Dictionary of Tax Deductions

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Edward A. Lyon, JD
TaxTuneup.com, Inc.
3416 Shaw Ave #5
Cincinnati OH 45208
513.321.2821
elyon@taxtuneup.com

C Corporation

A “C” corporation is a regular taxable corporation that pays tax on its net income at corporate rates. Corporate tax rates start at 15% for the first 450,000 in taxable income and climb quickly. (The spikes you see as rates climb are intended to eliminate the benefit of moving through the brackets for corporations with higher income.)

Report C corporation income and expenses on Form 1120 or 1120-A. For more information, see IRS Publication 542: Corporations.

Cab Fare

• Cab fare for business trips is a deductible Business Expense on Schedule C, Form 1065, or your corporate return.
   
• Cab fare for trips you take on behalf of your employer is an Employee Business Expense subject to the 2% floor on Miscellaneous Itemized Deductions.
   
• Cab fare your employer pays is a a nontaxable De Minimis Fringe Benefit if your employer pays the fare to let you work late.

Cafeteria Plan (See Flexible Spending Account)

Capital Gains

Capital gains and losses are profits from the sale of property. You might not think that a type of "income" qualifies as a tax break. But long-term capital gains from sales of property held for more than 12 months enjoy three important advantages over ordinary income:

• Long-term capital gains -- gains from the sale of property held for more than 12 months--are taxed at lower rates than ordinary income -- no more than 15%, even for taxpayers in the top tax brackets. 
   
• You don't pay tax until you "realize" your gain, or actually sell your property. This lets you choose when to pay the tax.
   
• If you hold on to your appreciated property until your death, you'll avoid income tax entirely. Your heirs will inherit the property with a basis equal to its value on your date of death. 

Capital gains are the first place to look to cut your tax on your investments. But there are several strategies you can use to avoid even these taxes:

• Consider borrowing against assets to draw cash in the form of nontaxable loans. You can use your home, your investment real estate, and even your securities as collateral for a loan or line of credit. You can also borrow against a permanent life insurance policy. This gives you access to your equity and lets your investment keep appreciating.
   
• Consider Tax Swaps to generate offsetting capital losses.
   
• Give assets to a lower-bracket family member. This strategy used to be popular for paying college tuition until Congress raised the age limit for the Kiddie Tax; however, it can still be useful for older relatives.
   
• Use appreciated assets to make a Charitable Gift.
   
• If you have a large position in a single security, consider Tax-Engineered Products.

Car Phone (See Cell Phone)

Car and Truck

Car and truck expenses are deductible when you drive for a deductible activity:

• Car travel on behalf of your employer is deductible as an Employee Business Expense subject to the 2% floor on Miscellaneous Itemized Deductions.

• Car travel to and from medical facilities is deductible at 12 cents per mile, plus parking and tolls, as a Medical Expense subject to the 7.5% floor.

• Car travel during a move is deductible as a Moving Expense.
   
• Car travel to find a job is deductible at 50.5 cents per mile as a Job-Hunting Expense subject to the 2% floor on miscellaneous itemized deductions.

• Car travel to manage your investments is deductible at 50.5 cents per mile (up to investment income) as an Investment Expense subject to the 2% floor on Miscellaneous Itemized Deductions. However, there's no deduction for travel to investment seminars or to attend shareholder meetings.

• Car travel for volunteer or charitable causes is deductible at 14 cents per mile as a Charitable Gift.

• Property taxes you pay on your car are deductible as an itemized deduction on Schedule A, regardless of how you use your car.

Business Use of Your Car

If you use your car or light truck for business, you can deduct those expenses attributable to the business. If you use your vehicle 100% for business, just deduct 100% of your expenses. if you use your vehicle less than 100% for business, you can deduct whatever percentage of your expenses that you use the vehicle for business.

There are two ways to calculate your deduction for business use of your car: "actual expenses" method and the mileage allowance:

• To use the "actual expense" method, keep actual records of all your car expenses. These include lease or purchase payments, garage fees, gas, insurance, licensing and tags, oil, maintenance, parking, tires, tolls, and even washing. Deduct the percentage of your total expenses that equals your business use of the car. If you use this method the year you place the car in service, you'll have to use it for all future years for that car.
   
• To use the mileage allowance, simply keep track of your deductible mileage and deduct the appropriate amount per mile. You have to choose this method the first year you use the car for business if you want to use it for future years. You can switch from the mileage allowance to the actual expense method, but you can't switch back

If you choose to claim actual expenses, you can also deduct Depreciation on the car. For 2008, you can deduct up to $3,160 in the first year, $5,000 in the second, $3,050 in the third, $1,775 in the fourth and fifth, and $1,152 in the sixth. Personal use cuts your depreciation by whatever percentage you use the car personally. For example, if you use the car 75% for business, your maximum first-year depreciation is 75% of $3,160, or $2,370. To claim depreciation as an employee, you have to show that you use the car for your employer's convenience. If you use a car more than 50% for business, you can choose first-year expensing or "200% modified accelerated cost recovery system" (MACRS). If you're subject to the AMT, use "150% MACRS." If you use it less than 50% for business, use straight-line depreciation.

If you choose first-year expensing, you can deduct whatever percentage of the $3,160 limit applies to your business use of the car. In future years, you'll reduce your depreciable basis by the full $3,160, even if personal use cuts your actual deduction. For example, if you claim first-year expensing for a car that you use 80% for business, reduce your basis by the full $3,160 even though you only claim $2,528 of first-year expensing (80% of the $3,160 limit).

If you choose MACRS, your deduction depends on when you buy the car. If the car is the only capital equipment you buy in a year, use the "mid-year" convention, below, if you buy it in January through September, or the "fourth quarter" convention if you buy it in October, November, or December. If you buy other capital equipment, you'll need to add the cost of the car to any other equipment you buy. If the cost of the car is more than 40% of the total cost of equipment you buy, then use the appropriate quarter convention for when you buy the car. (If the mid-quarter convention limits your deduction to less than the $3,160 annual limit, consider using first-year expensing, instead.) Otherwise, use the "mid-year" convention. In future years, you'll reduce your depreciable basis by the full amount of depreciation allowable, whether or not you claim the full deduction.

If you choose MACRS and your business use of the car falls below 50% in a later year, you'll have to "recapture" the difference between what you actually claimed (including first-year expensing) and what you could have claimed using straight-line depreciation. Report this "excess depreciation" as ordinary income the year business use falls below 50%.If you use the car 100% for business and you can't deduct 100% of the depreciable basis in the six-year periods above, you can continue deducting the remaining balance over future years at the final year's rate until you've completed depreciating.

Sport-utility vehicles with a gross vehicle weight, loaded, of 6,000 pounds or more, don't count as "cars," so they aren't limited to the annual depreciation ceilings. You can deduct the full amount of depreciation under any of these three methods. Popular sport-utility vehicles that qualify for full depreciation include the Chevy Suburban and Ford Expedition and Excursion; your dealer can tell you if your preferred truck qualifies.

If you lease your car, you can deduct whatever part of your lease payment equals your business use of the car. For example, if you lease a car for $300 per month, and use it 75% for business, you can deduct $225 per month. If the fair market value of the car at the beginning of the lease is $15,800 or more, you may have to report income to reflect the value of the car. The purpose of this rule is to limit your deduction to what you could take if you had bought the car outright.

Example: You buy a car for $18,000 in October 2007. You use it 60% for business that year. Since you use it more than 50% for business, you can use first-year expensing to deduct $1,896 (60% of the $3,160 first-year expensing limit). Using the depreciation table in Appendix 1, you can also use MACRS to deduct $540 (60% of the $900 fourth-quarter depreciation limit).

In 2000, you use the car just 30% for business. Your allowable deduction for 1999 under straight-line depreciation would have been $270. Your straight-line deduction for 2000 will equal the car?s depreciable basis (the $18,000 purchase price minus the $3,160 first-year expensing deduction, or $14,840) multiplied by the fourth-quarter depreciation limit (20%), multiplied by your business use of the car (30%), or $890.40. You'll also "recapture" and report as income the "excess depreciation" of what you claimed in 1998 ($1,896) minus what you could have claimed under the straight-line method ($270), or $1,626.

For more information, see IRS Publication 463, "Travel, Entertainment, Gift, and Car Expenses."

Car Crash

Casualty losses from crashes that occur while you are driving for business are actually deductible as a Business Expense on Schedule C, Form 1065, or your corporate return. The Tax Court says that car crashes "seem to be an inseparable incident of driving a car." So the costs of litigating and settling business car crashes are deductible business expenses.

Car Service (See Cab Fare)

Career Counseling

Career counseling fees you pay to find a new position in your same field of work is a deductible Job-Hunting Expense, subject to the 2% floor on Miscellaneous Itemized Deductions.

Casualty Losses

Casualty and theft losses, including unreimbursed losses from fire, earthquake, and the like are deductible to the extent that they exceed $100 plus 10% of your adjusted gross income. Losses are deductible in the year the casualty occurs or the year you discover the damage:

• You can estimate your reimbursement from insurance and deduct any remaining loss. (If your insurance reimbursement winds up more than your estimate, report the additional reimbursement as "other income" the year you receive it.)

• If you suffer a disaster loss in an area the President designates as a "disaster area" eligible for federal relief, you can claim your loss for the previous year, either on your original return (if you haven't yet filed it) or an amended return. The purpose of this rule is to speed up your relief.

Example: In 2007, your adjusted gross income was $30,000. A tree falls on your uninsured car worth $4,000. First, subtract $100 from the loss. Then subtract 10% of your adjusted gross income, or $3,000. Your deduction is $900.

Use Form 4684 to figure your deduction, then carry it to Schedule A of Form 1040.

CAT Scan

Deductible Medical Expense subject to the 7.5% floor.

Cell Phone

Cell phone and pager costs are deductible under these rules:

• A cell phone or pager you use for your trade or business is deductible as a Business Expense on Schedule C, Form 1065, or your corporate return.

• A cell phone or pager you maintain for your employer's convenience is deductible as an Employee Business Expense, subject to the 2% floor on Miscellaneous Itemized Deductions.
   

• A cell phone or car phone you install for medical emergencies is a deductible Medical Expense subject to the 7.5% floor.

Certificate of Deposit

Bank CD interest is taxed as ordinary income the year the bank reports the interest. If you pay a penalty for early withdrawal of savings, report the penalty as an adjustment to income on Form 1040. You might think this is a nice tax break. But it's actually one of the reasons bank CDs are such lousy investments. All of your interest income is taxable immediately, as you earn it, at ordinary income rates. There's no chance to profit from lower capital gain rates, and no opportunity (other than holding your CD in an IRA or retirement account) to defer tax until you actually need the money.

Charitable Gifts

Charitable gifts let you do well for yourself while you do well for others. There are several ways to write off charitable gifts, depending on what you give and what "strings" you keep attached.

For cash gifts:

• You can deduct up to 50% of your adjusted gross income for cash gifts to "501(c)(3) organizations" or public charities. These generally include churches, symphonies and museums, schools and colleges, and traditional charities such as the American Cancer Society and the United Way. If gifts to public charities exceed 50% of adjusted gross income you can carry forward the excess for 15 years.

• You can deduct up to 30% of your adjusted gross income for cash gifts to private foundations. If gifts to private foundations exceed 30% of adjusted gross income, you can carry forward the balance for up to five years.

• Gifts you make by check are deductible the year you present the check, even if it isn?t cashed until the next year.
   

• If your donation exceeds $75 and the organization gives you anything in return, such as dinner or entertainment at a banquet, the organization has to disclose the value of the benefits you receive. However, you don't need to reduce your deduction for token items such as calendars and tote bags or "intangible religious benefits."
   

• If you give more than $250, you'll need a written receipt as well as a cancelled check. The receipt has to be dated no later than the filing date of your return.

• If your donation to a college entitles you to buy sporting tickets, you can deduct 80% of your donation. The right to buy tickets is valued at 20% of the gift, regardless of the amount.

• Gifts you make through payroll deductions at work are deductible. Don't forget to deduct your United Way!

• There's no deduction for charitable losses at summer festivals or bingo games.

For gifts of property:

• Raffle tickets are deductible as gambling losses, up to your total gambling winnings.

• Donations of used clothing and household items are deductible at fair-market value, such as the price they would bring at a resale shop.

• Gifts of life insurance are valued at the policy's cash value, plus any ongoing premiums you give to support the policy. If you contribute annual premiums, make sure to give them to the charity, for the charity to pay, rather than paying premiums directly to the company.

• Gifts of a remainder interest in your home or other property are valued according to the value of the property and your life expectancy, calculated with the applicable federal rate. To make such a gift, just retitle the property in the name of the charity with a restriction letting you use the property for the rest of your life. You'll get a charitable deduction now for the value of the future use of the property.
   

• If you donate the use of your vacation home, there's no deduction for the fair market value of the use. Plus, the days of charitable use will count as personal use for purposes of qualifying your vacation home as rental property. Similarly, there's no deduction for free use of property. You can't write off a gift of office space, for example, or an interest-free loan. If the value of the gift exceeds $75, you'll need a written receipt from the recipient. If it exceeds $500, you'll need to file Form 8283.
   

• You can deduct 14 cents/mile for charity-related car trips.

Gifts of appreciated property--specifically, gifts of securities, mutual funds, real estate, and artwork held for more than a year--are ideal for charitable gifts. These gifts let you deduct the full fair market value of the gift as well as avoid the tax on capital gains that you would otherwise pay if you sold the property.

Example: In 1999, you bought 100 shares of Internet.com for $4,000. The stock is now worth $10,000. (It's just an example, folks, please don't e-mail me for the name of a dot.com stock that still shows a profit!) You're in the 28% bracket, and you'd like to give the stock to your alma mater. You save $2,800 by giving the stock to the college, plus you avoid $1,200 in capital gains, for a total tax saving of $4,000.

Here's how to claim these two breaks at once:

• First, you'll need to figure the value of property you donate. With securities, fair market value is the average of the high and low sale prices on the date of the donation. With real estate and works of art, you'll need an appraisal. The IRS Art Advisory Board helps the IRS decide whether to accept or contest these valuations. Appraisal fees are a miscellaneous itemized deduction subject to the 2% floor.
   

• You have to hold the property for at least a year to deduct the fair market value

• Make sure the charity sells the property after you make the gift. If you merely sell the property yourself, then donate the proceeds, you'll wind up owing tax on the capital gain.

• You can deduct up to 30% of your adjusted gross income for gifts of appreciated property to public charities and qualifying private foundations. You can carry over any unused deduction for up to five years.

• If you donate property that's worth less now than when you bought it, there's no deduction for the loss

If you donate art or other tangible personal property--books, furniture, and the like--you can deduct only your actual cost if you've owned it less than one year. If you've owned it for more than a year, your deduction depends on how the charity plans to use the property. If the charity plans to use it for "exempt" purposes--such as a college planning to display donated art for students to study--you can deduct the fair market value. If the charity plans to sell donated property to raise cash, you can deduct only your cost.

Example: You own a painting that you bought ten years ago for $1,000, now worth $10,000, and an antique desk that you bought two years ago for $1,000, now worth $2,000. You'd like to give them to good old alma mater. If the college displays the painting and uses the desk in an office, you can deduct the full market value for each. If the college sells the desk, you can deduct only the $1,000 cost.

If your gift is worth more than $500, you'll need to file Form 8283, "Noncash Charitable Contributions." If it's worth more than $5,000, you'll need an appraisal. And if you're a really heavy hitter, giving art worth more than $20,000, you'll need to attach a copy of the appraisal. The IRS maintains an Art Advisory Board to review gifts of art. If you're concerned that the IRS might not accept your valuation, you can request an advance Statement of Value. The fee is $2,500 for up to three appraisals, plus $250 for each extra appraisal. This will avoid any interest or penalties in case of dispute.

For more information, see IRS Publication 526, "Charitable Gifts."

Charitable Gift Annuity

Charitable gift annuities let you donate property to a charity in exchange for an annuity income from the charity itself. You get a charitable deduction today, figured the same as if you had given the money to a charitable trust. You can take an annuity income now, or wait until later--retirement, perhaps. A charitable gift annuity avoids the legal hassle of setting up a trust. The main difference is that you no longer direct the investment of assets you give. Also, you have to count on the charity, rather than an insurance company or investment advisor, to make the ongoing annuity payments.

Charitable Trust

Charitable trusts let you donate property to a charity, but still keep an interest in the income or the property itself. These are especially valuable if you have low-basis property that you'd like to sell, but don't want to pay the capital gain that you would otherwise owe.

A trust, in general, is when one party holds property for the benefit of another. The person giving the property is a "grantor." The person holding the property is the "trustee." And the person or persons getting the benefit of the property are "beneficiaries." With charitable trusts, you as grantor donate property to yourself or someone else as trustee, for benefit of yourself, your heirs, or one or more charitable organizations.

Charitable trusts offer several tax advantages:

• You can claim an immediate Charitable Gift deduction for property you donate to the trust.
   

• The trust can sell the property without paying tax on the Capital Gains.

• The trust can trade investments, to generate more income or diversify holdings, without tax on Capital Gains.
   

• You remove the value of the donated property from the value of your estate.

Charitable trusts aren't for do-it-yourselfers. There's a wide variety of trust types, from "unitrusts" (those that pay out a fixed percentage of the trust's corpus each year), "annuitrusts" (those that pay out a fixed amount each year) to "net income makeup remainder" trusts and even "flip" trusts that flip from one type to another. And complicated rules for valuing the gift according to prevailing interest rates mean that your deduction can vary from one month to the next even if the value of the property you give stays the same. For more information, see your attorney, accountant, or the charity's development officer.

Chemotherapy

Deductible Medical Expense subject to the 7.5% floor.

Childbirth Classes

Deductible Medical Expense subject to the 7.5% floor.

Child Support

Child support payments you make to your ex-spouse are a nondeductible personal expense. Payments you receive from your ex-spouse are nontaxable income. To shift the tax burden on income between spouses following a divorce, use Alimony.

Child Tax Credit

The child tax credit is a $1,000 credit against your tax for each child, grandchild, stepchild, and foster child under age 17 who is your dependent. The credit phases out by $50 for each $1,000 or fraction that adjusted gross income tops $75,000 for single filers and heads of households, $110,000 for joint filers, and $55,000 for married couples filing separately. The credit phases out completely for married filers at $119,001 and single filers at $84,001.

For more information, see IRS Publication 972, "Child Tax Credit."

Chiropractor

Deductible Medical Expense subject to the 7.5% floor.

Christian Science Practitioner Fees

Deductible Medical Expense subject to the 7.5% floor.

Deductible Medical Expense subject to the 7.5% floor.

Clothing (See Uniforms and Work Clothes)

Clarinet Lessons

Deductible Medical Expense, subject to the 7.5% floor, if prescribed for teeth defects.

Club Dues (See Country Club Dues)

Coffee Service

Coffee and refreshments you provide for employees or clients of your trade or business are a deductible Business Expense on Schedule C, Form 1065, or your corporate return.

Collectibles

Collectibles include a variety of investments whose values are based on quality or scarcity. These range from the finest art and antiques, auctioned at Christie's and Sotheby's, all the way down to bean-bag stuffed animals, given away by the truckload to sell children's hamburgers.

Collectibles have a unique tax twist: capital gains are still taxed at pre-1997 rates. Long-term gains are taxed at 15% for investors in the 15% bracket and capped at 28% for taxpayers in higher brackets. That means there's no tax relief for the vast majority of investors in the 15% and 28% brackets.

Investing in collectibles isn't for amateurs. There's little liquidity, and transaction costs are high. You need to be an expert--or be advised by one--to profit from most collectibles. (For example, the NFL has announced that Super Bowl XXXV game balls will be encoded with artificial DNA to foil counterfeiters, and the FBI estimates that as much as 80% of sports memorabilia is fake.) But if you know your stuff, the psychic rewards can match the money.

College IRA (See Education IRA)

College Savings Plan (See Section 529 Plan)

Commissions

Commissions you pay to buy real estate, investments, or property for your business aren't deductible when you pay them. Instead, include them in the Basis of the property for figuring Depreciation and Capital Gain or loss when you sell.

Commissions you earn as a salesperson are taxable as ordinary income. If you're paid as an independent contractor, report them as income on Schedule C, Form 1065, or Form 1120. If you're paid as an employee, your employer will report the taxable amount on Form W-2.

Commuting

Commuting costs for trips between your home and your job are generally a nondeductible personal expense. However, if you travel to more than one location in a day, your actual "commute" is limited to travel from home to your first location of the day, and from your last location home. If you have a home office or sideline business, your "commute" may be the trip from the kitchen to the office. Any further travel is a deductible Business Expense. Also, if you travel more than 50 miles each day from your home to a temporary job location (less than one year), you can deduct the cost as an Employee Business Expense subject to the 2% floor on miscellaneous itemized deductions. Deduct actual expenses or 50.5 cents per mile (2008), whichever gives you the greater deduction.

Commodities

Commodities are agricultural and natural resources--the raw ingredients of finished products and the fuels that drive our economy. There are five main categories of commodities: energy, agriculture, livestock, industrial metals, and precious metals. Commodities are a distinct equity asset subclass. Since they don't move in lockstep with stock markets, you can use them to diversify their holdings. During the high-inflation 1970s, commodities shined. During the disinflationary early 1980s, they lagged. And during the low inflation years since 1986, commodities have paralleled other markets. Commodity prices are also influenced by fundamental factors of supply and demand. As world economies heat up and former third-world nations modernize, many experts expect commodity prices to rise.

There are several ways to buy commodities, depending on how much leverage you want to magnify your gains:

• You can buy commodity options and futures directly, like Dan Aykroyd and Eddie Murphy in the movie Trading Places. These are highly leveraged, high-risk investments that require special expertise and attention.
   

• You can give your money to a commodity-trading advisor, who functions much like a mutual fund manager. These funds are generally organized as limited partnerships, with little liquidity and often high suitability requirements. Most of these are also highly leveraged.
   

• Many brokers offer "principal protection" programs. These are a sub-class of commodity trading funds that invest a majority of your investments in low-risk Treasuries to guarantee return of your original investment, then use the rest to speculate on commodities.
   

• Finally, you can buy commodity-based mutual funds. Several fund families offer domestic and global natural resources funds that invest in the commodity producers. These aren't pure commodity plays, but equity investments that rise and fall with commodities prices. General stock market moves will affect these funds as well as commodity price movements. You'll also feel the effects of industry developments like the recent Exxon/Mobil merger.

Gold

Gold is the most popular commodity because of its reputation as an inflation hedge. Other investors like it as life insurance for their stock and bond portfolios. Since gold is so popular, there are several different ways to buy it. All of them carry different tax twists:

• You can buy gold coins or certificates. These don't produce current income, so they're extremely tax-efficient. You pay tax at short- or long-term capital gain rates when you sell.
   

• You can buy gold mining stocks and mutual funds. These are taxed like any other stocks or funds. But their prices generally magnify moves in actual gold prices, leveraging your investment.
   

• Finally, you can buy options and futures. These give you the greatest leverage in exchange for the least tax efficiency. If you're buying gold as a long-term inflation hedge, buy coins, bars, or funds. If you're looking to leverage short-term price moves, consider gold options or futures.

Computer

Computers and peripherals, such as printers and scanners, are deductible if you use your computer for deductible purposes:

• Computer equipment you buy for your trade or business is a deductible Business Expense on Schedule C, Form 1065, or your corporate return.
   

• Computer equipment you buy on behalf of your job may be a deductible Employee Business Expense, subject to the 2% floor on Miscellaneous Itemized Deductions, if your employer requires you to own it as a condition of your job. It's not enough that the computer merely makes your productive. You have to show that your employer doesn't provide one powerful enough to do your job.
   

• Computer equipment you buy to help manage your investments is a deductible Investment Expense, up to net investment income, subject to the 2% floor on Miscellaneous Itemized Deductions.

There are several ways you can write off your computer, depending on how much time you use it for deductible purposes:

• If you use your computer more than 50% for business, you can choose First-Year Expensing or Depreciation. First-year expensing limits are high enough that you should be able to deduct the full purchase price the year you buy the system--and this is also the simplest way to write off your system. However, if first-year expensing isn't available, you can depreciate it according to the Modified Accelerated Cost Recovery System (MACRS) "200% double declining rate." (If you're subject to the Alternative Minimum Tax, your depreciation is limited to the MACRS "150% double declining rate" even if your deductible use is more than 50%.) If business use falls below 50% in a later year, you'll have to "recapture" and report as income any MACRS and first-year expensing that exceeds what you would otherwise have been able to deduct with straight-line depreciation. For more information, including full depreciation schedules, see IRS Publication 534.

Example: You spend $2,500 for your computer system. You use it 60% to manage a sideline business, 20% to manage your investments, and 20% to watch online videos. Since business use tops 50%, you can claim first-year expensing of $2,000 (80% of the full $2,500 price). This lets you deduct the highest possible amount that year. You could also claim depreciation of $400 (20% of the $2,500 purchase price, multiplied by the 80% deductible use).

• If you use your computer less than 50% for a deductible purpose, you can depreciate the portion of the price equal to the percentage you use it for a deductible purpose using straight-line depreciation. Generally, this will mean depreciating 10% in Year One, 20% in each of Years Two through Five, and 10% in Year Six.

Example: You buy the same system for $2,500. You use it 40% to manage your portfolio and 60% for games. Now you can deduct just $100 (10% of the purchase price, multiplied by the 40% deductible use). If you continue to use it 40% to manage investments (or for any other deductible purpose), next year you can write off $200 (20% of the purchase price, multiplied by the 40% deductible use).

If you lease your system, you can deduct whatever percentage of your lease payment equals your deductible use of the computer. However, if your business use is less than 50%, you'll have to report income based on the value of the machine according to tables published in IRS Publication 946, "How to Depreciate Property."

Computer software is also deductible according to similar rules depending on the purpose of the software:

• Programs with a usable life of just one year are deductible the year you buy them. Other programs Depreciate over three years.
   

• Accounting software and programs you buy for your trade or business are a deductible Business Expense on Schedule C, Form 1065, or your corporate return.
   

• Software you buy on behalf of your employer is a deductible Employee Business Expense subject to the 2% floor on Miscellaneous Itemized Deductions if you meet the same tests necessary to deduct the computer.
   

• Investment management programs, such as stock charting programs, are a deductible Investment Expense up to investment income and subject to the 2% floor on Miscellaneous Itemized Deductions.
   

• Tax preparation software is a deductible Miscellaneous Itemized Deduction subject to the 2% floor.

Use Form 4562 to claim Depreciation and First-Year Expensing deductions. Then carry the amount to Schedule C, Form 1065, or your corporate return.

Consent Money (See High Yield Bond)

Conservation Easement

A conservation easement is a gift of a partial interest in real estate for the benefit of a qualified conservation organization. This lets you take a deduction for the value of the gift without giving away your entire property.

• You can donate your entire interest in the property other than mineral right, a remainder interest, or a restriction granted in perpetuity on the use of the property.
   

• Your donation has to be for "conservation purposes." This includes preservation of land for outdoor recreation or education, protection of a natural habitat, preservation of open land for scenic enjoyment, or preservation of a historically important or certified historic structure.
   

• The deduction is limited to gifts to governments or publicly-supported charities.
   

• The value of the gift is equal to its fair market value. This will require an appraisal to determine the value of the property before and after the gift. For example, you might donate development rights to a farm near an urban center, preserving it as open space. You might also donate the facade to a historic townhouse.

Constitutional Trusts (See Trusts)

Construction Interest

Construction interest you pay to build your primary residence is deductible for up to 24 months following the date you begin construction. Construction interest you pay to build or develop commercial or investment property is deductible for an indefinite period on Schedule C, Schedule E, Form 1165, or Form 1120.

Contact Lenses

Deductible Medical Expense subject to the 7.5% floor.

Continuing Education

Continuing education courses you take to maintain professional and occupational licenses are deductible as follows:

• Courses related to your trade or business are a deductible Business Expense on Schedule C, Form 1065, or your corporate return.
   

• Courses you take on behalf of your employer are a deductible Employee Business Expense subject to the 2% floor on Miscellaneous Itemized Deductions.

Deductible Medical Expense subject to the 7.5% floor (Prescription contraceptives only.)

Convention

Convention costs may be deductible if you travel for a deductible purpose:

• Conventions you attend on behalf of your trade or business are a deductible Business Expense on Schedule C, Form 1065, or your corporate return.
   

• Conventions you attend on behalf of your employer are a deductible Employee Business Expense subject to the 2% floor on Miscellaneous Itemized Deductions.

Deductible costs include transportation, lodging, and 50% of Meals and Entertainment, as well as specific convention registration fees and costs.

Conventions outside North America and the Caribbean are deductible only if you can show that they're directly related to your trade or business and it's as reasonable to hold the convention abroad as it is to hold it here.

Finally, you can deduct up to $2,000 per year for cruise ship conventions on U.S.-registered ships if all ports of call are in the U.S. and U.S. possessions. Keep a log of convention sessions and business appointments you attend, as well as convention programs and materials.

Conventions you attend on behalf of volunteer organizations, such as a Boy Scout jamboree, are deductible as Volunteer Expenses.

Convertible Bonds

Convertible bonds are corporate bonds that let you convert the bond into the issuer's stock at a predetermined price, called the "conversion price." Convertible bond interest is taxed according to the same rules as with any other bond.

If you exercise your option to convert the bond into stock, there's no tax due on the gain until you sell the stock. Your Basis in the stock is the same as in the original bond, and your holding period starts with the date you buy the bond.

Convertibles may be appropriate if you want to profit from stock moves but keep an interest-paying safety cushion.

Cosmetic Surgery

Cosmetic surgery is generally not deductible except for disfigurement related to a congenital abnormality, disfiguring disease, or accidental injury. However, a stripper once won a case in Tax Court arguing her breast implants were a deductible Business Expense.

Cost Segregation

If you’ve missed depreciation deductions, you can use Form 3115 to “catch up” and claim them retroactively as far back as 1987. File the form with the IRS national office within the first 180 days of the year for which you claim the election, then attach a copy to that year’s return. Many firms offer “cost segregation studies” to recover these lost deductions, and the IRS has issued an Audit Techniques Guide examining the process

For more information, see IRS Publication 527, "Residential Rental Property," and IRS Publication 946, "How to Depreciate Property."

Country Club Dues

Country club dues, lunch club dues, and other private club dues are a nondeductible personal expense. However, you can still deduct meals and entertainment expenses, greens fees, and similar expenses you pay to the club so long as they relate to a deductible activity (trade or business, investments, etc.).

Covered Calls (See Stock Options)

CPA Fees (See Accounting Fees and Tax Preparation Fees)

Credit card interest and account fees are ordinarily nondeductible personal expenses. However, credit card interest you pay on deductible items may be deductible as well:

• Interest and fees you pay on behalf of your trade or business are a deductible Business Expense on Schedule C, Form 1065, or your corporate return..
   

• Interest and fees you pay on behalf of your employer are a deductible Employee Business Expense subject to the 2% floor on Miscellaneous Itemized Deductions.

Ordinarily, you can't deduct expenses until you actually pay them. However, if you charge expenses to a third-party credit card, such as VISA, MasterCard, American Express, or Discover (as opposed to a store card for purchases made at that store), you can deduct the expense the year you incur the charge. This is because you actually incur the obligation to pay when you make the charge. This strategy is useful for accelerating deductions to capture tax savings now, as well as bunching deductions for maximum value.

Cross-Tested Pension Plan (See Qualified Plan)

Crutches

Deductible Medical Expense subject to the 7.5% floor.