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Free file taxes 13. Free file taxes   Employment Taxes Table of Contents What's New for 2013 What's New for 2014 Reminders Important Dates for 2014 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Farm Employment Family Employees Crew Leaders Social Security and Medicare TaxesReligious exemption. Free file taxes Wage limit. Free file taxes Federal Income Tax WithholdingNew Form W-4 for 2014. Free file taxes Required Notice to Employees About Earned Income Credit (EIC) Reporting and Paying Social Security, Medicare, and Withheld Federal Income TaxesElectronic deposit requirement. Free file taxes Federal Unemployment (FUTA) TaxReporting and Paying FUTA Tax What's New for 2013 Social security and Medicare tax for 2013. Free file taxes  The employee tax rate for social security is 6. Free file taxes 2%. Free file taxes Previously, the employee tax rate for social security was 4. Free file taxes 2%. Free file taxes The employer tax rate for social security remains unchanged at 6. Free file taxes 2%. Free file taxes The social security wage base limit is $113,700. Free file taxes The Medicare tax rate is 1. Free file taxes 45% each for the employee and employer, unchanged from 2012. Free file taxes There is no wage base limit for Medicare tax. Free file taxes Additional Medicare Tax. Free file taxes  In addition to withholding Medicare tax at 1. Free file taxes 45%, you must withhold a 0. Free file taxes 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Free file taxes You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Free file taxes Additional Medicare Tax is only imposed on the employee. Free file taxes There is no employer share of Additional Medicare Tax. Free file taxes All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 threshold. Free file taxes For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15 (Circular E), Employer's Tax Guide. Free file taxes For more information on Additional Medicare Tax, visit IRS. Free file taxes gov and enter “Additional Medicare Tax” in the search box. Free file taxes Leave-based donation programs to aid victims of Hurricane Sandy. Free file taxes  Under these programs, employees may donate their vacation, sick, or personal leave in exchange for employer cash payments made before January 1, 2014, to qualified tax-exempt organizations providing relief for the victims of Hurricane Sandy. Free file taxes The donated leave will not be included in the income or wages of the employee. Free file taxes The employer may deduct the cash payments as business expenses or charitable contributions. Free file taxes For more information, see Notice 2012-69, 2012-51 I. Free file taxes R. Free file taxes B. Free file taxes 712, available at www. Free file taxes irs. Free file taxes gov/irb/2012-51_IRB/ar09. Free file taxes html. Free file taxes Work opportunity tax credit for qualified tax-exempt organizations hiring qualified veterans extended. Free file taxes  The work opportunity tax credit is now available for eligible unemployed veterans who begin work before January 1, 2014. Free file taxes Previously, the credit was available for unemployed veterans who began work on or after November 22, 2011, and before January 1, 2013. Free file taxes Qualified tax-exempt organizations that hire eligible unemployed veterans can claim the work opportunity tax credit against their payroll tax liability using Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. Free file taxes For more information, visit IRS. Free file taxes gov and enter “work opportunity credit” in the search box. Free file taxes What's New for 2014 Social security and Medicare tax for 2014. Free file taxes  The employee and employer tax rates for social security and the maximum amount of wages subject to social security tax for 2014 will be discussed in Publication 51 (Circular A), Agricultural Employer's Tax Guide (For use in 2014). Free file taxes The Medicare tax rate for 2014 will also be discussed in Publication 51 (Circular A) (For use in 2014). Free file taxes There is no limit on the amount of wages subject to Medicare tax. Free file taxes Reminders Additional employment tax information for farmers. Free file taxes  See Publication 51 (Circular A) for more detailed guidance on employment taxes. Free file taxes For the latest information about employment tax developments impacting farmers, go to www. Free file taxes irs. Free file taxes gov/pub51. Free file taxes Correcting a previously filed Form 943. Free file taxes  If you discover an error on a previously filed Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, make the correction using Form 943-X, Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or Claim for Refund. Free file taxes Form 943-X is filed separately from Form 943. Free file taxes For more information on correcting Form 943, see the Instructions for Form 943-X. Free file taxes Federal tax deposits must be made by electronic funds transfer. Free file taxes  You must use electronic funds transfer to make all federal tax deposits. Free file taxes Generally, electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). Free file taxes If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Free file taxes Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. Free file taxes EFTPS is a free service provided by the Department of Treasury. Free file taxes Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. Free file taxes For more information on making federal tax deposits, see section 7 of Publication 51 (Circular A). Free file taxes To get more information about EFTPS or to enroll in EFTPS, visit www. Free file taxes eftps. Free file taxes gov or call 1-800-555-4477 or 1-800-733-4829 (TDD). Free file taxes Additional information about EFTPS is also available in Publication 966, Electronic Federal Tax Payment System: A Guide To Getting Started. Free file taxes Important Dates for 2014 You should take the action indicated by the dates listed. Free file taxes See By February 15 and On February 16 for Form W-4, Employee's Withholding Allowance Certificate, information. Free file taxes Due dates for deposits of withheld federal income taxes, social security taxes, and Medicare taxes are not listed here. Free file taxes For these dates, see Publication 509, Tax Calendars (For use in 2014). Free file taxes Note. Free file taxes  If any date shown below for filing a return, furnishing a form, or depositing taxes falls on a Saturday, Sunday, or legal holiday, the due date is the next business day. Free file taxes A statewide legal holiday delays a filing or furnishing due date only if the IRS office where you are required to file a return or furnish a form is located in that state. Free file taxes For any due date, you will meet the “file” or “furnish” date requirement if the envelope containing the tax return or form is properly addressed, contains sufficient postage, and is postmarked by the U. Free file taxes S. Free file taxes Postal Service by the due date, or sent by an IRS-designated delivery service by the due date. Free file taxes See Private delivery services in Publication 51 (Circular A). Free file taxes Federal tax deposits can only be made by electronic funds transfer and are governed by legal holidays in the District of Columbia. Free file taxes Statewide holidays no longer apply. Free file taxes For a list of legal holidays that delay the due date of a federal tax deposit, see section 7 of Publication 51 (Circular A). Free file taxes Fiscal year taxpayers. Free file taxes  The due dates listed below apply whether you use a calendar or a fiscal year. Free file taxes By January 31. Free file taxes   File Form 943 with the IRS. Free file taxes If you deposited all Form 943 taxes when due, you have 10 additional days to file. Free file taxes Furnish each employee with a completed Form W-2, Wage and Tax Statement. Free file taxes Furnish each recipient to whom you paid $600 or more in nonemployee compensation with a completed Form 1099 (for example, Form 1099-MISC). Free file taxes File Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, with the IRS. Free file taxes If you deposited all the FUTA tax when due, you have 10 additional days to file. Free file taxes File Form 945, Annual Return of Withheld Federal Income Tax, with the IRS to report any nonpayroll income tax withheld during 2013. Free file taxes If you deposited all Form 945 taxes when due, you have 10 additional days to file. Free file taxes By February 15. Free file taxes  Ask for a new Form W-4 or Formulario W-4(SP), Certificado de Exención de Retenciones del Empleado, from each employee who claimed exemption from federal income tax withholding last year. Free file taxes On February 16. Free file taxes  Any Form W-4 claiming exemption from withholding for the previous year has now expired. Free file taxes Begin withholding for any employee who previously claimed exemption from withholding but has not given you a new Form W-4 for the current year. Free file taxes If the employee does not give you a new Form W-4, withhold taxes based on the last valid Form W-4 you have for the employee that does not claim exemption from withholding or, if one does not exist, as if he or she is single with zero withholding allowances. Free file taxes If the employee furnishes a new Form W-4 claiming exemption from withholding after February 15, you may apply the exemption to future wages, but do not refund taxes withheld while the exempt status was not in place. Free file taxes By February 28. Free file taxes   File paper Forms 1099 and 1096. Free file taxes File Copy A of all paper Forms 1099 with Form 1096, Annual Summary and Transmittal of U. Free file taxes S. Free file taxes Information Returns, with the IRS. Free file taxes For electronically filed returns, see By March 31 below. Free file taxes File paper Forms W-2 and W-3. Free file taxes File Copy A of all paper Forms W-2 with Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration (SSA). Free file taxes For electronically filed returns, see By March 31 below. Free file taxes By March 31. Free file taxes   File electronic Forms W-2 and 1099. Free file taxes File electronic Forms W-2 with the SSA and Forms 1099 with the IRS. Free file taxes For more information on reporting Form W-2 information to the SSA electronically, visit the SSA's Employer W-2 Filing Instructions & Information webpage at www. Free file taxes socialsecurity. Free file taxes gov/employer. Free file taxes For information on filing information returns electronically with the IRS, see Publication 1220, Specifications for Filing Forms 1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G Electronically. Free file taxes By April 30, July 31, October 31, and January 31. Free file taxes   Deposit FUTA taxes. Free file taxes Deposit FUTA tax due if it is more than $500. Free file taxes Before December 1. Free file taxes  Remind employees to submit a new Form W-4 if their withholding allowances have changed or will change for the next year. Free file taxes Introduction You are generally required to withhold federal income tax from the wages of your employees. Free file taxes You may also be subject to social security and Medicare taxes under the Federal Insurance Contributions Act (FICA) and federal unemployment tax under the Federal Unemployment Tax Act (FUTA). Free file taxes You must also withhold Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Free file taxes This chapter includes information about these taxes. Free file taxes You must also pay self-employment tax on your net earnings from farming. Free file taxes See chapter 12 for information on self-employment tax. Free file taxes Topics - This chapter discusses: Farm employment, Family employees, Crew leaders, Social security and Medicare taxes, Additional Medicare Tax withholding, Federal income tax withholding, Reporting and paying social security, Medicare, and withheld federal income taxes, and FUTA tax. Free file taxes Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits 51 (Circular A), Agricultural Employer's Tax Guide 926 Household Employer's Tax Guide Form (and Instructions) W-2 Wage and Tax Statement W-4 Employee's Withholding Allowance Certificate W-9 Request for Taxpayer Identification Number and Certification 940 Employer's Annual Federal Unemployment (FUTA) Tax Return 943 Employer's Annual Federal Tax Return for Agricultural Employees 943-X Adjusted Employer's Annual Federal Tax Return for Agricultural Employees or Claim for Refund See chapter 16 for information about getting publications and forms. Free file taxes Farm Employment In general, you are an employer of farmworkers if your employees do any of the following types of work. Free file taxes Raising or harvesting agricultural or horticultural products on a farm, including raising and feeding of livestock. Free file taxes Operating, managing, conserving, improving, or maintaining your farm and its tools and equipment. Free file taxes Services performed in salvaging timber, or clearing land of brush and other debris, left by a hurricane (also known as hurricane labor). Free file taxes Handling, processing, or packaging any agricultural or horticultural commodity if you produced more than half of the commodity (for a group of up to 20 unincorporated operators, all of the commodity). Free file taxes Work related to cotton ginning, turpentine, gum resin products, or the operation and maintenance of irrigation facilities. Free file taxes For more information, see Publication 51 (Circular A). Free file taxes Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. Free file taxes This is so even when you give the employee freedom of action. Free file taxes What matters is that you have the right to control the details of how the services are performed. Free file taxes You are responsible for withholding and paying employment taxes for your employees. Free file taxes You are also required to file employment tax returns. Free file taxes These requirements do not apply to amounts that you pay to independent contractors. Free file taxes See Publication 15-A for more information on how to determine whether an individual providing services is an independent contractor or an employee. Free file taxes If you employ a family of workers, each worker subject to your control (not just the head of the family) is an employee. Free file taxes Special rules apply to crew leaders. Free file taxes See Crew Leaders , later. Free file taxes Employer identification number (EIN). Free file taxes   If you have employees, you must have an EIN. Free file taxes If you do not have an EIN, you may apply for one online. Free file taxes Go to IRS. Free file taxes gov and click on the Apply for an EIN Online link under Tools. Free file taxes You may also apply for an EIN by calling 1-800-829-4933 or 1-800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability). Free file taxes The hours of operation for both numbers are Monday–Friday form 7:00 a. Free file taxes m. Free file taxes –7:00 p. Free file taxes m. Free file taxes local time (Alaska and Hawaii follow Pacific time). Free file taxes You can also fax or mail Form SS-4, Application for Employer Identification Number, to the IRS. Free file taxes Employee's social security number (SSN). Free file taxes   An employee who does not have an SSN should submit Form SS-5, Application for a Social Security Card, to the Social Security Administration (SSA). Free file taxes Form SS-5 is available from any SSA office or by calling 1-800-772-1213 (operates 24 hours per day). Free file taxes It is also available from the SSA's website at www. Free file taxes socialsecurity. Free file taxes gov. Free file taxes   The employee must furnish evidence of age, identity, and U. Free file taxes S. Free file taxes citizenship or lawful immigration status permitting employment with the Form SS-5. Free file taxes An employee who is age 18 or older must appear in person with this evidence at an SSA office. Free file taxes Form I-9. Free file taxes    You must verify that each new employee is legally eligible to work in the United States. Free file taxes This includes completing the Form I-9, Employment Eligibility Verification. Free file taxes Form I-9 is available from the U. Free file taxes S. Free file taxes Citizenship and Immigration Services (USCIS) offices or by calling the Bureau of Citizenship and Immigration Services Forms Request Line at 1-800-870-3676. Free file taxes Form I-9 is also available from the USCIS website at www. Free file taxes uscis. Free file taxes gov. Free file taxes You can also contact the USCIS at 1-800-375-5283 for more information. Free file taxes New hire reporting. Free file taxes   You are required to report any new employee to a designated state new hire registry. Free file taxes Many states accept a copy of Form W-4 with employer information added. Free file taxes Visit the Office of Child Support Enforcement website at www. Free file taxes acf. Free file taxes hhs. Free file taxes gov/programs/cse/newhire for more information. Free file taxes Family Employees Generally, the wages you pay to family members who are your employees are subject to employment taxes. Free file taxes However, certain exemptions may apply to wages paid to your child, spouse, or parent. Free file taxes Exemptions for your child. Free file taxes   Payments for the services of your child under age 18 who works for you in your trade or business (including a farm) are not subject to social security and Medicare taxes. Free file taxes However, see Nonexempt services of a child or spouse , later. Free file taxes Payments for the services of your child under age 21 employed by you in other than a trade or business, such as payments for household services in your home, are also not subject to social security or Medicare taxes. Free file taxes Payments for the services of your child under age 21 employed by you, whether or not in your trade or business, are not subject to FUTA tax. Free file taxes Although not subject to social security, Medicare, or FUTA tax, the child's wages still may be subject to federal income tax withholding. Free file taxes Exemptions for your spouse. Free file taxes   Payments for the services of your spouse who works for you in your trade or business are subject to federal income tax withholding and social security and Medicare taxes, but not FUTA tax. Free file taxes   Payments for the services of your spouse employed by you in other than a trade or business, such as payments for household services in your home, are not subject to social security, Medicare, or FUTA taxes. Free file taxes Nonexempt services of a child or spouse. Free file taxes   Payments for the services of your child or spouse are subject to federal income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for any of the following entities. Free file taxes A corporation, even if it is controlled by you. Free file taxes A partnership, even if you are a partner. Free file taxes This does not apply to wages paid to your child if each partner is a parent of the child. Free file taxes An estate or trust, even if it is the estate of a deceased parent. Free file taxes In these situations, the child or spouse is considered to work for the corporation, partnership, or estate, not you. Free file taxes Exemptions for your parent. Free file taxes   Payments for the services of your parent employed by you in your trade or business are subject to federal income tax withholding and social security and Medicare taxes. Free file taxes Social security and Medicare taxes do not apply to wages paid to your parent for services not in your trade or business, but they do apply to payments for household services in your home if both the following conditions are satisfied. Free file taxes You have a child living in your home who is under age 18 or has a physical or mental condition that requires care by an adult for at least 4 continuous weeks in a calendar quarter. Free file taxes You are a widow or widower; or divorced and not remarried; or have a spouse in the home who, because of a physical or mental condition, cannot care for your child for at least 4 continuous weeks in the quarter. Free file taxes   Wages you pay to your parent are not subject to FUTA tax, regardless of the type of services provided. Free file taxes Qualified joint venture. Free file taxes   If spouses elect to be treated as a qualified joint venture instead of a partnership, either spouse may report and pay the employment taxes due on the wages paid to employees using the EIN of that spouse's sole proprietorship. Free file taxes For more information about qualified joint ventures, see chapter 12. Free file taxes Crew Leaders If farmworkers are provided by a crew leader, the crew leader may be the employer of the workers. Free file taxes Social security and Medicare taxes. Free file taxes   For social security and Medicare tax purposes, the crew leader is the employer of the workers if both of the following requirements are met. Free file taxes The crew leader pays (either on his or her own behalf or on behalf of the farmer) the workers for their farm labor. Free file taxes The crew leader has not entered into a written agreement with the farmer under which the crew leader is designated as an employee of the farmer. Free file taxes Federal income tax withholding. Free file taxes   If the crew leader is the employer for social security and Medicare tax purposes, the crew leader is the employer for federal income tax withholding purposes. Free file taxes Federal unemployment (FUTA) tax. Free file taxes   For FUTA tax purposes, the crew leader is the employer of the workers if, in addition to the earlier requirements, either of the following requirements are met. Free file taxes The crew leader is registered under the Migrant and Seasonal Agricultural Worker Protection Act. Free file taxes Substantially all crew members operate or maintain mechanized equipment provided by the crew leader as part of the service to the farmer. Free file taxes   The farmer is the employer of workers furnished by a crew leader in all other situations. Free file taxes In addition, the farmer is the employer of workers furnished by a registered crew leader if the workers are the employees of the farmer under the common-law test. Free file taxes For example, some farmers employ individuals to recruit farmworkers exclusively for them. Free file taxes Although these individuals may be required to register under the Migrant and Seasonal Agricultural Worker Protection Act, the workers are employed directly by the farmer. Free file taxes The farmer is the employer in these cases. Free file taxes For information about common-law employees, see section 1 of Publication 15-A. Free file taxes For information about crew leaders, see the Department of Labor website at www. Free file taxes dol. Free file taxes gov/whd/regs/compliance/whdfs49. Free file taxes htm. Free file taxes Social Security and Medicare Taxes All cash wages you pay to an employee during the year for farmwork are subject to social security and Medicare taxes if you meet either of the following tests. Free file taxes You pay the employee $150 or more in cash wages (count all wages paid on a time, piecework, or other basis) during the year for farmwork (the $150 test). Free file taxes The $150 test applies separately to each farmworker that you employ. Free file taxes If you employ a family of workers, each member is treated separately. Free file taxes Do not count wages paid by other employers. Free file taxes You pay cash and noncash wages of $2,500 or more during the year to all your employees for farmwork (the $2,500 test). Free file taxes If the $2,500 test for the group is not met, the $150 test for an employee still applies. Free file taxes Exceptions. Free file taxes   Annual cash wages of less than $150 you pay to a seasonal farmworker are not subject to social security and Medicare taxes, even if you pay $2,500 or more to all your farmworkers. Free file taxes However, these wages count toward the $2,500 test for determining whether other farmworkers' wages are subject to social security and Medicare taxes. Free file taxes   A seasonal farmworker is a worker who: Works as a hand-harvest laborer, Is paid piece rates in an operation usually paid on this basis in the region of employment, Commutes daily from his or her permanent home to the farm, and Worked in agriculture less than 13 weeks in the preceding calendar year. Free file taxes   See Family Employees , earlier, for certain exemptions from social security and Medicare taxes that apply to your child, spouse, and parent. Free file taxes Religious exemption. Free file taxes   An exemption from social security and Medicare taxes is available to members of a recognized religious group or division opposed to public insurance. Free file taxes This exemption is available only if both the employee and the employer are members of the group or division. Free file taxes   For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Free file taxes Cash wages. Free file taxes   Only cash wages paid to farmworkers are subject to social security and Medicare taxes. Free file taxes Cash wages include checks, money orders, and any kind of money or cash. Free file taxes   Only cash wages subject to social security and Medicare taxes are credited to your employees for social security benefit purposes. Free file taxes Payments not subject to these taxes, such as commodity wages, do not contribute to your employees' social security coverage. Free file taxes For information about social security benefits, contact the SSA at 1-800-772-1213 or online at www. Free file taxes socialsecurity. Free file taxes gov. Free file taxes Noncash wages. Free file taxes    Noncash wages include food, lodging, clothing, transportation passes, and other goods and services. Free file taxes Noncash wages paid to farmworkers, including commodity wages, are not subject to social security and Medicare taxes. Free file taxes However, they are subject to these taxes if the substance of the transaction is a cash payment. Free file taxes For information on lodging provided as a condition of employment, see Publication 15-B. Free file taxes   Report the value of noncash wages in box 1 of Form W-2 together with cash wages. Free file taxes Do not show noncash wages in box 3 or in box 5, (unless the substance of the transaction is a cash payment). Free file taxes Tax rates and social security wage limit. Free file taxes   For 2013, the employer and the employee will pay the following taxes. Free file taxes The employer and employee each pay 6. Free file taxes 2% of cash wages for social security tax (old-age, survivors, and disability insurance). Free file taxes The employer and employee each pay 1. Free file taxes 45% of cash wages for Medicare tax (hospital insurance). Free file taxes The employee pays 0. Free file taxes 9% of cash wages in excess of $200,000 for Additional Medicare Tax. Free file taxes Wage limit. Free file taxes   The limit on wages subject to the social security tax for 2013 is $113,700. Free file taxes There is no limit on wages subject to the Medicare tax. Free file taxes All covered wages are subject to the Medicare tax. Free file taxes Additionally, all wages in excess of $200,000 are subject to Additional Medicare Tax withholding. Free file taxes Paying employee's share. Free file taxes   If you would rather pay the employee's share of social security and Medicare taxes without deducting it from his or her wages, you may do so. Free file taxes It is additional income to the employee. Free file taxes You must include it in box 1 of the employee's Form W-2, but do not count it as social security and Medicare wages (boxes 3 and 5 on Form W-2) or as wages for federal unemployment (FUTA) tax purposes. Free file taxes Example. Free file taxes Jane operates a small family fruit farm. Free file taxes She employs day laborers in the picking season to enable her to timely get her crop to market. Free file taxes She does not deduct the employees' share of social security and Medicare taxes from their pay; instead, she pays it on their behalf. Free file taxes When her accountant, Susan, prepares the employees' Forms W-2, she adds each employee's share of social security and Medicare taxes paid by Jane to the employee's wage income (box 1 of Form W-2), but does not include it in box 3 (social security wages) or box 5 (Medicare wages and tips). Free file taxes For 2013, Jane paid Mary $1,000 during the year. Free file taxes Susan enters $1,076. Free file taxes 50 in box 1 of Mary's Form W-2 ($1,000 wages plus $76. Free file taxes 50 social security and Medicare taxes paid for Mary). Free file taxes She enters $1,000 in boxes 3 and 5 of Mary's Form W-2. Free file taxes Additional Medicare Tax. Free file taxes   In addition to withholding Medicare tax at 1. Free file taxes 45%, you must withhold a 0. Free file taxes 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Free file taxes You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Free file taxes Additional Medicare Tax is only imposed on the employee. Free file taxes There is no employer share of Additional Medicare Tax. Free file taxes All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 threshold. Free file taxes   For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15 (Circular E). Free file taxes For more information on Additional Medicare Tax, visit IRS. Free file taxes gov and enter “Additional Medicare Tax” in the search box. Free file taxes Federal Income Tax Withholding If the cash wages you pay to farmworkers are subject to social security and Medicare taxes, they are also subject to federal income tax withholding. Free file taxes Although noncash wages are subject to federal income tax, withhold income tax only if you and the employee agree to do so. Free file taxes The amount to withhold is figured on gross wages without taking out social security and Medicare taxes, union dues, insurance, etc. Free file taxes Form W-4. Free file taxes   Generally, the amount of federal income tax you withhold is based on the employee's marital status and withholding allowances claimed on the employee's Form W-4. Free file taxes In general, an employee can claim withholding allowances on Form W-4 equal to the number of exemptions the employee will be entitled to claim on his or her tax return. Free file taxes An employee may also be able to claim a special withholding allowance and allowances for estimated deductions and credits. Free file taxes   Do not withhold federal income tax from the wages of an employee who, by filing Form W-4, certifies that he or she had no federal income tax liability last year and anticipates no liability for the current year. Free file taxes   You should give each new employee a Form W-4 as soon as you hire the employee. Free file taxes For Spanish-speaking employees, you may use Formulario W-4(SP) which is the Spanish translation of Form W-4. Free file taxes Have the employee complete and return the form to you before the first payday. Free file taxes If the employee does not return the completed form, you must withhold federal income tax as if the employee is single and claims no withholding allowances. Free file taxes New Form W-4 for 2014. Free file taxes   You should make the 2014 Form W-4 available to your employees and encourage them to check their income tax withholding for 2014. Free file taxes Those employees who owed a large amount of tax or received a large refund for 2013 may want to submit a new Form W-4. Free file taxes You cannot accept substitute Forms W-4 developed by employees. Free file taxes How to figure withholding. Free file taxes   You can use one of several methods to determine the amount to withhold. Free file taxes The methods are described in Publication 51 (Circular A), which contains tables showing the correct amount of federal income tax you should withhold. Free file taxes Publication 51 (Circular A) also contains additional information about federal income tax withholding. Free file taxes Nonemployee compensation. Free file taxes   Generally, you do not have to withhold federal income tax on payments for services to individuals who are not your employees. Free file taxes However, you may be required to report these payments on Form 1099-MISC, Miscellaneous Income, and to withhold under the backup withholding rules. Free file taxes For more information, see the Instructions for Form 1099-MISC. Free file taxes Required Notice to Employees About Earned Income Credit (EIC) You must provide notification about EIC to each employee who worked for you at any time during the year and from whom you did not withhold any federal income tax. Free file taxes However, you do not have to notify employees who claim exemption from federal income tax withholding on Form W-4. Free file taxes You meet the notification requirement by giving each employee any of the following. Free file taxes Form W-2, which contains EIC notification on the back of Copy B. Free file taxes A substitute Form W-2 with the exact EIC wording shown on the back of copy B of Form W-2. Free file taxes Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC). Free file taxes Your own written statement with the exact wording of Notice 797. Free file taxes For more information, see Publication 51 (Circular A). Free file taxes Reporting and Paying Social Security, Medicare, and Withheld Federal Income Taxes You must withhold federal income, social security, and Medicare taxes required to be withheld from the salaries and wages of your employees. Free file taxes You are liable for the payment of these taxes to the federal government whether or not you collect them from your employees. Free file taxes If, for example, you withhold less than the correct tax from an employee's wages, you are still liable for the full amount. Free file taxes You must also pay the employer's share of social security and Medicare taxes. Free file taxes There is no employer share of Additional Medicare Tax. Free file taxes Form 943. Free file taxes   Report withheld federal income tax, social security tax, and Medicare tax on Form 943. Free file taxes Your 2013 Form 943 is due by January 31, 2014 (or February 10, 2014, if you made deposits on time in full payment of the taxes due for the year). Free file taxes Deposits. Free file taxes   Generally, you must deposit both the employer and employee shares of social security and Medicare taxes and federal income tax withheld during the year. Free file taxes However, you may make payments with Form 943 instead of depositing them if you accumulate less than a $2,500 tax liability (“Total taxes after adjustments” line on Form 943) during the year and you pay in full with a timely filed return. Free file taxes   For more information on deposit rules, see Publication 51 (Circular A). Free file taxes Electronic deposit requirement. Free file taxes   You must use electronic funds transfer to make all federal tax deposits. Free file taxes Generally, electronic funds transfers are made using EFTPS. Free file taxes If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Free file taxes Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. Free file taxes EFTPS is a free service provided by the Department of Treasury. Free file taxes Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. Free file taxes   For more information on making federal tax deposits, see section 7 of Publication 51 (Circular A). Free file taxes To get more information about EFTPS or to enroll in EFTPS, visit www. Free file taxes eftps. Free file taxes gov or call 1-800-555-4477 or 1-800-733-4829 (TDD). Free file taxes Additional information about EFTPS is also available in Publication 966. Free file taxes Form W-2. Free file taxes   By January 31, you must furnish each employee a Form W-2 showing total wages for the previous year and total federal income tax, social security tax, and Medicare tax withheld. Free file taxes However, if an employee stops working for you and requests the form earlier, you must give it to the employee within 30 days of the later of the following dates. Free file taxes The date the employee requests the form. Free file taxes The date you make your final payment of wages to the employee. Free file taxes Compensation paid to H-2A visa holders. Free file taxes   Report compensation of $600 or more paid to foreign agricultural workers who entered the country on H-2A visas in box 1 of Form W-2. Free file taxes Compensation paid to H-2A workers for agricultural labor performed in connection with this visa is not subject to social security and Medicare taxes, and therefore should not be reported as wages subject to social security tax (line 2), Medicare tax (line 4), or Additional Medicare Tax (line 6) on Form 943, and should not be reported as social security wages (box 3) or Medicare wages (box 5) on Form W-2. Free file taxes   An employer is not required to withhold federal income tax from compensation it pays to an H-2A worker for agricultural labor performed in connection with this visa unless the worker asks for withholding and the employer agrees. Free file taxes In this case, the worker must give the employer a completed Form W-4. Free file taxes Federal income tax withheld should be reported on Form 943, line 8, and in box 2 of Form W-2. Free file taxes   These reporting rules apply when the H-2A worker provides his or her taxpayer identification number (TIN) to the employer. Free file taxes For the rules relating to backup withholding and reporting when the H-2A worker does not provide a TIN, see the Instructions for Form 1099-MISC and the Instructions for Form 945. Free file taxes Trust fund recovery penalty. Free file taxes   If you are responsible for withholding, accounting for, depositing, or paying federal withholding taxes and willfully fail to do so, you can be held liable for a penalty equal to the withheld tax not paid. Free file taxes A responsible person can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. Free file taxes A trustee or agent with authority over the funds of the business can also be held responsible for the penalty. Free file taxes   Willfully means voluntarily, consciously, and intentionally. Free file taxes Paying other expenses of the business instead of the taxes due is acting willfully. Free file taxes Consequences of treating an employee as an independent contractor. Free file taxes   If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker. Free file taxes See Publication 15-A for more information. Free file taxes Federal Unemployment (FUTA) Tax You must pay FUTA tax if you meet either of the following tests. Free file taxes You paid cash wages of $20,000 or more to farmworkers in any calendar quarter during the current or preceding calendar year. Free file taxes You employed 10 or more farmworkers for some part of at least 1 day during any 20 or more different calendar weeks during the current or preceding calendar year. Free file taxes These rules do not apply to exempt services of your spouse, your parents, or your children under age 21. Free file taxes See Family Employees , earlier. Free file taxes Alien farmworkers. Free file taxes   Wages paid to aliens admitted on a temporary basis to the United States to perform farmwork (also known as “H-2A visa workers”) are exempt from FUTA tax. Free file taxes However, include your employment of these workers and the wages you paid them to determine whether you meet either of the above tests. Free file taxes Commodity wages. Free file taxes   Payments in kind for farm labor are not cash wages. Free file taxes Do not count them to figure whether you are subject to FUTA tax or to figure how much tax you owe. Free file taxes Tax rate and credit. Free file taxes   The gross FUTA tax rate is 6. Free file taxes 0% of the first $7,000 cash wages you pay to each employee during the year. Free file taxes However, you are given a credit of up to 5. Free file taxes 4% of the first $7,000 cash wages you pay to each employee for the state unemployment tax you pay. Free file taxes If your state tax rate (experience rate) is less than 5. Free file taxes 4%, you may still be allowed the full 5. Free file taxes 4% credit. Free file taxes   If you do not pay the state tax, you cannot take the credit. Free file taxes If you are exempt from state unemployment tax for any reason, the full 6. Free file taxes 0% rate applies. Free file taxes See the Instructions for Form 940 for additional information. Free file taxes More information. Free file taxes   For more information on FUTA tax, see Publication 51 (Circular A). Free file taxes Reporting and Paying FUTA Tax The FUTA tax is imposed on you as the employer. Free file taxes It must not be collected or deducted from the wages of your employees. Free file taxes Form 940. Free file taxes   Report FUTA tax on Form 940. Free file taxes The 2013 Form 940 is due January 31, 2014 (or February 10, 2014, if you timely deposited the full amount of your 2013 FUTA tax). Free file taxes Deposits. Free file taxes   If at the end of any calendar quarter you owe, but have not yet deposited, more than $500 in FUTA tax for the year, you must make a deposit by the end of the following month. Free file taxes If the undeposited tax is $500 or less at the end of a quarter, you do not have to deposit it. Free file taxes You can add it to the tax for the next quarter. Free file taxes If the total undeposited tax is more than $500 at the end of the next quarter, a deposit will be required. Free file taxes If the total undeposited tax at the end of the 4th quarter is $500 or less, you can either make a deposit or pay it with your return by the January 31, 2014, due date. Free file taxes Electronic deposit requirement. Free file taxes   You must use electronic funds transfer to make all federal tax deposits. Free file taxes Generally, electronic funds transfers are made using EFTPS. Free file taxes If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Free file taxes Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. Free file taxes EFTPS is a free service provided by the Department of Treasury. Free file taxes Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. Free file taxes   For more information on making federal tax deposits, see section 7 of Publication 51 (Circular A). Free file taxes To get more information about EFTPS or to enroll in EFTPS, visit www. Free file taxes eftps. Free file taxes gov or call 1-800-555-4477 or 1-800-733-4829 (TDD). Free file taxes Additional information about EFTPS is also available in Publication 966. Free file taxes Prev  Up  Next   Home   More Online Publications
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The Free File Taxes

Free file taxes 3. Free file taxes   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Free file taxes Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. Free file taxes Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Free file taxes When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Free file taxes Any remaining gain is a section 1231 gain. Free file taxes Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. Free file taxes Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Free file taxes Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Free file taxes If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Free file taxes Do not take that gain into account as section 1231 gain. Free file taxes Section 1231 transactions. Free file taxes   The following transactions result in gain or loss subject to section 1231 treatment. Free file taxes Sales or exchanges of real property or depreciable personal property. Free file taxes This property must be used in a trade or business and held longer than 1 year. Free file taxes Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Free file taxes Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Free file taxes Sales or exchanges of leaseholds. Free file taxes The leasehold must be used in a trade or business and held longer than 1 year. Free file taxes Sales or exchanges of cattle and horses. Free file taxes The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Free file taxes Sales or exchanges of other livestock. Free file taxes This livestock does not include poultry. Free file taxes It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Free file taxes Sales or exchanges of unharvested crops. Free file taxes The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. Free file taxes You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). Free file taxes Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Free file taxes Cutting of timber or disposal of timber, coal, or iron ore. Free file taxes The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Free file taxes Condemnations. Free file taxes The condemned property must have been held longer than 1 year. Free file taxes It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Free file taxes It cannot be property held for personal use. Free file taxes Casualties and thefts. Free file taxes The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). Free file taxes You must have held the property longer than 1 year. Free file taxes However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Free file taxes For more information on casualties and thefts, see Publication 547. Free file taxes Property for sale to customers. Free file taxes   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Free file taxes If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Free file taxes Example. Free file taxes You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Free file taxes Customers make deposits on the reels, which you refund if the reels are returned within a year. Free file taxes If they are not returned, you keep each deposit as the agreed-upon sales price. Free file taxes Most reels are returned within the 1-year period. Free file taxes You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Free file taxes Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Free file taxes Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Free file taxes Copyrights. Free file taxes    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). Free file taxes The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Free file taxes Treatment as ordinary or capital. Free file taxes   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Free file taxes If you have a net section 1231 loss, it is ordinary loss. Free file taxes If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. Free file taxes The rest, if any, is long-term capital gain. Free file taxes Nonrecaptured section 1231 losses. Free file taxes   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Free file taxes Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. Free file taxes These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Free file taxes Example. Free file taxes In 2013, Ben has a $2,000 net section 1231 gain. Free file taxes To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Free file taxes From 2008 through 2012 he had the following section 1231 gains and losses. Free file taxes Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Free file taxes 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. Free file taxes To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Free file taxes This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Free file taxes On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Free file taxes Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Free file taxes Whether the adjusted basis was figured using depreciation or amortization another person claimed. Free file taxes Corporate distributions. Free file taxes   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Free file taxes General asset accounts. Free file taxes   Different rules apply to dispositions of property you depreciated using a general asset account. Free file taxes For information on these rules, see Publication 946. Free file taxes Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. Free file taxes See Gain Treated as Ordinary Income, later. Free file taxes Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Free file taxes See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Free file taxes Section 1245 property defined. Free file taxes   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Free file taxes Personal property (either tangible or intangible). Free file taxes Other tangible property (except buildings and their structural components) used as any of the following. Free file taxes See Buildings and structural components below. Free file taxes An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Free file taxes A research facility in any of the activities in (a). Free file taxes A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Free file taxes That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Free file taxes Amortization of certified pollution control facilities. Free file taxes The section 179 expense deduction. Free file taxes Deduction for clean-fuel vehicles and certain refueling property. Free file taxes Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Free file taxes Deduction for certain qualified refinery property. Free file taxes Deduction for qualified energy efficient commercial building property. Free file taxes Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Free file taxes (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Free file taxes ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). Free file taxes Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Free file taxes Deduction for qualified tertiary injectant expenses. Free file taxes Certain reforestation expenditures. Free file taxes Deduction for election to expense qualified advanced mine safety equipment property. Free file taxes Single purpose agricultural (livestock) or horticultural structures. Free file taxes Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Free file taxes Any railroad grading or tunnel bore. Free file taxes Buildings and structural components. Free file taxes   Section 1245 property does not include buildings and structural components. Free file taxes The term building includes a house, barn, warehouse, or garage. Free file taxes The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Free file taxes   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Free file taxes Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Free file taxes   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Free file taxes Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. Free file taxes Facility for bulk storage of fungible commodities. Free file taxes   This term includes oil or gas storage tanks and grain storage bins. Free file taxes Bulk storage means the storage of a commodity in a large mass before it is used. Free file taxes For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Free file taxes To be fungible, a commodity must be such that one part may be used in place of another. Free file taxes   Stored materials that vary in composition, size, and weight are not fungible. Free file taxes Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. Free file taxes For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Free file taxes Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Free file taxes The depreciation and amortization allowed or allowable on the property. Free file taxes The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Free file taxes A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Free file taxes For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. Free file taxes See Gifts and Transfers at Death, later. Free file taxes Use Part III of Form 4797 to figure the ordinary income part of the gain. Free file taxes Depreciation taken on other property or taken by other taxpayers. Free file taxes   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Free file taxes Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Free file taxes Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). Free file taxes Depreciation and amortization. Free file taxes   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Free file taxes Ordinary depreciation deductions. Free file taxes Any special depreciation allowance you claimed. Free file taxes Amortization deductions for all the following costs. Free file taxes Acquiring a lease. Free file taxes Lessee improvements. Free file taxes Certified pollution control facilities. Free file taxes Certain reforestation expenses. Free file taxes Section 197 intangibles. Free file taxes Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Free file taxes Franchises, trademarks, and trade names acquired before August 11, 1993. Free file taxes The section 179 deduction. Free file taxes Deductions for all the following costs. Free file taxes Removing barriers to the disabled and the elderly. Free file taxes Tertiary injectant expenses. Free file taxes Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Free file taxes Environmental cleanup costs. Free file taxes Certain reforestation expenses. Free file taxes Qualified disaster expenses. Free file taxes Any basis reduction for the investment credit (minus any basis increase for credit recapture). Free file taxes Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Free file taxes Example. Free file taxes You file your returns on a calendar year basis. Free file taxes In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. Free file taxes You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Free file taxes You did not take the section 179 deduction. Free file taxes You sold the truck in May 2013 for $7,000. Free file taxes The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Free file taxes Figure the gain treated as ordinary income as follows. Free file taxes 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. Free file taxes   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. Free file taxes   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. Free file taxes Depreciation allowed or allowable. Free file taxes   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. Free file taxes However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Free file taxes If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Free file taxes   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Free file taxes Multiple asset accounts. Free file taxes   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. Free file taxes Example. Free file taxes In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Free file taxes All of the depreciation was recorded in a single depreciation account. Free file taxes After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Free file taxes You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Free file taxes However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. Free file taxes Normal retirement. Free file taxes   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. Free file taxes Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Free file taxes To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Free file taxes Section 1250 property defined. Free file taxes   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Free file taxes It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Free file taxes A fee simple interest in land is not included because it is not depreciable. Free file taxes   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Free file taxes Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. Free file taxes For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Free file taxes For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Free file taxes If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Free file taxes You will not have additional depreciation if any of the following conditions apply to the property disposed of. Free file taxes You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Free file taxes In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. Free file taxes The property was residential low-income rental property you held for 162/3 years or longer. Free file taxes For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. Free file taxes You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Free file taxes The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Free file taxes These properties are depreciated using the straight line method. Free file taxes In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Free file taxes Depreciation taken by other taxpayers or on other property. Free file taxes   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Free file taxes Example. Free file taxes Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Free file taxes Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. Free file taxes On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. Free file taxes At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Free file taxes Depreciation allowed or allowable. Free file taxes   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. Free file taxes If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. Free file taxes Retired or demolished property. Free file taxes   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. Free file taxes Example. Free file taxes A wing of your building is totally destroyed by fire. Free file taxes The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. Free file taxes Figuring straight line depreciation. Free file taxes   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. Free file taxes If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. Free file taxes   Salvage value and useful life are not used for the ACRS method of depreciation. Free file taxes Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Free file taxes   The straight line method is applied without any basis reduction for the investment credit. Free file taxes Property held by lessee. Free file taxes   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. Free file taxes This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. Free file taxes The same rule applies to the cost of acquiring a lease. Free file taxes   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Free file taxes However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. Free file taxes Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. Free file taxes The percentages for these types of real property are as follows. Free file taxes Nonresidential real property. Free file taxes   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Free file taxes For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Free file taxes Residential rental property. Free file taxes   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. Free file taxes The percentage for periods before 1976 is zero. Free file taxes Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Free file taxes Low-income housing. Free file taxes    Low-income housing includes all the following types of residential rental property. Free file taxes Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Free file taxes Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Free file taxes Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. Free file taxes Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Free file taxes   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Free file taxes If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. Free file taxes Foreclosure. Free file taxes   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. Free file taxes Example. Free file taxes On June 1, 2001, you acquired low-income housing property. Free file taxes On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. Free file taxes The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Free file taxes The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. Free file taxes Therefore, 70% of the additional depreciation is treated as ordinary income. Free file taxes Holding period. Free file taxes   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Free file taxes For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Free file taxes If you sold it on January 2, 2013, the holding period is exactly 192 full months. Free file taxes The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Free file taxes Holding period for constructed, reconstructed, or erected property. Free file taxes   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. Free file taxes Property acquired by gift or received in a tax-free transfer. Free file taxes   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. Free file taxes   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. Free file taxes See Low-Income Housing With Two or More Elements, next. Free file taxes Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. Free file taxes The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Free file taxes The following are the types of separate elements. Free file taxes A separate improvement (defined below). Free file taxes The basic section 1250 property plus improvements not qualifying as separate improvements. Free file taxes The units placed in service at different times before all the section 1250 property is finished. Free file taxes For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. Free file taxes As a result, the apartment house consists of three separate elements. Free file taxes The 36-month test for separate improvements. Free file taxes   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. Free file taxes Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. Free file taxes Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). Free file taxes $5,000. Free file taxes The 1-year test. Free file taxes   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. Free file taxes The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Free file taxes In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. Free file taxes Example. Free file taxes The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Free file taxes During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Free file taxes The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. Free file taxes However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Free file taxes Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Free file taxes Addition to the capital account. Free file taxes   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. Free file taxes   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Free file taxes For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. Free file taxes The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Free file taxes The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. Free file taxes   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Free file taxes If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. Free file taxes Unadjusted basis. Free file taxes   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. Free file taxes However, the cost of components retired before that date is not included in the unadjusted basis. Free file taxes Holding period. Free file taxes   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Free file taxes The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. Free file taxes The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. Free file taxes The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Free file taxes   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. Free file taxes Use the first day of a calendar month that is closest to the middle of the tax year. Free file taxes If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Free file taxes Figuring ordinary income attributable to each separate element. Free file taxes   Figure ordinary income attributable to each separate element as follows. Free file taxes   Step 1. Free file taxes Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. Free file taxes   Step 2. Free file taxes Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). Free file taxes   Step 3. Free file taxes Multiply the result in Step 2 by the applicable percentage for the element. Free file taxes Example. Free file taxes You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Free file taxes The property consisted of four elements (W, X, Y, and Z). Free file taxes Step 1. Free file taxes The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Free file taxes The sum of the additional depreciation for all the elements is $24,000. Free file taxes Step 2. Free file taxes The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Free file taxes Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Free file taxes $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Free file taxes Step 3. Free file taxes The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Free file taxes From these facts, the sum of the ordinary income for each element is figured as follows. Free file taxes   Step 1 Step 2 Step 3 Ordinary Income W . Free file taxes 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Free file taxes 25 5,000 92% 4,600 Z . Free file taxes 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. Free file taxes In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Free file taxes In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Free file taxes Figure the additional depreciation for the periods after 1975. Free file taxes Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Free file taxes Stop here if this is residential rental property or if (2) is equal to or more than (1). Free file taxes This is the gain treated as ordinary income because of additional depreciation. Free file taxes Subtract (2) from (1). Free file taxes Figure the additional depreciation for periods after 1969 but before 1976. Free file taxes Add the lesser of (4) or (5) to the result in (3). Free file taxes This is the gain treated as ordinary income because of additional depreciation. Free file taxes A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Free file taxes Use Form 4797, Part III, to figure the ordinary income part of the gain. Free file taxes Corporations. Free file taxes   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Free file taxes The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. Free file taxes Report this additional ordinary income on Form 4797, Part III, line 26 (f). Free file taxes Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Free file taxes This applies even if no payments are received in that year. Free file taxes If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Free file taxes For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Free file taxes If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. Free file taxes To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Free file taxes Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Free file taxes For a detailed discussion of installment sales, see Publication 537. Free file taxes Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Free file taxes However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. Free file taxes For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Free file taxes See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Free file taxes Part gift and part sale or exchange. Free file taxes   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. Free file taxes If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. Free file taxes However, see Bargain sale to charity, later. Free file taxes Example. Free file taxes You transferred depreciable personal property to your son for $20,000. Free file taxes When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Free file taxes You took depreciation of $30,000. Free file taxes You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. Free file taxes You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. Free file taxes You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. Free file taxes Gift to charitable organization. Free file taxes   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. Free file taxes Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Free file taxes   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. Free file taxes For more information, see Giving Property That Has Increased in Value in Publication 526. Free file taxes Bargain sale to charity. Free file taxes   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. Free file taxes First, figure the ordinary income as if you had sold the property at its fair market value. Free file taxes Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. Free file taxes See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Free file taxes Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Free file taxes Example. Free file taxes You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Free file taxes Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Free file taxes If you had sold the property at its fair market value, your ordinary income would have been $5,000. Free file taxes Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Free file taxes Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. Free file taxes For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Free file taxes However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. Free file taxes Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. Free file taxes Example 1. Free file taxes Janet Smith owned depreciable property that, upon her death, was inherited by her son. Free file taxes No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. Free file taxes However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. Free file taxes Example 2. Free file taxes The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Free file taxes If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. Free file taxes Ordinary income from depreciation must be reported by the trust on the transfer. Free file taxes Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. Free file taxes For information on like-kind exchanges and involuntary conversions, see chapter 1. Free file taxes Depreciable personal property. Free file taxes   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. Free file taxes The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Free file taxes The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Free file taxes Example 1. Free file taxes You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Free file taxes The old machine cost you $5,000 two years ago. Free file taxes You took depreciation deductions of $3,950. Free file taxes Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. Free file taxes Example 2. Free file taxes You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Free file taxes This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). Free file taxes You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Free file taxes Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Free file taxes All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Free file taxes Example 3. Free file taxes A fire destroyed office machinery you bought for $116,000. Free file taxes The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Free file taxes You received a $117,000 insurance payment, realizing a gain of $92,640. Free file taxes You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. Free file taxes $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. Free file taxes The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. Free file taxes The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Free file taxes 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. Free file taxes Depreciable real property. Free file taxes   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. Free file taxes The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. Free file taxes The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. Free file taxes   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. Free file taxes Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Free file taxes Example. Free file taxes The state paid you $116,000 when it condemned your depreciable real property for public use. Free file taxes You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). Free file taxes You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Free file taxes You choose to postpone reporting the gain. Free file taxes If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. Free file taxes The ordinary income to be reported is $6,000, which is the greater of the following amounts. Free file taxes The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. Free file taxes The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. Free file taxes   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Free file taxes Basis of property acquired. Free file taxes   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. Free file taxes   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). Free file taxes However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Free file taxes Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. Free file taxes Add the fair market value (or cost) of the other property acquired to the result in (1). Free file taxes Divide the result in (1) by the result in (2). Free file taxes Multiply the total basis by the result in (3). Free file taxes This is the basis of the depreciable real property acquired. Free file taxes If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Free file taxes Subtract the result in (4) from the total basis. Free file taxes This is the basis of the other property acquired. Free file taxes If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Free file taxes Example 1. Free file taxes In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. Free file taxes The property's adjusted basis was $38,400, with additional depreciation of $14,932. Free file taxes On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Free file taxes Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Free file taxes You chose to postpone reporting the gain under the involuntary conversion rules. Free file taxes Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. Free file taxes The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Free file taxes The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Free file taxes If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. Free file taxes Example 2. Free file taxes John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Free file taxes He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Free file taxes He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Free file taxes Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. Free file taxes The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Free file taxes The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Free file taxes The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Free file taxes The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Free file taxes 4. Free file taxes The basis of the depreciable real property is $12,000. Free file taxes This is the $30,000 total basis multiplied by the 0. Free file taxes 4 figured in (3). Free file taxes The basis of the other property (land) is $18,000. Free file taxes This is the $30,000 total basis minus the $12,000 figured in (4). Free file taxes The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. Free file taxes Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. Free file taxes Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Free file taxes See chapter 2. Free file taxes In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. Free file taxes In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Free file taxes These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Free file taxes The comparison should take into account all the following facts and circumstances. Free file taxes The original cost and reproduction cost of construction, erection, or production. Free file taxes The remaining economic useful life. Free file taxes The state of obsolescence. Free file taxes The anticipated expenditures required to maintain, renovate, or modernize the properties. Free file taxes Like-kind exchanges and involuntary conversions. Free file taxes   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Free file taxes The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. Free file taxes The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. Free file taxes   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Free file taxes The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. Free file taxes If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. Free file taxes Example. Free file taxes A fire destroyed your property with a total fair market value of $50,000. Free file taxes It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Free file taxes You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. Free file taxes The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Free file taxes You choose to postpone reporting your gain from the involuntary conversion. Free file taxes You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Free file taxes The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. Free file taxes The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Free file taxes The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Free file taxes Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Free file taxes The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. Free file taxes All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. Free file taxes Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Free file taxes However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. Free file taxes Prev  Up  Next   Home   More Online Publications