Introduction

This publication discusses common business expenses and explains what is and is not deductible. The general rules for deducting business expenses are discussed in the opening chapter. The chapters that follow cover specific expenses and list other publications and forms you may need.

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Important Changes for 2002

The following items highlight some changes in the tax law for 2002.

Retirement plans.   Many changes to the tax laws for retirement plans were made by the Economic Growth and Tax Relief Reconciliation Act of 2001 that was enacted on June 7, 2001. Most of those changes take effect in 2002. For information about those changes that are not covered in chapter 3, see Publication 560, Retirement Plans for Small Business, or Publication 553, Highlights of 2002 Tax Changes.

Health insurance deduction for the self-employed.   For 2002, this deduction is 70% of the amount you pay for health insurance for yourself and your family. See chapter 7.

New health insurance credit for eligible recipients.   You may be able to take this new credit only if you were an eligible trade adjustment assistance (TAA), alternative TAA, or Pension Benefit Guaranty Corporation pension recipient. By February 18, 2003, Form 8887, Health Insurance Credit Eligibility Certificate, showing that you were an eligible recipient should be sent to you. Use Form 8885, Health Insurance Credit for Eligible Recipients, to figure the amount, if any, of your health insurance credit.

Qualified environmental cleanup (remediation) costs.   The deduction for qualified environmental cleanup (remediation) costs was scheduled to expire for costs paid or incurred after 2001. It has been extended to include costs you pay or incur before 2004. See chapter 8.

Marginal production of oil and gas.   The suspension of the taxable income limit on percentage depletion from the marginal production of oil and natural gas that scheduled to expire for tax years beginning after 2001 has been extended to tax years beginning before 2004. For more information on marginal production, see section 613A(c) of the Internal Revenue Code.

Maximum clean-fuel vehicle deduction.   The maximum clean-fuel vehicle deduction and qualified electric vehicle credit were scheduled to be 25% lower for 2002 and both were scheduled to be phased out completely by 2005. The full deduction and credit are now allowed for qualified property placed in service in 2002 and 2003. The phaseout of the deduction and the credit will begin in 2004, and no deduction or credit will be allowed for property placed in service after 2006. See chapter 12.

Standard mileage rate.   The standard mileage rate for the cost of operating your car, van, pickup, or panel truck in 2002 is 36½ cents a mile for all business miles. See chapter 13.

Meal expense deduction subject to hours of service limits.   In 2002, this deduction increases to 65% of the reimbursed meals your employees consume while they are subject to the Department of Transportation's hours of service limits. See chapter 13.

Important Change for 2003

Health insurance deduction for the self-employed.   For 2003, this deduction is 100% of the amount you pay for health insurance for yourself and your family. See chapter 7.

Important Reminder

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

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