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Efile 2010 Taxes

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Efile 2010 Taxes

Efile 2010 taxes 2. Efile 2010 taxes   Accounting Periods and Methods Table of Contents Introduction Useful Items - You may want to see: Accounting Periods Accounting MethodsCash Method Accrual Method Combination Method Inventories Uniform Capitalization Rules Special Methods Change in Accounting Method Introduction You must figure your taxable income and file an income tax return for an annual accounting period called a tax year. Efile 2010 taxes Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. Efile 2010 taxes Useful Items - You may want to see: Publication 538 Accounting Periods and Methods See chapter 12 for information about getting publications and forms. Efile 2010 taxes Accounting Periods When preparing a statement of income and expenses (generally your income tax return), you must use your books and records for a specific interval of time called an accounting period. Efile 2010 taxes The annual accounting period for your income tax return is called a tax year. Efile 2010 taxes You can use one of the following tax years. Efile 2010 taxes A calendar tax year. Efile 2010 taxes A fiscal tax year. Efile 2010 taxes Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Efile 2010 taxes A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Efile 2010 taxes Calendar tax year. Efile 2010 taxes   A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Efile 2010 taxes   You must adopt the calendar tax year if any of the following apply. Efile 2010 taxes You do not keep books. Efile 2010 taxes You have no annual accounting period. Efile 2010 taxes Your present tax year does not qualify as a fiscal year. Efile 2010 taxes Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations. Efile 2010 taxes   If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. Efile 2010 taxes For more information, see Change in tax year, later. Efile 2010 taxes   If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year. Efile 2010 taxes Fiscal tax year. Efile 2010 taxes   A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Efile 2010 taxes A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Efile 2010 taxes   If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. Efile 2010 taxes   For more information on a fiscal tax year, including a 52-53-week tax year, see Publication 538. Efile 2010 taxes Change in tax year. Efile 2010 taxes   Generally, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. Efile 2010 taxes See the Instructions for Form 1128 for exceptions. Efile 2010 taxes If you qualify for an automatic approval request, a user fee is not required. Efile 2010 taxes If you do not qualify for automatic approval, a ruling must be requested. Efile 2010 taxes See the instructions for Form 1128 for information about user fees if you are requesting a ruling. Efile 2010 taxes Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Efile 2010 taxes Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item. Efile 2010 taxes You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. Efile 2010 taxes After that, if you want to change your accounting method, you must generally get IRS approval. Efile 2010 taxes See Change in Accounting Method, later. Efile 2010 taxes Kinds of methods. Efile 2010 taxes   Generally, you can use any of the following accounting methods. Efile 2010 taxes Cash method. Efile 2010 taxes An accrual method. Efile 2010 taxes Special methods of accounting for certain items of income and expenses. Efile 2010 taxes Combination method using elements of two or more of the above. Efile 2010 taxes You must use the same accounting method to figure your taxable income and to keep your books. Efile 2010 taxes Also, you must use an accounting method that clearly shows your income. Efile 2010 taxes Business and personal items. Efile 2010 taxes   You can account for business and personal items under different accounting methods. Efile 2010 taxes For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Efile 2010 taxes Two or more businesses. Efile 2010 taxes   If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. Efile 2010 taxes They are separate and distinct only if you maintain complete and separate books and records for each business. Efile 2010 taxes Cash Method Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. Efile 2010 taxes However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. Efile 2010 taxes For more information, see Inventories, later. Efile 2010 taxes Income Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. Efile 2010 taxes If you receive property or services, you must include their fair market value in income. Efile 2010 taxes Example. Efile 2010 taxes On December 30, 2012, Mrs. Efile 2010 taxes Sycamore sent you a check for interior decorating services you provided to her. Efile 2010 taxes You received the check on January 2, 2013. Efile 2010 taxes You must include the amount of the check in income for 2013. Efile 2010 taxes Constructive receipt. Efile 2010 taxes   You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. Efile 2010 taxes You do not need to have possession of it. Efile 2010 taxes If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. Efile 2010 taxes Example. Efile 2010 taxes Interest is credited to your bank account in December 2013. Efile 2010 taxes You do not withdraw it or enter it into your passbook until 2014. Efile 2010 taxes You must include it in your gross income for 2013. Efile 2010 taxes Delaying receipt of income. Efile 2010 taxes   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Efile 2010 taxes You must report the income in the year the property is received or made available to you without restriction. Efile 2010 taxes Example. Efile 2010 taxes Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2013. Efile 2010 taxes She was told in December that her payment was available. Efile 2010 taxes At her request, she was not paid until January 2014. Efile 2010 taxes She must include this payment in her 2013 income because it was constructively received in 2013. Efile 2010 taxes Checks. Efile 2010 taxes   Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year. Efile 2010 taxes Example. Efile 2010 taxes Dr. Efile 2010 taxes Redd received a check for $500 on December 31, 2013, from a patient. Efile 2010 taxes She could not deposit the check in her business account until January 2, 2014. Efile 2010 taxes She must include this fee in her income for 2013. Efile 2010 taxes Debts paid by another person or canceled. Efile 2010 taxes   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Efile 2010 taxes If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Efile 2010 taxes For more information, see Canceled Debt under Kinds of Income in chapter 5. Efile 2010 taxes Repayment of income. Efile 2010 taxes   If you include an amount in income and in a later year you have to repay all or part of it, you can usually deduct the repayment in the year in which you make it. Efile 2010 taxes If the amount you repay is over $3,000, a special rule applies. Efile 2010 taxes For details about the special rule, see Repayments in chapter 11 of Publication 535, Business Expenses. Efile 2010 taxes Expenses Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. Efile 2010 taxes This includes business expenses for which you contest liability. Efile 2010 taxes However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Efile 2010 taxes Expenses paid in advance. Efile 2010 taxes   You can deduct an expense you pay in advance only in the year to which it applies. Efile 2010 taxes Example. Efile 2010 taxes You are a calendar year taxpayer and you pay $1,000 in 2013 for a business insurance policy effective for one year, beginning July 1. Efile 2010 taxes You can deduct $500 in 2013 and $500 in 2014. Efile 2010 taxes Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Efile 2010 taxes The purpose of an accrual method of accounting is to match income and expenses in the correct year. Efile 2010 taxes Income—General Rule Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. Efile 2010 taxes Example. Efile 2010 taxes You are a calendar year accrual method taxpayer. Efile 2010 taxes You sold a computer on December 28, 2013. Efile 2010 taxes You billed the customer in the first week of January 2014, but you did not receive payment until February 2014. Efile 2010 taxes You must include the amount received for the computer in your 2013 income. Efile 2010 taxes Income—Special Rules The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services. Efile 2010 taxes Estimated income. Efile 2010 taxes   If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination. Efile 2010 taxes Change in payment schedule for services. Efile 2010 taxes   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference. Efile 2010 taxes Advance payments for services. Efile 2010 taxes   Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. Efile 2010 taxes However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. Efile 2010 taxes However, you cannot postpone including any payment beyond that tax year. Efile 2010 taxes   For more information, see Advance Payment for Services under Accrual Method in Publication 538. Efile 2010 taxes That publication also explains special rules for reporting the following types of income. Efile 2010 taxes Advance payments for service agreements. Efile 2010 taxes Prepaid rent. Efile 2010 taxes Advance payments for sales. Efile 2010 taxes   Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. Efile 2010 taxes If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. Efile 2010 taxes An agreement includes a gift certificate that can be redeemed for goods. Efile 2010 taxes Treat amounts that are due and payable as amounts you received. Efile 2010 taxes   You generally include an advance payment in income for the tax year in which you receive it. Efile 2010 taxes However, you can use an alternative method. Efile 2010 taxes For information about the alternative method, see Publication 538. Efile 2010 taxes Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Efile 2010 taxes The all-events test has been met. Efile 2010 taxes The test has been met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Efile 2010 taxes Economic performance has occurred. Efile 2010 taxes Economic performance. Efile 2010 taxes   You generally cannot deduct or capitalize a business expense until economic performance occurs. Efile 2010 taxes If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Efile 2010 taxes If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Efile 2010 taxes An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Efile 2010 taxes For more information on economic performance, see Economic Performance under Accrual Method in Publication 538. Efile 2010 taxes Example. Efile 2010 taxes You are a calendar year taxpayer and use an accrual method of accounting. Efile 2010 taxes You buy office supplies in December 2013. Efile 2010 taxes You receive the supplies and the bill in December, but you pay the bill in January 2014. Efile 2010 taxes You can deduct the expense in 2013 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year. Efile 2010 taxes Your office supplies may qualify as a recurring expense. Efile 2010 taxes In that case, you can deduct them in 2013 even if the supplies are not delivered until 2014 (when economic performance occurs). Efile 2010 taxes Keeping inventories. Efile 2010 taxes   When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year. Efile 2010 taxes If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. Efile 2010 taxes For more information, see Inventories , later. Efile 2010 taxes Special rule for related persons. Efile 2010 taxes   You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person's gross income. Efile 2010 taxes Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Efile 2010 taxes If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. Efile 2010 taxes   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Efile 2010 taxes For a list of other related persons, see section 267 of the Internal Revenue Code. Efile 2010 taxes Combination Method You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Efile 2010 taxes However, the following restrictions apply. Efile 2010 taxes If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. Efile 2010 taxes (See, however, Inventories, later. Efile 2010 taxes ) You can use the cash method for all other items of income and expenses. Efile 2010 taxes If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Efile 2010 taxes If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Efile 2010 taxes If you use a combination method that includes the cash method, treat that combination method as the cash method. Efile 2010 taxes Inventories Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. Efile 2010 taxes However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Efile 2010 taxes These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Efile 2010 taxes A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Efile 2010 taxes A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Efile 2010 taxes Qualifying taxpayer. Efile 2010 taxes   You are a qualifying taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 17, 1998, is $1 million or less. Efile 2010 taxes (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing by 3. Efile 2010 taxes ) Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code. Efile 2010 taxes Qualifying small business taxpayer. Efile 2010 taxes   You are a qualifying small business taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. Efile 2010 taxes (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. Efile 2010 taxes ) You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Efile 2010 taxes Your principal business activity is an eligible business (described in Publication 538 and Revenue Procedure 2002-28). Efile 2010 taxes Business not owned or not in existence for 3 years. Efile 2010 taxes   If you did not own your business for all of the 3-tax-year period used in figuring your average annual gross receipts, include the period of any predecessor. Efile 2010 taxes If your business has not been in existence for the 3-tax-year period, base your average on the period it has existed including any short tax years, annualizing the short tax year's gross receipts. Efile 2010 taxes Materials and supplies that are not incidental. Efile 2010 taxes   If you account for inventoriable items as materials and supplies that are not incidental, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later. Efile 2010 taxes If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year. Efile 2010 taxes Changing accounting method. Efile 2010 taxes   If you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies, you must file Form 3115, Application for Change in Accounting Method. Efile 2010 taxes See Change in Accounting Method, later. Efile 2010 taxes More information. Efile 2010 taxes    For more information about the qualifying taxpayer exception, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Efile 2010 taxes For more information about the qualifying small business taxpayer exception, see Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Efile 2010 taxes Items included in inventory. Efile 2010 taxes   If you are required to account for inventories, include the following items when accounting for your inventory. Efile 2010 taxes Merchandise or stock in trade. Efile 2010 taxes Raw materials. Efile 2010 taxes Work in process. Efile 2010 taxes Finished products. Efile 2010 taxes Supplies that physically become a part of the item intended for sale. Efile 2010 taxes Valuing inventory. Efile 2010 taxes   You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). Efile 2010 taxes To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items. Efile 2010 taxes   Inventory valuation rules cannot be the same for all kinds of businesses. Efile 2010 taxes The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Efile 2010 taxes Your inventory practices must be consistent from year to year. Efile 2010 taxes More information. Efile 2010 taxes   For more information about inventories, see Publication 538. Efile 2010 taxes Uniform Capitalization Rules Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. Efile 2010 taxes Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Efile 2010 taxes You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Efile 2010 taxes Activities subject to the uniform capitalization rules. Efile 2010 taxes   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. Efile 2010 taxes Produce real or tangible personal property. Efile 2010 taxes For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Efile 2010 taxes Acquire property for resale. Efile 2010 taxes Exceptions. Efile 2010 taxes   These rules do not apply to the following property. Efile 2010 taxes Personal property you acquire for resale if your average annual gross receipts are $10 million or less. Efile 2010 taxes Property you produce if you meet either of the following conditions. Efile 2010 taxes Your indirect costs of producing the property are $200,000 or less. Efile 2010 taxes You use the cash method of accounting and do not account for inventories. Efile 2010 taxes For more information, see Inventories, earlier. Efile 2010 taxes Special Methods There are special methods of accounting for certain items of income or expense. Efile 2010 taxes These include the following. Efile 2010 taxes Amortization, discussed in chapter 8 of Publication 535, Business Expenses. Efile 2010 taxes Bad debts, discussed in chapter 10 of Publication 535. Efile 2010 taxes Depletion, discussed in chapter 9 of Publication 535. Efile 2010 taxes Depreciation, discussed in Publication 946, How To Depreciate Property. Efile 2010 taxes Installment sales, discussed in Publication 537, Installment Sales. Efile 2010 taxes Change in Accounting Method Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Efile 2010 taxes A change in your accounting method includes a change in: Your overall method, such as from cash to an accrual method, and Your treatment of any material item. Efile 2010 taxes To get approval, you must file Form 3115, Application for Change in Accounting Method. Efile 2010 taxes You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. Efile 2010 taxes You may have to pay a user fee. Efile 2010 taxes For more information, see the form instructions. Efile 2010 taxes Automatic change procedures. Efile 2010 taxes   Certain taxpayers can presume to have IRS approval to change their method of accounting. Efile 2010 taxes The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. Efile 2010 taxes No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9. Efile 2010 taxes   Generally, you must use Form 3115 to request an automatic change. Efile 2010 taxes For more information, see the Instructions for Form 3115. Efile 2010 taxes Prev  Up  Next   Home   More Online Publications
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Understanding Your CP264 Notice

CP264 is the notice for denial of Form 2553, Election by a Small Business Corporation.


What you need to do

If you want to be treated as a Small Business Corporation, file a new and complete Form 2553. Be sure to include all required statements.


You may want to

Seek professional assistance


Answers to Common Questions

Q. Is there a waiting period before I can re-submit a new Form 2553?

A. No, a newly prepared, complete, and timely Form 2553 can be filed at any time.

Q. How can I find out why my Form 2553 was rejected?

A. Your denied Form 2553 will arrive in a separate envelope. Examine the form to see if it is complete; if not, this may be the reason.

 

 

Page Last Reviewed or Updated: 12-Feb-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Efile 2010 Taxes

Efile 2010 taxes 6. Efile 2010 taxes   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. Efile 2010 taxes Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Efile 2010 taxes Also use basis to figure depreciation, amortization, depletion, and casualty losses. Efile 2010 taxes If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Efile 2010 taxes Only the basis allocated to the business or investment use of the property can be depreciated. Efile 2010 taxes Your original basis in property is adjusted (increased or decreased) by certain events. Efile 2010 taxes For example, if you make improvements to the property, increase your basis. Efile 2010 taxes If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. Efile 2010 taxes Keep accurate records of all items that affect the basis of your assets. Efile 2010 taxes For information on keeping records, see chapter 1. Efile 2010 taxes Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. Efile 2010 taxes Cost Basis The basis of property you buy is usually its cost. Efile 2010 taxes Cost is the amount you pay in cash, debt obligations, other property, or services. Efile 2010 taxes Your cost includes amounts you pay for sales tax, freight, installation, and testing. Efile 2010 taxes The basis of real estate and business assets will include other items, discussed later. Efile 2010 taxes Basis generally does not include interest payments. Efile 2010 taxes However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. Efile 2010 taxes You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Efile 2010 taxes Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. Efile 2010 taxes Loans with low or no interest. Efile 2010 taxes   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. Efile 2010 taxes You generally have unstated interest if your interest rate is less than the applicable federal rate. Efile 2010 taxes See the discussion of unstated interest in Publication 537, Installment Sales. Efile 2010 taxes Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Efile 2010 taxes If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Efile 2010 taxes Some of these expenses are discussed next. Efile 2010 taxes Lump sum purchase. Efile 2010 taxes   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. Efile 2010 taxes Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Efile 2010 taxes Figure the basis of each asset by multiplying the lump sum by a fraction. Efile 2010 taxes The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Efile 2010 taxes Fair market value (FMV). Efile 2010 taxes   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Efile 2010 taxes Sales of similar property on or about the same date may help in figuring the FMV of the property. Efile 2010 taxes If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. Efile 2010 taxes Real estate taxes. Efile 2010 taxes   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Efile 2010 taxes   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Efile 2010 taxes Whether or not you reimburse the seller, do not include that amount in the basis of your property. Efile 2010 taxes Settlement costs. Efile 2010 taxes   Your basis includes the settlement fees and closing costs for buying the property. Efile 2010 taxes See Publication 551 for a detailed list of items you can and cannot include in basis. Efile 2010 taxes   Do not include fees and costs for getting a loan on the property. Efile 2010 taxes Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Efile 2010 taxes Points. Efile 2010 taxes   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. Efile 2010 taxes You may be able to deduct the points currently or over the term of the loan. Efile 2010 taxes For more information about deducting points, see Points in chapter 4 of Publication 535. Efile 2010 taxes Assumption of a mortgage. Efile 2010 taxes   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. Efile 2010 taxes Example. Efile 2010 taxes If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. Efile 2010 taxes Constructing assets. Efile 2010 taxes   If you build property or have assets built for you, your expenses for this construction are part of your basis. Efile 2010 taxes Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Efile 2010 taxes   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. Efile 2010 taxes You must capitalize them (include them in the asset's basis). Efile 2010 taxes Employee wages paid for the construction work, reduced by any employment credits allowed. Efile 2010 taxes Depreciation on equipment you own while it is used in the construction. Efile 2010 taxes Operating and maintenance costs for equipment used in the construction. Efile 2010 taxes The cost of business supplies and materials used in the construction. Efile 2010 taxes    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Efile 2010 taxes Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. Efile 2010 taxes To determine the basis of these assets or separate items, there must be an allocation of basis. Efile 2010 taxes Group of assets acquired. Efile 2010 taxes   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Efile 2010 taxes Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Efile 2010 taxes You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. Efile 2010 taxes If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Efile 2010 taxes Farming business acquired. Efile 2010 taxes   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. Efile 2010 taxes Generally, reduce the purchase price by any cash received. Efile 2010 taxes Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. Efile 2010 taxes See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. Efile 2010 taxes Transplanted embryo. Efile 2010 taxes   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Efile 2010 taxes Allocate the rest of the purchase price to the basis of the calf. Efile 2010 taxes Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. Efile 2010 taxes Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. Efile 2010 taxes You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Efile 2010 taxes Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. Efile 2010 taxes However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. Efile 2010 taxes You produce property if you construct, build, install, manufacture, develop, improve, or create the property. Efile 2010 taxes You are not subject to the uniform capitalization rules if the property is produced for personal use. Efile 2010 taxes In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. Efile 2010 taxes Plants. Efile 2010 taxes   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. Efile 2010 taxes Animals. Efile 2010 taxes   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. Efile 2010 taxes The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Efile 2010 taxes Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. Efile 2010 taxes For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. Efile 2010 taxes For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. Efile 2010 taxes Exceptions. Efile 2010 taxes   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. Efile 2010 taxes   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. Efile 2010 taxes See Accrual Method Required under Accounting Methods in chapter 2. Efile 2010 taxes   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. Efile 2010 taxes If you make this election, special rules apply. Efile 2010 taxes This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. Efile 2010 taxes This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. Efile 2010 taxes    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. Efile 2010 taxes See chapter 7, for additional information on depreciation. Efile 2010 taxes Example. Efile 2010 taxes You grow trees that have a preproductive period of more than 2 years. Efile 2010 taxes The trees produce an annual crop. Efile 2010 taxes You are an individual and the uniform capitalization rules apply to your farming business. Efile 2010 taxes You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. Efile 2010 taxes You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. Efile 2010 taxes Preproductive period of more than 2 years. Efile 2010 taxes   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Efile 2010 taxes Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. Efile 2010 taxes Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. Efile 2010 taxes More information. Efile 2010 taxes   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. Efile 2010 taxes 263A-4. Efile 2010 taxes Table 6-1. Efile 2010 taxes Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. Efile 2010 taxes Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. Efile 2010 taxes The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. Efile 2010 taxes Increases to Basis Increase the basis of any property by all items properly added to a capital account. Efile 2010 taxes These include the cost of any improvements having a useful life of more than 1 year. Efile 2010 taxes The following costs increase the basis of property. Efile 2010 taxes The cost of extending utility service lines to property. Efile 2010 taxes Legal fees, such as the cost of defending and perfecting title. Efile 2010 taxes Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. Efile 2010 taxes Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Efile 2010 taxes Do not deduct these expenses as taxes. Efile 2010 taxes However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. Efile 2010 taxes If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Efile 2010 taxes See chapter 7. Efile 2010 taxes Deducting vs. Efile 2010 taxes capitalizing costs. Efile 2010 taxes   Do not add to your basis costs you can deduct as current expenses. Efile 2010 taxes For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. Efile 2010 taxes However, you can elect either to deduct or to capitalize certain other costs. Efile 2010 taxes See chapter 7 in Publication 535. Efile 2010 taxes Decreases to Basis The following are some items that reduce the basis of property. Efile 2010 taxes Section 179 deduction. Efile 2010 taxes Deductions previously allowed or allowable for amortization, depreciation, and depletion. Efile 2010 taxes Alternative motor vehicle credit. Efile 2010 taxes See Form 8910. Efile 2010 taxes Alternative fuel vehicle refueling property credit. Efile 2010 taxes See Form 8911. Efile 2010 taxes Residential energy efficient property credits. Efile 2010 taxes See Form 5695. Efile 2010 taxes Investment credit (part or all) taken. Efile 2010 taxes Casualty and theft losses and insurance reimbursements. Efile 2010 taxes Payments you receive for granting an easement. Efile 2010 taxes Exclusion from income of subsidies for energy conservation measures. Efile 2010 taxes Certain canceled debt excluded from income. Efile 2010 taxes Rebates from a manufacturer or seller. Efile 2010 taxes Patronage dividends received from a cooperative association as a result of a purchase of property. Efile 2010 taxes See Patronage Dividends in chapter 3. Efile 2010 taxes Gas-guzzler tax. Efile 2010 taxes See Form 6197. Efile 2010 taxes Some of these items are discussed next. Efile 2010 taxes For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. Efile 2010 taxes Depreciation and section 179 deduction. Efile 2010 taxes   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. Efile 2010 taxes For more information on these deductions, see chapter 7. Efile 2010 taxes Section 179 deduction. Efile 2010 taxes   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Efile 2010 taxes Depreciation. Efile 2010 taxes   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. Efile 2010 taxes If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Efile 2010 taxes If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Efile 2010 taxes   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. Efile 2010 taxes   See chapter 7 for information on figuring the depreciation you should have claimed. Efile 2010 taxes   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. Efile 2010 taxes Casualty and theft losses. Efile 2010 taxes   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Efile 2010 taxes Also, decrease it by any deductible loss not covered by insurance. Efile 2010 taxes See chapter 11 for information about figuring your casualty or theft loss. Efile 2010 taxes   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. Efile 2010 taxes To make this determination, compare the repaired property to the property before the casualty. Efile 2010 taxes Easements. Efile 2010 taxes   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. Efile 2010 taxes It reduces the basis of the affected part of the property. Efile 2010 taxes If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Efile 2010 taxes See Easements and rights-of-way in chapter 3. Efile 2010 taxes Exclusion from income of subsidies for energy conservation measures. Efile 2010 taxes   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Efile 2010 taxes Reduce the basis of the property by the excluded amount. Efile 2010 taxes Canceled debt excluded from income. Efile 2010 taxes   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Efile 2010 taxes A debt includes any indebtedness for which you are liable or which attaches to property you hold. Efile 2010 taxes   You can exclude your canceled debt from income if the debt is any of the following. Efile 2010 taxes Debt canceled in a bankruptcy case or when you are insolvent. Efile 2010 taxes Qualified farm debt. Efile 2010 taxes Qualified real property business debt (provided you are not a C corporation). Efile 2010 taxes Qualified principal residence indebtedness. Efile 2010 taxes Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. Efile 2010 taxes If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Efile 2010 taxes If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. Efile 2010 taxes   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. Efile 2010 taxes For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. Efile 2010 taxes For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. Efile 2010 taxes For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Efile 2010 taxes Basis Other Than Cost There are times when you cannot use cost as basis. Efile 2010 taxes In these situations, the fair market value or the adjusted basis of property may be used. Efile 2010 taxes Examples are discussed next. Efile 2010 taxes Property changed from personal to business or rental use. Efile 2010 taxes   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Efile 2010 taxes An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. Efile 2010 taxes   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Efile 2010 taxes   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. Efile 2010 taxes The basis for figuring a gain is your adjusted basis in the property when you sell the property. Efile 2010 taxes Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Efile 2010 taxes Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Efile 2010 taxes Property received for services. Efile 2010 taxes   If you receive property for services, include the property's FMV in income. Efile 2010 taxes The amount you include in income becomes your basis. Efile 2010 taxes If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Efile 2010 taxes Example. Efile 2010 taxes George Smith is an accountant and also operates a farming business. Efile 2010 taxes George agreed to do some accounting work for his neighbor in exchange for a dairy cow. Efile 2010 taxes The accounting work and the cow are each worth $1,500. Efile 2010 taxes George must include $1,500 in income for his accounting services. Efile 2010 taxes George's basis in the cow is $1,500. Efile 2010 taxes Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. Efile 2010 taxes A taxable gain or deductible loss also is known as a recognized gain or loss. Efile 2010 taxes A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. Efile 2010 taxes If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Efile 2010 taxes Example. Efile 2010 taxes You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. Efile 2010 taxes You must report a taxable gain of $4,000 for the land. Efile 2010 taxes The tractor has a basis of $6,000. Efile 2010 taxes Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. Efile 2010 taxes Similar or related property. Efile 2010 taxes   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. Efile 2010 taxes However, make the following adjustments. Efile 2010 taxes Decrease the basis by the following amounts. Efile 2010 taxes Any loss you recognize on the involuntary conversion. Efile 2010 taxes Any money you receive that you do not spend on similar property. Efile 2010 taxes Increase the basis by the following amounts. Efile 2010 taxes Any gain you recognize on the involuntary conversion. Efile 2010 taxes Any cost of acquiring the replacement property. Efile 2010 taxes Money or property not similar or related. Efile 2010 taxes   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. Efile 2010 taxes Allocating the basis. Efile 2010 taxes   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Efile 2010 taxes Basis for depreciation. Efile 2010 taxes   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Efile 2010 taxes For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Efile 2010 taxes For more information about involuntary conversions, see chapter 11. Efile 2010 taxes Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Efile 2010 taxes A nontaxable gain or loss also is known as an unrecognized gain or loss. Efile 2010 taxes If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Efile 2010 taxes Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Efile 2010 taxes For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Efile 2010 taxes There must also be an exchange of like-kind property. Efile 2010 taxes For more information, see Like-Kind Exchanges in  chapter 8. Efile 2010 taxes The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. Efile 2010 taxes Example 1. Efile 2010 taxes You traded a truck you used in your farming business for a new smaller truck to use in farming. Efile 2010 taxes The adjusted basis of the old truck was $10,000. Efile 2010 taxes The FMV of the new truck is $30,000. Efile 2010 taxes Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. Efile 2010 taxes Example 2. Efile 2010 taxes You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). Efile 2010 taxes You use both the field cultivator and the planter in your farming business. Efile 2010 taxes The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. Efile 2010 taxes   Exchange expenses generally are the closing costs that you pay. Efile 2010 taxes They include such items as brokerage commissions, attorney fees, and deed preparation fees. Efile 2010 taxes Add them to the basis of the like-kind property you receive. Efile 2010 taxes Property plus cash. Efile 2010 taxes   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. Efile 2010 taxes Example. Efile 2010 taxes You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Efile 2010 taxes Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). Efile 2010 taxes Special rules for related persons. Efile 2010 taxes   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Efile 2010 taxes Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. Efile 2010 taxes Each person reports it on the tax return filed for the year in which the later disposition occurred. Efile 2010 taxes If this rule applies, the basis of the property received in the original exchange will be its FMV. Efile 2010 taxes For more information, see chapter 8. Efile 2010 taxes Exchange of business property. Efile 2010 taxes   Exchanging the property of one business for the property of another business generally is a multiple property exchange. Efile 2010 taxes For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Efile 2010 taxes Basis for depreciation. Efile 2010 taxes   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. Efile 2010 taxes For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Efile 2010 taxes Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Efile 2010 taxes The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. Efile 2010 taxes Decrease the basis by the following amounts. Efile 2010 taxes Any money you receive. Efile 2010 taxes Any loss you recognize on the exchange. Efile 2010 taxes Increase the basis by the following amounts. Efile 2010 taxes Any additional costs you incur. Efile 2010 taxes Any gain you recognize on the exchange. Efile 2010 taxes If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Efile 2010 taxes Example 1. Efile 2010 taxes You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. Efile 2010 taxes You realize a gain of $40,000. Efile 2010 taxes This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Efile 2010 taxes Include your gain in income (recognize gain) only to the extent of the cash received. Efile 2010 taxes Your basis in the land you received is figured as follows. Efile 2010 taxes Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. Efile 2010 taxes You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. Efile 2010 taxes You realize a gain of $7,250. Efile 2010 taxes This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). Efile 2010 taxes You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Efile 2010 taxes Your basis in the truck you received is figured as follows. Efile 2010 taxes Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. Efile 2010 taxes   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Efile 2010 taxes The rest is the basis of the like-kind property. Efile 2010 taxes Example. Efile 2010 taxes You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. Efile 2010 taxes You also received $1,000 cash and a truck that had an FMV of $3,000. Efile 2010 taxes The truck is unlike property. Efile 2010 taxes You realized a gain of $1,500. Efile 2010 taxes This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). Efile 2010 taxes You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Efile 2010 taxes Your basis in the properties you received is figured as follows. Efile 2010 taxes Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). Efile 2010 taxes This is the truck's FMV. Efile 2010 taxes The rest ($12,500) is the basis of the tractor. Efile 2010 taxes Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Efile 2010 taxes Example. Efile 2010 taxes You used a tractor on your farm for 3 years. Efile 2010 taxes Its adjusted basis is $22,000 and its FMV is $40,000. Efile 2010 taxes You are interested in a new tractor, which sells for $60,000. Efile 2010 taxes Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. Efile 2010 taxes Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). Efile 2010 taxes However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. Efile 2010 taxes Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). Efile 2010 taxes Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. Efile 2010 taxes Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. Efile 2010 taxes You also must know its FMV at the time it was given to you and any gift tax paid on it. Efile 2010 taxes FMV equal to or greater than donor's adjusted basis. Efile 2010 taxes   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. Efile 2010 taxes Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Efile 2010 taxes   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Efile 2010 taxes See Adjusted Basis , earlier. Efile 2010 taxes   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Efile 2010 taxes Figure the increase by multiplying the gift tax paid by the following fraction. Efile 2010 taxes Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Efile 2010 taxes The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Efile 2010 taxes Example. Efile 2010 taxes In 2013, you received a gift of property from your mother that had an FMV of $50,000. Efile 2010 taxes Her adjusted basis was $20,000. Efile 2010 taxes The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Efile 2010 taxes She paid a gift tax of $7,320. Efile 2010 taxes Your basis, $26,076, is figured as follows. Efile 2010 taxes Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Efile 2010 taxes 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Efile 2010 taxes If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Efile 2010 taxes However, your basis cannot exceed the FMV of the gift when it was given to you. Efile 2010 taxes FMV less than donor's adjusted basis. Efile 2010 taxes   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Efile 2010 taxes Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Efile 2010 taxes Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Efile 2010 taxes (See Adjusted Basis , earlier. Efile 2010 taxes )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. Efile 2010 taxes Example. Efile 2010 taxes You received farmland as a gift from your parents when they retired from farming. Efile 2010 taxes At the time of the gift, the land had an FMV of $80,000. Efile 2010 taxes Your parents' adjusted basis was $100,000. Efile 2010 taxes After you received the land, no events occurred that would increase or decrease your basis. Efile 2010 taxes If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. Efile 2010 taxes If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. Efile 2010 taxes If the sales price is between $80,000 and $100,000, you have neither gain nor loss. Efile 2010 taxes For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. Efile 2010 taxes If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. Efile 2010 taxes Business property. Efile 2010 taxes   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Efile 2010 taxes Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Efile 2010 taxes The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. Efile 2010 taxes However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. Efile 2010 taxes The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Efile 2010 taxes For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. Efile 2010 taxes Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Efile 2010 taxes If a federal estate return is filed, you can use its appraised value. Efile 2010 taxes The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. Efile 2010 taxes For information on the alternate valuation, see the Instructions for Form 706. Efile 2010 taxes The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. Efile 2010 taxes If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Efile 2010 taxes Special-use valuation method. Efile 2010 taxes   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. Efile 2010 taxes If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. Efile 2010 taxes If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. Efile 2010 taxes The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Efile 2010 taxes   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Efile 2010 taxes Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. Efile 2010 taxes Figure all FMVs without regard to the special-use valuation. Efile 2010 taxes   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. Efile 2010 taxes This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. Efile 2010 taxes The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. Efile 2010 taxes   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Efile 2010 taxes To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. Efile 2010 taxes If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Efile 2010 taxes The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. Efile 2010 taxes   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. Efile 2010 taxes   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. Efile 2010 taxes Property inherited from a decedent who died in 2010. Efile 2010 taxes   If you inherited property from a decedent who died in 2010, different rules may apply. Efile 2010 taxes See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. Efile 2010 taxes Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. Efile 2010 taxes Partner's basis. Efile 2010 taxes   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. Efile 2010 taxes However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Efile 2010 taxes For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. Efile 2010 taxes Shareholder's basis. Efile 2010 taxes   The basis of property distributed by a corporation to a shareholder is its fair market value. Efile 2010 taxes For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. Efile 2010 taxes Prev  Up  Next   Home   More Online Publications