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Free tax online Publication 547 - Main Content Table of Contents CasualtyFamily pet. Free tax online Progressive deterioration. Free tax online Special Procedure for Damage From Corrosive Drywall Theft Loss on Deposits Proof of Loss Figuring a LossGain from reimbursement. Free tax online Business or income-producing property. Free tax online Loss of inventory. Free tax online Leased property. Free tax online Exception for personal-use real property. Free tax online Decrease in Fair Market Value Adjusted Basis Insurance and Other Reimbursements Deduction Limits2% Rule $100 Rule 10% Rule Figuring the Deduction Figuring a GainPostponement of Gain When To Report Gains and LossesLoss on deposits. Free tax online Lessee's loss. Free tax online Disaster Area LossesDisaster loss to inventory. Free tax online Main home in disaster area. Free tax online Unsafe home. Free tax online Time limit for making choice. Free tax online Revoking your choice. Free tax online Figuring the loss deduction. Free tax online How to report the loss on Form 1040X. Free tax online Records. Free tax online Need a copy of your tax return for the preceding year? Postponed Tax Deadlines Contacting the Federal Emergency Management Agency (FEMA) How To Report Gains and LossesProperty held 1 year or less. Free tax online Property held more than 1 year. Free tax online Depreciable property. Free tax online Adjustments to Basis If Deductions Are More Than Income How To Get Tax HelpLow Income Taxpayer Clinics Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Free tax online A sudden event is one that is swift, not gradual or progressive. Free tax online An unexpected event is one that is ordinarily unanticipated and unintended. Free tax online An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. Free tax online Generally, casualty losses are deductible during the taxable year that the loss occurred. Free tax online See Table 3, later. Free tax online Deductible losses. Free tax online   Deductible casualty losses can result from a number of different causes, including the following. Free tax online Car accidents (but see Nondeductible losses , next, for exceptions). Free tax online Earthquakes. Free tax online Fires (but see Nondeductible losses , next, for exceptions). Free tax online Floods. Free tax online Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses , later. Free tax online Mine cave-ins. Free tax online Shipwrecks. Free tax online Sonic booms. Free tax online Storms, including hurricanes and tornadoes. Free tax online Terrorist attacks. Free tax online Vandalism. Free tax online Volcanic eruptions. Free tax online Nondeductible losses. Free tax online   A casualty loss is not deductible if the damage or destruction is caused by the following. Free tax online Accidentally breaking articles such as glassware or china under normal conditions. Free tax online A family pet (explained below). Free tax online A fire if you willfully set it, or pay someone else to set it. Free tax online A car accident if your willful negligence or willful act caused it. Free tax online The same is true if the willful act or willful negligence of someone acting for you caused the accident. Free tax online Progressive deterioration (explained below). Free tax online However, see Special Procedure for Damage From Corrosive Drywall , later. Free tax online Family pet. Free tax online   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met. Free tax online Example. Free tax online Your antique oriental rug was damaged by your new puppy before it was housebroken. Free tax online Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss. Free tax online Progressive deterioration. Free tax online   Loss of property due to progressive deterioration is not deductible as a casualty loss. Free tax online This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. Free tax online The following are examples of damage due to progressive deterioration. Free tax online The steady weakening of a building due to normal wind and weather conditions. Free tax online The deterioration and damage to a water heater that bursts. Free tax online However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty. Free tax online Most losses of property caused by droughts. Free tax online To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit. Free tax online Termite or moth damage. Free tax online The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. Free tax online However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss. Free tax online Special Procedure for Damage From Corrosive Drywall Under a special procedure, you can deduct the amounts you paid to repair damage to your home and household appliances due to corrosive drywall. Free tax online Under this procedure, you treat the amounts paid for repairs as a casualty loss in the year of payment. Free tax online For example, amounts you paid for repairs in 2013 are deductible on your 2013 tax return and amounts you paid for repairs in 2012 are deductible on your 2012 tax return. Free tax online Note. Free tax online If you paid for any repairs before 2013 and you choose to follow this special procedure, you can amend your return for the earlier year by filing Form 1040X, Amended U. Free tax online S. Free tax online Individual Income Tax Return, and attaching a completed Form 4684 for the appropriate year. Free tax online Form 4684 for the appropriate year can be found at IRS. Free tax online gov. Free tax online Generally, Form 1040X must be filed within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. Free tax online Corrosive drywall. Free tax online   For purposes of this special procedure, “corrosive drywall” means drywall that is identified as problem drywall under the two-step identification method published by the Consumer Product Safety Commission (CPSC) and the Department of Housing and Urban Development (HUD) in their interim guidance dated January 28, 2010, as revised by the CPSC and HUD. Free tax online The revised identification guidance and remediation guidelines are available at www. Free tax online cpsc. Free tax online gov/Safety-Education/Safety-Education-Centers/Drywall. Free tax online Special instructions for completing Form 4684. Free tax online   If you choose to follow this special procedure, complete Form 4684, Section A, according to the instructions below. Free tax online The IRS will not challenge your treatment of damage resulting from corrosive drywall as a casualty loss if you determine and report the loss as explained below. Free tax online Top margin of Form 4684. Free tax online   Enter “Revenue Procedure 2010-36”. Free tax online Line 1. Free tax online   Enter the information required by the line 1 instructions. Free tax online Line 2. Free tax online   Skip this line. Free tax online Line 3. Free tax online   Enter the amount of insurance or other reimbursements you received (including through litigation). Free tax online If none, enter -0-. Free tax online Lines 4–7. Free tax online   Skip these lines. Free tax online Line 8. Free tax online   Enter the amount you paid to repair the damage to your home and household appliances due to corrosive drywall. Free tax online Enter only the amounts you paid to restore your home to the condition existing immediately before the damage. Free tax online Do not enter any amounts you paid for improvements or additions that increased the value of your home above its pre-loss value. Free tax online If you replaced a household appliance instead of repairing it, enter the lesser of: The current cost to replace the original appliance, or The basis of the original appliance (generally its cost). Free tax online Line 9. Free tax online   If line 8 is more than line 3, do one of the following. Free tax online If you have a pending claim for reimbursement (or you intend to pursue reimbursement), enter 75% of the difference between lines 3 and 8. Free tax online If item (1) does not apply to you, enter the full amount of the difference between lines 3 and 8. Free tax online If line 8 is less than or equal to line 3, you cannot claim a casualty loss deduction using this special procedure. Free tax online    If you have a pending claim for reimbursement (or you intend to pursue reimbursement), you may have income or an additional deduction in a later tax year depending on the actual amount of reimbursement received. Free tax online See Reimbursement Received After Deducting Loss, later. Free tax online Lines 10–18. Free tax online   Complete these lines according to the Instructions for Form 4684. Free tax online Choosing not to follow this special procedure. Free tax online   If you choose not to follow this special procedure, you are subject to all of the provisions that apply to the deductibility of casualty losses, and you must complete lines 1–9 according to the Instructions for Form 4684. Free tax online This means, for example, that you must establish that the damage, destruction, or loss of property resulted from an identifiable event as defined earlier under Casualty . Free tax online Furthermore, you must have proof that shows the following. Free tax online The loss is properly deductible in the tax year you claimed it and not in some other year. Free tax online See When To Report Gains and Losses , later. Free tax online The amount of the claimed loss. Free tax online See Proof of Loss , later. Free tax online No claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery. Free tax online See When To Report Gains and Losses , later. Free tax online Theft A theft is the taking and removing of money or property with the intent to deprive the owner of it. Free tax online The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. Free tax online You do not need to show a conviction for theft. Free tax online Theft includes the taking of money or property by the following means. Free tax online Blackmail. Free tax online Burglary. Free tax online Embezzlement. Free tax online Extortion. Free tax online Kidnapping for ransom. Free tax online Larceny. Free tax online Robbery. Free tax online The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Free tax online Decline in market value of stock. Free tax online   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. Free tax online However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. Free tax online You report a capital loss on Schedule D (Form 1040). Free tax online For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. Free tax online Mislaid or lost property. Free tax online    The simple disappearance of money or property is not a theft. Free tax online However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Free tax online Sudden, unexpected, and unusual events were defined earlier under Casualty . Free tax online Example. Free tax online A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. Free tax online The diamond falls from the ring and is never found. Free tax online The loss of the diamond is a casualty. Free tax online Losses from Ponzi-type investment schemes. Free tax online   The IRS has issued the following guidance to assist taxpayers who are victims of losses from Ponzi-type investment schemes: Revenue Ruling 2009-9, 2009-14 I. Free tax online R. Free tax online B. Free tax online 735 (available at www. Free tax online irs. Free tax online gov/irb/2009-14_IRB/ar07. Free tax online html). Free tax online Revenue Procedure 2009-20, 2009-14 I. Free tax online R. Free tax online B. Free tax online 749 (available at www. Free tax online irs. Free tax online gov/irb/2009-14_IRB/ar11. Free tax online html). Free tax online Revenue Procedure 2011-58, 2011-50 I. Free tax online R. Free tax online B. Free tax online 847 (available at www. Free tax online irs. Free tax online gov/irb/2011-50_IRB/ar11. Free tax online html). Free tax online If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. Free tax online Skip lines 19 to 27, but you must fill out Section B, lines 29 to 39, as appropriate. Free tax online Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. Free tax online You do not need to complete Appendix A. Free tax online For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684. Free tax online   If you choose not to use the procedures in Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate. Free tax online Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. Free tax online If you incurred this type of loss, you can choose one of the following ways to deduct the loss. Free tax online As a casualty loss. Free tax online As an ordinary loss. Free tax online As a nonbusiness bad debt. Free tax online Casualty loss or ordinary loss. Free tax online   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. Free tax online The choice generally is made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. Free tax online If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. Free tax online However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. Free tax online Once you make the choice, you cannot change it without permission from the Internal Revenue Service. Free tax online   If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. Free tax online The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. Free tax online Your loss is subject to the 2%-of-adjusted-gross-income limit. Free tax online You cannot choose to claim an ordinary loss if any part of the deposit is federally insured. Free tax online Nonbusiness bad debt. Free tax online   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year. Free tax online How to report. Free tax online   The kind of deduction you choose for your loss on deposits determines how you report your loss. Free tax online See Table 1. Free tax online More information. Free tax online   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684. Free tax online Deducted loss recovered. Free tax online   If you recover an amount you deducted as a loss in an earlier year, you may have to include the amount recovered in your income for the year of recovery. Free tax online If any part of the original deduction did not reduce your tax in the earlier year, you do not have to include that part of the recovery in your income. Free tax online For more information, see Recoveries in Publication 525. Free tax online Proof of Loss To deduct a casualty or theft loss, you must be able to show that there was a casualty or theft. Free tax online You also must be able to support the amount you take as a deduction. Free tax online Casualty loss proof. Free tax online   For a casualty loss, you should be able to show all of the following. Free tax online The type of casualty (car accident, fire, storm, etc. Free tax online ) and when it occurred. Free tax online That the loss was a direct result of the casualty. Free tax online That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage. Free tax online Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Free tax online Theft loss proof. Free tax online   For a theft loss, you should be able to show all of the following. Free tax online When you discovered that your property was missing. Free tax online That your property was stolen. Free tax online That you were the owner of the property. Free tax online Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Free tax online    It is important that you have records that will prove your deduction. Free tax online If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it. Free tax online Figuring a Loss To determine your deduction for a casualty or theft loss, you must first figure your loss. Free tax online Table 1. Free tax online Reporting Loss on Deposits IF you choose to report the loss as a(n). Free tax online . Free tax online . Free tax online   THEN report it on. Free tax online . Free tax online . Free tax online casualty loss   Form 4684 and Schedule A  (Form 1040). Free tax online ordinary loss   Schedule A (Form 1040). Free tax online nonbusiness bad debt   Form 8949 and Schedule D (Form 1040). Free tax online Amount of loss. Free tax online   Figure the amount of your loss using the following steps. Free tax online Determine your adjusted basis in the property before the casualty or theft. Free tax online Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. Free tax online From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. Free tax online For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss. Free tax online Gain from reimbursement. Free tax online   If your reimbursement is more than your adjusted basis in the property, you have a gain. Free tax online This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. Free tax online If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. Free tax online See Figuring a Gain , later. Free tax online Business or income-producing property. Free tax online   If you have business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV is not considered. Free tax online Your loss is figured as follows:   Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive   Loss of inventory. Free tax online   There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers. Free tax online   One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. Free tax online Do not claim this loss again as a casualty or theft loss. Free tax online If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income. Free tax online   The other way is to deduct the loss separately. Free tax online If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. Free tax online Reduce the loss by the reimbursement you received. Free tax online Do not include the reimbursement in gross income. Free tax online If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery. Free tax online Leased property. Free tax online   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive. Free tax online Separate computations. Free tax online   Generally, if a single casualty or theft involves more than one item of property, you must figure the loss on each item separately. Free tax online Then combine the losses to determine the total loss from that casualty or theft. Free tax online Exception for personal-use real property. Free tax online   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. Free tax online Figure the loss using the smaller of the following. Free tax online The decrease in FMV of the entire property. Free tax online The adjusted basis of the entire property. Free tax online   See Real property under Figuring the Deduction, later. Free tax online Decrease in Fair Market Value Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts. Free tax online The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. Free tax online FMV of stolen property. Free tax online   The FMV of property immediately after a theft is considered to be zero because you no longer have the property. Free tax online Example. Free tax online Several years ago, you purchased silver dollars at face value for $150. Free tax online This is your adjusted basis in the property. Free tax online Your silver dollars were stolen this year. Free tax online The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. Free tax online Your theft loss is $150. Free tax online Recovered stolen property. Free tax online   Recovered stolen property is your property that was stolen and later returned to you. Free tax online If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. Free tax online Use this amount to refigure your total loss for the year in which the loss was deducted. Free tax online   If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. Free tax online But report the difference only up to the amount of the loss that reduced your tax. Free tax online For more information on the amount to report, see Recoveries in Publication 525. Free tax online Figuring Decrease in FMV — Items To Consider To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. Free tax online However, other measures also can be used to establish certain decreases. Free tax online See Appraisal and Cost of cleaning up or making repairs , next. Free tax online Appraisal. Free tax online   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterwards should be made by a competent appraiser. Free tax online The appraiser must recognize the effects of any general market decline that may occur along with the casualty. Free tax online This information is needed to limit any deduction to the actual loss resulting from damage to the property. Free tax online   Several factors are important in evaluating the accuracy of an appraisal, including the following. Free tax online The appraiser's familiarity with your property before and after the casualty or theft. Free tax online The appraiser's knowledge of sales of comparable property in the area. Free tax online The appraiser's knowledge of conditions in the area of the casualty. Free tax online The appraiser's method of appraisal. Free tax online You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. Free tax online For more information on disasters, see Disaster Area Losses, later. Free tax online Cost of cleaning up or making repairs. Free tax online   The cost of repairing damaged property is not part of a casualty loss. Free tax online Neither is the cost of cleaning up after a casualty. Free tax online But you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. Free tax online The repairs are actually made. Free tax online The repairs are necessary to bring the property back to its condition before the casualty. Free tax online The amount spent for repairs is not excessive. Free tax online The repairs take care of the damage only. Free tax online The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. Free tax online Landscaping. Free tax online   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. Free tax online You may be able to measure your loss by what you spend on the following. Free tax online Removing destroyed or damaged trees and shrubs, minus any salvage you receive. Free tax online Pruning and other measures taken to preserve damaged trees and shrubs. Free tax online Replanting necessary to restore the property to its approximate value before the casualty. Free tax online Car value. Free tax online   Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. Free tax online You can use the books' retail values and modify them by factors such as the mileage and condition of your car to figure its value. Free tax online The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. Free tax online If your car is not listed in the books, determine its value from other sources. Free tax online A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value. Free tax online Figuring Decrease in FMV — Items Not To Consider You generally should not consider the following items when attempting to establish the decrease in FMV of your property. Free tax online Cost of protection. Free tax online   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. Free tax online The amount you spend on insurance or to board up your house against a storm is not part of your loss. Free tax online If the property is business property, these expenses are deductible as business expenses. Free tax online   If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. Free tax online An example would be the cost of a dike to prevent flooding. Free tax online Exception. Free tax online   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments (discussed later under Disaster Area Losses ). Free tax online Related expenses. Free tax online   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. Free tax online However, they may be deductible as business expenses if the damaged or stolen property is business property. Free tax online Replacement cost. Free tax online   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss. Free tax online Example. Free tax online You bought a new chair 4 years ago for $300. Free tax online In April, a fire destroyed the chair. Free tax online You estimate that it would cost $500 to replace it. Free tax online If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. Free tax online The chair was not insured. Free tax online Your loss is $100, the FMV of the chair before the fire. Free tax online It is not $500, the replacement cost. Free tax online Sentimental value. Free tax online   Do not consider sentimental value when determining your loss. Free tax online If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property. Free tax online Decline in market value of property in or near casualty area. Free tax online   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. Free tax online You have a loss only for actual casualty damage to your property. Free tax online However, if your home is in a federally declared disaster area, see Disaster Area Losses , later. Free tax online Costs of photographs and appraisals. Free tax online   Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. Free tax online Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful. Free tax online   Appraisals are used to figure the decrease in FMV because of a casualty or theft. Free tax online See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals. Free tax online   The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. Free tax online They are expenses in determining your tax liability. Free tax online You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). Free tax online Adjusted Basis The measure of your investment in the property you own is its basis. Free tax online For property you buy, your basis is usually its cost to you. Free tax online For property you acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in another way, as explained in Publication 551. Free tax online If you inherited the property from someone who died in 2010 and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Free tax online Adjustments to basis. Free tax online    While you own the property, various events may take place that change your basis. Free tax online Some events, such as additions or permanent improvements to the property, increase basis. Free tax online Others, such as earlier casualty losses and depreciation deductions, decrease basis. Free tax online When you add the increases to the basis and subtract the decreases from the basis, the result is your adjusted basis. Free tax online See Publication 551 for more information on figuring the basis of your property. Free tax online Insurance and Other Reimbursements If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. Free tax online You do not have a casualty or theft loss to the extent you are reimbursed. Free tax online If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. Free tax online You must reduce your loss even if you do not receive payment until a later tax year. Free tax online See Reimbursement Received After Deducting Loss , later. Free tax online Failure to file a claim for reimbursement. Free tax online   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. Free tax online Otherwise, you cannot deduct this loss as a casualty or theft. Free tax online The portion of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule. Free tax online Example. Free tax online You have a car insurance policy with a $1,000 deductible. Free tax online Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the $100 and 10% rules, discussed later). Free tax online This is true, even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible. Free tax online Types of Reimbursements The most common type of reimbursement is an insurance payment for your stolen or damaged property. Free tax online Other types of reimbursements are discussed next. Free tax online Also see the Instructions for Form 4684. Free tax online Employer's emergency disaster fund. Free tax online   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. Free tax online Take into consideration only the amount you used to replace your destroyed or damaged property. Free tax online Example. Free tax online Your home was extensively damaged by a tornado. Free tax online Your loss after reimbursement from your insurance company was $10,000. Free tax online Your employer set up a disaster relief fund for its employees. Free tax online Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. Free tax online You received $4,000 from the fund and spent the entire amount on repairs to your home. Free tax online In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. Free tax online Your casualty loss before applying the deduction limits (discussed later) is $6,000. Free tax online Cash gifts. Free tax online   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. Free tax online This applies even if you use the money to pay for repairs to property damaged in the disaster. Free tax online Example. Free tax online Your home was damaged by a hurricane. Free tax online Relatives and neighbors made cash gifts to you that were excludable from your income. Free tax online You used part of the cash gifts to pay for repairs to your home. Free tax online There were no limits or restrictions on how you could use the cash gifts. Free tax online It was an excludable gift, so the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home. Free tax online Insurance payments for living expenses. Free tax online   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations. Free tax online You lose the use of your main home because of a casualty. Free tax online Government authorities do not allow you access to your main home because of a casualty or threat of one. Free tax online Inclusion in income. Free tax online   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. Free tax online Report this amount on Form 1040, line 21. Free tax online However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. Free tax online See Qualified disaster relief payments , later, under Disaster Area Losses. Free tax online   A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. Free tax online Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. Free tax online Generally, these expenses include the amounts you pay for the following. Free tax online Renting suitable housing. Free tax online Transportation. Free tax online Food. Free tax online Utilities. Free tax online Miscellaneous services. Free tax online Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one. Free tax online Example. Free tax online As a result of a fire, you vacated your apartment for a month and moved to a motel. Free tax online You normally pay $525 a month for rent. Free tax online None was charged for the month the apartment was vacated. Free tax online Your motel rent for this month was $1,200. Free tax online You normally pay $200 a month for food. Free tax online Your food expenses for the month you lived in the motel were $400. Free tax online You received $1,100 from your insurance company to cover your living expenses. Free tax online You determine the payment you must include in income as follows. Free tax online 1. Free tax online Insurance payment for living expenses $1,100 2. Free tax online Actual expenses during the month you are unable to use your home because of the fire $1,600   3. Free tax online Normal living expenses 725   4. Free tax online Temporary increase in living expenses: Subtract line 3  from line 2 875 5. Free tax online Amount of payment includible in income: Subtract line 4 from line 1 $ 225 Tax year of inclusion. Free tax online   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment. Free tax online Example. Free tax online Your main home was destroyed by a tornado in August 2011. Free tax online You regained use of your home in November 2012. Free tax online The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. Free tax online You include this amount in income on your 2012 Form 1040. Free tax online If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040. Free tax online Disaster relief. Free tax online   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. Free tax online Table 2. Free tax online Deduction Limit Rules for Personal-Use and Employee Property       $100 Rule 10% Rule 2% Rule General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. Free tax online Apply this rule to personal-use property after you have figured the amount of your loss. Free tax online You must reduce your total casualty or theft loss by 10% of your adjusted gross income. Free tax online Apply this rule to personal-use property after you reduce each loss by $100 (the $100 rule). Free tax online You must reduce your total casualty or theft loss by 2% of your adjusted gross income. Free tax online Apply this rule to property you used in performing services as an employee after you have figured the amount of your loss and added it to your job expenses and most other miscellaneous itemized deductions. Free tax online Single Event Apply this rule only once, even if many pieces of property are affected. Free tax online Apply this rule only once, even if many pieces of property are affected. Free tax online Apply this rule only once, even if many pieces of property are affected. Free tax online More Than One Event Apply to the loss from each event. Free tax online Apply to the total of all your losses from all events. Free tax online Apply to the total of all your losses from all events. Free tax online More Than One Person— With Loss From the   Same Event  (other than a married couple  filing jointly) Apply separately to each person. Free tax online Apply separately to each person. Free tax online Apply separately to each person. Free tax online Married Couple—  With Loss From the  Same Event Filing Joint Return Apply as if you were one person. Free tax online Apply as if you were one person. Free tax online Apply as if you were one person. Free tax online Filing Separate Return Apply separately to each spouse. Free tax online Apply separately to each spouse. Free tax online Apply separately to each spouse. Free tax online More Than One Owner (other than a married couple filing jointly) Apply separately to each owner of jointly owned property. Free tax online Apply separately to each owner of jointly owned property. Free tax online Apply separately to each owner of jointly owned property. Free tax online    Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster, are not taxable income to you. Free tax online For more information, see Qualified disaster relief payments under Disaster Area Losses, later. Free tax online   Disaster unemployment assistance payments are unemployment benefits that are taxable. Free tax online   Generally, disaster relief grants received under the Robert T. Free tax online Stafford Disaster Relief and Emergency Assistance Act are not included in your income. Free tax online See Federal disaster relief grants , later, under Disaster Area Losses. Free tax online Loan proceeds. Free tax online   Do not reduce your casualty loss by loan proceeds you use to rehabilitate or replace property on which you are claiming a casualty loss deduction. Free tax online If you have a federal loan that is canceled (forgiven), see Federal loan canceled , later, under Disaster Area Losses. Free tax online Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using the amount of your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. Free tax online This section explains the adjustment you may have to make. Free tax online Actual reimbursement less than expected. Free tax online   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. Free tax online Example. Free tax online Your personal car had a FMV of $2,000 when it was destroyed in a collision with another car in 2012. Free tax online The accident was due to the negligence of the other driver. Free tax online At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. Free tax online You did not have a deductible loss in 2012. Free tax online In January 2013, the court awards you a judgment of $2,000. Free tax online However, in July it becomes apparent that you will be unable to collect any amount from the other driver. Free tax online Since this is your only casualty or theft loss, you can deduct the loss in 2013 that is figured by applying the Deduction Limits (discussed later). Free tax online Actual reimbursement more than expected. Free tax online   If you later receive more reimbursement than you expected, after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. Free tax online However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. Free tax online You do not refigure your tax for the year you claimed the deduction. Free tax online See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. Free tax online Example. Free tax online In 2012, a hurricane destroyed your motorboat. Free tax online Your loss was $3,000, and you estimated that your insurance would cover $2,500 of it. Free tax online You did not itemize deductions on your 2012 return, so you could not deduct the loss. Free tax online When the insurance company reimburses you for the loss, you do not report any of the reimbursement as income. Free tax online This is true even if it is for the full $3,000 because you did not deduct the loss on your 2012 return. Free tax online The loss did not reduce your tax. Free tax online    If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. Free tax online If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. Free tax online Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. Free tax online You may be able to postpone reporting any remaining gain as explained under Postponement of Gain, later. Free tax online Actual reimbursement same as expected. Free tax online   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. Free tax online Example. Free tax online In December 2013, you had a collision while driving your personal car. Free tax online Repairs to the car cost $950. Free tax online You had $100 deductible collision insurance. Free tax online Your insurance company agreed to reimburse you for the rest of the damage. Free tax online Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013. Free tax online Due to the $100 rule, you cannot deduct the $100 you paid as the deductible. Free tax online When you receive the $850 from the insurance company in 2014, do not report it as income. Free tax online Deduction Limits After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. Free tax online The deduction for casualty and theft losses of employee property and personal-use property is limited. Free tax online A loss on employee property is subject to the 2% rule, discussed next. Free tax online With certain exceptions, a loss on property you own for your personal use is subject to the $100 and 10% rules, discussed later. Free tax online The 2%, $100, and 10% rules are also summarized in Table 2 . Free tax online Losses on business property (other than employee property) and income-producing property are not subject to these rules. Free tax online However, if your casualty or theft loss involved a home you used for business or rented out, your deductible loss may be limited. Free tax online See the Instructions for Form 4684, Section B. Free tax online If the casualty or theft loss involved property used in a passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions. Free tax online 2% Rule The casualty and theft loss deduction for employee property, when added to your job expenses and most other miscellaneous itemized deductions on Schedule A (Form 1040) or Form 1040NR, Schedule A, must be reduced by 2% of your adjusted gross income. Free tax online Employee property is property used in performing services as an employee. Free tax online $100 Rule After you have figured your casualty or theft loss on personal-use property, as discussed earlier, you must reduce that loss by $100. Free tax online This reduction applies to each total casualty or theft loss. Free tax online It does not matter how many pieces of property are involved in an event. Free tax online Only a single $100 reduction applies. Free tax online Example. Free tax online You have $750 deductible collision insurance on your car. Free tax online The car is damaged in a collision. Free tax online The insurance company pays you for the damage minus the $750 deductible. Free tax online The amount of the casualty loss is based solely on the deductible. Free tax online The casualty loss is $650 ($750 − $100) because the first $100 of a casualty loss on personal-use property is not deductible. Free tax online Single event. Free tax online   Generally, events closely related in origin cause a single casualty. Free tax online It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm. Free tax online A single casualty may also damage two or more pieces of property, such as a hailstorm that damages both your home and your car parked in your driveway. Free tax online Example 1. Free tax online A thunderstorm destroyed your pleasure boat. Free tax online You also lost some boating equipment in the storm. Free tax online Your loss was $5,000 on the boat and $1,200 on the equipment. Free tax online Your insurance company reimbursed you $4,500 for the damage to your boat. Free tax online You had no insurance coverage on the equipment. Free tax online Your casualty loss is from a single event and the $100 rule applies once. Free tax online Figure your loss before applying the 10% rule (discussed later) as follows. Free tax online     Boat Equipment 1. Free tax online Loss $5,000 $1,200 2. Free tax online Subtract insurance 4,500 -0- 3. Free tax online Loss after reimbursement $ 500 $1,200 4. Free tax online Total loss $1,700 5. Free tax online Subtract $100 100 6. Free tax online Loss before 10% rule $1,600 Example 2. Free tax online Thieves broke into your home in January and stole a ring and a fur coat. Free tax online You had a loss of $200 on the ring and $700 on the coat. Free tax online This is a single theft. Free tax online The $100 rule applies to the total $900 loss. Free tax online Example 3. Free tax online In September, hurricane winds blew the roof off your home. Free tax online Flood waters caused by the hurricane further damaged your home and destroyed your furniture and personal car. Free tax online This is considered a single casualty. Free tax online The $100 rule is applied to your total loss from the flood waters and the wind. Free tax online More than one loss. Free tax online   If you have more than one casualty or theft loss during your tax year, you must reduce each loss by $100. Free tax online Example. Free tax online Your family car was damaged in an accident in January. Free tax online Your loss after the insurance reimbursement was $75. Free tax online In February, your car was damaged in another accident. Free tax online This time your loss after the insurance reimbursement was $90. Free tax online Apply the $100 rule to each separate casualty loss. Free tax online Since neither accident resulted in a loss of over $100, you are not entitled to any deduction for these accidents. Free tax online More than one person. Free tax online   If two or more individuals (other than a husband and wife filing a joint return) have losses from the same casualty or theft, the $100 rule applies separately to each individual. Free tax online Example. Free tax online A fire damaged your house and also damaged the personal property of your house guest. Free tax online You must reduce your loss by $100. Free tax online Your house guest must reduce his or her loss by $100. Free tax online Married taxpayers. Free tax online   If you and your spouse file a joint return, you are treated as one individual in applying the $100 rule. Free tax online It does not matter whether you own the property jointly or separately. Free tax online   If you and your spouse have a casualty or theft loss and you file separate returns, each of you must reduce your loss by $100. Free tax online This is true even if you own the property jointly. Free tax online If one spouse owns the property, only that spouse can figure a loss deduction on a separate return. Free tax online   If the casualty or theft loss is on property you own as tenants by the entirety, each of you can figure your deduction on only one-half of the loss on separate returns. Free tax online Neither of you can figure your deduction on the entire loss on a separate return. Free tax online Each of you must reduce the loss by $100. Free tax online More than one owner. Free tax online   If two or more individuals (other than a husband and wife filing a joint return) have a loss on property jointly owned, the $100 rule applies separately to each. Free tax online For example, if two sisters live together in a home they own jointly and they have a casualty loss on the home, the $100 rule applies separately to each sister. Free tax online 10% Rule You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Free tax online Apply this rule after you reduce each loss by $100. Free tax online For more information, see the Form 4684 instructions. Free tax online If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion. Free tax online Example. Free tax online In June, you discovered that your house had been burglarized. Free tax online Your loss after insurance reimbursement was $2,000. Free tax online Your adjusted gross income for the year you discovered the theft is $29,500. Free tax online Figure your theft loss as follows. Free tax online 1. Free tax online Loss after insurance $2,000 2. Free tax online Subtract $100 100 3. Free tax online Loss after $100 rule $1,900 4. Free tax online Subtract 10% of $29,500 AGI $2,950 5. Free tax online Theft loss deduction $-0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950). Free tax online More than one loss. Free tax online   If you have more than one casualty or theft loss during your tax year, reduce each loss by any reimbursement and by $100. Free tax online Then you must reduce the total of all your losses by 10% of your adjusted gross income. Free tax online Example. Free tax online In March, you had a car accident that totally destroyed your car. Free tax online You did not have collision insurance on your car, so you did not receive any insurance reimbursement. Free tax online Your loss on the car was $1,800. Free tax online In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items you had stored there. Free tax online Your loss on the basement items after reimbursement was $2,100. Free tax online Your adjusted gross income for the year that the accident and fire occurred is $25,000. Free tax online You figure your casualty loss deduction as follows. Free tax online     Car Basement 1. Free tax online Loss $1,800 $2,100 2. Free tax online Subtract $100 per incident 100 100 3. Free tax online Loss after $100 rule $1,700 $2,000 4. Free tax online Total loss $3,700 5. Free tax online Subtract 10% of $25,000 AGI 2,500 6. Free tax online Casualty loss deduction $1,200 Married taxpayers. Free tax online   If you and your spouse file a joint return, you are treated as one individual in applying the 10% rule. Free tax online It does not matter if you own the property jointly or separately. Free tax online   If you file separate returns, the 10% rule applies to each return on which a loss is claimed. Free tax online More than one owner. Free tax online   If two or more individuals (other than husband and wife filing a joint return) have a loss on property that is owned jointly, the 10% rule applies separately to each. Free tax online Gains and losses. Free tax online   If you have casualty or theft gains as well as losses to personal-use property, you must compare your total gains to your total losses. Free tax online Do this after you have reduced each loss by any reimbursements and by $100 but before you have reduced the losses by 10% of your adjusted gross income. Free tax online Casualty or theft gains do not include gains you choose to postpone. Free tax online See Postponement of Gain, later. Free tax online Losses more than gains. Free tax online   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. Free tax online The rest, if any, is your deductible loss from personal-use property. Free tax online Example. Free tax online Your theft loss after reducing it by reimbursements and by $100 is $2,700. Free tax online Your casualty gain is $700. Free tax online Your loss is more than your gain, so you must reduce your $2,000 net loss ($2,700 − $700) by 10% of your adjusted gross income. Free tax online Gains more than losses. Free tax online   If your recognized gains are more than your losses, subtract your losses from your gains. Free tax online The difference is treated as a capital gain and must be reported on Schedule D (Form 1040). Free tax online The 10% rule does not apply to your gains. Free tax online Example. Free tax online Your theft loss is $600 after reducing it by reimbursements and by $100. Free tax online Your casualty gain is $1,600. Free tax online Because your gain is more than your loss, you must report the $1,000 net gain ($1,600 − $600) on Schedule D (Form 1040). Free tax online More information. Free tax online   For information on how to figure recognized gains, see Figuring a Gain , later. Free tax online Figuring the Deduction Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. Free tax online However, a special rule applies to real property you own for personal use. Free tax online Real property. Free tax online   In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the improvements) are considered together. Free tax online Example 1. Free tax online In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. Free tax online (Your land was not damaged. Free tax online ) This was your only casualty or theft loss for the year. Free tax online The FMV of the property immediately before the fire was $180,000 ($145,000 for the cottage and $35,000 for the land). Free tax online The FMV immediately after the fire was $35,000 (value of the land). Free tax online You collected $130,000 from the insurance company. Free tax online Your adjusted gross income for the year the fire occurred is $80,000. Free tax online Your deduction for the casualty loss is $6,700, figured in the following manner. Free tax online 1. Free tax online Adjusted basis of the entire property (cost in this example) $144,800 2. Free tax online FMV of entire property  before fire $180,000 3. Free tax online FMV of entire property after fire 35,000 4. Free tax online Decrease in FMV of entire property (line 2 − line 3) $145,000 5. Free tax online Loss (smaller of line 1 or line 4) $144,800 6. Free tax online Subtract insurance 130,000 7. Free tax online Loss after reimbursement $14,800 8. Free tax online Subtract $100 100 9. Free tax online Loss after $100 rule $14,700 10. Free tax online Subtract 10% of $80,000 AGI 8,000 11. Free tax online Casualty loss deduction $ 6,700 Example 2. Free tax online You bought your home a few years ago. Free tax online You paid $150,000 ($10,000 for the land and $140,000 for the house). Free tax online You also spent an additional $2,000 for landscaping. Free tax online This year a fire destroyed your home. Free tax online The fire also damaged the shrubbery and trees in your yard. Free tax online The fire was your only casualty or theft loss this year. Free tax online Competent appraisers valued the property as a whole at $175,000 before the fire, but only $50,000 after the fire. Free tax online Shortly after the fire, the insurance company paid you $95,000 for the loss. Free tax online Your adjusted gross income for this year is $70,000. Free tax online You figure your casualty loss deduction as follows. Free tax online 1. Free tax online Adjusted basis of the entire property (cost of land, building, and landscaping) $152,000 2. Free tax online FMV of entire property  before fire $175,000 3. Free tax online FMV of entire property after fire 50,000 4. Free tax online Decrease in FMV of entire property (line 2 − line 3) $125,000 5. Free tax online Loss (smaller of line 1 or line 4) $125,000 6. Free tax online Subtract insurance 95,000 7. Free tax online Loss after reimbursement $30,000 8. Free tax online Subtract $100 100 9. Free tax online Loss after $100 rule $29,900 10. Free tax online Subtract 10% of $70,000 AGI 7,000 11. Free tax online Casualty loss deduction $ 22,900 Personal property. Free tax online   Personal property is any property that is not real property. Free tax online If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. Free tax online Then combine these separate losses to figure the total loss. Free tax online Reduce the total loss by $100 and 10% of your adjusted gross income to figure the loss deduction. Free tax online Example 1. Free tax online In August, a storm destroyed your pleasure boat, which cost $18,500. Free tax online This was your only casualty or theft loss for the year. Free tax online Its FMV immediately before the storm was $17,000. Free tax online You had no insurance, but were able to salvage the motor of the boat and sell it for $200. Free tax online Your adjusted gross income for the year the casualty occurred is $70,000. Free tax online Although the motor was sold separately, it is part of the boat and not a separate item of property. Free tax online You figure your casualty loss deduction as follows. Free tax online 1. Free tax online Adjusted basis (cost in this example) $18,500 2. Free tax online FMV before storm $17,000 3. Free tax online FMV after storm 200 4. Free tax online Decrease in FMV  (line 2 − line 3) $16,800 5. Free tax online Loss (smaller of line 1 or line 4) $16,800 6. Free tax online Subtract insurance -0- 7. Free tax online Loss after reimbursement $16,800 8. Free tax online Subtract $100 100 9. Free tax online Loss after $100 rule $16,700 10. Free tax online Subtract 10% of $70,000 AGI 7,000 11. Free tax online Casualty loss deduction $ 9,700 Example 2. Free tax online In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. Free tax online You had bought the car for $30,000. Free tax online The FMV of the car just before the accident was $17,500. Free tax online Its FMV just after the accident was $180 (scrap value). Free tax online Your insurance company reimbursed you $16,000. Free tax online Your watch was not insured. Free tax online You had purchased it for $250. Free tax online Its FMV just before the accident was $500. Free tax online Your adjusted gross income for the year the accident occurred is $97,000. Free tax online Your casualty loss deduction is zero, figured as follows. Free tax online     Car Watch 1. Free tax online Adjusted basis (cost) $30,000 $250 2. Free tax online FMV before accident $17,500 $500 3. Free tax online FMV after accident 180 -0- 4. Free tax online Decrease in FMV (line 2 − line 3) $17,320 $500 5. Free tax online Loss (smaller of line 1 or line 4) $17,320 $250 6. Free tax online Subtract insurance 16,000 -0- 7. Free tax online Loss after reimbursement $1,320 $250 8. Free tax online Total loss $1,570 9. Free tax online Subtract $100 100 10. Free tax online Loss after $100 rule $1,470 11. Free tax online Subtract 10% of $97,000 AGI 9,700 12. Free tax online Casualty loss deduction $ -0- Both real and personal properties. Free tax online   When a casualty involves both real and personal properties, you must figure the loss separately for each type of property. Free tax online However, you apply a single $100 reduction to the total loss. Free tax online Then, you apply the 10% rule to figure the casualty loss deduction. Free tax online Example. Free tax online In July, a hurricane damaged your home, which cost you $164,000 including land. Free tax online The FMV of the property (both building and land) immediately before the storm was $170,000 and its FMV immediately after the storm was $100,000. Free tax online Your household furnishings were also damaged. Free tax online You separately figured the loss on each damaged household item and arrived at a total loss of $600. Free tax online You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. Free tax online Your adjusted gross income for the year the hurricane occurred is $65,000. Free tax online You figure your casualty loss deduction from the hurricane in the following manner. Free tax online 1. Free tax online Adjusted basis of real property (cost in this example) $164,000 2. Free tax online FMV of real property before hurricane $170,000 3. Free tax online FMV of real property after hurricane 100,000 4. Free tax online Decrease in FMV of real property (line 2 − line 3) $70,000 5. Free tax online Loss on real property (smaller of line 1 or line 4) $70,000 6. Free tax online Subtract insurance 50,000 7. Free tax online Loss on real property after reimbursement $20,000 8. Free tax online Loss on furnishings $600 9. Free tax online Subtract insurance -0- 10. Free tax online Loss on furnishings after reimbursement $600 11. Free tax online Total loss (line 7 plus line 10) $20,600 12. Free tax online Subtract $100 100 13. Free tax online Loss after $100 rule $20,500 14. Free tax online Subtract 10% of $65,000 AGI 6,500 15. Free tax online Casualty loss deduction $14,000 Property used partly for business and partly for personal purposes. Free tax online   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use portion and for the business or income-producing portion. Free tax online You must figure each loss separately because the losses attributed to these two uses are figured in two different ways. Free tax online When figuring each loss, allocate the total cost or basis, the FMV before and after the casualty or theft loss, and the insurance or other reimbursement between the business and personal use of the property. Free tax online The $100 rule and the 10% rule apply only to the casualty or theft loss on the personal-use portion of the property. Free tax online Example. Free tax online You own a building that you constructed on leased land. Free tax online You use half of the building for your business and you live in the other half. Free tax online The cost of the building was $400,000. Free tax online You made no further improvements or additions to it. Free tax online A flood in March damaged the entire building. Free tax online The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. Free tax online Your insurance company reimbursed you $40,000 for the flood damage. Free tax online Depreciation on the business part of the building before the flood totaled $24,000. Free tax online Your adjusted gross income for the year the flood occurred is $125,000. Free tax online You have a deductible business casualty loss of $10,000. Free tax online You do not have a deductible personal casualty loss because of the 10% rule. Free tax online You figure your loss as follows. Free tax online     Business   Personal     Part   Part 1. Free tax online Cost (total $400,000) $200,000   $200,000 2. Free tax online Subtract depreciation 24,000   -0- 3. Free tax online Adjusted basis $176,000   $200,000 4. Free tax online FMV before flood (total $380,000) $190,000   $190,000 5. Free tax online FMV after flood (total $320,000) 160,000   160,000 6. Free tax online Decrease in FMV  (line 4 − line 5) $30,000   $30,000 7. Free tax online Loss (smaller of line 3 or line 6) $30,000   $30,000 8. Free tax online Subtract insurance 20,000   20,000 9. Free tax online Loss after reimbursement $10,000   $10,000 10. Free tax online Subtract $100 on personal-use property -0-   100 11. Free tax online Loss after $100 rule $10,000   $9,900 12. Free tax online Subtract 10% of $125,000 AGI on personal-use property -0-   12,500 13. Free tax online Deductible business loss $10,000     14. Free tax online Deductible personal loss $-0- Figuring a Gain If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. Free tax online Your gain is figured as follows. Free tax online The amount you receive (discussed next), minus Your adjusted basis in the property at the time of the casualty or theft. Free tax online See Adjusted Basis , earlier, for information on adjusted basis. Free tax online Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. Free tax online Amount you receive. Free tax online   The amount you receive includes any money plus the value of any property you receive minus any expenses you have in obtaining reimbursement. Free tax online It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. Free tax online Example. Free tax online A hurricane destroyed your personal residence and the insurance company awarded you $145,000. Free tax online You received $140,000 in cash. Free tax online The remaining $5,000 was paid directly to the holder of a mortgage on the property. Free tax online The amount you received includes the $5,000 reimbursement paid on the mortgage. Free tax online Main home destroyed. Free tax online   If you have a gain because your main home was destroyed, you generally can exclude the gain from your income as if you had sold or exchanged your home. Free tax online You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Free tax online To exclude a gain, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date it was destroyed. Free tax online For information on this exclusion, see Publication 523. Free tax online If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. Free tax online See Postponement of Gain , later. Free tax online Reporting a gain. Free tax online   You generally must report your gain as income in the year you receive the reimbursement. Free tax online However, you do not have to report your gain if you meet certain requirements and choose to postpone reporting the gain according to the rules explained under Postponement of Gain, next. Free tax online   For information on how to report a gain, see How To Report Gains and Losses , later. Free tax online    If you have a casualty or theft gain on personal-use property that you choose to postpone reporting (as explained next) and you also have another casualty or theft loss on personal-use property, do not consider the gain you are postponing when figuring your casualty or theft loss deduction. Free tax online See 10% Rule under Deduction Limits, earlier. Free tax online Postponement of Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. Free tax online Your basis in the new property is generally the same as your adjusted basis in the property it replaces. Free tax online You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. Free tax online However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. Free tax online You also can choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. Free tax online See Controlling interest in a corporation , later. Free tax online If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. Free tax online To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. Free tax online If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. Free tax online Example. Free tax online In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. Free tax online You made no further improvements or additions to it. Free tax online When a storm destroyed the cottage this January, the cottage was worth $250,000. Free tax online You received $146,000 from the insurance company in March. Free tax online You had a gain of $128,000 ($146,000 − $18,000). Free tax online You spent $144,000 to rebuild the cottage. Free tax online Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. Free tax online Buying replacement property from a related person. Free tax online   You cannot postpone reporting a gain from a casualty or theft if you buy the replacement property from a related person (discussed later). Free tax online This rule applies to the following taxpayers. Free tax online C corporations. Free tax online Partnerships in which more than 50% of the capital or profits interests is owned by C corporations. Free tax online All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000. Free tax online For casualties and thefts described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. Free tax online If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Free tax online If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Free tax online Exception. Free tax online   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the destroyed or stolen property. Free tax online Related persons. Free tax online   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. Free tax online For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Free tax online Death of a taxpayer. Free tax online   If a taxpayer dies after having a gain but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. Free tax online The executor of the estate or the person succeeding to the funds from the casualty or theft cannot postpone reporting the gain by buying replacement property. Free tax online Replacement Property You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. Free tax online Property you acquire as a gift or inheritance does not qualify. Free tax online You do not have to use the same funds you receive as
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Free tax online 7. Free tax online   Costs You Can Deduct or Capitalize Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Carrying Charges Research and Experimental CostsProduct. Free tax online Costs not included. Free tax online Intangible Drilling Costs Exploration CostsPartnerships and S corporations. Free tax online Development Costs Circulation Costs Business Start-Up and Organizational Costs Reforestation Costs Retired Asset Removal Costs Barrier Removal CostsOther barrier removals. Free tax online Film and Television Production Costs What's New Film and television productions costs. Free tax online  The election to expense film and television production costs does not apply to productions that begin after December 31, 2013. Free tax online See Film and Television Production Costs , later. Free tax online Introduction This chapter discusses costs you can elect to deduct or capitalize. Free tax online You generally deduct a cost as a current business expense by subtracting it from your income in either the year you incur it or the year you pay it. Free tax online If you capitalize a cost, you may be able to recover it over a period of years through periodic deductions for amortization, depletion, or depreciation. Free tax online When you capitalize a cost, you add it to the basis of property to which it relates. Free tax online A partnership, corporation, estate, or trust makes the election to deduct or capitalize the costs discussed in this chapter except for exploration costs for mineral deposits. Free tax online Each individual partner, shareholder, or beneficiary elects whether to deduct or capitalize exploration costs. Free tax online You may be subject to the alternative minimum tax (AMT) if you deduct research and experimental, intangible drilling, exploration, development, circulation, or business organizational costs. Free tax online For more information on the alternative minimum tax, see the instructions for the following forms. Free tax online Form 6251, Alternative Minimum Tax—Individuals. Free tax online Form 4626, Alternative Minimum Tax—Corporations. Free tax online Topics - This chapter discusses: Carrying charges Research and experimental costs Intangible drilling costs Exploration costs Development costs Circulation costs Qualified disaster expenses Business start-up and organizational costs Reforestation costs Retired asset removal costs Barrier removal costs Film and television production costs Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 3468 Investment Credit 8826 Disabled Access Credit See chapter 12 for information about getting publications and forms. Free tax online Carrying Charges Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Free tax online Certain carrying charges must be capitalized under the uniform capitalization rules. Free tax online (For information on capitalization of interest, see chapter 4 . Free tax online ) You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible. Free tax online You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. Free tax online For unimproved and unproductive real property, your election is good for only 1 year. Free tax online You must decide whether to capitalize carrying charges each year the property remains unimproved and unproductive. Free tax online For other real property, your election to capitalize carrying charges remains in effect until construction or development is completed. Free tax online For personal property, your election is effective until the date you install or first use it, whichever is later. Free tax online How to make the election. Free tax online   To make the election to capitalize a carrying charge, attach a statement to your original tax return for the year the election is to be effective indicating which charges you are electing to capitalize. Free tax online However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Free tax online Attach the statement to the amended return and write “Filed pursuant to section 301. Free tax online 9100-2” on the statement. Free tax online File the amended return at the same address you filed the original return. Free tax online Research and Experimental Costs The costs of research and experimentation are generally capital expenses. Free tax online However, you can elect to deduct these costs as a current business expense. Free tax online Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change. Free tax online If you meet certain requirements, you may elect to defer and amortize research and experimental costs. Free tax online For information on electing to defer and amortize these costs, see Research and Experimental Costs in chapter 8. Free tax online Research and experimental costs defined. Free tax online   Research and experimental costs are reasonable costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. Free tax online Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product. Free tax online Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the nature of the product or improvement being developed or the level of technological advancement. Free tax online      The costs of obtaining a patent, including attorneys' fees paid or incurred in making and perfecting a patent application, are research and experimental costs. Free tax online However, costs paid or incurred to obtain another's patent are not research and experimental costs. Free tax online Product. Free tax online   The term “product” includes any of the following items. Free tax online Formula. Free tax online Invention. Free tax online Patent. Free tax online Pilot model. Free tax online Process. Free tax online Technique. Free tax online Property similar to the items listed above. Free tax online It also includes products used by you in your trade or business or held for sale, lease, or license. Free tax online Costs not included. Free tax online   Research and experimental costs do not include expenses for any of the following activities. Free tax online Advertising or promotions. Free tax online Consumer surveys. Free tax online Efficiency surveys. Free tax online Management studies. Free tax online Quality control testing. Free tax online Research in connection with literary, historical, or similar projects. Free tax online The acquisition of another's patent, model, production, or process. Free tax online When and how to elect. Free tax online   You make the election to deduct research and experimental costs by deducting them on your tax return for the year in which you first pay or incur research and experimental costs. Free tax online If you do not make the election to deduct research and experimental costs in the first year in which you pay or incur the costs, you can deduct the costs in a later year only with approval from the IRS. Free tax online Deducting or Amortizing Research and Experimentation Costs IF you . Free tax online . Free tax online . Free tax online THEN . Free tax online . Free tax online . Free tax online Elect to deduct research and experimental costs as a current business expense Deduct all research and experimental costs in the first year you pay or incur the costs and all later years. Free tax online Do not deduct research and experimental costs as a current business expense If you meet the requirements, amortize them over at least 60 months, starting with the month you first receive an economic benefit from the research. Free tax online See Research and Experimental Costs in chapter 8. Free tax online Research credit. Free tax online   If you pay or incur qualified research expenses, you may be able to take the research credit. Free tax online For more information see Form 6765, Credit for Increasing Research Activities and its instructions. Free tax online Intangible Drilling Costs The costs of developing oil, gas, or geothermal wells are ordinarily capital expenditures. Free tax online You can usually recover them through depreciation or depletion. Free tax online However, you can elect to deduct intangible drilling costs (IDCs) as a current business expense. Free tax online These are certain drilling and development costs for wells in the United States in which you hold an operating or working interest. Free tax online You can deduct only costs for drilling or preparing a well for the production of oil, gas, or geothermal steam or hot water. Free tax online You can elect to deduct only the costs of items with no salvage value. Free tax online These include wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production. Free tax online Your cost for any drilling or development work done by contractors under any form of contract is also an IDC. Free tax online However, see Amounts paid to contractor that must be capitalized , later. Free tax online You can also elect to deduct the cost of drilling exploratory bore holes to determine the location and delineation of offshore hydrocarbon deposits if the shaft is capable of conducting hydrocarbons to the surface on completion. Free tax online It does not matter whether there is any intent to produce hydrocarbons. Free tax online If you do not elect to deduct your IDCs as a current business expense, you can elect to deduct them over the 60-month period beginning with the month they were paid or incurred. Free tax online Amounts paid to contractor that must be capitalized. Free tax online   Amounts paid to a contractor must be capitalized if they are either: Amounts properly allocable to the cost of depreciable property, or Amounts paid only out of production or proceeds from production if these amounts are depletable income to the recipient. Free tax online How to make the election. Free tax online   You elect to deduct IDCs as a current business expense by taking the deduction on your income tax return for the first tax year you have eligible costs. Free tax online No formal statement is required. Free tax online If you file Schedule C (Form 1040), enter these costs under “Other expenses. Free tax online ”   For oil and gas wells, your election is binding for the year it is made and for all later years. Free tax online For geothermal wells, your election can be revoked by the filing of an amended return on which you do not take the deduction. Free tax online You can file the amended return for the year up to the normal time of expiration for filing a claim for credit or refund, generally, within 3 years after the date you filed the original return or within 2 years after the date you paid the tax, whichever is later. Free tax online Energy credit for costs of geothermal wells. Free tax online   If you capitalize the drilling and development costs of geothermal wells that you place in service during the tax year, you may be able to claim a business energy credit. Free tax online See the Instructions for Form 3468 for more information. Free tax online Nonproductive well. Free tax online   If you capitalize your IDCs, you have another option if the well is nonproductive. Free tax online You can deduct the IDCs of the nonproductive well as an ordinary loss. Free tax online You must indicate and clearly state your election on your tax return for the year the well is completed. Free tax online Once made, the election for oil and gas wells is binding for all later years. Free tax online You can revoke your election for a geothermal well by filing an amended return that does not claim the loss. Free tax online Costs incurred outside the United States. Free tax online   You cannot deduct as a current business expense all the IDCs paid or incurred for an oil, gas, or geothermal well located outside the United States. Free tax online However, you can elect to include the costs in the adjusted basis of the well to figure depletion or depreciation. Free tax online If you do not make this election, you can deduct the costs over the 10-year period beginning with the tax year in which you paid or incurred them. Free tax online These rules do not apply to a nonproductive well. Free tax online Exploration Costs The costs of determining the existence, location, extent, or quality of any mineral deposit are ordinarily capital expenditures if the costs lead to the development of a mine. Free tax online You recover these costs through depletion as the mineral is removed from the ground. Free tax online However, you can elect to deduct domestic exploration costs paid or incurred before the beginning of the development stage of the mine (except those for oil and gas wells). Free tax online How to make the election. Free tax online   You elect to deduct exploration costs by taking the deduction on your income tax return, or on an amended income tax return, for the first tax year for which you wish to deduct the costs paid or incurred during the tax year. Free tax online Your return must adequately describe and identify each property or mine, and clearly state how much is being deducted for each one. Free tax online The election applies to the tax year you make this election and all later tax years. Free tax online Partnerships and S corporations. Free tax online   Each partner, not the partnership, elects whether to capitalize or to deduct that partner's share of exploration costs. Free tax online Each shareholder, not the S corporation, elects whether to capitalize or to deduct that shareholder's share of exploration costs. Free tax online Reduced corporate deductions for exploration costs. Free tax online   A corporation (other than an S corporation) can deduct only 70% of its domestic exploration costs. Free tax online It must capitalize the remaining 30% of costs and amortize them over the 60-month period starting with the month the exploration costs are paid or incurred. Free tax online A corporation may also elect to capitalize and amortize mining exploration costs over a 10-year period. Free tax online For more information on this method of amortization, see Internal Revenue Code section 59(e). Free tax online   The 30% the corporation capitalizes cannot be added to its basis in the property to figure cost depletion. Free tax online However, the amount amortized is treated as additional depreciation and is subject to recapture as ordinary income on a disposition of the property. Free tax online See Section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Free tax online   These rules also apply to the deduction of development costs by corporations. Free tax online See Development Costs , later. Free tax online Recapture of exploration expenses. Free tax online   When your mine reaches the producing stage, you must recapture any exploration costs you elected to deduct. Free tax online Use either of the following methods. Free tax online Method 1—Include the deducted costs in gross income for the tax year the mine reaches the producing stage. Free tax online Your election must be clearly indicated on the return. Free tax online Increase your adjusted basis in the mine by the amount included in income. Free tax online Generally, you must elect this recapture method by the due date (including extensions) of your return. Free tax online However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Free tax online Make the election on your amended return and write “Filed pursuant to section 301. Free tax online 9100-2” on the form where you are including the income. Free tax online File the amended return at the same address you filed the original return. Free tax online Method 2—Do not claim any depletion deduction for the tax year the mine reaches the producing stage and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Free tax online   You also must recapture deducted exploration costs if you receive a bonus or royalty from mine property before it reaches the producing stage. Free tax online Do not claim any depletion deduction for the tax year you receive the bonus or royalty and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Free tax online   Generally, if you dispose of the mine before you have fully recaptured the exploration costs you deducted, recapture the balance by treating all or part of your gain as ordinary income. Free tax online Under these circumstances, you generally treat as ordinary income all of your gain if it is less than your adjusted exploration costs with respect to the mine. Free tax online If your gain is more than your adjusted exploration costs, treat as ordinary income only a part of your gain, up to the amount of your adjusted exploration costs. Free tax online Foreign exploration costs. Free tax online   If you pay or incur exploration costs for a mine or other natural deposit located outside the United States, you cannot deduct all the costs in the current year. Free tax online You can elect to include the costs (other than for an oil, gas, or geothermal well) in the adjusted basis of the mineral property to figure cost depletion. Free tax online (Cost depletion is discussed in chapter 9 . Free tax online ) If you do not make this election, you must deduct the costs over the 10-year period beginning with the tax year in which you pay or incur them. Free tax online These rules also apply to foreign development costs. Free tax online Development Costs You can deduct costs paid or incurred during the tax year for developing a mine or any other natural deposit (other than an oil or gas well) located in the United States. Free tax online These costs must be paid or incurred after the discovery of ores or minerals in commercially marketable quantities. Free tax online Development costs also include depreciation on improvements used in the development of ores or minerals and costs incurred for you by a contractor. Free tax online Development costs do not include the costs for the acquisition or improvement of depreciable property. Free tax online Instead of deducting development costs in the year paid or incurred, you can elect to treat the cost as deferred expenses and deduct them ratably as the units of produced ores or minerals benefited by the expenses are sold. Free tax online This election applies each tax year to expenses paid or incurred in that year. Free tax online Once made, the election is binding for the year and cannot be revoked for any reason. Free tax online How to make the election. Free tax online   The election to deduct development costs ratably as the ores or minerals are sold must be made for each mine or other natural deposit by a clear indication on your return or by a statement filed with the IRS office where you file your return. Free tax online Generally, you must make the election by the due date of the return (including extensions). Free tax online However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Free tax online Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Free tax online 9100-2. Free tax online ” File the amended return at the same address you filed the original return. Free tax online Foreign development costs. Free tax online   The rules discussed earlier for foreign exploration costs apply to foreign development costs. Free tax online Reduced corporate deductions for development costs. Free tax online   The rules discussed earlier for reduced corporate deductions for exploration costs also apply to corporate deductions for development costs. Free tax online Circulation Costs A publisher can deduct as a current business expense the costs of establishing, maintaining, or increasing the circulation of a newspaper, magazine, or other periodical. Free tax online For example, a publisher can deduct the cost of hiring extra employees for a limited time to get new subscriptions through telephone calls. Free tax online Circulation costs are deductible even if they normally would be capitalized. Free tax online This rule does not apply to the following costs that must be capitalized. Free tax online The purchase of land or depreciable property. Free tax online The acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical, including the purchase of another publisher's list of subscribers. Free tax online Other treatment of circulation costs. Free tax online   If you do not want to deduct circulation costs as a current business expense, you can elect one of the following ways to recover these costs. Free tax online Capitalize all circulation costs that are properly chargeable to a capital account (see chapter 1 ). Free tax online Amortize circulation costs over the 3-year period beginning with the tax year they were paid or incurred. Free tax online How to make the election. Free tax online   You elect to capitalize circulation costs by attaching a statement to your return for the first tax year the election applies. Free tax online Your election is binding for the year it is made and for all later years, unless you get IRS approval to revoke it. Free tax online Business Start-Up and Organizational Costs Business start-up and organizational costs are generally capital expenditures. Free tax online However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. Free tax online The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Free tax online Any remaining costs must be amortized. Free tax online For information about amortizing start-up and organizational costs, see chapter 8 . Free tax online Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Free tax online Organizational costs include the costs of creating a corporation. Free tax online For more information on start-up and organizational costs, see chapter 8 . Free tax online How to make the election. Free tax online   You elect to deduct the start-up or organizational costs by claiming the deduction on your income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins. Free tax online However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Free tax online Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Free tax online 9100-2. Free tax online ” File the amended return at the same address you filed the original return. Free tax online The election applies when computing taxable income for the current tax year and all subsequent years. Free tax online Reforestation Costs Reforestation costs are generally capital expenditures. Free tax online However, you can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Free tax online The remaining costs can be amortized over an 84-month period. Free tax online For information about amortizing reforestation costs, see chapter 8 . Free tax online Qualifying reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Free tax online Qualified timber property is property that contains trees in significant commercial quantities. Free tax online See chapter 8 for more information on qualifying reforestation costs and qualified timber property. Free tax online If you elect to deduct qualified reforestation costs, create and maintain separate timber accounts for each qualified timber property and include all reforestation costs and the dates each was applied. Free tax online Do not include this qualified timber property in any account (for example, depletion block) for which depletion is allowed. Free tax online How to make the election. Free tax online   You elect to deduct qualifying reforestation costs by claiming the deduction on your timely filed income tax return (including extensions) for the tax year the expenses were paid or incurred. Free tax online If Form T (Timber), Forest Activities Schedule, is required, complete Part IV of Form T. Free tax online If Form T is not required, attach a statement containing the following information for each qualified timber property for which an election is being made. Free tax online The unique stand identification numbers. Free tax online The total number of acres reforested during the tax year. Free tax online The nature of the reforestation treatments. Free tax online The total amounts of qualified reforestation expenditures eligible to be amortized or deducted. Free tax online   If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Free tax online Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Free tax online 9100-2. Free tax online ” File the amended return at the same address you filed the original return. Free tax online The election applies when computing taxable income for the current tax year and all subsequent years. Free tax online   For additional information on reforestation costs, see chapter 8 . Free tax online Recapture. Free tax online   This deduction may have to be recaptured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not elected to deduct the expenditure. Free tax online For more information on recapturing the deduction, see Depreciation Recapture in Publication 544. Free tax online Retired Asset Removal Costs If you retire and remove a depreciable asset in connection with the installation or production of a replacement asset, you can deduct the costs of removing the retired asset. Free tax online However, if you replace a component (part) of a depreciable asset, capitalize the removal costs if the replacement is an improvement and deduct the costs if the replacement is a repair. Free tax online Barrier Removal Costs The cost of an improvement to a business asset is normally a capital expense. Free tax online However, you can elect to deduct the costs of making a facility or public transportation vehicle more accessible to and usable by those who are disabled or elderly. Free tax online You must own or lease the facility or vehicle for use in connection with your trade or business. Free tax online A facility is all or any part of buildings, structures, equipment, roads, walks, parking lots, or similar real or personal property. Free tax online A public transportation vehicle is a vehicle, such as a bus or railroad car, that provides transportation service to the public (including service for your customers, even if you are not in the business of providing transportation services). Free tax online You cannot deduct any costs that you paid or incurred to completely renovate or build a facility or public transportation vehicle or to replace depreciable property in the normal course of business. Free tax online Deduction limit. Free tax online   The most you can deduct as a cost of removing barriers to the disabled and the elderly for any tax year is $15,000. Free tax online However, you can add any costs over this limit to the basis of the property and depreciate these excess costs. Free tax online Partners and partnerships. Free tax online   The $15,000 limit applies to a partnership and also to each partner in the partnership. Free tax online A partner can allocate the $15,000 limit in any manner among the partner's individually incurred costs and the partner's distributive share of partnership costs. Free tax online If the partner cannot deduct the entire share of partnership costs, the partnership can add any costs not deducted to the basis of the improved property. Free tax online   A partnership must be able to show that any amount added to basis was not deducted by the partner and that it was over a partner's $15,000 limit (as determined by the partner). Free tax online If the partnership cannot show this, it is presumed that the partner was able to deduct the distributive share of the partnership's costs in full. Free tax online Example. Free tax online Emilio Azul's distributive share of ABC partnership's deductible expenses for the removal of architectural barriers was $14,000. Free tax online Emilio had $12,000 of similar expenses in his sole proprietorship. Free tax online He elected to deduct $7,000 of them. Free tax online Emilio allocated the remaining $8,000 of the $15,000 limit to his share of ABC's expenses. Free tax online Emilio can add the excess $5,000 of his own expenses to the basis of the property used in his business. Free tax online Also, if ABC can show that Emilio could not deduct $6,000 ($14,000 – $8,000) of his share of the partnership's expenses because of how Emilio applied the limit, ABC can add $6,000 to the basis of its property. Free tax online Qualification standards. Free tax online   You can deduct your costs as a current expense only if the barrier removal meets the guidelines and requirements issued by the Architectural and Transportation Barriers Compliance Board under the Americans with Disabilities Act (ADA) of 1990. Free tax online You can view the Americans with Disabilities Act at www. Free tax online ada. Free tax online gov/pubs/ada. Free tax online htm. Free tax online   The following is a list of some architectural barrier removal costs that can be deducted. Free tax online Ground and floor surfaces. Free tax online Walks. Free tax online Parking lots. Free tax online Ramps. Free tax online Entrances. Free tax online Doors and doorways. Free tax online Stairs. Free tax online Floors. Free tax online Toilet rooms. Free tax online Water fountains. Free tax online Public telephones. Free tax online Elevators. Free tax online Controls. Free tax online Signage. Free tax online Alarms. Free tax online Protruding objects. Free tax online Symbols of accessibility. Free tax online You can find the ADA guidelines and requirements for architectural barrier removal at www. Free tax online usdoj. Free tax online gov/crt/ada/reg3a. Free tax online html. Free tax online   The costs for removal of transportation barriers from rail facilities, buses, and rapid and light rail vehicles are deductible. Free tax online You can find the guidelines and requirements for transportation barrier removal at www. Free tax online fta. Free tax online dot. Free tax online gov. Free tax online   Also, you can access the ADA website at www. Free tax online ada. Free tax online gov for additional information. Free tax online Other barrier removals. Free tax online   To be deductible, expenses of removing any barrier not covered by the above standards must meet all three of the following tests. Free tax online The removed barrier must be a substantial barrier to access or use of a facility or public transportation vehicle by persons who have a disability or are elderly. Free tax online The removed barrier must have been a barrier for at least one major group of persons who have a disability or are elderly (such as people who are blind, deaf, or wheelchair users). Free tax online The barrier must be removed without creating any new barrier that significantly impairs access to or use of the facility or vehicle by a major group of persons who have a disability or are elderly. Free tax online How to make the election. Free tax online   If you elect to deduct your costs for removing barriers to the disabled or the elderly, claim the deduction on your income tax return (partnership return for partnerships) for the tax year the expenses were paid or incurred. Free tax online Identify the deduction as a separate item. Free tax online The election applies to all the qualifying costs you have during the year, up to the $15,000 limit. Free tax online If you make this election, you must maintain adequate records to support your deduction. Free tax online   For your election to be valid, you generally must file your return by its due date, including extensions. Free tax online However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Free tax online Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Free tax online 9100-2. Free tax online ” File the amended return at the same address you filed the original return. Free tax online Your election is irrevocable after the due date, including extensions, of your return. Free tax online Disabled access credit. Free tax online   If you make your business accessible to persons with disabilities and your business is an eligible small business, you may be able to claim the disabled access credit. Free tax online If you choose to claim the credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Free tax online   For more information, see Form 8826, Disabled Access Credit. Free tax online Film and Television Production Costs Film and television production costs are generally capital expenses. Free tax online However, you can elect to deduct costs paid or incurred for certain productions commencing before January 1, 2014. Free tax online For more information, see section 181 of the Internal Revenue Code and the related Treasury Regulations. Free tax online Prev  Up  Next   Home   More Online Publications