Page 106 - Small Business Taxes

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
more information, see Lobbying expenses, are deductible on your income tax return in re- Damages recovered. Special rules apply to
later. gards to information reporting. See Form compensation you receive for damages sus-
You can usually deduct as a business ex- 1099-MISC for more information. tained as a result of patent infringement, breach
pense the cost of institutional or goodwill adver- of contract or fiduciary duty, or antitrust viola-
tising to keep your name before the public if it Car and truck expenses. The costs of operat- tions. You must include this compensation in
relates to business you reasonably expect to ing a car, truck, or other vehicle in your busi- your income. However, you may be able to take
gain in the future. For example, the cost of ad- ness may be deductible. For more information a special deduction. The deduction applies only
vertising that encourages people to contribute on how to figure your deduction, see Pub. 463. to amounts recovered for actual economic in-
to the Red Cross, to buy U.S. savings bonds, or jury, not any additional amount. The deduction
to participate in similar causes is usually deduc- Charitable contributions. Cash payments to is the smaller of the following.
tible. an organization, charitable or otherwise, may • The amount you received or accrued for
be deductible as business expenses if the pay- damages in the tax year reduced by the
Anticipated liabilities. Anticipated liabilities or ments aren’t charitable contributions or gifts amount you paid or incurred in the year to
reserves for anticipated liabilities aren’t deducti- and are directly related to your business. If the recover that amount.
ble. For example, assume you sold 1-year TV payments are charitable contributions or gifts, • Your losses from the injury you haven’t de-
service contracts this year totaling $50,000. you can’t deduct them as business expenses. ducted.
From experience, you know you will have ex- However, corporations (other than S corpora-
penses of about $15,000 in the coming year for tions) can deduct charitable contributions on Demolition expenses or losses. Amounts
these contracts. You can’t deduct any of the their income tax returns, subject to limitations. paid or incurred to demolish a structure aren’t
$15,000 this year by charging expenses to a re- See the Instructions for Form 1120 for more in- deductible. These amounts are added to the
serve or liability account. You can deduct your formation. Sole proprietors, partners in a part- basis of the land where the demolished struc-
expenses only when you actually pay or accrue nership, or shareholders in an S corporation ture was located. Any loss for the remaining un-
them, depending on your accounting method. may be able to deduct charitable contributions depreciated basis of a demolished structure
made by their businesses on Schedule A (Form wouldn’t be recognized until the property is dis-
Bribes and kickbacks. Engaging in the pay- 1040). posed of.
ment of bribes or kickbacks is a serious criminal
matter. Such activity could result in criminal Example. You paid $15 to a local church Education expenses. Ordinary and neces-
prosecution. Any payments that appear to have for a half-page ad in a program for a concert it is sary expenses paid for the cost of the education
been made, either directly or indirectly, to an of- sponsoring. The purpose of the ad was to en- and training of your employees are deductible.
ficial or employee of any government or an courage readers to buy your products. Your See Education Expenses in chapter 2.
agency or instrumentality of any government payment isn’t a charitable contribution. You can You can also deduct the cost of your own
aren’t deductible for tax purposes and are in vi- deduct it as an advertising expense. education (including certain related travel) rela-
olation of the law. ted to your trade or business. You must be able
Payments paid directly or indirectly to a per- Example. You made a $100,000 donation to show the education maintains or improves
son in violation of any federal or state law (but to a committee organized by the local Chamber skills required in your trade or business, or that
only if that state law is generally enforced, de- of Commerce to bring a convention to your city, it is required by law or regulations, for keeping
fined below) that provides for a criminal penalty intended to increase business activity, including your license to practice, status, or job. For ex-
or for the loss of a license or privilege to engage yours. Your payment isn’t a charitable contribu- ample, an attorney can deduct the cost of at-
in a trade or business aren’t allowed as a de- tion. You can deduct it as a business expense. tending Continuing Legal Education (CLE)
duction for tax purposes. See Pub. 526 for a discussion of donated in- classes that are required by the state bar asso-
Meaning of “generally enforced.” A state ventory, including capital gain property. ciation to maintain their license to practice law.
Education expenses you incur to meet the
law is considered generally enforced unless it is minimum requirements of your present trade or
never enforced or enforced only for infamous Club dues and membership fees. Generally, business, or those that qualify you for a new
persons or persons whose violations are extra- you can’t deduct amounts paid or incurred for trade or business, aren’t deductible. This is true
ordinarily flagrant. For example, a state law is membership in any club organized for business, even if the education maintains or improves
generally enforced unless proper reporting of a pleasure, recreation, or any other social pur- skills presently required in your business. For
violation of the law results in enforcement only pose. This includes country clubs, golf and ath- more information on education expenses, see
under unusual circumstances. letic clubs, hotel clubs, sporting clubs, airline
clubs, and clubs operated to provide meals un- Pub. 970.
Kickbacks. A kickback is a payment for re- der circumstances generally considered to be
ferring a client, patient, or customer. The com- conducive to business discussions. Franchise, trademark, trade name. If you
mon kickback situation occurs when money or buy a franchise, trademark, or trade name, you
property is given to someone as payment for in- Exception. The following organizations can deduct the amount you pay or incur as a
fluencing a third party to purchase from, use the aren’t treated as clubs organized for business, business expense only if your payments are
services of, or otherwise deal with the person pleasure, recreation, or other social purpose part of a series of payments that are:
who pays the kickback. In many cases, the per- unless one of the main purposes is to conduct 1. Contingent on productivity, use, or dispo-
son whose business is being sought or enjoyed entertainment activities for members or their sition of the item;
by the person who pays the kickback isn’t guests or to provide members or their guests
aware of the payment. with access to entertainment facilities. 2. Payable at least annually for the entire
For example, the Yard Corporation is in the • Boards of trade. term of the transfer agreement; and
business of repairing ships. It returns 10% of • Business leagues. 3. Substantially equal in amount (or payable
the repair bills as kickbacks to the captains and • Chambers of commerce. under a fixed formula).
chief officers of the vessels it repairs. Although • Civic or public service organizations.
this practice is considered an ordinary and nec- • Professional organizations such as bar as- When determining the term of the transfer
essary expense of getting business, it is clearly sociations and medical associations. agreement, include all renewal options and any
a violation of a state law that is generally en- • Real estate boards. other period for which you and the transferor
forced. These expenditures aren’t deductible • Trade associations. reasonably expect the agreement to be re-
for tax purposes, whether or not the owners of newed.
the shipyard are subsequently prosecuted. Credit card convenience fees. Credit card A franchise includes an agreement that
companies charge a fee to businesses who ac-
Form 1099-MISC. It doesn’t matter cept their cards. This fee when paid or incurred gives one of the parties to the agreement the
right to distribute, sell, or provide goods, serv-
whether any kickbacks paid during the tax year by the business can be deducted as a business ices, or facilities within a specified area.
expense.

Chapter 11 Other Expenses Page 47