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1040ez 2013 1. 1040ez 2013   Overview of Depreciation Table of Contents Introduction Useful Items - You may want to see: What Property Can Be Depreciated?Property You Own Property Used in Your Business or Income-Producing Activity Property Having a Determinable Useful Life Property Lasting More Than One Year What Property Cannot Be Depreciated?Land Excepted Property When Does Depreciation Begin and End?Placed in Service Idle Property Cost or Other Basis Fully Recovered Retired From Service What Method Can You Use To Depreciate Your Property?Property You Placed in Service Before 1987 Property Owned or Used in 1986 Intangible Property Corporate or Partnership Property Acquired in a Nontaxable Transfer Election To Exclude Property From MACRS What Is the Basis of Your Depreciable Property?Cost as Basis Other Basis Adjusted Basis How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions?Filing an Amended Return Changing Your Accounting Method Introduction Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. 1040ez 2013 It is an allowance for the wear and tear, deterioration, or obsolescence of the property. 1040ez 2013 This chapter discusses the general rules for depreciating property and answers the following questions. 1040ez 2013 What property can be depreciated? What property cannot be depreciated? When does depreciation begin and end? What method can you use to depreciate your property? What is the basis of your depreciable property? How do you treat repairs and improvements? Do you have to file Form 4562? How do you correct depreciation deductions? Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. 1040ez 2013 What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. 1040ez 2013 You also can depreciate certain intangible property, such as patents, copyrights, and computer software. 1040ez 2013 To be depreciable, the property must meet all the following requirements. 1040ez 2013 It must be property you own. 1040ez 2013 It must be used in your business or income-producing activity. 1040ez 2013 It must have a determinable useful life. 1040ez 2013 It must be expected to last more than one year. 1040ez 2013 The following discussions provide information about these requirements. 1040ez 2013 Property You Own To claim depreciation, you usually must be the owner of the property. 1040ez 2013 You are considered as owning property even if it is subject to a debt. 1040ez 2013 Example 1. 1040ez 2013 You made a down payment to purchase rental property and assumed the previous owner's mortgage. 1040ez 2013 You own the property and you can depreciate it. 1040ez 2013 Example 2. 1040ez 2013 You bought a new van that you will use only for your courier business. 1040ez 2013 You will be making payments on the van over the next 5 years. 1040ez 2013 You own the van and you can depreciate it. 1040ez 2013 Leased property. 1040ez 2013   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). 1040ez 2013 This means you bear the burden of exhaustion of the capital investment in the property. 1040ez 2013 Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. 1040ez 2013 You can, however, depreciate any capital improvements you make to the property. 1040ez 2013 See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. 1040ez 2013   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. 1040ez 2013 However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property. 1040ez 2013 Incidents of ownership. 1040ez 2013   Incidents of ownership in property include the following. 1040ez 2013 The legal title to the property. 1040ez 2013 The legal obligation to pay for the property. 1040ez 2013 The responsibility to pay maintenance and operating expenses. 1040ez 2013 The duty to pay any taxes on the property. 1040ez 2013 The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. 1040ez 2013 Life tenant. 1040ez 2013   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. 1040ez 2013 However, see Certain term interests in property under Excepted Property, later. 1040ez 2013 Cooperative apartments. 1040ez 2013   If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment. 1040ez 2013   Figure your depreciation deduction as follows. 1040ez 2013 Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. 1040ez 2013 If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. 1040ez 2013 Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. 1040ez 2013 Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. 1040ez 2013 Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. 1040ez 2013 Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. 1040ez 2013 Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. 1040ez 2013 Multiply the result of (2) by the percentage you figured in (3). 1040ez 2013 This is your depreciation on the stock. 1040ez 2013   Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or income-producing property. 1040ez 2013 You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income. 1040ez 2013 Example. 1040ez 2013 You figure your share of the cooperative housing corporation's depreciation to be $30,000. 1040ez 2013 Your adjusted basis in the stock of the corporation is $50,000. 1040ez 2013 You use one half of your apartment solely for business purposes. 1040ez 2013 Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). 1040ez 2013 Change to business use. 1040ez 2013   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. 1040ez 2013 The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. 1040ez 2013 The fair market value of the property on the date you change your apartment to business use. 1040ez 2013 This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. 1040ez 2013 The corporation's adjusted basis in the property on that date. 1040ez 2013 Do not subtract depreciation when figuring the corporation's adjusted basis. 1040ez 2013   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. 1040ez 2013 The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. 1040ez 2013   For a discussion of fair market value and adjusted basis, see Publication 551. 1040ez 2013 Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. 1040ez 2013 If you use property to produce income (investment use), the income must be taxable. 1040ez 2013 You cannot depreciate property that you use solely for personal activities. 1040ez 2013 Partial business or investment use. 1040ez 2013   If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use. 1040ez 2013 For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities. 1040ez 2013    You must keep records showing the business, investment, and personal use of your property. 1040ez 2013 For more information on the records you must keep for listed property, such as a car, see What Records Must Be Kept in chapter 5. 1040ez 2013    Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. 1040ez 2013 For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. 1040ez 2013 Office in the home. 1040ez 2013   If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. 1040ez 2013 For information about depreciating your home office, see Publication 587. 1040ez 2013 Inventory. 1040ez 2013   You cannot depreciate inventory because it is not held for use in your business. 1040ez 2013 Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. 1040ez 2013   If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory. 1040ez 2013 See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. 1040ez 2013   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. 1040ez 2013 If it is unclear, examine carefully all the facts in the operation of the particular business. 1040ez 2013 The following example shows how a careful examination of the facts in two similar situations results in different conclusions. 1040ez 2013 Example. 1040ez 2013 Maple Corporation is in the business of leasing cars. 1040ez 2013 At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. 1040ez 2013 Maple does not have a showroom, used car lot, or individuals to sell the cars. 1040ez 2013 Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. 1040ez 2013 Maple can depreciate the leased cars because the cars are not held primarily for sale to customers in the ordinary course of business, but are leased. 1040ez 2013 If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit is intended, the cars are treated as inventory and are not depreciable property. 1040ez 2013 In this situation, the cars are held primarily for sale to customers in the ordinary course of business. 1040ez 2013 Containers. 1040ez 2013   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. 1040ez 2013 However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. 1040ez 2013 They qualify as property used in your business. 1040ez 2013 Title to the containers does not pass to the buyer. 1040ez 2013   To determine if these requirements are met, consider the following questions. 1040ez 2013 Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title? Does your invoice treat the containers as separate items? Do any of your records state your basis in the containers? Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. 1040ez 2013 This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. 1040ez 2013 Property Lasting More Than One Year To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service. 1040ez 2013 Example. 1040ez 2013 You maintain a library for use in your profession. 1040ez 2013 You can depreciate it. 1040ez 2013 However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. 1040ez 2013 Instead, you deduct their cost as a business expense. 1040ez 2013 What Property Cannot Be Depreciated? Certain property cannot be depreciated. 1040ez 2013 This includes land and certain excepted property. 1040ez 2013 Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. 1040ez 2013 The cost of land generally includes the cost of clearing, grading, planting, and landscaping. 1040ez 2013 Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. 1040ez 2013 These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. 1040ez 2013 Example. 1040ez 2013 You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. 1040ez 2013 Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. 1040ez 2013 If you replace the building, you would have to destroy the bushes and trees right next to it. 1040ez 2013 These bushes and trees are closely associated with the building, so they have a determinable useful life. 1040ez 2013 Therefore, you can depreciate them. 1040ez 2013 Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. 1040ez 2013 Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. 1040ez 2013 Property placed in service and disposed of in the same year. 1040ez 2013 Determining when property is placed in service is explained later. 1040ez 2013 Equipment used to build capital improvements. 1040ez 2013 You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. 1040ez 2013 See Uniform Capitalization Rules in Publication 551. 1040ez 2013 Section 197 intangibles. 1040ez 2013 You must amortize these costs. 1040ez 2013 Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. 1040ez 2013 Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. 1040ez 2013 See Intangible Property , later. 1040ez 2013 Certain term interests. 1040ez 2013 Certain term interests in property. 1040ez 2013   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. 1040ez 2013 A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust. 1040ez 2013 Related persons. 1040ez 2013   For a description of related persons, see Related Persons, later. 1040ez 2013 For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. 1040ez 2013 Basis adjustments. 1040ez 2013   If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed. 1040ez 2013   If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest holder. 1040ez 2013 However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. 1040ez 2013 The term interest is held by an organization exempt from tax. 1040ez 2013 The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States. 1040ez 2013 Exceptions. 1040ez 2013   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. 1040ez 2013 They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser. 1040ez 2013 When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. 1040ez 2013 You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. 1040ez 2013 Placed in Service You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. 1040ez 2013 Even if you are not using the property, it is in service when it is ready and available for its specific use. 1040ez 2013 Example 1. 1040ez 2013 Donald Steep bought a machine for his business. 1040ez 2013 The machine was delivered last year. 1040ez 2013 However, it was not installed and operational until this year. 1040ez 2013 It is considered placed in service this year. 1040ez 2013 If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year. 1040ez 2013 Example 2. 1040ez 2013 On April 6, Sue Thorn bought a house to use as residential rental property. 1040ez 2013 She made several repairs and had it ready for rent on July 5. 1040ez 2013 At that time, she began to advertise it for rent in the local newspaper. 1040ez 2013 The house is considered placed in service in July when it was ready and available for rent. 1040ez 2013 She can begin to depreciate it in July. 1040ez 2013 Example 3. 1040ez 2013 James Elm is a building contractor who specializes in constructing office buildings. 1040ez 2013 He bought a truck last year that had to be modified to lift materials to second-story levels. 1040ez 2013 The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. 1040ez 2013 The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought. 1040ez 2013 Conversion to business use. 1040ez 2013   If you place property in service in a personal activity, you cannot claim depreciation. 1040ez 2013 However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. 1040ez 2013 You place the property in service in the business or income-producing activity on the date of the change. 1040ez 2013 Example. 1040ez 2013 You bought a home and used it as your personal home several years before you converted it to rental property. 1040ez 2013 Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. 1040ez 2013 You can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time. 1040ez 2013 Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). 1040ez 2013 For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. 1040ez 2013 Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. 1040ez 2013 You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. 1040ez 2013 See What Is the Basis of Your Depreciable Property , later. 1040ez 2013 Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. 1040ez 2013 You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. 1040ez 2013 You sell or exchange the property. 1040ez 2013 You convert the property to personal use. 1040ez 2013 You abandon the property. 1040ez 2013 You transfer the property to a supplies or scrap account. 1040ez 2013 The property is destroyed. 1040ez 2013 If you included the property in a general asset account, see How Do You Use General Asset Accounts in chapter 4 for the rules that apply when you dispose of that property. 1040ez 2013 What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. 1040ez 2013 MACRS is discussed in chapter 4. 1040ez 2013 You cannot use MACRS to depreciate the following property. 1040ez 2013 Property you placed in service before 1987. 1040ez 2013 Certain property owned or used in 1986. 1040ez 2013 Intangible property. 1040ez 2013 Films, video tapes, and recordings. 1040ez 2013 Certain corporate or partnership property acquired in a nontaxable transfer. 1040ez 2013 Property you elected to exclude from MACRS. 1040ez 2013 The following discussions describe the property listed above and explain what depreciation method should be used. 1040ez 2013 Property You Placed in Service Before 1987 You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). 1040ez 2013 Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. 1040ez 2013 For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. 1040ez 2013 Use of real property changed. 1040ez 2013   You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. 1040ez 2013 Improvements made after 1986. 1040ez 2013   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. 1040ez 2013 Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. 1040ez 2013 For more information about improvements, see How Do You Treat Repairs and Improvements , later and Additions and Improvements under Which Recovery Period Applies in chapter 4. 1040ez 2013 Property Owned or Used in 1986 You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. 1040ez 2013 If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. 1040ez 2013 For the following discussions, do not treat property as owned before you placed it in service. 1040ez 2013 If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. 1040ez 2013 Personal property. 1040ez 2013   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. 1040ez 2013 You or someone related to you owned or used the property in 1986. 1040ez 2013 You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change. 1040ez 2013 You lease the property to a person (or someone related to this person) who owned or used the property in 1986. 1040ez 2013 You acquired the property in a transaction in which: The user of the property did not change, and The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above. 1040ez 2013 Real property. 1040ez 2013   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. 1040ez 2013 You or someone related to you owned the property in 1986. 1040ez 2013 You lease the property to a person who owned the property in 1986 (or someone related to that person). 1040ez 2013 You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. 1040ez 2013 MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. 1040ez 2013 It does not apply to the carried-over part of the basis. 1040ez 2013 Exceptions. 1040ez 2013   The rules above do not apply to the following. 1040ez 2013 Residential rental property or nonresidential real property. 1040ez 2013 Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention. 1040ez 2013 For information on how to figure depreciation under ACRS, see Publication 534. 1040ez 2013 Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. 1040ez 2013 Related persons. 1040ez 2013   For this purpose, the following are related persons. 1040ez 2013 An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. 1040ez 2013 A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. 1040ez 2013 Two corporations that are members of the same controlled group. 1040ez 2013 A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. 1040ez 2013 The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 1040ez 2013 The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. 1040ez 2013 A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. 1040ez 2013 Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation. 1040ez 2013 A corporation and a partnership if the same persons own both of the following. 1040ez 2013 More than 10% of the value of the outstanding stock of the corporation. 1040ez 2013 More than 10% of the capital or profits interest in the partnership. 1040ez 2013 The executor and beneficiary of any estate. 1040ez 2013 A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. 1040ez 2013 Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. 1040ez 2013 The related person and a person who is engaged in trades or businesses under common control. 1040ez 2013 See section 52(a) and 52(b) of the Internal Revenue Code. 1040ez 2013 When to determine relationship. 1040ez 2013   You must determine whether you are related to another person at the time you acquire the property. 1040ez 2013   A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. 1040ez 2013 For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits. 1040ez 2013 Constructive ownership of stock or partnership interest. 1040ez 2013   To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules. 1040ez 2013 Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. 1040ez 2013 However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation. 1040ez 2013 An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. 1040ez 2013 An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner. 1040ez 2013 For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. 1040ez 2013 However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership interest. 1040ez 2013 Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. 1040ez 2013 However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). 1040ez 2013 You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated. 1040ez 2013 Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. 1040ez 2013 To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. 1040ez 2013 Subtract the salvage value, if any, from the adjusted basis. 1040ez 2013 The balance is the total depreciation you can take over the useful life of the property. 1040ez 2013 Divide the balance by the number of years in the useful life. 1040ez 2013 This gives you your yearly depreciation deduction. 1040ez 2013 Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. 1040ez 2013 If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. 1040ez 2013 Example. 1040ez 2013 In April, Frank bought a patent for $5,100 that is not a section 197 intangible. 1040ez 2013 He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. 1040ez 2013 He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. 1040ez 2013 He only used the patent for 9 months during the first year, so he multiplies $300 by 9/12 to get his deduction of $225 for the first year. 1040ez 2013 Next year, Frank can deduct $300 for the full year. 1040ez 2013 Patents and copyrights. 1040ez 2013   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. 1040ez 2013 The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. 1040ez 2013 However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis. 1040ez 2013 Computer software. 1040ez 2013   Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business. 1040ez 2013   However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests. 1040ez 2013 It is readily available for purchase by the general public. 1040ez 2013 It is subject to a nonexclusive license. 1040ez 2013 It has not been substantially modified. 1040ez 2013   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. 1040ez 2013 If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. 1040ez 2013    Tax-exempt use property subject to a lease. 1040ez 2013   The useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), cannot be less than 125% of the lease term. 1040ez 2013 Certain created intangibles. 1040ez 2013   You can amortize certain intangibles created on or after December 31, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. 1040ez 2013 For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. 1040ez 2013   The following are not eligible. 1040ez 2013 Any intangible asset acquired from another person. 1040ez 2013 Created financial interests. 1040ez 2013 Any intangible asset that has a useful life that can be estimated with reasonable accuracy. 1040ez 2013 Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance. 1040ez 2013 Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. 1040ez 2013   You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. 1040ez 2013 For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities. 1040ez 2013 Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. 1040ez 2013 Motion picture films or video tapes. 1040ez 2013 Sound recordings. 1040ez 2013 Copyrights. 1040ez 2013 Books. 1040ez 2013 Patents. 1040ez 2013 Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. 1040ez 2013 The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. 1040ez 2013 For more information, see section 167(g) of the Internal Revenue Code. 1040ez 2013 Films, video tapes, and recordings. 1040ez 2013   You cannot use MACRS for motion picture films, video tapes, and sound recordings. 1040ez 2013 For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. 1040ez 2013 You can depreciate this property using either the straight line method or the income forecast method. 1040ez 2013 Participations and residuals. 1040ez 2013   You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. 1040ez 2013 The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year after the property is placed in service. 1040ez 2013 For this purpose, participations and residuals are defined as costs which by contract vary with the amount of income earned in connection with the property. 1040ez 2013   Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid. 1040ez 2013 Videocassettes. 1040ez 2013   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. 1040ez 2013 If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. 1040ez 2013 Corporate or Partnership Property Acquired in a Nontaxable Transfer MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. 1040ez 2013 You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. 1040ez 2013 However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis. 1040ez 2013 The nontaxable transfers covered by this rule include the following. 1040ez 2013 A distribution in complete liquidation of a subsidiary. 1040ez 2013 A transfer to a corporation controlled by the transferor. 1040ez 2013 An exchange of property solely for corporate stock or securities in a reorganization. 1040ez 2013 A contribution of property to a partnership in exchange for a partnership interest. 1040ez 2013 A partnership distribution of property to a partner. 1040ez 2013 Election To Exclude Property From MACRS If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. 1040ez 2013 You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and attaching a statement as described in the instructions for Form 4562. 1040ez 2013 You must make this election by the return due date (including extensions) for the tax year you place your property in service. 1040ez 2013 However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). 1040ez 2013 Attach the election to the amended return and write “Filed pursuant to section 301. 1040ez 2013 9100-2” on the election statement. 1040ez 2013 File the amended return at the same address you filed the original return. 1040ez 2013 Use of standard mileage rate. 1040ez 2013   If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. 1040ez 2013 See Publication 463 for a discussion of the standard mileage rate. 1040ez 2013 What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. 1040ez 2013 To determine basis, you need to know the cost or other basis of your property. 1040ez 2013 Cost as Basis The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception , below), freight charges, and installation and testing fees. 1040ez 2013 The cost includes the amount you pay in cash, debt obligations, other property, or services. 1040ez 2013 Exception. 1040ez 2013   You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). 1040ez 2013 If you make that choice, you cannot include those sales taxes as part of your cost basis. 1040ez 2013 Assumed debt. 1040ez 2013   If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt. 1040ez 2013 Example. 1040ez 2013 You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. 1040ez 2013 Your total cost is $140,000, the cash you paid plus the mortgage you assumed. 1040ez 2013 Settlement costs. 1040ez 2013   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. 1040ez 2013 These generally are shown on your settlement statement and include the following. 1040ez 2013 Legal and recording fees. 1040ez 2013 Abstract fees. 1040ez 2013 Survey charges. 1040ez 2013 Owner's title insurance. 1040ez 2013 Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. 1040ez 2013   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. 1040ez 2013 Property you construct or build. 1040ez 2013   If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. 1040ez 2013 For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. 1040ez 2013 Other Basis Other basis usually refers to basis that is determined by the way you received the property. 1040ez 2013 For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. 1040ez 2013 If you acquired property in this or some other way, see Publication 551 to determine your basis. 1040ez 2013 Property changed from personal use. 1040ez 2013   If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. 1040ez 2013 The fair market value (FMV) of the property on the date of the change in use. 1040ez 2013 Your original cost or other basis adjusted as follows. 1040ez 2013 Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. 1040ez 2013 Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. 1040ez 2013 Example. 1040ez 2013 Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. 1040ez 2013 Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. 1040ez 2013 Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. 1040ez 2013 Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). 1040ez 2013 On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. 1040ez 2013 The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000). 1040ez 2013 Property acquired in a nontaxable transaction. 1040ez 2013   Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. 1040ez 2013 Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. 1040ez 2013 See Like-kind exchanges and involuntary conversions. 1040ez 2013 under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. 1040ez 2013   There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. 1040ez 2013 See How Do You Use General Asset Accounts in chapter 4. 1040ez 2013 Adjusted Basis To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. 1040ez 2013 These events could include the following. 1040ez 2013 Installing utility lines. 1040ez 2013 Paying legal fees for perfecting the title. 1040ez 2013 Settling zoning issues. 1040ez 2013 Receiving rebates. 1040ez 2013 Incurring a casualty or theft loss. 1040ez 2013 For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. 1040ez 2013 If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property. 1040ez 2013 For more information, see What Is the Basis for Depreciation in chapter 4. 1040ez 2013 . 1040ez 2013 Basis adjustment for depreciation allowed or allowable. 1040ez 2013   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. 1040ez 2013 Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). 1040ez 2013 Depreciation allowable is depreciation you are entitled to deduct. 1040ez 2013   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. 1040ez 2013   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). 1040ez 2013 How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. 1040ez 2013 Improvement means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. 1040ez 2013 You generally deduct the cost of repairing business property in the same way as any other business expense. 1040ez 2013 However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. 1040ez 2013 Example. 1040ez 2013 You repair a small section on one corner of the roof of a rental house. 1040ez 2013 You deduct the cost of the repair as a rental expense. 1040ez 2013 However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. 1040ez 2013 You depreciate the cost of the new roof. 1040ez 2013 Improvements to rented property. 1040ez 2013   You can depreciate permanent improvements you make to business property you rent from someone else. 1040ez 2013 Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. 1040ez 2013 Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. 1040ez 2013 A section 179 deduction for the current year or a section 179 carryover from a prior year. 1040ez 2013 See chapter 2 for information on the section 179 deduction. 1040ez 2013 Depreciation for property placed in service during the current year. 1040ez 2013 Depreciation on any vehicle or other listed property, regardless of when it was placed in service. 1040ez 2013 See chapter 5 for information on listed property. 1040ez 2013 A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040). 1040ez 2013 Amortization of costs if the current year is the first year of the amortization period. 1040ez 2013 Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. 1040ez 2013 S. 1040ez 2013 Income Tax Return for an S Corporation) regardless of when it was placed in service. 1040ez 2013 You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. 1040ez 2013 Table 1-1 presents an overview of the purpose of the various parts of Form 4562. 1040ez 2013 Employee. 1040ez 2013   Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or the standard mileage rate. 1040ez 2013 Instead, use either Form 2106 or Form 2106-EZ. 1040ez 2013 Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. 1040ez 2013 How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. 1040ez 2013 See Filing an Amended Return , next. 1040ez 2013 If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. 1040ez 2013 See Changing Your Accounting Method , later. 1040ez 2013 Filing an Amended Return You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. 1040ez 2013 You claimed the incorrect amount because of a mathematical error made in any year. 1040ez 2013 You claimed the incorrect amount because of a posting error made in any year. 1040ez 2013 You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. 1040ez 2013 You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. 1040ez 2013 Adoption of accounting method defined. 1040ez 2013   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. 1040ez 2013   For an exception to this 2-year rule, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. 1040ez 2013 irs. 1040ez 2013 gov/pub/irs-irbs/irb11-04. 1040ez 2013 pdf. 1040ez 2013 (Note. 1040ez 2013 Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. 1040ez 2013 For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. 1040ez 2013 irs. 1040ez 2013 gov/pub/irs-irbs/irb12-14. 1040ez 2013 pdf. 1040ez 2013 )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. 1040ez 2013 irs. 1040ez 2013 gov/pub/irs-irbs/irb07-29. 1040ez 2013 pdf. 1040ez 2013 When to file. 1040ez 2013   If an amended return is allowed, you must file it by the later of the following. 1040ez 2013 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. 1040ez 2013 A return filed before an unextended due date is considered filed on that due date. 1040ez 2013 2 years from the time you paid your tax for that year. 1040ez 2013 Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. 1040ez 2013 You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. 1040ez 2013 The following are examples of a change in method of accounting for depreciation. 1040ez 2013 A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns. 1040ez 2013 A change in the treatment of an asset from nondepreciable to depreciable or vice versa. 1040ez 2013 A change in the depreciation method, period of recovery, or convention of a depreciable asset. 1040ez 2013 A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. 1040ez 2013 A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance). 1040ez 2013 Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. 1040ez 2013 An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. 1040ez 2013 A change in use of an asset in the hands of the same taxpayer. 1040ez 2013 Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). 1040ez 2013 If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. 1040ez 2013 Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. 1040ez 2013 You must submit a request for a letter ruling to make a late election or revoke an election. 1040ez 2013 Any change in the placed in service date of a depreciable asset. 1040ez 2013 See section 1. 1040ez 2013 446-1(e)(2)(ii)(d) of the regulations for more information and examples. 1040ez 2013 IRS approval. 1040ez 2013   In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2011-14. 1040ez 2013 If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C. 1040ez 2013 B. 1040ez 2013 680. 1040ez 2013 Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. 1040ez 2013 Additional guidance. 1040ez 2013    For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. 1040ez 2013 irs. 1040ez 2013 gov/pub/irs-irbs/irb11-04. 1040ez 2013 pdf. 1040ez 2013 (Note. 1040ez 2013 Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. 1040ez 2013 For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. 1040ez 2013 irs. 1040ez 2013 gov/pub/irs-irbs/irb12-14. 1040ez 2013 pdf. 1040ez 2013 )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. 1040ez 2013 irs. 1040ez 2013 gov/pub/irs-irbs/irb07-29. 1040ez 2013 pdf. 1040ez 2013 Table 1-1. 1040ez 2013 Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. 1040ez 2013 For more information, see Form 4562 and its instructions. 1040ez 2013 Part Purpose I • Electing the section 179 deduction • Figuring the maximum section 179 deduction for the current year • Figuring any section 179 deduction carryover to the next year II • Reporting the special depreciation allowance for property (other than listed property) placed in service during the tax year • Reporting depreciation deductions on property being depreciated under any method other than Modified Accelerated Cost Recovery System (MACRS) III • Reporting MACRS depreciation deductions for property placed in service before this year • Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current year IV • Summarizing other parts V • Reporting the special depreciation allowance for automobiles and other listed property • Reporting MACRS depreciation on automobiles and other listed property • Reporting the section 179 cost elected for automobiles and other listed property • Reporting information on the use of automobiles and other transportation vehicles VI • Reporting amortization deductions Section 481(a) adjustment. 1040ez 2013   If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. 1040ez 2013 The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. 1040ez 2013 If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. 1040ez 2013 A negative section 481(a) adjustment results in a decrease in taxable income. 1040ez 2013 It is taken into account in the year of change and is reported on your business tax returns as “other expenses. 1040ez 2013 ” A positive section 481(a) adjustment results in an increase in taxable income. 1040ez 2013 It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. 1040ez 2013 ” However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. 1040ez 2013 Make the election by completing the appropriate line on Form 3115. 1040ez 2013   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. 1040ez 2013 Prev  Up  Next   Home   More Online Publications
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1040ez 2013 3. 1040ez 2013   Farm Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Schedule F (Form 1040) Sales of Farm ProductsSchedule F. 1040ez 2013 Form 4797. 1040ez 2013 Sales Caused by Weather-Related Conditions Rents (Including Crop Shares)Crop Shares Agricultural Program PaymentsCommodity Credit Corporation (CCC) Loans Conservation Reserve Program (CRP) Crop Insurance and Crop Disaster Payments Feed Assistance and Payments Cost-Sharing Exclusion (Improvements) Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 Tobacco Quota Buyout Program Payments Other Payments Payment to More Than One Person Income From CooperativesPatronage Dividends Per-Unit Retain Certificates Cancellation of DebtGeneral Rule Exceptions Exclusions Income From Other SourcesSod. 1040ez 2013 Granting the right to remove deposits. 1040ez 2013 Income Averaging for FarmersElected Farm Income (EFI) How To Figure the Tax Effect on Other Tax Determinations Tax for Certain Children Who Have Unearned Income Alternative Minimum Tax (AMT) Schedule J Introduction You may receive income from many sources. 1040ez 2013 You must report the income from all the different sources on your tax return, unless it is excluded by law. 1040ez 2013 Where you report the income on your tax return depends on its source. 1040ez 2013 This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss From Farming. 1040ez 2013 For information on where to report other income, see the Instructions for Form 1040, U. 1040ez 2013 S. 1040ez 2013 Individual Income Tax Return. 1040ez 2013 Accounting method. 1040ez 2013   The rules discussed in this chapter assume you use the cash method of accounting. 1040ez 2013 Under the cash method, you generally include an item of income in gross income in the year you receive it. 1040ez 2013 See Cash Method in chapter 2. 1040ez 2013   If you use an accrual method of accounting, different rules may apply to your situation. 1040ez 2013 See Accrual Method in chapter 2. 1040ez 2013 Topics - This chapter discusses: Schedule F Sales of farm products Rents (including crop shares) Agricultural program payments Income from cooperatives Cancellation of debt Income from other sources Income averaging for farmers Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness Sch E (Form 1040) Supplemental Income and Loss Sch J (Form 1040) Income Averaging for Farmers and Fishermen 1099-G Certain Government Payments 1099-PATR Taxable Distributions Received From Cooperatives 4797 Sales of Business Property 4835 Farm Rental Income and Expenses See chapter 16 for information about getting publications and forms. 1040ez 2013 Schedule F (Form 1040) Individuals, trusts, and partnerships report farm income on Schedule F (Form 1040), Profit or Loss From Farming. 1040ez 2013 Use this schedule to figure the net profit or loss from regular farming operations. 1040ez 2013 Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. 1040ez 2013 This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. 1040ez 2013 It also includes income from the sale of crop shares if you materially participate in producing the crop. 1040ez 2013 See Rents (Including Crop Shares) , later. 1040ez 2013 Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming. 1040ez 2013 Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets. 1040ez 2013 Land. 1040ez 2013 Depreciable farm equipment. 1040ez 2013 Buildings and structures. 1040ez 2013 Livestock held for draft, breeding, sport, or dairy purposes. 1040ez 2013 Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. 1040ez 2013 Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11. 1040ez 2013 Sales of Farm Products Where to report. 1040ez 2013    Table 3-1 shows where to report the sale of farm products on your tax return. 1040ez 2013 Schedule F. 1040ez 2013   Amounts received from the sales of products you raised on your farm for sale (or bought for resale), such as livestock, produce, or grains, are reported on Schedule F. 1040ez 2013 This includes money and the fair market value of any property or services you receive. 1040ez 2013 When you sell farm products bought for resale, your profit or loss is the difference between your selling price (money plus the fair market value of any property) and your basis in the item (usually the cost). 1040ez 2013 See chapter 6 for information on the basis of assets. 1040ez 2013 You generally report these amounts on Schedule F for the year you receive payment. 1040ez 2013 Example. 1040ez 2013 In 2012, you bought 20 feeder calves for $11,000 for resale. 1040ez 2013 You sold them in 2013 for $21,000. 1040ez 2013 You report the $21,000 sales price on Schedule F, line 1b, subtract your $11,000 basis on line 1d, and report the resulting $10,000 profit on line 1e. 1040ez 2013 Form 4797. 1040ez 2013   Sales of livestock held for draft, breeding, sport, or dairy purposes may result in ordinary or capital gains or losses, depending on the circumstances. 1040ez 2013 In either case, you should always report these sales on Form 4797 instead of Schedule F. 1040ez 2013 See Livestock under Ordinary or Capital Gain or Loss in chapter 8. 1040ez 2013 Animals you do not hold primarily for sale are considered business assets of your farm. 1040ez 2013 Table 3-1. 1040ez 2013 Where To Report Sales of Farm Products Item Sold Schedule F Form 4797 Farm products raised for sale X   Farm products bought for resale X   Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport, or dairy purposes (bought or raised)   X Sale by agent. 1040ez 2013   If your agent sells your farm products, you have constructive receipt of the income when your agent receives payment and you must include the net proceeds from the sale in gross income for the year the agent receives payment. 1040ez 2013 This applies even if your agent pays you in a later year. 1040ez 2013 For a discussion on constructive receipt of income, see Cash Method under Accounting Methods in chapter 2. 1040ez 2013 Sales Caused by Weather-Related Conditions If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. 1040ez 2013 You must meet all the following conditions to qualify. 1040ez 2013 Your principal trade or business is farming. 1040ez 2013 You use the cash method of accounting. 1040ez 2013 You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition. 1040ez 2013 The weather-related condition caused an area to be designated as eligible for assistance by the federal government. 1040ez 2013 Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. 1040ez 2013 The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies. 1040ez 2013 A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. 1040ez 2013 See Other Involuntary Conversions in chapter 11. 1040ez 2013 Usual business practice. 1040ez 2013   You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. 1040ez 2013 Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you postponed the gain. 1040ez 2013 If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region. 1040ez 2013 Connection with affected area. 1040ez 2013   The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. 1040ez 2013 However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock. 1040ez 2013 This requirement generally will not be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition are not substantial in relation to the total costs of holding the livestock. 1040ez 2013 Classes of livestock. 1040ez 2013   You must figure the amount to be postponed separately for each generic class of animals—for example, hogs, sheep, and cattle. 1040ez 2013 Do not separate animals into classes based on age, sex, or breed. 1040ez 2013 Amount to be postponed. 1040ez 2013   Follow these steps to figure the amount of gain to be postponed for each class of animals. 1040ez 2013 Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. 1040ez 2013 For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock. 1040ez 2013 Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions. 1040ez 2013 Example. 1040ez 2013 You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. 1040ez 2013 As a result of drought, you sold 135 head during 2012. 1040ez 2013 You realized $70,200 from the sale. 1040ez 2013 On August 9, 2012, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. 1040ez 2013 The income you can postpone until 2013 is $18,200 [($70,200 ÷ 135) × 35]. 1040ez 2013 How to postpone gain. 1040ez 2013   To postpone gain, attach a statement to your tax return for the year of the sale. 1040ez 2013 The statement must include your name and address and give the following information for each class of livestock for which you are postponing gain. 1040ez 2013 A statement that you are postponing gain under Internal Revenue Code (IRC) section 451(e). 1040ez 2013 Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions. 1040ez 2013 A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock. 1040ez 2013 The number of animals sold in each of the 3 preceding years. 1040ez 2013 The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions. 1040ez 2013 The total number of animals sold and the number sold because of weather-related conditions during the tax year. 1040ez 2013 A computation, as described above, of the income to be postponed for each class of livestock. 1040ez 2013   Generally, you must file the statement and the return by the due date of the return, including extensions. 1040ez 2013 However, for sales or exchanges treated as an involuntary conversion from weather-related sales of livestock in an area eligible for federal assistance (discussed in chapter 11), you can file this statement at any time during the replacement period. 1040ez 2013 For other sales or exchanges, if you timely filed your return for the year without postponing gain, you can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040ez 2013 Attach the statement to the amended return and write “Filed pursuant to section 301. 1040ez 2013 9100-2” at the top of the amended return. 1040ez 2013 File the amended return at the same address you filed the original return. 1040ez 2013 Once you have filed the statement, you can cancel your postponement of gain only with the approval of the IRS. 1040ez 2013 Rents (Including Crop Shares) The rent you receive for the use of your farmland is generally rental income, not farm income. 1040ez 2013 However, if you materially participate in farming operations on the land, the rent is farm income. 1040ez 2013 See Landlord Participation in Farming in chapter 12. 1040ez 2013 Pasture income and rental. 1040ez 2013   If you pasture someone else's livestock and take care of them for a fee, the income is from your farming business. 1040ez 2013 You must enter it as Other income on Schedule F. 1040ez 2013 If you simply rent your pasture for a flat cash amount without providing services, report the income as rent on Part I of Schedule E (Form 1040), Supplemental Income and Loss. 1040ez 2013 Crop Shares You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. 1040ez 2013 It does not matter whether you use the cash method of accounting or an accrual method of accounting. 1040ez 2013 If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. 1040ez 2013 See Landlord Participation in Farming in chapter 12. 1040ez 2013 Report the rental income on Schedule F. 1040ez 2013 If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). 1040ez 2013 The income is not included in self-employment income. 1040ez 2013 Crop shares you use to feed livestock. 1040ez 2013   Crop shares you receive as a landlord and feed to your livestock are considered converted to money when fed to the livestock. 1040ez 2013 You must include the fair market value of the crop shares in income at that time. 1040ez 2013 You are entitled to a business expense deduction for the livestock feed in the same amount and at the same time you include the fair market value of the crop share as rental income. 1040ez 2013 Although these two transactions cancel each other for figuring adjusted gross income on Form 1040, they may be necessary to figure your self-employment tax. 1040ez 2013 See  chapter 12. 1040ez 2013 Crop shares you give to others (gift). 1040ez 2013   Crop shares you receive as a landlord and give to others are considered converted to money when you make the gift. 1040ez 2013 You must report the fair market value of the crop share as income, even though someone else receives payment for the crop share. 1040ez 2013 Example. 1040ez 2013 A tenant farmed part of your land under a crop-share arrangement. 1040ez 2013 The tenant harvested and delivered the crop in your name to an elevator company. 1040ez 2013 Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. 1040ez 2013 They sell their crop shares in the following year and the elevator company makes payments directly to your children. 1040ez 2013 In this situation, you are considered to have received rental income and then made a gift of that income. 1040ez 2013 You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children. 1040ez 2013 Crop share loss. 1040ez 2013   If you are involved in a rental or crop-share lease arrangement, any loss from these activities may be subject to the limits under the passive loss rules. 1040ez 2013 See Publication 925 for information on these rules. 1040ez 2013 Agricultural Program Payments You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. 1040ez 2013 However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. 1040ez 2013 See Cost-Sharing Exclusion (Improvements) , later. 1040ez 2013 Report the agricultural program payment on the appropriate line of Schedule F, Part I. 1040ez 2013 Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. 1040ez 2013 However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. 1040ez 2013 Claim the deduction on Schedule F for the year of repayment or reduction. 1040ez 2013 Commodity Credit Corporation (CCC) Loans Generally, you do not report loans you receive as income. 1040ez 2013 However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. 1040ez 2013 You do not need approval from the IRS to adopt this method of reporting CCC loans. 1040ez 2013 Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later years in the same way. 1040ez 2013 However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. 1040ez 2013 For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. 1040ez 2013 Revenue Procedure 2008-52, 2008-36 I. 1040ez 2013 R. 1040ez 2013 B. 1040ez 2013 587, is available at  www. 1040ez 2013 irs. 1040ez 2013 gov/irb/2008-36_IRB/ar09. 1040ez 2013 html. 1040ez 2013 You can request income tax withholding from CCC loan payments you receive. 1040ez 2013 Use Form W-4V, Voluntary Withholding Request. 1040ez 2013 See chapter 16 for information about ordering the form. 1040ez 2013 To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. 1040ez 2013 Attach a statement to your return showing the details of the loan. 1040ez 2013 You must file the statement and the return by the due date of the return, including extensions. 1040ez 2013 If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040ez 2013 Attach the statement to the amended return and write “Filed pursuant to section 301. 1040ez 2013 9100-2” at the top of the return. 1040ez 2013 File the amended return at the same address you filed the original return. 1040ez 2013 When you make this election, the amount you report as income becomes your basis in the commodity. 1040ez 2013 See chapter 6 for information on the basis of assets. 1040ez 2013 If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. 1040ez 2013 If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F. 1040ez 2013 If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. 1040ez 2013 If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture. 1040ez 2013 Form 1099-A. 1040ez 2013   If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A, Acquisition or Abandonment of Secured Property. 1040ez 2013 “CCC” should be shown in box 6. 1040ez 2013 The amount of any CCC loan outstanding when you forfeited your commodity should also be indicated on the form. 1040ez 2013 Market Gain Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. 1040ez 2013 If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. 1040ez 2013 Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. 1040ez 2013 Market gain should be reported as follows. 1040ez 2013 If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. 1040ez 2013 However, adjust the basis of the commodity for the amount of the market gain. 1040ez 2013 If you did not include the CCC loan in income in the year received, include the market gain in your income. 1040ez 2013 The following examples show how to report market gain. 1040ez 2013 Example 1. 1040ez 2013 Mike Green is a cotton farmer. 1040ez 2013 He uses the cash method of accounting and files his tax return on a calendar year basis. 1040ez 2013 He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. 1040ez 2013 In 2012, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $2,000 (a loan rate of $2. 1040ez 2013 00 per pound). 1040ez 2013 In 2013, he repaid the loan and redeemed the cotton for $1,500 when the world price was $1. 1040ez 2013 50 per pound (lower than the loan amount). 1040ez 2013 Later in 2013, he sold the cotton for $2,500. 1040ez 2013 The market gain on the redemption was $. 1040ez 2013 50 ($2. 1040ez 2013 00 – $1. 1040ez 2013 50) per pound. 1040ez 2013 Mike realized total market gain of $500 ($. 1040ez 2013 50 x 1,000 pounds). 1040ez 2013 How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2012. 1040ez 2013 Included CCC loan. 1040ez 2013   Mike reported the $2,000 CCC loan as income for 2012 on Schedule F, line 1b, so he is treated as if he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when he redeemed it. 1040ez 2013 The $500 market gain is not recognized on the redemption. 1040ez 2013 He reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. 1040ez 2013   Mike's basis in the cotton after he redeemed it was $1,500, which is the redemption (repurchase) price paid for the cotton. 1040ez 2013 His gain from the sale is $1,000 ($2,500 – $1,500). 1040ez 2013 He reports the $1,000 gain as income for 2013 on Schedule F, line 1b. 1040ez 2013 Excluded CCC loan. 1040ez 2013   Mike has income of $500 from market gain in 2013. 1040ez 2013 He reports it on Schedule F, lines 4a and 4b. 1040ez 2013 His basis in the cotton is zero, so his gain from its sale is $2,500. 1040ez 2013 He reports the $2,500 gain as income for 2013 on Schedule F, line 1b. 1040ez 2013 Example 2. 1040ez 2013 The facts are the same as in Example 1 except that, instead of selling the cotton for $2,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. 1040ez 2013 Under that contract, Mike authorized the cotton buyer to pay the CCC loan on Mike's behalf. 1040ez 2013 In 2013, the cotton buyer repaid the loan for $1,500 and immediately exercised his option, buying the cotton for $1,500. 1040ez 2013 How Mike reports the $500 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2012. 1040ez 2013 Included CCC loan. 1040ez 2013   As in Example 1, Mike is treated as though he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when the cotton buyer redeemed it for him. 1040ez 2013 The $500 market gain is not recognized on the redemption. 1040ez 2013 Mike reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. 1040ez 2013   Also, as in Example 1, Mike's basis in the cotton when the cotton buyer redeemed it for him was $1,500. 1040ez 2013 Mike has no gain or loss on its sale to the cotton buyer for that amount. 1040ez 2013 Excluded CCC loan. 1040ez 2013   As in Example 1, Mike has income of $500 from market gain in 2013. 1040ez 2013 He reports it on Schedule F, lines 4a and 4b. 1040ez 2013 His basis in the cotton is zero, so his gain from its sale is $1,500. 1040ez 2013 He reports the $1,500 gain as income for 2013 on Schedule F, line 1b. 1040ez 2013 Conservation Reserve Program (CRP) Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. 1040ez 2013 You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b. 1040ez 2013 Cost-share payments you receive may qualify for the cost-sharing exclusion. 1040ez 2013 See Cost-Sharing Exclusion (Improvements) , later. 1040ez 2013 CRP payments are reported to you on Form 1099-G. 1040ez 2013 Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. 1040ez 2013 See the instructions for Schedule SE (Form 1040). 1040ez 2013 Crop Insurance and Crop Disaster Payments You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. 1040ez 2013 You generally include them in the year you receive them. 1040ez 2013 Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster. 1040ez 2013 You can request income tax withholding from crop disaster payments you receive from the federal government. 1040ez 2013 Use Form W-4V, Voluntary Withholding Request. 1040ez 2013 See chapter 16 for information about ordering the form. 1040ez 2013 Election to postpone reporting until the following year. 1040ez 2013   You can postpone reporting some or all crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions. 1040ez 2013 You use the cash method of accounting. 1040ez 2013 You receive the crop insurance proceeds in the same tax year the crops are damaged. 1040ez 2013 You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred. 1040ez 2013   Deferral is not permitted for proceeds received from revenue insurance policies. 1040ez 2013   To postpone reporting some or all crop insurance proceeds received in 2013, report the amount you received on Schedule F, line 6a, but do not include it as a taxable amount on line 6b. 1040ez 2013 Check the box on line 8c and attach a statement to your tax return. 1040ez 2013 The statement must include your name and address and contain the following information. 1040ez 2013 A statement that you are making an election under IRC section 451(d) and Regulations section 1. 1040ez 2013 451-6. 1040ez 2013 The specific crop or crops physically destroyed or damaged. 1040ez 2013 A statement that under your normal business practice you would have included income from some or all of the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged. 1040ez 2013 The cause of the physical destruction or damage and the date or dates it occurred. 1040ez 2013 The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment. 1040ez 2013 The name of each insurance carrier from whom you received payments. 1040ez 2013   One election covers all crops representing a single trade or business. 1040ez 2013 If you have more than one farming business, make a separate election for each one. 1040ez 2013 For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms. 1040ez 2013   An election is binding for the year unless the IRS approves your request to change it. 1040ez 2013 To request IRS approval to change your election, write to the IRS at the following address giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it. 1040ez 2013 Ogden Submission Processing Center P. 1040ez 2013 O. 1040ez 2013 Box 9941 Ogden, UT 84409 Feed Assistance and Payments The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. 1040ez 2013 These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. 1040ez 2013 They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation. 1040ez 2013 Include in income: The market value of donated feed, The difference between the market value and the price you paid for feed you buy at below-market prices, and Any cost reimbursement you receive. 1040ez 2013 You must include these benefits in income in the year you receive them. 1040ez 2013 You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. 1040ez 2013 Report the benefits on Schedule F, Part I, as agricultural program payments. 1040ez 2013 You can usually take a current deduction for the same amount as a feed expense. 1040ez 2013 Cost-Sharing Exclusion (Improvements) You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. 1040ez 2013 A payment is any economic benefit you get as a result of an improvement. 1040ez 2013 However, this exclusion applies only to that part of a payment that meets all three of the following tests. 1040ez 2013 It was for a capital expense. 1040ez 2013 You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. 1040ez 2013 You must include the payment for a deductible expense in income, and you can take any offsetting deduction. 1040ez 2013 See chapter 5 for information on deducting soil and water conservation expenses. 1040ez 2013 It does not substantially increase your annual income from the property for which it is made. 1040ez 2013 An increase in annual income is substantial if it is more than the greater of the following amounts. 1040ez 2013 10% of the average annual income derived from the affected property before receiving the improvement. 1040ez 2013 $2. 1040ez 2013 50 times the number of affected acres. 1040ez 2013 The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. 1040ez 2013 Qualifying programs. 1040ez 2013   If the three tests listed above are met, you can exclude part or all of the payments from the following programs. 1040ez 2013 The rural clean water program authorized by the Federal Water Pollution Control Act. 1040ez 2013 The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977. 1040ez 2013 The water bank program authorized by the Water Bank Act. 1040ez 2013 The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. 1040ez 2013 The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act. 1040ez 2013 The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act. 1040ez 2013 The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act. 1040ez 2013 Certain small watershed programs, listed later. 1040ez 2013 Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. 1040ez 2013 Several state programs have been approved. 1040ez 2013 For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS). 1040ez 2013 Small watershed programs. 1040ez 2013   If the three tests listed earlier are met, you can exclude part or all of the payments you receive under the following programs for improvements made in connection with a watershed. 1040ez 2013 The programs under the Watershed Protection and Flood Prevention Act. 1040ez 2013 The flood prevention projects under the Flood Control Act of 1944. 1040ez 2013 The Emergency Watershed Protection Program under the Flood Control Act of 1950. 1040ez 2013 Certain programs under the Colorado River Basin Salinity Control Act. 1040ez 2013 The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002. 1040ez 2013 The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. 1040ez 2013 The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. 1040ez 2013 The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000. 1040ez 2013 The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000. 1040ez 2013 The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996. 1040ez 2013 The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002. 1040ez 2013 The Conservation Security Program authorized by the Food Security Act of 1985. 1040ez 2013 The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978. 1040ez 2013 Income realized. 1040ez 2013   The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any). 1040ez 2013 Value of the improvement. 1040ez 2013   You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. 1040ez 2013 The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items. 1040ez 2013 Any government payments under a program not listed earlier. 1040ez 2013 Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation. 1040ez 2013 Any government payment to you for rent or for your services. 1040ez 2013 The denominator of the fraction is the total cost of the improvement. 1040ez 2013 Excludable portion. 1040ez 2013   The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts. 1040ez 2013 10% of the prior average annual income from the affected acreage. 1040ez 2013 The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement. 1040ez 2013 $2. 1040ez 2013 50 times the number of affected acres. 1040ez 2013 The calculation of present fair market value of the right to receive annual income is too complex to discuss in this publication. 1040ez 2013 You may need to consult your tax advisor for assistance. 1040ez 2013 Example. 1040ez 2013 One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. 1040ez 2013 The total cost of the improvement was $500,000. 1040ez 2013 The USDA paid $490,000. 1040ez 2013 You paid $10,000. 1040ez 2013 The value of the cost-sharing improvement is $15,000. 1040ez 2013 The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. 1040ez 2013 The excludable portion is the greater amount, $1,550. 1040ez 2013 You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000     Excludable portion 1,550 11,550 Amount included in income $ 3,450 Effects of the exclusion. 1040ez 2013   When you figure the basis of property you acquire or improve using cost-sharing payments excluded from income, subtract the excluded payments from your capital costs. 1040ez 2013 Any payment excluded from income is not part of your basis. 1040ez 2013 In the example above, the increase in basis is $500,000 – $490,000 + $3,450 = $13,450. 1040ez 2013   In addition, you cannot take depreciation, amortization, or depletion deductions for the part of the cost of the property for which you receive cost-sharing payments you exclude from income. 1040ez 2013 How to report the exclusion. 1040ez 2013   Attach a statement to your tax return (or amended return) for the tax year you receive the last government payment for the improvement. 1040ez 2013 The statement must include the following information. 1040ez 2013 The dollar amount of the cost funded by the government payment. 1040ez 2013 The value of the improvement. 1040ez 2013 The amount you are excluding. 1040ez 2013   Report the total cost-sharing payments you receive on Schedule F, line 4a, and the taxable amount on line 4b. 1040ez 2013 Recapture. 1040ez 2013   If you dispose of the property within 20 years after you received the excluded payments, you must treat as ordinary income part or all of the cost-sharing payments you excluded. 1040ez 2013 In the above example, if the 100 acres were sold within 20 years of the exclusion for a gain of $2,000, $1,550 of that amount would be included in ordinary income. 1040ez 2013 You must report the recapture on Form 4797. 1040ez 2013 See Section 1255 property under Other Gains in chapter 9. 1040ez 2013 Electing not to exclude payments. 1040ez 2013   You can elect not to exclude all or part of any payments you receive under these programs. 1040ez 2013 If you make this election for all of these payments, none of the above restrictions and rules apply. 1040ez 2013 You must make this election by the due date, including extensions, for filing your return. 1040ez 2013 In the example above, an election not to exclude payments results in $5,000 included in income and a $15,000 increase in basis. 1040ez 2013 If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040ez 2013 Write “Filed pursuant to section 301. 1040ez 2013 9100-2” at the top of the amended return and file it at the same address you filed the original return. 1040ez 2013 Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. 1040ez 2013 You must include these payments on Schedule F, lines 4a and 4b. 1040ez 2013 The Food, Conservation, and Energy Act of 2008 provides for direct and counter-cyclical payments (DCP) as well as Average Crop Revenue Election (ACRE) payments. 1040ez 2013 You must include these payments on Schedule F, lines 6a and 6b. 1040ez 2013 The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, amends the Food, Conservation, and Energy Act of 2008 and provided a one-year extension for these payments. 1040ez 2013 Tobacco Quota Buyout Program Payments The Fair and Equitable Tobacco Reform Act of 2004, title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. 1040ez 2013 As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support. 1040ez 2013 If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. 1040ez 2013 If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. 1040ez 2013 Tobacco Quota Holders Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. 1040ez 2013 Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. 1040ez 2013 The gain or loss is capital or ordinary depending on how you used the quota. 1040ez 2013 See Capital or ordinary gain or loss , later. 1040ez 2013 Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method. 1040ez 2013 Adjusted basis. 1040ez 2013   The adjusted basis of your quota is determined differently depending on how you obtained the quota. 1040ez 2013 The basis of a quota derived from an original grant by the federal government is zero. 1040ez 2013 The basis of a purchased quota is the purchase price. 1040ez 2013 The basis of a quota received as a gift is generally the same as the donor's basis. 1040ez 2013 However, under certain circumstances, the basis is increased by the amount of gift taxes paid. 1040ez 2013 If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value. 1040ez 2013 The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death. 1040ez 2013 Reduction of basis. 1040ez 2013   You are required to reduce the basis of your tobacco quota by the following amounts. 1040ez 2013 Deductions you took for amortization, depletion, or depreciation. 1040ez 2013 Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota. 1040ez 2013 The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero). 1040ez 2013 Amount treated as interest. 1040ez 2013   You must reduce your tobacco quota buyout program payment by the amount treated as interest. 1040ez 2013 The interest is reportable as ordinary income. 1040ez 2013 If payments total $3,000 or less, your total quota buyout program payment does not include any amount treated as interest and you are not required to reduce the total payment you receive. 1040ez 2013   In all other cases, a portion of each payment may be treated as interest for federal tax purposes. 1040ez 2013 You may be required to reduce your total quota buyout program payment before you calculate your gain or loss. 1040ez 2013 For more information, see Notice 2005-57, 2005-32 I. 1040ez 2013 R. 1040ez 2013 B. 1040ez 2013 267, available at www. 1040ez 2013 irs. 1040ez 2013 gov/irb/2005-32_IRB/ar13. 1040ez 2013 html. 1040ez 2013 Installment method. 1040ez 2013   You may use the installment method to report a gain if you receive at least one payment after the close of your tax year. 1040ez 2013 Under the installment method, a portion of the gain is taken into account in each year in which a payment is received. 1040ez 2013 See chapter 10 for more information. 1040ez 2013 Capital or ordinary gain or loss. 1040ez 2013   Whether your gain or loss is ordinary or capital depends on how you used the quota. 1040ez 2013 Quota used in the trade or business of farming. 1040ez 2013   If you used the quota in the trade or business of farming and you held it for more than one year, you report the transaction as a section 1231 transaction on Form 4797. 1040ez 2013 See Section 1231 transactions in the Instructions for Form 4797 for detailed information on reporting section 1231 transactions. 1040ez 2013 Quota held for investment. 1040ez 2013   If you held the quota for investment purposes, any gain or loss is capital gain or loss. 1040ez 2013 The same result also applies if you held the quota for the production of income, though not connected with a trade or business. 1040ez 2013 Gain treated as ordinary income. 1040ez 2013   If you previously deducted any of the following items, some or all of the capital gain must be recharacterized and reported as ordinary income. 1040ez 2013 Any resulting capital gain is taxed as ordinary income up to the amount previously deducted. 1040ez 2013 The cost of acquiring a quota. 1040ez 2013 Amounts for amortization, depletion, or depreciation. 1040ez 2013 Amounts to reflect a reduction in the quota pounds. 1040ez 2013   You should include the ordinary income on your return for the tax year even if you use the installment method to report the remainder of the gain. 1040ez 2013 Self-employment income. 1040ez 2013   The tobacco quota buyout payments are not self-employment income. 1040ez 2013 Income averaging for farmers. 1040ez 2013   The gain or loss resulting from the quota payments does not qualify for income averaging. 1040ez 2013 A tobacco quota is considered an interest in land. 1040ez 2013 Income averaging is not available for gain or loss arising from the sale or other disposition of land. 1040ez 2013 Involuntary conversion. 1040ez 2013   The buyout of the tobacco quota is not an involuntary conversion. 1040ez 2013 Form 1099-S. 1040ez 2013   A tobacco quota is considered an interest in land, so the USDA will generally report the total amount you receive under a contract on Form 1099-S, Proceeds From Real Estate Transactions, if the amount is $600 or more. 1040ez 2013 The USDA will generally report any portion of a payment treated as interest of $600 or more to you on Form 1099-INT, Interest Income, for the year in which the payment is made. 1040ez 2013 Like-kind exchange of quota. 1040ez 2013   You may postpone reporting the gain or loss from tobacco quota buyout payments by entering into a like-kind exchange if you comply with the requirements of section 1031 and the regulations thereunder. 1040ez 2013 See Notice 2005-57 for more information. 1040ez 2013 Tobacco Growers Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years. 1040ez 2013 Taxation of payments to tobacco growers. 1040ez 2013   Payments to growers replace ordinary income that would have been earned had the tobacco marketing quota and price support programs continued. 1040ez 2013 Individuals will generally report the payments as an Agricultural program payment on Schedule F. 1040ez 2013 If you are a landowner who does not materially participate in the operation or management of the farm and are receiving the grower payment because your farm rental income is based on the tobacco grown by a tenant, the grower payment should be reported on Form 4835. 1040ez 2013 Self-employment income. 1040ez 2013   Payments to growers generally represent self-employment income. 1040ez 2013 If the grower is an individual carrying on a trade or business and deriving income (other than farm rental income properly reported on Form 4835) from that trade or business, the payments are net earnings from self-employment. 1040ez 2013 Income averaging for farmers. 1040ez 2013   Payments to growers who are individuals qualify for farm income averaging. 1040ez 2013 Form 1099-G. 1040ez 2013   If the amount received in a taxable year is $600 or more, the amount will generally be reported by the USDA on a Form 1099-G. 1040ez 2013 Other Payments You must include most other government program payments in income. 1040ez 2013 Fertilizer and Lime Include in income the value of fertilizer or lime you receive under a government program. 1040ez 2013 How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4. 1040ez 2013 Improvements If government payments are based on improvements, such as a pollution control facility, you must include them in income. 1040ez 2013 You must also capitalize the full cost of the improvement. 1040ez 2013 Since you have included the payments in income, they do not reduce your basis. 1040ez 2013 However, see Cost-Sharing Exclusion (Improvements) , earlier, for additional information. 1040ez 2013 National Tobacco Growers' Settlement Trust Fund Payments If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. 1040ez 2013 You should receive a Form 1099-MISC, Miscellaneous Income, that shows the payment amount. 1040ez 2013 If you produce a tobacco crop, report the payments as income from farming on your Schedule F. 1040ez 2013 If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835. 1040ez 2013 Payment to More Than One Person The USDA reports program payments to the IRS. 1040ez 2013 It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). 1040ez 2013 If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. 1040ez 2013 You should file Form 1099-G to report the identity of the actual recipient to the IRS. 1040ez 2013 You should also give this information to the recipient. 1040ez 2013 You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form. 1040ez 2013 Report the total amount reported to you as the payee of record on Schedule F, line 4a or 6a. 1040ez 2013 However, do not report as a taxable amount on line 4b or 6b any amount belonging to someone else. 1040ez 2013 See chapter 16 for information about ordering Form 1099-G. 1040ez 2013 Income From Cooperatives If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). 1040ez 2013 If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative. 1040ez 2013 Form 1099-PATR. 1040ez 2013   The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. 1040ez 2013 Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251, Alternative Minimum Tax—Individuals, if you are required to file the form. 1040ez 2013 For information on the alternative minimum tax, see the Instructions for Form 6251. 1040ez 2013 Patronage Dividends You generally report patronage dividends as income on Schedule F, lines 3a and 3b, for the tax year you receive them. 1040ez 2013 They include the following items. 1040ez 2013 Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative). 1040ez 2013 The stated dollar value of qualified written notices of allocation. 1040ez 2013 The fair market value of other property. 1040ez 2013 Do not report as income on line 3b any patronage dividends you receive from expenditures that were not deductible, such as buying personal or family items, capital assets, or depreciable property. 1040ez 2013 You must reduce the cost or other basis of these items by the amount of such patronage dividends received. 1040ez 2013 Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls. 1040ez 2013 If you cannot determine what the dividend is for, report it as income on lines 3a and 3b. 1040ez 2013 Qualified written notice of allocation. 1040ez 2013   If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F, lines 3a and 3b, in the year you receive it. 1040ez 2013 A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met. 1040ez 2013 The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation. 1040ez 2013 You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following. 1040ez 2013 Signing and giving a written agreement to the cooperative. 1040ez 2013 Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. 1040ez 2013 The cooperative must notify you in writing of this bylaw and give you a copy. 1040ez 2013 Endorsing and cashing a qualified check paid as part of the same patronage dividend. 1040ez 2013 You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid. 1040ez 2013 Qualified check. 1040ez 2013   A qualified check is any instrument that is redeemable in money and meets both of the following requirements. 1040ez 2013 It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above. 1040ez 2013 It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend. 1040ez 2013 Loss on redemption. 1040ez 2013   You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. 1040ez 2013 The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. 1040ez 2013 Nonqualified notice of allocation. 1040ez 2013   Do not include the stated dollar value of any nonqualified notice of allocation in income when you receive it. 1040ez 2013 Your basis in the notice is zero. 1040ez 2013 You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. 1040ez 2013 Report that amount, up to the stated dollar value of the notice, on Schedule F, lines 3a and 3b. 1040ez 2013 However, do not include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions. 1040ez 2013   If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. 1040ez 2013 For example, if it represents interest income, report it on your return as interest. 1040ez 2013 Buying or selling capital assets or depreciable property. 1040ez 2013   Do not include in income patronage dividends from buying capital assets or depreciable property used in your business. 1040ez 2013 You must, however, reduce the basis of these assets by the dividends. 1040ez 2013 This reduction is taken into account as of the first day of the tax year in which the dividends are received. 1040ez 2013 If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F, line 3a, for the tax year you receive them. 1040ez 2013   This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property. 1040ez 2013 Example. 1040ez 2013 On July 1, 2012, Mr. 1040ez 2013 Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. 1040ez 2013 The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946, Depreciation and Amortization). 1040ez 2013 Mr. 1040ez 2013 Brown files his return on a calendar year basis. 1040ez 2013 For 2012, he claimed a depreciation deduction of $311, using the 10. 1040ez 2013 71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). 1040ez 2013 On July 2, 2013, the cooperative association paid Mr. 1040ez 2013 Brown a $300 cash patronage dividend for buying the machine. 1040ez 2013 Mr. 1040ez 2013 Brown adjusts the basis of the machine and figures his depreciation deduction for 2013 (and later years) as follows. 1040ez 2013 Cost of machine on July 1, 2012 $2,900 Minus: 2012 depreciation $311     2013 cash dividend 300 611 Adjusted basis for  depreciation for 2013: $2,289 Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/2012) = 15. 1040ez 2013 38% × 1. 1040ez 2013 5 = 23. 1040ez 2013 07% Depreciation deduction for 2013 ($2,289 × 23. 1040ez 2013 07%) $528 Exceptions. 1040ez 2013   If the dividends are for buying or selling capital assets or depreciable property you did not own at any time during the year you received the dividends, you must include them on Schedule F, lines 3a and 3b, unless one of the following rules applies. 1040ez 2013 If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year. 1040ez 2013 If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain). 1040ez 2013   If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale. 1040ez 2013 Personal purchases. 1040ez 2013   Because you cannot deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F, line 3b, any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). 1040ez 2013 This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases. 1040ez 2013 Per-Unit Retain Certificates A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. 1040ez 2013 A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. 1040ez 2013 These allocations can be paid in money, other property, or qualified certificates. 1040ez 2013 Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier. 1040ez 2013 Qualified certificates. 1040ez 2013   Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. 1040ez 2013 The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. 1040ez 2013 If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, lines 3a and 3b, for the tax year you receive them. 1040ez 2013 Nonqualified certificates. 1040ez 2013   Do not include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. 1040ez 2013 Your basis in the certificate is zero. 1040ez 2013 You must include in income any amount you receive from its sale, redemption, or other disposition. 1040ez 2013 Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition. 1040ez 2013 Cancellation of Debt This section explains the general rule for including canceled debt in income and the exceptions to the general rule. 1040ez 2013 For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. 1040ez 2013 General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in gross income for tax purposes. 1040ez 2013 Discharge of qualified farm indebtedness (defined below) is one of the exceptions to the general rule. 1040ez 2013 It is excluded from taxable income (see Exclusions , later). 1040ez 2013 Report the canceled amount on Schedule F, line 8, if you incurred the debt in your farming business. 1040ez 2013 If the debt is a nonbusiness debt, report the canceled amount as other income on Form 1040, line 21. 1040ez 2013 Election to defer income from discharge of indebtedness. 1040ez 2013   You can elect to defer income from a discharge of business indebtedness that occurred after 2008 and before 2011. 1040ez 2013 Generally, if the election is made, the deferred income is included in gross income ratably over a 5-year period beginning in 2014 (for calendar year taxpayers) and the exclusions listed below do not apply. 1040ez 2013 See IRC section 108(i) and Publication 4681 for details. 1040ez 2013 Form 1099-C. 1040ez 2013   If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. 1040ez 2013 The amount of debt canceled is shown in box 2. 1040ez 2013 Exceptions The following discussion covers some exceptions to the general rule for canceled debt. 1040ez 2013 These exceptions apply before the exclusions discussed below. 1040ez 2013 Price reduced after purchase. 1040ez 2013   If your purchase of property was financed by the seller and the seller reduces the amount of the debt at a time when you are not insolvent and the reduction does not occur in a chapter 11 bankruptcy case, the amount of the debt reduction will be treated as a reduction in the purchase price of the property. 1040ez 2013 Reduce your basis in the property by the amount of the reduction in the debt. 1040ez 2013 The rules that apply to bankruptcy and insolvency are explained below under Exclusions . 1040ez 2013 Deductible debt. 1040ez 2013   You do not realize income from a canceled debt to the extent the payment of the debt would have been a deductible expense. 1040ez 2013 This exception applies before the price reduction exception discussed above and the bankruptcy and insolvency exclusions discussed next. 1040ez 2013 Example. 1040ez 2013 You get accounting services for your farm on credit. 1040ez 2013 Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. 1040ez 2013 Your accountant forgives part of the amount you owe for the accounting services. 1040ez 2013 How you treat the canceled debt depends on your method of accounting. 1040ez 2013 Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. 1040ez 2013 Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. 1040ez 2013 Exclusions Do not include canceled debt in income in the following situations. 1040ez 2013 The cancellation takes place in a bankruptcy case under title 11 of the U. 1040ez 2013 S. 1040ez 2013 Code. 1040ez 2013 The cancellation takes place when you are insolvent. 1040ez 2013 The canceled debt is a qualified farm debt. 1040ez 2013 The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). 1040ez 2013 See Publication 334, Tax Guide for Small Business, chapter 5. 1040ez 2013 The canceled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2014. 1040ez 2013 The exclusions do not apply in the following situations: If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), and (5) do not apply. 1040ez 2013 If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent. 1040ez 2013 If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness. 1040ez 2013 See Form 982 , later, for information on how to claim an exclusion for a canceled debt. 1040ez 2013 Debt. 1040ez 2013   For this discussion, debt includes any debt for which you are liable or that attaches to property you hold. 1040ez 2013 Bankruptcy and Insolvency You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent. 1040ez 2013 Bankruptcy. 1040ez 2013   A bankruptcy case is a case under title 11 of the U. 1040ez 2013 S. 1040ez 2013 Code if you are under the jurisdiction of the court and the cancellation of the debt is granted by the court or is the result of a plan approved by the court. 1040ez 2013   Do not include debt canceled in a bankruptcy case in your income in the year it is canceled. 1040ez 2013 Instead, you must use the amount canceled to reduce your tax attributes, explained below under Reduction of tax attributes . 1040ez 2013 Insolvency. 1040ez 2013   You are insolvent to the extent your liabilities are more than the fair market value of your assets immediately before the cancellation of debt. 1040ez 2013   You can exclude canceled debt from gross income up to the amount by which you are insolvent. 1040ez 2013 If the canceled debt is more than this amount and the debt qualifies, you can apply the rules for qualified farm debt or qualified real property business debt to the difference. 1040ez 2013 Otherwise, you include the difference in gross income. 1040ez 2013 Use the amount excluded because of insolvency to reduce any tax attributes, as explained below under Reduction of tax attributes . 1040ez 2013 You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt or for qualified real property business debt. 1040ez 2013 Example. 1040ez 2013 You had a $15,000 debt that was not qualified principal residence debt canceled outside of bankruptcy. 1040ez 2013 Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. 1040ez 2013 Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). 1040ez 2013 You can exclude this amount from income. 1040ez 2013 The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. 1040ez 2013 If not, you must include it in income. 1040ez 2013 Reduction of tax attributes. 1040ez 2013   If you exclude canceled debt from income in a bankruptcy case or during insolvency, you must use the excluded debt to reduce certain tax attributes. 1040ez 2013 Order of reduction. 1040ez 2013   You must use the excluded canceled debt to reduce the following tax attributes in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. 1040ez 2013 Net operating loss (NOL). 1040ez 2013 Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. 1040ez 2013 Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt. 1040ez 2013 General business credit carryover. 1040ez 2013 Reduce the credit carryover to or from the tax year of the debt cancellation. 1040ez 2013 Reduce the carryover 331/3 cents for each dollar of excluded canceled debt. 1040ez 2013 Minimum tax credit. 1040ez 2013 Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. 1040ez 2013 Reduce the credit 331/3 cents for each dollar of excluded canceled debt. 1040ez 2013 Capital loss. 1040ez 2013 Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. 1040ez 2013 Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt. 1040ez 2013 Basis. 1040ez 2013 Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order. 1040ez 2013 Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt. 1040ez 2013 Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt. 1040ez 2013 Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment. 1040ez 2013 Inventory and accounts and notes receivable. 1040ez 2013 Other property. 1040ez 2013 Reduce the basis one dollar for each dollar of excluded canceled debt. 1040ez 2013 However, the reduction cannot be more than the total basis of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation. 1040ez 2013 For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1. 1040ez 2013 1017-1(b)(2). 1040ez 2013 Also see Electing to reduce the basis of depreciable property