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Federal Income Tax Forms 2011

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Federal Income Tax Forms 2011

Federal income tax forms 2011 2. Federal income tax forms 2011   Source of Income Table of Contents Introduction Topics - This chapter discusses: Resident Aliens Nonresident AliensInterest Income Dividends Guarantee of Indebtedness Personal Services Transportation Income Scholarships, Grants, Prizes, and Awards Pensions and Annuities Rents or Royalties Real Property Personal Property Community Income Introduction After you have determined your alien status, you must determine the source of your income. Federal income tax forms 2011 This chapter will help you determine the source of different types of income you may receive during the tax year. Federal income tax forms 2011 This chapter also discusses special rules for married individuals who are domiciled in a country with community property laws. Federal income tax forms 2011 Topics - This chapter discusses: Income source rules, and Community income. Federal income tax forms 2011 Resident Aliens A resident alien's income is generally subject to tax in the same manner as a U. Federal income tax forms 2011 S. Federal income tax forms 2011 citizen. Federal income tax forms 2011 If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U. Federal income tax forms 2011 S. Federal income tax forms 2011 tax return. Federal income tax forms 2011 You must report these amounts from sources within and outside the United States. Federal income tax forms 2011 Nonresident Aliens A nonresident alien usually is subject to U. Federal income tax forms 2011 S. Federal income tax forms 2011 income tax only on U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income. Federal income tax forms 2011 Under limited circumstances, certain foreign source income is subject to U. Federal income tax forms 2011 S. Federal income tax forms 2011 tax. Federal income tax forms 2011 See Foreign Income in chapter 4. Federal income tax forms 2011 The general rules for determining U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income that apply to most nonresident aliens are shown in Table 2-1. Federal income tax forms 2011 The following discussions cover the general rules as well as the exceptions to these rules. Federal income tax forms 2011 Not all items of U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income are taxable. Federal income tax forms 2011 See chapter 3. Federal income tax forms 2011 Interest Income Generally, U. Federal income tax forms 2011 S. Federal income tax forms 2011 source interest income includes the following items. Federal income tax forms 2011 Interest on bonds, notes, or other interest-bearing obligations of U. Federal income tax forms 2011 S. Federal income tax forms 2011 residents or domestic corporations. Federal income tax forms 2011 Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U. Federal income tax forms 2011 S. Federal income tax forms 2011 trade or business at any time during the tax year. Federal income tax forms 2011 Original issue discount. Federal income tax forms 2011 Interest from a state, the District of Columbia, or the U. Federal income tax forms 2011 S. Federal income tax forms 2011 Government. Federal income tax forms 2011 The place or manner of payment is immaterial in determining the source of the income. Federal income tax forms 2011 A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as the interest on the transferred security. Federal income tax forms 2011 Exceptions. Federal income tax forms 2011   U. Federal income tax forms 2011 S. Federal income tax forms 2011 source interest income does not include the following items. Federal income tax forms 2011 Interest paid by a resident alien or a domestic corporation on obligations issued before August 10, 2010, if for the 3-year period ending with the close of the payer's tax year preceding the interest payment, at least 80% of the payer's total gross income: Is from sources outside the United States, and Is attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U. Federal income tax forms 2011 S. Federal income tax forms 2011 possession. Federal income tax forms 2011 However, the interest will be considered U. Federal income tax forms 2011 S. Federal income tax forms 2011 source interest income if either of the following apply. Federal income tax forms 2011 The recipient of the interest is related to the resident alien or domestic corporation. Federal income tax forms 2011 See section 954(d)(3) for the definition of related person. Federal income tax forms 2011 The terms of the obligation are significantly modified after August 9, 2010. Federal income tax forms 2011 Any extension of the term of the obligation is considered a significant modification. Federal income tax forms 2011 Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the association. Federal income tax forms 2011 Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business. Federal income tax forms 2011 Dividends In most cases, dividend income received from domestic corporations is U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income. Federal income tax forms 2011 Dividend income from foreign corporations is usually foreign source income. Federal income tax forms 2011 Exceptions to both of these rules are discussed below. Federal income tax forms 2011 A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as a distribution on the transferred security. Federal income tax forms 2011 Dividend equivalent payments. Federal income tax forms 2011   U. Federal income tax forms 2011 S. Federal income tax forms 2011 source dividends also include all dividend equivalent payments. Federal income tax forms 2011 Dividend equivalent payments include substitute dividends, payments made pursuant to a specified notional principal contract, and all similar payments that, directly or indirectly, are contingent on or determined by reference to, the payment of a dividend from U. Federal income tax forms 2011 S. Federal income tax forms 2011 sources. Federal income tax forms 2011    The Internal Revenue Service has issued final regulations that would affect the treatment of dividend equivalent payments and specified notional principal contracts. Federal income tax forms 2011 You can view this regulation at www. Federal income tax forms 2011 irs. Federal income tax forms 2011 gov/irb/2013-52_IRB/ar08. Federal income tax forms 2011 html. Federal income tax forms 2011 First exception. Federal income tax forms 2011   Dividends received from a domestic corporation are not U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income if the corporation elects to take the American Samoa economic development credit. Federal income tax forms 2011 Second exception. Federal income tax forms 2011   Part of the dividends received from a foreign corporation is U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income if 25% or more of its total gross income for the 3-year period ending with the close of its tax year preceding the declaration of dividends was effectively connected with a trade or business in the United States. Federal income tax forms 2011 If the corporation was formed less than 3 years before the declaration, use its total gross income from the time it was formed. Federal income tax forms 2011 Determine the part that is U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income by multiplying the dividend by the following fraction. Federal income tax forms 2011   Foreign corporation's gross income connected with a U. Federal income tax forms 2011 S. Federal income tax forms 2011 trade or business for the 3-year period     Foreign corporation's gross income from all sources for that period   Guarantee of Indebtedness Certain amounts received directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income. Federal income tax forms 2011 They must be paid by a noncorporate resident or U. Federal income tax forms 2011 S. Federal income tax forms 2011 corporation or by any foreign person if the amounts are effectively connected with the conduct of a U. Federal income tax forms 2011 S. Federal income tax forms 2011 trade or business. Federal income tax forms 2011 For more information, see Internal Revenue Code sections 861(a)(9) and 862(a)(9). Federal income tax forms 2011 Personal Services All wages and any other compensation for services performed in the United States are considered to be from sources in the United States. Federal income tax forms 2011 The only exceptions to this rule are discussed in chapter 3 under Employees of foreign persons, organizations, or offices, and under Crew members. Federal income tax forms 2011 If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. Federal income tax forms 2011 Compensation (other than certain fringe benefits) is sourced on a time basis. Federal income tax forms 2011 Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Federal income tax forms 2011 Or, you may be permitted to use an alternative basis to determine the source of compensation. Federal income tax forms 2011 See Alternative Basis , later. Federal income tax forms 2011 Multi-level marketing. Federal income tax forms 2011   Certain companies sell products through a multi-level marketing arrangement, such that an upper-tier distributor, who has sponsored a lower-tier distributor, is entitled to a payment from the company based on certain activities of that lower-tier distributor. Federal income tax forms 2011 Generally, depending on the facts, payments from such multi-level marketing companies to independent (non-employee) distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have sponsored (lower-tier distributors) constitute income for the performance of personal services in recruiting, training, and supporting the lower-tier distributors. Federal income tax forms 2011 The source of such income is generally based on where the services of the upper-tier distributor are performed, and may, depending on the facts, be considered multi-year compensation, with the source of income determined over the period to which such compensation is attributable. Federal income tax forms 2011 Self-employed individuals. Federal income tax forms 2011   If you are self-employed, you determine the source of compensation for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Federal income tax forms 2011 In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Federal income tax forms 2011 Time Basis Use a time basis to figure your U. Federal income tax forms 2011 S. Federal income tax forms 2011 source compensation (other than the fringe benefits discussed later). Federal income tax forms 2011 Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed services in the United States during the year     Total number of days you performed services during the year   You can use a unit of time less than a day in the above fraction, if appropriate. Federal income tax forms 2011 The time period for which the compensation is made does not have to be a year. Federal income tax forms 2011 Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Federal income tax forms 2011 Example 1. Federal income tax forms 2011 Christina Brooks, a resident of the Netherlands, worked 240 days for a U. Federal income tax forms 2011 S. Federal income tax forms 2011 company during the tax year. Federal income tax forms 2011 She received $80,000 in compensation. Federal income tax forms 2011 None of it was for fringe benefits. Federal income tax forms 2011 Christina performed services in the United States for 60 days and performed services in the Netherlands for 180 days. Federal income tax forms 2011 Using the time basis for determining the source of compensation, $20,000 ($80,000 × 60/240) is her U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income. Federal income tax forms 2011 Example 2. Federal income tax forms 2011 Rob Waters, a resident of South Africa, is employed by a corporation. Federal income tax forms 2011 His annual salary is $100,000. Federal income tax forms 2011 None of it is for fringe benefits. Federal income tax forms 2011 During the first quarter of the year he worked entirely within the United States. Federal income tax forms 2011 On April 1, Rob was transferred to Singapore for the remainder of the year. Federal income tax forms 2011 Rob is able to establish that the first quarter of the year and the last 3 quarters of the year are two separate, distinct, and continuous periods of time. Federal income tax forms 2011 Accordingly, $25,000 of Rob's annual salary is attributable to the first quarter of the year (. Federal income tax forms 2011 25 × $100,000). Federal income tax forms 2011 All of it is U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income because he worked entirely within the United States during that quarter. Federal income tax forms 2011 The remaining $75,000 is attributable to the last three quarters of the year. Federal income tax forms 2011 During those quarters, he worked 150 days in Singapore and 30 days in the United States. Federal income tax forms 2011 His periodic performance of services in the United States did not result in distinct, separate, and continuous periods of time. Federal income tax forms 2011 Of this $75,000, $12,500 ($75,000 × 30/180) is U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income. Federal income tax forms 2011 Multi-year compensation. Federal income tax forms 2011   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Federal income tax forms 2011 Multi-year compensation is compensation that is included in your income in one tax year but that is attributable to a period that includes two or more tax years. Federal income tax forms 2011   You determine the period to which the compensation is attributable based on the facts and circumstances of your case. Federal income tax forms 2011 For example, an amount of compensation that specifically relates to a period of time that includes several calendar years is attributable to the entire multi-year period. Federal income tax forms 2011   The amount of compensation treated as from U. Federal income tax forms 2011 S. Federal income tax forms 2011 sources is figured by multiplying the total multi-year compensation by a fraction. Federal income tax forms 2011 The numerator of the fraction is the number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in the United States in connection with the project. Federal income tax forms 2011 The denominator of the fraction is the total number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in connection with the project. Federal income tax forms 2011 Geographical Basis Compensation you receive as an employee in the form of the following fringe benefits is sourced on a geographical basis. Federal income tax forms 2011 Housing. Federal income tax forms 2011 Education. Federal income tax forms 2011 Local transportation. Federal income tax forms 2011 Tax reimbursement. Federal income tax forms 2011 Hazardous or hardship duty pay as defined in Regulations section 1. Federal income tax forms 2011 861-4(b)(2)(ii)(D)(5). Federal income tax forms 2011 Moving expense reimbursement. Federal income tax forms 2011 The amount of fringe benefits must be reasonable and you must substantiate them by adequate records or by sufficient evidence. Federal income tax forms 2011 Principal place of work. Federal income tax forms 2011   The above fringe benefits, except for tax reimbursement and hazardous or hardship duty pay, are sourced based on your principal place of work. Federal income tax forms 2011 Your principal place of work is usually the place where you spend most of your working time. Federal income tax forms 2011 This could be your office, plant, store, shop, or other location. Federal income tax forms 2011 If there is no one place where you spend most of your working time, your main job location is the place where your work is centered, such as where you report for work or are otherwise required to “base” your work. Federal income tax forms 2011   If you have more than one job at any time, your main job location depends on the facts in each case. Federal income tax forms 2011 The more important factors to be considered are: The total time you spend at each place, The amount of work you do at each place, and How much money you earn at each place. Federal income tax forms 2011 Housing. Federal income tax forms 2011   The source of a housing fringe benefit is determined based on the location of your principal place of work. Federal income tax forms 2011 A housing fringe benefit includes payments to you or on your behalf (and your family's if your family resides with you) only for the following. Federal income tax forms 2011 Rent. Federal income tax forms 2011 Utilities (except telephone charges). Federal income tax forms 2011 Real and personal property insurance. Federal income tax forms 2011 Occupancy taxes not deductible under section 164 or 216(a). Federal income tax forms 2011 Nonrefundable fees for securing a leasehold. Federal income tax forms 2011 Rental of furniture and accessories. Federal income tax forms 2011 Household repairs. Federal income tax forms 2011 Residential parking. Federal income tax forms 2011 Fair rental value of housing provided in kind by your employer. Federal income tax forms 2011   A housing fringe benefit does not include: Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation), The cost of buying property, including principal payments on a mortgage, The cost of domestic labor (maids, gardeners, etc. Federal income tax forms 2011 ), Pay television subscriptions, Improvements and other expenses that increase the value or appreciably prolong the life of property, Purchased furniture or accessories, Depreciation or amortization of property or improvements, The value of meals or lodging that you exclude from gross income, or The value of meals or lodging that you deduct as moving expenses. Federal income tax forms 2011 Education. Federal income tax forms 2011   The source of an education fringe benefit for the education expenses of your dependents is determined based on the location of your principal place of work. Federal income tax forms 2011 An education fringe benefit includes payments only for the following expenses for education at an elementary or secondary school. Federal income tax forms 2011 Tuition, fees, academic tutoring, special needs services for a special needs student, books, supplies, and other equipment. Federal income tax forms 2011 Room and board and uniforms that are required or provided by the school in connection with enrollment or attendance. Federal income tax forms 2011 Local transportation. Federal income tax forms 2011   The source of a local transportation fringe benefit is determined based on the location of your principal place of work. Federal income tax forms 2011 Your local transportation fringe benefit is the amount that you receive as compensation for local transportation for you or your spouse or dependents at the location of your principal place of work. Federal income tax forms 2011 The amount treated as a local transportation fringe benefit is limited to actual expenses incurred for local transportation and the fair rental value of any employer-provided vehicle used predominantly by you, your spouse, or your dependents for local transportation. Federal income tax forms 2011 Actual expenses do not include the cost (including interest) of any vehicle purchased by you or on your behalf. Federal income tax forms 2011 Tax reimbursement. Federal income tax forms 2011   The source of a tax reimbursement fringe benefit is determined based on the location of the jurisdiction that imposed the tax for which you are reimbursed. Federal income tax forms 2011 Moving expense reimbursement. Federal income tax forms 2011   The source of a moving expense reimbursement is generally based on the location of your new principal place of work. Federal income tax forms 2011 However, the source is determined based on the location of your former principal place of work if you provide sufficient evidence that such determination of source is more appropriate under the facts and circumstances of your case. Federal income tax forms 2011 Sufficient evidence generally requires an agreement between you and your employer, or a written statement of company policy, which is reduced to writing before the move and which is entered into or established to induce you or other employees to move to another country. Federal income tax forms 2011 The written statement or agreement must state that your employer will reimburse you for moving expenses that you incur to return to your former principal place of work regardless of whether you continue to work for your employer after returning to that location. Federal income tax forms 2011 It may contain certain conditions upon which the right to reimbursement is determined as long as those conditions set forth standards that are definitely ascertainable and can only be fulfilled prior to, or through completion of, your return move to your former principal place of work. Federal income tax forms 2011 Alternative Basis If you are an employee, you can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your compensation than the time or geographical basis. Federal income tax forms 2011 If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your compensation. Federal income tax forms 2011 Also, if your total compensation from all sources is $250,000 or more, check “Yes” to both questions on line K on page 5 of Form 1040NR, and attach a written statement to your tax return that sets forth all of the following. Federal income tax forms 2011 Your name and social security number (written across the top of the statement). Federal income tax forms 2011 The specific compensation income, or the specific fringe benefit, for which you are using the alternative basis. Federal income tax forms 2011 For each item in (2), the alternative basis of allocation of source used. Federal income tax forms 2011 For each item in (2), a computation showing how the alternative allocation was computed. Federal income tax forms 2011 A comparison of the dollar amount of the U. Federal income tax forms 2011 S. Federal income tax forms 2011 compensation and foreign compensation sourced under both the alternative basis and the time or geographical basis discussed earlier. Federal income tax forms 2011 Transportation Income Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to the use of any vessel or aircraft. Federal income tax forms 2011 This is true whether the vessel or aircraft is owned, hired, or leased. Federal income tax forms 2011 The term “vessel or aircraft” includes any container used in connection with a vessel or aircraft. Federal income tax forms 2011 All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. Federal income tax forms 2011 If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States. Federal income tax forms 2011 For transportation income from personal services, 50% of the income is U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income if the transportation is between the United States and a U. Federal income tax forms 2011 S. Federal income tax forms 2011 possession. Federal income tax forms 2011 For nonresident aliens, this only applies to income derived from, or in connection with, an aircraft. Federal income tax forms 2011 For information on how U. Federal income tax forms 2011 S. Federal income tax forms 2011 source transportation income is taxed, see chapter 4. Federal income tax forms 2011 Scholarships, Grants, Prizes, and Awards Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds. Federal income tax forms 2011 However, see Activities to be performed outside the United States , later. Federal income tax forms 2011 For example, payments for research or study in the United States made by the United States, a noncorporate U. Federal income tax forms 2011 S. Federal income tax forms 2011 resident, or a domestic corporation, are from U. Federal income tax forms 2011 S. Federal income tax forms 2011 sources. Federal income tax forms 2011 Similar payments from a foreign government or foreign corporation are foreign source payments even though the funds may be disbursed through a U. Federal income tax forms 2011 S. Federal income tax forms 2011 agent. Federal income tax forms 2011 Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources. Federal income tax forms 2011 Activities to be performed outside the United States. Federal income tax forms 2011   Scholarships, fellowship grants, targeted grants, and achievement awards received by nonresident aliens for activities performed, or to be performed, outside the United States are not U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income. Federal income tax forms 2011    These rules do not apply to amounts paid as salary or other compensation for services. Federal income tax forms 2011 See Personal Services, earlier, for the source rules that apply. Federal income tax forms 2011 Pensions and Annuities If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension payment is from U. Federal income tax forms 2011 S. Federal income tax forms 2011 sources. Federal income tax forms 2011 That part is the amount attributable to earnings of the pension plan and the employer contributions made for services performed in the United States. Federal income tax forms 2011 This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded). Federal income tax forms 2011 If you performed services as an employee of the United States, you may receive a distribution from the U. Federal income tax forms 2011 S. Federal income tax forms 2011 Government under a plan, such as the Civil Service Retirement System, that is treated as a qualified pension plan. Federal income tax forms 2011 Your U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income is the otherwise taxable amount of the distribution that is attributable to your total U. Federal income tax forms 2011 S. Federal income tax forms 2011 Government basic pay other than tax-exempt pay for services performed outside the United States. Federal income tax forms 2011 Rents or Royalties Your U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income includes rent and royalty income received during the tax year from property located in the United States or from any interest in that property. Federal income tax forms 2011 U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property. Federal income tax forms 2011 Real Property Real property is land and buildings and generally anything built on, growing on, or attached to land. Federal income tax forms 2011 Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real property located in the United States. Federal income tax forms 2011 Natural resources. Federal income tax forms 2011   The income from the sale of products of any farm, mine, oil or gas well, other natural deposit, or timber located in the United States and sold in a foreign country, or located in a foreign country and sold in the United States, is partly from sources in the United States. Federal income tax forms 2011 For information on determining that part, see section 1. Federal income tax forms 2011 863-1(b) of the regulations. Federal income tax forms 2011 Table 2-1. Federal income tax forms 2011 Summary of Source Rules for Income of Nonresident Aliens Item of income Factor determining source Salaries, wages, other compensation Where services performed Business income:   Personal services Where services performed Sale of inventory—purchased Where sold Sale of inventory—produced Allocation Interest Residence of payer Dividends Whether a U. Federal income tax forms 2011 S. Federal income tax forms 2011 or foreign corporation* Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Federal income tax forms 2011 Where property is used Sale of real property Location of property Sale of personal property Seller's tax home (but see Personal Property , later, for exceptions) Pension distributions attributable to contributions Where services were performed that earned the pension Investment earnings on pension contributions Location of pension trust Sale of natural resources Allocation based on fair market value of product at export terminal. Federal income tax forms 2011 For more information, see section 1. Federal income tax forms 2011 863-1(b) of the regulations. Federal income tax forms 2011 *Exceptions include: a) Dividends paid by a U. Federal income tax forms 2011 S. Federal income tax forms 2011 corporation are foreign source if the corporation elects the  American Samoa economic development credit. Federal income tax forms 2011  b) Part of a dividend paid by a foreign corporation is U. Federal income tax forms 2011 S. Federal income tax forms 2011 source if at least 25% of the  corporation's gross income is effectively connected with a U. Federal income tax forms 2011 S. Federal income tax forms 2011 trade or business for the  3 tax years before the year in which the dividends are declared. Federal income tax forms 2011 Personal Property Personal property is property, such as machinery, equipment, or furniture, that is not real property. Federal income tax forms 2011 Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax home in the United States. Federal income tax forms 2011 If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside the United States. Federal income tax forms 2011 Tax home. Federal income tax forms 2011   Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Federal income tax forms 2011 Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. Federal income tax forms 2011 If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. Federal income tax forms 2011 If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. Federal income tax forms 2011 Inventory property. Federal income tax forms 2011   Inventory property is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Federal income tax forms 2011 Income from the sale of inventory that you purchased is sourced where the property is sold. Federal income tax forms 2011 Generally, this is where title to the property passes to the buyer. Federal income tax forms 2011 For example, income from the sale of inventory in the United States is U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income, whether you purchased it in the United States or in a foreign country. Federal income tax forms 2011   Income from the sale of inventory property that you produced in the United States and sold outside the United States (or vice versa) is partly from sources in the United States and partly from sources outside the United States. Federal income tax forms 2011 For information on making this allocation, see section 1. Federal income tax forms 2011 863-3 of the regulations. Federal income tax forms 2011   These rules apply even if your tax home is not in the United States. Federal income tax forms 2011 Depreciable property. Federal income tax forms 2011   To determine the source of any gain from the sale of depreciable personal property, you must first figure the part of the gain that is not more than the total depreciation adjustments on the property. Federal income tax forms 2011 You allocate this part of the gain to sources in the United States based on the ratio of U. Federal income tax forms 2011 S. Federal income tax forms 2011 depreciation adjustments to total depreciation adjustments. Federal income tax forms 2011 The rest of this part of the gain is considered to be from sources outside the United States. Federal income tax forms 2011   For this purpose, “U. Federal income tax forms 2011 S. Federal income tax forms 2011 depreciation adjustments” are the depreciation adjustments to the basis of the property that are allowable in figuring taxable income from U. Federal income tax forms 2011 S. Federal income tax forms 2011 sources. Federal income tax forms 2011 However, if the property is used predominantly in the United States during a tax year, all depreciation deductions allowable for that year are treated as U. Federal income tax forms 2011 S. Federal income tax forms 2011 depreciation adjustments. Federal income tax forms 2011 But there are some exceptions for certain transportation, communications, and other property used internationally. Federal income tax forms 2011   Gain from the sale of depreciable property that is more than the total depreciation adjustments on the property is sourced as if the property were inventory property, as discussed above. Federal income tax forms 2011   A loss is sourced in the same way as the depreciation deductions were sourced. Federal income tax forms 2011 However, if the property was used predominantly in the United States, the entire loss reduces U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income. Federal income tax forms 2011   The basis of property usually means the cost (money plus the fair market value of other property or services) of property you acquire. Federal income tax forms 2011 Depreciation is an amount deducted to recover the cost or other basis of a trade or business asset. Federal income tax forms 2011 The amount you can deduct depends on the property's cost, when you began using the property, how long it will take to recover your cost, and which depreciation method you use. Federal income tax forms 2011 A depreciation deduction is any deduction for depreciation or amortization or any other allowable deduction that treats a capital expenditure as a deductible expense. Federal income tax forms 2011 Intangible property. Federal income tax forms 2011   Intangible property includes patents, copyrights, secret processes or formulas, goodwill, trademarks, trade names, or other like property. Federal income tax forms 2011 The gain from the sale of amortizable or depreciable intangible property, up to the previously allowable amortization or depreciation deductions, is sourced in the same way as the original deductions were sourced. Federal income tax forms 2011 This is the same as the source rule for gain from the sale of depreciable property. Federal income tax forms 2011 See Depreciable property , earlier, for details on how to apply this rule. Federal income tax forms 2011   Gain in excess of the amortization or depreciation deductions is sourced in the country where the property is used if the income from the sale is contingent on the productivity, use, or disposition of that property. Federal income tax forms 2011 If the income is not contingent on the productivity, use, or disposition of the property, the income is sourced according to your tax home as discussed earlier. Federal income tax forms 2011 If payments for goodwill do not depend on its productivity, use, or disposition, their source is the country in which the goodwill was generated. Federal income tax forms 2011 Sales through offices or fixed places of business. Federal income tax forms 2011   Despite any of the earlier rules, if you do not have a tax home in the United States, but you maintain an office or other fixed place of business in the United States, treat the income from any sale of personal property (including inventory property) that is attributable to that office or place of business as U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income. Federal income tax forms 2011 However, this rule does not apply to sales of inventory property for use, disposition, or consumption outside the United States if your office or other fixed place of business outside the United States materially participated in the sale. Federal income tax forms 2011   If you have a tax home in the United States but maintain an office or other fixed place of business outside the United States, income from sales of personal property, other than inventory, depreciable property, or intangibles, that is attributable to that foreign office or place of business may be treated as U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income. Federal income tax forms 2011 The income is treated as U. Federal income tax forms 2011 S. Federal income tax forms 2011 source income if an income tax of less than 10% of the income from the sale is paid to a foreign country. Federal income tax forms 2011 This rule also applies to losses if the foreign country would have imposed an income tax of less than 10% had the sale resulted in a gain. Federal income tax forms 2011 Community Income If you are married and you or your spouse is subject to the community property laws of a foreign country, a U. Federal income tax forms 2011 S. Federal income tax forms 2011 state, or a U. Federal income tax forms 2011 S. Federal income tax forms 2011 possession, you generally must follow those laws to determine the income of yourself and your spouse for U. Federal income tax forms 2011 S. Federal income tax forms 2011 tax purposes. Federal income tax forms 2011 But you must disregard certain community property laws if: Both you and your spouse are nonresident aliens, or One of you is a nonresident alien and the other is a U. Federal income tax forms 2011 S. Federal income tax forms 2011 citizen or resident and you do not both choose to be treated as U. Federal income tax forms 2011 S. Federal income tax forms 2011 residents as explained in chapter 1. Federal income tax forms 2011 In these cases, you and your spouse must report community income as explained later. Federal income tax forms 2011 Earned income. Federal income tax forms 2011   Earned income of a spouse, other than trade or business income and a partner's distributive share of partnership income, is treated as the income of the spouse whose services produced the income. Federal income tax forms 2011 That spouse must report all of it on his or her separate return. Federal income tax forms 2011 Trade or business income. Federal income tax forms 2011   Trade or business income, other than a partner's distributive share of partnership income, is treated as the income of the spouse carrying on the trade or business. Federal income tax forms 2011 That spouse must report all of it on his or her separate return. Federal income tax forms 2011 Partnership income (or loss). Federal income tax forms 2011   A partner's distributive share of partnership income (or loss) is treated as the income (or loss) of the partner. Federal income tax forms 2011 The partner must report all of it on his or her separate return. Federal income tax forms 2011 Separate property income. Federal income tax forms 2011   Income derived from the separate property of one spouse (and which is not earned income, trade or business income, or partnership distributive share income) is treated as the income of that spouse. Federal income tax forms 2011 That spouse must report all of it on his or her separate return. Federal income tax forms 2011 Use the appropriate community property law to determine what is separate property. Federal income tax forms 2011 Other community income. Federal income tax forms 2011   All other community income is treated as provided by the applicable community property laws. Federal income tax forms 2011 Prev  Up  Next   Home   More Online Publications
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The Federal Income Tax Forms 2011

Federal income tax forms 2011 2. Federal income tax forms 2011   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. Federal income tax forms 2011 Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. Federal income tax forms 2011 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). Federal income tax forms 2011 You must do this to figure your net capital gain or loss. Federal income tax forms 2011 For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. Federal income tax forms 2011 See Capital Gains Tax Rates in chapter 4. Federal income tax forms 2011 Your deduction for a net capital loss may be limited. Federal income tax forms 2011 See Treatment of Capital Losses in chapter 4. Federal income tax forms 2011 Capital gain or loss. Federal income tax forms 2011   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. Federal income tax forms 2011 You also may have a capital gain if your section 1231 transactions result in a net gain. Federal income tax forms 2011 Section 1231 transactions. Federal income tax forms 2011   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. Federal income tax forms 2011 They also include certain involuntary conversions of business or investment property, including capital assets. Federal income tax forms 2011 See Section 1231 Gains and Losses in chapter 3 for more information. Federal income tax forms 2011 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. Federal income tax forms 2011 Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. Federal income tax forms 2011 For exceptions, see Noncapital Assets, later. Federal income tax forms 2011 The following items are examples of capital assets. Federal income tax forms 2011 Stocks and bonds. Federal income tax forms 2011 A home owned and occupied by you and your family. Federal income tax forms 2011 Timber grown on your home property or investment property, even if you make casual sales of the timber. Federal income tax forms 2011 Household furnishings. Federal income tax forms 2011 A car used for pleasure or commuting. Federal income tax forms 2011 Coin or stamp collections. Federal income tax forms 2011 Gems and jewelry. Federal income tax forms 2011 Gold, silver, and other metals. Federal income tax forms 2011 Personal-use property. Federal income tax forms 2011   Generally, property held for personal use is a capital asset. Federal income tax forms 2011 Gain from a sale or exchange of that property is a capital gain. Federal income tax forms 2011 Loss from the sale or exchange of that property is not deductible. Federal income tax forms 2011 You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Federal income tax forms 2011 Investment property. Federal income tax forms 2011   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. Federal income tax forms 2011 This treatment does not apply to property used to produce rental income. Federal income tax forms 2011 See Business assets, later, under Noncapital Assets. Federal income tax forms 2011 Release of restriction on land. Federal income tax forms 2011   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. Federal income tax forms 2011 Noncapital Assets A noncapital asset is property that is not a capital asset. Federal income tax forms 2011 The following kinds of property are not capital assets. Federal income tax forms 2011 Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Federal income tax forms 2011 Inventories are discussed in Publication 538, Accounting Periods and Methods. Federal income tax forms 2011 But, see the Tip below. Federal income tax forms 2011 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. Federal income tax forms 2011 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). Federal income tax forms 2011 Sales of this type of property are discussed in chapter 3. Federal income tax forms 2011 Real property used in your trade or business or as rental property, even if the property is fully depreciated. Federal income tax forms 2011 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. Federal income tax forms 2011 But, see the Tip below. Federal income tax forms 2011 U. Federal income tax forms 2011 S. Federal income tax forms 2011 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. Federal income tax forms 2011 Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. Federal income tax forms 2011 It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Federal income tax forms 2011 You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. Federal income tax forms 2011 See chapter 4 of Publication 550 for details. Federal income tax forms 2011 Property held mainly for sale to customers. Federal income tax forms 2011   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. Federal income tax forms 2011 Inventories are discussed in Publication 538. Federal income tax forms 2011 Business assets. Federal income tax forms 2011   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. Federal income tax forms 2011 The sale or disposition of business property is discussed in chapter 3. Federal income tax forms 2011 Letters and memoranda. Federal income tax forms 2011   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. Federal income tax forms 2011 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. Federal income tax forms 2011 For this purpose, letters and memoranda addressed to you are considered prepared for you. Federal income tax forms 2011 If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. Federal income tax forms 2011 Commodities derivative financial instrument. Federal income tax forms 2011   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). Federal income tax forms 2011 Commodities derivative dealer. Federal income tax forms 2011   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. Federal income tax forms 2011 Hedging transaction. Federal income tax forms 2011   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. Federal income tax forms 2011 Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. Federal income tax forms 2011 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. Federal income tax forms 2011 Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. Federal income tax forms 2011 If these rules apply, gains may be treated as ordinary income and losses may not be deductible. Federal income tax forms 2011 See Transfers to Spouse in chapter 1 for rules that apply to spouses. Federal income tax forms 2011 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. Federal income tax forms 2011 It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. Federal income tax forms 2011 Depreciable property transaction. Federal income tax forms 2011   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. Federal income tax forms 2011 A person and the person's controlled entity or entities. Federal income tax forms 2011 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. Federal income tax forms 2011 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). Federal income tax forms 2011 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). Federal income tax forms 2011 Controlled entity. Federal income tax forms 2011   A person's controlled entity is either of the following. Federal income tax forms 2011 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. Federal income tax forms 2011 An entity whose relationship with that person is one of the following. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. Federal income tax forms 2011 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. Federal income tax forms 2011 Controlled partnership transaction. Federal income tax forms 2011   A gain recognized in a controlled partnership transaction may be ordinary income. Federal income tax forms 2011 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. Federal income tax forms 2011   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. Federal income tax forms 2011 A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Federal income tax forms 2011 Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Federal income tax forms 2011 Determining ownership. Federal income tax forms 2011   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. Federal income tax forms 2011 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. Federal income tax forms 2011 (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. Federal income tax forms 2011 ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Federal income tax forms 2011 Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. Federal income tax forms 2011 This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. Federal income tax forms 2011 For the list of related persons, see Related persons next. Federal income tax forms 2011 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. Federal income tax forms 2011 The gain on each item is taxable. Federal income tax forms 2011 The loss on any item is nondeductible. Federal income tax forms 2011 Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. Federal income tax forms 2011 Related persons. Federal income tax forms 2011   The following is a list of related persons. Federal income tax forms 2011 Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Federal income tax forms 2011 ), and lineal descendants (children, grandchildren, etc. Federal income tax forms 2011 ). Federal income tax forms 2011 An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Federal income tax forms 2011 Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. Federal income tax forms 2011 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. Federal income tax forms 2011 A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Federal income tax forms 2011 Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Federal income tax forms 2011 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. Federal income tax forms 2011 An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. Federal income tax forms 2011 Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Federal income tax forms 2011 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. Federal income tax forms 2011 Partnership interests. Federal income tax forms 2011   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. Federal income tax forms 2011 Controlled groups. Federal income tax forms 2011   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. Federal income tax forms 2011   For more information, see section 267(f) of the Internal Revenue Code. Federal income tax forms 2011 Ownership of stock or partnership interests. Federal income tax forms 2011   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. Federal income tax forms 2011 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. Federal income tax forms 2011 (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. Federal income tax forms 2011 ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Federal income tax forms 2011 Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 Indirect transactions. Federal income tax forms 2011   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. Federal income tax forms 2011 This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. Federal income tax forms 2011 Property received from a related person. Federal income tax forms 2011   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. Federal income tax forms 2011 This rule applies only to the original transferee. Federal income tax forms 2011 Example 1. Federal income tax forms 2011 Your brother sold stock to you for $7,600. Federal income tax forms 2011 His cost basis was $10,000. Federal income tax forms 2011 His loss of $2,400 was not deductible. Federal income tax forms 2011 You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). Federal income tax forms 2011 Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. Federal income tax forms 2011 Example 2. Federal income tax forms 2011 Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. Federal income tax forms 2011 Your recognized loss is only $700 ($7,600 − $6,900). Federal income tax forms 2011 You cannot deduct the loss not allowed to your brother. Federal income tax forms 2011 Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. Federal income tax forms 2011 Sale of a Business The sale of a business usually is not a sale of one asset. Federal income tax forms 2011 Instead, all the assets of the business are sold. Federal income tax forms 2011 Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Federal income tax forms 2011 A business usually has many assets. Federal income tax forms 2011 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. Federal income tax forms 2011 The gain or loss on each asset is figured separately. Federal income tax forms 2011 The sale of capital assets results in capital gain or loss. Federal income tax forms 2011 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). Federal income tax forms 2011 The sale of inventory results in ordinary income or loss. Federal income tax forms 2011 Partnership interests. Federal income tax forms 2011   An interest in a partnership or joint venture is treated as a capital asset when sold. Federal income tax forms 2011 The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Federal income tax forms 2011 For more information, see Disposition of Partner's Interest in Publication 541. Federal income tax forms 2011 Corporation interests. Federal income tax forms 2011   Your interest in a corporation is represented by stock certificates. Federal income tax forms 2011 When you sell these certificates, you usually realize capital gain or loss. Federal income tax forms 2011 For information on the sale of stock, see chapter 4 in Publication 550. Federal income tax forms 2011 Corporate liquidations. Federal income tax forms 2011   Corporate liquidations of property generally are treated as a sale or exchange. Federal income tax forms 2011 Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Federal income tax forms 2011 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. Federal income tax forms 2011   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. Federal income tax forms 2011 For more information, see section 332 of the Internal Revenue Code and the related regulations. Federal income tax forms 2011 Allocation of consideration paid for a business. Federal income tax forms 2011   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. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 It also determines the buyer's basis in the business assets. Federal income tax forms 2011 Consideration. Federal income tax forms 2011   The buyer's consideration is the cost of the assets acquired. Federal income tax forms 2011 The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. Federal income tax forms 2011 Residual method. Federal income tax forms 2011   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. Federal income tax forms 2011 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. Federal income tax forms 2011 Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. Federal income tax forms 2011   A group of assets constitutes a trade or business if either of the following applies. Federal income tax forms 2011 Goodwill or going concern value could, under any circumstances, attach to them. Federal income tax forms 2011 The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. Federal income tax forms 2011   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). Federal income tax forms 2011 The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Federal income tax forms 2011 See Classes of assets next for the complete order. Federal income tax forms 2011 Classes of assets. Federal income tax forms 2011   The following definitions are the classifications for deemed or actual asset acquisitions. Federal income tax forms 2011 Allocate the consideration among the assets in the following order. Federal income tax forms 2011 The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Federal income tax forms 2011 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. Federal income tax forms 2011 Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Federal income tax forms 2011 Class II assets are certificates of deposit, U. Federal income tax forms 2011 S. Federal income tax forms 2011 Government securities, foreign currency, and actively traded personal property, including stock and securities. Federal income tax forms 2011 Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Federal income tax forms 2011 However, see section 1. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. Federal income tax forms 2011    Note. Federal income tax forms 2011 Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. Federal income tax forms 2011 Class VI assets are section 197 intangibles (other than goodwill and going concern value). Federal income tax forms 2011 Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). Federal income tax forms 2011   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. Federal income tax forms 2011 For example, if an asset is described in both Class II and Class IV, choose Class II. Federal income tax forms 2011 Example. Federal income tax forms 2011 The total paid in the sale of the assets of Company SKB is $21,000. Federal income tax forms 2011 No cash or deposit accounts or similar accounts were sold. Federal income tax forms 2011 The company's U. Federal income tax forms 2011 S. Federal income tax forms 2011 Government securities sold had a fair market value of $3,200. Federal income tax forms 2011 The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. Federal income tax forms 2011 Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. Federal income tax forms 2011 S. Federal income tax forms 2011 Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. Federal income tax forms 2011 Agreement. Federal income tax forms 2011   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. Federal income tax forms 2011 This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Federal income tax forms 2011 Reporting requirement. Federal income tax forms 2011   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. Federal income tax forms 2011 Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Federal income tax forms 2011 Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Federal income tax forms 2011 See the Instructions for Form 8594. Federal income tax forms 2011 Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. Federal income tax forms 2011 It includes such items as patents, copyrights, and the goodwill value of a business. Federal income tax forms 2011 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. Federal income tax forms 2011 The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 The following discussions explain special rules that apply to certain dispositions of intangible property. Federal income tax forms 2011 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. Federal income tax forms 2011 They include the following assets. Federal income tax forms 2011 Goodwill. Federal income tax forms 2011 Going concern value. Federal income tax forms 2011 Workforce in place. Federal income tax forms 2011 Business books and records, operating systems, and other information bases. Federal income tax forms 2011 Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. Federal income tax forms 2011 Customer-based intangibles. Federal income tax forms 2011 Supplier-based intangibles. Federal income tax forms 2011 Licenses, permits, and other rights granted by a governmental unit. Federal income tax forms 2011 Covenants not to compete entered into in connection with the acquisition of a business. Federal income tax forms 2011 Franchises, trademarks, and trade names. Federal income tax forms 2011 See chapter 8 of Publication 535 for a description of each intangible. Federal income tax forms 2011 Dispositions. Federal income tax forms 2011   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. Federal income tax forms 2011 Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. Federal income tax forms 2011 If you retain more than one section 197 intangible, increase each intangible's adjusted basis. Federal income tax forms 2011 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. Federal income tax forms 2011   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. Federal income tax forms 2011 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. Federal income tax forms 2011 Covenant not to compete. Federal income tax forms 2011   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. Federal income tax forms 2011 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. Federal income tax forms 2011 Anti-churning rules. Federal income tax forms 2011   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. Federal income tax forms 2011 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. Federal income tax forms 2011 Recognize gain on the transfer of the property. Federal income tax forms 2011 Pay income tax on the gain at the highest tax rate. Federal income tax forms 2011   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. Federal income tax forms 2011 But each partner or shareholder must pay the tax on his or her share of gain. Federal income tax forms 2011   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. Federal income tax forms 2011 You must file the tax return by the due date (including extensions). Federal income tax forms 2011 You must also notify the transferee of the election in writing by the due date of the return. Federal income tax forms 2011   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). Federal income tax forms 2011 Attach the statement to the amended return and write “Filed pursuant to section 301. Federal income tax forms 2011 9100-2” at the top of the statement. Federal income tax forms 2011 File the amended return at the same address the original return was filed. Federal income tax forms 2011 For more information about making the election, see Regulations section 1. Federal income tax forms 2011 197-2(h)(9). Federal income tax forms 2011 For information about reporting the tax on your income tax return, see the Instructions for Form 4797. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. Federal income tax forms 2011 This treatment applies to your transfer of a patent if you meet all the following conditions. Federal income tax forms 2011 You are the holder of the patent. Federal income tax forms 2011 You transfer the patent other than by gift, inheritance, or devise. Federal income tax forms 2011 You transfer all substantial rights to the patent or an undivided interest in all such rights. Federal income tax forms 2011 You do not transfer the patent to a related person. Federal income tax forms 2011 Holder. Federal income tax forms 2011   You are the holder of a patent if you are either of the following. Federal income tax forms 2011 The individual whose effort created the patent property and who qualifies as the original and first inventor. Federal income tax forms 2011 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. Federal income tax forms 2011 All substantial rights. Federal income tax forms 2011   All substantial rights to patent property are all rights that have value when they are transferred. Federal income tax forms 2011 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. Federal income tax forms 2011   All substantial rights to a patent are not transferred if any of the following apply to the transfer. Federal income tax forms 2011 The rights are limited geographically within a country. Federal income tax forms 2011 The rights are limited to a period less than the remaining life of the patent. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 Related persons. Federal income tax forms 2011   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. Federal income tax forms 2011 Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. Federal income tax forms 2011 Substitute “25% or more” ownership for “more than 50%. Federal income tax forms 2011 ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. Federal income tax forms 2011 For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. Federal income tax forms 2011 The brother-sister exception does not apply because the trust relationship is independent of family status. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 Significant power, right, or continuing interest. Federal income tax forms 2011   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. Federal income tax forms 2011   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. Federal income tax forms 2011 A right to disapprove any assignment of the interest, or any part of it. Federal income tax forms 2011 A right to end the agreement at will. Federal income tax forms 2011 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. Federal income tax forms 2011 A right to make the recipient sell or advertise only your products or services. Federal income tax forms 2011 A right to make the recipient buy most supplies and equipment from you. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. Federal income tax forms 2011 See section 1237 of the Internal Revenue Code. Federal income tax forms 2011 Timber Standing timber held as investment property is a capital asset. Federal income tax forms 2011 Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. Federal income tax forms 2011 If you held the timber primarily for sale to customers, it is not a capital asset. Federal income tax forms 2011 Gain or loss on its sale is ordinary business income or loss. Federal income tax forms 2011 It is reported in the gross receipts or sales and cost of goods sold items of your return. Federal income tax forms 2011 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. Federal income tax forms 2011 These sales constitute a very minor part of their farm businesses. Federal income tax forms 2011 In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. Federal income tax forms 2011 , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. Federal income tax forms 2011 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. Federal income tax forms 2011 Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Federal income tax forms 2011 This is true whether the timber is cut under contract or whether you cut it yourself. Federal income tax forms 2011 Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. Federal income tax forms 2011 See chapter 3. Federal income tax forms 2011 Gain or loss is reported on Form 4797. Federal income tax forms 2011 Christmas trees. Federal income tax forms 2011   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. Federal income tax forms 2011 They qualify for both rules discussed below. Federal income tax forms 2011 Election to treat cutting as a sale or exchange. Federal income tax forms 2011   Under the general rule, the cutting of timber results in no gain or loss. Federal income tax forms 2011 It is not until a sale or exchange occurs that gain or loss is realized. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 Any later sale results in ordinary business income or loss. Federal income tax forms 2011 See Example, later. Federal income tax forms 2011   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. Federal income tax forms 2011 Making the election. Federal income tax forms 2011   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. Federal income tax forms 2011 You do not have to make the election in the first year you cut timber. Federal income tax forms 2011 You can make it in any year to which the election would apply. Federal income tax forms 2011 If the timber is partnership property, the election is made on the partnership return. Federal income tax forms 2011 This election cannot be made on an amended return. Federal income tax forms 2011   Once you have made the election, it remains in effect for all later years unless you cancel it. Federal income tax forms 2011   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. Federal income tax forms 2011 The prior election (and revocation) is disregarded for purposes of making a subsequent election. Federal income tax forms 2011 See Form T (Timber), Forest Activities Schedule, for more information. Federal income tax forms 2011 Gain or loss. Federal income tax forms 2011   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. Federal income tax forms 2011   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. Federal income tax forms 2011 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. Federal income tax forms 2011   Timber depletion is discussed in chapter 9 of Publication 535. Federal income tax forms 2011 Example. Federal income tax forms 2011 In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Federal income tax forms 2011 It had an adjusted basis for depletion of $40 per MBF. Federal income tax forms 2011 You are a calendar year taxpayer. Federal income tax forms 2011 On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. Federal income tax forms 2011 It was cut in April for sale. Federal income tax forms 2011 On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Federal income tax forms 2011 You report the difference between the fair market value and your adjusted basis for depletion as a gain. Federal income tax forms 2011 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. Federal income tax forms 2011 You figure your gain as follows. Federal income tax forms 2011 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. Federal income tax forms 2011 Outright sales of timber. Federal income tax forms 2011   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). Federal income tax forms 2011 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). Federal income tax forms 2011 Cutting contract. Federal income tax forms 2011   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Federal income tax forms 2011 You are the owner of the timber. Federal income tax forms 2011 You held the timber longer than 1 year before its disposal. Federal income tax forms 2011 You kept an economic interest in the timber. Federal income tax forms 2011   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. Federal income tax forms 2011   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. Federal income tax forms 2011 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. Federal income tax forms 2011 Date of disposal. Federal income tax forms 2011   The date of disposal is the date the timber is cut. Federal income tax forms 2011 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. Federal income tax forms 2011   This election applies only to figure the holding period of the timber. Federal income tax forms 2011 It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Federal income tax forms 2011   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Federal income tax forms 2011 The statement must identify the advance payments subject to the election and the contract under which they were made. Federal income tax forms 2011   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). Federal income tax forms 2011 Attach the statement to the amended return and write “Filed pursuant to section 301. Federal income tax forms 2011 9100-2” at the top of the statement. Federal income tax forms 2011 File the amended return at the same address the original return was filed. Federal income tax forms 2011 Owner. Federal income tax forms 2011   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. Federal income tax forms 2011 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. Federal income tax forms 2011 Tree stumps. Federal income tax forms 2011   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. Federal income tax forms 2011 Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Federal income tax forms 2011 However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Federal income tax forms 2011 Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Federal income tax forms 2011   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Federal income tax forms 2011 Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. Federal income tax forms 2011 , are capital assets except when they are held for sale by a dealer. Federal income tax forms 2011 Any gain or loss from their sale or exchange generally is a capital gain or loss. Federal income tax forms 2011 If you are a dealer, the amount received from the sale is ordinary business income. Federal income tax forms 2011 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. Federal income tax forms 2011 You owned the coal or iron ore longer than 1 year before its disposal. Federal income tax forms 2011 You kept an economic interest in the coal or iron ore. Federal income tax forms 2011 For this rule, the date the coal or iron ore is mined is considered the date of its disposal. Federal income tax forms 2011 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). Federal income tax forms 2011 This amount is included on Form 4797 along with your other section 1231 gains and losses. Federal income tax forms 2011 You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. Federal income tax forms 2011 If you own only an option to buy the coal in place, you do not qualify as an owner. Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. Federal income tax forms 2011 If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. Federal income tax forms 2011 Special rule. Federal income tax forms 2011   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. Federal income tax forms 2011 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). Federal income tax forms 2011 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. Federal income tax forms 2011 Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. Federal income tax forms 2011 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. Federal income tax forms 2011 An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). Federal income tax forms 2011 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. Federal income tax forms 2011 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. Federal income tax forms 2011 For more information, see chapter 4 of Publication 550. Federal income tax forms 2011 Prev  Up  Next   Home   More Online Publications