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Free tax help Publication 225 - Introductory Material Table of Contents IntroductionOrdering forms and publications. Free tax help Tax questions. Free tax help Future Developments What's New for 2013 What's New for 2014 Reminders Introduction You are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant. Free tax help A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. Free tax help It also includes plantations, ranches, ranges, and orchards. Free tax help This publication explains how the federal tax laws apply to farming. Free tax help Use this publication as a guide to figure your taxes and complete your farm tax return. Free tax help If you need more information on a subject, get the specific IRS tax publication covering that subject. Free tax help We refer to many of these free publications throughout this publication. Free tax help See chapter 16 for information on ordering these publications. Free tax help The explanations and examples in this publication reflect the Internal Revenue Service's interpretation of tax laws enacted by Congress, Treasury regulations, and court decisions. Free tax help However, the information given does not cover every situation and is not intended to replace the law or change its meaning. Free tax help This publication covers subjects on which a court may have made a decision more favorable to taxpayers than the interpretation of the Service. Free tax help Until these differing interpretations are resolved by higher court decisions, or in some other way, this publication will continue to present the interpretation of the Service. Free tax help The IRS Mission. Free tax help   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Free tax help Comments and suggestions. Free tax help   We welcome your comments about this publication and your suggestions for future editions. Free tax help   You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. Free tax help NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free tax help Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free tax help   You can email us at taxforms@irs. Free tax help gov. Free tax help Please put “Publications Comment” on the subject line. Free tax help You can also send us comments from www. Free tax help irs. Free tax help gov/formspubs/, select “Comment on Tax Forms and Publications” under “More Information. Free tax help ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free tax help Ordering forms and publications. Free tax help   Visit www. Free tax help irs. Free tax help gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free tax help Internal Revenue Service 1201 N. Free tax help Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free tax help   If you have a tax question, check the information available on IRS. Free tax help gov or call 1-800-829-1040. Free tax help We cannot answer tax questions sent to either of the above addresses. Free tax help Comments on IRS enforcement actions. Free tax help   The Small Business and Agricultural Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were established to receive comments from small business about federal agency enforcement actions. Free tax help The Ombudsman will annually evaluate the enforcement activities of each agency and rate its responsiveness to small business. Free tax help If you wish to comment on the enforcement actions of the IRS, you can: Call 1-888-734-3247, Fax your comments to 202-481-5719, Write to Office of the National Ombudsman U. Free tax help S. Free tax help Small Business Administration 409 3rd Street, S. Free tax help W. Free tax help  Washington, DC 20416 Send an email to ombudsman@sba. Free tax help gov, or Download the appraisal form at  www. Free tax help sba. Free tax help gov/ombudsman. Free tax help Treasury Inspector General for Tax Administration. Free tax help   If you want to confidentially report misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484 (1-800-877-8339 for TTY/TDD users). Free tax help You can remain anonymous. Free tax help Farm tax classes. Free tax help   Many state Cooperative Extension Services conduct farm tax workshops in conjunction with the IRS. Free tax help Contact your county extension office for more information. Free tax help Rural tax education website. Free tax help   The Rural Tax Education website is a source for information concerning agriculturally related income and deductions and self-employment tax. Free tax help The website is available for farmers and ranchers, other agricultural producers, Extension educators, and any one interested in learning about the tax side of the agricultural community. Free tax help Members of the National Farm Income Tax Extension Committee are contributors for the website and the website is hosted by Utah State University Cooperative Extension. Free tax help You can visit the website at www. Free tax help ruraltax. Free tax help org. Free tax help Future Developments The IRS has created a page on IRS. Free tax help gov for information about Publication 225, at  www. Free tax help irs. Free tax help gov/pub225. Free tax help Information about recent developments affecting Publication 225 will be posted on that page. Free tax help What's New for 2013 The following items highlight a number of administrative and tax law changes for 2013. Free tax help They are discussed in more detail throughout the publication. Free tax help Standard mileage rate. Free tax help  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. Free tax help 5 cents. Free tax help See chapter 4. Free tax help Simplified method for business use of home deduction. Free tax help  The IRS now provides a simplified method to determine your expenses for business use of your home. Free tax help For more information, see Schedule C (Form 1040), Part II, and its instructions. Free tax help See chapter 4. Free tax help Increased section 179 expense deduction dollar limits. Free tax help  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Free tax help This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Free tax help See chapter 7. Free tax help Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Free tax help  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free tax help See chapter 7. Free tax help Expiration of the 3-year recovery period for certain race horses. Free tax help . Free tax help  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. Free tax help See chapter 7. Free tax help Tax rates. Free tax help  For tax years beginning in 2013, the social security part of the self-employment tax increases from 10. Free tax help 4% to 12. Free tax help 4%. Free tax help As a result, the self-employment tax is increased from 13. Free tax help 3% to 15. Free tax help 3%. Free tax help See chapter 12. Free tax help Maximum net earnings. Free tax help  The maximum net self-employment earnings subject to the social security part (12. Free tax help 4%) of the self-employment tax increased to $113,700 for 2013. Free tax help There is no maximum limit on earnings subject to the Medicare part (2. Free tax help 9%). Free tax help See chapter 12. Free tax help Net investment income tax. Free tax help  For tax years beginning in 2013, individuals, estates, and trusts may be subject to the net investment income tax (NIIT). Free tax help If you are a trader in financial instruments and commodities and required to file Schedule C (Form 1040), your investment income (for purposes of the NIIT) may be reduced by your interest and other investment expenses to the extent those expenses are not used to reduce your self-employment income. Free tax help For information about NIIT and the special rule for traders in financial instruments and commodities, see the Instructions for Form 8960. Free tax help Social Security and Medicare Tax for 2013. Free tax help  The employee tax rate for social security is 6. Free tax help 2%. Free tax help The employer tax rate for social security remains unchanged at 6. Free tax help 2%. Free tax help The social security wage base limit is $113,700. Free tax help The Medicare tax rate is 1. Free tax help 45% each for the employee and employer, unchanged from 2012. Free tax help There is no wage base limit for Medicare tax. Free tax help See chapter 13. Free tax help Additional Medicare Tax. Free tax help  For tax years beginning in 2013, a 0. Free tax help 9% Additional Medicare Tax applies to your Medicare wages, Railroad Tax Act (RRTA) compensation, and self-employment income above a threshold amount. Free tax help Use Form 8959, Additional Medicare Tax, to figure this tax. Free tax help For more information, see the Instructions for Form 8959 and the Instructions for Schedule SE (Form 1040). Free tax help In addition to withholding Medicare tax at 1. Free tax help 45%, you must withhold a 0. Free tax help 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Free tax help 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 tax help Additional Medicare Tax is only imposed on the employee. Free tax help There is no employer share of Additional Medicare Tax. Free tax help All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Free tax help 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 tax help For more information on Additional Medicare Tax, visit IRS. Free tax help gov and enter “Additional Medicare Tax” in the search box. Free tax help See chapter 13. Free tax help Leave-Based donation programs to aid victims of Hurricane Sandy. Free tax help  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 tax help The donated leave will not be included in the income or wages of the employee. Free tax help The employer may deduct the cash payments as business expenses or charitable contributions. Free tax help See chapter 13. Free tax help Work opportunity tax credit for qualified tax-exempt organizations hiring qualified veterans extended. Free tax help  The work opportunity tax credit is now available for eligible unemployed veterans who begin work before January 1, 2014. Free tax help 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 tax help For more information, visit IRS. Free tax help gov and enter “work opportunity credit” in the search box. Free tax help See chapter 13. Free tax help Estimated tax. Free tax help  For tax years beginning in 2013, the Net Investment Income Tax (NIIT) may need to be included when calculating your estimated tax. Free tax help Also, when figuring your estimated tax, you may need to include the 0. Free tax help 9% Additional Medicare Tax applicable to Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above the threshold amount based on your filing status. Free tax help For more information, see Publication 505. Free tax help What's New for 2014 Maximum net earnings. Free tax help  The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2014 will be discussed in the 2013 Publication 334. Free tax help See chapter 12. Free tax help Social security and Medicare tax for 2014. Free tax help  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 tax help The Medicare tax rate for 2014 will also be discussed in Publication 51 (Circular A) (For use in 2014). Free tax help There is no limit on the amount of wages subject to Medicare tax. Free tax help See chapter 13. Free tax help Reminders The following reminders and other items may help you file your tax return. Free tax help   IRS e-file (Electronic Filing) You can file your tax returns electronically using an IRS e-file option. Free tax help The benefits of IRS e-file include faster refunds, increased accuracy, and acknowledgment of IRS receipt of your return. Free tax help You can use one of the following IRS e-file options. Free tax help Use an authorized IRS e-file provider. Free tax help Use a personal computer. Free tax help Visit a Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) site. Free tax help For details on these fast filing methods, see your income tax package. Free tax help Principal agricultural activity codes. Free tax help  You must enter on line B of Schedule F (Form 1040) a code that identifies your principal agricultural activity. Free tax help It is important to use the correct code because this information will identify market segments of the public for IRS Taxpayer Education programs. Free tax help The U. Free tax help S. Free tax help Census Bureau also uses this information for its economic census. Free tax help See the list of Principal Agricultural Activity Codes on page 2 of Schedule F (Form 1040). Free tax help Publication on employer identification numbers (EIN). Free tax help  Publication 1635, Understanding Your Employer Identification Number, provides general information on employer identification numbers. Free tax help Topics include how to apply for an EIN and how to complete Form SS-4. Free tax help Change of address. Free tax help  If you change your home address, you should use Form 8822, Change of Addres, to notify the IRS. Free tax help If you change your business address, you should use Form 8822-B, Change of Address or Responsible Party — Business, to notify the IRS. Free tax help Be sure to include your suite, room, or other unit number. Free tax help Reportable transactions. Free tax help  You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. Free tax help You may have to pay a penalty if you are required to file Form 8886 but do not do so. Free tax help Reportable transactions include (1) transactions the same as or substantially similar to tax avoidance transactions identified by the IRS, (2) transactions offered to you under conditions of confidentiality and for which you paid an advisor a minimum fee, (3) transactions for which you have or a related party has a right to a full or partial refund of fees if all or part of the intended tax consequences from the transaction are not sustained, (4) transactions that result in losses of at least $2 million in any single year or $4 million in any combination of years, and (5) transactions with asset holding periods of 45 days or less and that result in a tax credit of more than $250,000. Free tax help For more information, see the Instructions for Form 8886. Free tax help Form W-4 for 2014. Free tax help  You should make new Forms W-4 available to your employees and encourage them to check their income tax withholding for 2014. Free tax help Those employees who owed a large amount of tax or received a large refund for 2013 may need to submit a new Form W-4. Free tax help See Publication 919, How Do I Adjust My Tax Withholding. Free tax help Form 1099-MISC. Free tax help  Generally, file Form 1099-MISC if you pay at least $600 in rents, services, and other miscellaneous payments in your farming business to an individual (for example, an accountant, an attorney, or a veterinarian) who is not your employee. Free tax help Limited Liability Company (LLC). Free tax help  For purposes of this publication, a limited liability company (LLC) is a business entity organized in the United States under state law. Free tax help Unlike a partnership, all of the members of an LLC have limited personal liability for its debts. Free tax help An LLC may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner by applying the rules in Regulations section 301. Free tax help 7701-3. Free tax help See Publication 3402 for more details. Free tax help Photographs of missing children. Free tax help  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free tax help Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free tax help You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free tax help Prev  Up  Next   Home   More Online Publications
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Free tax help 2. Free tax help   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. Free tax help Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. Free tax help Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction You must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Free tax help You must do this to figure your net capital gain or loss. Free tax help For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. Free tax help See Capital Gains Tax Rates in chapter 4. Free tax help Your deduction for a net capital loss may be limited. Free tax help See Treatment of Capital Losses in chapter 4. Free tax help Capital gain or loss. Free tax help   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. Free tax help You also may have a capital gain if your section 1231 transactions result in a net gain. Free tax help Section 1231 transactions. Free tax help   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. Free tax help They also include certain involuntary conversions of business or investment property, including capital assets. Free tax help See Section 1231 Gains and Losses in chapter 3 for more information. Free tax help Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Free tax help Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. Free tax help For exceptions, see Noncapital Assets, later. Free tax help The following items are examples of capital assets. Free tax help Stocks and bonds. Free tax help A home owned and occupied by you and your family. Free tax help Timber grown on your home property or investment property, even if you make casual sales of the timber. Free tax help Household furnishings. Free tax help A car used for pleasure or commuting. Free tax help Coin or stamp collections. Free tax help Gems and jewelry. Free tax help Gold, silver, and other metals. Free tax help Personal-use property. Free tax help   Generally, property held for personal use is a capital asset. Free tax help Gain from a sale or exchange of that property is a capital gain. Free tax help Loss from the sale or exchange of that property is not deductible. Free tax help You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Free tax help Investment property. Free tax help   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. Free tax help This treatment does not apply to property used to produce rental income. Free tax help See Business assets, later, under Noncapital Assets. Free tax help Release of restriction on land. Free tax help   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. Free tax help Noncapital Assets A noncapital asset is property that is not a capital asset. Free tax help The following kinds of property are not capital assets. Free tax help Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Free tax help Inventories are discussed in Publication 538, Accounting Periods and Methods. Free tax help But, see the Tip below. Free tax help Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. Free tax help Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Free tax help Sales of this type of property are discussed in chapter 3. Free tax help Real property used in your trade or business or as rental property, even if the property is fully depreciated. Free tax help A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. Free tax help But, see the Tip below. Free tax help U. Free tax help S. Free tax help Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. Free tax help Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. Free tax help It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. Free tax help The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. Free tax help Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. Free tax help Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Free tax help You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. Free tax help See chapter 4 of Publication 550 for details. Free tax help Property held mainly for sale to customers. Free tax help   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. Free tax help Inventories are discussed in Publication 538. Free tax help Business assets. Free tax help   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. Free tax help The sale or disposition of business property is discussed in chapter 3. Free tax help Letters and memoranda. Free tax help   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. Free tax help Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. Free tax help For this purpose, letters and memoranda addressed to you are considered prepared for you. Free tax help If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. Free tax help Commodities derivative financial instrument. Free tax help   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). Free tax help Commodities derivative dealer. Free tax help   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. Free tax help Hedging transaction. Free tax help   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. Free tax help Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. Free tax help Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. Free tax help Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. Free tax help If these rules apply, gains may be treated as ordinary income and losses may not be deductible. Free tax help See Transfers to Spouse in chapter 1 for rules that apply to spouses. Free tax help Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. Free tax help It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. Free tax help Depreciable property transaction. Free tax help   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. Free tax help A person and the person's controlled entity or entities. Free tax help A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. Free tax help An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). Free tax help An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). Free tax help Controlled entity. Free tax help   A person's controlled entity is either of the following. Free tax help A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. Free tax help An entity whose relationship with that person is one of the following. Free tax help A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Free tax help Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. Free tax help Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. Free tax help Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Free tax help Controlled partnership transaction. Free tax help   A gain recognized in a controlled partnership transaction may be ordinary income. Free tax help The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. Free tax help   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. Free tax help A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Free tax help Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Free tax help Determining ownership. Free tax help   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. Free tax help Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Free tax help (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Free tax help ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Free tax help Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Free tax help For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Free tax help But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. Free tax help Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. Free tax help This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. Free tax help For the list of related persons, see Related persons next. Free tax help If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. Free tax help The gain on each item is taxable. Free tax help The loss on any item is nondeductible. Free tax help Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. Free tax help Related persons. Free tax help   The following is a list of related persons. Free tax help Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Free tax help ), and lineal descendants (children, grandchildren, etc. Free tax help ). Free tax help An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Free tax help Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. Free tax help A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Free tax help A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Free tax help Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Free tax help A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. Free tax help A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Free tax help Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Free tax help Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Free tax help An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. Free tax help Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Free tax help A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Free tax help Partnership interests. Free tax help   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. Free tax help Controlled groups. Free tax help   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. Free tax help   For more information, see section 267(f) of the Internal Revenue Code. Free tax help Ownership of stock or partnership interests. Free tax help   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. Free tax help Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Free tax help (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Free tax help ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Free tax help Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Free tax help An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Free tax help For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Free tax help But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. Free tax help Indirect transactions. Free tax help   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. Free tax help This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. Free tax help Property received from a related person. Free tax help   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. Free tax help This rule applies only to the original transferee. Free tax help Example 1. Free tax help Your brother sold stock to you for $7,600. Free tax help His cost basis was $10,000. Free tax help His loss of $2,400 was not deductible. Free tax help You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). Free tax help Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. Free tax help Example 2. Free tax help Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. Free tax help Your recognized loss is only $700 ($7,600 − $6,900). Free tax help You cannot deduct the loss not allowed to your brother. Free tax help Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. Free tax help Sale of a Business The sale of a business usually is not a sale of one asset. Free tax help Instead, all the assets of the business are sold. Free tax help Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Free tax help A business usually has many assets. Free tax help When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. Free tax help The gain or loss on each asset is figured separately. Free tax help The sale of capital assets results in capital gain or loss. Free tax help The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). Free tax help The sale of inventory results in ordinary income or loss. Free tax help Partnership interests. Free tax help   An interest in a partnership or joint venture is treated as a capital asset when sold. Free tax help The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Free tax help For more information, see Disposition of Partner's Interest in Publication 541. Free tax help Corporation interests. Free tax help   Your interest in a corporation is represented by stock certificates. Free tax help When you sell these certificates, you usually realize capital gain or loss. Free tax help For information on the sale of stock, see chapter 4 in Publication 550. Free tax help Corporate liquidations. Free tax help   Corporate liquidations of property generally are treated as a sale or exchange. Free tax help Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Free tax help Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. Free tax help   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. Free tax help For more information, see section 332 of the Internal Revenue Code and the related regulations. Free tax help Allocation of consideration paid for a business. Free tax help   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. Free tax help Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. Free tax help This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. Free tax help It also determines the buyer's basis in the business assets. Free tax help Consideration. Free tax help   The buyer's consideration is the cost of the assets acquired. Free tax help The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. Free tax help Residual method. Free tax help   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Free tax help This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. Free tax help Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. Free tax help   A group of assets constitutes a trade or business if either of the following applies. Free tax help Goodwill or going concern value could, under any circumstances, attach to them. Free tax help The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. Free tax help   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). Free tax help The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Free tax help See Classes of assets next for the complete order. Free tax help Classes of assets. Free tax help   The following definitions are the classifications for deemed or actual asset acquisitions. Free tax help Allocate the consideration among the assets in the following order. Free tax help The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Free tax help The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. Free tax help Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Free tax help Class II assets are certificates of deposit, U. Free tax help S. Free tax help Government securities, foreign currency, and actively traded personal property, including stock and securities. Free tax help Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Free tax help However, see section 1. Free tax help 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Free tax help Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Free tax help Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. Free tax help    Note. Free tax help Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. Free tax help Class VI assets are section 197 intangibles (other than goodwill and going concern value). Free tax help Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). Free tax help   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. Free tax help For example, if an asset is described in both Class II and Class IV, choose Class II. Free tax help Example. Free tax help The total paid in the sale of the assets of Company SKB is $21,000. Free tax help No cash or deposit accounts or similar accounts were sold. Free tax help The company's U. Free tax help S. Free tax help Government securities sold had a fair market value of $3,200. Free tax help The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. Free tax help Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. Free tax help S. Free tax help Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. Free tax help Agreement. Free tax help   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Free tax help This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Free tax help Reporting requirement. Free tax help   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Free tax help Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Free tax help Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Free tax help See the Instructions for Form 8594. Free tax help Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. Free tax help It includes such items as patents, copyrights, and the goodwill value of a business. Free tax help Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. Free tax help The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. Free tax help See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. Free tax help Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. Free tax help The following discussions explain special rules that apply to certain dispositions of intangible property. Free tax help Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. Free tax help They include the following assets. Free tax help Goodwill. Free tax help Going concern value. Free tax help Workforce in place. Free tax help Business books and records, operating systems, and other information bases. Free tax help Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. Free tax help Customer-based intangibles. Free tax help Supplier-based intangibles. Free tax help Licenses, permits, and other rights granted by a governmental unit. Free tax help Covenants not to compete entered into in connection with the acquisition of a business. Free tax help Franchises, trademarks, and trade names. Free tax help See chapter 8 of Publication 535 for a description of each intangible. Free tax help Dispositions. Free tax help   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. Free tax help Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. Free tax help If you retain more than one section 197 intangible, increase each intangible's adjusted basis. Free tax help Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. Free tax help   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. Free tax help For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. Free tax help Covenant not to compete. Free tax help   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. Free tax help Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. Free tax help Anti-churning rules. Free tax help   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. Free tax help However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. Free tax help Recognize gain on the transfer of the property. Free tax help Pay income tax on the gain at the highest tax rate. Free tax help   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. Free tax help But each partner or shareholder must pay the tax on his or her share of gain. Free tax help   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. Free tax help You must file the tax return by the due date (including extensions). Free tax help You must also notify the transferee of the election in writing by the due date of the return. Free tax help   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Free tax help Attach the statement to the amended return and write “Filed pursuant to section 301. Free tax help 9100-2” at the top of the statement. Free tax help File the amended return at the same address the original return was filed. Free tax help For more information about making the election, see Regulations section 1. Free tax help 197-2(h)(9). Free tax help For information about reporting the tax on your income tax return, see the Instructions for Form 4797. Free tax help Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. Free tax help This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. Free tax help For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. Free tax help This treatment applies to your transfer of a patent if you meet all the following conditions. Free tax help You are the holder of the patent. Free tax help You transfer the patent other than by gift, inheritance, or devise. Free tax help You transfer all substantial rights to the patent or an undivided interest in all such rights. Free tax help You do not transfer the patent to a related person. Free tax help Holder. Free tax help   You are the holder of a patent if you are either of the following. Free tax help The individual whose effort created the patent property and who qualifies as the original and first inventor. Free tax help The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. Free tax help All substantial rights. Free tax help   All substantial rights to patent property are all rights that have value when they are transferred. Free tax help A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. Free tax help   All substantial rights to a patent are not transferred if any of the following apply to the transfer. Free tax help The rights are limited geographically within a country. Free tax help The rights are limited to a period less than the remaining life of the patent. Free tax help The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. Free tax help The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. Free tax help Related persons. Free tax help   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. Free tax help Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. Free tax help Substitute “25% or more” ownership for “more than 50%. Free tax help ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. Free tax help For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. Free tax help The brother-sister exception does not apply because the trust relationship is independent of family status. Free tax help Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. Free tax help A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. Free tax help Significant power, right, or continuing interest. Free tax help   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. Free tax help   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. Free tax help A right to disapprove any assignment of the interest, or any part of it. Free tax help A right to end the agreement at will. Free tax help A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. Free tax help A right to make the recipient sell or advertise only your products or services. Free tax help A right to make the recipient buy most supplies and equipment from you. Free tax help A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. Free tax help Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. Free tax help However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. Free tax help See section 1237 of the Internal Revenue Code. Free tax help Timber Standing timber held as investment property is a capital asset. Free tax help Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. Free tax help If you held the timber primarily for sale to customers, it is not a capital asset. Free tax help Gain or loss on its sale is ordinary business income or loss. Free tax help It is reported in the gross receipts or sales and cost of goods sold items of your return. Free tax help Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Free tax help These sales constitute a very minor part of their farm businesses. Free tax help In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. Free tax help , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. Free tax help Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. Free tax help Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Free tax help This is true whether the timber is cut under contract or whether you cut it yourself. Free tax help Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. Free tax help See chapter 3. Free tax help Gain or loss is reported on Form 4797. Free tax help Christmas trees. Free tax help   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Free tax help They qualify for both rules discussed below. Free tax help Election to treat cutting as a sale or exchange. Free tax help   Under the general rule, the cutting of timber results in no gain or loss. Free tax help It is not until a sale or exchange occurs that gain or loss is realized. Free tax help But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year the timber is cut. Free tax help Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Free tax help Any later sale results in ordinary business income or loss. Free tax help See Example, later. Free tax help   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or for use in your trade or business. Free tax help Making the election. Free tax help   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of the gain or loss. Free tax help You do not have to make the election in the first year you cut timber. Free tax help You can make it in any year to which the election would apply. Free tax help If the timber is partnership property, the election is made on the partnership return. Free tax help This election cannot be made on an amended return. Free tax help   Once you have made the election, it remains in effect for all later years unless you cancel it. Free tax help   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. Free tax help The prior election (and revocation) is disregarded for purposes of making a subsequent election. Free tax help See Form T (Timber), Forest Activities Schedule, for more information. Free tax help Gain or loss. Free tax help   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. Free tax help   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Free tax help Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 of the Internal Revenue Code and the related regulations. Free tax help   Timber depletion is discussed in chapter 9 of Publication 535. Free tax help Example. Free tax help In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Free tax help It had an adjusted basis for depletion of $40 per MBF. Free tax help You are a calendar year taxpayer. Free tax help On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. Free tax help It was cut in April for sale. Free tax help On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Free tax help You report the difference between the fair market value and your adjusted basis for depletion as a gain. Free tax help This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. Free tax help You figure your gain as follows. Free tax help FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value becomes your basis in the cut timber and a later sale of the cut timber including any by-product or tree tops will result in ordinary business income or loss. Free tax help Outright sales of timber. Free tax help   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined below). Free tax help However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see below). Free tax help Cutting contract. Free tax help   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Free tax help You are the owner of the timber. Free tax help You held the timber longer than 1 year before its disposal. Free tax help You kept an economic interest in the timber. Free tax help   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Free tax help   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Free tax help Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. Free tax help Date of disposal. Free tax help   The date of disposal is the date the timber is cut. Free tax help However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Free tax help   This election applies only to figure the holding period of the timber. Free tax help It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Free tax help   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Free tax help The statement must identify the advance payments subject to the election and the contract under which they were made. Free tax help   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Free tax help Attach the statement to the amended return and write “Filed pursuant to section 301. Free tax help 9100-2” at the top of the statement. Free tax help File the amended return at the same address the original return was filed. Free tax help Owner. Free tax help   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. Free tax help You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Free tax help Tree stumps. Free tax help   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Free tax help Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Free tax help However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Free tax help Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Free tax help   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Free tax help Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. Free tax help , are capital assets except when they are held for sale by a dealer. Free tax help Any gain or loss from their sale or exchange generally is a capital gain or loss. Free tax help If you are a dealer, the amount received from the sale is ordinary business income. Free tax help Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. Free tax help You owned the coal or iron ore longer than 1 year before its disposal. Free tax help You kept an economic interest in the coal or iron ore. Free tax help For this rule, the date the coal or iron ore is mined is considered the date of its disposal. Free tax help Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). Free tax help This amount is included on Form 4797 along with your other section 1231 gains and losses. Free tax help You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. Free tax help If you own only an option to buy the coal in place, you do not qualify as an owner. Free tax help In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. Free tax help The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. Free tax help Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. Free tax help If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. Free tax help Special rule. Free tax help   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. Free tax help A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). Free tax help An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. Free tax help Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. Free tax help This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. Free tax help An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). Free tax help A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. Free tax help Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. Free tax help For more information, see chapter 4 of Publication 550. Free tax help Prev  Up  Next   Home   More Online Publications