11-1.

Allowance less than or equal to the federal rate. If your allowance for the employee is 

less than or equal to the appropriate federal 

rate, that allowance isn’t included as part of the 

employee's pay in box 1 of the employee's 

Form W-2. Deduct the allowance as travel expenses (including meals that may be subject to 

the 50% limit, discussed later). See How to deduct under Accountable Plans, earlier.

Allowance more than the federal rate. If 

your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items.

Include the allowance amount up to the federal rate in box 12 (code L) of the employee's 

Form W-2. Deduct it as travel expenses (explained above). This part of the allowance is 

treated as reimbursed under an accountable 

plan.

Include the amount that is more than the 

federal rate in box 1 (and in boxes 3 and 5 if 

they apply) of the employee's Form W-2. Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. This part of the allowance is 

treated as reimbursed under a nonaccountable 

plan (explained later) under Nonaccountable 

Plans.

Meals

Under an accountable plan, you can generally 

deduct only 50% of any otherwise deductible 

business-related meal expenses you reimburse 

your employees. The deduction limit applies 

even if you reimburse them for 100% of the expenses.

Application of the 50% limit. The 50% deduction limit applies to reimbursements you 

make to your employees for expenses they incur for meals while traveling away from home 

Chapter 11 Other Expenses Page 45
on business and meals for business customers 

at your place of business, a restaurant, or another location. It applies to expenses incurred at 

a business convention or reception, business 

meeting, or business luncheon at a club. The 

deduction limit may also apply to meals you furnish on your premises to your employees.

Section 210 of the Taxpayer Certainty 

and Disaster Tax Relief Act of 2020 

provides for the temporary allowance 

of a 100% business meal deduction for food or 

beverages provided by a restaurant and paid or 

incurred after December 31, 2020, and before 

January 1, 2023.

Related expenses. Taxes and tips relating to a meal you reimburse to your employee 

under an accountable plan are included in the 

amount subject to the 50% limit. However, the 

cost of transportation to and from an otherwise 

allowable business meal isn’t subject to the 

50% limit.

Amount subject to 50% limit. If you provide 

your employees with a per diem allowance only 

for meal and incidental expenses, the amount 

treated as an expense for food and beverages 

is the lesser of the following.

• The per diem allowance.

• The federal rate for M&IE.

If you provide your employees with a per 

diem allowance that covers lodging, meals, and 

incidental expenses, you must treat an amount 

equal to the federal M&IE rate for the area of 

travel as an expense for food and beverages. If 

the per diem allowance you provide is less than 

the federal per diem rate for the area of travel, 

you can treat 40% of the per diem allowance as 

the amount for food and beverages.

Meal expenses when subject to “hours of 

service” limits. You can deduct 80% of the 

cost of reimbursed meals your employees consume while away from their tax home on business during, or incident to, any period subject to 

the Department of Transportation's “hours of 

service” limits.

See Pub. 463 for a detailed discussion of individuals subject to the Department of Transportation's “hours of service” limits.

De minimis (minimal) fringe benefit. P.L. 

115-97, Tax Cuts and Jobs Act, changed the 

rules for the deduction of food or beverage expenses that are excludable from employee income as a de minimis fringe benefit. For 

amounts incurred or paid after 2017, the 50% 

limit on deductions for food or beverage expenses also applies to food or beverage expenses 

excludable from employee income as a de minimis fringe benefit. While your business deduction may be limited, the rules that allow you to 

exclude certain de minimis meals and meals on 

your business premises from your employee's 

wages still apply. See Meals in section 2 of 

Pub. 15-B.

Company cafeteria or executive dining 

room. The cost of food and beverages you 

provide primarily to your employees on your 

business premises is deductible. This includes 

the cost of maintaining the facilities for providing the food and beverages. These expenses 

TIP

are subject to the 50% limit unless they are 

compensation to your employees (explained 

later).

Employee activities. The expense of providing recreational, social, or similar activities (including the use of a facility) for your employees 

is deductible and isn’t subject to the 50% limit. 

The benefit must be primarily for your employees who aren’t highly compensated.

For this purpose, a highly compensated employee is an employee who meets either of the 

following requirements.

1. Owned a 5%-or-more interest in the business during the year or the preceding 

year. An employee is treated as owning 

any interest owned by his or her brother, 

sister, spouse, ancestors, and lineal descendants.

2. Received more than $130,000 in pay for 

the preceding year. You can choose to include only employees who were also in 

the top 20% of employees when ranked by 

pay for the preceding year.

For example, the expenses for food, beverages, and entertainment for a company-wide 

picnic aren’t subject to the 50% or 100% limit.

Meals or entertainment treated as compensation. The 50% limit doesn’t apply to either of 

the following.

1. Expenses for meals or entertainment that 

you treat as:

a. Compensation to an employee who 

was the recipient of the meals or entertainment, and

b. Wages subject to withholding of federal income tax.

2. Expenses for meals or entertainment if:

a. A recipient of the meals or entertainment who isn’t your employee has to 

include the expenses in gross income 

as compensation for services or as a 

prize or award; and

b. You include that amount on a Form 

1099-MISC issued to the recipient, if a 

Form 1099-MISC is required.

Sales of meals or entertainment. You can 

deduct the cost of meals or entertainment (including the use of facilities) you sell to the public. For example, if you run a nightclub, your expense for the entertainment you furnish to your 

customers, such as a floor show, is a business 

expense that is fully deductible. The 100% limit 

doesn’t apply to this expense.

Providing meals or entertainment to general public to promote goodwill. You can 

deduct the cost of providing meals, entertainment, or recreational facilities to the general 

public as a means of advertising or promoting 

goodwill in the community. The 50% or 100% 

limit doesn’t apply to this expense.

Director, stockholder, or employee meetings. You can deduct entertainment expenses 

directly related to business meetings of your 

employees, partners, stockholders, agents, or 

directors. You can provide some minor social 

activities, but the main purpose of the meeting 

must be your company's business. These expenses are subject to the 100% limit.

Trade association meetings. You can deduct expenses directly related to, and necessary for, attending business meetings or conventions of certain tax-exempt organizations. 

These organizations include business leagues, 

chambers of commerce, real estate boards, 

and trade and professional associations.

Nonaccountable Plans

A nonaccountable plan is an arrangement that 

doesn’t meet the requirements for an accountable plan. All amounts paid, or treated as paid, 

under a nonaccountable plan are reported as 

wages on Form W-2. The payments are subject 

to income tax withholding, social security, Medicare, and federal unemployment taxes. You can 

deduct the reimbursement as compensation or 

wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. Deduct 

the allowable amount as compensation or wages on the appropriate line of your income tax 

return, as provided in its instructions.

Miscellaneous Expenses

In addition to travel, meal, and certain entertainment expenses, there are other expenses you 

can deduct.

Advertising expenses. You can generally deduct reasonable advertising expenses that are 

directly related to your business activities. Generally, you can’t deduct amounts paid to influence legislation (for example, lobbying). For 

more information, see Lobbying expenses, 

later.

You can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it 

relates to business you reasonably expect to 

gain in the future. For example, the cost of advertising that encourages people to contribute 

to the Red Cross, to buy U.S. savings bonds, or 

to participate in similar causes is usually deductible.

Anticipated liabilities. Anticipated liabilities or 

reserves for anticipated liabilities aren’t deductible. For example, assume you sold 1-year TV 

service contracts this year totaling $50,000. 

From experience, you know you will have expenses of about $15,000 in the coming year for 

these contracts. You can’t deduct any of the 

$15,000 this year by charging expenses to a reserve or liability account. You can deduct your 

expenses only when you actually pay or accrue 

them, depending on your accounting method.

Bribes and kickbacks. Engaging in the payment of bribes or kickbacks is a serious criminal 

matter. Such activity could result in criminal 

prosecution. Any payments that appear to have 

been made, either directly or indirectly, to an official or employee of any government or an 

agency or instrumentality of any government 

aren’t deductible for tax purposes and are in violation of the law.

Page 46 Chapter 11 Other Expenses
Payments paid directly or indirectly to a person in violation of any federal or state law (but 

only if that state law is generally enforced, defined below) that provides for a criminal penalty 

or for the loss of a license or privilege to engage 

in a trade or business aren’t allowed as a deduction for tax purposes.

Meaning of “generally enforced.” A state 

law is considered generally enforced unless it is 

never enforced or enforced only for infamous 

persons or persons whose violations are extraordinarily flagrant. For example, a state law is 

generally enforced unless proper reporting of a 

violation of the law results in enforcement only 

under unusual circumstances.

Kickbacks. A kickback is a payment for referring a client, patient, or customer. The common kickback situation occurs when money or 

property is given to someone as payment for influencing a third party to purchase from, use the 

services of, or otherwise deal with the person 

who pays the kickback. In many cases, the person whose business is being sought or enjoyed 

by the person who pays the kickback isn’t 

aware of the payment.

For example, the Yard Corporation is in the 

business of repairing ships. It returns 10% of 

the repair bills as kickbacks to the captains and 

chief officers of the vessels it repairs. Although 

this practice is considered an ordinary and necessary expense of getting business, it is clearly 

a violation of a state law that is generally enforced. These expenditures aren’t deductible 

for tax purposes, whether or not the owners of 

the shipyard are subsequently prosecuted.

Form 1099-MISC. It doesn’t matter 

whether any kickbacks paid during the tax year 

are deductible on your income tax return in regards to information reporting. See Form 

1099-MISC for more information.

Car and truck expenses. The costs of operating a car, truck, or other vehicle in your business may be deductible. For more information 

on how to figure your deduction, see Pub. 463.

Charitable contributions. Cash payments to 

an organization, charitable or otherwise, may 

be deductible as business expenses if the payments aren’t charitable contributions or gifts 

and are directly related to your business. If the 

payments are charitable contributions or gifts, 

you can’t deduct them as business expenses. 

However, corporations (other than S corporations) can deduct charitable contributions on 

their income tax returns, subject to limitations. 

See the Instructions for Form 1120 for more information. Sole proprietors, partners in a partnership, or shareholders in an S corporation 

may be able to deduct charitable contributions 

made by their business on Schedule A (Form 

1040).

Example. You paid $15 to a local church 

for a half-page ad in a program for a concert it is 

sponsoring. The purpose of the ad was to encourage readers to buy your products. Your 

payment isn’t a charitable contribution. You can 

deduct it as an advertising expense.

Example. You made a $100,000 donation 

to a committee organized by the local Chamber 

of Commerce to bring a convention to your city, 

intended to increase business activity, including 

yours. Your payment isn’t a charitable contribution. You can deduct it as a business expense.

See Pub. 526 for a discussion of donated inventory, including capital gain property.

Club dues and membership fees. Generally, 

you can’t deduct amounts paid or incurred for 

membership in any club organized for business, 

pleasure, recreation, or any other social purpose. This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline 

clubs, and clubs operated to provide meals under circumstances generally considered to be 

conducive to business discussions.

Exception. The following organizations 

aren’t treated as clubs organized for business, 

pleasure, recreation, or other social purpose 

unless one of the main purposes is to conduct 

entertainment activities for members or their 

guests or to provide members or their guests 

with access to entertainment facilities.

• Boards of trade.

• Business leagues.

• Chambers of commerce.

• Civic or public service organizations.

• Professional organizations such as bar associations and medical associations.

• Real estate boards.

• Trade associations.

Credit card convenience fees. Credit card 

companies charge a fee to businesses who accept their cards. This fee when paid or incurred 

by the business can be deducted as a business 

expense.

Damages recovered. Special rules apply to 

compensation you receive for damages sustained as a result of patent infringement, breach 

of contract or fiduciary duty, or antitrust violations. You must include this compensation in 

your income. However, you may be able to take 

a special deduction. The deduction applies only 

to amounts recovered for actual economic injury, not any additional amount. The deduction 

is the smaller of the following.

• The amount you received or accrued for 

damages in the tax year reduced by the 

amount you paid or incurred in the year to 

recover that amount.

• Your losses from the injury you haven’t deducted.

Demolition expenses or losses. Amounts 

paid or incurred to demolish a structure aren’t 

deductible. These amounts are added to the 

basis of the land where the demolished structure was located. Any loss for the remaining undepreciated basis of a demolished structure 

wouldn’t be recognized until the property is disposed of.

Education expenses. Ordinary and necessary expenses paid for the cost of the education 

and training of your employees are deductible. 

See Education Expenses in chapter 2.

You can also deduct the cost of your own 

education (including certain related travel) related to your trade or business. You must be able 

to show the education maintains or improves 

skills required in your trade or business, or that 

it is required by law or regulations, for keeping 

your license to practice, status, or job. For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) 

classes that are required by the state bar association to maintain his or her license to practice 

law.

Education expenses you incur to meet the 

minimum requirements of your present trade or 

business, or those that qualify you for a new 

trade or business, aren’t deductible. This is true 

even if the education maintains or improves 

skills presently required in your business. For 

more information on education expenses, see 

Pub. 970.

Franchise, trademark, trade name. If you 

buy a franchise, trademark, or trade name, you 

can deduct the amount you pay or incur as a 

business expense only if your payments are 

part of a series of payments that are:

1. Contingent on productivity, use, or disposition of the item;

2. Payable at least annually for the entire 

term of the transfer agreement; and

3. Substantially equal in amount (or payable 

under a fixed formula).

When determining the term of the transfer 

agreement, include all renewal options and any 

other period for which you and the transferor 

reasonably expect the agreement to be renewed.

A franchise includes an agreement that 

gives one of the parties to the agreement the 

right to distribute, sell, or provide goods, services, or facilities within a specified area.

Impairment-related expenses. If you are disabled, you can deduct expenses necessary for 

you to be able to work (impairment-related expenses) as a business expense, rather than as 

a medical expense.

You are disabled if you have either of the following.

• A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed.

• A physical or mental impairment that substantially limits one or more of your major 

life activities.

The expense qualifies as a business expense if all the following apply.

• Your work clearly requires the expense for 

you to satisfactorily perform that work.

• The goods or services purchased are 

clearly not needed or used, other than incidentally, in your personal activities.

• Their treatment isn’t specifically provided 

for under other tax law provisions.

Example. You are blind. You must use a 

reader to do your work, both at and away from 

your place of work. The reader's services are 

only for your work. You can deduct your expenses for the reader as a business expense.

Internet-related expenses. Generally, you 

can deduct Internet-related expenses including 

domain registration fees and webmaster consulting costs. If you are starting a business, you 

may have to amortize these expenses as 

Chapter 11 Other Expenses Page 47
start-up costs. For more information about amortizing start-up and organizational costs, see 

chapter 8.

Interview expense allowances. Reimbursements you make to job candidates for transportation or other expenses related to interviews 

for possible employment aren’t wages. You can 

deduct the reimbursements as a business expense. However, expenses for food and beverages are subject to the 50% limit discussed earlier under Meals and Entertainment.

Legal and professional fees. Fees charged 

by accountants and attorneys that are ordinary 

and necessary expenses directly related to operating your business are deductible as business expenses. However, legal fees you pay to 

acquire business assets usually aren’t deductible. These costs are added to the basis of the 

property.

Fees that include payments for work of a 

personal nature (such as drafting a will or damages arising from a personal injury) aren’t allowed as a business deduction on Schedule C 

(Form 1040). If the invoice includes both business and personal charges, figure the business 

portion as follows: multiply the total amount of 

the bill by a fraction, the numerator of which is 

the amount attributable to business matters, the 

denominator of which is the total amount paid. 

The result is the portion of the invoice attributable to business expenses. The portion attributable to personal matters is the difference between the total amount and the business 

portion (figured above).

Legal fees related to doing or keeping your 

job, such as those you paid to defend yourself 

against criminal charges arising out of your 

trade or business, may be deductible on Schedule A (Form 1040) if you itemize deductions. 

For more information, see Pub. 529.

Certain payments made in sexual harassment or sexual abuse cases. For 

amounts paid or incurred after December 22, 

2017, new section 162(q) provides that no deduction is allowed under section 162 for any 

settlement or payment related to sexual harassment or sexual abuse if it is subject to a nondisclosure agreement. In addition, attorney’s fees 

related to such a settlement or payment aren’t 

allowed as a deduction.

Tax preparation fees. The cost of hiring a 

tax professional, such as a certified public accountant (CPA), to prepare that part of your tax 

return relating to your business as a sole proprietor is deductible on Schedule C (Form 

1040). Deduct expenses of preparing tax 

schedules relating to rentals or royalties 

(Schedule E), or farm income and expenses 

(Schedule F) on the appropriate schedule. Expenses for completing the remainder of the return are miscellaneous deductions and are no 

longer deductible.

You can also claim a business deduction for 

amounts paid or incurred in resolving asserted 

tax deficiencies for your business operated as a 

sole proprietor.

Licenses and regulatory fees. Licenses and 

regulatory fees for your trade or business paid 

annually to state or local governments are generally deductible. Some licenses and fees may 

have to be amortized. See chapter 8 for more 

information.

Lobbying expenses. Generally, lobbying expenses aren’t deductible. Lobbying expenses 

include amounts paid or incurred for any of the 

following activities.

• Influencing legislation.

• Participating in or intervening in any political campaign for, or against, any candidate 

for public office.

• Attempting to influence the general public, 

or segments of the public, about elections, 

legislative matters, or referendums.

• Communicating directly with covered executive branch officials (defined later) in 

any attempt to influence the official actions 

or positions of those officials.

• Researching, preparing, planning, or coordinating any of the preceding activities.

Your expenses for influencing legislation 

and communicating directly with a covered executive branch official include a portion of your 

labor costs and general and administrative 

costs of your business. For information on making this allocation, see section 1.162-28 of the 

regulations.

You can’t claim a charitable or business expense deduction for amounts paid to an organization if both of the following apply.

• The organization conducts lobbying activities on matters of direct financial interest to 

your business.

• A principal purpose of your contribution is 

to avoid the rules discussed earlier that 

prohibit a business deduction for lobbying 

expenses.

If a tax-exempt organization, other than a 

section 501(c)(3) organization, provides you 

with a notice on the part of dues that is allocable 

to nondeductible lobbying and political expenses, you can’t deduct that part of the dues.

Covered executive branch official. For 

purposes of this discussion, a “covered executive branch official” is any of the following.

1. The President.

2. The Vice President.

3. Any officer or employee of the White 

House Office of the Executive Office of the 

President and the two most senior level officers of each of the other agencies in the 

Executive Office.

4. Any individual who:

a. Is serving in a position in Level I of the 

Executive Schedule under section 

5312 of title 5, United States Code;

b. Has been designated by the President as having Cabinet-level status; 

or

c. Is an immediate deputy of an individual listed in item (a) or (b).

Exceptions to denial of deduction. The 

general denial of the deduction doesn’t apply to 

the following.

• Any in-house expenses for influencing legislation and communicating directly with a 

covered executive branch official if those 

expenses for the tax year don’t exceed 

$2,000 (excluding overhead expenses).

• Expenses incurred by taxpayers engaged 

in the trade or business of lobbying (professional lobbyists) on behalf of another 

person (but does apply to payments by the 

other person to the lobbyist for lobbying 

activities).

Moving machinery. Generally, the cost of 

moving machinery from one city to another is a 

deductible expense. So is the cost of moving 

machinery from one plant to another, or from 

one part of your plant to another. You can deduct the cost of installing the machinery in the 

new location. However, you must capitalize the 

costs of installing or moving newly purchased 

machinery.

Outplacement services. The costs of outplacement services you provide to your employees to help them find new employment, such as 

career counseling, resume assistance, skills assessment, etc., are deductible.

The costs of outplacement services may 

cover more than one deduction category. For 

example, deduct as a utilities expense the cost 

of telephone calls made under this service and 

deduct as a rental expense the cost of renting 

machinery and equipment for this service.

For information on whether the value of outplacement services is includible in your employees' income, see Pub. 15-B.

Penalties and fines. Penalties paid for late 

performance or nonperformance of a contract 

are generally deductible. For instance, you own 

and operate a construction company. Under a 

contract, you are to finish construction of a 

building by a certain date. Due to construction 

delays, the building isn’t completed and ready 

for occupancy on the date stipulated in the contract. You are now required to pay an additional 

amount for each day that completion is delayed 

beyond the completion date stipulated in the 

contract. These additional costs are deductible 

business expenses.

On the other hand, generally, no deduction 

is allowed for penalties and fines paid to a government or specified nongovernmental entity for 

the violation of any law except the following.

• Amounts that constitute restitution.

• Amounts paid to come into compliance 

with the law.

• Amounts paid or incurred as the result of 

certain court orders in which no government or specified nongovernmental 

agency is a party.

• Amounts paid or incurred for taxes due.

On or after December 22, 2017, no deduction is allowed for the restitution amount or 

amount paid to come into compliance with the 

law unless the amounts are specifically identified in the settlement agreement or court order. 

Also, any amount paid or incurred as reimbursement to a government for the costs of any 

investigation or litigation aren’t eligible for the 

exceptions and are nondeductible.

See section 162(f), as amended by P.L. 

115-97, section 13306.

Examples of nondeductible penalties and 

fines include the following.

• Amounts paid because of a conviction for 

a crime or after a plea of guilty or no contest in a criminal proceeding.

Page 48 Chapter 11 Other Expenses
• Amounts paid as a penalty imposed by 

federal, state, or local law in a civil action, 

including certain additions to tax and additional amounts and assessable penalties 

imposed by the Internal Revenue Code.

• Amounts paid in settlement of actual or 

possible liability for a fine or penalty, 

whether civil or criminal.

• Amounts forfeited as collateral posted for a 

proceeding that could result in a fine or 

penalty.

• Fines paid for violating city housing codes.

• Fines paid by truckers for violating state 

maximum highway weight laws.

• Fines paid for violating air quality laws.

• Civil penalties paid for violating federal 

laws regarding mining safety standards 

and discharges into navigable waters.

A fine or penalty doesn’t include any of the 

following.

• Legal fees and related expenses to defend 

yourself in a prosecution or civil action for a 

violation of the law imposing the fine or civil 

penalty.

• Court costs or stenographic and printing 

charges.

• Compensatory damages paid to a government.

Political contributions. Contributions or gifts 

paid to political parties or candidates aren’t deductible. In addition, expenses paid or incurred 

to take part in any political campaign of a candidate for public office aren’t deductible.

Indirect political contributions. You 

can’t deduct indirect political contributions and 

costs of taking part in political activities as business expenses. Examples of nondeductible expenses include the following.

• Advertising in a convention program of a 

political party, or in any other publication if 

any of the proceeds from the publication 

are for, or intended for, the use of a political party or candidate.

• Admission to a dinner or program (including, but not limited to, galas, dances, film 

presentations, parties, and sporting 

events) if any of the proceeds from the 

function are for, or intended for, the use of 

a political party or candidate.

• Admission to an inaugural ball, gala, parade, concert, or similar event if identified 

with a political party or candidate.

Repairs. The cost of repairing or improving 

property used in your trade or business is either 

a deductible or capital expense. Routine maintenance that keeps your property in a normal efficient operating condition, but that doesn’t materially increase the value or substantially 

prolong the useful life of the property, is deductible in the year that it is incurred. Otherwise, 

the cost must be capitalized and depreciated. 

See Form 4562 and its instructions for how to 

figure and claim the depreciation deduction.

The cost of repairs includes the costs of labor, supplies, and certain other items. The 

value of your own labor isn’t deductible. Examples of repairs include:

• Reconditioning floors (but not replacement),

• Repainting the interior and exterior walls of 

a building,

• Cleaning and repairing roofs and gutters, 

and

• Fixing plumbing leaks (but not replacement 

of fixtures).

Repayments. If you had to repay an amount 

you included in your income in an earlier year, 

you may be able to deduct the amount repaid 

for the year in which you repaid it. Or, if the 

amount you repaid is more than $3,000, you 

may be able to take a credit against your tax for 

the year in which you repaid it. In most cases, 

you can claim a deduction or credit only if the 

repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit 

transaction.

Type of deduction. The type of deduction 

you are allowed in the year of repayment depends on the type of income you included in the 

earlier year. For instance, if you repay an 

amount you previously reported as a capital 

gain, deduct the repayment as a capital loss as 

explained in the Instructions for Schedule D 

(Form 1040). If you reported it as self-employment income, deduct it as a business expense 

on Schedule C (Form 1040), or a farm expense 

on Schedule F (Form 1040).

If you reported the amount as wages, unemployment compensation, or other nonbusiness 

ordinary income, you may be able to deduct it 

as an other itemized deduction if the amount repaid is over $3,000.

Beginning in 2018, due to the suspension of miscellaneous itemized deductions subject to the 2% floor under section 67(a), you aren’t able to deduct the 

repayment as an itemized deduction if it is 

$3,000 or less.

Repayment—$3,000 or less. If the 

amount you repaid was $3,000 or less, deduct it 

from your income in the year you repaid it.

Repayment—Over $3,000. If the amount 

you repaid was more than $3,000, you can deduct the repayment as an other itemized deduction on Schedule A (Form 1040), line 16, if you 

included the income under a “claim of right.” 

This means that at the time you included the income, it appeared that you had an unrestricted 

right to it. However, you can choose to take a 

credit for the year of repayment. Figure your tax 

under both methods and use the method that 

results in less tax.

Method 1. Figure your tax for 2021 claiming a deduction for the repaid amount.

Method 2. Figure your tax for 2021 claiming a credit for the repaid amount. Follow these 

steps.

1. Figure your tax for 2021 without deducting 

the repaid amount.

2. Refigure your tax from the earlier year 

without including in income the amount 

you repaid in 2021.

3. Subtract the tax in (2) from the tax shown 

on your return for the earlier year. This is 

the amount of your credit.

4. Subtract the answer in (3) from the tax for 

2021 figured without the deduction (step 

1).

CAUTION

!

If Method 1 results in less tax, deduct the 

amount repaid as discussed earlier under Type 

of deduction.

If Method 2 results in less tax, claim the 

credit on Schedule 3 (Form 1040), line 13z, and 

write “I.R.C. 1341” next to line 13z.

Example. For 2020, you filed a return and 

reported your income on the cash method. In 

2021, you repaid $5,000 included in your 2020 

gross income under a claim of right. Your filing 

status in 2021 and 2020 is single. Your income 

and tax for both years are as follows:

2020 

With Income

2020

Without 

Income

Taxable

 Income $15,000 $10,000

Tax $ 1,606 $ 1,006

2021 

Without 

Deduction

2021 

With Deduction

Taxable

 Income $49,950 $44,950

Tax $6,743 $5,643

Your tax under Method 1 is $5,643. Your tax under Method 2 is $6,143, figured as follows:

Tax previously determined for 

2020 ........................... $ 1,606

Less: Tax as refigured ........... − 1,006

Decrease in 2020 tax ............ $600

Regular tax liability for 2021 ....... $6,743

Less: Decrease in 2020 tax ....... − 600

Refigured tax for 2021 ....... $6,143

Because you pay less tax under Method 1, you 

should take a deduction for the repayment in 

2021.

Repayment does not apply. This discussion doesn’t apply to the following.

• Deductions for bad debts.

• Deductions from sales to customers, such 

as returns and allowances, and similar 

items.

• Deductions for legal and other expenses of 

contesting the repayment.

Year of deduction (or credit). If you use 

the cash method of accounting, you can take 

the deduction (or credit, if applicable) for the tax 

year in which you actually make the repayment. 

If you use any other accounting method, you 

can deduct the repayment or claim a credit for it 

only for the tax year in which it is a proper deduction under your accounting method. For example, if you use the accrual method, you are 

entitled to the deduction or credit in the tax year 

in which the obligation for the repayment accrues.

Supplies and materials. Unless you have deducted the cost in any earlier year, you can generally deduct the cost of materials and supplies 

actually consumed and used during the tax 

year.

Chapter 11 Other Expenses Page 49
If you keep incidental materials and supplies 

on hand, you can deduct the cost of the incidental materials and supplies you bought during 

the tax year if all the following requirements are 

met.

• You don’t keep a record of when they are 

used.

• You don’t take an inventory of the amount 

on hand at the beginning and end of the 

tax year.

• This method doesn’t distort your income.

You can also deduct the cost of books, professional instruments, equipment, etc., if you 

normally use them within a year. However, if the 

usefulness of these items extends substantially 

beyond the year they are placed in service, you 

must generally recover their costs through depreciation. For more information regarding depreciation, see Pub. 946.

Utilities. Business expenses for heat, lights, 

power, telephone service, and water and sewerage are deductible. However, any part due to 

personal use isn’t deductible.

Telephone. You can’t deduct the cost of 

basic local telephone service (including any 

taxes) for the first telephone line you have in 

your home, even if you have an office in your 

home. However, charges for business long-distance phone calls on that line, as well as the 

cost of a second line into your home used exclusively for business, are deductible business 

expenses.

12.

How To Get Tax 

Help

If you have questions about a tax issue; need 

help preparing your tax return; or want to download free publications, forms, or instructions, go 

to IRS.gov to find resources that can help you 

right away.

TTY/TDD and Federal Relay Service. People 

who are deaf, hard of hearing, or have a speech 

disability and who have access to TTY/TDD 

equipment can call toll free 800-829-4059 to 

ask tax questions or to order forms and publications. Deaf or hard-of-hearing individuals can 

contact the IRS through relay services such as 

the Federal Relay Service, available at 

GSA.gov/FedRelay.

Advance child tax credit payments. From 

July through December 2021, advance payments were sent automatically to taxpayers with 

qualifying children who met certain criteria. The 

advance child tax credit payments were early 

payments of up to 50% of the estimated child 

tax credit that taxpayers may properly claim on 

their 2021 returns. Go to IRS.gov/AdvCTC for 

more information about these payments and 

how they can affect your taxes.

Coronavirus. Go to IRS.gov/Coronavirus for 

links to information on the impact of the coronavirus, as well as tax relief available for individuals and families, small and large businesses, 

and tax-exempt organizations.

Preparing and filing your tax return. After 

receiving all your wage and earning statements 

(Forms W-2, W-2G, 1099-R, 1099-MISC, 

1099-NEC, etc.); unemployment compensation 

statements (by mail or in a digital format) or 

other government payment statements (Form 

1099-G); and interest, dividend, and retirement 

statements from banks and investment firms 

(Forms 1099), you have several options to 

choose from to prepare and file your tax return. 

You can prepare the tax return yourself, see if 

you qualify for free tax preparation, or hire a tax 

professional to prepare your return.

For 2021, if you received an Economic 

Impact Payment (EIP), refer to your 

Notice 1444-C, Your 2021 Economic 

Impact Payment. If you received Advance Child 

Tax Credit payments, refer to your Letter 6419.

Free options for tax preparation. Go to 

IRS.gov to see your options for preparing and 

filing your return, which include the following.

• Free File. This program lets you prepare 

and file your federal individual income tax 

return for free using brand-name tax-preparation-and-filing software or Free File fillable forms. However, state tax preparation 

may not be available through Free File. Go 

to IRS.gov/FreeFile to see if you qualify to 

use brand-name software to prepare and 

e-file your federal tax return for free.

• VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help 

to people with low-to-moderate incomes, 

persons with disabilities, and limited-English-speaking taxpayers who need help 

preparing their own tax returns. Go to 

IRS.gov/VITA, download the free IRS2Go 

app, or call 800-906-9887 for information 

on free tax return preparation.

• TCE. The Tax Counseling for the Elderly 

(TCE) program offers free tax help for all 

taxpayers, particularly those who are 60 

years of age and older. TCE volunteers 

specialize in answering questions about 

pensions and retirement-related issues 

unique to seniors. Go to IRS.gov/TCE, 

download the free IRS2Go app, or call 

888-227-7669 for information on free tax 

return preparation.

• MilTax. Members of the U.S. Armed 

Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. For more information, go to 

MilitaryOneSource (MilitaryOneSource.mil/

MilTax).

Also, the IRS offers Free Fillable Forms, 

which can be completed online and then filed 

electronically regardless of income.

Employers can register to use Business 

Services Online. The Social Security Administration (SSA) offers online service at SSA.gov/

CAUTION

!

Employer for fast, free, and secure online W-2 

filing options to certified public accountants 

(CPAs), accountants, enrolled agents, and individuals who process Forms W-2, Wage and 

Tax Statement, and Forms W-2c, Corrected 

Wage and Tax Statement.

Tax reform. Tax reform legislation affects individuals, businesses, and tax-exempt and government entities. Go to IRS.gov/TaxReform for 

information and updates on how this legislation 

affects your taxes.

A–Z index for business. Find it fast! Know 

what you're looking for and want to find it fast? 

Select business topics using our A–Z listing, or 

by business type such as sole proprietor, corporation, etc. We also provide links to major 

business subjects, such as Business Expenses, 

which provide a gateway to all related information on those subjects.

• Small Business Forms and Publications. 

You can download forms and publications 

for small businesses and self-employed individuals.

• Employer ID Numbers (EINs). Find out 

about EINs or apply for one online.

• e-File Form 940, 941, 944, or 945 for Small 

Businesses. Learn your options for e-filing 

Form 940, 941, 944, or 945 for small businesses.

• Employment Taxes. Federal income tax, 

social security and Medicare taxes, FUTA 

tax, self-employment tax, and more.

• Independent Contractor (Self-Employed) 

or Employee. It is critical that you, the employer, correctly determine whether the individuals providing services are employees 

or independent contractors.

• Self-Employed Individuals Tax Center. The 

basics on self-employment, filing requirements, and reporting responsibilities for independent contractors.

• Information Return Filing Requirements. If 

you made or received a payment as a 

small business or self-employed individual, 

you are most likely required to file an information return with the IRS.

• IRS Video Portal. Video, webinars, and audio presentations for small businesses, individuals, and tax pros.

• Small Business Events. Workshops and 

webinars on a variety of topics for small 

businesses.

• Online Tools & Educational Products. 

Choose from a variety of products, including the Tax Calendar desktop tool, to help 

you learn about business taxes on your 

own time, and at your own pace.

• Subscribe to e-News. A free electronic 

mail service keeping you up to date on tax 

topics.

Requirements for filing. If you made or received a payment during the calendar year as a 

small business or self-employed individual, you 

are most likely required to file an information return with the IRS. For more information, see Am 

I Required To File a Form 1099 or Other 

Information Return? on IRS.gov.

Getting answers to your tax questions. On IRS.gov, you can get 

up-to-date information on current 

events and changes in tax law.

Page 50 Chapter 12 How To Get Tax Help
• IRS.gov/Help: A variety of tools to help you 

get answers to some of the most common 

tax questions.

• IRS.gov/ITA: The Interactive Tax Assistant, 

a tool that will ask you questions and, 

based on you input, provide a number of 

tax law topics and provide answers.

• IRS.gov/Forms: Find forms, instructions, 

and publications. You will find details on 

2021 tax changes and hundreds of interactive links to help you find answers to your 

questions.

• You may also be able to access tax law information in your electronic filing software.

IRS social media. Go to IRS.gov/SocialMedia 

to see the various social media tools the IRS 

uses to share the latest information on tax 

changes, scam alerts, initiatives, products, and 

services. At the IRS, privacy and security are 

our highest priority. We use these tools to share 

public information with you. Don’t post your social security number (SSN) or other confidential 

information on social media sites. Always protect your identity when using any social networking site.

The following IRS YouTube channels provide short, informative videos on various tax-related topics in English, Spanish, and ASL.

• Youtube.com/irsvideos.

• Youtube.com/irsvideosmultilingua.

• Youtube.com/irsvideosASL.

Watching IRS videos. The IRS Video portal 

(IRSVideos.gov) contains video and audio presentations for individuals, small businesses, 

and tax professionals.

Online tax information in other languages.

You can find information on IRS.gov/

MyLanguage if English isn't your native language.

Free Over-the-Phone Interpreter (OPI) Service. The IRS is committed to serving our multilingual customers by offering OPI services. The 

OPI Service is a federally funded program and 

is available at Taxpayer Assistance Centers 

(TACs), other IRS offices, and every VITA/TCE 

return site. The OPI Service is accessible in 

more than 350 languages.

Accessibility Helpline available for taxpayers with disabilities. Taxpayers who need information about accessibility services can call 

833-690-0598. The Accessibility Helpline can 

answer questions related to current and future 

accessibility products and services available in 

alternative media formats (for example, braille, 

large print, audio, etc.).

Getting tax forms and publications. Go to 

IRS.gov/Forms to view, download, or print all of 

the forms, instructions, and publications you 

may need. Or, you can go to IRS.gov/

OrderForms to place an order and have them 

mailed to you within 10 business days.

Getting tax publications and instructions in 

eBook format. You can also download and 

view popular tax publications and instructions 

(including the Instructions for Form 1040) on 

mobile devices as eBooks at IRS.gov/eBooks.

Note. IRS eBooks have been tested using 

Apple's iBooks for iPad. Our eBooks haven't 

been tested on other dedicated eBook readers, 

and eBook functionality may not operate as intended.

Access your online account (individual taxpayers only). Go to IRS.gov/Account to securely access information about your federal tax 

account.

• View the amount you owe and a breakdown by tax year.

• See payment plan details or apply for a 

new payment plan.

• Make a payment or view 5 years of payment history and any pending or scheduled payments.

• Access your tax records, including key 

data from your most recent tax return, your 

EIP amounts, and transcripts.

• View digital copies of select notices from 

the IRS.

• Approve or reject authorization requests 

from tax professionals.

• View your address on file or manage your 

communication preferences.

Tax Pro Account. This tool lets your tax professional submit an authorization request to access your individual taxpayer IRS online 

account. For more information, go to IRS.gov/

TaxProAccount.

Using direct deposit. The fastest way to receive a tax refund is to file electronically and 

choose direct deposit, which securely and electronically transfers your refund directly into your 

financial account. Direct deposit also avoids the 

possibility that your check could be lost, stolen, 

or returned undeliverable to the IRS. Eight in 10 

taxpayers use direct deposit to receive their refund. If you don't have a bank account, go to 

IRS.gov/DirectDeposit for more information on 

where to find a bank or credit union that can 

open an account online.

Need someone to prepare your tax return?

There are various types of tax return preparers, 

including tax preparers, enrolled agents, CPAs, 

attorneys, and many others who don't have professional credentials. If you choose to have 

someone prepare your tax return, choose that 

preparer wisely. A paid tax preparer is:

• Primarily responsible for the overall substantive accuracy of your return,

• Required to sign the return, and

• Required to include their preparer tax identification number (PTIN).

Although the tax preparer always signs the 

return, you're ultimately responsible for providing all the information required for the preparer 

to accurately prepare your return. Anyone paid 

to prepare tax returns for others should have a 

thorough understanding of tax matters. For 

more information on how to choose a tax preparer, go to Tips for Choosing a Tax Preparer 

on IRS.gov.

For your convenience, the IRS provides an 

online database for all Authorized IRS e-file 

Providers that choose to be included in the database. You can locate the closest Authorized 

IRS e-file Providers in your area where you can 

electronically file your tax return. For more information on finding a tax return preparer who provides IRS e-file, see Authorized IRS e-file 

Providers for Individuals on IRS.gov, or go to 

IRS.gov/uac/Authorized-IRS-e-file-Providersfor-Individuals. The inclusion in this database 

does not constitute any endorsement by the 

IRS of the e-file Providers listed in this database 

or any of the products or services that they provide. You should always be sure to conduct 

your own due diligence when selecting an e-file 

Provider. In addition to the Authorized IRS e-file 

Provider locator tool above, you can also find 

professional help through the IRS Tax 

Professional Partner page at IRS.gov/TaxProfessionals/IRSTaxProAssociationPartners.

Choose a tax return preparer you will be 

able to contact in case the IRS examines your 

return and has questions regarding how your 

return was prepared. You can designate your 

paid tax return preparer or another third party to 

speak to the IRS concerning the preparation of 

your return, payment/refund issues, and mathematical errors. The third party authorization 

checkbox on Form 1040 or 1040-SR gives the 

designated party the authority to receive and inspect returns and return information for 1 year 

from the original due date of your return (without 

regard to extensions). You can extend the authority to receive and inspect returns and return 

information to a third party using Form 8821, 

Tax Information Authorization.

The following points will assist you when selecting a tax return preparer.

• Check the preparer’s qualifications. All 

paid tax return preparers are required to 

have a PTIN.

• Check the preparer’s history. You can 

check with the Better Business Bureau to 

find out if a preparer has a questionable 

history. Check for disciplinary actions and 

the license status for credentialed preparers. For CPAs, check with the State Board 

of Accountancy. For attorneys, check with 

the State Bar Association. For Enrolled 

Agents (EAs), go to IRS.gov/TaxProfessionals/Verify-the-Status-of-anEnrolled-Agent and follow the instructions 

for requesting EA status verification.

• Ask about service fees. Avoid preparers 

who base their fee on a percentage of your 

refund or those who say they can get 

larger refunds than others can. Always 

make sure any refund due is sent directly 

to you or deposited into your bank account. You should not have your refund 

deposited into a preparer’s bank account.

• Ask to e-file your return. Make sure your 

preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 

returns must generally e-file their clients’ 

returns. The IRS has safely processed 

more than 1.3 billion e-filed tax returns.

• Make sure the preparer is available. 

You need to ensure that you can contact 

the tax preparer after you file your return. 

That’s true even after the April 15, 2022, 

due date for individual returns. The due 

date for partnerships and S corporations 

using a calendar year is March 15, 2022. 

You may need to contact the preparer if 

questions come up about your tax return at 

a later time.

Chapter 12 How To Get Tax Help Page 51
• Provide tax records. A good preparer will 

ask to see your records and receipts. They 

ask you questions to report your total income and the tax benefits you’re entitled to 

claim. These may include tax deductions, 

tax credits, and other items. Do not use a 

preparer who is willing to e-file your return 

using your last pay stub instead of your 

Form W-2. This is against IRS e-file rules.

• Never sign a blank tax return. Do not 

use a tax preparer who asks you to sign a 

blank tax form.

• Review your return before signing. Before you sign your tax return, review it thoroughly. Ask questions if something is not 

clear to you. Make sure you’re comfortable 

with the information on the return before 

you sign it.

• Preparer must sign returns and include 

their PTIN. A paid preparer must sign returns and include his or her PTIN as required by law. The preparer must also give 

you a copy of the return.

• Report abusive tax preparers to the 

IRS. You can report abusive tax preparers 

and suspected tax fraud to the IRS. Use 

Form 14157, Complaint: Tax Return 

Preparer. If you suspect a return preparer 

filed or changed the return without your 

consent, you should also file Form 14157-

A, Return Preparer Fraud or Misconduct 

Affidavit. You can download and print 

these forms from IRS.gov. If you need a 

paper form mailed to you, go to IRS.gov/

OrderForms to order online. For more information, go to How Do You Report 

Suspected Tax Fraud Activity? on IRS.gov.

Using online tools to help prepare your return. Go to IRS.gov/Tools for the following.

• The Earned Income Tax Credit Assistant 

(IRS.gov/EITCAssistant) determines if 

you’re eligible for the EIC.

• The Online EIN Application (IRS.gov/EIN) 

helps you get an employer identification 

number (EIN) at no cost.

• The Tax Withholding Estimator (IRS.gov/

W4app) makes it easier for everyone to 

pay the correct amount of tax during the 

year. The tool is a convenient, online way 

to check and tailor your withholding. It’s 

user-friendly for taxpayers, including retirees and self-employed individuals. The 

features include the following.

▶ Easy to understand language.

▶ The ability to switch between 

screens, correct previous entries, and skip 

screens that don’t apply.

▶ Tips and links to help you determine 

if you qualify for tax credits and deductions.

▶ A progress tracker.

▶ A self-employment tax feature.

▶ Automatic calculation of taxable social security benefits.

• The First-Time Homebuyer Credit Account 

Look-up (IRS.gov/HomeBuyer) tool provides information on your repayments and 

account balance.

• The Sales Tax Deduction Calculator 

(IRS.gov/SalesTax) figures the amount you 

can claim if you itemize deductions on 

Schedule A (Form 1040).

• Go to IRS.gov/Pub17 to get Pub. 17, Your 

Federal Income Tax for Individuals, which 

features details on tax-saving opportunities, 2021 tax changes, and thousands of 

interactive links to help you find answers to 

your questions. View it online in HTML or 

as a PDF or, better yet, download it to your 

mobile device to enjoy eBook features.

• You may also be able to access tax law information in your electronic filing software.

• Go to IRS.gov and click on the Help & Resources tab for more information.

Getting a transcript or copy of a return. Tax 

transcripts are summaries of tax returns. IRS 

transcripts are best and most often used to validate past income and tax filing status for mortgage, student, and small business loan applications, and to help with tax preparation. 

Taxpayers can also use transcripts to obtain 

their prior-year adjusted gross income (AGI), 

which they need in order to e-file their tax returns. You can get a transcript by mail to view 

your tax account transactions or line-by-line tax 

return information for a specific tax year. The 

method you used to file your return and whether 

you have a refund or balance due affects your 

current tax year transcript availability. Generally, these transcript types are available for the 

current tax year and 3 prior years. The quickest 

way to get a copy of your tax transcript is to go 

to IRS.gov/Transcripts. Click on either "Get 

Transcript Online" or "Get Transcript by Mail" to 

order a free copy of your transcript. If you need 

an account transcript for an older tax year, a 

wage and income transcript, or a verification of 

nonfiling letter, you’ll need to complete Form 

4506-T, Request for Transcript of Tax Return, 

available at IRS.gov/Forms-Pubs/AboutForm-4506-T, and send it to us as instructed on 

the form. If you made estimated tax payments 

and/or applied your overpayment from a 

prior-year tax return to your current-year tax return, you can request a tax account transcript to 

confirm these payments or credits a few weeks 

after the beginning of the calendar year prior to 

filing your current-year return. For the list of the 

various types of transcripts available for you to 

order, see Transcript Types and Ways to Order 

Them at IRS.gov/Individuals/Tax-ReturnTranscript-Types-and-Ways-to-Order-Them. To 

order your transcript, you can choose from one 

of the following convenient options.

• Request a return or account transcript using Get Transcript at IRS.gov/Individuals/

Get-Transcript.

• Download the free IRS2Go app to your 

mobile device and use it to order transcripts of your tax returns or tax account.

• Call the automated transcript toll-free line 

at 800-908-9946 to receive your transcript 

by mail.

• Go to Get Transcript at IRS.gov/

Individuals/Get-Transcript, and click on 

“Get Transcript by Mail.” You will need 

your SSN or your individual taxpayer identification number (ITIN), date of birth, and 

address from your latest tax return. Transcripts arrive in 5 to 10 calendar days at 

the address we have on file for you.

• Mail Form 4506-T, Request for Transcript 

of Tax Return, or Form 4506T-EZ, Short 

Form Request for Individual Tax Return 

Transcript (both available on IRS.gov).

The IRS never sends email requesting that 

you obtain or access your transcripts. Report all 

unsolicited email claiming to be from the IRS or 

an IRS-related function to phishing@irs.gov.

A transcript isn’t a photocopy of your return. 

If you need a photocopy of your original return, 

complete and mail Form 4506, Request for 

Copy of Tax Return, available at IRS.gov/Pub/

irs-pdf/F4506.pdf, along with the applicable fee.

Reporting and resolving your tax-related 

identity theft issues.

• Tax-related identity theft happens when 

someone steals your personal information 

to commit tax fraud. Your taxes can be affected if your SSN is used to file a fraudulent return or to claim a refund or credit.

• The IRS doesn't initiate contact with taxpayers by email, text messages, telephone 

calls, or social media channels to request 

personal or financial information. This includes requests for personal identification 

numbers (PINs), passwords, or similar information for credit cards, banks, or other 

financial accounts.

• Go to IRS.gov/IdentityTheft, the IRS Identity Theft Central webpage, for information 

on identity theft and data security protection for taxpayers, tax professionals, and 

businesses. If your SSN has been lost or 

stolen or you suspect you're a victim of 

tax-related identity theft, you can learn 

what steps you should take.

• Get an Identity Protection PIN (IP PIN). IP 

PINs are six-digit numbers assigned to taxpayers to help prevent the misuse of their 

SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents someone else from filing a tax return 

with your SSN. To learn more, go to 

IRS.gov/IPPIN.

• The IRS stops and flags suspicious or duplicate federal tax returns that falsely represent your identity, such as your name or 

SSN. If the IRS suspects tax ID theft, the 

agency will send a 5071C letter to your 

home address. If you receive this letter, 

verify your identity at IDVerify.IRS.gov or 

call the toll-free number listed in the letter. 

If you did not receive an IRS notice but believe you’ve been the victim of ID theft, 

contact the IRS Identity Protection Specialized Unit at 800-908-4490 right away so 

we can take steps to secure your tax account and match your SSN or ITIN.

• Also, fill out and submit the IRS Form 

14039, Identity Theft Affidavit. Please write 

legibly and follow the directions on the 

back of the form that relate to your specific 

circumstances.

• If you are a victim of state tax ID theft, contact your state's taxation department or 

comptroller's office about the next steps 

you need to take.

• You should protect the information that you 

keep, and properly dispose of what you no 

longer need. And, of course, you should 

create a plan to respond to security incidents. As part of its long-standing efforts to 

promote good data security practices, the 

Federal Trade Commission (FTC) has undertaken extensive efforts to educate businesses and has brought more than 50 law 

enforcement actions related to data 

Page 52 Chapter 12 How To Get Tax Help
security issues. For more information, see 

Protecting Personal Information: A Guide 

for Business, available at FTC.gov/Tipsadvice/business-center/guidance/

protecting-personal-information-guidebusiness, for practical tips on creating and 

implementing a plan for safeguarding personal information used in your business. 

Most recently, the FTC released Start with 

Security: A Guide for Business, available 

at FTC.gov/Tips-advice/business-center/

guidance/start-security-guide-business?

utm_source=govdelivery, which draws on 

the lessons learned from the FTC's enforcement actions.

The IRS, the states, and the tax industry 

joined together to enact new safeguards and 

take additional actions to combat tax-related 

identity theft. Many of these safeguards will be 

invisible to you, but invaluable to our fight 

against these criminal syndicates. If you prepare your own return with tax software, you will 

see new log-on standards. Some states also 

have taken additional steps. See your state 

revenue agency’s web site for additional details.

The FTC works for consumers to prevent 

fraudulent, deceptive, and unfair business practices and to provide information to help spot, 

stop, and avoid them. To file a complaint, for 

example, to report someone falsely claiming to 

be from the government, a business, or a family 

member, visit the FTC’s online Complaint 

Assistant or call 877-FTC-HELP 

(877-382-4357). The FTC enters complaints 

into Consumer Sentinel, a secure, online database available to more than 2,000 civil and 

criminal law enforcement agencies in the United 

States and abroad. Complaints from consumers 

help the FTC detect patterns of fraud and 

abuse. The FTC’s website provides free information on a variety of consumer topics, in English and in Spanish.

Consumer complaints regarding international scams can be reported online through 

Econsumer.gov. These are also entered into 

Consumer Sentinel, the complaint database 

maintained by the FTC, and are made available 

to enforcers and regulators in countries with 

participating agencies. Those agencies may 

use the complaints to investigate cross-border 

issues, uncover new scams, pursue regulatory 

or enforcement actions, and spot consumer 

trends.

Ways to check on the status of your refund. 

• Go to IRS.gov/Refunds.

• Download the official IRS2Go app to your 

mobile device to check your refund status.

• Call the automated refund hotline at 

800-829-1954.

Note. The IRS can’t issue refunds before 

mid-February 2022 for returns that claimed the 

EIC or the additional child tax credit (ACTC). 

This applies to the entire refund, not just the 

portion associated with these credits.

Making a tax payment. Go to IRS.gov/

Payments for information on how to make a 

payment using any of the following options.

• IRS Direct Pay: Pay your individual tax bill 

or estimated tax payment directly from 

your checking or savings account at no 

cost to you.

• Debit or Credit Card: Choose an approved 

payment processor to pay online or by 

phone.

• Electronic Funds Withdrawal: Schedule a 

payment when filing your federal taxes using tax return preparation software or 

through a tax professional.

• Electronic Federal Tax Payment System 

(EFTPS®). EFTPS® is a system for paying federal taxes electronically online, or 

by phone using the EFTPS® Voice Response System. EFTPS® is offered free 

by the U.S. Department of the Treasury. 

You can use EFTPS® to make all your federal tax payments, including income, employment, estimated, and excise taxes. It is 

the best option for businesses. Enrollment 

is required. You can initiate your tax payment from your home or office, 24/7. Businesses and individuals can schedule payments up to 365 days in advance. 

Scheduled payments can be changed or 

canceled up to 2 business days in advance 

of the scheduled payment date.

• Check or Money Order: Mail your payment 

to the address listed on the notice or instructions.

• Cash: You may be able to pay your taxes 

with cash at a participating retail store.

• Same-Day Wire: You may be able to do 

same-day wire from your financial institution. Contact your financial institution for 

availability, cost, and time frames.

Note. The IRS uses the latest encryption 

technology to ensure that the electronic payments you make online, by phone, or from a 

mobile device using the IRS2Go app are safe 

and secure. Paying electronically is quick, easy, 

and faster than mailing in a check or money order.

What if I can’t pay now? Go to IRS.gov/

Payments for more information about your options.

• Apply for an online payment agreement 

(IRS.gov/OPA) to meet your tax obligation 

in monthly installments if you can’t pay 

your taxes in full today. Once you complete 

the online process, you will receive immediate notification of whether your agreement has been approved.

• Use the Offer in Compromise Pre-Qualifier 

to see if you can settle your tax debt for 

less than the full amount you owe. For 

more information on the Offer in Compromise program, go to IRS.gov/OIC. If you 

are a sole proprietor or independent contractor, apply for a payment agreement as 

an individual.

Filing an amended return. You can now file 

Form 1040-X electronically with tax filing software to amend 2019 or 2020 Forms 1040 and 

1040-SR. To do so, you must have e-filed your 

original 2019 or 2020 return. Amended returns 

for all prior years must be mailed. Go to 

IRS.gov/Form1040X for information and updates.

Checking the status of an amended return.

Go to IRS.gov/WMAR to track the status of 

Form 1040-X amended returns.

Note. It can take up to 3 weeks from the 

date you filed your amended return for it to 

show up in our system, and processing it can 

take up to 16 weeks.

Filing past due tax returns. File all tax returns that are due, regardless of whether or not 

you can pay in full. File your past due return the 

same way and to the same location where you 

would file an on-time return. If you have received a notice, make sure to send your past 

due return to the location indicated on the notice you received. If you have a past due return, 

filing your past due return now can help you do 

the following.

• Avoid interest and penalties. File your 

past due return and pay now to limit interest charges and late payment penalties.

• Claim a refund. You risk losing your refund if you don't file your return. If you are 

due a refund for withholding or estimated 

taxes, you must file your return to claim it 

within 3 years of the return due date. The 

same rule applies to a right to claim tax 

credits such as the EIC. We hold income 

tax refunds in cases where our records 

show that one or more income tax returns 

are past due. We hold them until we get 

the past due return or receive an acceptable reason for not filing a past due return.

• Protect social security benefits. If you 

are self-employed and do not file your federal income tax return, any self-employment income you earned will not be reported to the SSA and you will not receive 

credits toward social security retirement or 

disability benefits.

• Avoid issues obtaining loans. Loan approvals may be delayed if you don't file 

your return. Copies of filed tax returns must 

be submitted to financial institutions, mortgage lenders/brokers, etc., whenever you 

want to buy or refinance a home, get a loan 

for a business, or apply for federal aid for 

higher education.

For more information, go to Filing Past Due 

Tax Returns on IRS.gov.

Substitute return. If you fail to file voluntarily, 

we may file a substitute return for you, based on 

income reported to the IRS. This return might 

not give you credit for deductions and exemptions you may be entitled to receive. We will 

send you a Notice of Deficiency CP3219N

(90-day letter) proposing a tax assessment. 

You will have 90 days to file your past due tax 

return or file a petition in Tax Court. If you do 

neither, we will proceed with our proposed assessment. If you have received a Notice of Deficiency CP3219N, you can't request an extension to file. Call us if you think you don't have to 

file.

If any of the income listed is incorrect, you 

may do the following.

• Contact us toll free at 866-681-4271 to let 

us know.

• Contact the payer (source) of the income 

to request a corrected Form W-2 or 1099.

• Attach the corrected forms when you send 

us your completed tax returns.

Chapter 12 How To Get Tax Help Page 53
If the IRS files a substitute return, it is still in 

your best interest to file your own tax return to 

take advantage of any exemptions, credits, and 

deductions you are entitled to receive. The IRS 

will generally adjust your account to reflect the 

correct figures. If you filed a past due return and 

have received a notice, you should send us a 

copy of the past due return to the address contained in the notice. It takes approximately 6 

weeks for us to process an accurately completed past due tax return.

Understanding an IRS notice or letter. Go to 

IRS.gov/Notices to find additional information 

about responding to an IRS notice or letter. We 

will send you a notice or letter if any of the following apply.

• You have a balance due.

• You are due a larger or smaller refund.

• We have a question about your tax return.

• We need to verify your identity.

• We need additional information.

• We changed your return.

• We are notifying you of delays in processing your return.

When you receive correspondence from us, 

read the entire notice or letter carefully. Typically, we only need a response if you don’t 

agree with the information, we need additional 

information, or you have a balance due. If we 

changed your tax return, compare the information we provided in the notice or letter with the 

information in your original return. If we receive 

a return that we suspect is ID theft, we will ask 

you to verify your identity using the web address provided in the letter.

If we ask for a response within a specific 

time frame, you must respond on time to minimize additional interest and penalty charges or 

to preserve your appeal rights if you don’t 

agree. Pay as much as you can, even if you 

can’t pay the full amount you owe. You can pay 

online or apply for an OPA or OIC. See What if I 

can’t pay now, earlier, or visit our Payments 

page, IRS.gov/Payments, for more information.

We provide our contact phone number on 

the top right-hand corner of our correspondence. Be sure you have your tax return and any 

related documentation available when you call. 

You can also write to us at the address in the 

correspondence to explain why you disagree. If 

you write, allow at least 30 days for our response. Keep a copy of all correspondence 

with your tax records.

You can use Schedule LEP, Request for 

Change in Language Preference, to state a 

preference to receive notices, letters, or other 

written communications from the IRS in an alternative language, when these are available. 

Once your Schedule LEP is processed, the IRS 

will determine your translation needs and provide you translations when available. If you 

have a disability requiring notices in an accessible format, see Form 9000.

Collection and enforcement actions. The 

return we prepare for you (our proposed assessment) will lead to a tax bill, which, if unpaid, 

will trigger the collection process. This can include such actions as a levy on your wages or 

bank account or the filing of a notice of federal 

tax lien. If you repeatedly do not file, you could 

be subject to additional enforcement measures, 

such as additional penalties and/or criminal 

prosecution.

Contacting your local IRS office. Keep in 

mind, many questions can be answered on 

IRS.gov without visiting an IRS TAC. Go to 

IRS.gov/LetUsHelp for the topics people ask 

about most. If you still need help, IRS TACs 

provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide 

service by appointment, so you’ll know in advance that you can get the service you need 

without long wait times. Before you visit, go to 

IRS.gov/TACLocator to find the nearest TAC, 

check hours, available services, and appointment options. Or, on the IRS2Go app, under the 

Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

Recognizing and reporting tax scams. The 

Dirty Dozen is compiled annually by the IRS 

and lists a variety of common scams taxpayers 

may encounter any time during the year. Many 

of these con games peak during filing season 

as people prepare their tax returns or hire 

someone to do so. Aggressive and threatening 

phone calls by criminals impersonating IRS 

agents remain near the top of the annual Dirty 

Dozen list of tax scams for the 2021 filing season.

Scammers are able to alter caller identification (caller ID) numbers to make it look like the 

IRS is calling. They use fake names and bogus 

IRS identification or badge numbers. They often 

leave “urgent” callback requests. They prey on 

the most vulnerable people, such as the elderly, 

newly arrived immigrants, and those whose first 

language is not English. Scammers have been 

known to impersonate agents of IRS Criminal 

Investigation as well.

Be cautious when receiving suspicious calls 

at home or at work from sources claiming to be 

from the IRS, other agencies, or outside sources asking for money or credit card information, 

or threatening to have you arrested for not paying. These callers may demand money or may 

say you have a refund due and try to trick you 

into sharing private information. These con artists can sound convincing when they call. They 

may know a lot about you.

Here are five things the scammers often do 

but the IRS will not do. Any one of these five 

things is a tell-tale sign of a scam.

The IRS will never do any of the following.

• Call to demand immediate payment, nor 

will the agency call about taxes owed without first having mailed you a bill.

• Demand that you pay taxes without giving 

you the opportunity to question or appeal 

the amount they say you owe.

• Require you to use a specific payment 

method for your taxes, such as a prepaid 

debit card.

• Ask for credit or debit card numbers over 

the phone.

• Threaten to bring in local police or other 

law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money, do 

not disclose your personal information. You 

should make notes of all information regarding 

the call and/or the caller, for example, any caller 

ID information, then hang up immediately and 

do the following.

• If you know you owe taxes or think you 

might owe, call the IRS toll free at 

800-829-1040. The IRS assistors can help 

you with a payment issue.

• If you know you don’t owe taxes or have no 

reason to believe that you do, report the incident to the Treasury Inspector General 

for Tax Administration (TIGTA) toll free at 

800-366-4484 or at TIGTA.gov.

• If you’ve been targeted by this scam, also 

contact the FTC and use their FTC 

Complaint Assistant at FTC.gov. Please 

add “IRS Telephone Scam” to the comments of your complaint.

Remember, too, the IRS does not use 

email, text messages, or any social media to 

discuss your personal tax issue involving bills or 

refunds. If you get a phone call from someone 

claiming to be from the IRS regarding a refund 

owed to you and asking you for your SSN and 

bank account information, do not give them this 

information. You should make notes of all information regarding the call and/or the caller, for 

example, any caller ID information, and report 

this scam. For more information on reporting tax 

scams, go to IRS.gov and type “scam” in the 

search box. You can verify any potential refunds owed to you by contacting the IRS directly.

For additional information about tax scams, 

go to IRS.gov/newsroom/use-irs-social-mediatools, where you can search “scam” to find all 

the scam-related posts.

The Taxpayer Advocate 

Service (TAS) Is Here To 

Help You

What Is TAS?

TAS is an independent organization within the 

IRS that helps taxpayers and protects taxpayer 

rights. Their job is to ensure that every taxpayer 

is treated fairly and that you know and understand your rights under the Taxpayer Bill of 

Rights.

How Can You Learn About Your 

Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic 

rights that all taxpayers have when dealing with 

the IRS. Go to TaxpayerAdvocate.IRS.gov to 

help you understand what these rights mean to 

you and how they apply. These are your rights. 

Know them. Use them.

You can find a list of your rights and the 

IRS’s obligations to protect them in Pub. 1, Your 

Rights as a Taxpayer. It includes the following.

1. The Right To Be Informed. Taxpayers 

have the right to know what they need to 

do to comply with the tax laws. They are 

entitled to clear explanations of the laws 

and IRS procedures in all tax forms, instructions, publications, notices, and 

correspondence. They have the right to be 

Page 54 Chapter 12 How To Get Tax Help
informed of IRS decisions about their tax 

accounts and to receive clear explanations of the outcomes.

2. The Right to Quality Service. Taxpayers 

have the right to receive prompt, courteous, and professional assistance in their 

dealings with the IRS, to be spoken to in a 

way they can easily understand, to receive 

clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.

3. The Right To Pay No More Than the 

Correct Amount of Tax. Taxpayers have 

the right to pay only the amount of tax legally due, including interest and penalties, 

and to have the IRS apply all tax payments 

properly.

4. The Right To Challenge the IRS’s Position and Be Heard. Taxpayers have the 

right to raise objections and provide additional documentation in response to formal 

IRS actions or proposed actions, to expect 

that the IRS will consider their timely objections and documentation promptly and 

fairly, and to receive a response if the IRS 

does not agree with their position.

5. The Right To Appeal an IRS Decision 

in an Independent Forum. Taxpayers 

are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right 

to receive a written response regarding 

the Office of Appeals’ decision. Taxpayers 

generally have the right to take their cases 

to court.

6. The Right to Finality. Taxpayers have 

the right to know the maximum amount of 

time they have to challenge the IRS’s position as well as the maximum amount of 

time the IRS has to audit a particular tax 

year or collect a tax debt. Taxpayers have 

the right to know when the IRS has finished an audit.

7. The Right to Privacy. Taxpayers have 

the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive 

than necessary, and will respect all due 

process rights, including search and seizure protections, and will provide, where 

applicable, a collection due process hearing.

8. The Right to Confidentiality. Taxpayers 

have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer 

or by law. Taxpayers have the right to expect appropriate action will be taken 

against employees, return preparers, and 

others who wrongfully use or disclose taxpayer return information.

9. The Right To Retain Representation. 

Taxpayers have the right to retain an authorized representative of their choice to 

represent them in their dealings with the 

IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer 

Clinic if they cannot afford representation.

10. The Right to a Fair and Just Tax System. Taxpayers have the right to expect 

the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have 

the right to receive assistance from TAS if 

they are experiencing financial difficulty or 

if the IRS has not resolved their tax issues 

properly and timely through its normal 

channels.

The IRS is working to increase the number 

of Americans who know and understand their 

rights under the tax law. To expand awareness, 

the IRS makes Pub. 1 available in multiple languages on IRS.gov. This important publication 

is available in the following languages.

• English, Your Rights as a Taxpayer, at 

IRS.gov/Pub/irs-pdf/P1.pdf.

• Chinese, Chinese- Your Rights as a 

Taxpayer (Pub 1), at IRS.gov/Chinese.

• Korean, Korean- Your Rights as a 

Taxpayer (Pub 1), at IRS.gov/Korean.

• Russian, Ваши права в качестве 

налогоплательщика (Публикацию No 1), 

at IRS.gov/Russian.

• Spanish, Publicación 1SP, Derechos del 

Contribuyente, at IRS.gov/Spanish.

• Vietnamese, Quyền Hạn của Người Đóng 

Thuế, Your Rights as a Taxpayer (Pub 1), 

at IRS.gov/Vietnamese.

The IRS will include Pub. 1 when sending notices to taxpayers on a range of issues, such as 

an audit or collection matter. All IRS facilities 

will publicly display the rights for taxpayers and 

employees to see.

What Can TAS Do for You?

TAS can help you resolve problems that you 

can’t resolve with the IRS. And their service is 

free. If you qualify for their assistance, you will 

be assigned to one advocate who will work with 

you throughout the process and will do everything possible to resolve your issue. TAS can 

help you if:

• Your problem is causing financial difficulty 

for you, your family, or your business;

• You face (or your business is facing) an 

immediate threat of adverse action; or

• You’ve tried repeatedly to contact the IRS 

but no one has responded, or the IRS 

hasn’t responded by the date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of 

Columbia, and Puerto Rico. Your local advocate’s number is in your local directory and at 

TaxpayerAdvocate.IRS.gov/Contact-Us. You 

can also call them at 877-777-4778.

How Else Does TAS Help 

Taxpayers?

TAS works to resolve large-scale problems that 

affect many taxpayers. If you know of one of 

these broad issues, report it to them at IRS.gov/

SAMS.

TAS also has a website, Tax Reform 

Changes, which shows you how the new tax 

law may change your future tax filings and helps 

you plan for these changes. The information is 

categorized by tax topic in the order of the IRS 

Form 1040 or 1040-SR. Go to TaxChanges.us 

for more information.

TAS for Tax Professionals

TAS can provide a variety of information for tax 

professionals, including tax law updates and 

guidance, TAS programs, and ways to let TAS 

know about systemic problems you’ve seen in 

your practice.

Low Income Taxpayer 

Clinics (LITCs)

LITCs are independent from the IRS. LITCs 

represent individuals whose income is below a 

certain level and need to resolve tax problems 

with the IRS, such as audits, appeals, and tax 

collection disputes. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. 

Services are offered for free or a small fee for 

eligible taxpayers. To find an LITC near you, go 

to TaxpayerAdvocate.IRS.gov/about-us/LowIncome-Taxpayer-Clinics-LITC or see IRS Pub. 

4134, Low Income Taxpayer Clinic List.

Chapter 12 How To Get Tax Help Page 55
To help us develop a more useful index, please let us know if you have ideas for index entries.

See “Comments and Suggestions” in the “Introduction” for the ways you can reach us. Index

A

Advertising 46

Amortization:

Anti-abuse rule 34

Anti-churning rules 33

Atmospheric pollution control 

facilities 35

Corporate organization costs 30

Dispositions of section 197 

intangibles 34

Experimental costs 36

Geological and geophysical 

costs 35

How to deduct 29

Incorrect amount deducted 34

Partnership organization 

costs 30

Pollution control facilities 35

Reforestation costs 34

Reforestation expenses 27

Related person 33

Research costs 36

Section 197 intangibles 

defined 31

Starting a businesscosts 29

Start-up costs 30

Anticipated liabilities 46

Assistance (See Tax help)

At-risk limits 6

Attorney fees 48

Authorized IRS e-file 

providers 51

Awards 9

A-Z Index for Business 50

B

Bad debts:

Defined 41

How to treat 42

Recovery 43

Types of 42

When worthless 42

Bonuses:

Employee 9

Royalties 40

Bribes 46

Business:

Assets 4

Books and records 32

Meal expenses 45

Use of car 5, 47

Use of home 5

Business Services Online 50

C

Campaign contribution 49

Capital expenses 3, 5

Capitalization of interest 16

Car allowance 45

Car and truck expenses 47

Carrying charges 25

Charitable contributions 47

Checking amended return 

status 53

Choosing a tax return 

preparer 51

Circulation costs, newspapers 

and periodicals 27

Claim a refund 53

Club dues 47

Collection and enforcement 

actions 54

Commitment fees 16

Compensation in excess of $1 

million 8

Computer software 33

Constant-yield method, OID 15

Contested liability 6

Contributions:

Charitable 47

Political 49

Copyrights 32

Coronavirus (COVID-19) related 

employment tax credits 2, 7

Cost depletion 37

Cost of getting lease 12, 31

Cost of goods sold 3

Cost recovery 3

Covenant not to compete 32

Credit card convenience fees 47

D

Debt-financed distribution 15

Definitions:

Business bad debt 41

Necessary expense 3

Ordinary expense 3

Section 197 intangibles 31

De minimis OID 15

Demolition expenses 47

Depletion:

Mineral property 37

Oil and gas wells 38

Timber 41

Who can claim 36

Depreciation (See Cost recovery)

Development costs, miners 27

Direct Pay 53

Dirty Dozen 54

Disabled, improvements for 28

Drilling and development 

costs 26

Dues, membership 47

E

Economic interest 36

Economic performance 6

Education expenses 9, 47

e-File Form 940, 941, or 944 for 

Small Businesses 50

Elderly, improvements for 28

Electronic Federal Tax Payment 

System (EFTPS®) 53

Employee benefit programs 10

Employer ID Numbers (EINs) 50

Employment taxes 20

Employment Taxes 50

Additional Medicare Tax 20

Self-employment tax:

Additional Medicare Tax 20

Unemployment fund 20

e-News 50

Entertainment 45

Entertainment expenses 10

Experimentation costs 25, 36

Exploration costs 26

F

Federal Relay Service 50

Fees:

Commitment 16

Legal and professional 48

Regulatory 48

Tax return preparation 48

Filing past due tax returns 53

Fines 48

Forgone interest 17

Form:

3115 34

4562 29

5213 7

8826 28, 29

T 41

Franchise 32, 47

Fringe benefits 9

G

Gas wells 39

Geological and geophysical 

costs:

Development, oil and gas 35

Exploration, oil and gas 35

Geothermal wells 26, 40

Gifts, nominal value 9

Going into business 3, 29

Goodwill 32

Gross income, not-for-profit 

activity 7

H

Health coverage tax credit 

(HCTC) 24

Health plan 24

Heating equipment 5

Home, business use of 5

I

Identity theft 52

Identity theft issues 52

Impairment-related expenses 47

Improvements 4

By lessee 13

For disabled and elderly 28

Income Taxes 19

Accrual of contested income 

taxes 19

Federal income taxes 19

Foreign income taxes 20

State and local income taxes 19

Incorrect amount of amortization 

deducted 34

Independent Contractor 

(Self-Employed) or 

Employee? 50

Information Return Filing 

Requirements 50

Insurance 24

Capitalized premiums 24

Deductible premiums 21

Nondeductible premiums 24

Intangible drilling costs 26

Intangibles, amortization 31

Interest:

Allocation of 13

Below-market 17

Business expense for 13

Capitalized 16

Carrying charge 25

Deductible 15

Forgone 17

Life insurance policies 16

Limitation 15

Not deductible 16

Refunds of 17

When to deduct 17

Internet-related expenses 47

Interview expenses 48

IRS social media 51

IRS Tax Professional 

Partners 51

IRS Video Portal 50

K

Key person 16

Kickbacks 46

L

Leases:

Canceling 11

Cost of getting 12, 31

Improvements by lessee 13

Leveraged 11

Mineral 40

Oil and gas 40

Sales distinguished 11

Taxes on 12

Legal and professional fees 48

Letter 5071C 52

Licenses 32, 48

Life insurance coverage 10

Limit on deductions 7

Line of credit 14

Loans:

Below-market 17

Discounted 17

Loans or advances 10

Lobbying expenses 48

Long-term care insurance 21

Losses 6, 7

At-risk limits 6

Net operating 6

Passive activities 6

Low Income Taxpayer Clinics 

(LITCs) 55

M

Machinery parts 5

Making a tax payment 53

Meals 44

Page 56 Publication 535 (2021)
Meals and entertainment 45

Meals and lodging 9

Methods of accounting 6

Mining:

Depletion 40

Development costs 27

Exploration costs 26

More than one health plan and 

business 24

Mortgage 15

Moving expenses, machinery 48

N

Natural gas 39

Nonqualifying intangibles 32

Not-for-profit activities 7

Not-for-profit activity, gross 

income 7

Notice of Deficiency 

CP3219N 53

O

Office in home 5

Oil and gas wells:

Depletion 38

Drilling costs 26

Partnerships 39

S corporations 39

Online payment agreement 53

Online Tools & Educational 

Products 50

Optional safe harbor method 5

Optional write-off method:

Circulation costs 36

Experimental costs 36

Intangible drilling and 

development costs 36

Mining exploration and 

development costs 36

Research costs 36

Organizational costs 27

Organization costs:

Corporate 30

Partnership 30

Original issue discount 15

Other coverage 24

Other Taxes 20

Excise taxes 20

Franchise taxes 20

Fuel taxes 20

Occupational taxes 20

Personal property taxes 20

Sales taxes 20

Outplacement services 48

P

Passive activities 6

Payments in kind 6

Penalties 15

Deductible 48

Nondeductible 48

Prepayment 15

Percentage depletion 37

Per diem and car allowances 45

Political contributions 49

Pollution control facilities 35

Prepaid expense 6

Extends useful life 25

Interest 17

Rent 11

Prepayment penalty 15

Presumption of profit 7

Publication 1, Your Rights as a 

Taxpayer 54

Publications (See Tax help)

Q

Qualified long-term care 

insurance:

Benefits received 23

Chronically ill individual 23

Qualified long-term care 

insurance contract 22

Qualified long-term care 

services 22

R

Real Estate Taxes 19

Assessments Local 19

Charges for services 19

Electing to ratably accrue to a 

definite period 19

Form 3115 19

Making the election to ratably 

accrue the taxes 19

Purchase or sale of real 

estate 19

Separate elections to ratably 

accrue for each separate 

trade or business and for 

nonbusiness activities 19

Recapture:

Exploration expenses 26

Timber property 35

Recordkeeping 39

Recovery of amount deducted 6

Refiners who cannot claim 

percentage depletion 38

Reforestation costs 27, 34

Regulatory fees 48

Reimbursements 44

Business expenses 11

Mileage 45

Nonaccountable plan 46

Per diem 45

Related persons:

Anti-churning rules 33

Coal or iron ore 40

Payments to 6, 17

Refiners 38

Unreasonable rent 11

Reminder:

Premium tax credit 20

Removal 28

Rent expense, capitalizing 13

Repairs 49

Repayments (claim of right) 49

Reporting abusive tax 

preparers 52

Research costs 25, 36

S

Scammers 54

Section 179 expense 

deduction (See Cost recovery )

Self-employed health insurance 

deduction 21

Self-Employed Health Insurance 

Deduction Worksheet 23

Self-Employed Individuals Tax 

Center 50

Self-insurance, reserve for 24

Sick pay 11

Small Business Events 50

Small Business Forms and 

Publications 50

Standard meal allowance 45

Standard mileage 

rate (See Business use of your 

car)

Standby charges 16

Start-up costs 27, 30

Substitute return 53

Supplies and materials 49

T

Taxes 12, 18

Carrying charge 25

Leased property 12

When To Deduct Taxes 18

Tax help 50

Tax information in other 

languages 51

Taxpayer Advocate Service 

(TAS) 54

Taxpayer Assistance Center 

(TAC) locator 54

Tax preparation 50

Tax preparation fees 48

Tax questions 50

Tax scams 54

Telephone 50

Timber 34, 41

Tools 5

Trademark, trade name 32, 47

transcript or copy of a return 52

Transportation (commuting) 

benefits 10

Travel 44

U

Understanding an IRS notice or 

letter 54

Unpaid expenses, related 

person 17

Utilities 50

V

Vacation pay 11

W

Wages:

Property 10

Tests for deducting pay 8

Welfare benefit funds 10

When To Deduct Premiums 24

When To Deduct Taxes:

Carrying charges 19

Limit on accrual of taxes 18

Refunds of taxes 19

Uniform capitalization rules 18

Publication 535 (2021) Page 57