If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income 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. Generally, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction. taxmap/pubs/p525-005.htm#en_us_publink1000229601
The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. You generally deduct the repayment on the same form or schedule on which you previously reported it as income. For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). If you reported it as a capital gain, deduct it as a capital loss on Schedule D (Form 1040). If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040).
If you repaid social security or equivalent railroad retirement benefits, see Publication 915.taxmap/pubs/p525-005.htm#en_us_publink1000229602
If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 23.taxmap/pubs/p525-005.htm#en_us_publink1000229603
If the amount you repaid was more than $3,000, you can deduct the repayment (as explained earlier under Type of deduction). However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. This means that at the time you included the income, it appeared that you had an unrestricted right to it. If you qualify for this choice, figure your tax under both methods and compare the results. Use the method (deduction or credit) that results in less tax. taxmap/pubs/p525-005.htm#en_us_publink1000229604
Figure your tax for 2009 claiming a deduction for the repaid amount. If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 28. taxmap/pubs/p525-005.htm#en_us_publink1000229605
Figure your tax for 2009 claiming a credit for the repaid amount. Follow these steps.
- Figure your tax for 2009 without deducting the repaid amount.
- Refigure your tax from the earlier year without including in income the amount you repaid in 2009.
- Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the credit.
- Subtract the answer in (3) from the tax for 2009 figured without the deduction (step 1).
If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 70, and enter "I.R.C. 1341" in the column to the right of line 70. taxmap/pubs/p525-005.htm#en_us_publink1000229606
For 2008 you filed a return and reported your income on the cash method. In 2009 you repaid $5,000 included in your 2008 income under a claim of right. Your filing status in 2009 and 2008 is single. Your income and tax for both years are as follows:
| || 2008 |
| || With Income || Without Income |
|Tax||$ 1,853||$ 1,103|
| || || || || |
| || 2009 |
| || Without Deduction || With Deduction |
|Tax||$ 8,681||$ 7,431|taxmap/pubs/p525-005.htm#en_us_publink1000229609
Your tax under method 1 is $7,431. Your tax under method 2 is $7,931, figured as follows:
|Tax previously determined for 2008||$1,853|
|Less: Tax as refigured|| − 1,103 |
|Decrease in 2008 tax|| $ 750 |
| || || |
|Regular tax liability for 2009||$8,681|
|Less: Decrease in 2008 tax|| − 750 |
|Refigured tax for 2009|| $7,931 |
You pay less tax using method 1, so you should take a deduction for the repayment in 2009.
This discussion does not apply to:
- Deductions for bad debts;
- Deductions for theft losses due to criminal fraud or embezzlement in a transaction entered into for profit;
- Deductions from sales to customers, such as returns and allowances, and similar items; or
- Deductions for legal and other expenses of contesting the repayment.
If you use the cash method, 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 deduction under your accounting method. For example, if you use an accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment accrues.