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• Fines paid for violating air quality laws. • Civil penalties paid for violating federal laws regarding mining safety standards and discharges into navigable waters. A fine or penalty doesn’t include any of the following. • Legal fees and related expenses to defend yourself in a prosecution or civil action for a violation of the law imposing the fine or civil penalty. • Court costs or stenographic and printing charges. • Compensatory damages paid to a govern- ment. Political contributions. Contributions or gifts paid to political parties or candidates aren’t de- ductible. In addition, expenses paid or incurred to take part in any political campaign of a candi- date for public office aren’t deductible. Indirect political contributions. You can’t deduct indirect political contributions and costs of taking part in political activities as business expenses. Examples of nondeductible expen- ses include the following. • Advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a politi- cal party or candidate. • Admission to a dinner or program (includ- ing, but not limited to, galas, dances, film presentations, parties, and sporting events) if any of the proceeds from the function are for, or intended for, the use of a political party or candidate. • Admission to an inaugural ball, gala, pa- rade, concert, or similar event if identified with a political party or candidate. Repairs. The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. Routine main- tenance that keeps your property in a normal ef- ficient operating condition, but that doesn’t ma- terially increase the value or substantially prolong the useful life of the property, is deduc- tible in the year that it is incurred. Otherwise, the cost must be capitalized and depreciated. See Form 4562 and its instructions for how to figure and claim the depreciation deduction. The cost of repairs includes the costs of la- bor, supplies, and certain other items. The value of your own labor isn’t deductible. Exam- ples of repairs include: • Reconditioning floors (but not replace- ment), • Repainting the interior and exterior walls of a building, • Cleaning and repairing roofs and gutters, and • Fixing plumbing leaks (but not replacement of fixtures). Repayments. If you had to repay an amount you included in your income in an earlier year, you may be able to deduct the amount repaid for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. In most cases, you can claim a deduction or credit only if the repayment qualifies as an expense or loss in- curred in your trade or business or in a for-profit transaction. Type of deduction. The type of deduction you are allowed in the year of repayment de- pends on the type of income you included in the earlier year. For instance, if you repay an amount you previously reported as a capital gain, deduct the repayment as a capital loss as explained in the Instructions for Schedule D (Form 1040). If you reported it as self-employ- ment income, deduct it as a business expense on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). If you reported the amount as wages, unem- ployment compensation, or other nonbusiness ordinary income, you may be able to deduct it as an other itemized deduction if the amount re- paid is over $3,000. Beginning in 2018, due to the suspen- sion of miscellaneous itemized deduc- tions subject to the 2% floor under sec- tion 67(a), your are not able to deduct the repayment as an itemized deduction if it is $3,000 or less. Repayment—$3,000 or less. If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Repayment—Over $3,000. If the amount you repaid was more than $3,000, you can de- duct the repayment as an other itemized deduc- tion on Schedule A (Form 1040), line 16, if you included the income under a “claim of right.” This means that at the time you included the in- come, it appeared that you had an unrestricted right to it. However, you can choose to take a credit for the year of repayment. Figure your tax under both methods and use the method that results in less tax. Method 1. Figure your tax for 2018 claim- ing a deduction for the repaid amount. Method 2. Figure your tax for 2018 claim- ing a credit for the repaid amount. Follow these steps. 1. Figure your tax for 2018 without deducting the repaid amount. 2. Refigure your tax from the earlier year without including in income the amount you repaid in 2018. 3. Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the amount of your credit. 4. Subtract the answer in (3) from the tax for 2018 figured without the deduction (step 1). If Method 1 results in less tax, deduct the amount repaid as discussed earlier under Type of deduction. If Method 2 results in less tax, claim the credit on Schedule 5 (Form 1040), line 74, and write “I.R.C. 1341” next to line 74. Example. For 2017, you filed a return and reported your income on the cash method. In 2018, you repaid $5,000 included in your 2017 gross income under a claim of right. Your filing status in 2018 and 2017 is single. Your income and tax for both years are as follows: CAUTION ! 2017 With Income 2017 Without Income Taxable Income $15,000 $10,000 Tax $ 1,788 $ 1,038 2018 Without Deduction 2018 With Deduction Taxable Income $49,950 $44,950 Tax $6,934 $5,834 Your tax under Method 1 is $5,834. Your tax un- der Method 2 is $6,184, figured as follows: Tax previously determined for 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,788 Less: Tax as refigured . . . . . . . . . . . − 1,038 Decrease in 2017 tax $750 Regular tax liability for 2018 . . . . . . . $6,934 Less: Decrease in 2017 tax . . . . . . . − 750 Refigured tax for 2018 $ 6,184 Because you pay less tax under Method 1, you should take a deduction for the repayment in 2018. Repayment does not apply. This discus- sion doesn’t apply to the following. • Deductions for bad debts. • Deductions from sales to customers, such as returns and allowances, and similar items. • Deductions for legal and other expenses of contesting the repayment. Year of deduction (or credit). If you use the cash method of accounting, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper de- duction under your accounting method. For ex- ample, if you use the accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment ac- crues. Supplies and materials. Unless you have de- ducted the cost in any earlier year, you gener- ally can deduct the cost of materials and sup- plies actually consumed and used during the tax year. If you keep incidental materials and supplies on hand, you can deduct the cost of the inci- dental materials and supplies you bought during the tax year if all the following requirements are met. • You don’t keep a record of when they are used. • You don’t take an inventory of the amount on hand at the beginning and end of the tax year. • This method doesn’t distort your income. You can also deduct the cost of books, pro- fessional instruments, equipment, etc., if you normally use them within a year. However, if the usefulness of these items extends substantially Page 48 Chapter 11 Other Expenses