Necessary
Expenses
 
Necessary
Expenses are the allowable payments you make to
support you and your family's health and welfare
and/or the production of income. This expense
allowance does not apply to business entities. Our
Publication 1854 explains the National Standard
Expenses and gives the allowable amounts. We derive
these amounts from the Bureau of Labor Statistics (
BLS
) Consumer Expenditure Survey. We also use
information for the Bureau of the Census to
determine local expenses for housing, utilities, and
transportation.
Note:
If the
IRS
determines that the facts and circumstances of your
situation indicates that using the scheduled
allowance of necessary expenses is inadequate to
provide for basic living expenses, we will allow for
your actual expenses. However, you must
provide documentation that supports a determination
that using national and local expense standards
leaves you an inadequate means of providing for
basic living expenses.
Expenses
Not Generally Allowed -- We typically do not allow
you to claim tuition for private schools, public or
private college expenses, charitable contributions,
voluntary retirement contributions, payments or
unsecured debts such as credit card bills, cable
television charges and other similar expenses as
necessary living expenses. However, we can allow
these expenses when you can prove that they are
necessary for the health and welfare of you or your
family or for the production of income.
Offer
in Compromise - Collection Financial Standards
Collection
Financial Standards are used to help determine a
taxpayer's ability to pay a delinquent tax
liability.
Allowances for food, clothing and other items, known
as the National Standards, apply nationwide except
for
Alaska
and
Hawaii
, which have their own tables. Taxpayers are allowed
the total National Standards amount for their family
size and income level, without questioning amounts
actually spent.
Maximum allowances for housing and utilities
and transportation, known as the Local Standards,
vary by location. Unlike the National Standards, the
taxpayer is allowed the amount actually spent or the
standard, whichever is less.
National
Standards for Allowable Living Expenses:
Food, Clothing and Other Items
National
Standandards for reasonable amounts have been
established for five necessary expenses: food,
housekeeping supplies, apparel and services,
personal care products and services, and
miscellaneous.
All
standards except miscellaneous are derived from the
Bureau of Labor Statistics (
BLS
) Consumer Expenditure Survey (CES). The
miscellaneous standard has been established by the
IRS
.
http://www.irs.gov/businesses/small/article/0,,id=104627,00.html
National
Standards for
Alaska
:
http://www.irs.gov/businesses/small/article/0,,id=104935,00.html
National
Standards for
Hawaii
:
http://www.irs.gov/businesses/small/article/0,,id=104937,00.html
Housing
and Utilities Allowable Living Expenses
The
housing and utilities standards are derived from
Census and
BLS
data, and are provided by state down to the county
level.
http://www.irs.gov/businesses/small/article/0,,id=104696,00.html
Allowable
Transportation Expenses:
The
transportation standards consist of nationwide
figures for monthly loan or lease payments referred
to as ownership costs, and additional amounts for
monthly operating costs broken down by Census Region
and Metropolitan Statistical Area (
MSA
). Public transportation is included under operating
costs. A conversion chart has been provided with the
standards which shows which
IRS
districts fall under each Census Region, as well as
the counties included in each
MSA
. The ownership cost portion of the transportation
standard, although it applies nationwide, is still
considered part of the Local Standards.
The
ownership costs provide maximum allowances for the
lease or purchase of up to two automobiles if
allowed as a necessary expense. The operating costs
are derived from
BLS
data. If
a taxpayer has a car payment, the allowable
ownership cost added to the allowable operating cost
equals the allowable transportation expense. If a
taxpayer has no car payment, or no car, only the
operating costs portion of the transportation.
http://www.irs.gov/businesses/small/article/0,,id=104623,00.html
Employee
Business Expenses
If
you are an employee, you may be able to deduct your
work–related expenses as an itemized deduction
(subject to limitations) on Schedule A, Form 1040.
These employee business expenses include the cost of
business travel away from home, local
transportation, entertainment, gifts, and other
ordinary and necessary expenses related to your job.
Deductible
travel expenses are the ordinary and necessary
expenses of temporarily traveling away from your tax
home overnight on business. They include the cost of
transportation, meals (subject to certain limits),
lodging and other expenses related to your business
travel. For travel expense purposes, generally, your
tax home is the entire city or general area where
your principal place of business is located,
regardless of where you maintain your family
residence.
Although
commuting costs are not deductible, some local
transportation expenses are. Deductible local
transportation expenses include the ordinary and
necessary expenses of going from one workplace (away
from the residence) to another. If you have an
office in your home which is maintained for the
convenience of your employer and that is used
exclusively on a regular basis as your principle
place of business (e.g., if your employer does not
provide you with office space), you may deduct the
cost of traveling between your home office and work
places associated with your employment. You may
deduct the cost of going between your residence and
a temporary work location outside of the
metropolitan area where you live and normally work.
If you regularly work at one or more regular
business locations away from your residence, you may
deduct the cost of going to a temporary work
location in that business within your metropolitan
area. For these purposes, a temporary work location
is a location where you realistically expect to work
for 1 year or less. Transportation expenses include
the cost of transportation by car, air, rail, bus,
taxi, etc.
Business
entertainment expenses and business gift expenses
may be deductible, but subject to certain limits.
You
must keep records to prove the expenses you deduct.
Business
Use of Home
Whether
you are self–employed or are an employee, you may
be able to deduct certain expenses for the part of
your home you use for business.
To
deduct business–use–of–the–home expenses,
part of your home must be used regularly and
exclusively as one of the following:
1.
Regularly and exclusively as the principal place of
business for your trade or business;
2.
Regularly and exclusively as the place where you
meet and deal with your patients, clients, or
customers in the normal course of your trade or
business; or
3.
In connection with your trade or business, if you
use a separate structure that is not attached to
your home.
Under
the principal-place-of-business test, you must
determine that your home is the principal place of
your trade or business after considering where your
most important activities are performed and most of
your time is spent, in order to deduct expenses for
the business use of your home.
Your
home office will also qualify as your principal
place of business for deducting expenses for its use
if you meet the following requirements:
1.
You use it exclusively and regularly for
administrative or management activities of your
trade or business; and
2.
You have no other fixed location where you conduct
substantial administrative or management activities
of your trade or business.
In
general, because of the exclusive–use rule, you
cannot deduct business expenses for any part of your
home that you use for both personal and business
purposes. For example, if you are an attorney and
use the den of your home to write legal briefs and
also for personal purposes, you may not deduct any
business–use–of–your–home expenses. The only
exceptions to the exclusive–use rule are for
qualified day–care providers and for persons
storing inventory or product samples used in their
business.
If
you are an employee, additional rules apply. Even if
you meet the exclusive and regular use tests, you
cannot take any deductions for the business use of
your home unless:
·
the business use of your home is for the
convenience of your employer; and
·
you do not rent any part of your home to your
employer and use the rented part to perform services
as an employee.
Deductible
expenses for business use of your home include the
business portion of real estate taxes, deductible
mortgage interest, rent, casualty losses, utilities,
insurance, depreciation, maintenance and repairs.
You may not deduct expenses for lawn care in general
or for painting a room not used for business.
When
figuring the amount you can deduct for the business
use of your home, you can use the entire amount of
expenses attributable solely to the portion of the
home used in your business. The amount you can
deduct for expenses attributable to the whole house
depends on the percentage of your home used for
business. To figure this percentage, you may divide
the number of square feet used for business by the
total square feet in your home. Or, if the rooms are
approximately the same size, divide the number of
rooms used for business by the total number of rooms
in your home. You figure the business portion of
your expenses by applying this percentage to the
total of each expense. Qualified day–care
providers must account for personal use of any area
not used exclusively for business when calculating
the percentage of the home used for business.
If
your gross income from the business use of your home
is less than your total business expenses, your
deduction for certain expenses for the business use
of your home is limited. However, those business
expenses that can not be deducted because of the
gross income limitation can be carried forward to
the next year but will be subject to the deduction
limit for that year.
Business
Travel Expenses
Travel
expenses are the ordinary and necessary expenses of
traveling away from home for your business,
profession, or job. Generally, employees deduct
these expenses using Form 2106) or Form 2106-EZ and
on Schedule A, Form 1040. You cannot deduct expenses
that are lavish or extravagant or that are for
personal purposes.
You
are traveling away from home if your duties require
you to be away from the general area of your tax
home for a period substantially longer than an
ordinary day's work, and you need to get sleep or
rest to meet the demands of your work while away.
Generally,
your tax home is the entire city or general area
where your main place of business or work is
located, regardless of where you maintain your
family home. For example, you live with your family
in
Chicago
but work in
Milwaukee
where you stay in a hotel and eat in restaurants.
You return to
Chicago
every weekend. You may not deduct any of your
travel, meals, or lodging in
Milwaukee
because that is your tax home. Your travel on
weekends to your family home in
Chicago
is not for your work, so these expenses are also not
deductible. If you regularly work in more than one
place, your tax home is the general area where your
main place of business or work is located.
In
determining which is your main place of business,
take into account the length of time you are
normally required to spend at each location for
business purposes, the degree of business activity
in each area, and the relative significance of the
financial return from each area. However, the most
important consideration is the length of time spent
at each location.
Travel
expenses paid or incurred in connection with a
temporary work assignment away from home are
deductible. However, travel expenses paid in
connection with an indefinite work assignment are
not deductible. Any work assignment in excess of one
year is considered indefinite. Also, you may not
deduct travel expenses at a work location if it is
realistically expected that you will work there for
more than one year, whether or not you actually work
there that long. If you realistically expect to work
at a temporary location for less than one year, and
the expectation changes so that at some point you
realistically expect to work there for more than one
year, travel expenses become nondeductible when your
expectation changes.
You
may deduct travel expenses, including meals and
lodging, you had in looking for a new job in your
present trade or business. You may not deduct these
expenses if you had them while looking for work in a
new trade or business or while looking for work for
the first time. If you are unemployed and there is a
substantial break between the time of your past work
and your looking for new work, you may not deduct
these expenses, even if the new work is in the same
trade or business as your previous work.
Travel
expenses for conventions are deductible if you can
show that your attendance benefits your trade or
business. Special rules apply to conventions held
outside the North American area.
Deductible
travel expenses while away from home include, but
are not limited to, the costs of:
1.
Travel by airplane, train, bus, or car between your
home and your business destination,
2.
Using your car while at your business destination,
3.
Fares for taxis or other types of transportation
between the airport or train station and your hotel,
the hotel and the work location, and from one
customer to another, or from one place of business
to another,
4.
Meals and lodging, and
5.
Tips you pay for services related to any of these
expenses.
Instead
of keeping records of your meal expenses and
deducting the actual cost, you can generally use a
standard meal allowance ranging from $31 to $51 for
certain high cost areas, depending on where you
travel.
The
deduction for business meals is generally limited to
50% of the un-reimbursed cost.
Business
Expenses
Business
expenses are the cost of carrying on a trade or
business. These expenses are usually deductible if
the business is operated to make a profit.
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 trade or business. 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.
It
is important to separate business expenses from the
following expenses;
- The expenses used to figure the cost of goods sold
- Capital Expenses
- Personal Expenses
Note – If you have an expense that is partly for
business and partly personal separate the personal
part from the business part.
Cost
of Goods Sold
If your business manufactures products or purchases
them for resale, some of your expenses may be
included in figuring cost of goods sold. You deduct
cost of goods sold from your gross receipt to figure
your gross profit for the year.
If
you use an expense to figure 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 product or raw materials, including the cost
of having them shipped to you.
- The cost of storing the products you sell.
- Direct labor costs (including contributions to pensions
or annuity plans) for workers who produce the
products.
- Factory overhead expenses.
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. There are,
in general, three types of costs you capitalize.
- Going into business.
- Business assets.
- Improvements.
Personal
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 as a business expense only the business part.
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. Refer to Publication 587, Business Use
of Your Home.
Business Use of Your Car
If you use your car in your business, you can deduct
car expenses. Refer to Publication 463, Travel,
Entertainment, Gift, and Car Expenses.
Other Types
of Business Expenses
- Employees'
Pay
- You can generally deduct the pay you give your
employees for the services they perform for your
business.
- Retirement
Plans
- Retirement plans are savings plans that offer
you tax advantages to set aside money for your
own, and your employees', retirement.
- Rent
Expense
- 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.
- Interest
- Business interest expense is an amount charged
for the use of money you borrowed for business
activities.
- Taxes
- You can deduct various federal, state, local,
and foreign taxes directly attributable to your
trade or business as business expenses.
Insurance - Generally, you can deduct
the ordinary and necessary cost of insurance as a
business expense, if it is for your trade, business,
or profession.
Necessary Expenses
Defines under the Standars of
§301.6343-1(b)(4)
of the Regulations
The
IRS
Offer in Compromise Regulations cross references §301.6343-1(b)(4) of the levy regulations.
This means that if you have an “economic
hardship” within the meaning of these regulations,
those expenses will be treated as necessary expenses in computing your reasonable collection potential for
OIC purposes. §301.6343-1(b)(4)
is as follows:
(4) Economic hardship
(i)
General rule. --The levy is creating an economic hardship due to
the financial condition of an individual taxpayer.
This condition applies if satisfaction of the levy
in whole or in part will cause an individual
taxpayer to be unable to pay his or her reasonable
basic living expenses. The determination of a
reasonable amount for basic living expenses will be
made by the director and will vary according to the
unique circumstances of the individual taxpayer.
Unique circumstances, however, do not include the
maintenance of an affluent or luxurious standard of
living.
(ii)
Information from taxpayer. --In determining a reasonable amount
for basic living expenses the director will consider
any information provided by the taxpayer including
(A) The taxpayer's age, employment status and history, ability to earn,
number of dependents, and status as a dependent of
someone else;
(B) The amount reasonably necessary for food, clothing, housing
(including utilities, home-owner insurance,
home-owner dues, and the like), medical expenses
(including health insurance), transportation,
current tax payments (including federal, state, and
local), alimony, child support, or other
court-ordered payments, and expenses necessary to
the taxpayer's production of income (such as dues
for a trade union or professional organization, or
child care payments which allow the taxpayer to be
gainfully employed);
(C) The cost of living in the geographic area in which the taxpayer
resides;
(D) The amount of property exempt from levy which is available to pay the
taxpayer's expenses;
(E) Any extraordinary circumstances such as special education expenses, a
medical catastrophe, or natural disaster; and
(F)
Any other factor that the taxpayer claims bears on
economic hardship and brings to the attention of the
director. |
