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Form1040

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Form1040

Form1040 Publication 4492 - Main Contents Table of Contents DefinitionsHurricane Katrina Disaster Area Katrina Covered Disaster Area Gulf Opportunity (GO) Zone (Core Disaster Area) Hurricane Rita Disaster Area (Rita Covered Disaster Area) Rita GO Zone Hurricane Wilma Disaster Area Wilma Covered Disaster Area Wilma GO Zone Extended Tax Deadlines Charitable Giving IncentivesTemporary Suspension of Limits on Charitable Contributions Standard Mileage Rate for Charitable Use of Vehicles Mileage Reimbursements to Charitable Volunteers Charitable Deduction for Contributions of Food Inventory Charitable Deduction for Contributions of Book Inventories to Public Schools Casualty and Theft LossesTime limit for making election. Form1040 Replacement Period for Nonrecognition of Gain Net Operating Losses IRAs and Other Retirement PlansDefinitions Taxation of Qualified Hurricane Distributions Repayment of Qualified Hurricane Distributions Repayment of Qualified Distributions for the Purchase or Construction of a Main Home Loans From Qualified Plans Additional Tax Relief for IndividualsEarned Income Credit and Child Tax Credit Additional Exemption for Housing Individuals Displaced by Hurricane Katrina Education Credits Recapture of Federal Mortgage Subsidy Exclusion of Certain Cancellations of Indebtedness by Reason of Hurricane Katrina Tax Relief for Temporary Relocation Additional Tax Relief for BusinessesSpecial Depreciation Allowance Increased Section 179 Deduction Work Opportunity Credit Employee Retention Credit Hurricane Katrina Housing Credit Reforestation Costs Demolition and Clean-up Costs Increase in Rehabilitation Tax Credit Request for Copy or Transcript of Tax Return How To Get Tax Help Definitions The following definitions are used throughout this publication. Form1040 Hurricane Katrina Disaster Area The Hurricane Katrina disaster area covers the area for which the President declared a major disaster before September 14, 2005, because of Hurricane Katrina. Form1040 The Hurricane Katrina disaster area covers the entire states of Alabama, Florida, Louisiana, and Mississippi. Form1040 Katrina Covered Disaster Area A portion of the Hurricane Katrina disaster area has been designated by the IRS as a covered disaster area. Form1040 The Katrina covered disaster area covers the following areas in four states. Form1040 Alabama. Form1040   The counties of Baldwin, Bibb, Choctaw, Clarke, Colbert, Cullman, Greene, Hale, Jefferson, Lamar, Lauderdale, Marengo, Marion, Mobile, Monroe, Perry, Pickens, Sumter, Tuscaloosa, Washington, Wilcox, and Winston. Form1040 Florida. Form1040   The counties of Bay, Broward, Collier, Escambia, Franklin, Gulf, Miami-Dade, Monroe, Okaloosa, Santa Rosa, and Walton. Form1040 Louisiana. Form1040   All parishes. Form1040 Mississippi. Form1040   All counties. Form1040 Gulf Opportunity (GO) Zone (Core Disaster Area) The GO Zone (also called the core disaster area) covers the portion of the Hurricane Katrina disaster area determined by the Federal Emergency Management Agency (FEMA) to be eligible for either individual only or both individual and public assistance from the Federal Government. Form1040 The GO Zone covers the following areas in three states. Form1040 Alabama. Form1040   The counties of Baldwin, Choctaw, Clarke, Greene, Hale, Marengo, Mobile, Pickens, Sumter, Tuscaloosa, and Washington. Form1040 Louisiana. Form1040   The parishes of Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Plaquemines, Pointe Coupee, St. Form1040 Bernard, St. Form1040 Charles, St. Form1040 Helena, St. Form1040 James, St. Form1040 John the Baptist, St. Form1040 Martin, St. Form1040 Mary, St. Form1040 Tammany, Tangipahoa, Terrebonne, Vermilion, Washington, West Baton Rouge, and West Feliciana. Form1040 Mississippi. Form1040   The counties of Adams, Amite, Attala, Choctaw, Claiborne, Clarke, Copiah, Covington, Forrest, Franklin, George, Greene, Hancock, Harrison, Hinds, Holmes, Humphreys, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lamar, Lauderdale, Lawrence, Leake, Lincoln, Lowndes, Madison, Marion, Neshoba, Newton, Noxubee, Oktibbeha, Pearl River, Perry, Pike, Rankin, Scott, Simpson, Smith, Stone, Walthall, Warren, Wayne, Wilkinson, Winston, and Yazoo. Form1040 Hurricane Rita Disaster Area (Rita Covered Disaster Area) The Hurricane Rita disaster area (also designated by the IRS as the Rita covered disaster area) covers the area for which the President declared a major disaster before October 6, 2005, because of Hurricane Rita. Form1040 This area covers the entire states of Louisiana and Texas. Form1040 Rita GO Zone The Rita GO Zone covers the portion of the Hurricane Rita disaster area determined by FEMA to be eligible for either individual only or both individual and public assistance from the Federal Government. Form1040 The Rita GO Zone covers the following areas in two states. Form1040 Louisiana. Form1040   The parishes of Acadia, Allen, Ascension, Beauregard, Calcasieu, Cameron, Evangeline, Iberia, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Plaquemines, Sabine, St. Form1040 Landry, St. Form1040 Martin, St. Form1040 Mary, St. Form1040 Tammany, Terrebonne, Vermilion, Vernon, and West Baton Rouge. Form1040 Texas. Form1040   The counties of Angelina, Brazoria, Chambers, Fort Bend, Galveston, Hardin, Harris, Jasper, Jefferson, Liberty, Montgomery, Nacogdoches, Newton, Orange, Polk, Sabine, San Augustine, San Jacinto, Shelby, Trinity, Tyler, and Walker. Form1040 Hurricane Wilma Disaster Area The Hurricane Wilma disaster area covers the area for which the President declared a major disaster before November 14, 2005, because of Hurricane Wilma. Form1040 The Hurricane Wilma disaster area covers the entire state of Florida. Form1040 Wilma Covered Disaster Area A portion of the Hurricane Wilma disaster area has been designated by the IRS as a covered disaster area. Form1040 The Wilma covered disaster area covers the following counties. Form1040 Florida. Form1040   Brevard, Broward, Charlotte, Collier, DeSoto, Glades, Hardee, Hendry, Highlands, Indian River, Lee, Martin, Miami-Dade, Monroe, Okeechobee, Osceola, Palm Beach, Polk, St. Form1040 Lucie, and Sarasota. Form1040 Wilma GO Zone The Wilma GO Zone covers the portion of the Hurricane Wilma disaster area determined by FEMA to be eligible for either individual only or both individual and public assistance from the Federal Government. Form1040 The Wilma GO Zone covers the following counties. Form1040 Florida. Form1040   Brevard, Broward, Collier, Glades, Hendry, Indian River, Lee, Martin, Miami-Dade, Monroe, Okeechobee, Palm Beach, and St. Form1040 Lucie. Form1040 Extended Tax Deadlines The IRS has extended deadlines that apply to filing returns, paying taxes, and performing certain other time-sensitive acts for certain taxpayers affected by Hurricane Katrina, Rita, or Wilma, until February 28, 2006. Form1040 The extension applies to deadlines (either an original or extended due date) that occur during the following periods. Form1040 After August 28, 2005 (August 23, 2005, for Florida affected taxpayers), and before February 28, 2006, for taxpayers affected by Hurricane Katrina. Form1040 After September 22, 2005, and before February 28, 2006, for taxpayers affected by Hurricane Rita. Form1040 After October 22, 2005, and before February 28, 2006, for taxpayers affected by Hurricane Wilma. Form1040 Affected taxpayer. Form1040   The following taxpayers are eligible for the extension. Form1040 Any individual whose main home is located in a covered disaster area. Form1040 Any business entity or sole proprietor whose principal place of business is located in a covered disaster area. Form1040 Any individual, business entity, or sole proprietor whose records needed to meet a postponed deadline are maintained or whose tax professional's office is in a covered disaster area. Form1040 The main home or principal place of business does not have to be located in the covered area. Form1040 Any individual visiting a county or parish in the Hurricane Katrina or Hurricane Rita covered disaster area that was injured or killed (and the estate of an individual killed) as a result of the hurricane or its aftermath. Form1040 Any estate or trust whose tax records needed to meet a filing or payment deadline are maintained in a covered disaster area. Form1040 Generally, any individual who is a worker assisting in the relief activities in a covered disaster area. Form1040 However, a relief worker assisting in the Wilma covered disaster area is not an affected taxpayer unless the worker is affiliated with a recognized government or philanthropic organization assisting in the relief activities. Form1040 The spouse of an affected taxpayer, solely with regard to a joint income tax return with that taxpayer. Form1040   To ensure correct processing, affected taxpayers should write the assigned disaster designation (for example, “Hurricane Katrina”) in red ink at the top of any forms or documents filed with the IRS. Form1040 Affected taxpayers can also identify themselves to the IRS or ask hurricane-related questions by calling the special IRS disaster hotline at 1-866-562-5227. Form1040 Acts extended. Form1040   Deadlines for performing the following acts are extended. Form1040 Filing any return of income, estate, gift, generation-skipping transfer, excise, or employment tax. Form1040 Paying any income, estate, gift, generation-skipping transfer, excise, or employment tax. Form1040 This includes making estimated tax payments. Form1040 Making certain contributions, distributions, recharacterizing contributions, or making a rollover to or from a qualified retirement plan. Form1040 Filing certain petitions with the Tax Court. Form1040 Filing a claim for credit or refund of any tax. Form1040 Bringing suit upon a claim for credit or refund. Form1040 Certain other acts described in Revenue Procedure 2005-27. Form1040 You can find Revenue Procedure 2005-27 on page 1050 of Internal Revenue Bulletin 2005-20 at www. Form1040 irs. Form1040 gov/pub/irs-irbs/irb05-20. Form1040 pdf. Form1040 Forgiveness of interest and penalties. Form1040   The IRS may forgive the interest and penalties on any underpaid income, estate, gift, employment, or excise tax for the length of any extension. Form1040 Charitable Giving Incentives Temporary Suspension of Limits on Charitable Contributions Individuals. Form1040   Qualified contributions are not subject to the overall limit on itemized deductions or the 50% adjusted gross income (AGI) limit. Form1040 A qualified contribution is a charitable contribution paid in cash or by check after August 27, 2005, and before January 1, 2006, to a 50% limit organization (other than certain private foundations described in section 509(a)(3)) if you make an election to have the 50% limit not apply to these contributions. Form1040   Your deduction for qualified contributions is limited to your AGI minus your deduction for all other charitable contributions. Form1040 You can carry over any contributions you are not able to deduct for 2005 because of this limit. Form1040 In 2006, treat the carryover of your unused qualified contributions as a carryover of contributions subject to the 50% limit. Form1040 Exception. Form1040   Qualified contributions do not include a contribution to a segregated fund or account for which you (or any person you appoint or designate) have or expect to have advisory privileges with respect to distributions or investments based on your contribution. Form1040 Corporations. Form1040   A corporation may elect to deduct qualified cash contributions without regard to the 10% taxable income limit if the contributions were made after August 27, 2005, and before January 1, 2006, to a qualified charitable organization (other than certain private foundations described in section 509(a)(3)), for Hurricane Katrina, Rita, or Wilma relief efforts. Form1040 The corporation's deduction for these qualified contributions is limited to 100% of taxable income (as modified for the 10% limit) minus the corporation's deduction for all other charitable contributions. Form1040 Any qualified contributions over this limit can be carried over to the next 5 years, subject to the 10% limit. Form1040 Partners and shareholders. Form1040   Each partner in a partnership and each shareholder in an S corporation makes a separate election to have the appropriate limit not apply. Form1040 More information. Form1040   For more information, see Publication 526 or Publication 542, Corporations. Form1040 Publication 526 includes a worksheet you can use to figure your deduction if any limits apply to your charitable contributions. Form1040 Standard Mileage Rate for Charitable Use of Vehicles The following are special standard mileage rates in effect in 2005 and 2006 for the cost of operating your automobile for providing charitable services solely related to Hurricane Katrina. Form1040 29 cents per mile for the period August 25 through August 31, 2005. Form1040 34 cents per mile for the period September 1 through December 31, 2005. Form1040 32 cents per mile for the period January 1 through December 31, 2006. Form1040 Mileage Reimbursements to Charitable Volunteers You can exclude from income amounts you receive as mileage reimbursements for the use of a private passenger automobile for the benefit of a qualified charitable organization in providing relief related to Hurricane Katrina during the period beginning on August 25, 2005, and ending on December 31, 2006. Form1040 You cannot claim a deduction or credit for amounts you receive as a mileage reimbursement. Form1040 You must keep records of miles driven, time, place (or use), and purpose of the mileage. Form1040 The amount you can exclude from income cannot exceed the standard business mileage rate (shown below) for expenses incurred during the following periods. Form1040 40. Form1040 5 cents per mile for the period August 25 through August 31, 2005. Form1040 48. Form1040 5 cents per mile for the period September 1 through December 31, 2005. Form1040 44. Form1040 5 cents per mile for the period January 1 through December 31, 2006. Form1040 Charitable Deduction for Contributions of Food Inventory Any taxpayer engaged in a trade or business is eligible to claim a deduction for a contribution of “apparently wholesome food” inventory to a qualified charitable organization described in section 501(c)(3) (except for private nonoperating foundations) after August 27, 2005, and before January 1, 2006. Form1040 “Apparently wholesome food” is food that meets all quality and labeling standards imposed by federal, state, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions. Form1040 The deduction is equal to the lesser of: The basis of the donated food plus one-half of the gain that would have been realized if the donated food had been sold at fair market value on the date of the donation, or Two times the basis of the donated food. Form1040 The taxpayer must receive written certification from the donee stating: The donated food is related to the purpose or function of the donee's basis for exemption under section 501(c)(3) and is to be used solely for the care of the ill, the needy, or infants; and The food was not given in exchange for money, other property, or services. Form1040 For a taxpayer other than a C corporation, the deduction is limited to 10% of the taxpayer's total net income from all trades or businesses from which the food contributions were made (figured without regard to the deduction for charitable contributions). Form1040 For example, if a taxpayer is a sole proprietor, a shareholder in an S corporation, and a partner in a partnership, and each made a contribution of apparently wholesome food inventory, the taxpayer's deduction is limited to 10% of the taxpayer's total net income from the sole proprietorship, S corporation, and partnership (figured without regard to the deduction for charitable contributions). Form1040 Charitable Deduction for Contributions of Book Inventories to Public Schools A corporation (other than an S corporation) may be allowed a charitable deduction for a qualified book contribution made after August 27, 2005, and before January 1, 2006, to a public school that: Provides elementary or secondary education (kindergarten through grade 12), and Normally maintains a regular faculty and curriculum and has a regular enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. Form1040 . Form1040 The deduction is equal to the lesser of: The basis of the donated books plus one-half of the gain that would have been realized if the donated books had been sold at fair market value on the date of the donation, or Two times the basis of the donated books. Form1040 The corporation must receive written certification from the school stating that the donated books are suitable for the organization's educational programs and will be used for such programs. Form1040 Casualty and Theft Losses The following paragraphs explain changes to casualty and theft losses that were caused by Hurricane Katrina, Rita, or Wilma. Form1040 For more information, see Publication 547. Form1040 Limits on personal casualty or theft losses caused by Hurricane Katrina, Rita, or Wilma. Form1040   The following losses to personal use property are not subject to the $100 or 10% of adjusted gross income limits. Form1040 Losses that arose in the Hurricane Katrina disaster area after August 24, 2005, and that were caused by Hurricane Katrina. Form1040 Losses that arose in the Hurricane Rita disaster area after September 22, 2005, and that were caused by Hurricane Rita. Form1040 Losses that arose in the Hurricane Wilma disaster area after October 22, 2005, and that were caused by Hurricane Wilma. Form1040 Qualifying losses include losses from flooding or other casualty, and from theft, that arose in the hurricane disaster area and that were caused by the hurricane. Form1040 Special instructions for individuals who elect to claim a Hurricane Katrina, Rita, or Wilma casualty or theft loss for 2004. Form1040   Casualty and theft losses are generally deductible only in the year the casualty occurred or theft was discovered. Form1040 However, Hurricane Katrina, Rita, and Wilma are Presidentially declared disasters. Form1040 Therefore, you can elect to deduct losses from these hurricanes on your tax return for the previous year. Form1040 If you make this election, use the following additional instructions to complete your forms. Form1040   Individuals filing or amending their 2004 tax return whose only casualty or theft losses to personal use property claimed on that return were caused by Hurricane Katrina, Rita, or Wilma should write “Hurricane Katrina,” “Hurricane Rita,” or “Hurricane Wilma” at the top of Form 1040 or 1040X. Form1040 They must also complete and attach the 2004 Form 4684 and write “Hurricane Katrina,”“Hurricane Rita,” or “Hurricane Wilma” on the dotted line next to line 11 and enter -0- on lines 11 and 17. Form1040   Individuals filing or amending their 2004 tax return who also have casualty or theft losses to personal use property not related to Hurricane Katrina, Rita, or Wilma should disregard the caution directing taxpayers to use only one Form 4684, located above line 13, and complete lines 13 through 18 on two Forms 4684. Form1040 The Form 1040 or 1040X and the first Form 4684 should be prepared as explained above for Hurricane Katrina, Rita, or Wilma losses only. Form1040 The second Form 4684 should be prepared in the normal manner for all gains and non-Hurricane Katrina, Rita or Wilma losses. Form1040 If both Forms 4684 have a loss on line 18, they should carry the combined losses from that line to Schedule A (Form 1040), line 19. Form1040 If there is a gain on line 15 of the second Form 4684, disregard the instruction to enter it on Schedule D (Form 1040), and instead enter on Schedule A (Form 1040), line 19, the excess of the loss from the first Form 4684 over the gain on line 15 of the second Form 4684. Form1040 , Time limit for making election. Form1040   You must make this election to claim your casualty or theft loss in 2004 by the later of the following dates. Form1040 The due date (without extensions) for filing your 2005 income tax return. Form1040 The due date (with extensions) for filing your 2004 income tax return. Form1040 Example. Form1040 If you are a calendar year individual taxpayer, you have until April 17, 2006, to amend your 2004 tax return to claim a casualty or theft loss that occurred during 2005. Form1040 Replacement Period for Nonrecognition of Gain Generally, an involuntary conversion occurs when property is damaged, destroyed, stolen, seized, requisitioned, or condemned, and you receive other property or money in payment, such as insurance or a condemnation award. Form1040 Generally, you do not have to report a gain (if any) if you replace the property within 2 years (4 years for a main home in a Presidentially declared disaster area). Form1040 However, for property that was involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, a 5-year replacement period applies if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Form1040 For more information, see the Instructions for Form 4684. Form1040 Net Operating Losses Qualified GO Zone loss. Form1040   Generally, you can carry a net operating loss (NOL) back to the 2 tax years before the NOL year. Form1040 However, the portion of an NOL that is a qualified GO Zone loss can be carried back to the 5 tax years before the NOL year. Form1040 In addition, the 90% limit on the alternative tax NOL deduction (ATNOLD) does not apply to such portion of the ATNOLD. Form1040   A qualified GO Zone loss is the smaller of: The excess of the NOL for the year over the specified liability loss for the year to which a 10-year carryback applies, or The total of the following deductions (to the extent they are taken into account in computing the NOL for the tax year): Qualified GO Zone casualty loss (as defined below), Moving expenses paid or incurred after August 27, 2005, and before January 1, 2008, for the employment of an individual whose main home was in the GO Zone before August 28, 2005, who was unable to remain in that home because of Hurricane Katrina, and whose main job location (after the move) is in the GO Zone, Temporary housing expenses paid or incurred after August 27, 2005, and before January 1, 2008, to house employees of the taxpayer whose main job location is in the GO Zone, Depreciation or amortization allowable for any qualified GO Zone property (even if you elected not to claim the special GO Zone depreciation allowance for such property) for the year placed in service, and Repair expenses (including expenses for the removal of debris) paid or incurred after August 27, 2005, and before January 1, 2008, for any damage from Hurricane Katrina to property located in the GO Zone. Form1040 Qualified GO Zone casualty loss. Form1040   A qualified GO Zone casualty loss is any deductible section 1231 loss of property located in the GO Zone if the loss was caused by Hurricane Katrina. Form1040 For this purpose, the amount of the loss is reduced by any recognized gain from an involuntary conversion caused by Hurricane Katrina of property located in the GO Zone. Form1040 Any such loss taken into account in figuring your qualified GO Zone loss is not eligible for the election to be treated as having occurred in the previous tax year. Form1040 5-year NOL carryback of certain timber losses. Form1040   Generally, you can carry the portion of an NOL due to income and deductions attributable to a farming business back to the 5 tax years before the NOL year. Form1040 You can treat income and deductions attributable to qualified timber property as attributable to a farming business if any portion of the property is located in the GO Zone, Rita GO Zone, or Wilma GO Zone, and the income and deductions are allocable to the part of your tax year which is after the applicable date below. Form1040 August 27, 2005, if any portion of the property is located in the GO Zone. Form1040 September 22, 2005, if any portion of the property is located in the Rita GO Zone (but not in the GO Zone). Form1040 October 22, 2005, if any portion of the property is located in the Wilma GO Zone (but not in the GO Zone or the RITA GO Zone). Form1040   These rules will not apply after 2006. Form1040   However, these rules apply only to a timber producer who: Held qualified timber property (defined in Publication 535, Business Expenses) on the applicable date below: August 28, 2005, if any portion of the property is located in the GO Zone, September 23, 2005, if any portion of the property is located in the Rita GO Zone (but not in the GO Zone), or October 23, 2005, if any portion of the property is located in the Wilma GO Zone (but not in the GO Zone or the Rita GO Zone); Is not a corporation with stock publicly traded on an established securities market; Is not a real estate investment trust; and Did not hold more than 500 acres of qualified timber property on the applicable date above. Form1040 More information. Form1040   For more information on NOLs, see Publication 536 or Publication 542, Corporations. Form1040 IRAs and Other Retirement Plans New rules provide for tax-favored withdrawals, repayments, and loans from certain retirement plans for taxpayers who suffered economic losses as a result of Hurricane Katrina, Rita, or Wilma. Form1040 Definitions Qualified hurricane distribution. Form1040   A qualified hurricane distribution is any distribution you received from an eligible retirement plan if all of the following apply. Form1040 The distribution was made: After August 24, 2005, and before January 1, 2007, for Hurricane Katrina; After September 22, 2005, and before January 1, 2007, for Hurricane Rita; or After October 22, 2005, and before January 1, 2007, for Hurricane Wilma. Form1040 Your main home was located in a hurricane disaster area listed below on the date shown for that area. Form1040 August 28, 2005, for the Hurricane Katrina disaster area. Form1040 September 23, 2005, for the Hurricane Rita disaster area. Form1040 October 23, 2005, for the Hurricane Wilma disaster area. Form1040 You sustained an economic loss because of Hurricane Katrina, Rita, or Wilma and your main home was in that hurricane disaster area on the date shown in (2) above for that hurricane. Form1040 Examples of an economic loss include, but are not limited to: Loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause; Loss related to displacement from your home; or Loss of livelihood due to temporary or permanent layoffs. Form1040   If (1) through (3) above apply, you can generally designate any distribution (including periodic payments and required minimum distributions) from an eligible retirement plan as a qualified hurricane distribution, regardless of whether the distribution was made on account of Hurricane Katrina, Rita, or Wilma. Form1040 Qualified hurricane distributions are permitted without regard to your need or the actual amount of your economic loss. Form1040   The total of your qualified hurricane distributions from all plans is limited to $100,000. Form1040 If you have distributions in excess of $100,000 from more than one type of plan, such as a 401(k) plan and an IRA, you may allocate the $100,000 limit among the plans any way you choose. Form1040   A reduction or offset (after August 24, 2005, for Katrina; after September 22, 2005, for Rita; or after October 22, 2005, for Wilma) of your account balance in an eligible retirement plan in order to repay a loan can also be designated as a qualified hurricane distribution. Form1040 Eligible retirement plan. Form1040   An eligible retirement plan can be any of the following. Form1040 A qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan). Form1040 A qualified annuity plan. Form1040 A tax-sheltered annuity contract. Form1040 A governmental section 457 deferred compensation plan. Form1040 A traditional, SEP, SIMPLE, or Roth IRA. Form1040 Main home. Form1040   Generally, your main home is the home where you live most of the time. Form1040 A temporary absence due to special circumstances, such as illness, education, business, military service, evacuation, or vacation, will not change your main home. Form1040 Taxation of Qualified Hurricane Distributions Qualified hurricane distributions are included in income in equal amounts over three years. Form1040 However, if you elect, you can include the entire distribution in your income in the year it was received. Form1040 Qualified hurricane distributions are not subject to the additional 10% tax (or the additional 25% tax for certain distributions from SIMPLE IRAs) on early distributions from qualified retirement plans (including IRAs). Form1040 However, any distributions you receive in excess of the $100,000 qualified hurricane distribution limit may be subject to the additional tax on early distributions. Form1040 For more information, see Form 8915. Form1040 Repayment of Qualified Hurricane Distributions If you choose, you generally can repay any portion of a qualified hurricane distribution that is eligible for tax-free rollover treatment to an eligible retirement plan. Form1040 Also, you can repay a qualified hurricane distribution made on account of a hardship from a retirement plan. Form1040 However, see Exceptions below for qualified hurricane distributions you cannot repay. Form1040 You have three years from the day after the date you received the distribution to make a repayment. Form1040 Amounts that are repaid are treated as a qualified rollover and are not included in income. Form1040 Also, for purposes of the one-rollover-per-year limitation for IRAs, a repayment to an IRA is not considered a qualified rollover. Form1040 See Form 8915 for more information on how to report repayments. Form1040 Exceptions. Form1040   You cannot repay the following types of distributions. Form1040 Qualified hurricane distributions received as a beneficiary (other than a surviving spouse). Form1040 Required minimum distributions. Form1040 Periodic payments (other than from an IRA) that are for: A period of 10 years or more, Your life or life expectancy, or The joint lives or joint life expectancies of you and your beneficiary. Form1040 Repayment of Qualified Distributions for the Purchase or Construction of a Main Home If you received a qualified distribution to purchase or construct a main home in the Hurricane Katrina, Rita, or Wilma disaster area, you can repay that distribution before March 1, 2006, to an eligible retirement plan after August 24, 2005 (Katrina); after September 22, 2005 (Rita); or after October 22, 2005 (Wilma). Form1040 For this purpose, an eligible retirement plan is any plan, annuity, or IRA to which a qualified rollover can be made. Form1040 To be a qualified distribution, the distribution must meet all of the following requirements. Form1040 The distribution is a hardship distribution from a 401(k) plan, a hardship distribution from a tax-sheltered annuity contract, or a qualified first-time homebuyer distribution from an IRA. Form1040 The distribution was received in 2005 after February 28 and before: August 29 for Hurricane Katrina; September 24 for Hurricane Rita; or October 24 for Hurricane Wilma. Form1040 The distribution was to be used to purchase or construct a main home in the Hurricane Katrina, Rita, or Wilma disaster area that was not purchased or constructed because of Hurricane Katrina, Rita, or Wilma. Form1040 Amounts that are repaid before March 1, 2006, are treated as a qualified rollover and are not included in income. Form1040 Also, for purposes of the one-rollover-per-year limitation for IRAs, a repayment to an IRA is not considered a qualified rollover. Form1040 A qualified distribution not repaid before March 1, 2006, may be taxable for 2005 and subject to the additional 10% tax (or the additional 25% tax for certain SIMPLE IRAs) on early distributions. Form1040 You must file Form 8915 if you received a qualified distribution that you repaid, in whole or in part, before March 1, 2006. Form1040 Loans From Qualified Plans The following benefits are available to qualified individuals. Form1040 Increases to the limits for distributions treated as loans from employer plans. Form1040 A 1-year suspension for payments due on plan loans. Form1040 Qualified individual. Form1040   You are a qualified individual if any of the following apply. Form1040 Your main home on August 28, 2005, was located in the Hurricane Katrina disaster area and you had an economic loss because of Hurricane Katrina. Form1040 Your main home on September 23, 2005, was located in the Hurricane Rita disaster area and you had an economic loss because of Hurricane Rita. Form1040 Your main home on October 23, 2005, was located in the Hurricane Wilma disaster area and you had an economic loss because of Hurricane Wilma. Form1040 Examples of an economic loss include, but are not limited to: Loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause; Loss related to displacement from your home; or Loss of livelihood due to temporary or permanent layoffs. Form1040 Limits on plan loans. Form1040   The $50,000 limit for distributions treated as plan loans is increased to $100,000. Form1040 In addition, the limit based on 50% of your vested accrued benefit is increased to 100% of that benefit. Form1040 The higher limits apply only to loans received during the following period. Form1040 If your main home was located in the Hurricane Katrina disaster area, the period began on September 24, 2005, and ends on December 31, 2006. Form1040 If your main home was located in the Hurricane Rita or Wilma disaster area, the period began on December 21, 2005, and ends on December 31, 2006. Form1040 If you are a qualified individual based on Hurricane Katrina and another hurricane, use the period based on Hurricane Katrina. Form1040 One-year suspension of loan payments. Form1040   Payments on plan loans due before 2007 may be suspended for 1 year by the plan administrator. Form1040 To qualify for the suspension, the due date for any loan payment must occur during the period beginning on: August 28, 2005, if your main home was located in the Hurricane Katrina disaster area. Form1040 September 23, 2005, if your main home was located in the Hurricane Rita disaster area. Form1040 October 23, 2005, if your main home was located in the Hurricane Wilma disaster area. Form1040 If you are a qualified individual based on more than one hurricane, use the period with the earliest beginning date. Form1040 Additional Tax Relief for Individuals Earned Income Credit and Child Tax Credit You can elect to use your 2004 earned income to figure your earned income credit (EIC) and additional child tax credit for 2005 if: Your 2005 earned income is less than your 2004 earned income, and At least one of the following statements is true. Form1040 Your main home on August 25, 2005, was in the Gulf Opportunity (GO) Zone. Form1040 Your main home on August 25, 2005, was in the Hurricane Katrina disaster area and you were displaced from that home because of Hurricane Katrina. Form1040 Your main home on September 23, 2005, was in the Rita GO Zone. Form1040 Your main home on September 23, 2005, was in the Hurricane Rita disaster area and you were displaced from that home because of Hurricane Rita. Form1040 Your main home on October 23, 2005, was in the Wilma GO Zone. Form1040 Your main home on October 23, 2005, was in the Hurricane Wilma disaster area and you were displaced from that home because of Hurricane Wilma. Form1040 Earned income. Form1040    For the purpose of this election, your earned income for both the EIC and the additional child tax credit is the amount of earned income used to figure your EIC, even if you did not take the EIC and even if that amount is different than your earned income for the additional child tax credit. Form1040 If you are claiming only the additional child tax credit, you must figure the amount of your earned income for EIC purposes to determine your eligibility to make the election and the amount of the credit. Form1040 Joint returns. Form1040   If you file a joint return, you qualify to make this election even if only one spouse meets the requirements. Form1040 If you make the election, your 2004 earned income is the sum of your 2004 earned income and your spouse's 2004 earned income. Form1040 Making the election. Form1040   If you make the election to use your 2004 earned income, the election applies for figuring both the EIC and the additional child tax credit. Form1040 However, you can make the election for the additional child tax credit even if you do not take the EIC. Form1040   Electing to use your 2004 earned income may increase or decrease your EIC. Form1040 Take the following steps to decide whether to make the election. Form1040 Figure your 2005 EIC using your 2004 earned income. Form1040 Figure your 2005 additional child tax credit using your 2004 earned income for EIC purposes. Form1040 Add the results of (1) and (2). Form1040 Figure your 2005 EIC using your 2005 earned income. Form1040 Figure your 2005 additional child tax credit using your 2005 earned income for additional child tax credit purposes. Form1040 Add the results of (4) and (5). Form1040 Compare the results of (3) and (6). Form1040 If (3) is larger than (6), it is to your benefit to make the election. Form1040 If (3) is equal to or smaller than (6), making the election will not help you. Form1040   If you elect to use your 2004 earned income and you are claiming the EIC, enter “PYEI” and the amount of your 2004 earned income on the dotted line next to line 66a of Form 1040, on the line next to line 41a of Form 1040A, or in the space to the left of line 8a of Form 1040EZ. Form1040   If you elect to use your 2004 earned income and you are claiming the additional child tax credit, enter your 2004 earned income for EIC purposes (even if you did not claim the EIC) on Form 8812, Additional Child Tax Credit, line 4a, and check the box on that line. Form1040   Because Form 8812 was released before the GO Zone legislation was enacted, the instructions refer only to individuals whose main home was in the Hurricane Katrina disaster area. Form1040 When completing Form 8812, line 4a, use the above rules to determine your eligibility to make the election (instead of the Form 8812 instructions). Form1040 Getting your 2004 tax return information. Form1040   If you do not have your 2004 tax records, you can get the amount of earned income used to figure your 2004 EIC by calling 1-866-562-5227. Form1040 You can also get this information by visiting the IRS website at www. Form1040 irs. Form1040 gov. Form1040   If you prefer to figure your 2004 earned income yourself, copies or transcripts of your filed and processed tax returns can help you reconstruct your tax records. Form1040 See Request for Copy or Transcript of Tax Return on page 16. Form1040 Additional Exemption for Housing Individuals Displaced by Hurricane Katrina You may be able to claim an additional exemption amount of $500 for providing housing in your main home for each individual displaced by Hurricane Katrina. Form1040 The additional exemption amount is claimed on new Form 8914. Form1040 The additional exemption amount is allowable once per taxpayer for a specific individual in 2005 or 2006, but not in both years. Form1040 The maximum additional exemption amount you can claim for all displaced individuals is $2,000 ($1,000 if married filing separately). Form1040 The additional exemption amount you claim for displaced individuals in 2005 will reduce the $2,000 maximum for 2006. Form1040 If two or more taxpayers share the same main home, only one taxpayer in that main home can claim the additional exemption amount for a specific displaced individual. Form1040 If married filing separately, only one spouse may claim the additional exemption amount for a specific displaced individual. Form1040 In order for you to be considered to have provided housing, you must have a legal interest in the main home (that is, own or rent the home). Form1040 To qualify as a displaced individual, the individual: Must have had his or her main home in the Hurricane Katrina disaster area on August 28, 2005, and he or she must have been displaced from that home. Form1040 If the individual's main home was located outside the core disaster area, that home must have been damaged by Hurricane Katrina or the individual must have been evacuated from that home because of Hurricane Katrina, Must have been provided housing in your main home for a period of at least 60 consecutive days ending in the tax year in which the exemption is claimed, and Cannot be your spouse or dependent. Form1040 You cannot claim the additional exemption amount if you received rent (or any other amount) from any source for providing the housing. Form1040 You are permitted to receive payments or reimbursements that do not relate to normal housing costs, including the following. Form1040 Food, clothing, or personal items consumed or used by the displaced individual. Form1040 Reimbursement for the cost of any long distance telephone calls made by the displaced individual. Form1040 Reimbursement for the cost of gasoline for the displaced individual's use of your vehicle. Form1040 However, you cannot claim the additional exemption amount if you received any reimbursement for the extra costs of heat, electricity, or water used by the displaced individual. Form1040 Also, you must report on Form 8914 the displaced individual's social security number or individual taxpayer identification number to claim an additional exemption amount. Form1040 For more information, see Form 8914. Form1040 Education Credits The education credits have been expanded for students attending an eligible educational institution located in the Gulf Opportunity Zone (GOZ students) for any tax year beginning in 2005 or 2006. Form1040 The Hope credit for a GOZ student is increased to 100% of the first $2,000 in qualified education expenses and 50% of the next $2,000 of qualified education expenses for a maximum credit of $3,000 per student. Form1040 The lifetime learning credit rate for a GOZ student is increased from 20% to 40%. Form1040 The definition of qualified education expenses for a GOZ student also has been expanded. Form1040 In addition to tuition and fees required for the student's enrollment or attendance at an eligible educational institution, qualified education expenses for a GOZ student include the following. Form1040 Books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Form1040 For a special needs student, expenses that are necessary for that person's enrollment or attendance at an eligible educational institution. Form1040 For a student who is at least a half-time student, the reasonable costs of room and board, but only to the extent that the costs are not more than the greater of the following two amounts. Form1040 The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Form1040 The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Form1040 You will need to contact the eligible educational institution for qualified room and board costs. Form1040 For more information, see Form 8863. Form1040 Recapture of Federal Mortgage Subsidy Generally, if you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. Form1040 However, you do not have to recapture any benefit if your mortgage loan was a qualified home improvement loan of not more than $15,000. Form1040 This amount is increased to $150,000 if the loan was provided before 2011 and was used to: Repair damage caused by Hurricane Katrina to a residence in the Hurricane Katrina disaster area, or Alter, repair, or improve an existing owner-occupied residence in the GO Zone, Rita GO Zone, or Wilma GO Zone. Form1040 Exclusion of Certain Cancellations of Indebtedness by Reason of Hurricane Katrina Generally, discharges of nonbusiness debts (such as mortgages) made after August 24, 2005, and before January 1, 2007, are excluded from income for individuals whose main home was in the Hurricane Katrina disaster area on August 25, 2005. Form1040 If the individual's main home was located outside the core disaster area, the individual also must have had an economic loss because of Hurricane Katrina. Form1040 Examples of an economic loss include, but are not limited to: Loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind, or other cause; Loss related to displacement from your home; or Loss of livelihood due to temporary or permanent layoffs. Form1040 This relief does not apply to any debt secured by real property located outside the Hurricane Katrina disaster area. Form1040 You may also have to reduce certain tax attributes by the amount excluded. Form1040 For more information, see Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). Form1040 Tax Relief for Temporary Relocation Under the Gulf Opportunity Zone Act of 2005, the IRS may adjust the internal revenue laws to ensure that taxpayers do not lose a deduction or credit or experience a change of filing status in 2005 or 2006 as a result of a temporary relocation caused by Hurricane Katrina, Rita, or Wilma. Form1040 However, any such adjustment must ensure that an individual is not taken into account by more than one taxpayer for the same tax benefit. Form1040 The IRS has exercised this authority as follows. Form1040 In determining whether you furnished over one-half of the cost of maintaining a household, you can exclude from total household costs any assistance received from the government or charitable organizations because you were temporarily relocated as a result of Hurricane Katrina, Rita, or Wilma. Form1040 In determining whether you provided more than one-half of an individual's support, you can disregard any assistance received from the government or charitable organizations because you were temporarily relocated as a result of Hurricane Katrina, Rita, or Wilma. Form1040 You can treat as a student an individual who enrolled in school before August 25, 2005, and who is unable to attend classes because of Hurricane Katrina, for each month of the enrollment period that individual is prevented by Hurricane Katrina from attending school as planned. Form1040 You can treat as a student an individual who enrolled in school before September 23, 2005, and who is unable to attend classes because of Hurricane Rita, for each month of the enrollment period that individual is prevented by Hurricane Rita from attending school as planned. Form1040 You can treat as a student an individual who enrolled in school before October 23, 2005, and who is unable to attend classes because of Hurricane Wilma, for each month of the enrollment period that individual is prevented by Hurricane Wilma from attending school as planned. Form1040 Additional Tax Relief for Businesses Special Depreciation Allowance You can take a special depreciation allowance for qualified Gulf Opportunity (GO) Zone property (as defined below) you place in service after August 27, 2005. Form1040 The allowance is an additional deduction of 50% of the property's depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction). Form1040 The special allowance applies only for the first year the property is placed in service. Form1040 The allowance is deductible for both the regular tax and the alternative minimum tax (AMT). Form1040 There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. Form1040 You can elect not to deduct the special GO Zone depreciation allowance for qualified property. Form1040 If you make this election for any property, it applies to all property in the same class placed in service during the year. Form1040 Qualified GO Zone property. Form1040   Property that qualifies for the special GO Zone depreciation allowance includes the following. Form1040 Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. Form1040 Water utility property. Form1040 Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. Form1040 (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Form1040 ) Qualified leasehold improvement property. Form1040 Nonresidential real property and residential rental property. Form1040   For more information on this property, see Publication 946. Form1040 Other tests to be met. Form1040   To be qualified GO Zone property, the property must also meet all of the following tests. Form1040 You must have acquired the property, by purchase, after August 27, 2005, but only if no binding written contract for the acquisition was in effect before August 28, 2005. Form1040 The property must be placed in service before 2008 (2009 in the case of nonresidential real property and residential rental property). Form1040 Substantially all of the use of the property must be in the GO Zone and in the active conduct of your trade or business in the GO Zone. Form1040 The original use of the property in the GO Zone must begin with you after August 27, 2005. Form1040 Used property can be qualified GO Zone property if it has not previously been used within the GO Zone. Form1040 Also, additional capital expenditures you incurred after August 27, 2005, to recondition or rebuild your property meet the original use test if the original use of the property in the GO Zone began with you. Form1040 Excepted property. Form1040   Qualified GO Zone property does not include any of the following. Form1040 Property required to be depreciated using the Alternative Depreciation System (ADS). Form1040 Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103. Form1040 Property for which you are claiming a commercial revitalization deduction. Form1040 Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises. Form1040 Any gambling or animal racing property (as defined below). Form1040 Property in the same class as that for which you elected not to claim the special GO Zone depreciation allowance. Form1040   Gambling or animal racing property is: Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site viewing of such racing, and The portion of any real property (determined by square footage) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing, unless this portion is less than 100 square feet. Form1040 Recapture of special allowance. Form1040   If, in any year after the year you claim the special allowance, the property ceases to be qualified GO Zone property, you may have to recapture as ordinary income any excess benefit you received from claiming the special allowance. Form1040 Increased Section 179 Deduction An increased section 179 deduction is allowable for qualified section 179 Gulf Opportunity (GO) Zone property (as defined later) placed in service in the GO Zone. Form1040 Increased dollar limit. Form1040   The limit on the section 179 deduction ($105,000 for 2005, $108,000 for 2006) for qualified section 179 GO Zone property acquired after August 27, 2005, is increased by the smaller of: $100,000, or The cost of qualified section 179 GO Zone property placed in service during the year (including such property placed in service by your spouse, even if you are filing a separate return). Form1040   The amount for which you can make the election is reduced if the cost of all qualified section 179 GO Zone property you placed in service during the year exceeds $420,000 for 2005 ($430,000 for 2006) increased by the smaller of: $600,000, or The cost of qualified section 179 GO Zone property placed in service during the year. Form1040 Qualified section 179 GO Zone property. Form1040   Qualified section 179 GO Zone property is section 179 property that is qualified GO Zone property (explained earlier under Special Depreciation Allowance). Form1040 Section 179 property does not include nonresidential real property or residential rental property. Form1040 For more information, including the requirements that must be met for property to qualify for the section 179 deduction, see chapter 2 of Publication 946. Form1040 Work Opportunity Credit For the work opportunity credit, the definition of “targeted group employee” has been expanded to include a Hurricane Katrina employee. Form1040 Hurricane Katrina employee. Form1040   A Hurricane Katrina employee is: A person who, on August 28, 2005, had a main home in the core disaster area and, within a two-year period beginning on that date, is hired to perform services principally in the core disaster area; or A person who, on August 28, 2005, had a main home in the core disaster area, was displaced from that main home as a result of Hurricane Katrina, and was hired during the period beginning on August 28, 2005, and ending on December 31, 2005. Form1040 Qualified wages. Form1040   Generally, qualified wages do not include wages you paid to a targeted group employee who worked for you previously. Form1040 However, wages will qualify if: You paid them to an employee who is a Hurricane Katrina employee, The employee was not in your employment on August 28, 2005, and This is your first hire of the employee as a Hurricane Katrina employee after August 28, 2005. Form1040   For more information, see Form 5884. Form1040 Certification requirements. Form1040   An employee must provide to the employer reasonable evidence that he or she is a Hurricane Katrina employee. Form1040 An employer may accept a completed Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity and Welfare-to-Work Credits, as such evidence. Form1040 The certification requirements described in Form 8850 do not apply to a Hurricane Katrina employee. Form1040 Do not send any Forms 8850 that have only box 1 checked to the state employment security agency. Form1040 Instead, the employer should keep these Forms 8850 with the employer's other records. Form1040 For more information, see Form 8850 and its instructions. Form1040 Employee Retention Credit An eligible employer who conducted an active trade or business in the Gulf Opportunity (GO) Zone, the Rita GO Zone, or the Wilma GO Zone can claim the employee retention credit. Form1040 The credit is 40% of qualified wages for each eligible employee (up to a maximum of $6,000 in qualified wages per employee). Form1040 Generally, you must reduce your deduction for salaries and wages by the amount of this credit (before the tax liability limit). Form1040 Use Form 5884-A to claim the credit. Form1040 See the following rules and definitions for each hurricane. Form1040 Employers affected by Hurricane Katrina. Form1040   The following definitions apply to employers affected by Hurricane Katrina. Form1040 Eligible employer. Form1040   For this purpose, an eligible employer is any employer who conducted an active trade or business on August 28, 2005, in the GO Zone and whose trade or business was inoperable on any day after August 28, 2005, and before January 1, 2006, because of damage caused by Hurricane Katrina. Form1040 Eligible employee. Form1040   For this purpose, an eligible employee is an employee whose principal place of employment on August 28, 2005, with such eligible employer was in the GO Zone. Form1040 An employee is not an eligible employee for purposes of Hurricane Katrina if the employee is treated as an eligible employee for the work opportunity credit. Form1040 Employers affected by Hurricane Rita. Form1040   The following definitions apply to employers affected by Hurricane Rita. Form1040 Eligible employer. Form1040   For this purpose, an eligible employer is any employer who conducted an active trade or business on September 23, 2005, in the Rita GO Zone and whose trade or business was inoperable on any day after September 23, 2005, and before January 1, 2006, because of damage caused by Hurricane Rita. Form1040 Eligible employee. Form1040   For this purpose, an eligible employee is an employee whose principal place of employment on September 23, 2005, with such eligible employer was in the Rita GO Zone. Form1040 An employee is not an eligible employee for purposes of Hurricane Rita if the employee is treated as an eligible employee for the work opportunity credit or the Hurricane Katrina employee retention credit. Form1040 Employers affected by Hurricane Wilma. Form1040   The following definitions apply to employers affected by Hurricane Wilma. Form1040 Eligible employer. Form1040   For this purpose, an eligible employer is any employer who conducted an active trade or business on October 23, 2005, in the Wilma GO Zone and whose trade or business was inoperable on any day after October 23, 2005, and before January 1, 2006, because of damage caused by Hurricane Wilma. Form1040 Eligible employee. Form1040   For this purpose, an eligible employee is an employee whose principal place of employment on October 23, 2005, with such eligible employer was in the Wilma GO Zone. Form1040 An employee is not an eligible employee for purposes of Hurricane Wilma if the employee is treated as an eligible employee for the work opportunity credit or the Hurricane Katrina or Rita employee retention credit. Form1040 Qualified wages. Form1040   Qualified wages are wages you paid or incurred before January 1, 2006, (up to $6,000 per employee) for an eligible employee beginning on the date your trade or business first became inoperable at the employee's principal place of employment immediately before the applicable hurricane, and ending on the date your trade or business resumed significant operations at that place. Form1040 In addition, the wages must have been paid or incurred after the following date. Form1040 August 28, 2005, for Hurricane Katrina. Form1040 September 23, 2005, for Hurricane Rita. Form1040 October 23, 2005, for Hurricane Wilma. Form1040    This includes wages paid even if the employee performed no services, performed services at a place of employment other than the principal place of employment, or performed services at the principal place of employment before significant operations resumed. Form1040    Wages qualifying for the credit generally have the same meaning as wages subject to the Federal Unemployment Tax Act (FUTA). Form1040 Qualified wages also include amounts you paid for medical or hospitalization expenses in connection with sickness or accident disability. Form1040 Qualified wages for any employee must be reduced by the amount of any work supplementation payment you received under the Social Security Act. Form1040   For agricultural employees, if the work performed by any employee during more than half of any pay period qualified under FUTA as agricultural labor, that employee's wages subject to social security and Medicare taxes are qualified wages. Form1040 For a special rule that applies to railroad employees, see section 51(h)(1)(B). Form1040   Qualified wages do not include the following. Form1040 Wages paid to your dependent or a related individual. Form1040 See section 51(i)(1). Form1040 Wages paid to any employee during the period for which you received payment for the employee from a federally funded on-the-job training program. Form1040 Wages for services of replacement workers during a strike or lockout. Form1040   For more information, see Form 5884-A. Form1040 Hurricane Katrina Housing Credit An employer who conducted an active trade or business in the Gulf Opportunity (GO) Zone can claim the Hurricane Katrina housing credit. Form1040 The credit is equal to 30% of the value (up to $600 per month per employee) of in-kind lodging furnished to a qualified employee (and the employee's spouse or dependents) from January 1, 2006, through July 1, 2006. Form1040 The value of the lodging is excluded from the income of the qualified employee but is treated as wages for purposes of taxes imposed under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). Form1040 Generally, you must reduce your deduction for salaries and wages by the amount of this credit (before the tax liability limit). Form1040 The employer must use Form 5884-A to claim the credit. Form1040 A qualified employee is an individual who had a main home in the GO Zone on August 28, 2005, and who performs substantially all employment services in the GO Zone for the employer furnishing the lodging. Form1040 The employee cannot be your dependent or a related individual. Form1040 See section 51(i)(1). Form1040 For more information, see Form 5884-A. Form1040 Reforestation Costs You may be able to elect to deduct a limited amount of reforestation costs for each qualified timber property. Form1040 The deduction for any tax year generally is limited to $10,000 ($5,000 if married filing separately, $0 for a trust). Form1040 However, this limit is increased if you paid or incurred reforestation costs after the applicable date below and any portion of the qualified timber property is located in one of the following areas. Form1040 August 27, 2005, if any portion of the property is located in the GO Zone. Form1040 September 22, 2005, if any portion of the property is located in the Rita GO Zone (but not in the GO Zone). Form1040 October 22, 2005, if any portion of the property is located in the Wilma GO Zone. Form1040 The limit for each qualified timber property is increased by the smaller of: $10,000 ($5,000 if married filing separately, $0 for a trust), or The amount of reforestation costs you paid or incurred after the applicable date for the qualified timber property, any portion of which is located in the zone described above. Form1040 The increase in the limit applies only to costs paid or incurred before 2008. Form1040 However, these rules do not apply to any timber producer who: Held more than 500 acres of qualified timber property at any time during the tax year, Is a corporation with stock publicly traded on an established securities market, or Is a real estate investment trust. Form1040 For more information about the election to deduct reforestation costs, see chapter 8 in Publication 535, Business Expenses. Form1040 Demolition and Clean-up Costs You can elect to deduct 50% of any qualified GO Zone clean-up costs for the tax year in which the costs are paid or incurred, instead of capitalizing them. Form1040 Qualified GO Zone clean-up costs are any amounts paid or incurred after August 27, 2005, and before January 1, 2008, for the removal of debris from, or the demolition of structures on, real property located in the GO Zone that is: Held by you for use in a trade or business or for the production of income, or Inventory or other property held primarily for sale to customers in the ordinary course of your trade or business. Form1040 Increase in Rehabilitation Tax Credit The rehabilitation credit is increased for qualified rehabilitation expenditures paid or incurred after August 27, 2005, and before January 1, 2009, on buildings located in the GO Zone as follows. Form1040 For pre-1936 buildings (other than certified historic structures), the credit percentage is increased from 10% to 13%. Form1040 For certified historic structures, the credit percentage is increased from 20% to 26%. Form1040 For more information, see Form 3468, Investment Credit. Form1040 Request for Copy or Transcript of Tax Return Request for copy of tax return. Form1040   You can use Form 4506 to order a copy of your tax return. Form1040 Generally, there is a $39. Form1040 00 fee for requesting each copy of a tax return. Form1040 If your main home, principal place of business, or tax records are located in a Presidentially declared disaster area, the fee will be waived if the assigned disaster designation (for example, “Hurricane Katrina”) is written in red across the top of the form when filed. Form1040 Request for transcript of tax return. Form1040   You can use Form 4506-T to order a free transcript of your tax return. Form1040 A transcript provides most of the line entries from a tax return and usually contains the information that a third party requires. Form1040 You can also call 1-800-829-1040 to order a transcript. Form1040 How To Get Tax Help Special IRS assistance. Form1040   The IRS is providing special help for those affected by Hurricane Katrina, Rita, or Wilma, as well as survivors and personal representatives of the victims. Form1040 We have set up a special toll-free number for people who may have trouble filing or paying their taxes because they were affected by Hurricane Katrina, Rita, or Wilma, or who have other tax issues related to the hurricanes. Form1040 Call 1-866-562-5227 Monday through Friday In English-7 a. Form1040 m. Form1040 to 10 p. Form1040 m. Form1040 local time In Spanish-8 a. Form1040 m. Form1040 to 9:30 p. Form1040 m. Form1040 local time   The IRS website at www. Form1040 irs. Form1040 gov has notices and other tax relief information. Form1040 Check it periodically for any new guidance. Form1040 Other help from the IRS. Form1040   You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. Form1040 By selecting the method that is best for you, you will have quick and easy access to tax help. Form1040 Contacting your Taxpayer Advocate. Form1040   If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate. Form1040   The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. Form1040 While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review. Form1040   To contact your Taxpayer Advocate: Call the Taxpayer Advocate toll free at 1-877-777-4778. Form1040 Call, write, or fax the Taxpayer Advocate office in your area. Form1040 Call 1-800-829-4059 if you are a TTY/TDD user. Form1040 Visit www. Form1040 irs. Form1040 gov/advocate. Form1040   For more information, see Publication 1546, How To Get Help With Unresolved Tax Problems (now available in Chinese, Korean, Russian, and Vietnamese, in addition to English and Spanish). Form1040 Free tax services. Form1040   To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. Form1040 It contains a list of free tax publications and an index of tax topics. Form1040 It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics. Form1040 Internet. Form1040 You can access the IRS website 24 hours a day, 7 days a week, at www. Form1040 irs. Form1040 gov to: E-file your return. Form1040 Find out about commercial tax preparation and e-file services available free to eligible taxpayers. Form1040 Check the status of your refund. Form1040 Click on Where's My Refund. Form1040 Be sure to wait at least 6 weeks from the date you filed your return (3 weeks if you filed electronically). Form1040 Have your tax return available because you will need to know your social security number, your filing status, and the exact whole dollar amount of your refund. Form1040 Download forms, instructions, and publications. Form1040 Order IRS products online. Form1040 Research your tax questions online. Form1040 Search publications online by topic or keyword. Form1040 View Internal Revenue Bulletins (IRBs) published in the last few years. Form1040 Figure your withholdin
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IRS Charts a Path Forward with Immediate Actions

The IRS is outlining new actions and next steps to fix problems uncovered with the IRS’ review of tax-exempt applications and improve the wider processes and operations in place at the IRS. The report released by Principal Deputy Commissioner Danny Werfel reflects important findings, aggressive actions and the next steps to help the IRS make improvements. Other documents give specific highlights of those findings and actions.

The following table represents the current status of recommended actions from the Treasury Inspector General for Tax Administration's (TIGTA) report on IRS's tax-exempt area. The status of the recommended actions will be updated monthly. Use the link in the Status column to view the historical updates for each recommendation.

Recommended Actions Status


All recommendations are closed as of Jan. 31, 2014. In Recommendation 7, we continue to report on the number of original backlog cases monthly until those cases are closed. Most recent update: March 24, 2004.

No. Recommendation Lead ECD Status*
1 Ensure that the memorandum requiring the Director, Rulings and Agreements, to approve all original entries and changes to criteria included on the BOLO listing prior to implementation be formalized in the appropriate Internal Revenue Manual. Director, Exempt Organizations

06/28/2013
09/30/2013

 

Completed
2 Develop procedures to better document the reason(s) applications are chosen for review by the team of specialists (e.g., evidence of specific political campaign intervention in the application file or specific reasons the EO function may have for choosing to review the application further based on past experience). Director, Exempt Organizations 09/30/2013 Completed
3 Develop training or workshops to be held before each election cycle including, but not limited to, the proper ways to identify applications that require review of political campaign intervention activities. Director, Exempt Organizations 01/31/2014 Completed
4 Develop a process for the Determinations Unit to formally request assistance from the Technical Unit and the Guidance Unit. The process should include actions to initiate, track, and monitor requests for assistance to ensure that requests are responded to timely. Director, Exempt Organizations

06/28/2013
01/31/2014

 

Completed
5 Develop guidance for specialists on how to process requests for tax-exempt status involving potentially significant political campaign intervention. This guidance should also be posted to the Internet to provide transparency to organizations on the application process. Director, Exempt Organizations

06/27/2013
01/31/2014

 

Completed
6 Develop training or workshops to be held before each election cycle including, but not limited to: a) what constitutes political campaign intervention versus general advocacy (including case examples) and b) the ability to refer for follow-up those organizations that may conduct activities in a future year which may cause them to lose their tax-exempt status. Director, Exempt Organizations 01/31/2014 Completed
7 Provide oversight to ensure that potential political cases, some of which have been in process for three years, are approved or denied expeditiously. Director, Exempt Organizations 01/31/2014 Completed
8 Recommend to IRS Chief Counsel and the Department of the Treasury that guidance on how to measure the “primary activity” of I.R.C. § 501(c)(4) social welfare organizations be included for consideration in the Department of the Treasury Priority Guidance Plan. Commissioner, Tax Exempt and Government Entities 05/03/2013 Completed
9 The Director, EO, should develop training or workshops to be held before each election cycle including, but not limited to, how to word questions in additional information request letters and what additional information should be requested. Director, Exempt Organizations 01/31/2014 Completed

* Green = On schedule; Yellow = Behind schedule; Red = Significant issues

 

Page Last Reviewed or Updated: 24-Mar-2014

The Form1040

Form1040 4. Form1040   Transportation Table of Contents Parking fees. Form1040 Advertising display on car. Form1040 Car pools. Form1040 Hauling tools or instruments. Form1040 Union members' trips from a union hall. Form1040 Car ExpensesStandard Mileage Rate Actual Car Expenses Leasing a Car Disposition of a Car This chapter discusses expenses you can deduct for business transportation when you are not traveling away from home as defined in chapter 1. Form1040 These expenses include the cost of transportation by air, rail, bus, taxi, etc. Form1040 , and the cost of driving and maintaining your car. Form1040 Transportation expenses include the ordinary and necessary costs of all of the following. Form1040 Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Form1040 Tax home is defined in chapter 1. Form1040 Visiting clients or customers. Form1040 Going to a business meeting away from your regular workplace. Form1040 Getting from your home to a temporary workplace when you have one or more regular places of work. Form1040 These temporary workplaces can be either within the area of your tax home or outside that area. Form1040 Transportation expenses do not include expenses you have while traveling away from home overnight. Form1040 Those expenses are travel expenses discussed in chapter 1 . Form1040 However, if you use your car while traveling away from home overnight, use the rules in this chapter to figure your car expense deduction. Form1040 See Car Expenses , later. Form1040 Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses. Form1040 However, there may be exceptions to this general rule. Form1040 You can deduct daily transportation expenses incurred going between your residence and a temporary work station outside the metropolitan area where you live. Form1040 Also, daily transportation expenses can be deducted if: (1) you have one or more regular work locations away from your residence or (2) your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance. Form1040 Illustration of transportation expenses. Form1040    Figure B , earlier, illustrates the rules that apply for deducting transportation expenses when you have a regular or main job away from your home. Form1040 You may want to refer to it when deciding whether you can deduct your transportation expenses. Form1040 Temporary work location. Form1040   If you have one or more regular work locations away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location, regardless of distance. Form1040   If your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary unless there are facts and circumstances that would indicate otherwise. Form1040   If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more than 1 year. Form1040   If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes. Form1040 It will not be treated as temporary after the date you determine it will last more than 1 year. Form1040   If the temporary work location is beyond the general area of your regular place of work and you stay overnight, you are traveling away from home. Form1040 You may have deductible travel expenses as discussed in chapter 1 . Form1040 No regular place of work. Form1040   If you have no regular place of work but ordinarily work in the metropolitan area where you live, you can deduct daily transportation costs between home and a temporary work site outside that metropolitan area. Form1040   Generally, a metropolitan area includes the area within the city limits and the suburbs that are considered part of that metropolitan area. Form1040   You cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. Form1040 These are nondeductible commuting expenses. Form1040 Two places of work. Form1040   If you work at two places in one day, whether or not for the same employer, you can deduct the expense of getting from one workplace to the other. Form1040 However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the amount it would have cost you to go directly from the first location to the second. Form1040   Transportation expenses you have in going between home and a part-time job on a day off from your main job are commuting expenses. Form1040 You cannot deduct them. Form1040 Armed Forces reservists. Form1040   A meeting of an Armed Forces reserve unit is a second place of business if the meeting is held on a day on which you work at your regular job. Form1040 You can deduct the expense of getting from one workplace to the other as just discussed under Two places of work . Form1040   You usually cannot deduct the expense if the reserve meeting is held on a day on which you do not work at your regular job. Form1040 In this case, your transportation generally is a nondeductible commuting expense. Form1040 However, you can deduct your transportation expenses if the location of the meeting is temporary and you have one or more regular places of work. Form1040   If you ordinarily work in a particular metropolitan area but not at any specific location and the reserve meeting is held at a temporary location outside that metropolitan area, you can deduct your transportation expenses. Form1040   If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses. Form1040 These expenses are discussed in chapter 1 . Form1040   If you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you may be able to deduct some of your reserve-related travel costs as an adjustment to gross income rather than as an itemized deduction. Form1040 For more information, see Armed Forces Reservists Traveling More Than 100 Miles From Home under Special Rules, in chapter 6. Form1040 Commuting expenses. Form1040   You cannot deduct the costs of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your main or regular place of work. Form1040 These costs are personal commuting expenses. Form1040 You cannot deduct commuting expenses no matter how far your home is from your regular place of work. Form1040 You cannot deduct commuting expenses even if you work during the commuting trip. Form1040 Example. Form1040 You sometimes use your cell phone to make business calls while commuting to and from work. Form1040 Sometimes business associates ride with you to and from work, and you have a business discussion in the car. Form1040 These activities do not change the trip from personal to business. Form1040 You cannot deduct your commuting expenses. Form1040 Parking fees. Form1040    Fees you pay to park your car at your place of business are nondeductible commuting expenses. Form1040 You can, however, deduct business-related parking fees when visiting a customer or client. Form1040 Advertising display on car. Form1040   Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. Form1040 If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses. Form1040 Car pools. Form1040   You cannot deduct the cost of using your car in a nonprofit car pool. Form1040 Do not include payments you receive from the passengers in your income. Form1040 These payments are considered reimbursements of your expenses. Form1040 However, if you operate a car pool for a profit, you must include payments from passengers in your income. Form1040 You can then deduct your car expenses (using the rules in this publication). Form1040 Hauling tools or instruments. Form1040   Hauling tools or instruments in your car while commuting to and from work does not make your car expenses deductible. Form1040 However, you can deduct any additional costs you have for hauling tools or instruments (such as for renting a trailer you tow with your car). Form1040 Union members' trips from a union hall. Form1040   If you get your work assignments at a union hall and then go to your place of work, the costs of getting from the union hall to your place of work are nondeductible commuting expenses. Form1040 Although you need the union to get your work assignments, you are employed where you work, not where the union hall is located. Form1040 Office in the home. Form1040   If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. Form1040 (See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Form1040 ) Examples of deductible transportation. Form1040   The following examples show when you can deduct transportation expenses based on the location of your work and your home. Form1040 Example 1. Form1040 You regularly work in an office in the city where you live. Form1040 Your employer sends you to a 1-week training session at a different office in the same city. Form1040 You travel directly from your home to the training location and return each day. Form1040 You can deduct the cost of your daily round-trip transportation between your home and the training location. Form1040 Example 2. Form1040 Your principal place of business is in your home. Form1040 You can deduct the cost of round-trip transportation between your qualifying home office and your client's or customer's place of business. Form1040 Example 3. Form1040 You have no regular office, and you do not have an office in your home. Form1040 In this case, the location of your first business contact inside the metropolitan area is considered your office. Form1040 Transportation expenses between your home and this first contact are nondeductible commuting expenses. Form1040 Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. Form1040 While you cannot deduct the costs of these trips, you can deduct the costs of going from one client or customer to another. Form1040 Car Expenses If you use your car for business purposes, you ordinarily can deduct car expenses. Form1040 You generally can use one of the two following methods to figure your deductible expenses. Form1040 Standard mileage rate. Form1040 Actual car expenses. Form1040 If you use actual expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments you can deduct. Form1040 See Leasing a Car , later. Form1040 In this publication, “car” includes a van, pickup, or panel truck. Form1040 For the definition of “car” for depreciation purposes, see Car defined under Actual Car Expenses, later. Form1040 Rural mail carriers. Form1040   If you are a rural mail carrier, you may be able to treat the qualified reimbursement you received as your allowable expense. Form1040 Because the qualified reimbursement is treated as paid under an accountable plan, your employer should not include the reimbursement in your income. Form1040   If your vehicle expenses are more than the amount of your reimbursement, you can deduct the unreimbursed expenses as an itemized deduction on Schedule A (Form 1040). Form1040 You must complete Form 2106 and attach it to your Form 1040, U. Form1040 S. Form1040 Individual Income Tax Return. Form1040   A “qualified reimbursement” is the reimbursement you receive that meets both of the following conditions. Form1040 It is given as an equipment maintenance allowance (EMA) to employees of the U. Form1040 S. Form1040 Postal Service. Form1040 It is at the rate contained in the 1991 collective bargaining agreement. Form1040 Any later agreement cannot increase the qualified reimbursement amount by more than the rate of inflation. Form1040 See your employer for information on your reimbursement. Form1040    If you are a rural mail carrier and received a qualified reimbursement, you cannot use the standard mileage rate. Form1040 Standard Mileage Rate You may be able to use the standard mileage rate to figure the deductible costs of operating your car for business purposes. Form1040 For 2013, the standard mileage rate for the cost of operating your car for business use is 56½ cents per mile. Form1040 If you use the standard mileage rate for a year, you cannot deduct your actual car expenses for that year. Form1040 You cannot deduct depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance, or vehicle registration fees. Form1040 See Choosing the standard mileage rate and Standard mileage rate not allowed, later. Form1040 You generally can use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. Form1040 See chapter 6 for more information on reimbursements . Form1040 Choosing the standard mileage rate. Form1040   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Form1040 Then, in later years, you can choose to use either the standard mileage rate or actual expenses. Form1040   If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. Form1040 For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that is after 1997. Form1040   You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. Form1040 You cannot revoke the choice. Form1040 However, in later years, you can switch from the standard mileage rate to the actual expenses method. Form1040 If you change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation. Form1040 Example. Form1040 Larry is an employee who occasionally uses his own car for business purposes. Form1040 He purchased the car in 2011, but he did not claim any unreimbursed employee expenses on his 2011 tax return. Form1040 Because Larry did not use the standard mileage rate the first year the car was available for business use, he cannot use the standard mileage rate in 2013 to claim unreimbursed employee business expenses. Form1040   For more information about depreciation included in the standard mileage rate, see Exception under Methods of depreciation, later. Form1040 Standard mileage rate not allowed. Form1040   You cannot use the standard mileage rate if you: Use five or more cars at the same time (such as in fleet operations), Claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS (as discussed later under Depreciation Deduction), Claimed a section 179 deduction (discussed later) on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses after 1997 for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. Form1040 (See Rural mail carriers , earlier. Form1040 ) Note. Form1040 You can elect to use the standard mileage rate if you used a car for hire (such as a taxi) unless the standard mileage rate is otherwise not allowed, as discussed above. Form1040 Five or more cars. Form1040   If you own or lease five or more cars that are used for business at the same time, you cannot use the standard mileage rate for the business use of any car. Form1040 However, you may be able to deduct your actual expenses for operating each of the cars in your business. Form1040 See Actual Car Expenses , later, for information on how to figure your deduction. Form1040   You are not using five or more cars for business at the same time if you alternate using (use at different times) the cars for business. Form1040   The following examples illustrate the rules for when you can and cannot use the standard mileage rate for five or more cars. Form1040 Example 1. Form1040 Marcia, a salesperson, owns three cars and two vans that she alternates using for calling on her customers. Form1040 She can use the standard mileage rate for the business mileage of the three cars and the two vans because she does not use them at the same time. Form1040 Example 2. Form1040 Tony and his employees use his four pickup trucks in his landscaping business. Form1040 During the year, he traded in two of his old trucks for two newer ones. Form1040 Tony can use the standard mileage rate for the business mileage of all six of the trucks he owned during the year. Form1040 Example 3. Form1040 Chris owns a repair shop and an insurance business. Form1040 He and his employees use his two pickup trucks and van for the repair shop. Form1040 Chris alternates using his two cars for the insurance business. Form1040 No one else uses the cars for business purposes. Form1040 Chris can use the standard mileage rate for the business use of the pickup trucks, van, and the cars because he never has more than four vehicles used for business at the same time. Form1040 Example 4. Form1040 Maureen owns a car and four vans that are used in her housecleaning business. Form1040 Her employees use the vans, and she uses the car to travel to various customers. Form1040 Maureen cannot use the standard mileage rate for the car or the vans. Form1040 This is because all five vehicles are used in Maureen's business at the same time. Form1040 She must use actual expenses for all vehicles. Form1040 Interest. Form1040   If you are an employee, you cannot deduct any interest paid on a car loan. Form1040 This applies even if you use the car 100% for business as an employee. Form1040   However, if you are self-employed and use your car in your business, you can deduct that part of the interest expense that represents your business use of the car. Form1040 For example, if you use your car 60% for business, you can deduct 60% of the interest on Schedule C (Form 1040). Form1040 You cannot deduct the part of the interest expense that represents your personal use of the car. Form1040    If you use a home equity loan to purchase your car, you may be able to deduct the interest. Form1040 See Publication 936, Home Mortgage Interest Deduction, for more information. Form1040 Personal property taxes. Form1040   If you itemize your deductions on Schedule A (Form 1040), you can deduct on line 7 state and local personal property taxes on motor vehicles. Form1040 You can take this deduction even if you use the standard mileage rate or if you do not use the car for business. Form1040   If you are self-employed and use your car in your business, you can deduct the business part of state and local personal property taxes on motor vehicles on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040). Form1040 If you itemize your deductions, you can include the remainder of your state and local personal property taxes on the car on Schedule A (Form 1040). Form1040 Parking fees and tolls. Form1040   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. Form1040 (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. Form1040 ) Sale, trade-in, or other disposition. Form1040   If you sell, trade in, or otherwise dispose of your car, you may have a gain or loss on the transaction or an adjustment to the basis of your new car. Form1040 See Disposition of a Car , later. Form1040 Actual Car Expenses If you do not use the standard mileage rate, you may be able to deduct your actual car expenses. Form1040 If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction. Form1040 Actual car expenses include: Depreciation Licenses Lease  payments Registration  fees Gas Insurance Repairs Oil Garage rent Tires Tolls Parking fees   If you have fully depreciated a car that you still use in your business, you can continue to claim your other actual car expenses. Form1040 Continue to keep records, as explained later in chapter 5 . Form1040 Business and personal use. Form1040   If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. Form1040 You can divide your expense based on the miles driven for each purpose. Form1040 Example. Form1040 You are a sales representative for a clothing firm and drive your car 20,000 miles during the year: 12,000 miles for business and 8,000 miles for personal use. Form1040 You can claim only 60% (12,000 ÷ 20,000) of the cost of operating your car as a business expense. Form1040 Employer-provided vehicle. Form1040   If you use a vehicle provided by your employer for business purposes, you can deduct your actual unreimbursed car expenses. Form1040 You cannot use the standard mileage rate. Form1040 See Vehicle Provided by Your Employer in chapter 6. Form1040 Interest on car loans. Form1040   If you are an employee, you cannot deduct any interest paid on a car loan. Form1040 This interest is treated as personal interest and is not deductible. Form1040 If you are self-employed and use your car in that business, see Interest , earlier, under Standard Mileage Rate. Form1040 Taxes paid on your car. Form1040   If you are an employee, you can deduct personal property taxes paid on your car if you itemize deductions. Form1040 Enter the amount paid on line 7 of Schedule A (Form 1040). Form1040 Sales taxes. Form1040   Generally, sales taxes on your car are part of your car's basis and are recovered through depreciation, discussed later. Form1040 Fines and collateral. Form1040   You cannot deduct fines you pay or collateral you forfeit for traffic violations. Form1040 Casualty and theft losses. Form1040   If your car is damaged, destroyed, or stolen, you may be able to deduct part of the loss not covered by insurance. Form1040 See Publication 547, Casualties, Disasters, and Thefts, for information on deducting a loss on your car. Form1040 Depreciation and section 179 deductions. Form1040   Generally, the cost of a car, plus sales tax and improvements, is a capital expense. Form1040 Because the benefits last longer than 1 year, you generally cannot deduct a capital expense. Form1040 However, you can recover this cost through the section 179 deduction (the deduction allowed by section 179 of the Internal Revenue Code), special depreciation allowance, and depreciation deductions. Form1040 Depreciation allows you to recover the cost over more than 1 year by deducting part of it each year. Form1040 The section 179 deduction , special depreciation allowance , and depreciation deductions are discussed later. Form1040   Generally, there are limits on these deductions. Form1040 Special rules apply if you use your car 50% or less in your work or business. Form1040   You can claim a section 179 deduction and use a depreciation method other than straight line only if you do not use the standard mileage rate to figure your business-related car expenses in the year you first place a car in service. Form1040   If, in the year you first place a car in service, you claim either a section 179 deduction or use a depreciation method other than straight line for its estimated useful life, you cannot use the standard mileage rate on that car in any future year. Form1040 Car defined. Form1040   For depreciation purposes, a car is any four-wheeled vehicle (including a truck or van) made primarily for use on public streets, roads, and highways. Form1040 Its unloaded gross vehicle weight must not be more than 6,000 pounds. Form1040 A car includes any part, component, or other item physically attached to it or usually included in the purchase price. Form1040   A car does not include: An ambulance, hearse, or combination ambulance-hearse used directly in a business, A vehicle used directly in the business of transporting persons or property for pay or hire, or A truck or van that is a qualified nonpersonal use vehicle. Form1040 Qualified nonpersonal use vehicles. Form1040   These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. Form1040 They include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name. Form1040 Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat, are qualified nonpersonal use vehicles. Form1040 More information. Form1040   See Depreciation Deduction , later, for more information on how to depreciate your vehicle. Form1040 Section 179 Deduction The section 179 deduction allows you to treat a portion or all of the cost of a car as a current expense. Form1040 If you choose to deduct all or part of the cost as a current expense, you must reduce your depreciable basis in the car by the amount of the section 179 deduction. Form1040 There is a limit on the total section 179 deduction, special depreciation allowance, and depreciation deduction for cars, trucks, and vans that may reduce or eliminate any benefit from claiming the section 179 deduction. Form1040 See Depreciation Limits, later. Form1040 You can claim the section 179 deduction only in the year you place the car in service. Form1040 For this purpose, a car is placed in service when it is ready and available for a specifically assigned use, whether in a trade or business, a tax-exempt activity, a personal activity, or for the production of income. Form1040 Even if you are not using the property, it is in service when it is ready and available for its specifically assigned use. Form1040 A car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business. Form1040 Example. Form1040 In 2012, you bought a new car and used it for personal purposes. Form1040 In 2013, you began to use it for business. Form1040 Changing its use to business use does not qualify the cost of your car for a section 179 deduction in 2013. Form1040 However, you can claim a depreciation deduction for the business use of the car starting in 2013. Form1040 See Depreciation Deduction , later. Form1040 More than 50% business use requirement. Form1040   You must use the property more than 50% for business to claim any section 179 deduction. Form1040 If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Form1040 The result is the cost of the property that can qualify for the section 179 deduction. Form1040 Example. Form1040 Peter purchased a car in April 2013 for $24,500 and used it 60% for business. Form1040 Based on his business usage, the total cost of Peter's car that qualifies for the section 179 deduction is $14,700 ($24,500 cost × 60% business use). Form1040 But see Limit on total section 179, special depreciation allowance, and depreciation deduction , discussed later. Form1040 Limits. Form1040   There are limits on: The amount of the section 179 deduction, The section 179 deduction for sport utility and certain other vehicles, and The total amount of the section 179 deduction, special depreciation allowance, and depreciation deduction (discussed later ) you can claim for a qualified property. Form1040 Limit on the amount of the section 179 deduction. Form1040   For 2013, the total amount you can choose to deduct under section 179 generally cannot be more than $500,000. Form1040   If the cost of your section 179 property placed in service in 2013 is over $2,000,000, you must reduce the $500,000 dollar limit (but not below zero) by the amount of cost over $2,000,000. Form1040 If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. Form1040   The total amount you can deduct under section 179 each year after you apply the limits listed above cannot be more than the taxable income from the active conduct of any trade or business during the year. Form1040   If you are married and file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Form1040   If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit. Form1040 You must allocate the dollar limit (after any reduction) between you. Form1040   For more information on the above section 179 deduction limits, see Publication 946. Form1040 Limit for sport utility and certain other vehicles. Form1040   For sport utility and certain other vehicles placed in service in 2013, the portion of the vehicle's cost taken into account in figuring your section 179 deduction is limited to $25,000. Form1040 This rule applies to any four-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is not subject to any of the passenger automobile limits explained under Depreciation Limits , later, and that is rated at no more than 14,000 pounds gross vehicle weight. Form1040 However, the $25,000 limit does not apply to any vehicle: Designed to have a seating capacity of more than nine persons behind the driver's seat, Equipped with a cargo area of at least 6 feet in interior length that is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or That has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. Form1040    Limit on total section 179, special depreciation allowance, and depreciation deduction. Form1040   Generally, the total amount of section 179, special depreciation allowance, and depreciation deduction you can claim for a car that is qualified property and that you placed in service in 2013 is $11,160. Form1040 The limit is reduced if your business use of the car is less than 100%. Form1040 See Depreciation Limits , later, for more information. Form1040 Example. Form1040 In the earlier example under More than 50% business use requirement, Peter had a car with a cost (for purposes of the section 179 deduction) of $14,700. Form1040 However, based on Peter's business usage of his car, the total of his section 179, special depreciation allowance, and depreciation deductions is limited to $6,696 ($11,160 limit x 60% business use). Form1040 Cost of car. Form1040   For purposes of the section 179 deduction, the cost of the car does not include any amount figured by reference to any other property held by you at any time. Form1040 For example, if you buy (for cash and a trade-in) a new car to use in your business, your cost for purposes of the section 179 deduction does not include your adjusted basis in the car you trade in for the new car. Form1040 Your cost includes only the cash you paid. Form1040 Basis of car for depreciation. Form1040   The amount of the section 179 deduction reduces your basis in your car. Form1040 If you choose the section 179 deduction, you must subtract the amount of the deduction from the cost of your car. Form1040 The resulting amount is the basis in your car you use to figure your depreciation deduction. Form1040 When to choose. Form1040   If you want to take the section 179 deduction, you must make the choice in the tax year you place the car in service for business or work. Form1040 How to choose. Form1040    Employees use Form 2106 to make this choice and report the section 179 deduction. Form1040 All others use Form 4562. Form1040   File the appropriate form with either of the following. Form1040 Your original tax return filed for the year the property was placed in service (whether or not you file it timely). Form1040 An amended return filed within the time prescribed by law. Form1040 An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Form1040 The amended return must also include any resulting adjustments to taxable income. Form1040    You must keep records that show the specific identification of each piece of qualifying section 179 property. Form1040 These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Form1040 Revoking an election. Form1040   An election (or any specification made in the election) to take a section 179 deduction for 2013 can only be revoked with the Commissioner's approval. Form1040 Recapture of section 179 deduction. Form1040   To be eligible to claim the section 179 deduction, you must use your car more than 50% for business or work in the year you acquired it. Form1040 If your business use of the car is 50% or less in a later tax year during the recovery period, you have to recapture (include in income) in that later year any excess depreciation. Form1040 Any section 179 deduction claimed on the car is included in calculating the excess depreciation. Form1040 For information on this calculation, see Excess depreciation , later in this chapter under Car Used 50% or Less for Business. Form1040 Dispositions. Form1040   If you dispose of a car on which you had claimed the section 179 deduction, the amount of that deduction is treated as a depreciation deduction for recapture purposes. Form1040 You treat any gain on the disposition of the property as ordinary income up to the amount of the section 179 deduction and any allowable depreciation (unless you establish the amount actually allowed). Form1040 For information on the disposition of a car, see Disposition of a Car , later. Form1040 Special Depreciation Allowance You may be able to claim the special depreciation allowance for your car, truck, or van, if it is qualified property and was placed in service in 2013. Form1040 The allowance is an additional depreciation deduction of 50% of the car's depreciable basis (after any section 179 deduction, but before figuring your regular depreciation deduction under MACRS). Form1040 The special depreciation allowance applies only for the first year the car is placed in service. Form1040 To qualify for the allowance more than 50% of the use of the car must be in a qualified business use (as defined under Depreciation Deduction, later). Form1040 Combined depreciation. Form1040   Your combined section 179 deduction, special depreciation allowance, and regular MACRS depreciation deduction is limited to the maximum allowable depreciation deduction for cars of $11,160 ($3,160 if you elect not to claim the special depreciation allowance). Form1040 For trucks and vans, the first-year limit remains at $11,360 ($3,360 if you elect not to claim the special depreciation allowance). Form1040 See Depreciation Limits , later in this chapter. Form1040 Qualified car. Form1040   To be a qualified car (including trucks and vans), the car must meet all of the following tests. Form1040 You purchased the car new on or after January 1, 2008, but only if no binding written contract to acquire the car existed before January 1, 2008, You placed the car in service in your trade or business before January 1, 2014, You used the car more than 50% in a qualified business use. Form1040 Election not to claim the special depreciation allowance. Form1040   You can elect not to claim the special depreciation allowance for your car, truck, or van, that is qualified property. Form1040 If you make this election, it applies to all 5-year property placed in service during the year. Form1040   To make the election, attach a statement to your timely filed return (including extensions) indicating the class of property (5-year for cars) for which you are making the election and that you are electing not to claim the special depreciation allowance for qualified property acquired on or after January 1, 2008. Form1040    Unless you elect not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the amount of the allowance, even if the allowance was not claimed. Form1040 Depreciation Deduction If you use actual car expenses to figure your deduction for a car you own and use in your business, you can claim a depreciation deduction. Form1040 This means you can deduct a certain amount each year as a recovery of your cost or other basis in your car. Form1040 You generally need to know the following things about the car you intend to depreciate. Form1040 Your basis in the car. Form1040 The date you place the car in service. Form1040 The method of depreciation and recovery period you will use. Form1040 Basis. Form1040   Your basis in a car for figuring depreciation is generally its cost. Form1040 This includes any amount you borrow or pay in cash, other property, or services. Form1040   Generally, you figure depreciation on your car, truck, or van using your unadjusted basis (see Unadjusted basis , later). Form1040 However, in some situations you will use your adjusted basis (your basis reduced by depreciation allowed or allowable in earlier years). Form1040 For one of these situations see Exception under Methods of depreciation, later. Form1040   If you change the use of a car from personal to business, your basis for depreciation is the lesser of the fair market value or your adjusted basis in the car on the date of conversion. Form1040 Additional rules concerning basis are discussed later in this chapter under Unadjusted basis . Form1040 Placed in service. Form1040   You generally place a car in service when it is available for use in your work or business, in an income-producing activity, or in a personal activity. Form1040 Depreciation begins when the car is placed in service for use in your work or business or for the production of income. Form1040   For purposes of computing depreciation, if you first start using the car only for personal use and later convert it to business use, you place the car in service on the date of conversion. Form1040 Car placed in service and disposed of in the same year. Form1040   If you place a car in service and dispose of it in the same tax year, you cannot claim any depreciation deduction for that car. Form1040 Methods of depreciation. Form1040   Generally, you figure depreciation on cars using the Modified Accelerated Cost Recovery System (MACRS). Form1040 MACRS is discussed later in this chapter. Form1040 Exception. Form1040   If you used the standard mileage rate in the first year of business use and change to the actual expenses method in a later year, you cannot depreciate your car under the MACRS rules. Form1040 You must use straight line depreciation over the estimated remaining useful life of the car. Form1040   To figure depreciation under the straight line method, you must reduce your basis in the car (but not below zero) by a set rate per mile for all miles for which you used the standard mileage rate. Form1040 The rate per mile varies depending on the year(s) you used the standard mileage rate. Form1040 For the rate(s) to use, see Depreciation adjustment when you used the standard mileage rate under Disposition of a Car, later. Form1040   This reduction of basis is in addition to those basis adjustments described later under Unadjusted basis . Form1040 You must use your adjusted basis in your car to figure your depreciation deduction. Form1040 For additional information on the straight line method of depreciation, see Publication 946. Form1040 More-than-50%-use test. Form1040   Generally, you must use your car more than 50% for qualified business use (defined next) during the year to use MACRS. Form1040 You must meet this more-than-50%-use test each year of the recovery period (6 years under MACRS) for your car. Form1040   If your business use is 50% or less, you must use the straight line method to depreciate your car. Form1040 This is explained later under Car Used 50% or Less for Business . Form1040 Qualified business use. Form1040   A qualified business use is any use in your trade or business. Form1040 It does not include use for the production of income (investment use). Form1040 However, you do combine your business and investment use to compute your depreciation deduction for the tax year. Form1040 Use of your car by another person. Form1040   Do not treat any use of your car by another person as use in your trade or business unless that use meets one of the following conditions. Form1040 It is directly connected with your business. Form1040 It is properly reported by you as income to the other person (and, if you have to, you withhold tax on the income). Form1040 It results in a payment of fair market rent. Form1040 This includes any payment to you for the use of your car. Form1040 Business use changes. Form1040   If you used your car more than 50% in qualified business use in the year you placed it in service, but 50% or less in a later year (including the year of disposition), you have to change to the straight line method of depreciation. Form1040 See Qualified business use 50% or less in a later year under Car Used 50% or Less for Business, later. Form1040    Property does not cease to be used more than 50% in qualified business use by reason of a transfer at death. Form1040 Use for more than one purpose. Form1040   If you use your car for more than one purpose during the tax year, you must allocate the use to the various purposes. Form1040 You do this on the basis of mileage. Form1040 Figure the percentage of qualified business use by dividing the number of miles you drive your car for business purposes during the year by the total number of miles you drive the car during the year for any purpose. Form1040 Change from personal to business use. Form1040   If you change the use of a car from 100% personal use to business use during the tax year, you may not have mileage records for the time before the change to business use. Form1040 In this case, you figure the percentage of business use for the year as follows. Form1040 Determine the percentage of business use for the period following the change. Form1040 Do this by dividing business miles by total miles driven during that period. Form1040 Multiply the percentage in (1) by a fraction. Form1040 The numerator (top number) is the number of months the car is used for business and the denominator (bottom number) is 12. Form1040 Example. Form1040 You use a car only for personal purposes during the first 6 months of the year. Form1040 During the last 6 months of the year, you drive the car a total of 15,000 miles of which 12,000 miles are for business. Form1040 This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Form1040 Your business use for the year is 40% (80% × 6/12). Form1040 Limits. Form1040   The amount you can claim for section 179, special depreciation allowance, and depreciation deductions may be limited. Form1040 The maximum amount you can claim depends on the year in which you placed your car in service. Form1040 You have to reduce the maximum amount if you did not use the car exclusively for business. Form1040 See Depreciation Limits , later. Form1040 Unadjusted basis. Form1040   You use your unadjusted basis (often referred to as your basis or your basis for depreciation) to figure your depreciation using the MACRS depreciation chart, explained later under Modified Accelerated Cost Recovery System (MACRS) . Form1040 Your unadjusted basis for figuring depreciation is your original basis increased or decreased by certain amounts. Form1040   To figure your unadjusted basis, begin with your car's original basis, which generally is its cost. Form1040 Cost includes sales taxes (see Sales taxes , earlier), destination charges, and dealer preparation. Form1040 Increase your basis by any substantial improvements you make to your car, such as adding air conditioning or a new engine. Form1040 Decrease your basis by any section 179 deduction, special depreciation allowance, gas guzzler tax, clean-fuel vehicle deduction (for vehicles placed in service before Jan. Form1040 1, 2006), and alternative motor vehicle credit. Form1040   See Form 8910 for information on the alternative motor vehicle credit. Form1040 If your business use later falls to 50% or less, you may have to recapture (include in your income) any excess depreciation. Form1040 See Car Used 50% or Less for Business, later, for more information. Form1040 If you acquired the car by gift or inheritance, see Publication 551, Basis of Assets, for information on your basis in the car. Form1040 Improvements. Form1040   A major improvement to a car is treated as a new item of 5-year recovery property. Form1040 It is treated as placed in service in the year the improvement is made. Form1040 It does not matter how old the car is when the improvement is added. Form1040 Follow the same steps for depreciating the improvement as you would for depreciating the original cost of the car. Form1040 However, you must treat the improvement and the car as a whole when applying the limits on the depreciation deductions. Form1040 Your car's depreciation deduction for the year (plus any section 179 deduction, special depreciation allowance, and depreciation on any improvements) cannot be more than the depreciation limit that applies for that year. Form1040 See Depreciation Limits , later. Form1040 Car trade-in. Form1040   If you traded one car (the “old car”) for another car (the “new car”) in 2013, there are two ways you can treat the transaction. Form1040 You can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. Form1040 If you make this election, you treat the old car as disposed of at the time of the trade-in. Form1040 The depreciable basis of the new car is the adjusted basis of the old car (figured as if 100% of the car's use had been for business purposes) plus any additional amount you paid for the new car. Form1040 You then figure your depreciation deduction for the new car beginning with the date you placed it in service. Form1040 You make this election by completing Form 2106, Part II, Section D. Form1040 This method is explained later, beginning at Effect of trade-in on basis . Form1040 If you do not make the election described in (1), you must figure depreciation separately for the remaining basis of the old car and for any additional amount you paid for the new car. Form1040 You must apply two depreciation limits (see Depreciation Limits , later). Form1040 The limit that applies to the remaining basis of the old car generally is the amount that would have been allowed had you not traded in the old car. Form1040 The limit that applies to the additional amount you paid for the new car generally is the limit that applies for the tax year, reduced by the depreciation allowance for the remaining basis of the old car. Form1040 You must use Form 4562 to compute your depreciation deduction. Form1040 You cannot use Form 2106, Part II, Section D. Form1040 This method is explained in Publication 946. Form1040   If you elect to use the method described in (1), you must do so on a timely filed tax return (including extensions). Form1040 Otherwise, you must use the method described in (2). Form1040 Effect of trade-in on basis. Form1040   The discussion that follows applies to trade-ins of cars in 2013, where the election was made to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. Form1040 For information on how to figure depreciation for cars involved in a like-kind exchange (trade-in) in 2013, for which the election was not made, see Publication 946 and Regulations section 1. Form1040 168(i)-6(d)(3). Form1040 Traded car used only for business. Form1040   If you trade in a car you used only in your business for another car that will be used only in your business, your original basis in the new car is your adjusted basis in the old car, plus any additional amount you pay for the new car. Form1040 Example. Form1040 Paul trades in a car that has an adjusted basis of $5,000 for a new car. Form1040 In addition, he pays cash of $20,000 for the new car. Form1040 His original basis of the new car is $25,000 (his $5,000 adjusted basis in the old car plus the $20,000 cash paid). Form1040 Paul's unadjusted basis is $25,000 unless he claims the section 179 deduction, special depreciation allowance, or has other increases or decreases to his original basis, discussed under Unadjusted basis , earlier. Form1040 Traded car used partly in business. Form1040   If you trade in a car you used partly in your business for a new car you will use in your business, you must make a “trade-in” adjustment for the personal use of the old car. Form1040 This adjustment has the effect of reducing your basis in your old car, but not below zero, for purposes of figuring your depreciation deduction for the new car. Form1040 (This adjustment is not used, however, when you determine the gain or loss on the later disposition of the new car. Form1040 See Publication 544, Sales and Other Dispositions of Assets, for information on how to report the disposition of your car. Form1040 )   To figure the unadjusted basis of your new car for depreciation, first add to your adjusted basis in the old car any additional amount you pay for the new car. Form1040 Then subtract from that total the excess, if any, of: The total of the amounts that would have been allowable as depreciation during the tax years before the trade if 100% of the use of the car had been business and investment use, over The total of the amounts actually allowed as depreciation during those years. Form1040 For information about figuring depreciation, see Modified Accelerated Cost Recovery System (MACRS) , which follows Example 2, later. Form1040 Modified Accelerated Cost Recovery System (MACRS). Form1040   The Modified Accelerated Cost Recovery System (MACRS) is the name given to the tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. Form1040   The maximum amount you can deduct is limited, depending on the year you placed your car in service. Form1040 See Depreciation Limits , later. Form1040 Recovery period. Form1040   Under MACRS, cars are classified as 5-year property. Form1040 You actually depreciate the cost of a car, truck, or van over a period of 6 calendar years. Form1040 This is because your car is generally treated as placed in service in the middle of the year, and you claim depreciation for one-half of both the first year and the sixth year. Form1040 Depreciation deduction for certain Indian reservation property. Form1040   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations after 1993 and before 2014. Form1040 The recovery that applies for a business-use car is 3 years instead of 5 years. Form1040 However, the depreciation limits, discussed later, will still apply. Form1040   For more information on the qualifications for this shorter recovery period and the percentages to use in figuring the depreciation deduction, see chapter 4 of Publication 946. Form1040 Depreciation methods. Form1040   You can use one of the following methods to depreciate your car. Form1040 The 200% declining balance method (200% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction. Form1040 The 150% declining balance method (150% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction. Form1040 The straight line method (SL) over a 5-year recovery period. Form1040    If you use Table 4-1 (discussed later under MACRS depreciation chart) to determine your depreciation rate for 2013, you do not need to determine in what year using the straight line method provides an equal or greater deduction. Form1040 This is because the chart has the switch to the straight line method built into its rates. Form1040   Before choosing a method, you may wish to consider the following facts. Form1040 Using the straight line method provides equal yearly deductions throughout the recovery period. Form1040 Using the declining balance methods provides greater deductions during the earlier recovery years with the deductions generally getting smaller each year. Form1040 MACRS depreciation chart. Form1040   A 2013 MACRS Depreciation Chart and instructions are included in this chapter as Table 4-1 . Form1040 Using this table will make it easy for you to figure the 2013 depreciation deduction for your car. Form1040 A similar chart appears in the Instructions for Form 2106. Form1040    You may have to use the tables in Publication 946 instead of using this MACRS Depreciation Chart. Form1040   You must use the Depreciation Tables in Publication 946 rather than the 2013 MACRS Depreciation Chart in this publication if any one of the following four conditions applies to you. Form1040 You file your return on a fiscal year basis. Form1040 You file your return for a short tax year (less than 12 months). Form1040 During the year, all of the following conditions apply. Form1040 You placed some property in service from January through September. Form1040 You placed some property in service from October through December. Form1040 Your basis in the property you placed in service from October through December (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) was more than 40% of your total bases in all property you placed in service during the year. Form1040   You placed qualified property in service on an Indian reservation. Form1040 Depreciation in future years. Form1040   If you use the percentages from the chart, you generally must continue to use them for the entire recovery period of your car. Form1040 However, you cannot continue to use the chart if your basis in your car is adjusted because of a casualty. Form1040 In that case, for the year of the adjustment and the remaining recovery period, figure the depreciation without the chart using your adjusted basis in the car at the end of the year of the adjustment and over the remaining recovery period. Form1040 See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Form1040    In future years, do not use the chart in this edition of the publication. Form1040 Instead, use the chart in the publication or the form instructions for those future years. Form1040 Disposition of car during recovery period. Form1040   If you dispose of the car before the end of the recovery period, you are generally allowed a half year of depreciation in the year of disposition unless you purchased the car during the last quarter of a year. Form1040 See Depreciation deduction for the year of disposition under Disposition of a Car, later, for information on how to figure the depreciation allowed in the year of disposition. Form1040 How to use the 2013 chart. Form1040   To figure your depreciation deduction for 2013, find the percentage in the column of Table 4-1 based on the date that you first placed the car in service and the depreciation method that you are using. Form1040 Multiply the unadjusted basis of your car (defined earlier) by that percentage to determine the amount of your depreciation deduction. Form1040 If you prefer to figure your depreciation deduction without the help of the chart, see Publication 946. Form1040    Your deduction cannot be more than the maximum depreciation limit for cars. Form1040 See Depreciation Limits, later. Form1040 Example. Form1040 Phil bought a used truck in February 2012 to use exclusively in his landscape business. Form1040 He paid $9,200 for the truck with no trade-in. Form1040 Phil did not claim any section 179 deduction, the truck did not qualify for the special depreciation allowance, and he chose to use the 200% DB method to get the largest depreciation deduction in the early years. Form1040 Phil used the MACRS depreciation chart in 2012 to find his percentage. Form1040 The unadjusted basis of his truck equals its cost because Phil used it exclusively for business. Form1040 He multiplied the unadjusted basis of his truck, $9,200, by the percentage that applied, 20%, to figure his 2012 depreciation deduction of $1,840. Form1040 In 2013, Phil used the truck for personal purposes when he repaired his father's cabin. Form1040 His records show that the business use of his truck was 90% in 2013. Form1040 Phil used Table 4-1 to find his percentage. Form1040 Reading down the first column for the date placed in service and across to the 200% DB column, he locates his percentage, 32%. Form1040 He multiplies the unadjusted basis of his truck, $8,280 ($9,200 cost × 90% business use), by 32% to figure his 2013 depreciation deduction of $2,650. Form1040 Depreciation Limits There are limits on the amount you can deduct for depreciation of your car, truck, or van. Form1040 The section 179 deduction and special depreciation allowance are treated as depreciation for purposes of the limits. Form1040 The maximum amount you can deduct each year depends on the year you place the car in service. Form1040 These limits are shown in the following tables. Form1040   Maximum Depreciation Deduction for Cars Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2012–2013 $11,1601 $5,100 $3,050 $1,875 2010–2011 11,0602 4,900 2,950 1,775 2008–2009 10,9603 4,800 2,850 1,775 2007 3,060 4,900 2,850 1,775 2006 2,960 4,800 2,850 1,775 2005 2,960 4,700 2,850 1,675 2004 10,6103 4,800 2,850 1,675 5/06/2003– 12/31/2003 10,7104 4,900 2,950 1,775 1/01/2003– 5/05/2003 7,6605 4,900 2,950 1,775 2001–2002 7,6605 4,900 2,950 1,775 2000 3,060 4,900 2,950 1,775 1$3,160 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Form1040 2$3,060 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Form1040 3$2,960 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Form1040 4$7,660 if you acquired the car before 5/6/2003. Form1040 $3,060 if the car is not qualified property or if you elect not to claim any special depreciation allowance. Form1040 5$3,060 if you acquired the car before 9/11/2001, the car is not qualified property, or you elect not to claim the special depreciation allowance. Form1040 Trucks and vans. Form1040   For 2013, the maximum depreciation deductions for trucks and vans are generally higher than those for cars. Form1040 A truck or van is a passenger automobile that is classified by the manufacturer as a truck or van and rated at 6,000 pounds gross vehicle weight or less. Form1040 For trucks and vans placed in service before 2003, use the Maximum Depreciation Deduction for Cars table. Form1040 Maximum Depreciation Deduction for Trucks and Vans Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,3601 $5,400 $3,250 $1,975 2012 $11,3601 $5,300 $3,150 $1,875 2011 11,2601 5,200 3,150 1,875 2010 11,1601 5,100 3,050 1,875 2009 11,0601 4,900 2,950 1,775 2008 11,1601 5,100 3,050 1,875 2007 3,260 5,200 3,050 1,875 2005–2006 3,260 5,200 3,150 1,875 2004 10,9101 5,300 3,150 1,875 2003 11,0101,2 5,400 3,250 1,975 1If the special depreciation allowance does not apply or you make the election not to claim the special depreciation allowance, the first-year limit is $3,360 for 2012 and 2013, $3,260 for 2011, $3,160 for 2010, $3,060 for 2009, $3,160 for 2008, $3,260 for 2004, and $3,360 for 2003. Form1040 2If the truck or van was acquired before 5/06/2003, the truck or van is qualified property, and you claim the special depreciation allowance for the truck or van, the maximum deduction is $7,960. Form1040 Car used less than full year. Form1040   The depreciation limits are not reduced if you use a car for less than a full year. Form1040 This means that you do not reduce the limit when you either place a car in service or dispose of a car during the year. Form1040 However, the depreciation limits are reduced if you do not use the car exclusively for business and investment purposes. Form1040 See Reduction for personal use , next. Form1040 Reduction for personal use. Form1040   The depreciation limits are reduced based on your percentage of personal use. Form1040 If you use a car less than 100% in your business or work, you must determine the depreciation deduction limit by multiplying the limit amount by the percentage of business and investment use during the tax year. Form1040 Section 179 deduction. Form1040   The section 179 deduction is treated as a depreciation deduction. Form1040 If you place a car that is not a truck or van in service in 2013, use it only for business, and choose the section 179 deduction, the special depreciation allowance, and the depreciation deduction for that car for 2013 is limited to $11,160. Form1040 Example. Form1040 On September 4, 2013, Jack bought a used car for $10,000 and placed it in service. Form1040 He used it 80% for his business, and he chooses to take a section 179 deduction for the car. Form1040 The car is not qualified property for purposes of the special depreciation allowance. Form1040 Before applying the limit, Jack figures his maximum section 179 deduction to be $8,000. Form1040 This is the cost of his qualifying property (up to the maximum $500,000 amount) multiplied by his business use ($10,000 × 80%). Form1040 Jack then figures that his section 179 deduction for 2013 is limited to $2,528 (80% of $3,160). Form1040 He then figures his unadjusted basis of $5,472 (($10,000 × 80%) − $2,528) for determining his depreciation deduction. Form1040 Jack has reached his maximum depreciation deduction for 2013. Form1040 For 2014, Jack will use his unadjusted basis of $5,472 to figure his depreciation deduction. Form1040 Deductions in years after the recovery period. Form1040   If the depreciation deductions for your car are reduced under the passenger automobile limits (discussed earlier), you will have unrecovered basis in your car at the end of the recovery period. Form1040 If you continue to use your car for business, you can deduct that unrecovered basis (subject to depreciation limits) after the recovery period ends. Form1040 Unrecovered basis. Form1040   This is your cost or other basis in the car reduced by any clean-fuel vehicle deduction (for vehicles placed in service before January 1, 2006), alternative motor vehicle credit, electric vehicle credit, gas guzzler tax, and depreciation (including any special depreciation allowance , discussed earlier, unless you elect not to claim it) and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use. Form1040 The recovery period. Form1040   For 5-year property, your recovery period is 6 calendar years. Form1040 A part year's depreciation is allowed in the first calendar year, a full year's depreciation is allowed in each of the next 4 calendar years, and a part year's depreciation is allowed in the 6th calendar year. Form1040   Under MACRS, your recovery period is the same whether you use declining balance or straight line depreciation. Form1040 You determine your unrecovered basis in the 7th year after you placed the car in service. Form1040 How to treat unrecovered basis. Form1040   If you continue to use your car for business after the recovery period, you can claim a depreciation deduction in each succeeding tax year until you recover your basis in the car. Form1040 The maximum amount you can deduct each year is determined by the date you placed the car in service and your business-use percentage. Form1040 For example, no deduction is allowed for a year you use your car 100% for personal purposes. Form1040 Example. Form1040 In April 2007, Bob bought and placed in service a car he used exclusively in his business. Form1040 The car cost $31,500. Form1040 Bob did not claim a section 179 deduction or the special depreciation allowance for the car. Form1040 He continued to use the car 100% in his business throughout the recovery period (2007 through 2012). Form1040 For those years, Bob used the MACRS Depreciation Chart (200% declining balance method) and the Maximum Depreciation Deduction for Cars table, earlier, for the applicable tax year to compute his depreciation deductions during the recovery period. Form1040 Bob's depreciation deductions were subject to the depreciation limits so he will have unrecovered basis at the end of the recovery period as shown in the following table. Form1040      MACRS     Deprec. Form1040 Year % Amount Limit Allowed 2007 20. Form1040 00 $6,300 $3,060 $ 3,060 2008 32. Form1040 00 10,080 4,900 4,900 2009 19. Form1040 20 6,048 2,850 2,850 2010 11. Form1040 52 3,629 1,775 1,775 2011 11. Form1040 52 3,629 1,775 1,775 2012 5. Form1040 76 1,814 1,775 1,775 Total $31,500   16,135 For the correct limit, see Maximum Depreciation Deduction for Cars under “Depreciation Limits,” earlier, for the maximum amount of depreciation allowed each year. Form1040   At the end of 2012, Bob had an unrecovered basis in the car of $15,365 ($31,500 – $16,135). Form1040 If Bob continued to use the car 100% for business in 2013 and later years, he can claim a depreciation deduction equal to the lesser of $1,775 or his remaining unrecovered basis. Form1040   If Bob's business use of the car was less than 100% during any year, his depreciation deduction would be less than the maximum amount allowable for that year. Form1040 However, in determining his unrecovered basis in the car, he would still reduce his original basis by the maximum amount allowable as if the business use had been 100%. Form1040 For example, if Bob had used his car 60% for business instead of 100%, his allowable depreciation deductions would have been $9,681 ($16,135 × 60%), but he still would have to reduce his basis by $16,135 to determine his unrecovered basis. Form1040 Table 4-1. Form1040 2013 MACRS Depreciation Chart (Use to Figure Depreciation for 2013. Form1040 ) If you claim actual expenses for your car, use the chart below to find the depreciation method and percentage to use for your 2013 return for cars placed in service in 2013. Form1040   First, using the left column, find the date you first placed the car in service in 2013. Form1040 Then select the depreciation method and percentage from column (a), (b), or (c) following the rules explained in this chapter. Form1040 For cars placed in service before 2013, you must use the same method you used on last year's return unless a decline in your business use requires you to change to the straight line method. Form1040 Refer back to the MACRS Depreciation Chart for the year you placed the car in service. Form1040 (See Car Used 50% or Less for Business . Form1040 )  Multiply the unadjusted basis of your car by your business use percentage. Form1040 Multiply the result by the percentage you found in the chart to find the amount of your depreciation deduction for 2013. Form1040 (Also see Depreciation Limits . Form1040 )   If you placed your car in service after September of any year and you placed other business property in service during the same year, you may have to use the Jan. Form1040 1—Sept. Form1040 30 percentage instead of the Oct. Form1040 1—Dec. Form1040 31 percentage for your car. Form1040               To find out if this applies to you, determine: 1) the basis of all business property you placed in service after September of that year and 2) the basis of all business property you placed in service during that entire year. Form1040 If the basis of the property placed in service after September is not more than 40% of the basis of all property (certain property is excluded) placed in service for the entire year, use the percentage for Jan. Form1040 1—Sept. Form1040 30 for figuring depreciation for your car. Form1040 See Which Convention Applies? in chapter 4 of Publication 946 for more details. Form1040               Example. Form1040 You buy machinery (basis of $32,000) in May 2013 and a new van (basis of $20,000) in October 2013, both used 100% in your business. Form1040 You