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File Taxes For 2011 Free

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File Taxes For 2011 Free

File taxes for 2011 free 11. File taxes for 2011 free   Casualties, Thefts, and Condemnations Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Casualties and TheftsDeductible losses. File taxes for 2011 free Nondeductible losses. File taxes for 2011 free Family pet. File taxes for 2011 free Progressive deterioration. File taxes for 2011 free Decline in market value of stock. File taxes for 2011 free Mislaid or lost property. File taxes for 2011 free Farming Losses How To Figure a Loss Deduction Limits on Losses of Personal-Use Property When Loss Is Deductible Proof of Loss Figuring a Gain Other Involuntary ConversionsCondemnation Irrigation Project Livestock Losses Tree Seedlings Postponing GainException. File taxes for 2011 free Related persons. File taxes for 2011 free Replacement Property Replacement Period How To Postpone Gain Disaster Area LossesWho is eligible. File taxes for 2011 free Covered disaster area. File taxes for 2011 free Reporting Gains and Losses Introduction This chapter explains the tax treatment of casualties, thefts, and condemnations. File taxes for 2011 free A casualty occurs when property is damaged, destroyed, or lost due to a sudden, unexpected, or unusual event. File taxes for 2011 free A theft occurs when property is stolen. File taxes for 2011 free A condemnation occurs when private property is legally taken for public use without the owner's consent. File taxes for 2011 free A casualty, theft, or condemnation may result in a deductible loss or taxable gain on your federal income tax return. File taxes for 2011 free You may have a deductible loss or a taxable gain even if only a portion of your property was affected by a casualty, theft, or condemnation. File taxes for 2011 free An involuntary conversion occurs when you receive money or other property as reimbursement for a casualty, theft, condemnation, disposition of property under threat of condemnation, or certain other events discussed in this chapter. File taxes for 2011 free If an involuntary conversion results in a gain and you buy qualified replacement property within the specified replacement period, you can postpone reporting the gain on your income tax return. File taxes for 2011 free For more information, see Postponing Gain , later. File taxes for 2011 free Topics - This chapter discusses: Casualties and thefts How to figure a loss or gain Other involuntary conversions Postponing gain Disaster area losses Reporting gains and losses Drought involving property connected with a trade or business or a transaction entered into for profit Useful Items - You may want to see: Publication 523 Selling Your Home 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 547 Casualties, Disasters, and Thefts 584 Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) 584-B Business Casualty, Disaster, and Theft Loss Workbook Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 4684 Casualties and Thefts 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. File taxes for 2011 free Casualties and Thefts If your property is destroyed, damaged, or stolen, you may have a deductible loss. File taxes for 2011 free If the insurance or other reimbursement is more than the adjusted basis of the destroyed, damaged, or stolen property, you may have a taxable gain. File taxes for 2011 free Casualty. File taxes for 2011 free   A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. File taxes for 2011 free A sudden event is one that is swift, not gradual or progressive. File taxes for 2011 free An unexpected event is one that is ordinarily unanticipated and unintended. File taxes for 2011 free An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. File taxes for 2011 free Deductible losses. File taxes for 2011 free   Deductible casualty losses can result from a number of different causes, including the following. File taxes for 2011 free Airplane crashes. File taxes for 2011 free Car, truck, or farm equipment accidents not resulting from your willful act or willful negligence. File taxes for 2011 free Earthquakes. File taxes for 2011 free Fires (but see Nondeductible losses next for exceptions). File taxes for 2011 free Floods. File taxes for 2011 free Freezing. File taxes for 2011 free Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses, in Publication 547. File taxes for 2011 free Lightning. File taxes for 2011 free Storms, including hurricanes and tornadoes. File taxes for 2011 free Terrorist attacks. File taxes for 2011 free Vandalism. File taxes for 2011 free Volcanic eruptions. File taxes for 2011 free Nondeductible losses. File taxes for 2011 free   A casualty loss is not deductible if the damage or destruction is caused by the following. File taxes for 2011 free Accidentally breaking articles such as glassware or china under normal conditions. File taxes for 2011 free A family pet (explained below). File taxes for 2011 free A fire if you willfully set it, or pay someone else to set it. File taxes for 2011 free A car, truck, or farm equipment accident if your willful negligence or willful act caused it. File taxes for 2011 free The same is true if the willful act or willful negligence of someone acting for you caused the accident. File taxes for 2011 free Progressive deterioration (explained below). File taxes for 2011 free Family pet. File taxes for 2011 free   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed above under Casualty are met. File taxes for 2011 free Example. File taxes for 2011 free You keep your horse in your yard. File taxes for 2011 free The ornamental fruit trees in your yard were damaged when your horse stripped the bark from them. File taxes for 2011 free Some of the trees were completely girdled and died. File taxes for 2011 free Because the damage was not unexpected or unusual, the loss is not deductible. File taxes for 2011 free Progressive deterioration. File taxes for 2011 free   Loss of property due to progressive deterioration is not deductible as a casualty loss. File taxes for 2011 free This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. File taxes for 2011 free Examples of damage due to progressive deterioration include damage from rust, corrosion, or termites. File taxes for 2011 free However, weather-related conditions or disease may cause another type of involuntary conversion. File taxes for 2011 free See Other Involuntary Conversions , later. File taxes for 2011 free Theft. File taxes for 2011 free   A theft is the taking and removing of money or property with the intent to deprive the owner of it. File taxes for 2011 free The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. File taxes for 2011 free You do not need to show a conviction for theft. File taxes for 2011 free   Theft includes the taking of money or property by the following means: Blackmail, Burglary, Embezzlement, Extortion, Kidnapping for ransom, Larceny, Robbery, or Threats. File taxes for 2011 free The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. File taxes for 2011 free Decline in market value of stock. File taxes for 2011 free   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. File taxes for 2011 free However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. File taxes for 2011 free You report a capital loss on Schedule D (Form 1040). File taxes for 2011 free For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. File taxes for 2011 free Mislaid or lost property. File taxes for 2011 free   The simple disappearance of money or property is not a theft. File taxes for 2011 free However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. File taxes for 2011 free Example. File taxes for 2011 free A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. File taxes for 2011 free The diamond falls from the ring and is never found. File taxes for 2011 free The loss of the diamond is a casualty. File taxes for 2011 free Farming Losses You can deduct certain casualty or theft losses that occur in the business of farming. File taxes for 2011 free The following is a discussion of some losses you can deduct and some you cannot deduct. File taxes for 2011 free Livestock or produce bought for resale. File taxes for 2011 free   Casualty or theft losses of livestock or produce bought for resale are deductible if you report your income on the cash method. File taxes for 2011 free If you report your income on an accrual method, take casualty and theft losses on property bought for resale by omitting the item from the closing inventory for the year of the loss. File taxes for 2011 free You cannot take a separate deduction. File taxes for 2011 free Livestock, plants, produce, and crops raised for sale. File taxes for 2011 free   Losses of livestock, plants, produce, and crops raised for sale are generally not deductible if you report your income on the cash method. File taxes for 2011 free You have already deducted the cost of raising these items as farm expenses, so their basis is equal to zero. File taxes for 2011 free   For plants with a preproductive period of more than 2 years, you may have a deductible loss if you have a tax basis in the plants. File taxes for 2011 free You usually have a tax basis if you capitalized the expenses associated with these plants under the uniform capitalization rules. File taxes for 2011 free The uniform capitalization rules are discussed in chapter 6. File taxes for 2011 free   If you report your income on an accrual method, casualty or theft losses are deductible only if you included the items in your inventory at the beginning of your tax year. File taxes for 2011 free You get the deduction by omitting the item from your inventory at the close of your tax year. File taxes for 2011 free You cannot take a separate casualty or theft deduction. File taxes for 2011 free Income loss. File taxes for 2011 free   A loss of future income is not deductible. File taxes for 2011 free Example. File taxes for 2011 free A severe flood destroyed your crops. File taxes for 2011 free Because you are a cash method taxpayer and already deducted the cost of raising the crops as farm expenses, this loss is not deductible, as explained above under Livestock, plants, produce, and crops raised for sale . File taxes for 2011 free You estimate that the crop loss will reduce your farm income by $25,000. File taxes for 2011 free This loss of future income is also not deductible. File taxes for 2011 free Loss of timber. File taxes for 2011 free   If you sell timber downed as a result of a casualty, treat the proceeds from the sale as a reimbursement. File taxes for 2011 free If you use the proceeds to buy qualified replacement property, you can postpone reporting the gain. File taxes for 2011 free See Postponing Gain , later. File taxes for 2011 free Property used in farming. File taxes for 2011 free   Casualty and theft losses of property used in your farm business usually result in deductible losses. File taxes for 2011 free If a fire or storm destroyed your barn, or you lose by casualty or theft an animal you bought for draft, breeding, dairy, or sport, you may have a deductible loss. File taxes for 2011 free See How To Figure a Loss , later. File taxes for 2011 free Raised draft, breeding, dairy, or sporting animals. File taxes for 2011 free   Generally, losses of raised draft, breeding, dairy, or sporting animals do not result in deductible casualty or theft losses because you have no basis in the animals. File taxes for 2011 free However, you may have a basis in the animal and therefore may be able to claim a deduction if either of the following situations applies to you. File taxes for 2011 free You use inventories to determine your income and you included the animals in your inventory. File taxes for 2011 free You capitalized the expenses associated with the animals under the uniform capitalization rules and therefore have a tax basis in the animals subject to a casualty or theft. File taxes for 2011 free When you include livestock in inventory, its last inventory value is its basis. File taxes for 2011 free When you lose an inventoried animal held for draft, breeding, dairy, or sport by casualty or theft during the year, decrease ending inventory by the amount you included in inventory for the animal. File taxes for 2011 free You cannot take a separate deduction. File taxes for 2011 free How To Figure a Loss How you figure a deductible casualty or theft loss depends on whether the loss was to farm or personal-use property and whether the property was stolen or partly or completely destroyed. File taxes for 2011 free Farm property. File taxes for 2011 free   Farm property is the property you use in your farming business. File taxes for 2011 free If your farm property was completely destroyed or stolen, your loss is figured as follows:      Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive      You can use the schedules in Publication 584-B to list your stolen, damaged, or destroyed business property and to figure your loss. File taxes for 2011 free   If your farm property was partially damaged, use the steps shown under Personal-use property next to figure your casualty loss. File taxes for 2011 free However, the deduction limits, discussed later, do not apply to farm property. File taxes for 2011 free Personal-use property. File taxes for 2011 free   Personal-use property is property used by you or your family members for personal purposes and not used in your farm business or for income-producing purposes. File taxes for 2011 free The following items are examples of personal-use property: Your main home. File taxes for 2011 free Furniture and electronics used in your main home and not used in a home office or for business purposes. File taxes for 2011 free Clothing and jewelry. File taxes for 2011 free An automobile used for nonbusiness purposes. File taxes for 2011 free You figure the casualty or theft loss on this property by taking the following steps. File taxes for 2011 free Determine your adjusted basis in the property before the casualty or theft. File taxes for 2011 free Determine the decrease in fair market value of the property as a result of the casualty or theft. File taxes for 2011 free From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you receive or expect to receive. File taxes for 2011 free You must apply the deduction limits, discussed later, to determine your deductible loss. File taxes for 2011 free    You can use Publication 584 to list your stolen or damaged personal-use property and figure your loss. File taxes for 2011 free It includes schedules to help you figure the loss on your home, its contents, and your motor vehicles. File taxes for 2011 free Adjusted basis. File taxes for 2011 free   Adjusted basis is your basis (usually cost) increased or decreased by various events, such as improvements and casualty losses. File taxes for 2011 free For more information about adjusted basis, see chapter 6. File taxes for 2011 free Decrease in fair market value (FMV). File taxes for 2011 free   The decrease in FMV is the difference between the property's value immediately before the casualty or theft and its value immediately afterward. File taxes for 2011 free FMV is defined in chapter 10 under Payments Received or Considered Received . File taxes for 2011 free Appraisal. File taxes for 2011 free   To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. File taxes for 2011 free But other measures, such as the cost of cleaning up or making repairs (discussed next) can be used to establish decreases in FMV. File taxes for 2011 free   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent appraiser. File taxes for 2011 free The appraiser must recognize the effects of any general market decline that may occur along with the casualty. File taxes for 2011 free This information is needed to limit any deduction to the actual loss resulting from damage to the property. File taxes for 2011 free Cost of cleaning up or making repairs. File taxes for 2011 free   The cost of cleaning up after a casualty is not part of a casualty loss. File taxes for 2011 free Neither is the cost of repairing damaged property after a casualty. File taxes for 2011 free But you can use the cost of cleaning up or making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. File taxes for 2011 free The repairs are actually made. File taxes for 2011 free The repairs are necessary to bring the property back to its condition before the casualty. File taxes for 2011 free The amount spent for repairs is not excessive. File taxes for 2011 free The repairs fix the damage only. File taxes for 2011 free The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. File taxes for 2011 free Related expenses. File taxes for 2011 free   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, temporary housing, or a rental car, are not part of your casualty or theft loss. File taxes for 2011 free However, they may be deductible as farm business expenses if the damaged or stolen property is farm property. File taxes for 2011 free Separate computations for more than one item of property. File taxes for 2011 free   Generally, if a single casualty or theft involves more than one item of property, you must figure your loss separately for each item of property. File taxes for 2011 free Then combine the losses to determine your total loss. File taxes for 2011 free    There is an exception to this rule for personal-use real property. File taxes for 2011 free See Exception for personal-use real property, later. File taxes for 2011 free Example. File taxes for 2011 free A fire on your farm damaged a tractor and the barn in which it was stored. File taxes for 2011 free The tractor had an adjusted basis of $3,300. File taxes for 2011 free Its FMV was $28,000 just before the fire and $10,000 immediately afterward. File taxes for 2011 free The barn had an adjusted basis of $28,000. File taxes for 2011 free Its FMV was $55,000 just before the fire and $25,000 immediately afterward. File taxes for 2011 free You received insurance reimbursements of $2,100 on the tractor and $26,000 on the barn. File taxes for 2011 free Figure your deductible casualty loss separately for the two items of property. File taxes for 2011 free     Tractor Barn 1) Adjusted basis $3,300 $28,000 2) FMV before fire $28,000 $55,000 3) FMV after fire 10,000 25,000 4) Decrease in FMV  (line 2 − line 3) $18,000 $30,000 5) Loss (lesser of line 1 or line 4) $3,300 $28,000 6) Minus: Insurance 2,100 26,000 7) Deductible casualty loss $1,200 $2,000 8) Total deductible casualty loss $3,200 Exception for personal-use real property. File taxes for 2011 free   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. File taxes for 2011 free Figure the loss using the smaller of the following. File taxes for 2011 free The decrease in FMV of the entire property. File taxes for 2011 free The adjusted basis of the entire property. File taxes for 2011 free Example. File taxes for 2011 free You bought a farm in 1990 for $160,000. File taxes for 2011 free The adjusted basis of the residential part is now $128,000. File taxes for 2011 free In 2013, a windstorm blew down shade trees and three ornamental trees planted at a cost of $7,500 on the residential part. File taxes for 2011 free The adjusted basis of the residential part includes the $7,500. File taxes for 2011 free The fair market value (FMV) of the residential part immediately before the storm was $400,000, and $385,000 immediately after the storm. File taxes for 2011 free The trees were not covered by insurance. File taxes for 2011 free 1) Adjusted basis $128,000 2) FMV before the storm $400,000 3) FMV after the storm 385,000 4) Decrease in FMV (line 2 − line 3) $15,000 5) Loss before insurance (lesser of line 1 or line 4) $15,000 6) Minus: Insurance -0- 7) Amount of loss $15,000 Insurance and other reimbursements. File taxes for 2011 free   If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. File taxes for 2011 free You do not have a casualty or theft loss to the extent you are reimbursed. File taxes for 2011 free   If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. File taxes for 2011 free You must reduce your loss even if you do not receive payment until a later tax year. File taxes for 2011 free    Do not subtract from your loss any insurance payments you receive for living expenses if you lose the use of your main home or are denied access to it because of a casualty. File taxes for 2011 free You may have to include a portion of these payments in your income. File taxes for 2011 free See Insurance payments for living expenses in Publication 547 for details. File taxes for 2011 free Disaster relief. File taxes for 2011 free   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. File taxes for 2011 free Excludable cash gifts you receive also do not reduce your casualty loss if there are no limits on how you can use the money. File taxes for 2011 free   Generally, disaster relief grants received under the Robert T. File taxes for 2011 free Stafford Disaster Relief and Emergency Assistance Act are not included in your income. File taxes for 2011 free See Federal disaster relief grants , later, under Disaster Area Losses . File taxes for 2011 free   Qualified disaster relief payments for expenses you incurred as a result of a federally declared disaster are not taxable income to you. File taxes for 2011 free See Qualified disaster relief payments , later, under Disaster Area Losses . File taxes for 2011 free Reimbursement received after deducting loss. File taxes for 2011 free   If you figure your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. File taxes for 2011 free Actual reimbursement less than expected. File taxes for 2011 free   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. File taxes for 2011 free Actual reimbursement more than expected. File taxes for 2011 free   If you later receive more reimbursement than you expected after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. File taxes for 2011 free However, if any part of your original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. File taxes for 2011 free Do not refigure your tax for the year you claimed the deduction. File taxes for 2011 free See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. File taxes for 2011 free If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. File taxes for 2011 free See Figuring a Gain in Publication 547 for information on how to treat a gain from the reimbursement you receive because of a casualty or theft. File taxes for 2011 free Actual reimbursement same as expected. File taxes for 2011 free   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. File taxes for 2011 free Lump-sum reimbursement. File taxes for 2011 free   If you have a casualty or theft loss of several assets at the same time without an allocation of reimbursement to specific assets, divide the lump-sum reimbursement among the assets according to the fair market value of each asset at the time of the loss. File taxes for 2011 free Figure the gain or loss separately for each asset that has a separate basis. File taxes for 2011 free Adjustments to basis. File taxes for 2011 free   If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive and by any deductible loss. File taxes for 2011 free The result is your adjusted basis in the property. File taxes for 2011 free Amounts you spend on repairs to restore your property to its pre-casualty condition increase your adjusted basis. File taxes for 2011 free See Adjusted Basis in chapter 6 for more information. File taxes for 2011 free Example. File taxes for 2011 free You built a new silo for $25,000. File taxes for 2011 free This is the basis in your silo because that is the total cost you incurred to build it. File taxes for 2011 free During the year, a tornado damaged your silo and your allowable casualty loss deduction was $1,000. File taxes for 2011 free In addition, your insurance company reimbursed you $4,000 for the damage and you spent $6,000 to restore the silo to its pre-casualty condition. File taxes for 2011 free Your adjusted basis in the silo after the casualty is $26,000 ($25,000 - $1,000 - $4,000 + $6,000). File taxes for 2011 free Deduction Limits on Losses of Personal-Use Property Casualty and theft losses of property held for personal use may be deductible if you itemize deductions on Schedule A (Form 1040). File taxes for 2011 free There are two limits on the deduction for casualty or theft loss of personal-use property. File taxes for 2011 free You figure these limits on Form 4684. File taxes for 2011 free $100 rule. File taxes for 2011 free   You must reduce each casualty or theft loss on personal-use property by $100. File taxes for 2011 free This rule applies after you have subtracted any reimbursement. File taxes for 2011 free 10% rule. File taxes for 2011 free   You must further reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. File taxes for 2011 free Apply this rule after you reduce each loss by $100. File taxes for 2011 free Adjusted gross income is on line 38 of Form 1040. File taxes for 2011 free Example. File taxes for 2011 free In June, you discovered that your house had been burglarized. File taxes for 2011 free Your loss after insurance reimbursement was $2,000. File taxes for 2011 free Your adjusted gross income for the year you discovered the burglary is $57,000. File taxes for 2011 free Figure your theft loss deduction as follows: 1. File taxes for 2011 free Loss after insurance $2,000 2. File taxes for 2011 free Subtract $100 100 3. File taxes for 2011 free Loss after $100 rule $1,900 4. File taxes for 2011 free Subtract 10% (. File taxes for 2011 free 10) × $57,000 AGI $5,700 5. File taxes for 2011 free Theft loss deduction -0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($5,700). File taxes for 2011 free    If you have a casualty or theft gain in addition to a loss, you will have to make a special computation before you figure your 10% limit. File taxes for 2011 free See 10% Rule in Publication 547. File taxes for 2011 free When Loss Is Deductible Generally, you can deduct casualty losses that are not reimbursable only in the tax year in which they occur. File taxes for 2011 free You generally can deduct theft losses that are not reimbursable only in the year you discover your property was stolen. File taxes for 2011 free However, losses in federally declared disaster areas are subject to different rules. File taxes for 2011 free See Disaster Area Losses , later, for an exception. File taxes for 2011 free If you are not sure whether part of your casualty or theft loss will be reimbursed, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed. File taxes for 2011 free Leased property. File taxes for 2011 free   If you lease property from someone else, you can deduct a loss on the property in the year your liability for the loss is fixed. File taxes for 2011 free This is true even if the loss occurred or the liability was paid in a different year. File taxes for 2011 free You are not entitled to a deduction until your liability under the lease can be determined with reasonable accuracy. File taxes for 2011 free Your liability can be determined when a claim for recovery is settled, adjudicated, or abandoned. File taxes for 2011 free Example. File taxes for 2011 free Robert leased a tractor from First Implement, Inc. File taxes for 2011 free , for use in his farm business. File taxes for 2011 free The tractor was destroyed by a tornado in June 2012. File taxes for 2011 free The loss was not insured. File taxes for 2011 free First Implement billed Robert for the fair market value of the tractor on the date of the loss. File taxes for 2011 free Robert disagreed with the bill and refused to pay it. File taxes for 2011 free First Implement later filed suit in court against Robert. File taxes for 2011 free In 2013, Robert and First Implement agreed to settle the suit for $20,000, and the court entered a judgment in favor of First Implement. File taxes for 2011 free Robert paid $20,000 in June 2013. File taxes for 2011 free He can claim the $20,000 as a loss on his 2013 tax return. File taxes for 2011 free Net operating loss (NOL). File taxes for 2011 free   If your deductions, including casualty or theft loss deductions, are more than your income for the year, you may have an NOL. File taxes for 2011 free An NOL can be carried back or carried forward and deducted from income in other years. File taxes for 2011 free See Publication 536 for more information on NOLs. File taxes for 2011 free Proof of Loss To deduct a casualty or theft loss, you must be able to prove that there was a casualty or theft. File taxes for 2011 free You must have records to support the amount you claim for the loss. File taxes for 2011 free Casualty loss proof. File taxes for 2011 free   For a casualty loss, your records should show all the following information. File taxes for 2011 free The type of casualty (car accident, fire, storm, etc. File taxes for 2011 free ) and when it occurred. File taxes for 2011 free That the loss was a direct result of the casualty. File taxes for 2011 free That you were the owner of the property or, if you leased the property from someone else, that you were contractually liable to the owner for the damage. File taxes for 2011 free Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. File taxes for 2011 free Theft loss proof. File taxes for 2011 free   For a theft loss, your records should show all the following information. File taxes for 2011 free When you discovered your property was missing. File taxes for 2011 free That your property was stolen. File taxes for 2011 free That you were the owner of the property. File taxes for 2011 free Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. File taxes for 2011 free Figuring a Gain A casualty or theft may result in a taxable gain. File taxes for 2011 free If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. File taxes for 2011 free You generally report your gain as income in the year you receive the reimbursement. File taxes for 2011 free However, depending on the type of property you receive, you may not have to report your gain. File taxes for 2011 free See Postponing Gain , later. File taxes for 2011 free Your gain is figured as follows: The amount you receive, minus Your adjusted basis in the property at the time of the casualty or theft. File taxes for 2011 free Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. File taxes for 2011 free Amount you receive. File taxes for 2011 free   The amount you receive includes any money plus the value of any property you receive, minus any expenses you have in obtaining reimbursement. File taxes for 2011 free It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. File taxes for 2011 free Example. File taxes for 2011 free A tornado severely damaged your barn. File taxes for 2011 free The adjusted basis of the barn was $25,000. File taxes for 2011 free Your insurance company reimbursed you $40,000 for the damaged barn. File taxes for 2011 free However, you had legal expenses of $2,000 to collect that insurance. File taxes for 2011 free Your insurance minus your expenses to collect the insurance is more than your adjusted basis in the barn, so you have a gain. File taxes for 2011 free 1) Insurance reimbursement $40,000 2) Legal expenses 2,000 3) Amount received  (line 1 − line 2) $38,000 4) Adjusted basis 25,000 5) Gain on casualty (line 3 − line 4) $13,000 Other Involuntary Conversions In addition to casualties and thefts, other events cause involuntary conversions of property. File taxes for 2011 free Some of these are discussed in the following paragraphs. File taxes for 2011 free Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes. File taxes for 2011 free You report the gain or deduct the loss on your tax return for the year you realize it. File taxes for 2011 free However, depending on the type of property you receive, you may not have to report your gain on the involuntary conversion. File taxes for 2011 free See Postponing Gain , later. File taxes for 2011 free Condemnation Condemnation is the process by which private property is legally taken for public use without the owner's consent. File taxes for 2011 free The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take property. File taxes for 2011 free The owner receives a condemnation award (money or property) in exchange for the property taken. File taxes for 2011 free A condemnation is a forced sale, the owner being the seller and the condemning authority being the buyer. File taxes for 2011 free Threat of condemnation. File taxes for 2011 free   Treat the sale of your property under threat of condemnation as a condemnation, provided you have reasonable grounds to believe that your property will be condemned. File taxes for 2011 free Main home condemned. File taxes for 2011 free   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. File taxes for 2011 free For information on this exclusion, see Publication 523. File taxes for 2011 free If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. File taxes for 2011 free See Postponing Gain , later. File taxes for 2011 free (You cannot deduct a loss from the condemnation of your main home. File taxes for 2011 free ) More information. File taxes for 2011 free   For information on how to figure the gain or loss on condemned property, see chapter 1 in Publication 544. File taxes for 2011 free Also see Postponing Gain , later, to find out if you can postpone reporting the gain. File taxes for 2011 free Irrigation Project The sale or other disposition of property located within an irrigation project to conform to the acreage limits of federal reclamation laws is an involuntary conversion. File taxes for 2011 free Livestock Losses Diseased livestock. File taxes for 2011 free   If your livestock die from disease, or are destroyed, sold, or exchanged because of disease, even though the disease is not of epidemic proportions, treat these occurrences as involuntary conversions. File taxes for 2011 free If the livestock were raised or purchased for resale, follow the rules for livestock discussed earlier under Farming Losses . File taxes for 2011 free Otherwise, figure the gain or loss from these conversions using the rules discussed under Determining Gain or Loss in chapter 8. File taxes for 2011 free If you replace the livestock, you may be able to postpone reporting the gain. File taxes for 2011 free See Postponing Gain below. File taxes for 2011 free Reporting dispositions of diseased livestock. File taxes for 2011 free   If you choose to postpone reporting gain on the disposition of diseased livestock, you must attach a statement to your return explaining that the livestock were disposed of because of disease. File taxes for 2011 free You must also include other information on this statement. File taxes for 2011 free See How To Postpone Gain , later, under Postponing Gain . File taxes for 2011 free Weather-related sales of livestock. File taxes for 2011 free   If you sell or exchange livestock (other than poultry) held for draft, breeding, or dairy purposes solely because of drought, flood, or other weather-related conditions, treat the sale or exchange as an involuntary conversion. File taxes for 2011 free Only livestock sold in excess of the number you normally would sell under usual business practice, in the absence of weather-related conditions, are considered involuntary conversions. File taxes for 2011 free Figure the gain or loss using the rules discussed under Determining Gain or Loss in chapter 8. File taxes for 2011 free If you replace the livestock, you may be able to postpone reporting the gain. File taxes for 2011 free See Postponing Gain below. File taxes for 2011 free Example. File taxes for 2011 free It is your usual business practice to sell five of your dairy animals during the year. File taxes for 2011 free This year you sold 20 dairy animals because of drought. File taxes for 2011 free The sale of 15 animals is treated as an involuntary conversion. File taxes for 2011 free    If you do not replace the livestock, you may be able to report the gain in the following year's income. File taxes for 2011 free This rule also applies to other livestock (including poultry). File taxes for 2011 free See Sales Caused by Weather-Related Conditions in chapter 3. File taxes for 2011 free Tree Seedlings If, because of an abnormal drought, the failure of planted tree seedlings is greater than normally anticipated, you may have a deductible loss. File taxes for 2011 free Treat the loss as a loss from an involuntary conversion. File taxes for 2011 free The loss equals the previously capitalized reforestation costs you had to duplicate on replanting. File taxes for 2011 free You deduct the loss on the return for the year the seedlings died. File taxes for 2011 free Postponing Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed, stolen, or other involuntarily converted property. File taxes for 2011 free Your basis in the new property is generally the same as your adjusted basis in the property it replaces. File taxes for 2011 free You must ordinarily report the gain on your stolen, destroyed, or other involuntarily converted property if you receive money or unlike property as reimbursement. File taxes for 2011 free However, you can choose to postpone reporting the gain if you purchase replacement property similar or related in service or use to your destroyed, stolen, or other involuntarily converted property within a specific replacement period. File taxes for 2011 free If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. File taxes for 2011 free To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. File taxes for 2011 free If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. File taxes for 2011 free Example 1. File taxes for 2011 free In 1985, you constructed a barn to store farm equipment at a cost of $20,000. File taxes for 2011 free In 1987, you added a silo to the barn at a cost of $15,000 to store grain. File taxes for 2011 free In May of this year, the property was worth $100,000. File taxes for 2011 free In June the barn and silo were destroyed by a tornado. File taxes for 2011 free At the time of the tornado, you had an adjusted basis of $0 in the property. File taxes for 2011 free You received $85,000 from the insurance company. File taxes for 2011 free You had a gain of $85,000 ($85,000 – $0). File taxes for 2011 free You spent $80,000 to rebuild the barn and silo. File taxes for 2011 free Since this is less than the insurance proceeds received, you must include $5,000 ($85,000 – $80,000) in your income. File taxes for 2011 free Example 2. File taxes for 2011 free In 1970, you bought a cabin in the mountains for your personal use at a cost of $18,000. File taxes for 2011 free You made no further improvements or additions to it. File taxes for 2011 free When a storm destroyed the cabin this January, the cabin was worth $250,000. File taxes for 2011 free You received $146,000 from the insurance company in March. File taxes for 2011 free You had a gain of $128,000 ($146,000 − $18,000). File taxes for 2011 free You spent $144,000 to rebuild the cabin. File taxes for 2011 free Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. File taxes for 2011 free Buying replacement property from a related person. File taxes for 2011 free   You cannot postpone reporting a gain from a casualty, theft, or other involuntary conversion if you buy the replacement property from a related person (discussed later). File taxes for 2011 free This rule applies to the following taxpayers. File taxes for 2011 free C corporations. File taxes for 2011 free Partnerships in which more than 50% of the capital or profits interest is owned by C corporations. File taxes for 2011 free Individuals, partnerships (other than those in (2) above), and S corporations if the total realized gain for the tax year on all involuntarily converted properties on which there are realized gains is more than $100,000. File taxes for 2011 free For involuntary conversions described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. File taxes for 2011 free If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. File taxes for 2011 free If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. File taxes for 2011 free Exception. File taxes for 2011 free   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the involuntarily converted property. File taxes for 2011 free Related persons. File taxes for 2011 free   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. File taxes for 2011 free For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. File taxes for 2011 free Death of a taxpayer. File taxes for 2011 free   If a taxpayer dies after having a gain, but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. File taxes for 2011 free The executor of the estate or the person succeeding to the funds from the involuntary conversion cannot postpone reporting the gain by buying replacement property. File taxes for 2011 free Replacement Property You must buy replacement property for the specific purpose of replacing your property. File taxes for 2011 free Your replacement property must be similar or related in service or use to the property it replaces. File taxes for 2011 free You do not have to use the same funds you receive as reimbursement for your old property to acquire the replacement property. File taxes for 2011 free If you spend the money you receive for other purposes, and borrow money to buy replacement property, you can still choose to postpone reporting the gain if you meet the other requirements. File taxes for 2011 free Property you acquire by gift or inheritance does not qualify as replacement property. File taxes for 2011 free Owner-user. File taxes for 2011 free   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. File taxes for 2011 free Examples of property that functions in the same way as the property it replaces are a home that replaces another home, a dairy cow that replaces another dairy cow, and farm land that replaces other farm land. File taxes for 2011 free A grinding mill that replaces a tractor does not qualify. File taxes for 2011 free Neither does a breeding or draft animal that replaces a dairy cow. File taxes for 2011 free Soil or other environmental contamination. File taxes for 2011 free   If, because of soil or other environmental contamination, it is not feasible for you to reinvest your insurance money or other proceeds from destroyed or damaged livestock in property similar or related in service or use to the livestock, you can treat other property (including real property) used for farming purposes, as property similar or related in service or use to the destroyed or damaged livestock. File taxes for 2011 free Weather-related conditions. File taxes for 2011 free   If, because of drought, flood, or other weather-related conditions, it is not feasible for you to reinvest the insurance money or other proceeds in property similar or related in service or use to the livestock, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the livestock you disposed of. File taxes for 2011 free Example. File taxes for 2011 free Each year you normally sell 25 cows from your beef herd. File taxes for 2011 free However, this year you had to sell 50 cows. File taxes for 2011 free This is because a severe drought significantly reduced the amount of hay and pasture yield needed to feed your herd for the rest of the year. File taxes for 2011 free Because, as a result of the severe drought, it is not feasible for you to use the proceeds from selling the extra cows to buy new cows, you can treat other property (excluding real property) used for farming purposes, as property similar or related in service or use to the cows you sold. File taxes for 2011 free Standing crop destroyed by casualty. File taxes for 2011 free   If a storm or other casualty destroyed your standing crop and you use the insurance money to acquire either another standing crop or a harvested crop, this purchase qualifies as replacement property. File taxes for 2011 free The costs of planting and raising a new crop qualify as replacement costs for the destroyed crop only if you use the crop method of accounting (discussed in chapter 2). File taxes for 2011 free In that case, the costs of bringing the new crop to the same level of maturity as the destroyed crop qualify as replacement costs to the extent they are incurred during the replacement period. File taxes for 2011 free Timber loss. File taxes for 2011 free   Standing timber you bought with the proceeds from the sale of timber downed as a result of a casualty, such as high winds, earthquakes, or volcanic eruptions, qualifies as replacement property. File taxes for 2011 free If you bought the standing timber within the replacement period, you can postpone reporting the gain. File taxes for 2011 free Business or income-producing property located in a federally declared disaster area. File taxes for 2011 free   If your destroyed business or income-producing property was located in a federally declared disaster area, any tangible replacement property you acquire for use in any business is treated as similar or related in service or use to the destroyed property. File taxes for 2011 free For more information, see Disaster Area Losses in Publication 547. File taxes for 2011 free Substituting replacement property. File taxes for 2011 free   Once you have acquired qualified replacement property that you designate as replacement property in a statement attached to your tax return, you cannot substitute other qualified replacement property. File taxes for 2011 free This is true even if you acquire the other property within the replacement period. File taxes for 2011 free However, if you discover that the original replacement property was not qualified replacement property, you can, within the replacement period, substitute the new qualified replacement property. File taxes for 2011 free Basis of replacement property. File taxes for 2011 free   You must reduce the basis of your replacement property (its cost) by the amount of postponed gain. File taxes for 2011 free In this way, tax on the gain is postponed until you dispose of the replacement property. File taxes for 2011 free Replacement Period To postpone reporting your gain, you must buy replacement property within a specified period of time. File taxes for 2011 free This is the replacement period. File taxes for 2011 free The replacement period begins on the date your property was damaged, destroyed, stolen, sold, or exchanged. File taxes for 2011 free The replacement period generally ends 2 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. File taxes for 2011 free Example. File taxes for 2011 free You are a calendar year taxpayer. File taxes for 2011 free While you were on vacation, farm equipment that cost $2,200 was stolen from your farm. File taxes for 2011 free You discovered the theft when you returned to your farm on November 11, 2012. File taxes for 2011 free Your insurance company investigated the theft and did not settle your claim until January 5, 2013, when they paid you $3,000. File taxes for 2011 free You first realized a gain from the reimbursement for the theft during 2013, so you have until December 31, 2015, to replace the property. File taxes for 2011 free Main home in disaster area. File taxes for 2011 free   For your main home (or its contents) located in a federally declared disaster area, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. File taxes for 2011 free See Disaster Area Losses , later. File taxes for 2011 free Property in the Midwestern disaster areas. File taxes for 2011 free   For property located in the Midwestern disaster areas (defined in Table 4 in the 2008 Publication 547) that was destroyed, damaged, stolen, or condemned, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. File taxes for 2011 free This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Midwestern disaster areas. File taxes for 2011 free Property in the Kansas disaster area. File taxes for 2011 free   For property located in the Kansas disaster area that was destroyed, damaged, stolen, or condemned after May 3, 2007, as a result of the Kansas storms and tornadoes, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. File taxes for 2011 free This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Kansas disaster area. File taxes for 2011 free Property in the Hurricane Katrina disaster area. File taxes for 2011 free   For property located in the Hurricane Katrina disaster area that was destroyed, damaged, stolen, or condemned after August 24, 2005, as a result of Hurricane Katrina, the replacement period ends 5 years after the close of the first tax year in which any part of your gain is realized. File taxes for 2011 free This 5-year replacement period applies only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. File taxes for 2011 free Weather-related sales of livestock in an area eligible for federal assistance. File taxes for 2011 free   For the sale or exchange of livestock due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. File taxes for 2011 free The IRS may extend the replacement period on a regional basis if the weather-related conditions continue for longer than 3 years. File taxes for 2011 free   For information on extensions of the replacement period because of persistent drought, see Notice 2006-82, 2006-39 I. File taxes for 2011 free R. File taxes for 2011 free B. File taxes for 2011 free 529, available at  www. File taxes for 2011 free irs. File taxes for 2011 free gov/irb/2006-39_IRB/ar11. File taxes for 2011 free html. File taxes for 2011 free For a list of counties for which exceptional, extreme, or severe drought was reported during the 12 months ending August 31, 2013, see Notice 2013-62, available at IRS. File taxes for 2011 free gov. File taxes for 2011 free Condemnation. File taxes for 2011 free   The replacement period for a condemnation begins on the earlier of the following dates. File taxes for 2011 free The date on which you disposed of the condemned property. File taxes for 2011 free The date on which the threat of condemnation began. File taxes for 2011 free The replacement period generally ends 2 years after the close of the first tax year in which any part of the gain on the condemnation is realized. File taxes for 2011 free But see Main home in disaster area , Property in the Midwestern disaster areas , Property in the Kansas disaster area , and Property in the Hurricane Katrina disaster area , earlier, for exceptions. File taxes for 2011 free Business or investment real property. File taxes for 2011 free   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the close of the first tax year in which any part of the gain on the condemnation is realized. File taxes for 2011 free Extension. File taxes for 2011 free   You can apply for an extension of the replacement period. File taxes for 2011 free Send your written application to the Internal Revenue Service Center where you file your tax return. File taxes for 2011 free See your tax return instructions for the address. File taxes for 2011 free Include all the details about your need for an extension. File taxes for 2011 free Make your application before the end of the replacement period. File taxes for 2011 free However, you can file an application within a reasonable time after the replacement period ends if you can show a good reason for the delay. File taxes for 2011 free You will get an extension of the replacement period if you can show reasonable cause for not making the replacement within the regular period. File taxes for 2011 free How To Postpone Gain You postpone reporting your gain by reporting your choice on your tax return for the year you have the gain. File taxes for 2011 free You have the gain in the year you receive insurance proceeds or other reimbursements that result in a gain. File taxes for 2011 free Required statement. File taxes for 2011 free   You should attach a statement to your return for the year you have the gain. File taxes for 2011 free This statement should include all the following information. File taxes for 2011 free The date and details of the casualty, theft, or other involuntary conversion. File taxes for 2011 free The insurance or other reimbursement you received. File taxes for 2011 free How you figured the gain. File taxes for 2011 free Replacement property acquired before return filed. File taxes for 2011 free   If you acquire replacement property before you file your return for the year you have the gain, your statement should also include detailed information about all the following items. File taxes for 2011 free The replacement property. File taxes for 2011 free The postponed gain. File taxes for 2011 free The basis adjustment that reflects the postponed gain. File taxes for 2011 free Any gain you are reporting as income. File taxes for 2011 free Replacement property acquired after return filed. File taxes for 2011 free   If you intend to buy replacement property after you file your return for the year you realize gain, your statement should also say that you are choosing to replace the property within the required replacement period. File taxes for 2011 free   You should then attach another statement to your return for the year in which you buy the replacement property. File taxes for 2011 free This statement should contain detailed information on the replacement property. File taxes for 2011 free If you acquire part of your replacement property in one year and part in another year, you must attach a statement to each year's return. File taxes for 2011 free Include in the statement detailed information on the replacement property bought in that year. File taxes for 2011 free Reporting weather-related sales of livestock. File taxes for 2011 free   If you choose to postpone reporting the gain on weather-related sales or exchanges of livestock, show all the following information on a statement attached to your return for the tax year in which you first realize any of the gain. File taxes for 2011 free Evidence of the weather-related conditions that forced the sale or exchange of the livestock. File taxes for 2011 free The gain realized on the sale or exchange. File taxes for 2011 free The number and kind of livestock sold or exchanged. File taxes for 2011 free The number of livestock of each kind you would have sold or exchanged under your usual business practice. File taxes for 2011 free   Show all the following information and the preceding information on the return for the year in which you replace the livestock. File taxes for 2011 free The dates you bought the replacement property. File taxes for 2011 free The cost of the replacement property. File taxes for 2011 free Description of the replacement property (for example, the number and kind of the replacement livestock). File taxes for 2011 free Amended return. File taxes for 2011 free   You must file an amended return (Form 1040X) for the tax year of the gain in either of the following situations. File taxes for 2011 free You do not acquire replacement property within the replacement period, plus extensions. File taxes for 2011 free On this amended return, you must report the gain and pay any additional tax due. File taxes for 2011 free You acquire replacement property within the required replacement period, plus extensions, but at a cost less than the amount you receive from the casualty, theft, or other involuntary conversion. File taxes for 2011 free On this amended return, you must report the part of the gain that cannot be postponed and pay any additional tax due. File taxes for 2011 free Disaster Area Losses Special rules apply to federally declared disaster area losses. File taxes for 2011 free A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. File taxes for 2011 free Stafford Disaster Relief and Emergency Assistance Act. File taxes for 2011 free It includes a major disaster or emergency declaration under the act. File taxes for 2011 free A list of the areas warranting public or individual assistance (or both) under the Act is available at the Federal Emergency Management Agency (FEMA) web site at www. File taxes for 2011 free fema. File taxes for 2011 free gov. File taxes for 2011 free This part discusses the special rules for when to deduct a disaster area loss and what tax deadlines may be postponed. File taxes for 2011 free For other special rules, see Disaster Area Losses in Publication 547. File taxes for 2011 free When to deduct the loss. File taxes for 2011 free   You generally must deduct a casualty loss in the year it occurred. File taxes for 2011 free However, if you have a deductible loss from a disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. File taxes for 2011 free If you make this choice, the loss is treated as having occurred in the preceding year. File taxes for 2011 free    Claiming a qualifying disaster loss on the previous year's return may result in a lower tax for that year, often producing or increasing a cash refund. File taxes for 2011 free   You must make the choice to take your casualty loss for the disaster in the preceding year by the later of the following dates. File taxes for 2011 free The due date (without extensions) for filing your tax return for the tax year in which the disaster actually occurred. File taxes for 2011 free The due date (with extensions) for the return for the preceding tax year. File taxes for 2011 free Federal disaster relief grants. File taxes for 2011 free   Do not include post-disaster relief grants received under the Robert T. File taxes for 2011 free Stafford Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses. File taxes for 2011 free Do not deduct casualty losses or medical expenses to the extent they are specifically reimbursed by these disaster relief grants. File taxes for 2011 free If the casualty loss was specifically reimbursed by the grant and you received the grant after the year in which you deducted the casualty loss, see Reimbursement received after deducting loss , earlier. File taxes for 2011 free Unemployment assistance payments under the Act are taxable unemployment compensation. File taxes for 2011 free Qualified disaster relief payments. File taxes for 2011 free   Qualified disaster relief payments are not included in the income of individuals to the extent any expenses compensated by these payments are not otherwise compensated for by insurance or other reimbursement. File taxes for 2011 free These payments are not subject to income tax, self-employment tax, or employment taxes (social security, Medicare, and federal unemployment taxes). File taxes for 2011 free No withholding applies to these payments. File taxes for 2011 free   Qualified disaster relief payments include payments you receive (regardless of the source) for the following expenses. File taxes for 2011 free Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a federally declared disaster. File taxes for 2011 free Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a federally declared disaster. File taxes for 2011 free (A personal residence can be a rented residence or one you own. File taxes for 2011 free ) Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a federally declared disaster. File taxes for 2011 free   Qualified disaster relief payments include amounts paid by a federal, state, or local government in connection with a federally declared disaster to individuals affected by the disaster. File taxes for 2011 free    Qualified disaster relief payments do not include: Payments for expenses otherwise paid for by insurance or other reimbursements, or Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation. File taxes for 2011 free Qualified disaster mitigation payments. File taxes for 2011 free   Qualified disaster mitigation payments made under the Robert T. File taxes for 2011 free Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act (as in effect on April 15, 2005) are not included in income. File taxes for 2011 free These are payments you, as a property owner, receive to reduce the risk of future damage to your property. File taxes for 2011 free You cannot increase your basis in property, or take a deduction or credit, for expenditures made with respect to those payments. File taxes for 2011 free Sale of property under hazard mitigation program. File taxes for 2011 free   Generally, if you sell or otherwise transfer property, you must recognize any gain or loss for tax purposes unless the property is your main home. File taxes for 2011 free You report the gain or deduct the loss on your tax return for the year you realize it. File taxes for 2011 free (You cannot deduct a loss on personal-use property unless the loss resulted from a casualty, as discussed earlier. File taxes for 2011 free ) However, if you sell or otherwise transfer property to the Federal Government, a state or local government, or an Indian tribal government under a hazard mitigation program, you can choose to postpone reporting the gain if you buy qualifying replacement property within a certain period of time. File taxes for 2011 free See Postponing Gain , earlier, for the rules that apply. File taxes for 2011 free Other federal assistance programs. File taxes for 2011 free    For more information about other federal assistance programs, see Crop Insurance and Crop Disaster Payments and Feed Assistance and Payments in chapter 3 earlier. File taxes for 2011 free Postponed tax deadlines. File taxes for 2011 free   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a federally declared disaster. File taxes for 2011 free The tax deadlines the IRS may postpone include those for filing income, excise, and employment tax returns, paying income, excise, and employment taxes, and making contributions to a traditional IRA or Roth IRA. File taxes for 2011 free   If any tax deadline is postponed, the IRS will publicize the postponement in your area and publish a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB). File taxes for 2011 free Go to http://www. File taxes for 2011 free irs. File taxes for 2011 free gov/uac/Tax-Relief-in-Disaster-Situations to find out if a tax deadline has been postponed for your area. File taxes for 2011 free Who is eligible. File taxes for 2011 free   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement. File taxes for 2011 free Any individual whose main home is located in a covered disaster area (defined next). File taxes for 2011 free Any business entity or sole proprietor whose principal place of business is located in a covered disaster area. File taxes for 2011 free Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area. File taxes for 2011 free Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. File taxes for 2011 free The main home or principal place of business does not have to be located in the covered disaster area. File taxes for 2011 free Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. File taxes for 2011 free The spouse on a joint return with a taxpayer who is eligible for postponements. File taxes for 2011 free Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose necessary records to meet a postponed tax deadline are located in the covered disaster area. File taxes for 2011 free Any individual visiting the covered disaster area who was killed or injured as a result of the disaster. File taxes for 2011 free Any other person determined by the IRS to be affected by a federally declared disaster. File taxes for 2011 free Covered disaster area. File taxes for 2011 free   This is an area of a federally declared disaster area in which the IRS has decided to postpone tax deadlines for up to 1 year. File taxes for 2011 free Abatement of interest and penalties. File taxes for 2011 free   The IRS may abate the interest and penalties on the underpaid income tax for the length of any postponement of tax deadlines. File taxes for 2011 free Reporting Gains and Losses You will have to file one or more of the following forms to report your gains or losses from involuntary conversions. File taxes for 2011 free Form 4684. File taxes for 2011 free   Use this form to report your gains and losses from casualties and thefts. File taxes for 2011 free Form 4797. File taxes for 2011 free   Use this form to report involuntary conversions (other than from casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. File taxes for 2011 free Also use this form if you have a gain from a casualty or theft on trade, business or income-producing property held for more than 1 year and you have to recapture some or all of your gain as ordinary income. File taxes for 2011 free Form 8949. File taxes for 2011 free   Use this form to report gain from an involuntary conversion (other than from casualty or theft) of personal-use property. File taxes for 2011 free Schedule A (Form 1040). File taxes for 2011 free   Use this form to deduct your losses from casualties and thefts of personal-use property and income-producing property, that you reported on Form 4684. File taxes for 2011 free Schedule D (Form 1040). File taxes for 2011 free   Use this form to carry over the following gains. File taxes for 2011 free Net gain shown on Form 4797 from an involuntary conversion of business property held for more than 1 year. File taxes for 2011 free Net gain shown on Form 4684 from the casualty or theft of personal-use property. File taxes for 2011 free    Also use this form to figure the overall gain or loss from transactions reported on Form 8949. File taxes for 2011 free Schedule F (Form 1040). File taxes for 2011 free   Use this form to deduct your losses from casualty or theft of livestock or produce bought for sale under Other expenses in Part II, line 32, if you use the cash method of accounting and have not otherwise deducted these losses. File taxes for 2011 free Prev  Up  Next   Home   More Online Publications
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Examinations and Enforcement

EP Examinations is responsible for overseeing compliance with the retirement plan provisions of the Internal Revenue Code, including the protection of plan assets and of the interests/rights of participants. This is accomplished by conducting examinations to analyze operational features of retirement plans. A centralized examination case selection and review process is used to enhance consistency of enforcement activities and to focus resources on the areas of highest noncompliance.


Priorities and Goals
Critical priorities vital to the success of Employee Plans Examinations.

Articles by the Director of Examinations
Insights on retirement plan topics uncovered during audits.

Internal Controls Protect Your Retirement Plan
Review procedures to help you find and prevent mistakes in administering your plan

EP Abusive Tax Transactions
Abusive tax avoidance transactions involving employee plans are beginning to surface and are growing in number. Left unchallenged, transactions such as these undermine the confidence in our voluntary tax system.

International Issues Affecting Retirement Plans
International issues, including international tax compliance by large corporations and high-wealth individuals, are an IRS-wide priority. The Office of Employee Plans is focused on addressing existing abuse and preventing abuse going forward.

Employee Plans Compliance Unit (EPCU)
Did you receive a letter from this Unit? Will you be getting a letter soon? Go here to get more information.

EP Examination Projects
Results from various examination projects, including listings of most frequent errors and tips on how to avoid these errors.

EP Compliance Trends & Tips
Results and findings from past and current EP examinations that identify compliance risks and recurring plan issues.

Compliance Programs/Initiatives
Plan specialty (403(b)/457, 401(k), multiemployer), large employer plans and Employee Plans Compliance Unit (EPCU) activities.

Audit Closing Agreement Program
The Employee Plans Compliance Resolution System (EPCRS) is a comprehensive system of correction programs established by the IRS that enable sponsors of retirement plans that have experienced compliance violations to preserve the tax benefits of their plans. If plan errors are found during an EP examination, help is available through the Audit Closing Agreement Program (Audit CAP). For plan errors that are found prior to examination notification, possible alternates to Audit CAP are Self-Correction Program (SCP) or the Voluntary Correction Program (VCP).

Technical/Procedural Guidelines for EP Examinations Employees
Locate Field Directives, Examination Guidelines, and other useful information.

EP Examination Process Guide
In response to the results of the Customer Satisfaction Surveys, EP Examinations developed the EP Examination Process Guide to help customers through the examination process. The guide clarifies the various steps in the examination process and introduces available resources.

Form 5500 Corner
Filing tips and updates, notices, and other helpful materials to assist you in preparing your Form 5500 returns.

Form 5330 Corner
Filing tips and updates, notices, and other helpful materials to assist you in preparing your Form 5330 returns.

Communications With EP Customers
Interviews, outreach presentations, newsletters and other important communications.

EP Examinations Office Structure/Contacts
The organizational structure and contacts for the IRS Office of EP Examinations.

Page Last Reviewed or Updated: 20-Mar-2014

The File Taxes For 2011 Free

File taxes for 2011 free 4. File taxes for 2011 free   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. File taxes for 2011 free Payments from checking accounts. File taxes for 2011 free Amounts paid within 30 days. File taxes for 2011 free Optional method for determining date of reallocation. File taxes for 2011 free Interest on a segregated account. File taxes for 2011 free How to report. File taxes for 2011 free Interest You Can DeductStatement. File taxes for 2011 free Expenses paid to obtain a mortgage. File taxes for 2011 free Prepayment penalty. File taxes for 2011 free De minimis OID. File taxes for 2011 free Constant-yield method. File taxes for 2011 free Loan or mortgage ends. File taxes for 2011 free Interest You Cannot DeductPenalties. File taxes for 2011 free Who is a key person? Exceptions for pre-June 1997 contracts. File taxes for 2011 free Interest allocated to unborrowed policy cash value. File taxes for 2011 free Capitalization of Interest When To Deduct InterestPrepaid interest. File taxes for 2011 free Discounted loan. File taxes for 2011 free Refunds of interest. File taxes for 2011 free Prepaid interest. File taxes for 2011 free Discounted loan. File taxes for 2011 free Tax deficiency. File taxes for 2011 free Related person. File taxes for 2011 free Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. File taxes for 2011 free Introduction This chapter discusses the tax treatment of business interest expense. File taxes for 2011 free Business interest expense is an amount charged for the use of money you borrowed for business activities. File taxes for 2011 free Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. File taxes for 2011 free Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. File taxes for 2011 free 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. File taxes for 2011 free Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. File taxes for 2011 free If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. File taxes for 2011 free Allocate your interest expense to the following categories. File taxes for 2011 free Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. File taxes for 2011 free You allocate loan proceeds by tracing disbursements to specific uses. File taxes for 2011 free The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. File taxes for 2011 free Secured loan. File taxes for 2011 free   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. File taxes for 2011 free Example. File taxes for 2011 free You secure a loan with property used in your business. File taxes for 2011 free You use the loan proceeds to buy an automobile for personal use. File taxes for 2011 free You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. File taxes for 2011 free    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. File taxes for 2011 free The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. File taxes for 2011 free For more information, see Publication 936. File taxes for 2011 free Allocation period. File taxes for 2011 free   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. File taxes for 2011 free The date the loan is repaid. File taxes for 2011 free The date the loan is reallocated to another use. File taxes for 2011 free Proceeds not disbursed to borrower. File taxes for 2011 free   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. File taxes for 2011 free This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. File taxes for 2011 free Proceeds deposited in borrower's account. File taxes for 2011 free   Treat loan proceeds deposited in an account as property held for investment. File taxes for 2011 free It does not matter whether the account pays interest. File taxes for 2011 free Any interest you pay on the loan is investment interest expense. File taxes for 2011 free If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. File taxes for 2011 free Example. File taxes for 2011 free Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. File taxes for 2011 free No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. File taxes for 2011 free On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. File taxes for 2011 free On September 4, Celina uses an additional $40,000 from the account for personal purposes. File taxes for 2011 free Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. File taxes for 2011 free From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. File taxes for 2011 free From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. File taxes for 2011 free Order of funds spent. File taxes for 2011 free   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. File taxes for 2011 free Any unborrowed amounts held in the same account. File taxes for 2011 free Any amounts deposited after these loan proceeds. File taxes for 2011 free Example. File taxes for 2011 free On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. File taxes for 2011 free The following table shows the transactions in her account during the tax year. File taxes for 2011 free Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. File taxes for 2011 free She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. File taxes for 2011 free She treats the $800 used for an investment as made entirely from the proceeds of Loan C. File taxes for 2011 free She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. File taxes for 2011 free For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. File taxes for 2011 free Payments from checking accounts. File taxes for 2011 free   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. File taxes for 2011 free You can treat checks written on the same day as written in any order. File taxes for 2011 free Amounts paid within 30 days. File taxes for 2011 free   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. File taxes for 2011 free This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. File taxes for 2011 free   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. File taxes for 2011 free If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. File taxes for 2011 free   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. File taxes for 2011 free Example. File taxes for 2011 free Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. File taxes for 2011 free Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. File taxes for 2011 free Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. File taxes for 2011 free Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. File taxes for 2011 free In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. File taxes for 2011 free Optional method for determining date of reallocation. File taxes for 2011 free   You can use the following method to determine the date loan proceeds are reallocated to another use. File taxes for 2011 free You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. File taxes for 2011 free The first day of that month. File taxes for 2011 free The date the loan proceeds are deposited in the account. File taxes for 2011 free However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. File taxes for 2011 free Interest on a segregated account. File taxes for 2011 free   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. File taxes for 2011 free When the interest earned is used up, any remaining payments are from loan proceeds. File taxes for 2011 free Example. File taxes for 2011 free You borrowed $20,000 and used the proceeds of this loan to open a new savings account. File taxes for 2011 free When the account had earned interest of $867, you withdrew $20,000 for personal purposes. File taxes for 2011 free You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). File taxes for 2011 free All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. File taxes for 2011 free The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. File taxes for 2011 free The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. File taxes for 2011 free Loan repayment. File taxes for 2011 free   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. File taxes for 2011 free Personal use. File taxes for 2011 free Investments and passive activities (other than those included in (3)). File taxes for 2011 free Passive activities in connection with a rental real estate activity in which you actively participate. File taxes for 2011 free Former passive activities. File taxes for 2011 free Trade or business use and expenses for certain low-income housing projects. File taxes for 2011 free Line of credit (continuous borrowings). File taxes for 2011 free   The following rules apply if you have a line of credit or similar arrangement. File taxes for 2011 free Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. File taxes for 2011 free Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. File taxes for 2011 free Treat these loans as repaid in the order shown on the loan agreement. File taxes for 2011 free Loan refinancing. File taxes for 2011 free   Allocate the replacement loan to the same uses to which the repaid loan was allocated. File taxes for 2011 free Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. File taxes for 2011 free Debt-financed distribution. File taxes for 2011 free   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. File taxes for 2011 free The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. File taxes for 2011 free How to report. File taxes for 2011 free   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). File taxes for 2011 free If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). File taxes for 2011 free If the proceeds were used in an investment activity, enter the interest on Form 4952. File taxes for 2011 free If the proceeds are used for personal purposes, the interest is generally not deductible. File taxes for 2011 free Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. File taxes for 2011 free Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. File taxes for 2011 free It does not matter what type of property secures the loan. File taxes for 2011 free You can deduct interest on a debt only if you meet all the following requirements. File taxes for 2011 free You are legally liable for that debt. File taxes for 2011 free Both you and the lender intend that the debt be repaid. File taxes for 2011 free You and the lender have a true debtor-creditor relationship. File taxes for 2011 free Partial liability. File taxes for 2011 free   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. File taxes for 2011 free Example. File taxes for 2011 free You and your brother borrow money. File taxes for 2011 free You are liable for 50% of the note. File taxes for 2011 free You use your half of the loan in your business, and you make one-half of the loan payments. File taxes for 2011 free You can deduct your half of the total interest payments as a business deduction. File taxes for 2011 free Mortgage. File taxes for 2011 free   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. File taxes for 2011 free However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. File taxes for 2011 free Statement. File taxes for 2011 free   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. File taxes for 2011 free You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. File taxes for 2011 free A governmental unit is a person for purposes of furnishing the statement. File taxes for 2011 free   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. File taxes for 2011 free You cannot deduct this amount. File taxes for 2011 free For information on how to report this refund, see Refunds of interest, later in this chapter. File taxes for 2011 free Expenses paid to obtain a mortgage. File taxes for 2011 free   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. File taxes for 2011 free These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. File taxes for 2011 free If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. File taxes for 2011 free Prepayment penalty. File taxes for 2011 free   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. File taxes for 2011 free Interest on employment tax deficiency. File taxes for 2011 free   Interest charged on employment taxes assessed on your business is deductible. File taxes for 2011 free Original issue discount (OID). File taxes for 2011 free   OID is a form of interest. File taxes for 2011 free A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. File taxes for 2011 free The OID is the difference between the stated redemption price at maturity and the issue price of the loan. File taxes for 2011 free   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. File taxes for 2011 free Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. File taxes for 2011 free You generally deduct OID over the term of the loan. File taxes for 2011 free Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. File taxes for 2011 free De minimis OID. File taxes for 2011 free   The OID is de minimis if it is less than one-fourth of 1% (. File taxes for 2011 free 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). File taxes for 2011 free   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. File taxes for 2011 free On a constant-yield basis over the term of the loan. File taxes for 2011 free On a straight-line basis over the term of the loan. File taxes for 2011 free In proportion to stated interest payments. File taxes for 2011 free In its entirety at maturity of the loan. File taxes for 2011 free You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. File taxes for 2011 free Example. File taxes for 2011 free On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. File taxes for 2011 free The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. File taxes for 2011 free Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. File taxes for 2011 free The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . File taxes for 2011 free 0025 × 10). File taxes for 2011 free You choose to deduct the OID on a straight-line basis over the term of the loan. File taxes for 2011 free Beginning in 2013, you can deduct $150 each year for 10 years. File taxes for 2011 free Constant-yield method. File taxes for 2011 free   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. File taxes for 2011 free You figure your deduction for the first year using the following steps. File taxes for 2011 free Determine the issue price of the loan. File taxes for 2011 free Generally, this equals the proceeds of the loan. File taxes for 2011 free If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. File taxes for 2011 free Multiply the result in (1) by the yield to maturity. File taxes for 2011 free Subtract any qualified stated interest payments from the result in (2). File taxes for 2011 free This is the OID you can deduct in the first year. File taxes for 2011 free   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). File taxes for 2011 free To get the adjusted issue price, add to the issue price any OID previously deducted. File taxes for 2011 free Then follow steps (2) and (3) above. File taxes for 2011 free   The yield to maturity is generally shown in the literature you receive from your lender. File taxes for 2011 free If you do not have this information, consult your lender or tax advisor. File taxes for 2011 free In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. File taxes for 2011 free Example. File taxes for 2011 free The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. File taxes for 2011 free The yield to maturity on your loan is 10. File taxes for 2011 free 2467%, compounded annually. File taxes for 2011 free For 2013, you can deduct $93 [($98,500 × . File taxes for 2011 free 102467) − $10,000]. File taxes for 2011 free For 2014, you can deduct $103 [($98,593 × . File taxes for 2011 free 102467) − $10,000]. File taxes for 2011 free Loan or mortgage ends. File taxes for 2011 free   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. File taxes for 2011 free A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. File taxes for 2011 free If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. File taxes for 2011 free See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. File taxes for 2011 free Points. File taxes for 2011 free   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. File taxes for 2011 free These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. File taxes for 2011 free If any of these charges (points) are solely for the use of money, they are interest. File taxes for 2011 free   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. File taxes for 2011 free However, you can choose to fully deduct points in the year paid if you meet certain tests. File taxes for 2011 free For exceptions to the general rule, see Publication 936. File taxes for 2011 free The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. File taxes for 2011 free Partial payments on a nontax debt. File taxes for 2011 free   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. File taxes for 2011 free You can deduct only the interest. File taxes for 2011 free This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. File taxes for 2011 free Installment purchase. File taxes for 2011 free   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. File taxes for 2011 free If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). File taxes for 2011 free The amount recharacterized as interest reduces your basis in the property and increases your interest expense. File taxes for 2011 free For more information on installment sales and unstated interest, see Publication 537. File taxes for 2011 free Interest You Cannot Deduct Certain interest payments cannot be deducted. File taxes for 2011 free In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. File taxes for 2011 free You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. File taxes for 2011 free Interest paid with funds borrowed from original lender. File taxes for 2011 free   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. File taxes for 2011 free You can deduct the interest expense once you start making payments on the new loan. File taxes for 2011 free   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. File taxes for 2011 free All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. File taxes for 2011 free Capitalized interest. File taxes for 2011 free   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. File taxes for 2011 free See Capitalization of Interest, later. File taxes for 2011 free In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. File taxes for 2011 free Add this interest to the basis of the property. File taxes for 2011 free Commitment fees or standby charges. File taxes for 2011 free   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. File taxes for 2011 free You may be able to deduct them as business expenses. File taxes for 2011 free   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. File taxes for 2011 free See Capitalization of Interest, later. File taxes for 2011 free Interest on income tax. File taxes for 2011 free   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. File taxes for 2011 free Treat this interest as a business deduction only in figuring a net operating loss deduction. File taxes for 2011 free Penalties. File taxes for 2011 free   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. File taxes for 2011 free You cannot deduct them. File taxes for 2011 free Generally, you cannot deduct any fines or penalties. File taxes for 2011 free Interest on loans with respect to life insurance policies. File taxes for 2011 free   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. File taxes for 2011 free   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. File taxes for 2011 free However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. File taxes for 2011 free Who is a key person?   A key person is an officer or 20% owner. File taxes for 2011 free However, the number of individuals you can treat as key persons is limited to the greater of the following. File taxes for 2011 free Five individuals. File taxes for 2011 free The lesser of 5% of the total officers and employees of the company or 20 individuals. File taxes for 2011 free Exceptions for pre-June 1997 contracts. File taxes for 2011 free   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. File taxes for 2011 free If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. File taxes for 2011 free Interest allocated to unborrowed policy cash value. File taxes for 2011 free   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. File taxes for 2011 free This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. File taxes for 2011 free For more information, see section 264(f) of the Internal Revenue Code. File taxes for 2011 free Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. File taxes for 2011 free The property must be produced by you for use in your trade or business or for sale to customers. File taxes for 2011 free You cannot capitalize interest related to property that you acquire in any other manner. File taxes for 2011 free Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. File taxes for 2011 free Designated property is any of the following. File taxes for 2011 free Real property. File taxes for 2011 free Tangible personal property with a class life of 20 years or more. File taxes for 2011 free Tangible personal property with an estimated production period of more than 2 years. File taxes for 2011 free Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. File taxes for 2011 free Property you produce. File taxes for 2011 free   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. File taxes for 2011 free Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. File taxes for 2011 free Carrying charges. File taxes for 2011 free   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. File taxes for 2011 free You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. File taxes for 2011 free For more information, see chapter 7. File taxes for 2011 free Capitalized interest. File taxes for 2011 free   Treat capitalized interest as a cost of the property produced. File taxes for 2011 free You recover your interest when you sell or use the property. File taxes for 2011 free If the property is inventory, recover capitalized interest through cost of goods sold. File taxes for 2011 free If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. File taxes for 2011 free Partnerships and S corporations. File taxes for 2011 free   The interest capitalization rules are applied first at the partnership or S corporation level. File taxes for 2011 free The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. File taxes for 2011 free   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. File taxes for 2011 free You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. File taxes for 2011 free To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. File taxes for 2011 free Additional information. File taxes for 2011 free   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. File taxes for 2011 free For more information, see sections 1. File taxes for 2011 free 263A-8 through 1. File taxes for 2011 free 263A-15 of the regulations and Notice 88-99. File taxes for 2011 free Notice 88-99 is in Cumulative Bulletin 1988-2. File taxes for 2011 free When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. File taxes for 2011 free Cash method. File taxes for 2011 free   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. File taxes for 2011 free You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. File taxes for 2011 free Prepaid interest. File taxes for 2011 free   You generally cannot deduct any interest paid before the year it is due. File taxes for 2011 free Interest paid in advance can be deducted only in the tax year in which it is due. File taxes for 2011 free Discounted loan. File taxes for 2011 free   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. File taxes for 2011 free For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. File taxes for 2011 free Refunds of interest. File taxes for 2011 free   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. File taxes for 2011 free If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. File taxes for 2011 free Accrual method. File taxes for 2011 free   Under an accrual method, you can deduct only interest that has accrued during the tax year. File taxes for 2011 free Prepaid interest. File taxes for 2011 free   See Prepaid interest, earlier. File taxes for 2011 free Discounted loan. File taxes for 2011 free   See Discounted loan, earlier. File taxes for 2011 free Tax deficiency. File taxes for 2011 free   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. File taxes for 2011 free If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. File taxes for 2011 free   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. File taxes for 2011 free Related person. File taxes for 2011 free   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. File taxes for 2011 free The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. File taxes for 2011 free See section 267 of the Internal Revenue Code for more information. File taxes for 2011 free Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. File taxes for 2011 free See Treatment of gift and demand loans, later, in this discussion. File taxes for 2011 free A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. File taxes for 2011 free A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. File taxes for 2011 free A loan in exchange for a note that requires the payment of interest at the applicable federal rate. File taxes for 2011 free An additional payment in an amount equal to the forgone interest. File taxes for 2011 free The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. File taxes for 2011 free Forgone interest. File taxes for 2011 free   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. File taxes for 2011 free Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. File taxes for 2011 free Internal Revenue Bulletins are available on the IRS web site at www. File taxes for 2011 free irs. File taxes for 2011 free gov/irb. File taxes for 2011 free You can also contact an IRS office to get these rates. File taxes for 2011 free Loans subject to the rules. File taxes for 2011 free   The rules for below-market loans apply to the following. File taxes for 2011 free Gift loans (below-market loans where the forgone interest is in the nature of a gift). File taxes for 2011 free Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). File taxes for 2011 free Corporation-shareholder loans. File taxes for 2011 free Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). File taxes for 2011 free Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). File taxes for 2011 free   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. File taxes for 2011 free Treatment of gift and demand loans. File taxes for 2011 free   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. File taxes for 2011 free ) equal to the forgone interest on the loan. File taxes for 2011 free You are then treated as transferring this amount back to the lender as interest. File taxes for 2011 free These transfers are considered to occur annually, generally on December 31. File taxes for 2011 free If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. File taxes for 2011 free The lender must report it as interest income. File taxes for 2011 free Limit on forgone interest for gift loans of $100,000 or less. File taxes for 2011 free   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. File taxes for 2011 free This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. File taxes for 2011 free If the borrower's net investment income is $1,000 or less, it is treated as zero. File taxes for 2011 free This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. File taxes for 2011 free Treatment of term loans. File taxes for 2011 free   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. File taxes for 2011 free ) on the date the loan is made. File taxes for 2011 free This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. File taxes for 2011 free The same amount is treated as original issue discount on the loan. File taxes for 2011 free See Original issue discount (OID) under Interest You Can Deduct, earlier. File taxes for 2011 free Exceptions for loans of $10,000 or less. File taxes for 2011 free   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. File taxes for 2011 free This exception applies only to the following. File taxes for 2011 free Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. File taxes for 2011 free Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. File taxes for 2011 free This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. File taxes for 2011 free Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. File taxes for 2011 free Exceptions for loans without significant tax effect. File taxes for 2011 free   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. File taxes for 2011 free Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. File taxes for 2011 free Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. File taxes for 2011 free Certain employee-relocation loans. File taxes for 2011 free Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. File taxes for 2011 free S. File taxes for 2011 free trade or business and not exempt from U. File taxes for 2011 free S. File taxes for 2011 free tax under an income tax treaty. File taxes for 2011 free Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. File taxes for 2011 free Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. File taxes for 2011 free Consider all the following factors. File taxes for 2011 free Whether items of income and deduction generated by the loan offset each other. File taxes for 2011 free The amount of the items. File taxes for 2011 free The cost of complying with the below-market loan provisions if they were to apply. File taxes for 2011 free Any reasons, other than taxes, for structuring the transaction as a below-market loan. File taxes for 2011 free Exception for loans to qualified continuing care facilities. File taxes for 2011 free   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. File taxes for 2011 free A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. File taxes for 2011 free Designed to provide services under continuing care contracts (defined below). File taxes for 2011 free Includes an independent living unit, and either an assisted living or nursing facility, or both. File taxes for 2011 free Substantially all of the independent living unit residents are covered by continuing care contracts. File taxes for 2011 free A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. File taxes for 2011 free The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. File taxes for 2011 free The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. File taxes for 2011 free The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. File taxes for 2011 free For more information, see section 7872(h) of the Internal Revenue Code. File taxes for 2011 free Sale or exchange of property. File taxes for 2011 free   Different rules generally apply to a loan connected with the sale or exchange of property. File taxes for 2011 free If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. File taxes for 2011 free However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. File taxes for 2011 free See Unstated Interest and Original Issue Discount (OID) in Publication 537. File taxes for 2011 free More information. File taxes for 2011 free   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. File taxes for 2011 free 7872-5 of the regulations. File taxes for 2011 free Prev  Up  Next   Home   More Online Publications