26 U.S.C. § 162 : US Code - Section 162: Trade or business expenses

Search 26 U.S.C. § 162 : US Code - Section 162: Trade or business expenses

(a) In general
There shall be allowed as a deduction all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including -
(1) a reasonable allowance for salaries or other compensation
for personal services actually rendered;
(2) traveling expenses (including amounts expended for meals
and lodging other than amounts which are lavish or extravagant
under the circumstances) while away from home in the pursuit of a
trade or business; and
(3) rentals or other payments required to be made as a
condition to the continued use or possession, for purposes of the
trade or business, of property to which the taxpayer has not
taken or is not taking title or in which he has no equity.
For purposes of the preceding sentence, the place of residence of a
Member of Congress (including any Delegate and Resident
Commissioner) within the State, congressional district, or
possession which he represents in Congress shall be considered his
home, but amounts expended by such Members within each taxable year
for living expenses shall not be deductible for income tax purposes
in excess of $3,000. For purposes of paragraph (2), the taxpayer
shall not be treated as being temporarily away from home during any
period of employment if such period exceeds 1 year. The preceding
sentence shall not apply to any Federal employee during any period
for which such employee is certified by the Attorney General (or
the designee thereof) as traveling on behalf of the United States
in temporary duty status to investigate or prosecute, or provide
support services for the investigation or prosecution of, a Federal
crime.
(b) Charitable contributions and gifts excepted
No deduction shall be allowed under subsection (a) for any
contribution or gift which would be allowable as a deduction under
section 170 were it not for the percentage limitations, the dollar
limitations, or the requirements as to the time of payment, set
forth in such section.
(c) Illegal bribes, kickbacks, and other payments
(1) Illegal payments to government officials or employees
No deduction shall be allowed under subsection (a) for any
payment made, directly or indirectly, to an official or employee
of any government, or of any agency or instrumentality of any
government, if the payment constitutes an illegal bribe or
kickback or, if the payment is to an official or employee of a
foreign government, the payment is unlawful under the Foreign
Corrupt Practices Act of 1977. The burden of proof in respect of
the issue, for the purposes of this paragraph, as to whether a
payment constitutes an illegal bribe or kickback (or is unlawful
under the Foreign Corrupt Practices Act of 1977) shall be upon
the Secretary to the same extent as he bears the burden of proof
under section 7454 (concerning the burden of proof when the issue
relates to fraud).
(2) Other illegal payments
No deduction shall be allowed under subsection (a) for any
payment (other than a payment described in paragraph (1)) made,
directly or indirectly, to any person, if the payment constitutes
an illegal bribe, illegal kickback, or other illegal payment
under any law of the United States, or under any law of a State
(but only if such State law is generally enforced), which
subjects the payor to a criminal penalty or the loss of license
or privilege to engage in a trade or business. For purposes of
this paragraph, a kickback includes a payment in consideration of
the referral of a client, patient, or customer. The burden of
proof in respect of the issue, for purposes of this paragraph, as
to whether a payment constitutes an illegal bribe, illegal
kickback, or other illegal payment shall be upon the Secretary to
the same extent as he bears the burden of proof under section
7454 (concerning the burden of proof when the issue relates to
fraud).
(3) Kickbacks, rebates, and bribes under medicare and medicaid
No deduction shall be allowed under subsection (a) for any
kickback, rebate, or bribe made by any provider of services,
supplier, physician, or other person who furnishes items or
services for which payment is or may be made under the Social
Security Act, or in whole or in part out of Federal funds under a
State plan approved under such Act, if such kickback, rebate, or
bribe is made in connection with the furnishing of such items or
services or the making or receipt of such payments. For purposes
of this paragraph, a kickback includes a payment in consideration
of the referral of a client, patient, or customer.
(d) Capital contributions to Federal National Mortgage Association
For purposes of this subtitle, whenever the amount of capital
contributions evidenced by a share of stock issued pursuant to
section 303(c) of the Federal National Mortgage Association Charter
Act (12 U.S.C., sec. 1718) exceeds the fair market value of the
stock as of the issue date of such stock, the initial holder of the
stock shall treat the excess as ordinary and necessary expenses
paid or incurred during the taxable year in carrying on a trade or
business.
(e) Denial of deduction for certain lobbying and political
expenditures
(1) In general
No deduction shall be allowed under subsection (a) for any
amount paid or incurred in connection with -
(A) influencing legislation,
(B) participation in, or intervention in, any political
campaign on behalf of (or in opposition to) any candidate for
public office,
(C) any attempt to influence the general public, or segments
thereof, with respect to elections, legislative matters, or
referendums, or
(D) any direct communication with a covered executive branch
official in an attempt to influence the official actions or
positions of such official.
(2) Exception for local legislation
In the case of any legislation of any local council or similar
governing body -
(A) paragraph (1)(A) shall not apply, and
(B) the deduction allowed by subsection (a) shall include all
ordinary and necessary expenses (including, but not limited to,
traveling expenses described in subsection (a)(2) and the cost
of preparing testimony) paid or incurred during the taxable
year in carrying on any trade or business -
(i) in direct connection with appearances before,
submission of statements to, or sending communications to the
committees, or individual members, of such council or body
with respect to legislation or proposed legislation of direct
interest to the taxpayer, or
(ii) in direct connection with communication of information
between the taxpayer and an organization of which the
taxpayer is a member with respect to any such legislation or
proposed legislation which is of direct interest to the
taxpayer and to such organization,
and that portion of the dues so paid or incurred with respect
to any organization of which the taxpayer is a member which is
attributable to the expenses of the activities described in
clauses (i) and (ii) carried on by such organization.
(3) Application to dues of tax-exempt organizations
No deduction shall be allowed under subsection (a) for the
portion of dues or other similar amounts paid by the taxpayer to
an organization which is exempt from tax under this subtitle
which the organization notifies the taxpayer under section
6033(e)(1)(A)(ii) is allocable to expenditures to which paragraph
(1) applies.
(4) Influencing legislation
For purposes of this subsection -
(A) In general
The term "influencing legislation" means any attempt to
influence any legislation through communication with any member
or employee of a legislative body, or with any government
official or employee who may participate in the formulation of
legislation.
(B) Legislation
The term "legislation" has the meaning given such term by
section 4911(e)(2).
(5) Other special rules
(A) Exception for certain taxpayers
In the case of any taxpayer engaged in the trade or business
of conducting activities described in paragraph (1), paragraph
(1) shall not apply to expenditures of the taxpayer in
conducting such activities directly on behalf of another person
(but shall apply to payments by such other person to the
taxpayer for conducting such activities).
(B) De minimis exception
(i) In general
Paragraph (1) shall not apply to any in-house expenditures
for any taxable year if such expenditures do not exceed
$2,000. In determining whether a taxpayer exceeds the $2,000
limit under this clause, there shall not be taken into
account overhead costs otherwise allocable to activities
described in paragraphs (1)(A) and (D).
(ii) In-house expenditures
For purposes of clause (i), the term "in-house
expenditures" means expenditures described in paragraphs
(1)(A) and (D) other than -
(I) payments by the taxpayer to a person engaged in the
trade or business of conducting activities described in
paragraph (1) for the conduct of such activities on behalf
of the taxpayer, or
(II) dues or other similar amounts paid or incurred by
the taxpayer which are allocable to activities described in
paragraph (1).
(C) Expenses incurred in connection with lobbying and political
activities
Any amount paid or incurred for research for, or preparation,
planning, or coordination of, any activity described in
paragraph (1) shall be treated as paid or incurred in
connection with such activity.
(6) Covered executive branch official
For purposes of this subsection, the term "covered executive
branch official" means -
(A) the President,
(B) the Vice President,
(C) any officer or employee of the White House Office of the
Executive Office of the President, and the 2 most senior level
officers of each of the other agencies in such Executive
Office, and
(D)(i) any individual serving in a position in level I of the
Executive Schedule under section 5312 of title 5, United States
Code, (ii) any other individual designated by the President as
having Cabinet level status, and (iii) any immediate deputy of
an individual described in clause (i) or (ii).
(7) Special rule for Indian tribal governments
For purposes of this subsection, an Indian tribal government
shall be treated in the same manner as a local council or similar
governing body.
(8) Cross reference
For reporting requirements and alternative taxes related to
this subsection, see section 6033(e).
(f) Fines and penalties
No deduction shall be allowed under subsection (a) for any fine
or similar penalty paid to a government for the violation of any
law.
(g) Treble damage payments under the antitrust laws
If in a criminal proceeding a taxpayer is convicted of a
violation of the antitrust laws, or his plea of guilty or nolo
contendere to an indictment or information charging such a
violation is entered or accepted in such a proceeding, no deduction
shall be allowed under subsection (a) for two-thirds of any amount
paid or incurred -
(1) on any judgment for damages entered against the taxpayer
under section 4 of the Act entitled "An Act to supplement
existing laws against unlawful restraints and monopolies, and for
other purposes", approved October 15, 1914 (commonly known as the
Clayton Act), on account of such violation or any related
violation of the antitrust laws which occurred prior to the date
of the final judgment of such conviction, or
(2) in settlement of any action brought under such section 4 on
account of such violation or related violation.
The preceding sentence shall not apply with respect to any
conviction or plea before January 1, 1970, or to any conviction or
plea on or after such date in a new trial following an appeal of a
conviction before such date.
(h) State legislators' travel expenses away from home
(1) In general
For purposes of subsection (a), in the case of any individual
who is a State legislator at any time during the taxable year and
who makes an election under this subsection for the taxable year -

(A) the place of residence of such individual within the
legislative district which he represented shall be considered
his home,
(B) he shall be deemed to have expended for living expenses
(in connection with his trade or business as a legislator) an
amount equal to the sum of the amounts determined by
multiplying each legislative day of such individual during the
taxable year by the greater of -
(i) the amount generally allowable with respect to such day
to employees of the State of which he is a legislator for per
diem while away from home, to the extent such amount does not
exceed 110 percent of the amount described in clause (ii)
with respect to such day, or
(ii) the amount generally allowable with respect to such
day to employees of the executive branch of the Federal
Government for per diem while away from home but serving in
the United States, and
(C) he shall be deemed to be away from home in the pursuit of
a trade or business on each legislative day.
(2) Legislative days
For purposes of paragraph (1), a legislative day during any
taxable year for any individual shall be any day during such year
on which -
(A) the legislature was in session (including any day in
which the legislature was not in session for a period of 4
consecutive days or less), or
(B) the legislature was not in session but the physical
presence of the individual was formally recorded at a meeting
of a committee of such legislature.
(3) Election
An election under this subsection for any taxable year shall be
made at such time and in such manner as the Secretary shall by
regulations prescribe.
(4) Section not to apply to legislators who reside near capitol
For taxable years beginning after December 31, 1980, this
subsection shall not apply to any legislator whose place of
residence within the legislative district which he represents is
50 or fewer miles from the capitol building of the State.
[(i) Repealed. Pub. L. 101-239, title VI, Sec. 6202(b)(3)(A), Dec.
19, 1989, 103 Stat. 2233]
(j) Certain foreign advertising expenses
(1) In general
No deduction shall be allowed under subsection (a) for any
expenses of an advertisement carried by a foreign broadcast
undertaking and directed primarily to a market in the United
States. This paragraph shall apply only to foreign broadcast
undertakings located in a country which denies a similar
deduction for the cost of advertising directed primarily to a
market in the foreign country when placed with a United States
broadcast undertaking.
(2) Broadcast undertaking
For purposes of paragraph (1), the term "broadcast undertaking"
includes (but is not limited to) radio and television stations.
(k) Stock reacquisition expenses
(1) In general
Except as provided in paragraph (2), no deduction otherwise
allowable shall be allowed under this chapter for any amount paid
or incurred by a corporation in connection with the reacquisition
of its stock or of the stock of any related person (as defined in
section 465(b)(3)(C)).
(2) Exceptions
Paragraph (1) shall not apply to -
(A) Certain specific deductions
Any -
(i) deduction allowable under section 163 (relating to
interest),
(ii) deduction for amounts which are properly allocable to
indebtedness and amortized over the term of such
indebtedness, or
(iii) deduction for dividends paid (within the meaning of
section 561).
(B) Stock of certain regulated investment companies
Any amount paid or incurred in connection with the redemption
of any stock in a regulated investment company which issues
only stock which is redeemable upon the demand of the
shareholder.
(l) Special rules for health insurance costs of self-employed
individuals
(1) Allowance of deduction
(A) In general
In the case of an individual who is an employee within the
meaning of section 401(c)(1), there shall be allowed as a
deduction under this section an amount equal to the applicable
percentage of the amount paid during the taxable year for
insurance which constitutes medical care for the taxpayer, his
spouse, and dependents.
(B) Applicable percentage
For purposes of subparagraph (A), the applicable percentage
shall be determined under the following table:
For taxable years beginning 2The applicable
in calendar year - percentage is -
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1999 through 2001 60
2002 70
2003 and thereafter 100.
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(2) Limitations
(A) Dollar amount
No deduction shall be allowed under paragraph (1) to the
extent that the amount of such deduction exceeds the taxpayer's
earned income (within the meaning of section 401(c)) derived by
the taxpayer from the trade or business with respect to which
the plan providing the medical care coverage is established.
(B) Other coverage
Paragraph (1) shall not apply to any taxpayer for any
calendar month for which the taxpayer is eligible to
participate in any subsidized health plan maintained by any
employer of the taxpayer or of the spouse of the taxpayer. The
preceding sentence shall be applied separately with respect to -

(i) plans which include coverage for qualified long-term
care services (as defined in section 7702B(c)) or are
qualified long-term care insurance contracts (as defined in
section 7702B(b)), and
(ii) plans which do not include such coverage and are not
such contracts.
(C) Long-term care premiums
In the case of a qualified long-term care insurance contract
(as defined in section 7702B(b)), only eligible long-term care
premiums (as defined in section 213(d)(10)) shall be taken into
account under paragraph (1).
(3) Coordination with medical deduction
Any amount paid by a taxpayer for insurance to which paragraph
(1) applies shall not be taken into account in computing the
amount allowable to the taxpayer as a deduction under section
213(a).
(4) Deduction not allowed for self-employment tax purposes
The deduction allowable by reason of this subsection shall not
be taken into account in determining an individual's net earnings
from self-employment (within the meaning of section 1402(a)) for
purposes of chapter 2.
(5) Treatment of certain S corporation shareholders
This subsection shall apply in the case of any individual
treated as a partner under section 1372(a), except that -
(A) for purposes of this subsection, such individual's wages
(as defined in section 3121) from the S corporation shall be
treated as such individual's earned income (within the meaning
of section 401(c)(1)), and
(B) there shall be such adjustments in the application of
this subsection as the Secretary may by regulations prescribe.
(m) Certain excessive employee remuneration
(1) In general
In the case of any publicly held corporation, no deduction
shall be allowed under this chapter for applicable employee
remuneration with respect to any covered employee to the extent
that the amount of such remuneration for the taxable year with
respect to such employee exceeds $1,000,000.
(2) Publicly held corporation
For purposes of this subsection, the term "publicly held
corporation" means any corporation issuing any class of common
equity securities required to be registered under section 12 of
the Securities Exchange Act of 1934.
(3) Covered employee
For purposes of this subsection, the term "covered employee"
means any employee of the taxpayer if -
(A) as of the close of the taxable year, such employee is the
chief executive officer of the taxpayer or is an individual
acting in such a capacity, or
(B) the total compensation of such employee for the taxable
year is required to be reported to shareholders under the
Securities Exchange Act of 1934 by reason of such employee
being among the 4 highest compensated officers for the taxable
year (other than the chief executive officer).
(4) Applicable employee remuneration
For purposes of this subsection -
(A) In general
Except as otherwise provided in this paragraph, the term
"applicable employee remuneration" means, with respect to any
covered employee for any taxable year, the aggregate amount
allowable as a deduction under this chapter for such taxable
year (determined without regard to this subsection) for
remuneration for services performed by such employee (whether
or not during the taxable year).
(B) Exception for remuneration payable on commission basis
The term "applicable employee remuneration" shall not include
any remuneration payable on a commission basis solely on
account of income generated directly by the individual
performance of the individual to whom such remuneration is
payable.
(C) Other performance-based compensation
The term "applicable employee remuneration" shall not include
any remuneration payable solely on account of the attainment of
one or more performance goals, but only if -
(i) the performance goals are determined by a compensation
committee of the board of directors of the taxpayer which is
comprised solely of 2 or more outside directors,
(ii) the material terms under which the remuneration is to
be paid, including the performance goals, are disclosed to
shareholders and approved by a majority of the vote in a
separate shareholder vote before the payment of such
remuneration, and
(iii) before any payment of such remuneration, the
compensation committee referred to in clause (i) certifies
that the performance goals and any other material terms were
in fact satisfied.
(D) Exception for existing binding contracts
The term "applicable employee remuneration" shall not include
any remuneration payable under a written binding contract which
was in effect on February 17, 1993, and which was not modified
thereafter in any material respect before such remuneration is
paid.
(E) Remuneration
For purposes of this paragraph, the term "remuneration"
includes any remuneration (including benefits) in any medium
other than cash, but shall not include -
(i) any payment referred to in so much of section
3121(a)(5) as precedes subparagraph (E) thereof, and
(ii) any benefit provided to or on behalf of an employee if
at the time such benefit is provided it is reasonable to
believe that the employee will be able to exclude such
benefit from gross income under this chapter.
For purposes of clause (i), section 3121(a)(5) shall be applied
without regard to section 3121(v)(1).
(F) Coordination with disallowed golden parachute payments
The dollar limitation contained in paragraph (1) shall be
reduced (but not below zero) by the amount (if any) which would
have been included in the applicable employee remuneration of
the covered employee for the taxable year but for being
disallowed under section 280G.
(G) Coordination with excise tax on specified stock
compensation
The dollar limitation contained in paragraph (1) with respect
to any covered employee shall be reduced (but not below zero)
by the amount of any payment (with respect to such employee) of
the tax imposed by section 4985 directly or indirectly by the
expatriated corporation (as defined in such section) or by any
member of the expanded affiliated group (as defined in such
section) which includes such corporation.
(n) Special rule for certain group health plans
(1) In general
No deduction shall be allowed under this chapter to an employer
for any amount paid or incurred in connection with a group health
plan if the plan does not reimburse for inpatient hospital care
services provided in the State of New York -
(A) except as provided in subparagraphs (B) and (C), at the
same rate as licensed commercial insurers are required to
reimburse hospitals for such services when such reimbursement
is not through such a plan,
(B) in the case of any reimbursement through a health
maintenance organization, at the same rate as health
maintenance organizations are required to reimburse hospitals
for such services for individuals not covered by such a plan
(determined without regard to any government-supported
individuals exempt from such rate), or
(C) in the case of any reimbursement through any corporation
organized under Article 43 of the New York State Insurance Law,
at the same rate as any such corporation is required to
reimburse hospitals for such services for individuals not
covered by such a plan.
(2) State law exception
Paragraph (1) shall not apply to any group health plan which is
not required under the laws of the State of New York (determined
without regard to this subsection or other provisions of Federal
law) to reimburse at the rates provided in paragraph (1).
(3) Group health plan
For purposes of this subsection, the term "group health plan"
means a plan of, or contributed to by, an employer or employee
organization (including a self-insured plan) to provide health
care (directly or otherwise) to any employee, any former
employee, the employer, or any other individual associated or
formerly associated with the employer in a business relationship,
or any member of their family.
(o) Treatment of certain expenses of rural mail carriers
(1) General rule
In the case of any employee of the United States Postal Service
who performs services involving the collection and delivery of
mail on a rural route and who receives qualified reimbursements
for the expenses incurred by such employee for the use of a
vehicle in performing such services -
(A) the amount allowable as a deduction under this chapter
for the use of a vehicle in performing such services shall be
equal to the amount of such qualified reimbursements; and
(B) such qualified reimbursements shall be treated as paid
under a reimbursement or other expense allowance arrangement
for purposes of section 62(a)(2)(A) (and section 62(c) shall
not apply to such qualified reimbursements).
(2) Special rule where expenses exceed reimbursements
Notwithstanding paragraph (1)(A), if the expenses incurred by
an employee for the use of a vehicle in performing services
described in paragraph (1) exceed the qualified reimbursements
for such expenses, such excess shall be taken into account in
computing the miscellaneous itemized deductions of the employee
under section 67.
(3) Definition of qualified reimbursements
For purposes of this subsection, the term "qualified
reimbursements" means the amounts paid by the United States
Postal Service to employees as an equipment maintenance allowance
under the 1991 collective bargaining agreement between the United
States Postal Service and the National Rural Letter Carriers'
Association. Amounts paid as an equipment maintenance allowance
by such Postal Service under later collective bargaining
agreements that supersede the 1991 agreement shall be considered
qualified reimbursements if such amounts do not exceed the
amounts that would have been paid under the 1991 agreement,
adjusted for changes in the Consumer Price Index (as defined in
section 1(f)(5)) since 1991.
(p) Treatment of expenses of members of reserve component of Armed
Forces of the United States
For purposes of subsection (a)(2), in the case of an individual
who performs services as a member of a reserve component of the
Armed Forces of the United States at any time during the taxable
year, such individual shall be deemed to be away from home in the
pursuit of a trade or business for any period during which such
individual is away from home in connection with such service.
(q) Cross reference
(1) For special rule relating to expenses in connection with
subdividing real property for sale, see section 1237.
(2) For special rule relating to the treatment of payments by
a transferee of a franchise, trademark, or trade name, see
section 1253.
(3) For special rules relating to -
(A) funded welfare benefit plans, see section 419, and
(B) deferred compensation and other deferred benefits, see
section 404.