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1040x turbotax online 2. 1040x turbotax online   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. 1040x turbotax online How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. 1040x turbotax online Deferral percentage. 1040x turbotax online Employee compensation. 1040x turbotax online Compensation of self-employed individuals. 1040x turbotax online Choice not to treat deferrals as compensation. 1040x turbotax online Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. 1040x turbotax online Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. 1040x turbotax online S. 1040x turbotax online Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. 1040x turbotax online Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. 1040x turbotax online A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. 1040x turbotax online SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). 1040x turbotax online A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). 1040x turbotax online Eligible employee. 1040x turbotax online   An eligible employee is an individual who meets all the following requirements. 1040x turbotax online Has reached age 21. 1040x turbotax online Has worked for you in at least 3 of the last 5 years. 1040x turbotax online Has received at least $550 in compensation from you in 2013. 1040x turbotax online This amount remains the same in 2014. 1040x turbotax online    You can use less restrictive participation requirements than those listed, but not more restrictive ones. 1040x turbotax online Excludable employees. 1040x turbotax online   The following employees can be excluded from coverage under a SEP. 1040x turbotax online Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. 1040x turbotax online Nonresident alien employees who have received no U. 1040x turbotax online S. 1040x turbotax online source wages, salaries, or other personal services compensation from you. 1040x turbotax online For more information about nonresident aliens, see Publication 519, U. 1040x turbotax online S. 1040x turbotax online Tax Guide for Aliens. 1040x turbotax online Setting Up a SEP There are three basic steps in setting up a SEP. 1040x turbotax online You must execute a formal written agreement to provide benefits to all eligible employees. 1040x turbotax online You must give each eligible employee certain information about the SEP. 1040x turbotax online A SEP-IRA must be set up by or for each eligible employee. 1040x turbotax online Many financial institutions will help you set up a SEP. 1040x turbotax online Formal written agreement. 1040x turbotax online   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. 1040x turbotax online You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. 1040x turbotax online However, see When not to use Form 5305-SEP, below. 1040x turbotax online   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. 1040x turbotax online Keep the original form. 1040x turbotax online Do not file it with the IRS. 1040x turbotax online Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. 1040x turbotax online See the Form 5305-SEP instructions for details. 1040x turbotax online If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. 1040x turbotax online When not to use Form 5305-SEP. 1040x turbotax online   You cannot use Form 5305-SEP if any of the following apply. 1040x turbotax online You currently maintain any other qualified retirement plan other than another SEP. 1040x turbotax online You have any eligible employees for whom IRAs have not been set up. 1040x turbotax online You use the services of leased employees, who are not your common-law employees (as described in chapter 1). 1040x turbotax online You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. 1040x turbotax online An affiliated service group described in section 414(m). 1040x turbotax online A controlled group of corporations described in section 414(b). 1040x turbotax online Trades or businesses under common control described in section 414(c). 1040x turbotax online You do not pay the cost of the SEP contributions. 1040x turbotax online Information you must give to employees. 1040x turbotax online   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. 1040x turbotax online An IRS model SEP is not considered adopted until you give each employee this information. 1040x turbotax online Setting up the employee's SEP-IRA. 1040x turbotax online   A SEP-IRA must be set up by or for each eligible employee. 1040x turbotax online SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. 1040x turbotax online You send SEP contributions to the financial institution where the SEP-IRA is maintained. 1040x turbotax online Deadline for setting up a SEP. 1040x turbotax online   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. 1040x turbotax online Credit for startup costs. 1040x turbotax online   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. 1040x turbotax online For more information, see Credit for startup costs under Reminders, earlier. 1040x turbotax online How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. 1040x turbotax online If you are self-employed, you can contribute to your own SEP-IRA. 1040x turbotax online Contributions must be in the form of money (cash, check, or money order). 1040x turbotax online You cannot contribute property. 1040x turbotax online However, participants may be able to transfer or roll over certain property from one retirement plan to another. 1040x turbotax online See Publication 590 for more information about rollovers. 1040x turbotax online You do not have to make contributions every year. 1040x turbotax online But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). 1040x turbotax online When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. 1040x turbotax online Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. 1040x turbotax online A SEP-IRA cannot be a Roth IRA. 1040x turbotax online Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. 1040x turbotax online Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. 1040x turbotax online If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. 1040x turbotax online Participants age 70½ or over must take required minimum distributions. 1040x turbotax online Time limit for making contributions. 1040x turbotax online   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. 1040x turbotax online Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. 1040x turbotax online Compensation generally does not include your contributions to the SEP. 1040x turbotax online The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. 1040x turbotax online Example. 1040x turbotax online Your employee, Mary Plant, earned $21,000 for 2013. 1040x turbotax online The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). 1040x turbotax online Contributions for yourself. 1040x turbotax online   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. 1040x turbotax online However, special rules apply when figuring your maximum deductible contribution. 1040x turbotax online See Deduction Limit for Self-Employed Individuals , later. 1040x turbotax online Annual compensation limit. 1040x turbotax online   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. 1040x turbotax online However, $51,000 is the maximum contribution for an eligible employee. 1040x turbotax online These limits are $260,000 and $52,000, respectively, in 2014. 1040x turbotax online Example. 1040x turbotax online Your employee, Susan Green, earned $210,000 for 2013. 1040x turbotax online Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. 1040x turbotax online More than one plan. 1040x turbotax online   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. 1040x turbotax online When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. 1040x turbotax online Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. 1040x turbotax online Tax treatment of excess contributions. 1040x turbotax online   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. 1040x turbotax online 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). 1040x turbotax online $51,000. 1040x turbotax online Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. 1040x turbotax online For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. 1040x turbotax online Reporting on Form W-2. 1040x turbotax online   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). 1040x turbotax online Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. 1040x turbotax online If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. 1040x turbotax online Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. 1040x turbotax online Your contributions (including any excess contributions carryover). 1040x turbotax online 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. 1040x turbotax online In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. 1040x turbotax online Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. 1040x turbotax online When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. 1040x turbotax online The deduction for the deductible part of your self-employment tax. 1040x turbotax online The deduction for contributions to your own SEP-IRA. 1040x turbotax online The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. 1040x turbotax online For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. 1040x turbotax online To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. 1040x turbotax online Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. 1040x turbotax online Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. 1040x turbotax online However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. 1040x turbotax online If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. 1040x turbotax online Excise tax. 1040x turbotax online   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. 1040x turbotax online For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. 1040x turbotax online When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. 1040x turbotax online If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. 1040x turbotax online If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. 1040x turbotax online Example. 1040x turbotax online You are a fiscal year taxpayer whose tax year ends June 30. 1040x turbotax online You maintain a SEP on a calendar year basis. 1040x turbotax online You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. 1040x turbotax online Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. 1040x turbotax online For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. 1040x turbotax online S. 1040x turbotax online Return of Partnership Income; and corporations deduct them on Form 1120, U. 1040x turbotax online S. 1040x turbotax online Corporation Income Tax Return, or Form 1120S, U. 1040x turbotax online S. 1040x turbotax online Income Tax Return for an S Corporation. 1040x turbotax online Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. 1040x turbotax online (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 1040x turbotax online , you receive from the partnership. 1040x turbotax online ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. 1040x turbotax online Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. 1040x turbotax online (See the Caution, next. 1040x turbotax online ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. 1040x turbotax online This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. 1040x turbotax online You are not allowed to set up a SARSEP after 1996. 1040x turbotax online However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. 1040x turbotax online If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. 1040x turbotax online Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. 1040x turbotax online At least 50% of your employees eligible to participate choose to make elective deferrals. 1040x turbotax online You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. 1040x turbotax online The elective deferrals of your highly compensated employees meet the SARSEP ADP test. 1040x turbotax online SARSEP ADP test. 1040x turbotax online   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. 1040x turbotax online A highly compensated employee is defined in chapter 1. 1040x turbotax online Deferral percentage. 1040x turbotax online   The deferral percentage for an employee for a year is figured as follows. 1040x turbotax online   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. 1040x turbotax online Employee compensation. 1040x turbotax online   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. 1040x turbotax online Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. 1040x turbotax online See Compensation in chapter 1. 1040x turbotax online Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. 1040x turbotax online Compensation of self-employed individuals. 1040x turbotax online   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. 1040x turbotax online   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. 1040x turbotax online Choice not to treat deferrals as compensation. 1040x turbotax online   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. 1040x turbotax online Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. 1040x turbotax online 25% of the participant's compensation (limited to $255,000 of the participant's compensation). 1040x turbotax online $17,500. 1040x turbotax online The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. 1040x turbotax online Cash or deferred arrangement (section 401(k) plan). 1040x turbotax online Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). 1040x turbotax online SIMPLE IRA plan. 1040x turbotax online In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. 1040x turbotax online Catch-up contributions. 1040x turbotax online   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. 1040x turbotax online The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. 1040x turbotax online Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). 1040x turbotax online However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. 1040x turbotax online The catch-up contribution limit. 1040x turbotax online The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. 1040x turbotax online   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). 1040x turbotax online Overall limit on SEP contributions. 1040x turbotax online   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). 1040x turbotax online The same rule applies to contributions you make to your own SEP-IRA. 1040x turbotax online See Contribution Limits , earlier. 1040x turbotax online Figuring the elective deferral. 1040x turbotax online   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. 1040x turbotax online Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. 1040x turbotax online However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. 1040x turbotax online Excess deferrals. 1040x turbotax online   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. 1040x turbotax online For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. 1040x turbotax online The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. 1040x turbotax online See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. 1040x turbotax online Excess SEP contributions. 1040x turbotax online   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. 1040x turbotax online You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. 1040x turbotax online If you do not notify them within this time period, you must pay a 10% tax on the excess. 1040x turbotax online For an explanation of the notification requirements, see Rev. 1040x turbotax online Proc. 1040x turbotax online 91-44, 1991-2 C. 1040x turbotax online B. 1040x turbotax online 733. 1040x turbotax online If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. 1040x turbotax online Reporting on Form W-2. 1040x turbotax online   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. 1040x turbotax online You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. 1040x turbotax online You must also include them in box 12. 1040x turbotax online Mark the “Retirement plan” checkbox in box 13. 1040x turbotax online For more information, see the Form W-2 instructions. 1040x turbotax online Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. 1040x turbotax online Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. 1040x turbotax online Distributions are subject to IRA rules. 1040x turbotax online Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. 1040x turbotax online For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. 1040x turbotax online Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. 1040x turbotax online Making excess contributions. 1040x turbotax online Making early withdrawals. 1040x turbotax online Not making required withdrawals. 1040x turbotax online For information about these taxes, see chapter 1 in Publication 590. 1040x turbotax online Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. 1040x turbotax online Prohibited transaction. 1040x turbotax online   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. 1040x turbotax online In that case, the SEP-IRA will no longer qualify as an IRA. 1040x turbotax online For a list of prohibited transactions, see Prohibited Transactions in chapter 4. 1040x turbotax online Effects on employee. 1040x turbotax online   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. 1040x turbotax online The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. 1040x turbotax online Also, the employee may have to pay the additional tax for making early withdrawals. 1040x turbotax online Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. 1040x turbotax online See Setting Up a SEP , earlier. 1040x turbotax online Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. 1040x turbotax online You must also give them notice of any excess contributions. 1040x turbotax online For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). 1040x turbotax online Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. 1040x turbotax online For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. 1040x turbotax online Prev  Up  Next   Home   More Online Publications
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1040x turbotax online Internal Revenue Bulletin:  2013-12  March 18, 2013  Rev. 1040x turbotax online Proc. 1040x turbotax online 2013-21 Table of Contents SECTION 1. 1040x turbotax online PURPOSE SECTION 2. 1040x turbotax online BACKGROUND SECTION 3. 1040x turbotax online SCOPE SECTION 4. 1040x turbotax online APPLICATION. 1040x turbotax online 01 Limitations on Depreciation Deductions for Certain Automobiles. 1040x turbotax online . 1040x turbotax online 02 Inclusions in Income of Lessees of Passenger Automobiles. 1040x turbotax online SECTION 5. 1040x turbotax online EFFECTIVE DATE SECTION 6. 1040x turbotax online DRAFTING INFORMATION SECTION 1. 1040x turbotax online PURPOSE This revenue procedure provides: (1) limitations on depreciation deductions for owners of passenger automobiles first placed in service by the taxpayer during calendar year 2013, including separate tables of limitations on depreciation deductions for trucks and vans; and (2) the amounts that must be included in income by lessees of passenger automobiles first leased by the taxpayer during calendar year 2013, including a separate table of inclusion amounts for lessees of trucks and vans. 1040x turbotax online The tables detailing these depreciation limitations and lessee inclusion amounts reflect the automobile price inflation adjustments required by § 280F(d)(7) of the Internal Revenue Code. 1040x turbotax online SECTION 2. 1040x turbotax online BACKGROUND . 1040x turbotax online 01 For owners of passenger automobiles, § 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. 1040x turbotax online For passenger automobiles placed in service after 1988, § 280F(d)(7) requires the Internal Revenue Service to increase the amounts allowable as depreciation deductions by a price inflation adjustment amount. 1040x turbotax online The method of calculating this price inflation amount for trucks and vans placed in service in or after calendar year 2003 uses a different CPI “automobile component” (the “new trucks” component) than that used in the price inflation amount calculation for other passenger automobiles (the “new cars” component), resulting in somewhat higher depreciation deductions for trucks and vans. 1040x turbotax online This change reflects the higher rate of price inflation for trucks and vans since 1988. 1040x turbotax online . 1040x turbotax online 02 Section 331(a) of the American Taxpayer Relief Act of 2012, Pub. 1040x turbotax online L. 1040x turbotax online No. 1040x turbotax online 112-240, 126 Stat. 1040x turbotax online 2313 (Jan. 1040x turbotax online 2, 2013) (the “Act”) extended the 50 percent additional first year depreciation deduction under § 168(k) to qualified property acquired by the taxpayer after December 31, 2007, and before January 1, 2014, if no written binding contract for the acquisition of the property existed before January 1, 2008, and if the taxpayer places the property in service generally before January 1, 2014. 1040x turbotax online Section 168(k)(2)(F)(i) increases the first year depreciation allowed under § 280F(a)(1)(A)(i) by $8,000 for passenger automobiles to which the additional first year depreciation deduction under § 168(k) (hereinafter, referred to as “§ 168(k) additional first year depreciation deduction”) applies. 1040x turbotax online . 1040x turbotax online 03 Section 168(k)(2)(D)(i) provides that the § 168(k) additional first year depreciation deduction does not apply to any property required to be depreciated under the alternative depreciation system of § 168(g), including property described in § 280F(b)(1). 1040x turbotax online Section 168(k)(2)(D)(iii) permits a taxpayer to elect out of the § 168(k) additional first year depreciation deduction for any class of property. 1040x turbotax online Section 168(k)(4), as amended by the Act, permits a corporation to elect to increase the alternative minimum tax (“AMT”) credit limitation under § 53(c), instead of claiming the § 168(k) additional first year depreciation deduction for all eligible qualified property placed in service after December 31, 2012, that is round 3 extension property (as defined in § 168(k)(4)(J)(iv)). 1040x turbotax online Accordingly, this revenue procedure provides tables for passenger automobiles for which the § 168(k) additional first year depreciation deduction applies. 1040x turbotax online This revenue procedure also provides tables for passenger automobiles for which the § 168(k) additional first year depreciation deduction does not apply, either because taxpayer: (1) purchased the passenger automobile used; (2) did not use the passenger automobile during 2013 more than 50 percent for business purposes; (3) elected out of the § 168(k) additional first year depreciation deduction pursuant to § 168(k)(2)(D)(iii); or (4) elected to increase the § 53 AMT credit limitation in lieu of claiming § 168(k) additional first year depreciation. 1040x turbotax online . 1040x turbotax online 04 Section 280F(c) requires a reduction in the deduction allowed to the lessee of a leased passenger automobile. 1040x turbotax online The reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of passenger automobiles. 1040x turbotax online Under § 1. 1040x turbotax online 280F-7(a) of the Income Tax Regulations, this reduction requires a lessee to include in gross income an amount determined by applying a formula to the amount obtained from a table. 1040x turbotax online One table applies to lessees of trucks and vans and another table applies to all other passenger automobiles. 1040x turbotax online Each table shows inclusion amounts for a range of fair market values for each taxable year after the passenger automobile is first leased. 1040x turbotax online SECTION 3. 1040x turbotax online SCOPE . 1040x turbotax online 01 The limitations on depreciation deductions in section 4. 1040x turbotax online 01(2) of this revenue procedure apply to passenger automobiles (other than leased passenger automobiles) that are placed in service by the taxpayer in calendar year 2013, and continue to apply for each taxable year that the passenger automobile remains in service. 1040x turbotax online . 1040x turbotax online 02 The tables in section 4. 1040x turbotax online 02 of this revenue procedure apply to leased passenger automobiles for which the lease term begins during calendar year 2013. 1040x turbotax online Lessees of these passenger automobiles must use these tables to determine the inclusion amount for each taxable year during which the passenger automobile is leased. 1040x turbotax online See Rev. 1040x turbotax online Proc. 1040x turbotax online 2008-22, 2008-1 C. 1040x turbotax online B. 1040x turbotax online 658, for passenger automobiles first leased during calendar year 2008; Rev. 1040x turbotax online Proc. 1040x turbotax online 2009-24, 2009-17 I. 1040x turbotax online R. 1040x turbotax online B. 1040x turbotax online 885, for passenger automobiles first leased during calendar year 2009; Rev. 1040x turbotax online Proc. 1040x turbotax online 2010-18, 2010-09 I. 1040x turbotax online R. 1040x turbotax online B. 1040x turbotax online 427, as amplified and modified by section 4. 1040x turbotax online 03 of Rev. 1040x turbotax online Proc. 1040x turbotax online 2011-21, 2011-12 I. 1040x turbotax online R. 1040x turbotax online B. 1040x turbotax online 560, for passenger automobiles first leased during calendar year 2010; Rev. 1040x turbotax online Proc. 1040x turbotax online 2011-21, for passenger automobiles first leased during calendar year 2011; and Rev. 1040x turbotax online Proc. 1040x turbotax online 2012-23, 2012-14 I. 1040x turbotax online R. 1040x turbotax online B. 1040x turbotax online 712, for passenger automobiles first leased during calendar year 2012. 1040x turbotax online SECTION 4. 1040x turbotax online APPLICATION . 1040x turbotax online 01 Limitations on Depreciation Deductions for Certain Automobiles. 1040x turbotax online (1) Amount of the inflation adjustment. 1040x turbotax online (a) Passenger automobiles (other than trucks or vans). 1040x turbotax online Under § 280F(d)(7)(B)(i), the automobile price inflation adjustment for any calendar year is the percentage (if any) by which the CPI automobile component for October of the preceding calendar year exceeds the CPI automobile component for October 1987. 1040x turbotax online Section 280F(d)(7)(B)(ii) defines the term “CPI automobile component” as the automobile component of the Consumer Price Index for all Urban Consumers published by the Department of Labor. 1040x turbotax online The new car component of the CPI was 115. 1040x turbotax online 2 for October 1987 and 143. 1040x turbotax online 787 for October 2012. 1040x turbotax online The October 2012 index exceeded the October 1987 index by 28. 1040x turbotax online 587. 1040x turbotax online Therefore, the automobile price inflation adjustment for 2013 for passenger automobiles (other than trucks and vans) is 24. 1040x turbotax online 8 percent (28. 1040x turbotax online 587/115. 1040x turbotax online 2 x 100%). 1040x turbotax online The dollar limitations in § 280F(a) are multiplied by a factor of 0. 1040x turbotax online 248, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations applicable to passenger automobiles (other than trucks and vans) for calendar year 2013. 1040x turbotax online This adjustment applies to all passenger automobiles (other than trucks and vans) that are first placed in service in calendar year 2013. 1040x turbotax online (b) Trucks and vans. 1040x turbotax online To determine the dollar limitations for trucks and vans first placed in service during calendar year 2013, the Service uses the new truck component of the CPI instead of the new car component. 1040x turbotax online The new truck component of the CPI was 112. 1040x turbotax online 4 for October 1987 and 149. 1040x turbotax online 386 for October 2012. 1040x turbotax online The October 2012 index exceeded the October 1987 index by 36. 1040x turbotax online 986. 1040x turbotax online Therefore, the automobile price inflation adjustment for 2013 for trucks and vans is 32. 1040x turbotax online 9 percent (36. 1040x turbotax online 986/112. 1040x turbotax online 4 x 100%). 1040x turbotax online The dollar limitations in § 280F(a) are multiplied by a factor of 0. 1040x turbotax online 329, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations for trucks and vans. 1040x turbotax online This adjustment applies to all trucks and vans that are first placed in service in calendar year 2013. 1040x turbotax online (2) Amount of the limitation. 1040x turbotax online Tables 1 through 4 contain the dollar amount of the depreciation limitation for each taxable year for passenger automobiles a taxpayer places in service in calendar year 2013. 1040x turbotax online Use Table 1 for a passenger automobile (other than a truck or van), and Table 2 for a truck or van, placed in service in calendar year 2013 for which the § 168(k) additional first year depreciation deduction applies. 1040x turbotax online Use Table 3 for a passenger automobile (other than a truck or van), and Table 4 for a truck or van, placed in service in calendar year 2013 for which the § 168(k) additional first year depreciation deduction does not apply. 1040x turbotax online REV. 1040x turbotax online PROC. 1040x turbotax online 2013-21 TABLE 1 DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) PLACED IN SERVICE IN CALENDAR YEAR 2013 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION APPLIES Tax Year Amount 1st Tax Year $11,160 2nd Tax Year $5,100 3rd Tax Year $3,050 Each Succeeding Year $1,875 REV. 1040x turbotax online PROC. 1040x turbotax online 2013-21 TABLE 2 DEPRECIATION LIMITATIONS FOR TRUCKS AND VANS PLACED IN SERVICE IN CALENDAR YEAR 2013 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION APPLIES Tax Year Amount 1st Tax Year $11,360 2nd Tax Year $5,400 3rd Tax Year $3,250 Each Succeeding Year $1,975 REV. 1040x turbotax online PROC. 1040x turbotax online 2013-21 TABLE 3 DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) PLACED IN SERVICE IN CALENDAR YEAR 2013 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION DOES NOT APPLY Tax Year Amount 1st Tax Year $3,160 2nd Tax Year $5,100 3rd Tax Year $3,050 Each Succeeding Year $1,875 REV. 1040x turbotax online PROC. 1040x turbotax online 2013-21 TABLE 4 DEPRECIATION LIMITATIONS FOR TRUCKS AND VANS PLACED IN SERVICE IN CALENDAR YEAR 2013 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION DOES NOT APPLY Tax Year Amount 1st Tax Year $3,360 2nd Tax Year $5,400 3rd Tax Year $3,250 Each Succeeding Year $1,975 . 1040x turbotax online 02 Inclusions in Income of Lessees of Passenger Automobiles. 1040x turbotax online A taxpayer must follow the procedures in § 1. 1040x turbotax online 280F-7(a) for determining the inclusion amounts for passenger automobiles first leased in calendar year 2013. 1040x turbotax online In applying these procedures, lessees of passenger automobiles other than trucks and vans should use Table 5 of this revenue procedure, while lessees of trucks and vans should use Table 6 of this revenue procedure. 1040x turbotax online REV. 1040x turbotax online PROC. 1040x turbotax online 2013-21 TABLE 5 DOLLAR AMOUNTS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2013 Fair Market Value of Passenger Automobile Tax Year During Lease Over Not Over 1st 2nd 3rd 4th 5th & later $19,000 $19,500 2 4 6 7 8 19,500 20,000 2 5 6 9 9 20,000 20,500 2 5 8 9 11 20,500 21,000 3 6 8 10 12 21,000 21,500 3 6 10 11 13 21,500 22,000 3 7 10 13 14 22,000 23,000 4 8 11 14 16 23,000 24,000 4 9 14 16 18 24,000 25,000 5 10 15 18 21 25,000 26,000 5 12 16 21 23 26,000 27,000 6 12 19 23 25 27,000 28,000 6 14 20 25 28 28,000 29,000 7 15 22 27 30 29,000 30,000 7 16 24 29 33 30,000 31,000 8 17 26 31 35 31,000 32,000 8 19 27 33 38 32,000 33,000 9 20 29 35 40 33,000 34,000 10 21 31 37 43 34,000 35,000 10 22 33 39 45 35,000 36,000 11 23 35 41 48 36,000 37,000 11 25 36 43 50 37,000 38,000 12 26 38 45 53 38,000 39,000 12 27 40 47 55 39,000 40,000 13 28 42 49 58 40,000 41,000 13 29 44 52 59 41,000 42,000 14 30 45 54 63 42,000 43,000 14 32 47 56 64 43,000 44,000 15 33 48 59 67 44,000 45,000 15 34 51 60 69 45,000 46,000 16 35 52 63 72 46,000 47,000 17 36 54 65 74 47,000 48,000 17 38 55 67 77 48,000 49,000 18 39 57 69 79 49,000 50,000 18 40 59 71 82 50,000 51,000 19 41 61 73 84 51,000 52,000 19 42 63 75 87 52,000 53,000 20 43 65 77 89 53,000 54,000 20 45 66 79 92 54,000 55,000 21 46 68 81 94 55,000 56,000 21 47 70 84 96 56,000 57,000 22 48 72 85 99 57,000 58,000 22 50 73 88 101 58,000 59,000 23 51 75 90 103 59,000 60,000 24 52 76 92 106 60,000 62,000 24 54 79 95 110 62,000 64,000 25 56 83 99 115 64,000 66,000 27 58 87 103 120 66,000 68,000 28 60 90 108 125 68,000 70,000 29 63 93 112 130 70,000 72,000 30 65 97 117 134 72,000 74,000 31 68 100 121 139 74,000 76,000 32 70 104 125 144 76,000 78,000 33 73 107 129 149 78,000 80,000 34 75 111 133 154 80,000 85,000 36 79 117 141 162 85,000 90,000 39 85 126 151 174 90,000 95,000 41 91 135 162 186 95,000 100,000 44 97 144 172 199 100,000 110,000 48 106 157 188 217 110,000 120,000 53 118 174 210 241 120,000 130,000 59 129 193 230 266 130,000 140,000 64 141 210 252 290 140,000 150,000 70 153 227 273 315 150,000 160,000 75 165 245 294 339 160,000 170,000 80 177 263 315 363 170,000 180,000 86 189 280 336 388 180,000 190,000 91 201 298 357 412 190,000 200,000 97 212 316 378 436 200,000 210,000 102 224 333 400 461 210,000 220,000 107 236 351 420 486 220,000 230,000 113 248 368 442 509 230,000 240,000 118 260 386 463 534 240,000 And up 124 272 403 484 558 REV. 1040x turbotax online PROC. 1040x turbotax online 2013-21 TABLE 6 DOLLAR AMOUNTS FOR TRUCKS AND VANS WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2013 Fair Market Value of Truck or Van Tax Year During Lease Over Not Over 1st 2nd 3rd 4th 5th & later $19,000 $19,500 1 3 4 5 6 19,500 20,000 2 3 5 6 7 20,000 20,500 2 4 6 7 8 20,500 21,000 2 5 7 8 9 21,000 21,500 2 5 8 9 11 21,500 22,000 3 6 8 10 12 22,000 23,000 3 7 10 11 14 23,000 24,000 4 8 11 14 16 24,000 25,000 4 9 14 16 18 25,000 26,000 5 10 15 18 21 26,000 27,000 5 12 17 20 23 27,000 28,000 6 13 18 23 25 28,000 29,000 6 14 20 25 28 29,000 30,000 7 15 22 27 30 30,000 31,000 7 16 24 29 33 31,000 32,000 8 17 26 31 35 32,000 33,000 8 19 27 33 38 33,000 34,000 9 20 29 35 41 34,000 35,000 10 21 31 37 43 35,000 36,000 10 22 33 39 46 36,000 37,000 11 23 35 41 48 37,000 38,000 11 25 36 43 51 38,000 39,000 12 26 38 45 53 39,000 40,000 12 27 40 48 55 40,000 41,000 13 28 42 49 58 41,000 42,000 13 29 44 52 60 42,000 43,000 14 30 46 54 62 43,000 44,000 14 32 47 56 65 44,000 45,000 15 33 48 59 67 45,000 46,000 15 34 51 60 70 46,000 47,000 16 35 52 63 72 47,000 48,000 17 36 54 65 74 48,000 49,000 17 38 55 67 77 49,000 50,000 18 39 57 69 79 50,000 51,000 18 40 59 71 82 51,000 52,000 19 41 61 73 84 52,000 53,000 19 42 63 75 87 53,000 54,000 20 43 65 77 89 54,000 55,000 20 45 66 80 91 55,000 56,000 21 46 68 81 94 56,000 57,000 21 47 70 84 96 57,000 58,000 22 48 72 86 98 58,000 59,000 22 50 73 88 101 59,000 60,000 23 51 75 90 103 60,000 62,000 24 52 78 93 108 62,000 64,000 25 55 81 97 113 64,000 66,000 26 57 85 101 118 66,000 68,000 27 60 88 106 122 68,000 70,000 28 62 92 110 127 70,000 72,000 29 64 96 114 132 72,000 74,000 30 67 99 118 137 74,000 76,000 31 69 103 122 142 76,000 78,000 32 72 105 127 147 78,000 80,000 34 73 110 131 151 80,000 85,000 35 78 116 138 160 85,000 90,000 38 84 124 149 172 90,000 95,000 41 90 133 160 184 95,000 100,000 44 95 142 171 196 100,000 110,000 48 104 156 186 214 110,000 120,000 53 116 173 207 240 120,000 130,000 58 128 191 228 264 130,000 140,000 64 140 208 249 288 140,000 150,000 69 152 226 270 313 150,000 160,000 75 164 243 292 336 160,000 170,000 80 176 261 312 361 170,000 180,000 85 188 278 334 386 180,000 190,000 91 199 296 355 410 190,000 200,000 96 211 314 376 434 200,000 210,000 101 223 332 397 459 210,000 220,000 107 235 349 418 483 220,000 230,000 112 247 367 439 507 230,000 240,000 118 259 384 460 532 240,000 And up 123 271 401 482 556 SECTION 5. 1040x turbotax online EFFECTIVE DATE This revenue procedure applies to passenger automobiles that a taxpayer first places in service or first leases during calendar year 2013. 1040x turbotax online SECTION 6. 1040x turbotax online DRAFTING INFORMATION The principal author of this revenue procedure is Bernard P. 1040x turbotax online Harvey of the Office of Associate Chief Counsel (Income Tax & Accounting). 1040x turbotax online For further information regarding this revenue procedure, contact Mr. 1040x turbotax online Harvey at (202) 622-4930 (not a toll-free call). 1040x turbotax online Prev  Up  Next   Home   More Internal Revenue Bulletins