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Amended 1040ez

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Amended 1040ez

Amended 1040ez 2. Amended 1040ez   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. Amended 1040ez Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. Amended 1040ez Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction You must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Amended 1040ez You must do this to figure your net capital gain or loss. Amended 1040ez For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. Amended 1040ez See Capital Gains Tax Rates in chapter 4. Amended 1040ez Your deduction for a net capital loss may be limited. Amended 1040ez See Treatment of Capital Losses in chapter 4. Amended 1040ez Capital gain or loss. Amended 1040ez   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. Amended 1040ez You also may have a capital gain if your section 1231 transactions result in a net gain. Amended 1040ez Section 1231 transactions. Amended 1040ez   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. Amended 1040ez They also include certain involuntary conversions of business or investment property, including capital assets. Amended 1040ez See Section 1231 Gains and Losses in chapter 3 for more information. Amended 1040ez Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Amended 1040ez Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. Amended 1040ez For exceptions, see Noncapital Assets, later. Amended 1040ez The following items are examples of capital assets. Amended 1040ez Stocks and bonds. Amended 1040ez A home owned and occupied by you and your family. Amended 1040ez Timber grown on your home property or investment property, even if you make casual sales of the timber. Amended 1040ez Household furnishings. Amended 1040ez A car used for pleasure or commuting. Amended 1040ez Coin or stamp collections. Amended 1040ez Gems and jewelry. Amended 1040ez Gold, silver, and other metals. Amended 1040ez Personal-use property. Amended 1040ez   Generally, property held for personal use is a capital asset. Amended 1040ez Gain from a sale or exchange of that property is a capital gain. Amended 1040ez Loss from the sale or exchange of that property is not deductible. Amended 1040ez You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Amended 1040ez Investment property. Amended 1040ez   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. Amended 1040ez This treatment does not apply to property used to produce rental income. Amended 1040ez See Business assets, later, under Noncapital Assets. Amended 1040ez Release of restriction on land. Amended 1040ez   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. Amended 1040ez Noncapital Assets A noncapital asset is property that is not a capital asset. Amended 1040ez The following kinds of property are not capital assets. Amended 1040ez Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Amended 1040ez Inventories are discussed in Publication 538, Accounting Periods and Methods. Amended 1040ez But, see the Tip below. Amended 1040ez Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. Amended 1040ez Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Amended 1040ez Sales of this type of property are discussed in chapter 3. Amended 1040ez Real property used in your trade or business or as rental property, even if the property is fully depreciated. Amended 1040ez A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. Amended 1040ez But, see the Tip below. Amended 1040ez U. Amended 1040ez S. Amended 1040ez Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. Amended 1040ez Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. Amended 1040ez It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. Amended 1040ez The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. Amended 1040ez Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. Amended 1040ez Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Amended 1040ez You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. Amended 1040ez See chapter 4 of Publication 550 for details. Amended 1040ez Property held mainly for sale to customers. Amended 1040ez   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. Amended 1040ez Inventories are discussed in Publication 538. Amended 1040ez Business assets. Amended 1040ez   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. Amended 1040ez The sale or disposition of business property is discussed in chapter 3. Amended 1040ez Letters and memoranda. Amended 1040ez   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. Amended 1040ez Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. Amended 1040ez For this purpose, letters and memoranda addressed to you are considered prepared for you. Amended 1040ez If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. Amended 1040ez Commodities derivative financial instrument. Amended 1040ez   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). Amended 1040ez Commodities derivative dealer. Amended 1040ez   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. Amended 1040ez Hedging transaction. Amended 1040ez   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. Amended 1040ez Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. Amended 1040ez Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. Amended 1040ez Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. Amended 1040ez If these rules apply, gains may be treated as ordinary income and losses may not be deductible. Amended 1040ez See Transfers to Spouse in chapter 1 for rules that apply to spouses. Amended 1040ez Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. Amended 1040ez It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. Amended 1040ez Depreciable property transaction. Amended 1040ez   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. Amended 1040ez A person and the person's controlled entity or entities. Amended 1040ez A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. Amended 1040ez An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). Amended 1040ez An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). Amended 1040ez Controlled entity. Amended 1040ez   A person's controlled entity is either of the following. Amended 1040ez A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. Amended 1040ez An entity whose relationship with that person is one of the following. Amended 1040ez A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Amended 1040ez Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. Amended 1040ez Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. Amended 1040ez Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Amended 1040ez Controlled partnership transaction. Amended 1040ez   A gain recognized in a controlled partnership transaction may be ordinary income. Amended 1040ez The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. Amended 1040ez   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. Amended 1040ez A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Amended 1040ez Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Amended 1040ez Determining ownership. Amended 1040ez   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. Amended 1040ez 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. Amended 1040ez (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 in value of the stock of the corporation. Amended 1040ez ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Amended 1040ez Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Amended 1040ez For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Amended 1040ez But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. Amended 1040ez Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. Amended 1040ez This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. Amended 1040ez For the list of related persons, see Related persons next. Amended 1040ez If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. Amended 1040ez The gain on each item is taxable. Amended 1040ez The loss on any item is nondeductible. Amended 1040ez Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. Amended 1040ez Related persons. Amended 1040ez   The following is a list of related persons. Amended 1040ez Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Amended 1040ez ), and lineal descendants (children, grandchildren, etc. Amended 1040ez ). Amended 1040ez An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Amended 1040ez Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. Amended 1040ez A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Amended 1040ez A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Amended 1040ez Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Amended 1040ez A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. Amended 1040ez A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Amended 1040ez Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Amended 1040ez Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Amended 1040ez An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. Amended 1040ez Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Amended 1040ez A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Amended 1040ez Partnership interests. Amended 1040ez   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. Amended 1040ez Controlled groups. Amended 1040ez   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. Amended 1040ez   For more information, see section 267(f) of the Internal Revenue Code. Amended 1040ez Ownership of stock or partnership interests. Amended 1040ez   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. Amended 1040ez 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. Amended 1040ez (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 in value of the stock of the corporation. Amended 1040ez ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Amended 1040ez Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Amended 1040ez An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Amended 1040ez For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Amended 1040ez But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. Amended 1040ez Indirect transactions. Amended 1040ez   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. Amended 1040ez This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. Amended 1040ez Property received from a related person. Amended 1040ez   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. Amended 1040ez This rule applies only to the original transferee. Amended 1040ez Example 1. Amended 1040ez Your brother sold stock to you for $7,600. Amended 1040ez His cost basis was $10,000. Amended 1040ez His loss of $2,400 was not deductible. Amended 1040ez You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). Amended 1040ez Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. Amended 1040ez Example 2. Amended 1040ez Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. Amended 1040ez Your recognized loss is only $700 ($7,600 − $6,900). Amended 1040ez You cannot deduct the loss not allowed to your brother. Amended 1040ez Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. Amended 1040ez Sale of a Business The sale of a business usually is not a sale of one asset. Amended 1040ez Instead, all the assets of the business are sold. Amended 1040ez Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Amended 1040ez A business usually has many assets. Amended 1040ez When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. Amended 1040ez The gain or loss on each asset is figured separately. Amended 1040ez The sale of capital assets results in capital gain or loss. Amended 1040ez The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). Amended 1040ez The sale of inventory results in ordinary income or loss. Amended 1040ez Partnership interests. Amended 1040ez   An interest in a partnership or joint venture is treated as a capital asset when sold. Amended 1040ez The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Amended 1040ez For more information, see Disposition of Partner's Interest in Publication 541. Amended 1040ez Corporation interests. Amended 1040ez   Your interest in a corporation is represented by stock certificates. Amended 1040ez When you sell these certificates, you usually realize capital gain or loss. Amended 1040ez For information on the sale of stock, see chapter 4 in Publication 550. Amended 1040ez Corporate liquidations. Amended 1040ez   Corporate liquidations of property generally are treated as a sale or exchange. Amended 1040ez Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Amended 1040ez Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. Amended 1040ez   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. Amended 1040ez For more information, see section 332 of the Internal Revenue Code and the related regulations. Amended 1040ez Allocation of consideration paid for a business. Amended 1040ez   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. Amended 1040ez Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. Amended 1040ez This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. Amended 1040ez It also determines the buyer's basis in the business assets. Amended 1040ez Consideration. Amended 1040ez   The buyer's consideration is the cost of the assets acquired. Amended 1040ez The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. Amended 1040ez Residual method. Amended 1040ez   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Amended 1040ez This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. Amended 1040ez Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. Amended 1040ez   A group of assets constitutes a trade or business if either of the following applies. Amended 1040ez Goodwill or going concern value could, under any circumstances, attach to them. Amended 1040ez The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. Amended 1040ez   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). Amended 1040ez The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Amended 1040ez See Classes of assets next for the complete order. Amended 1040ez Classes of assets. Amended 1040ez   The following definitions are the classifications for deemed or actual asset acquisitions. Amended 1040ez Allocate the consideration among the assets in the following order. Amended 1040ez The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Amended 1040ez The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. Amended 1040ez Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Amended 1040ez Class II assets are certificates of deposit, U. Amended 1040ez S. Amended 1040ez Government securities, foreign currency, and actively traded personal property, including stock and securities. Amended 1040ez Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Amended 1040ez However, see section 1. Amended 1040ez 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Amended 1040ez Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Amended 1040ez Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. Amended 1040ez    Note. Amended 1040ez Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. Amended 1040ez Class VI assets are section 197 intangibles (other than goodwill and going concern value). Amended 1040ez Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). Amended 1040ez   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. Amended 1040ez For example, if an asset is described in both Class II and Class IV, choose Class II. Amended 1040ez Example. Amended 1040ez The total paid in the sale of the assets of Company SKB is $21,000. Amended 1040ez No cash or deposit accounts or similar accounts were sold. Amended 1040ez The company's U. Amended 1040ez S. Amended 1040ez Government securities sold had a fair market value of $3,200. Amended 1040ez The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. Amended 1040ez Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. Amended 1040ez S. Amended 1040ez Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. Amended 1040ez Agreement. Amended 1040ez   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Amended 1040ez This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Amended 1040ez Reporting requirement. Amended 1040ez   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Amended 1040ez Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Amended 1040ez Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Amended 1040ez See the Instructions for Form 8594. Amended 1040ez Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. Amended 1040ez It includes such items as patents, copyrights, and the goodwill value of a business. Amended 1040ez Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. Amended 1040ez The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. Amended 1040ez See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. Amended 1040ez Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. Amended 1040ez The following discussions explain special rules that apply to certain dispositions of intangible property. Amended 1040ez Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. Amended 1040ez They include the following assets. Amended 1040ez Goodwill. Amended 1040ez Going concern value. Amended 1040ez Workforce in place. Amended 1040ez Business books and records, operating systems, and other information bases. Amended 1040ez Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. Amended 1040ez Customer-based intangibles. Amended 1040ez Supplier-based intangibles. Amended 1040ez Licenses, permits, and other rights granted by a governmental unit. Amended 1040ez Covenants not to compete entered into in connection with the acquisition of a business. Amended 1040ez Franchises, trademarks, and trade names. Amended 1040ez See chapter 8 of Publication 535 for a description of each intangible. Amended 1040ez Dispositions. Amended 1040ez   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. Amended 1040ez Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. Amended 1040ez If you retain more than one section 197 intangible, increase each intangible's adjusted basis. Amended 1040ez Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. Amended 1040ez   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. Amended 1040ez For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. Amended 1040ez Covenant not to compete. Amended 1040ez   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. Amended 1040ez Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. Amended 1040ez Anti-churning rules. Amended 1040ez   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. Amended 1040ez However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. Amended 1040ez Recognize gain on the transfer of the property. Amended 1040ez Pay income tax on the gain at the highest tax rate. Amended 1040ez   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. Amended 1040ez But each partner or shareholder must pay the tax on his or her share of gain. Amended 1040ez   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. Amended 1040ez You must file the tax return by the due date (including extensions). Amended 1040ez You must also notify the transferee of the election in writing by the due date of the return. Amended 1040ez   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Amended 1040ez Attach the statement to the amended return and write “Filed pursuant to section 301. Amended 1040ez 9100-2” at the top of the statement. Amended 1040ez File the amended return at the same address the original return was filed. Amended 1040ez For more information about making the election, see Regulations section 1. Amended 1040ez 197-2(h)(9). Amended 1040ez For information about reporting the tax on your income tax return, see the Instructions for Form 4797. Amended 1040ez Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. Amended 1040ez This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. Amended 1040ez For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. Amended 1040ez This treatment applies to your transfer of a patent if you meet all the following conditions. Amended 1040ez You are the holder of the patent. Amended 1040ez You transfer the patent other than by gift, inheritance, or devise. Amended 1040ez You transfer all substantial rights to the patent or an undivided interest in all such rights. Amended 1040ez You do not transfer the patent to a related person. Amended 1040ez Holder. Amended 1040ez   You are the holder of a patent if you are either of the following. Amended 1040ez The individual whose effort created the patent property and who qualifies as the original and first inventor. Amended 1040ez The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. Amended 1040ez All substantial rights. Amended 1040ez   All substantial rights to patent property are all rights that have value when they are transferred. Amended 1040ez A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. Amended 1040ez   All substantial rights to a patent are not transferred if any of the following apply to the transfer. Amended 1040ez The rights are limited geographically within a country. Amended 1040ez The rights are limited to a period less than the remaining life of the patent. Amended 1040ez The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. Amended 1040ez The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. Amended 1040ez Related persons. Amended 1040ez   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. Amended 1040ez Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. Amended 1040ez Substitute “25% or more” ownership for “more than 50%. Amended 1040ez ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. Amended 1040ez For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. Amended 1040ez The brother-sister exception does not apply because the trust relationship is independent of family status. Amended 1040ez Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. Amended 1040ez A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. Amended 1040ez Significant power, right, or continuing interest. Amended 1040ez   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. Amended 1040ez   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. Amended 1040ez A right to disapprove any assignment of the interest, or any part of it. Amended 1040ez A right to end the agreement at will. Amended 1040ez A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. Amended 1040ez A right to make the recipient sell or advertise only your products or services. Amended 1040ez A right to make the recipient buy most supplies and equipment from you. Amended 1040ez A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. Amended 1040ez Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. Amended 1040ez However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. Amended 1040ez See section 1237 of the Internal Revenue Code. Amended 1040ez Timber Standing timber held as investment property is a capital asset. Amended 1040ez Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. Amended 1040ez If you held the timber primarily for sale to customers, it is not a capital asset. Amended 1040ez Gain or loss on its sale is ordinary business income or loss. Amended 1040ez It is reported in the gross receipts or sales and cost of goods sold items of your return. Amended 1040ez Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Amended 1040ez These sales constitute a very minor part of their farm businesses. Amended 1040ez In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. Amended 1040ez , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. Amended 1040ez Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. Amended 1040ez Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Amended 1040ez This is true whether the timber is cut under contract or whether you cut it yourself. Amended 1040ez Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. Amended 1040ez See chapter 3. Amended 1040ez Gain or loss is reported on Form 4797. Amended 1040ez Christmas trees. Amended 1040ez   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Amended 1040ez They qualify for both rules discussed below. Amended 1040ez Election to treat cutting as a sale or exchange. Amended 1040ez   Under the general rule, the cutting of timber results in no gain or loss. Amended 1040ez It is not until a sale or exchange occurs that gain or loss is realized. Amended 1040ez But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year the timber is cut. Amended 1040ez Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Amended 1040ez Any later sale results in ordinary business income or loss. Amended 1040ez See Example, later. Amended 1040ez   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or for use in your trade or business. Amended 1040ez Making the election. Amended 1040ez   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of the gain or loss. Amended 1040ez You do not have to make the election in the first year you cut timber. Amended 1040ez You can make it in any year to which the election would apply. Amended 1040ez If the timber is partnership property, the election is made on the partnership return. Amended 1040ez This election cannot be made on an amended return. Amended 1040ez   Once you have made the election, it remains in effect for all later years unless you cancel it. Amended 1040ez   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. Amended 1040ez The prior election (and revocation) is disregarded for purposes of making a subsequent election. Amended 1040ez See Form T (Timber), Forest Activities Schedule, for more information. Amended 1040ez Gain or loss. Amended 1040ez   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. Amended 1040ez   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Amended 1040ez Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 of the Internal Revenue Code and the related regulations. Amended 1040ez   Timber depletion is discussed in chapter 9 of Publication 535. Amended 1040ez Example. Amended 1040ez In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Amended 1040ez It had an adjusted basis for depletion of $40 per MBF. Amended 1040ez You are a calendar year taxpayer. Amended 1040ez On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. Amended 1040ez It was cut in April for sale. Amended 1040ez On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Amended 1040ez You report the difference between the fair market value and your adjusted basis for depletion as a gain. Amended 1040ez This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. Amended 1040ez You figure your gain as follows. Amended 1040ez FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value becomes your basis in the cut timber and a later sale of the cut timber including any by-product or tree tops will result in ordinary business income or loss. Amended 1040ez Outright sales of timber. Amended 1040ez   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined below). Amended 1040ez However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see below). Amended 1040ez Cutting contract. Amended 1040ez   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Amended 1040ez You are the owner of the timber. Amended 1040ez You held the timber longer than 1 year before its disposal. Amended 1040ez You kept an economic interest in the timber. Amended 1040ez   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Amended 1040ez   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Amended 1040ez Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. Amended 1040ez Date of disposal. Amended 1040ez   The date of disposal is the date the timber is cut. Amended 1040ez However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Amended 1040ez   This election applies only to figure the holding period of the timber. Amended 1040ez It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Amended 1040ez   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Amended 1040ez The statement must identify the advance payments subject to the election and the contract under which they were made. Amended 1040ez   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Amended 1040ez Attach the statement to the amended return and write “Filed pursuant to section 301. Amended 1040ez 9100-2” at the top of the statement. Amended 1040ez File the amended return at the same address the original return was filed. Amended 1040ez Owner. Amended 1040ez   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. Amended 1040ez You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Amended 1040ez Tree stumps. Amended 1040ez   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Amended 1040ez Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Amended 1040ez However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Amended 1040ez Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Amended 1040ez   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Amended 1040ez Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. Amended 1040ez , are capital assets except when they are held for sale by a dealer. Amended 1040ez Any gain or loss from their sale or exchange generally is a capital gain or loss. Amended 1040ez If you are a dealer, the amount received from the sale is ordinary business income. Amended 1040ez Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. Amended 1040ez You owned the coal or iron ore longer than 1 year before its disposal. Amended 1040ez You kept an economic interest in the coal or iron ore. Amended 1040ez For this rule, the date the coal or iron ore is mined is considered the date of its disposal. Amended 1040ez Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). Amended 1040ez This amount is included on Form 4797 along with your other section 1231 gains and losses. Amended 1040ez You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. Amended 1040ez If you own only an option to buy the coal in place, you do not qualify as an owner. Amended 1040ez In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. Amended 1040ez The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. Amended 1040ez Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. Amended 1040ez If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. Amended 1040ez Special rule. Amended 1040ez   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. Amended 1040ez A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). Amended 1040ez An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. Amended 1040ez Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. Amended 1040ez This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. Amended 1040ez An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). Amended 1040ez A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. Amended 1040ez Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. Amended 1040ez For more information, see chapter 4 of Publication 550. Amended 1040ez Prev  Up  Next   Home   More Online Publications
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The Amended 1040ez

Amended 1040ez Publication 908 - Introductory Material Table of Contents Future Developments What's New Reminders Introduction Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 908, such as legislation enacted after it was published, go to www. Amended 1040ez irs. Amended 1040ez gov/pub908. Amended 1040ez What's New Expiration of provision for catch-up contributions for IRC section 401(k) participants whose employer filed bankruptcy. Amended 1040ez  The Pension Protection Act of 2006, P. Amended 1040ez L. Amended 1040ez 109-280, previously allowed additional contributions of up to $7,000 in a traditional or Roth IRA for employees who participated in an IRC section 401(k) plan of an employer that filed bankruptcy in an earlier year. Amended 1040ez This provision was not extended for tax years beginning on or after January 1, 2010. Amended 1040ez Automatic 6-month extension of time to file a bankruptcy estate return now available for individuals in Chapter 7 or 11 bankruptcy. Amended 1040ez  Beginning June 24, 2011, the IRS clarified in T. Amended 1040ez D. Amended 1040ez 9531 that there is available an automatic 6-month extension of time to file a bankruptcy estate income tax return for individuals in Chapter 7 or Chapter 11 bankruptcy proceedings upon filing a required application. Amended 1040ez The previous extension of time to file a bankruptcy estate return was 5 months. Amended 1040ez Reminders The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Amended 1040ez  The changes to the U. Amended 1040ez S. Amended 1040ez Bankruptcy Code enacted by BAPCA are incorporated throughout this publication. Amended 1040ez Debtors filing under chapters 7, 11, 12, and 13 of the Bankruptcy Code must file all applicable federal, state, and local tax returns that become due after a case commences. Amended 1040ez Failure to file tax returns timely or obtain an extension can cause a bankruptcy case to be converted to another chapter or dismissed. Amended 1040ez In chapter 13 cases, the debtor must file all required tax returns for tax periods ending within 4 years of the filing of the bankruptcy petition. Amended 1040ez Photographs of missing children. Amended 1040ez  The IRS is a proud partner with the National Center for Missing and Exploited Children. Amended 1040ez Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Amended 1040ez You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Amended 1040ez Introduction This publication is not intended to cover bankruptcy law in general, or to provide detailed discussions of the tax rules for the more complex corporate bankruptcy reorganizations or other highly technical transactions. Amended 1040ez Additionally, this publication is not updated on an annual basis and may not reflect recent developments in bankruptcy or tax law. Amended 1040ez If you need more guidance on the bankruptcy or tax laws applicable to your case, you should seek professional advice. Amended 1040ez This publication explains the basic federal income tax aspects of bankruptcy. Amended 1040ez A fundamental goal of the bankruptcy laws enacted by Congress is to give an honest debtor a financial “fresh start”. Amended 1040ez This is accomplished through the bankruptcy discharge, which is a permanent injunction (court ordered prohibition) against the collection of certain debts as a personal liability of the debtor. Amended 1040ez Bankruptcy proceedings begin with the filing of either a voluntary petition in the United States Bankruptcy Court, or in certain cases an involuntary petition filed by creditors. Amended 1040ez This filing creates the bankruptcy estate. Amended 1040ez The bankruptcy estate generally consists of all of the assets the individual or entity owns on the date the bankruptcy petition was filed. Amended 1040ez The bankruptcy estate is treated as a separate taxable entity for individuals filing bankruptcy petitions under chapter 7 or 11 of the Bankruptcy Code, discussed later. Amended 1040ez The tax obligations of taxable bankruptcy estates are discussed later under Individuals in Chapter 7 or 11. Amended 1040ez Generally, when a debt owed to another person or entity is canceled, the amount canceled or forgiven is considered income that is taxed to the person owing the debt. Amended 1040ez If a debt is canceled under a bankruptcy proceeding, the amount canceled is not income. Amended 1040ez However, the canceled debt reduces other tax benefits to which the debtor would otherwise be entitled. Amended 1040ez See Debt Cancellation, later. Amended 1040ez Useful Items - You may want to see: Publication 225 Farmer's Tax Guide 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets 551 Basis of Assets 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) SS-4 Application for Employer Identification Number, and separate instructions 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) 1040 U. Amended 1040ez S. Amended 1040ez Individual Income Tax Return, and separate instructions Schedule SE (Form 1040) Self-Employment Tax 1040X Amended U. Amended 1040ez S. Amended 1040ez Individual Income Tax Return, and separate instructions 1041 U. Amended 1040ez S. Amended 1040ez Income Tax Return for Estates and Trusts, and separate instructions 1041-ES Estimated Income Tax for Estates and Trusts 1041-V Payment Voucher 4506 Request for Copy of Tax Return 4506-T Request for Transcript of Tax Return 4852 Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Amended 1040ez 4868 Application for Automatic Extension of Time To File U. Amended 1040ez S. Amended 1040ez Individual Income Tax Return 7004 Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns See How To Get Tax Help, later, for information about getting these publications and forms. Amended 1040ez Prev  Up  Next   Home   More Online Publications