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Part 8 Publication 334 (2009), Guide Small Bussine
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 Posted 12:42 PM Feb. 28, 2010 Travel Expenses Cont for part 7 Car or truck. You can deduct the costs of operating and maintaining your vehicle when traveling away from home on business. You can deduct actual expenses or the standard mileage rate (discussed earlier under Car and Truck Expenses), as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.
Meals and lodging. You can deduct the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. In most cases, you can deduct only 50% of your meal expenses.
Telephone. You can deduct the cost of business calls while on your business trip, including business communication by fax machine or other communication devices.
Entertainment expenses. You may be able to deduct business-related entertainment expenses for entertaining a client, customer, or employee. In most cases, you can deduct only 50% of these expenses.
The following are examples of entertainment expenses.
Reimbursing your employees for expenses. You generally can deduct the amount you reimburse your employees for travel and entertainment expenses. The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. For details, see chapter 11 in Publication 535. That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement.
To deduct expenses related to the part of your home used for business, you must meet specific requirements. Even then, your deduction may be limited. To qualify to claim expenses for business use of your home, you must meet the following tests.
Exclusive use. To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.
You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.
Exceptions to exclusive use. You do not have to meet the exclusive use test if you use part of your home in either of the following ways.
Regular use. To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose.
Principal place of business. You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. To determine your principal place of business, you must consider all the facts and circumstances.
Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements.
Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors.
If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. However, for other ways to qualify to deduct home office expenses, see Publication 587.
Deduction limit. If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. If your gross income from the business use is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited.
Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), allocable to the business is limited to the gross income from the business use of your home minus the sum of the following.
Use Form 8829, Expenses for Business Use of Your Home, to figure your deduction.
You may also be able to deduct the following expenses. See Publication 535 to find out whether you can deduct them.
You usually cannot deduct the following as business expenses. For more information, see Publication 535.
Table of Contents After figuring your business income and expenses, you are ready to figure the net profit or net loss from your business. You do this by subtracting business expenses from business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct it from gross income on page 1 of Form 1040. But in some situations your loss is limited. This chapter briefly explains two of those situations. Other situations that may limit your loss are explained in the Instructions for Schedule C, line G and line 32. If you have more than one business, you must figure your net profit or loss for each business on a separate Schedule C.
If your deductions for the year are more than your income for the year (line 41 of your Form 1040 is a negative number), you may have a net operating loss (NOL). You can use an NOL by deducting it from your income in another year or years. Examples of typical losses that may produce an NOL include, but are not limited to, losses incurred from the following.
A loss from operating a business is the most common reason for an NOL. For details about NOLs, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. It explains how to figure an NOL, when to use it, how to claim an NOL deduction, and how to figure an NOL carryover. If you do not carry on your business to make a profit, there is a limit on the deductions you can take. You cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, come under this limit. For details about not-for-profit activities, see chapter 1 in Publication 535, Business Expenses. That chapter explains how to determine whether your activity is carried on to make a profit and how to figure the amount of loss you can deduct. Table of Contents
The SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits.
Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Use Schedule SE to figure net earnings from self-employment. Sole proprietor or independent contractor. If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ (Form 1040) to figure your earnings subject to SE tax.
SE tax rate. The SE tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).
Maximum earnings subject to self-employment tax. Only the first $106,800 of your combined wages, tips, and net earnings in 2009 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax.
All of your combined wages, tips, and net earnings in 2009 are subject to any combination of the 2.9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $106,800, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings.
Aliens. Generally, resident aliens must pay self-employment tax under the same rules that apply to U.S. citizens. Nonresident aliens are not subject to SE tax. However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa, are subject to self-employment tax, as they are considered U.S. residents for self-employment tax purposes. For more information on aliens, see Publication 519, U.S. Tax Guide for Aliens.
Child employed by parent. You are not subject to SE tax if you are under age 18 and you are working for your father or mother.
Church employee. If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization. For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
Fishing crew member. If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply.
Notary public. Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax (see the Instructions for Schedule SE (Form 1040)).
State or local government employee. You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement.
Foreign government or international organization employee. You are subject to SE tax if both the following conditions are true.
U.S. citizen or resident alien residing abroad. If you are a self-employed U.S. citizen or resident alien living outside the United States, in most cases you must pay SE tax. Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion.
Exception. The United States has social security agreements with many countries to eliminate double taxation under two social security systems. Under these agreements, you generally must only pay social security and Medicare taxes to the country in which you live. The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country.
For more information, see the Instructions for Schedule SE (Form 1040).
If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. A loss from one business reduces your profit from another business. If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business. Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive. There are three ways to figure your net earnings from self-employment.
You must use the regular method unless you are eligible to use one or both of the optional methods. Why use an optional method? You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies.
Effects of using an optional method. Using an optional method could increase your SE tax. Paying more SE tax could result in your getting higher benefits when you retire.
If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method. The optional methods may be used only to figure your SE tax. To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax.
Multiply your total earnings subject to SE tax by 92.35% (.9235) to get your net earnings under the regular method. See Short Schedule SE, line 4, or Long Schedule SE, line 4a. Net earnings figured using the regular method are also called actual net earnings. Use the nonfarm optional method only for earnings that do not come from farming. You may use this method if you meet all the following tests.
Net nonfarm profits. Net nonfarm profit generally is the total of the amounts from:
However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss.
If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method.
Table 10-1. Figuring Nonfarm Net Earnings
Actual net earnings. Your actual net earnings are 92.35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92.35% (.9235) to get actual net earnings). Actual net earnings are equivalent to net earnings figured using the regular method.
Optional net earnings less than actual net earnings. You cannot use this method to report an amount less than your actual net earnings from self-employment.
Gross nonfarm income of $6,540 or less. The following examples illustrate how to figure net earnings when gross nonfarm income is $6,540 or less.
Example 1. Net nonfarm profit less than $4,721 and less than 72.189% of gross nonfarm income. Ann Green runs a craft business. Her actual net earnings from self-employment were $800 in 2007 and $900 in 2008. She meets the test for being self-employed on a regular basis. She has used the nonfarm optional method less than 5 years. Her gross income and net profit in 2009 are as follows:
Ann's actual net earnings for 2009 are $1,108 ($1,200 × .9235). Because her net profit is less than $4,721 and less than 72.189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 (2/3 × $5,400). Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2009. Example 2. Net nonfarm profit less than $4,721 but not less than 72.189% of gross nonfarm income. Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. She must use the regular method to figure her net earnings. She cannot use the nonfarm optional method because her net profit is not less than 72.189% of her gross income. Example 3. Net loss from a nonfarm business. Assume that in Example 1 Ann has a net loss of $700. She can use the nonfarm optional method and report $3,600 (2/3 × $5,400) as her net earnings. Example 4. Nonfarm net earnings less than $400. Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400. Gross nonfarm income of more than $6,540. The following examples illustrate how to figure net earnings when gross nonfarm income is more than $6,540.
Example 1. Net nonfarm profit less than $4,721 and less than 72.189% of gross nonfarm income. John White runs an appliance repair shop. His actual net earnings from self-employment were $10,500 in 2007 and $9,500 in 2008. He meets the test for being self-employed on a regular basis. He has used the nonfarm optional method less than 5 years. His gross income and net profit in 2009 are as follows:
John's actual net earnings for 2009 are $1,108 ($1,200 × .9235). Because his net profit is less than $4,721 and less than 72.189% of his gross income, he can use the nonfarm optional method to figure net earnings of $4,360. Because these net earnings are higher than his actual net earnings, he can report net earnings of $4,360 for 2009. Use the farm optional method only for earnings from a farming business. See Publication 225 for information about this method. If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment. To figure your net earnings using both optional methods, you must:
You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. If you use both optional methods, you can report no more than $4,360 as your combined net earnings from self-employment. Example. You are a self-employed farmer. You also operate a retail grocery store. Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2.
Table 10-2. Example—Farm and Nonfarm Earnings
Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2.
Note. Actual net earnings is the same as net earnings figured using the regular method. Table 10-3. Example—Net Earnings
Use Schedule SE (Form 1040) to figure and report your SE tax. Then enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. However, certain taxpayers must use Section B—Long Schedule SE. If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return.
Joint return. Even if you file a joint return, you cannot file a joint Schedule SE. This is true whether one spouse or both spouses have earnings subject to SE tax. If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. Attach both schedules to the joint return.
More than one business. If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. A loss from one business will reduce your profit from another business. File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business.
Example. You are the sole proprietor of two separate businesses. You operate a restaurant that made a net profit of $25,000. You also have a cabinetmaking business that had a net loss of $500. You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. You file Schedule SE showing total earnings subject to SE tax of $24,500. |
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