I would like assistance to see if I filled out the attached Form 1040 Schedule C correctly. I am attaching Schedule C, Schedule C Instructions, and the instructions with the information to work the tax problem. The actual instructions needed to work the problem begin on page 3 of the document titled Final Tax 1040 LD. Thank you in advance for checking my work.

SCHEDULE C (Form 1040) Profit or Loss From Business OMB No. 1545-0074 2015 (Sole Proprietorship) about Schedule C and its separate instructions is at www.irs.gov/schedulec. Attach to Form 1040, 1040NR, or 1041; partnerships generally must file Form 1065. Information Department of the Treasury Internal Revenue Service (99) Attachment Sequence No. 09 Name of proprietor Social security number (SSN) Jerome Horowitz A Principal business or profession, including product or service (see instructions) 100-00-0001 B Enter code from instructions Bungee Jumping C Business name. If no separate business name, leave blank. Jerry's Jiant Jumps E Business address (including suite or room no.) 7 F G H I J Did you make any payments in 2015 that would require you to file Form(s) 1099? (see instructions) . If "Yes," did you or will you file required Forms 1099? . . . . . . . . . . . . . . Income . . . . 2 3 Gross receipts or sales. See instructions for line 1 and check the box if this income was reported to you on Form W-2 and the \"Statutory employee\" box on that form was checked . . . . . . . . . Returns and allowances . . . . . . . . . . . . . . . . . . . . . . . . . Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . 4 5 6 Cost of goods sold (from line 42) . . . . . . . . . . . . . . . . . . . Gross profit. Subtract line 4 from line 3 . . . . . . . . . . . . . . . . . Other income, including federal and state gasoline or fuel tax credit or refund (see instructions) . . . . . . . 7 Gross income. Add lines 5 and 6 . . . 8 Advertising . 9 Car and truck expenses (see instructions) . . . . . Commissions and fees . 1 Part II 10 11 12 13 . . . . Employee benefit programs (other than on line 19) . . Insurance (other than health) 15 16 . . . . 8 . . 0 0 . Yes Yes No No . . 00 00 . . . 4 5 6 0 622,000 0 00 00 00 7 622,000 00 Office expense (see instructions) 18 6,900 00 Pension and profit-sharing plans . Rent or lease (see instructions): Vehicles, machinery, and equipment 19 20a Other business property . . . Repairs and maintenance . . . Supplies (not included in Part III) . 20b 21 22 36,000 00 50,000 00 Taxes and licenses . . . . . Travel, meals, and entertainment: Travel . . . . . . . . . 23 24a 25 Deductible meals and entertainment (see instructions) . Utilities . . . . . . . . 24b 25 26 27a b Wages (less employment credits) . Other expenses (from line 48) . . Reserved for future use . . . 26 27a 27b . . b 21 22 23 24 b 60,000 . . No 00 a 14 15 . . Yes 0 622,000 00 13 . . 622,000 a 125,000 . . . 2 3 00 18 19 20 14,100 9 10 11 12 9 1 . . . . . . Expenses. Enter expenses for business use of your home only on line 30. Contract labor (see instructions) Depletion . . . . . Depreciation and section 179 expense deduction (not included in Part III) (see instructions) . . . . . 14 . 3 1858 Bungee Drop Lane City, town or post office, state, and ZIP code Terrapin Falls, MD 20783 (2) Accrual (3) Other (specify) Accounting method: (1) Cash Did you \"materially participate\" in the operation of this business during 2015? If \"No,\" see instructions for limit on losses If you started or acquired this business during 2015, check here . . . . . . . . . . . . . . . . . Part I 1 D Employer ID number (EIN), (see instr.) 00 . . 17 Interest: Mortgage (paid to banks, etc.) Other . . . . . . Legal and professional services 28 Total expenses before expenses for business use of home. Add lines 8 through 27a . . . . . . 28 292,000 00 29 30 Tentative profit or (loss). Subtract line 28 from line 7 . . . . . . . 29 330,000 00 30 0 00 31 330,000 00 a b 16a 16b 17 . . . . . . . . . Expenses for business use of your home. Do not report these expenses elsewhere. Attach Form 8829 unless using the simplified method (see instructions). Simplified method filers only: enter the total square footage of: (a) your home: and (b) the part of your home used for business: Method Worksheet in the instructions to figure the amount to enter on line 30 31 . . . . Use the Simplified . . . . . . . Net profit or (loss). Subtract line 30 from line 29. If a profit, enter on both Form 1040, line 12 (or Form 1040NR, line 13) and on Schedule SE, line 2. (If you checked the box on line 1, see instructions). Estates and trusts, enter on Form 1041, line 3. If a loss, you must go to line 32. 32 If you have a loss, check the box that describes your investment in this activity (see instructions). If you checked 32a, enter the loss on both Form 1040, line 12, (or Form 1040NR, line 13) and on Schedule SE, line 2. (If you checked the box on line 1, see the line 31 instructions). Estates and trusts, enter on Form 1041, line 3. If you checked 32b, you must attach Form 6198. Your loss may be limited. For Paperwork Reduction Act Notice, see the separate instructions. Cat. No. 11334P } } 32a 32b All investment is at risk. Some investment is not at risk. Schedule C (Form 1040) 2015 Page 2 Schedule C (Form 1040) 2015 Part III Cost of Goods Sold (see instructions) 33 Method(s) used to value closing inventory: 34 Was there any change in determining quantities, costs, or valuations between opening and closing inventory? If \"Yes,\" attach explanation . . . . . . . . . . . . . . . . . . . . . . . . . a b Cost c Lower of cost or market Other (attach explanation) Yes . No 35 Inventory at beginning of year. If different from last year's closing inventory, attach explanation . . . 35 0` 0 36 Purchases less cost of items withdrawn for personal use . . . . . . . . . . . . . . 36 0 0 37 Cost of labor. Do not include any amounts paid to yourself . . . . . . . . . . . . . . 37 0 0 38 Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . 38 0 0 39 Other costs . . . . . . . . . . . . . . . . . . . . . . . . . 39 0 0 40 Add lines 35 through 39 . . . . . . . . . . . . . . . . . . . . . . . . 40 0 0 41 Inventory at end of year . . . . . . . . . . . . . . . . . . . . . . . . 41 0 0 42 Cost of goods sold. Subtract line 41 from line 40. Enter the result here and on line 4 . . . . . . 42 0 0 Part IV . . . Information on Your Vehicle. Complete this part only if you are claiming car or truck expenses on line 9 and are not required to file Form 4562 for this business. See the instructions for line 13 to find out if you must file Form 4562. / / 43 When did you place your vehicle in service for business purposes? (month, day, year) 44 Of the total number of miles you drove your vehicle during 2015, enter the number of miles you used your vehicle for: a b Commuting (see instructions) Business c Other Yes No 45 Was your vehicle available for personal use during off-duty hours? . . . . . . . . . . . . . . 46 Do you (or your spouse) have another vehicle available for personal use?. . . . . . . . . . . . . . Yes No 47a Do you have evidence to support your deduction? . . . . . . . . . . . . . . . . . . . . Yes No If \"Yes,\" is the evidence written? . . . . . . . . . . . . . . . . . . . . Yes No b Part V 48 . . . . . . Other Expenses. List below business expenses not included on lines 8-26 or line 30. Total other expenses. Enter here and on line 27a . . . . . . . . . . . . . . . . 48 Schedule C (Form 1040) 2015 I. Title: Preparation of an Individual Income Tax Return II. Introduction: In a prior learning demonstration, you conducted tax research for Jerome Horowitz (Nickname: Jerry), one of the firm's clients for many years. You still work for the same firm and Jerry is one of the firm's clients assigned to you. Having just conducted tax research to answer Jerry's questions and provide him with guidance, you are very familiar with his background and tax issues. Thus, you feel ready to prepare a federal tax return for Jerry and his wife Debra (Debbie). Fortunately, the firm has copies of Jerry Horowitz's tax documents from prior years. This hypothetical tax case has one main activity: 1) Preparing an individual federal income tax return using IRS Form 1040. Throughout this learning demonstration, your professor will play the role of a senior partner in the taxation department with whom you discuss various issues and submit draft documents for approval in advance of communicating with clients. To successfully complete this Learning Demonstration, you must demonstrate your knowledge of and abilities to complete the following goals and competencies: Goal 1: Communication: Learners demonstrate ability to communicate clearly both orally and in writing. o Competencies: ! 1.1 Organize document or presentation clearly in a manner that promotes understanding ! 1.2 Develop coherent paragraphs or points so that each is internally unified and so that each functions as part of the whole document or presentation ! 1.3 Provide sufficient, correctly cited support that substantiates the writer's ideas ! 1.4 Tailor communications to the audience ! 1.5 Use sentence structure appropriate to the task, message and audience ! 1.6 Follow conventions of Standard Written English Goal 2: Critical Thinking: Learners demonstrate ability to apply logical, systematic decision-making processes to formulate clear, defensible ideas and to draw ethical conclusions. o Competencies: ! 2.1 Articulate and frame the issue ! 2.2 Collect and evaluate information ! 2.3 Evaluate the underlying causes or conditions of elements contributing to an issue 1 ! ! 2.4 Use systems thinking to arrive at a decision in the context of an issue 2.5 Apply ethical principles when determining actions. Goal 3: Quantitative Reasoning: Learners demonstrate the ability to use mathematical operations and analytical concepts and operations to address problems and to inform decision-making o Competency ! 3.1 Construct models that represent real-world problems or processes ! 3.2 Develop visible representation of data ! 3.3 Analyze data using mathematical/algebraic operations ! 3.4 Use calculated results to inform the problem or process Goal 4: Leadership, Facilitation, and Collaboration: Learners lead, facilitate, and collaborate with a variety of individuals and diverse teams to achieve organizational objectives. o Competency ! 4.1 Demonstrate an ability to plan a particular objective or goal Goal 8: Technical Competencies in Federal Taxation of Individuals, Partnerships, Corporations, and Other Entities: learners demonstrate an applied understanding of tax accounting and federal taxation law by conducting tax research, preparing individual and corporate tax returns, and simulating tax audits. Learners apply competencies via contextualized learning demonstrations to perform authentic professional tasks in federal income taxation. o Competency ! 8.1 Legal and regulatory: Students demonstrate a general understanding of the Internal Revenue Code. ! 8.2 Professional research: learners demonstrate an applied understanding of how to conduct taxation research based on statutory, regulatory, and common-law rules. ! 8.3 Measurement and reporting: learners demonstrate an applied understanding of applicable income taxation laws to prepare tax returns for individuals, corporations, and or other entities. ! 8.4 Decision Making: Apply tax laws, regulations, and court cases to individual situations, identifying and communicating planning opportunities and compliance needs. If you feel the need to refresh your memory regarding Jerry, Debbie, and her two children, please review the Tax Research learning demonstration completed earlier in the semester. 2 III. Steps to Completion 1. Prepare Form 1040 After careful consideration based on your tax advice regarding filing status, Jerry and Debbie decided to use the filing status married filing jointly. Use the feedback you received from the senior partner, final guidance you provided Jerry, and information in Appendices A through G to prepare Form 1040 for Jerry and Debbie Horowitz. Do not prepare a state tax return. You may use forms found on the IRS Website: http://apps.irs.gov/app/picklist/list/formsInstructions.html IV. Deliverables Format: You will combine all files into one PDF document. If you are unfamiliar with combining multiple documents to create one PDF file, the following site explains how using 16 different methods: http://www.wikihow.com/Merge-PDF-Files. Naming convention: Name the PDF file using the following convention: FirstName_LastName_Form1040.pdf LEO Assignment folder: Submit the PDF document in your LEO assignment folder. Form 1040: Married Filing Jointly 1. Individual tax return assuming Jerry and Debbie chose the filing status, Married Filing Jointly, including: a. Form 1040, pages 1 and 2 b. Schedule A c. Schedule B d. Schedule C (2 pages) e. Schedule D (2 pages) f. Schedule SE 3 List of Appendices: ! Appendix A: Jerry, Debbie, Sally, and Sam's Personal information ! Appendix B: List of forms and documents Jerry dropped off in a shoebox ! Appendix C: Debbie's earnings and other tax issues ! Appendix D: Financial information for Jerry's Jiant Jumps Company ! Appendix E: Cancelled checks ! Appendix F: Tax documents ! Appendix G: Invoices and receipts 4 Appendix A: Jerry, Debbie, Sally, and Sam's Personal information Name Social Security Number Date of Birth Address Telephone number Healthcare insurance Name Social Security Number Date of Birth Telephone number Address Healthcare insurance Name Social Security Number Date of Birth Telephone number Address Healthcare insurance Name Social Security Number Date of Birth Telephone number Address Healthcare insurance Jerome Horowitz 100-00-0001 April 2, 1965 100 Lawrence Way Pikesville, MD 21208 240-000-0000 Covered by his employer's medical insurance plan. Debra Francois-Horowitz 100-00-0002 July 6, 1975 240-000-0000 100 Lawrence Way Pikesville, MD 21208 Covered by her husband's medical insurance plan. Sally Draper 100-00-0003 June 2, 1999 410-000-0000 112 Windward Way Annapolis, MD 21401 Covered by her father's insurance plan. Samuel Draper 100-00-0004 January 8, 2001 410-000-0000 112 Windward Way Annapolis, MD 21401 Covered by his father's insurance plan. 5 Appendix B: List of forms and documents Jerry dropped off in a shoebox Form / Source Document W-2 W-2 From Wages from managing short term rentals for JPM Real Estate Company, Inc. Maryland income taxes withheld Amount $300,000 16,800 1099-INT Interest Citibank personal checking account 2,450 1099-INT Interest received on Maryland State Municipal Bonds 1,875 1099-DIV Qualified dividends from various investments 36,250 Sales Tax (Jerry didn't keep receipts for purchases, this is his best guess) 10,485 Property taxes paid 12,650 None Real Property Tax Bill Form 1098 Home mortgage interest paid Thank you card Charitable donation to Red Cross in cash CPA Firm Invoice Cancelled check Tax preparation fees Cancelled check Cost to join Weight Watchers to maintain overall health Estimated federal tax payment to the IRS 8,265 12,600 2,000 $50,000 2,600 Receipt Dog Groomer 1099-B Purchased 200 shares of Comcast Stock on 2/15/20Y1 50,000 1099-B Sold 200 shares of Comcast Corp Stock on 4/15/20Y5 15,000 Jerry's Jiant Jumps Income Statement Net Income from Jerry's Jiant Jumps Company (Sole proprietorship) 165 330,000 6 Appendix C: Debbie's earnings and other tax issues Debbie has two children named Sally and Sam from her marriage to Donald. Sally and Sam lived with Debbie the first six months and her dad, Donald Draper for last six months of 20Y5. Debbie paid over 50% of the support for Sally and Sam. Debbie is a homemaker who earned no income in 20Y5 other than annual alimony payments of $120,000 and child support payments of $70,000. In 20Y5, Debbie received the following from a property settlement associated with her divorce decree: Beverly Hills mansion Bentley coupe Home furnishings $ 5,750,000 $ 200,000 $ 800,000 7 Appendix D: Financial information for Jerry's Jiant Jumps Company Jerry's Jiant Jumps Company is a sole proprietorship with the following Income Statement for 20Y5. Jerry's Jiant Jumps Company Income Statement For the Year Ending Dec. 31, 20Y5 Revenue: Jumping fees earned Total Revenue Operating Expenses: Advertising Rent on land Insurance Office expenses Non-employee compensation Supplies Total Expenses Net Income $ 622,000 $ $ 622,000 $ $ 292,000 330,000 14,100 36,000 60,000 6,900 125,000 50,000 8 Appendix E: Cancelled checks 9 Appendix F: Tax documents 10 11 12 13 14 Appendix G: Invoices and receipts 15 To: Debbie Horowitz Thank you for your generous cash donation of $12,600 on December 20, 20Y5. Your donation will be used to help millions around the world. We look forward to another generous donation from you at next year's Annual Philanthropists Gala. 16 Department of the Treasury Internal Revenue Service 2015 Instructions for Schedule C Profit or Loss From Business Use Schedule C (Form 1040) to report income or (loss) from a business you operated or a profession you practiced as a sole proprietor. An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity or a hobby does not qualify as a business. To report income from a nonbusiness activity, see the instructions for Form 1040, line 21, or Form 1040NR, line 21. Also use Schedule C to report (a) wages and expenses you had as a statutory employee, (b) income and deductions of certain qualified joint ventures, and (c) certain income shown on Form 1099-MISC, Miscellaneous Income. See the Instructions for Recipient (back of Copy B of Form 1099-MISC) for the types of income to report on Schedule C. Small businesses and statutory employees with business expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. See Schedule C-EZ for details. You may be subject to state and local taxes and other requirements such as business licenses and fees. Check with your state and local governments for more information. Section references are to the Internal Revenue Code unless otherwise noted. their accounting methods to adopt final tangible property repair regulations without filing Form 3115, Application for Change in Accounting Method. The final tangible property regulations, T.D. 9636, clarify the standards for determining whether to capitalize or expense certain repair and maintenance costs of tangible property. For additional information, see Rev. Proc. 2015-20, 2015-9 I.R.B. 694 available at www.irs.gov/irb/2015-9_IRB/ar09.html. Small Business and SelfEmployed (SB/SE) Tax Center. Do you need help with a tax issue or preparing your return, or do you need a free publication or form? SB/SE serves taxpayers who file Form 1040, Schedules C, E, F, or Form 2106, as well as small business taxpayers with assets under $10 million. For additional information, visit the Small Business and Self-Employed Tax Center www.irs.gov/Businesses/Smallat Businesses- &-Self-Employed/SmallBusiness-and-Self-Employed-TaxCenter-1. Future Developments For the latest information about developments related to Schedule C and its instructions, such as legislation enacted after they were published, go to www.irs.gov/schedulec. What's New Standard mileage rate. The business standard mileage rate for 2015 is 57.5 cents per mile. Deduction and capitalization of ex penditures related to tangible proper ty. Final regulations under sections 162(a) and 263(a) provide guidance for taxpayers that acquire, produce, or improve tangible property. The final regulations clarify and expand the standards under sections 162(a) and 263(a). The regulations generally apply to tax years beginning on or after January 1, 2014. For additional information, see T.D. 9636, 2013-43 I.R.B. 331 available at www.irs.gov/irb/2013-43_IRB/ ar05.html. Eased reporting requirements for cer tain small businesses changing ac counting methods to adopt new repair regulations. For tax years beginning on or after January 1, 2014, small business taxpayers may make certain changes to Reminders Simplified method for business use of home deduction. The IRS provides a simplified method to determine your expenses for business use of a home. For more information and to determine if you can use the simplified method, see Line 30, later. C-1 Jan 07, 2016 Cat. No. 24329W General Instructions Other Schedules and Forms You May Have To File Schedule A (Form 1040) to deduct interest, taxes, and casualty losses not related to your business. Schedule E (Form 1040) to report rental real estate and royalty income or (loss) that is not subject to self-employment tax. Schedule F (Form 1040) to report profit or (loss) from farming. Schedule J (Form 1040) to figure your tax by averaging your farming or fishing income over the previous 3 years. Doing so may reduce your tax. Schedule SE (Form 1040) to pay self-employment tax on income from any trade or business. Form 3800 to claim any of the general business credits. Form 4562 to claim depreciation (including the special allowance) on assets placed in service in 2015, to claim amortization that began in 2015, to make an election under section 179 to expense certain property, or to report information on listed property. Form 4684 to report a casualty or theft gain or (loss) involving property used in your trade or business or income-producing property. Form 4797 to report sales, exchanges, and involuntary conversions (not from a casualty or theft) of trade or business property. Form 6198 to figure your allowable loss if you have a business loss and you have amounts invested in the business for which you are not at risk. Form 8582 to figure your allowable loss from passive activities. Form 8594 to report certain purchases or sales of groups of assets that constitute a trade or business. Form 8824 to report like-kind exchanges. Form 8829 to claim actual expenses for business use of your home. Form 8903 to take a deduction for income from domestic production activities. Singlemember limited liability com pany (LLC). Generally, a single-member domestic LLC is not treated as a separate entity for federal income tax purposes. If you are the sole member of a domestic LLC, file Schedule C or C-EZ (or Schedule E or F, if applicable) unless you have elected to treat the domestic LLC as a corporation. See Form 8832 for details on making this election and for information about the tax treatment of a foreign LLC. Singlemember limited liability com panies (LLCs) with employees. A single-member LLC must file employment tax returns using the LLC's name and employer identification number (EIN) rather than the owner's name and EIN, even if the LLC is not treated as a separate entity for federal income tax purposes. Heavy highway vehicle use tax. If you use certain highway trucks, truck-trailers, tractor-trailers, or buses in your trade or business, you may have to pay a federal highway motor vehicle use tax. See the Instructions for Form 2290 to find out if you must pay this tax and visit www.irs.gov/trucker for the most recent developments. Information returns. You may have to file information returns for wages paid to employees, certain payments of fees and other nonemployee compensation, interest, rents, royalties, real estate transactions, annuities, and pensions. See Line I, later, and the 2015 General Instructions for Certain Information Re- turns for details and other payments that may require you to file a Form 1099. If you received cash of more than $10,000 in one or more related transactions in your trade or business, you may have to file Form 8300. For details, see Pub. 1544. Business Owned and Operated by Spouses Generally, if you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. You generally have to file Form 1065 instead of Schedule C or C-EZ for your joint business activity; however, you may not have to file Form 1065 if either of the following applies. You and your spouse elect to be treated as a qualified joint venture. See Qualified Joint Venture, next. You and your spouse wholly own the unincorporated business as community property and you treat the business as a sole proprietorship. See Community Income, later. Otherwise, use Form 1065. See Pub. 541 for more details. Qualified Joint Venture You and your spouse can elect to treat an unincorporated business as a qualified joint venture instead of a partnership if you: Each materially participate in the business (see Material participation, later, in the instructions for line G), Are the only owners of the business, and File a joint return for the tax year. Making the election will allow you to avoid the complexity of Form 1065, but still give each of you credit for social security earnings on which retirement benefits, disability benefits, survivor benefits, and insurance (Medicare) benefits are based. In most cases, this election will not increase the total tax owed on the joint return. Jointly owned property. You and your spouse must operate a business to make this election. Do not make the election for jointly owned property that is not a trade or business. Making the election. To make this election, divide all items of income, C-2 gain, loss, deduction, and credit attributable to the business between you and your spouse based on your interests in the business. Each of you must file a separate Schedule C, C-EZ, or F. Enter your share of the applicable income, deduction or (loss), on the appropriate lines of your separate Schedule C, C-EZ, or F. Each of you may also need to file a separate Schedule SE to pay self-employment tax. If the business was taxed as a partnership before you made the election, the partnership will be treated as terminating at the end of the preceding tax year. For information on how to report the termination of the partnership, see Pub. 541. Revoking the election. The election can be revoked only with the permission of the IRS. However, the election remains in effect only for as long as you and your spouse continue to meet the requirements to make the election. If you and your spouse fail to meet the requirements for any year, you will need to make a new election to be treated as a qualified joint venture in any future year. Employer identification number (EIN). You and your spouse do not need to obtain an EIN to make the election. But you may need an EIN to file other returns, such as employment or excise tax returns. To apply for an EIN, see the Instructions for Form SS-4. Rental real estate business. If you and your spouse make the election for your rental real estate business, you must each report your share of income and deductions on Schedule E. Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive loss limitation rules. Electing qualified joint venture status does not alter the application of the self-employment tax or the passive loss limitation rules. More information. For more information on qualified joint ventures, go to IRS.gov and enter \"qualified joint venture\" in the search box. Community Income If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U.S. possession, you can treat your wholly-owned, unincorporated business as a sole proprietorship, instead of a partnership. Any change in your reporting position will be treated as a conversion of the entity. Report your income and deductions as follows. If only one spouse participates in the business, all of the income from that business is the self-employment earnings of the spouse who carried on the business. If both spouses participate, the income and deductions are allocated to the spouses based on their distributive shares. If either or both spouses are partners in a partnership, see Pub. 541. If both spouses elected to treat the business as a qualifying joint venture, see Qualified Joint Venture, earlier. The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction in which you participated. Form 8886 must be filed for each tax year that your federal income tax liability is affected by your participation in the transaction. You may have to pay a penalty if you are required to file Form 8886 but do not do so. You may also have to pay interest and penalties on any reportable transaction understatements. The following are reportable transactions. Any listed transaction that is the same as or substantially similar to tax avoidance transactions identified by the IRS. Any transaction offered to you or a related party under conditions of confidentiality for which you paid an advisor a fee of at least $50,000. Certain transactions for which you or a related party have contractual protection against disallowance of the tax benefits. Certain transactions resulting in a loss of at least $2 million in any single tax year or $4 million in any combination of tax years. (At least $50,000 for a single tax year if the loss arose from a foreign currency transaction defined in section 988(c)(1), whether or not the loss flows through from an S corporation or partnership.) Certain transactions of interest entered into after November 1, 2006, that are the same or substantially similar to one of the types of transactions that the IRS has identified by published guidance as a transaction of interest. See the Instructions for Form 8886 for more details. Capital Construction Fund Do not claim on Schedule C or C-EZ the deduction for amounts contributed to a capital construction fund set up under chapter 535 of title 46 of the United States Code. Instead, reduce the amount you would otherwise enter on Form 1040, line 43, by the amount of the deduction. Next to line 43, enter \"CCF\" and the amount of the deduction. For details, see Pub. 595. Additional Information See Pub. 334 for more information for small businesses. Specific Instructions Filers of Form 1041. Do not complete the block labeled \"Social security number (SSN).\" Instead, enter the employer identification number (EIN) issued to the estate or trust on line D. Line A Describe the business or professional activity that provided your principal source of income reported on line 1. If you owned more than one business, you must complete a separate Schedule C for each business. Give the general field or activity and the type of product or service. If your general field or activity is wholesale or retail trade, or services connected with production services (mining, construction, or manufacturing), also give the type of customer or client. For example, \"wholesale sale of hardware to retailers\" or \"appraisal of real estate for lending institutions.\" Line B Enter on line B the six-digit code from the Principal Business or Professional C-3 Activity Codes chart at the end of these instructions. Line D Enter on line D the employer identification number (EIN) that was issued to you on Form SS-4. Do not enter your SSN on this line. Do not enter another taxpayer's EIN (for example, from any Forms 1099-MISC that you received). If you do not have an EIN, leave line D blank. You need an EIN only if you have a qualified retirement plan or are required to file employment, excise, alcohol, tobacco, or firearms returns, or are a payer of gambling winnings. If you need an EIN, see the Instructions for Form SS-4. Singlemember LLCs. If you are the sole owner of an LLC that is not treated as a separate entity for federal income tax purposes, you may have an EIN that was issued to the LLC (in the LLC's legal name) if you are required to file employment tax returns and certain excise tax returns. However, you should enter on line D only the EIN issued to you and in your name as a sole proprietor. If you do not have such an EIN, leave line D blank. Do not enter on line D the EIN issued to the LLC. Line E Enter your business address. Show a street address instead of a box number. Include the suite or room number, if any. If you conducted the business from your home located at the address shown on Form 1040, page 1, you do not have to complete this line. Line F Generally, you can use the cash method, accrual method, or any other method permitted by the Internal Revenue Code. In all cases, the method used must clearly reflect income. Unless you are a qualifying taxpayer or a qualifying small business taxpayer (see the Part III instructions), you must use the accrual method for sales and purchases of inventory items. Special rules apply to long-term contracts (see section 460 for details). If you use the cash method, show all items of taxable income actually or constructively received during the year (in cash, property, or services). Income is constructively received when it is credited to your account or set aside for you to use. Also, show amounts actually paid during the year for deductible expenses. However, if the payment of an expenditure creates an asset having a useful life that extends substantially beyond the close of the year, it may not be deductible or may be deductible only in part for the year of the payment. See chapter 1 of Pub. 535. If you use the accrual method, report income when you earn it and deduct expenses when you incur them even if you do not pay them during the tax year. Accrual-basis taxpayers are put on a cash basis for deducting business expenses owed to a related cash-basis taxpayer. Other rules determine the timing of deductions based on economic performance. See Pub. 538. To change your accounting method, you generally must file Form 3115. You also may have to make an adjustment to prevent amounts of income or expense from being duplicated or omitted. This is called a section 481(a) adjustment. Example. You change to the cash method of accounting and choose to account for inventoriable items in the same manner as materials and supplies that are not incidental. You accrued sales in 2014 for which you received payment in 2015. You must report those sales in both years as a result of changing your accounting method and must make a section 481(a) adjustment to prevent duplication of income. A net negative section 481(a) adjustment is taken into account entirely in the year of the change. A net positive section 481(a) adjustment is generally taken into account over a period of 4 years. Include any net positive section 481(a) adjustments on line 6. If the net section 481(a) adjustment is negative, report it in Part V. For details on figuring section 481(a) adjustments, see the Instructions for Form 3115, and Rev. Proc. 2006-12, 2006-3 I.R.B. 310, available at www.irs.gov/irb/2006-03_IRB/ ar14.html. Also see Rev. Proc. 2006-37, 2006-38 I.R.B. 499, available at www.irs.gov/irb/2006-38_IRB/ ar10.html. Line G If your business activity was not a rental activity and you met any of the material participation tests, explained next, or the exception for oil and gas applies, check the \"Yes\" box. Otherwise, check the \"No\" box. If you check the \"No\" box, this activity is passive. If you have a loss from a passive activity, see Limit on losses, later. If you have a profit from the rental of property to a nonpassive activity, see Recharacterization of Passive Income in Pub. 925 to find out how to report the net income. Material participation. For purposes of the seven material participation tests listed later, participation generally includes any work you did in connection with an activity if you owned an interest in the activity at the time you did the work. The capacity in which you did the work does not matter. However, work is not treated as participation if it is work that an owner would not customarily do in the same type of activity and one of your main reasons for doing the work was to avoid the disallowance of losses or credits from the activity under the passive activity rules. Work you did as an investor in an activity is not treated as participation unless you were directly involved in the day-to-day management or operations of the activity. Work done as an investor includes: Studying and reviewing financial statements or reports on the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. Participation by your spouse during the tax year in an activity you own can be counted as your participation in the activity. This rule applies even if your spouse did not own an interest in the activity and whether or not you and your spouse file a joint return. However, this rule does not apply for purposes of determining whether you and your spouse can elect to have your business treated as a qualified joint venture instead of a partnership (see Qualified Joint Venture, earlier). C-4 For purposes of the passive activity rules, you materially participated in the operation of this trade or business activity during 2015 if you met any of the following seven tests. 1. You participated in the activity for more than 500 hours during the tax year. 2. Your participation in the activity for the tax year was substantially all of the participation in the activity of all individuals (including individuals who did not own any interest in the activity) for the tax year. 3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other person for the tax year. This includes individuals who did not own any interest in the activity. 4. The activity is a significant participation activity for the tax year, and you participated in all significant participation activities for more than 500 hours during the year. An activity is a \"significant participation activity\" if it involves the conduct of a trade or business, you participated in the activity for more than 100 hours during the tax year, and you did not materially participate under any of the material participation tests (other than this test 4). 5. You materially participated in the activity for any 5 of the prior 10 tax years. 6. The activity is a personal service activity in which you materially participated for any 3 prior tax years. A personal service activity is an activity that involves performing personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. 7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis for more than 100 hours during the tax year.Your participation in managing the activity does not count in determining if you meet this test if any person (except you) (a) received compensation for performing management services in connection with the activity, or (b) spent more hours during the tax year than you spent performing management services in connection with the activity (regard- less of whether the person was compensated for the services). Rental of personal property. Generally, a rental activity (such as long-term equipment leasing) is a passive activity even if you materially participated in the activity. However, if you met any of the five exceptions listed under Rental Activities in the Instructions for Form 8582, the rental of the property is not treated as a rental activity and the material participation rules explained earlier apply. Exception for oil and gas. If you are filing Schedule C to report income and deductions from an oil or gas well in which you own a working interest directly or through an entity that does not limit your liability, check the \"Yes\" box. The activity of owning a working interest is not a passive activity, regardless of your participation. Limit on losses. Your business activity loss may be limited if you checked the \"No\" box on line G. In addition, your rental activity loss may be limited even if you materially participated. In general, a business activity in which you do not materially participate or a rental activity is a passive activity and you have to use Form 8582 to figure your allowable loss, if any, to enter on Schedule C, line 31. For details, see Pub. 925. Line H If you started or acquired this business in 2015, check the box on line H. Also check the box if you are reopening or restarting this business after temporarily closing it, and you did not file a 2014 Schedule C or C-EZ for this business. Line I If you made any payment in 2015 that would require you to file any Forms 1099, check the \"Yes\" box. Otherwise, check the \"No\" box. You may have to file information returns for wages paid to employees, certain payments of fees and other nonemployee compensation, interest, rents, royalties, real estate transactions, annuities, and pensions. You may also have to file an information return if you sold $5,000 or more of consumer products to a person on a buy-sell, deposit-commission, or other similar basis for resale. The Guide to Information Returns in the 2015 General Instructions for Certain Information Returns identifies which Forms 1099 must be filed, the amounts to report, and the due dates for the required Forms 1099. TIP Part I. Income Except as otherwise provided in the Internal Revenue Code, gross income includes income from whatever source derived. In certain circumstances, however, gross income does not include extraterritorial income that is qualifying foreign trade income. Use Form 8873 to figure the extraterritorial income exclusion. Report it on Schedule C as explained in the Instructions for Form 8873. If you were a debtor in a chapter 11 bankruptcy case during 2015, see Chapter 11 Bankruptcy Cases in the Instructions for Form 1040 (under Income) and the Instructions for Schedule SE. Line 1 Enter gross receipts from your trade or business. Include amounts you received in your trade or business that were properly shown on Forms 1099-MISC. If the total amounts that were reported in box 7 of Forms 1099-MISC are more than the total you are reporting on line 1, attach a statement explaining the difference. Statutory employees. If you received a Form W-2 and the "Statutory employee" box in box 13 of that form was checked, report your income and expenses related to that income on Schedule C or C-EZ. Enter your statutory employee income from box 1 of Form W-2 on line 1 of Schedule C or C-EZ and check the box on that line. Social security and Medicare tax should have been withheld from your earnings; as a result, you do not owe self-employment tax on these earnings. Statutory employees include full-time life insurance agents, certain agent or commission drivers and traveling salespersons, and certain homeworkers. If you had both self-employment income and statutory employee income, you must file two Schedules C. You C-5 cannot use Schedule C-EZ or combine these amounts on a single Schedule C. Qualified joint ventures should report rental real estate inCAUTION come not subject to self-employment tax on Schedule E. See Qualified Joint Venture, earlier, and the Instructions for Schedule E. ! Installment sales. Generally, the installment method cannot be used to report income from the sale of (a) personal property regularly sold under the installment method, or (b) real property held for resale to customers. But the installment method can be used to report income from sales of certain residential lots and timeshares if you elect to pay interest on the tax due on that income after the year of sale. See section 453(l)(2) (B) for details. If you make this election, include the interest in the total on Form 1040, line 62. Check box c and enter the amount of interest and \"453(l)(3)\" on the line next to that box. If you use the installment method, attach a statement to your return. Show separately for 2015 and the 3 preceding years: gross sales, cost of goods sold, gross profit, percentage of gross profit to gross sales, amounts collected, and gross profit on amounts collected. Line 2 Report your sales returns and allowances as a positive number on line 2. A sales return is a cash or credit refund you gave to customers who returned defective, damaged, or unwanted products. A sales allowance is a reduction in the selling price of products, instead of a cash or credit refund. Line 6 Report on line 6 amounts from finance reserve income, scrap sales, bad debts you recovered, interest (such as on notes and accounts receivable), state gasoline or fuel tax refunds you received in 2015, any amount of credit for biofuel claimed on line 2 of Form 6478, any amount of credit for biodiesel and renewable diesel fuels claimed on line 8 of Form 8864, credit for federal tax paid on fuels claimed on your 2014 Form 1040, prizes and awards related to your trade or business, and other kinds of miscellaneous business income. Include amounts you received in your trade or business as shown on Form 1099-PATR. If the business use percentage of any listed property (defined in Line 13, later) dropped to 50% or less in 2015, report on this line any recapture of excess depreciation, including any section 179 expense deduction. Use Part IV of Form 4797 to figure the recapture. Also, if the business use percentage drops to 50% or less on leased listed property (other than a vehicle), include on this line any inclusion amount. See chapter 5 of Pub. 946 to figure the amount. Part II. Expenses Capitalizing costs of property. If you produced real or tangible personal property or acquired property for resale, certain expenses attributable to the property generally must be included in inventory costs or capitalized. In addition to direct costs, producers of inventory property generally must also include part of certain indirect costs in their inventory. Purchasers of personal property acquired for resale must include part of certain indirect costs in inventory only if the average annual gross receipts for the 3 prior tax years exceed $10 million. Also, you must capitalize part of the indirect costs that benefit real or tangible personal property constructed for use in a trade or business, or noninventory property produced for sale to customers. Reduce the amounts on lines 8 through 26 and Part V by amounts capitalized. See Pub. 538 for a discussion of uniform capitalization rules. Exception for certain producers. Producers who account for inventoriable items in the same manner as materials and supplies that are not incidental can currently deduct expenditures for direct labor and all indirect costs that would otherwise be included in inventory costs. See Part III for more details. Exception for creative property. If you are a freelance artist, author, or photographer, you may be exempt from the capitalization rules. However, your personal efforts must have created (or reasonably be expected to create) the property. This exception does not apply to any expense related to printing, photographic plates, motion picture films, vid- eo tapes, or similar items. These expenses are subject to the capitalization rules. For details, see Uniform Capitalization Rules in Pub. 538. Line 9 You can deduct the actual expenses of operating your car or truck or take the standard mileage rate. This is true even if you used your vehicle for hire (such as a taxicab). You must use actual expenses if you used five or more vehicles simultaneously in your business (such as in fleet operations). You cannot use actual expenses for a leased vehicle if you previously used the standard mileage rate for that vehicle. 2. Complete Form 4562, Part V, if you are claiming depreciation on your vehicle or you are required to file Form 4562 for any other reason (see Line 13, later). Line 11 Enter the total cost of contract labor for the tax year. Contract labor includes payments to persons you do not treat as employees (for example, independent contractors) for services performed for your trade or business. Do not include contract labor deducted elsewhere on your return, such as contract labor includible on line 17, 21, 26, or 37. Also, do not include salaries and wages paid to your employees; instead, see Line 26, later. You can take the standard mileage rate for 2015 only if you: Owned the vehicle and used the standard mileage rate for the first year you placed the vehicle in service, or Leased the vehicle and are using the standard mileage rate for the entire lease period. You must file Form 1099-MISC to report contract labor payments of $600 or more during the year. See the Instructions for Form 1099-MISC for details. If you take the standard mileage rate: Multiply the number of business miles driven by 57.5 cents, and Add to this amount your parking fees and tolls. Enter your deduction for depletion on this line. If you have timber depletion, attach Form T (Timber). See chapter 9 of Pub. 535 for details. Enter the total on line 9. Do not deduct depreciation, rent or lease payments, or your actual operating expenses. If you deduct actual expenses: Include on line 9 the business portion of expenses for gasoline, oil, repairs, insurance, license plates, etc., and Show depreciation on line 13 and rent or lease payments on line 20a. For details, see chapter 4 of Pub. 463. Information on your vehicle. If you claim any car and truck expenses, you must provide certain information on the use of your vehicle by completing one of the following. 1. Complete Schedule C, Part IV, or Schedule C-EZ, Part III, if (a) you are claiming the standard mileage rate, you lease your vehicle, or your vehicle is fully depreciated, and (b) you are not required to file Form 4562 for any other reason. If you used more than one vehicle during the year, attach a statement with the information requested in Schedule C, Part IV, or Schedule C-EZ, Part III, for each additional vehicle. C-6 Line 12 Line 13 Depreciation and section 179 expense deduction. Depreciation is the annual deduction allowed to recover the cost or other basis of business or investment property having a useful life substantially beyond the tax year. You can also depreciate improvements made to leased business property. However, stock in trade, inventories, and land are not depreciable. Depreciation starts when you first use the property in your business or for the production of income. It ends when you take the property out of service, deduct all your depreciable cost or other basis, or no longer use the property in your business or for the production of income. You can also elect under section 179 to expense part or all of the cost of certain property you bought in 2015 for use in your business. See the Instructions for Form 4562 and Pub. 946 to figure the amount to enter on line 13. When to attach Form 4562. You must complete and attach Form 4562 only if you are claiming: Depreciation on property placed in service during 2015; Depreciation on listed property (defined later), regardless of the date it was placed in service; or A section 179 expense deduction. If you acquired depreciable property for the first time in 2015, see Pub. 946. Listed property generally includes but is not limited to: Passenger automobiles weighing 6,000 pounds or less; Any other property used for transportation if the nature of the property lends itself to personal use, such as motorcycles, pickup trucks, etc.; Any property used for entertainment or recreational purposes (such as photographic, phonographic, communication, and video recording equipment); and Computers or peripheral equipment. Exceptions. Listed property does not include photographic, phonographic, communication, or video equipment used exclusively in your trade or business or at your regular business establishment. It also does not include any computer or peripheral equipment used exclusively at a regular business establishment and owned or leased by the person operating the establishment. For purposes of these exceptions, a portion of your home is treated as a regular business establishment only if that portion meets the requirements under section 280A(c)(1) for deducting expenses for the business use of your home. See Line 6, earlier, if the business use percentage of any listed property dropped to 50% or less in 2015. Line 14 Deduct contributions to employee benefit programs that are not an incidental part of a pension or profit-sharing plan included on line 19. Examples are accident and health plans, group-term life insurance, and dependent care assistance programs. If you made contributions on your behalf as a self-employed person to a dependent care assistance program, complete Form 2441, Parts I and III, to figure your deductible contributions to that program. You cannot deduct contributions you made on your behalf as a self-employed person for group-term life insurance. Do not include on line 14 any contributions you made on your behalf as a self-employed person to an accident and health plan. However, you may be able to deduct on Form 1040, line 29, or Form 1040NR, line 29, the amount you paid for health insurance on behalf of yourself, your spouse, and dependents, even if you do not itemize your deductions. See the instructions for Form 1040, line 29, or Form 1040NR, line 29, for details. You must reduce your line 14 deduction by the amount of any credit for small employer health insurance premiums determined on Form 8941. See Form 8941 and its instructions to determine which expenses are eligible for the credit. Line 15 Deduct premiums paid for business insurance on line 15. Deduct on line 14 amounts paid for employee accident and health insurance. Do not deduct amounts credited to a reserve for self-insurance or premiums paid for a policy that pays for your lost earnings due to sickness or disability. For details, see chapter 6 of Pub. 535. Lines 16a and 16b Interest allocation rules. The tax treatment of interest expense differs depending on its type. For example, home mortgage interest and investment interest are treated differently. \"Interest allocation\" rules require you to allocate (classify) your interest expense so it is deducted (or capitalized) on the correct line of your return and receives the right tax treatment. These rules could affect how much interest you are allowed to deduct on Schedule C or C-EZ. Generally, you allocate interest expense by tracing how the proceeds of the loan were used. See chapter 4 of Pub. 535 for details. If you paid interest on a debt secured by your main home and any of the proceeds from that debt were used in connection with your trade or business, see chapter 4 of Pub. 535 to figure the C-7 amount that is deductible on Schedule C or C-EZ. How to report. If you have a mortgage on real property used in your business (other than your main home), enter on line 16a the interest you paid for 2015 to banks or other financial institutions for which you received a Form 1098 (or similar statement). If you did not receive a Form 1098, enter the interest on line 16b. If you paid more mortgage interest than is shown on Form 1098, see chapter 4 of Pub. 535 to find out if you can deduct the additional interest. If you can, include the amount on line 16a. Attach a statement to your return explaining the difference and enter \"See attached\" in the margin next to line 16a. If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on the mortgage and the other person received the Form 1098, include your share of the interest on line 16b. Attach a statement to your return showing the name and address of the person who received the Form 1098. In the margin next to line 16b, enter \"See attached.\" If you paid interest in 2015 that also applies to future years, deduct only the part that applies to 2015. Line 17 Include on this line fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business. Include fees for tax advice related to your business and for preparation of the tax forms related to your business. Also include expenses incurred in resolving asserted tax deficiencies related to your business. For more information, see Pub. 334 or 535. Line 18 Include on this line your expenses for office supplies and postage. Line 19 Enter your deduction for the contributions you made for the benefit of your employees to a pension, profit-sharing, or annuity plan (including SEP, SIM- PLE, and SARSEP plans described in Pub. 560). If the plan included you as a self-employed person, enter the contributions made as an employer on your behalf on Form 1040, line 28, or Form 1040NR, line 28, not on Schedule C. This deduction may be subject to limitations. For more information on potential limitations, see Pub. 560. In most cases, you must file the applicable form listed below if you maintain a pension, profit-sharing, or other funded-deferred compensation plan. The filing requirement is not affected by whether or not the plan qualified under the Internal Revenue Code, or whether or not you claim a deduction for the current tax year. There is a penalty for failure to timely file these forms. Form 5500EZ. File this form if you have a one-participant retirement plan that meets certain requirements. A one-participant plan is a plan that covers only you (or you and your spouse). Form 5500SF. File this form electronically with the Department of Labor (at www.efast.dol.gov) if you have a small plan (fewer than 100 participants in most cases) that meets certain requirements. Form 5500. File this form electronically with the Department of Labor (at www.efast.dol.gov) for a plan that does not meet the requirements for filing Form 5500-EZ or Form 5500-SF. For details, see Pub. 560. Lines 20a and 20b If you rented or leased vehicles, machinery, or equipment, enter on line 20a the business portion of your rental cost. But if you leased a vehicle for a term of 30 days or more, you may have to reduce your deduction by an amount called the inclusion amount. See Leasing a Car in chapter 4 of Pub. 463 to figure this amount. Enter on line 20b amounts paid to rent or lease other property, such as office space in a building. Line 21 Deduct the cost of incidental repairs and maintenance that do not add to the property's value or appreciably prolong its life. Do not deduct the value of your own labor. Do not deduct amounts spent to restore or replace property; they must be capitalized. You can also deduct the cost of books, professional instruments, equipment, etc., if you normally use them within a year. However, if their usefulness extends substantially beyond a year, you must generally recover their costs through depreciation. under the U.S. social security system due to an international social security agreement). Estate and gift taxes. Taxes assessed to pay for improvements, such as paving and sewers. Taxes on your home or personal use property. State and local sales taxes on property purchased for use in your business. Instead, treat these taxes as part of the cost of the property. State and local sales taxes imposed on the buyer that you were required to collect and pay over to state or local governments. These taxes are not included in gross receipts or sales nor are they a deductible expense. However, if the state or local government allowed you to retain any part of the sales tax you collected, you must include that amount as income on line 6. Other taxes and license fees not related to your business. Line 23 Line 24a You can deduct the following taxes and licenses on this line. State and local sales taxes imposed on you as the seller of goods or services. If you collected this tax from the buyer, you must also include the amount collected in gross receipts or sales on line 1. Real estate and personal property taxes on business assets. Licenses and regulatory fees for your trade or business paid each year to state or local governments. But some licenses, such as liquor licenses, may have to be amortized. See chapter 8 of Pub. 535 for details. Social security and Medicare taxes paid to match required withholding from your employees' wages. Reduce your deduction by the amount shown on Form 8846, line 4. Federal unemployment tax paid. Federal highway use tax. Contributions to state unemployment insurance fund or disability benefit fund if they are considered taxes under state law. Enter your expenses for lodging and transportation connected with overnight travel for business while away from your tax home. In most cases, your tax home is your main place of business, regardless of where you maintain your family home. You cannot deduct expenses paid or incurred in connection with employment away from home if that period of employment exceeds 1 year. Also, you cannot deduct travel expenses for your spouse, your dependent, or any other individual unless that person is your employee, the travel is for a bona fide business purpose, and the expenses would otherwise be deductible by that person. Line 22 In most cases, you can deduct the cost of materials and supplies only to the extent you actually consumed and used them in your business during the tax year (unless you deducted them in a prior tax year). However, if you had incidental materials and supplies on hand for which you kept no inventories or records of use, you can deduct the cost of those you actually purchased during the tax year, provided that method clearly reflects income. Do not deduct the following. Federal income taxes, including your self-employment tax. However, you can deduct one-half of your self-employment tax on Form 1040, line 27 (or Form 1040NR, line 27, when covered C-8 Do not include expenses for meals and entertainment on this line. Instead, see Line 24b, later. Instead of keeping records of your actual incidental expenses, you can use an optional method for deducting incidental expenses only if you did not pay or incur meal expenses on a day you were traveling away from your tax home. The amount of the deduction is $5 a day. Incidental expenses include fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and hotel servants in foreign countries. They do not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, or the costs of telegrams or telephone calls. You cannot use this method on any day that you use the standard meal allowance (as explained in Line 24b, later). You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless the meeting is directly related to your trade or business and it is as reasonable for the meeting to be held outside the North American area as within it. These rules apply to both employers and employees. Other rules apply to luxury water travel. For details on travel expenses, see chapter 1 of Pub. 463. Line 24b Enter your total deductible business meal and entertainment expenses. This includes expenses for meals while traveling away from home for business and for meals that are business-related entertainment. Deductible expenses. Business meal expenses are deductible only if they are (a) directly related to or associated with the active conduct of your trade or business, (b) not lavish or extravagant, and (c) incurred while you or your employee is present at the meal. You cannot deduct any expense paid or incurred for a facility (such as a yacht or hunting lodge) used for any activity usually considered entertainment, amusement, or recreation. Also, you cannot deduct membership dues for any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion. But it does not include civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards, unless a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests. There are exceptions to these rules as well as other rules that apply to skybox rentals and tickets to entertainment events. See chapters 1 and 2 of Pub. 463. Standard meal allowance. Instead of deducting the actual cost of your meals while traveling away from home, you can use the standard meal allowance for your daily meals and incidental expenses. Under this method, you deduct a specified amount, depending on where you travel, instead of keeping records of your actual meal expenses. However, you must still keep records to prove the time, place, and