Title: Publication 535 (2020), Business Expenses | Internal Revenue Service
Headings: Publication 535 (2020), Business Expenses
Publication 535 (2020), Business Expenses
Publication 535 - Introductory Material
Introduction
Future Developments
What's New for 2020
Coronavirus (COVID-19) related employment tax credits.
What's New for 2021
Reminders
1. Deducting Business Expenses
Reminder
Publication
Form (and Instructions)
What Can I Deduct?
Cost of Goods Sold
Capital Expenses
Cost recovery.
Going Into Business
If you go into business.
If your attempt to go into business is unsuccessful.
Business Assets
De Minimis Safe Harbor for Tangible Property
You have an applicable financial statement.
You do not have an applicable financial statement.
How to make the de minimis safe harbor election.
Improvements
Routine maintenance safe harbor.
Costs incurred during an improvement.
Election to capitalize repair and maintenance costs.
Capital Versus Deductible Expenses
Motor vehicles.
Roads and driveways.
Tools.
Machinery parts.
Heating equipment.
Deduction for qualified business income.
Personal Versus Business Expenses
Business use of your home.
Optional safe harbor method.
Business use of your car.
How Much Can I Deduct?
Recovery of amount deducted (tax benefit rule).
Payments in kind.
Limits on losses.
Not-for-profit limits.
At-risk limits.
Passive activities.
Net operating loss (NOL).
When Can I Deduct an Expense?
Cash method.
Accrual method.
Economic performance.
Prepayment.
Contested liability.
Not-for-Profit Activities
Presumption of profit.
Using the presumption later.
Gross Income
Limit on Deductions
Disaster tax relief.
Partnerships and S corporations.
More than one activity.
2. Employees' Pay
What's New
Coronavirus (COVID-19) related employment tax credits.
Publication
Form (and Instructions)
Tests for Deducting Pay
Test 1—Reasonableness
Factors to consider.
Compensation in excess of $1 million.
Test 2—For Services Performed
Employee-shareholder salaries.
Kinds of Pay
Awards
Achievement awards.
Tangible personal property.
Length-of-service award.
Safety achievement award.
Deduction limit.
Bonuses
Gifts of nominal value.
Education Expenses
Fringe Benefits
Meals and lodging.
Deduction limit on meals.
Food and beverage expense incurred together with entertainment expenses.
Transportation (commuting) benefits.
Employee benefit programs.
Life insurance coverage.
Welfare benefit funds.
Loans or Advances
Below-market interest rate loans.
Property
Restricted property.
Reimbursements for Business Expenses
Sick and Vacation Pay
Sick pay.
Vacation pay.
3. Rent Expense
Reminder
Publication
Rent
Unreasonable rent.
Rent on your home.
Rent paid in advance.
Canceling a lease.
Lease or purchase.
Conditional sales contract.
Leveraged leases.
Leveraged leases of limited-use property.
Leases over $250,000.
Taxes on Leased Property
Cash method.
Accrual method.
Cost of Getting a Lease
Option to renew.
Cost of a modification agreement.
Commissions, bonuses, and fees.
Loss on merchandise and fixtures.
Improvements by Lessee
Assignment of a lease.
Capitalizing Rent Expenses
Uniform capitalization rules.
Producing property.
More information.
4. Interest
Publication
Form (and Instructions)
Allocation of Interest
Secured loan.
Allocation period.
Proceeds not disbursed to borrower.
Proceeds deposited in borrower's account.
Order of funds spent.
Payments from checking accounts.
Amounts paid within 30 days.
Optional method for determining date of reallocation.
Interest on a segregated account.
Loan repayment.
Line of credit (continuous borrowings).
Loan refinancing.
Debt-financed distribution.
How to report.
Interest Expense Limitation
Interest You Can Deduct
Partial liability.
Mortgage.
Statement.
Expenses paid to obtain a mortgage.
Prepayment penalty.
Interest on employment tax deficiency.
Original issue discount (OID).
De minimis OID.
Constant-yield method.
Loan or mortgage ends.
Points.
Partial payments on a nontax debt.
Installment purchase.
Interest You Cannot Deduct
Interest paid with funds borrowed from original lender.
Capitalized interest.
Commitment fees or standby charges.
Interest on income tax.
Penalties.
Interest on loans with respect to life insurance policies.
Who is a key person?
Exceptions for pre-June 1997 contracts.
Interest allocated to unborrowed policy cash value.
Capitalization of Interest
Property you produce.
Carrying charges.
Capitalized interest.
Partnerships and S corporations.
Additional information.
When To Deduct Interest
Cash method.
Prepaid interest.
Discounted loan.
Refunds of interest.
Accrual method.
Prepaid interest.
Discounted loan.
Tax deficiency.
Below-Market Loans
Forgone interest.
Loans subject to the rules.
Treatment of gift and demand loans.
Limit on forgone interest for gift loans of $100,000 or less.
Treatment of term loans.
Exceptions for loans of $10,000 or less.
Exceptions for loans without significant tax effect.
Exception for loans to qualified continuing care facilities.
Sale or exchange of property.
More information.
5. Taxes
Publication
Form (and Instructions)
When To Deduct Taxes
Limit on accrual of taxes.
Uniform capitalization rules.
Carrying charges.
Refunds of taxes.
Real Estate Taxes
Taxes for local benefits.
Charges for services.
Purchase or sale of real estate.
Electing to ratably accrue.
Separate elections.
Making the election.
Form 3115.
Income Taxes
Federal income taxes.
State and local income taxes.
Accrual of contested income taxes.
Foreign income taxes.
Accrual of foreign income taxes.
Employment Taxes
Additional Medicare Tax.
Unemployment fund taxes.
Self-employment tax.
Other Taxes
Excise taxes.
Franchise taxes.
Fuel taxes.
Occupational taxes.
Personal property tax.
Sales tax.
6. Insurance
Reminder
Publication
Form (and Instructions)
Deductible Premiums
Self-Employed Health Insurance Deduction
Qualified long-term care insurance.
Qualified long-term care insurance contract.
Qualified long-term care services.
Worksheet 6-A. Self-Employed Health Insurance Deduction Worksheet
Chronically ill individual.
Benefits received.
Other coverage.
Effect on itemized deductions.
Effect on self-employment tax.
How to figure the deduction.
Health coverage tax credit.
More than one health plan and business.
Nondeductible Premiums
Capitalized Premiums
Uniform capitalization rules.
More information.
When To Deduct Premiums
Cash method.
Accrual method.
Prepayment.
Dividends received.
7. Costs You Can Deduct or Capitalize
What’s New
Publication
Form (and Instructions)
Carrying Charges
How to make the election.
Research and Experimental Costs
Research and experimental costs defined.
Product.
Costs not included.
When and how to elect.
Research credit.
Payroll tax credit.
Intangible Drilling Costs
Amounts paid to contractor that must be capitalized.
How to make the election.
Energy credit for costs of geothermal wells.
Nonproductive well.
Costs incurred outside the United States.
Exploration Costs
How to make the election.
Partnerships and S corporations.
Reduced corporate deductions for exploration costs.
Recapture of exploration expenses.
Foreign exploration costs.
Development Costs
How to make the election.
Foreign development costs.
Reduced corporate deductions for development costs.
Circulation Costs
Other treatment of circulation costs.
How to make the election.
Business Start-up and Organizational Costs
How to make the election.
Reforestation Costs
How to make the election.
Recapture.
Retired Asset Removal Costs
Barrier Removal Costs
Deduction limit.
Partners and partnerships.
Qualification standards.
Other barrier removals.
How to make the election.
Disabled access credit.
Film, Television, and Live Theatrical Production Costs
Note.
Repair and Maintenance Costs
How to make the election.
8. Amortization
Publication
Form (and Instructions)
How To Deduct Amortization
Starting a Business
Note.
Business Start-up Costs
Qualifying costs.
Nonqualifying costs.
Purchasing an active trade or business.
Disposition of business.
Costs of Organizing a Corporation
Qualifying costs.
Nonqualifying costs.
Costs of Organizing a Partnership
Qualifying costs.
Nonqualifying costs.
Liquidation of partnership.
How To Amortize
Cash method partnership.
How To Make the Election
Note.
Start-up costs election statement.
Filing the statement early.
Revised statement.
Organizational costs election statement.
Partnerships.
Getting a Lease
How to amortize.
Section 197 Intangibles
Tax-exempt use property subject to a lease.
Cost attributable to other property.
Section 197 Intangibles Defined
Goodwill.
Going concern value.
Workforce in place, etc.
Business books and records, etc.
Patents, copyrights, etc.
Customer-based intangible.
Supplier-based intangible.
Government-granted license, permit, etc.
Covenant not to compete.
Franchise, trademark, or trade name.
Professional sports franchise.
Contract for the use of, or a term interest in, a section 197 intangible.
Assets That Aren't Section 197 Intangibles
Computer software.
Computer software defined.
Rights of fixed duration or amount.
Safe Harbor for Creative Property Costs
Anti-Churning Rules
Exceptions.
When to determine relationship.
Ownership of stock.
Rule 1.
Rule 2.
Rule 3.
Rule 4.
Gain-recognition exception.
Notification.
Anti-abuse rule.
More information.
Incorrect Amount of Amortization Deducted
Amended Return
When to file.
Changing Your Accounting Method
Automatic approval.
Disposition of Section 197 Intangibles
Nondeductible loss.
Covenant not to compete.
Nonrecognition transfers.
Reforestation Costs
Qualifying costs.
Qualified timber property.
Amortization period.
Life tenant and remainderman.
Recapture.
How to make the election.
Revoking the election.
Geological and Geophysical Costs
Pollution Control Facilities
New identifiable treatment facility.
Atmospheric pollution control facilities.
Basis reduction for corporations.
More information.
Research and Experimental Costs
Optional write-off method.
Costs you can amortize.
How to make the election.
Optional Write-off of Certain Tax Preferences
How to make the election.
Revoking the election.
9. Depletion
Publication
Form (and Instructions)
Who Can Claim Depletion?
Basis adjustment for depletion.
Mineral Property
Cost Depletion
Basis for depletion.
Adjusted basis.
Total recoverable units.
Number of units sold during the tax year.
Figuring the cost depletion deduction.
Elective safe harbor for owners of oil and gas property.
Percentage Depletion
Gross income.
Taxable income limit.
Oil and Gas Wells
Independent Producers and Royalty Owners
Refiners who cannot claim percentage depletion.
Retailers who cannot claim percentage depletion.
Transferees who cannot claim percentage depletion.
Figuring percentage depletion.
Average daily production.
Partial interest.
Depletable oil or natural gas quantity.
Business entities and family members.
Controlled group of corporations.
Gross income from the property.
Average daily production exceeds depletable quantities.
Taxable income limit.
Partnerships and S Corporations
Partner's or shareholder's adjusted basis.
Reporting the deduction.
Natural Gas Wells
Regulated natural gas.
Natural gas sold under a fixed contract.
Natural gas from geopressured brine.
Mines and Geothermal Deposits
Mines, oil and gas wells, and other natural deposits.
Corporate deduction for iron ore and coal.
Gross income from the property.
Excise tax.
Extraction.
Treatment processes.
Transportation of more than 50 miles.
Disposal of coal or iron ore.
Geothermal deposits.
Lessor's Gross Income
Bonuses and advanced royalties.
Figuring cost depletion.
Figuring percentage depletion.
Ending the lease.
Delay rentals.
Timber
Figuring cost depletion.
Timber units.
Depletion unit.
When to claim depletion.
Electing to treat the cutting of timber as a sale or exchange.
Form T (Timber).
10. Business Bad Debts
Publication
Form (and Instructions)
Definition of Business Bad Debt
Credit sales.
Accrual method.
Cash method.
Debts from a former business.
Debt acquired from a decedent.
Liquidation.
Types of Business Bad Debts
Loans to clients and suppliers.
Debts owed by political parties.
Loan or capital contribution.
Debts of an insolvent partner.
Business loan guarantee.
Deductible in the year paid.
Rights against a borrower.
Joint debtor.
Sale of mortgaged property.
When a Debt Becomes Worthless
Property received for debt.
How To Claim a Business Bad Debt
Specific Charge-off Method
Partly worthless debts.
Significantly modified debt.
Deduction disallowed.
Totally worthless debts.
Filing a claim for refund.
Table 10-1. Forms Used To File a Claim
Nonaccrual-Experience Method
Recovery of a Bad Debt
NOL carryover.
11. Other Expenses
What's New
Reminders
Publication
Form (and Instructions)
Reimbursement of Travel and Non-Entertainment Related Meals
Reimbursements
Accountable Plans
Adequate accounting.
Excess reimbursement or allowance.
Reasonable period of time.
How to deduct.
Table 11-1. Reporting Reimbursements
Per Diem and Car Allowances
Federal rate.
Car allowance.
Per diem allowance.
Regular federal per diem rate.
Standard meal allowance.
Per diem rates online.
High-low method.
Reporting per diem and car allowances.
Allowance less than or equal to the federal rate.
Allowance more than the federal rate.
Meals
Application of the 50% limit.
Amount subject to 50% limit.
Meal expenses when subject to "hours of service" limits.
De minimis (minimal) fringe benefit.
Company cafeteria or executive dining room.
Employee activities.
Meals or entertainment treated as compensation.
Sales of meals or entertainment.
Providing meals or entertainment to general public to promote goodwill.
Director, stockholder, or employee meetings.
Trade association meetings.
Nonaccountable Plans
Miscellaneous Expenses
Advertising expenses.
Anticipated liabilities.
Bribes and kickbacks.
Meaning of "generally enforced."
Kickbacks.
Form 1099-MISC.
Car and truck expenses.
Charitable contributions.
Club dues and membership fees.
Exception.
Credit card convenience fees.
Damages recovered.
Demolition expenses or losses.
Education expenses.
Franchise, trademark, trade name.
Interview expense allowances.
Legal and professional fees.
Certain payments made in sexual harassment or sexual abuse cases.
Tax preparation fees.
Licenses and regulatory fees.
Lobbying expenses.
Covered executive branch official.
Exceptions to denial of deduction.
Moving machinery.
Outplacement services.
Penalties and fines.
Political contributions.
Indirect political contributions.
Repairs.
Repayments.
Type of deduction.
Repayment—$3,000 or less.
Repayment—Over $3,000.
Method 1.
Method 2.
Repayment does not apply.
Year of deduction (or credit).
Supplies and materials.
Utilities.
Telephone.
12. How To Get Tax Help
Coronavirus.
Preparing and filing your tax return.
Free options for tax preparation.
Employers can register to use Business Services Online.
Tax reform.
Tax reform provisions that affect businesses.
Small Business and Self-Employed (SB/SE) tax center.
A–Z index for business.
Requirements for filing.
IRS social media.
Watching IRS videos.
Online tax information in other languages.
Free interpreter service.
Getting tax forms and publications.
Access your online account (individual taxpayers only).
Using direct deposit.
Need someone to prepare your tax return?
Using online tools to help prepare your return.
Getting a transcript or copy of a return.
Resolving tax-related identity theft issues.
Checking on the status of your refund.
Making a tax payment.
What if I can’t pay now?
Filing an amended return.
Checking the status of an amended return.
Filing past due tax returns.
Substitute return.
Understanding an IRS notice or letter.
Collection and enforcement actions.
Contacting your local IRS office.
Recognizing and reporting tax scams.
The Taxpayer Advocate Service (TAS) Is Here To Help You
What Is TAS?
How Can You Learn About Your Taxpayer Rights?
What Can TAS Do For You?
How Can You Reach TAS?
How Else Does TAS Help Taxpayers?
TAS for Tax Professionals
Low Income Taxpayer Clinics (LITCs)
Publication 535 - Additional Material
Index
A
B
C
D
E
F
G
H
I
K
L
M
N
O
Optional safe harbor method, Optional safe harbor method.
P
Q
R
S
T
U
V
W

Content: Commissions, bonuses, and fees. Loss on merchandise and fixtures. Improvements by Lessee
Assignment of a lease. Capitalizing Rent Expenses
Uniform capitalization rules. Producing property. More information. Interest
Introduction
Topics - This chapter discusses: Useful Items - You may want to see: Allocation of Interest
Secured loan. Allocation period.