Page 108 - Small Business Taxes

16:31 - 2-Feb-2023
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Fileid: … tions/p535/2022/a/xml/cycle01/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
for occupancy on the date stipulated in the con- costs of taking part in political activities as busi- Beginning in 2018, due to the suspen-
tract. You are now required to pay an additional ness expenses. Examples of nondeductible ex- ! sion of miscellaneous itemized deduc-
amount for each day that completion is delayed penses include the following. CAUTION tions subject to the 2% floor under sec-
beyond the completion date stipulated in the • Advertising in a convention program of a tion 67(a), you aren’t able to deduct the
contract. These additional costs are deductible political party, or in any other publication if repayment as an itemized deduction if it is
business expenses. any of the proceeds from the publication $3,000 or less.
On the other hand, generally, no deduction are for, or intended for, the use of a politi-
is allowed for penalties and fines paid to a gov- cal party or candidate. Repayment—$3,000 or less. If the
ernment or specified nongovernmental entity for • Admission to a dinner or program (includ- amount you repaid was $3,000 or less, deduct it
the violation of any law except the following. ing, but not limited to, galas, dances, film from your income in the year you repaid it.
• Amounts that constitute restitution. presentations, parties, and sporting Repayment—Over $3,000. If the amount
• Amounts paid to come into compliance events) if any of the proceeds from the
with the law. function are for, or intended for, the use of you repaid was more than $3,000, you can de-
• Amounts paid or incurred as the result of a political party or candidate. duct the repayment as an other itemized deduc-
certain court orders in which no govern- • Admission to an inaugural ball, gala, pa- tion on Schedule A (Form 1040), line 16, if you
ment or specified nongovernmental rade, concert, or similar event if identified included the income under a “claim of right.”
agency is a party. with a political party or candidate. This means that at the time you included the in-
• Amounts paid or incurred for taxes due. come, it appeared that you had an unrestricted
right to it. However, you can choose to take a
On or after December 22, 2017, no deduc- Repairs. The cost of repairing or improving credit for the year of repayment. Figure your tax
property used in your trade or business is either
tion is allowed for the restitution amount or a deductible or capital expense. Routine main- under both methods and use the method that
amount paid to come into compliance with the tenance that keeps your property in a normal ef- results in less tax.
law unless the amounts are specifically identi- ficient operating condition, but that doesn’t ma-
fied in the settlement agreement or court order. terially increase the value or substantially Method 1. Figure your tax for 2022 claim-
Also, any amount paid or incurred as reim- prolong the useful life of the property, is deduc- ing a deduction for the repaid amount.
bursement to a government for the costs of any tible in the year that it is incurred. Otherwise, Method 2. Figure your tax for 2022 claim-
investigation or litigation aren’t eligible for the the cost must be capitalized and depreciated. ing a credit for the repaid amount. Follow these
exceptions and are nondeductible. See Form 4562 and its instructions for how to steps.
See section 162(f), as amended by P.L. figure and claim the depreciation deduction.
115-97, section 13306. The cost of repairs includes the costs of la- 1. Figure your tax for 2022 without deducting
Examples of nondeductible penalties and bor, supplies, and certain other items. The the repaid amount.
fines include the following. value of your own labor isn’t deductible. Exam- 2. Refigure your tax from the earlier year
• Amounts paid because of a conviction for ples of repairs include: without including in income the amount
a crime or after a plea of guilty or no con- • Reconditioning floors (but not replace- you repaid in 2022.
test in a criminal proceeding. ment),
• Amounts paid as a penalty imposed by • Repainting the interior and exterior walls of 3. Subtract the tax in (2) from the tax shown
federal, state, or local law in a civil action, a building, on your return for the earlier year. This is
including certain additions to tax and addi- • Cleaning and repairing roofs and gutters, the amount of your credit.
tional amounts and assessable penalties and 4. Subtract the answer in (3) from the tax for
imposed by the Internal Revenue Code. • Fixing plumbing leaks (but not replacement 2022 figured without the deduction (step
• Amounts paid in settlement of actual or of fixtures). 1).
possible liability for a fine or penalty,
whether civil or criminal. Repayments. If you had to repay an amount If Method 1 results in less tax, deduct the
• Amounts forfeited as collateral posted for a you included in your income in an earlier year, amount repaid as discussed earlier under Type
proceeding that could result in a fine or you may be able to deduct the amount repaid of deduction.
penalty. for the year in which you repaid it. Or, if the If Method 2 results in less tax, claim the
• Fines paid for violating city housing codes. amount you repaid is more than $3,000, you credit on Schedule 3 (Form 1040), line 13z, and
• Fines paid by truckers for violating state may be able to take a credit against your tax for write “I.R.C. 1341” next to line 13z.
maximum highway weight laws. the year in which you repaid it. In most cases,
• Fines paid for violating air quality laws. you can claim a deduction or credit only if the Example. For 2021, you filed a return and
• Civil penalties paid for violating federal repayment qualifies as an expense or loss in- reported your income on the cash method. In
laws regarding mining safety standards curred in your trade or business or in a for-profit 2022, you repaid $5,000 included in your 2021
and discharges into navigable waters. transaction. gross income under a claim of right. Your filing
A fine or penalty doesn’t include any of the Type of deduction. The type of deduction status in 2022 and 2021 is single. Your income
and tax for both years are as follows:
following. you are allowed in the year of repayment de-
• Legal fees and related expenses to defend pends on the type of income you included in the
yourself in a prosecution or civil action for a earlier year. For instance, if you repay an 2021 2021
violation of the law imposing the fine or civil amount you previously reported as a capital With Income Without
penalty. Income
• Court costs or stenographic and printing gain, deduct the repayment as a capital loss as Taxable
explained in the Instructions for Schedule D
charges. Income $15,000 $10,000
• Compensatory damages paid to a govern- (Form 1040). If you reported it as self-employ-
ment income, deduct it as a business expense
ment. on Schedule C (Form 1040), or a farm expense Tax $ 1,604 $ 1,004
Political contributions. Contributions or gifts on Schedule F (Form 1040). 2022 2022
If you reported the amount as wages, unem-
paid to political parties or candidates aren’t de- ployment compensation, or other nonbusiness Without With Deduction
ductible. In addition, expenses paid or incurred Deduction
to take part in any political campaign of a candi- ordinary income, you may be able to deduct it Taxable
as an other itemized deduction if the amount re-
date for public office aren’t deductible. paid is over $3,000. Income $49,950 $44,950
Indirect political contributions. You Tax $6,606 $5,506
can’t deduct indirect political contributions and
Your tax under Method 1 is $5,506. Your tax un-
der Method 2 is $6,006, figured as follows:

Chapter 11 Other Expenses Page 49