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Freetaxusa2010

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Freetaxusa2010

Freetaxusa2010 Index A Archer MSAs, Archer MSAs, Employment taxes. Freetaxusa2010 Assistance (see Tax help) C Contributions to FSA, Contributions to an FSA HRA, Contributions to an HRA HSA, Contributions to an HSA MSA, Contributions to an MSA D Death of HSA holder, Death of HSA Holder MSA holder, Death of the Archer MSA Holder Distributions from FSA, Distributions From an FSA HRA, Distributions From an HRA HSA, Distributions From an HSA MSA, Distributions From an MSA E Employer participation FSA, Employer Participation HRA, Employer Participation HSA, Employer Participation MSA, Employer Participation F Flexible Spending Arrangements Grace Period, Health FSA – grace period. Freetaxusa2010 Flexible spending arrangements, Flexible Spending Arrangements (FSAs), Employer Participation Balance in, Balance in an FSA Contributions to, Contributions to an FSA Distributions from, Distributions From an FSA Qualifying for, Qualifying for an FSA When to contribute, When To Contribute Form 5329, Excess contributions. Freetaxusa2010 , Excess contributions. Freetaxusa2010 5498–SA, Form 8889. Freetaxusa2010 , Reporting Contributions on Your Return 8853, Additional tax. Freetaxusa2010 , Filing Form 8853 8889, Form 8889. Freetaxusa2010 , Additional tax. Freetaxusa2010 , Filing Form 8889 Free tax services, Free help with your tax return. Freetaxusa2010 H Health plans, high deductible, High deductible health plan (HDHP). Freetaxusa2010 , High deductible health plan (HDHP). Freetaxusa2010 Health reimbursement arrangements, Health Reimbursement Arrangements (HRAs), Employer Participation Balance in, Balance in an HRA Contributions to, Contributions to an HRA Distributions from, Distributions From an HRA Qualifying for, Qualifying for an HRA Health savings accounts, Health Savings Accounts (HSAs), Employment taxes. Freetaxusa2010 Balance in, Balance in an HSA Contributions to, Contributions to an HSA Deemed distributions, Deemed distributions from HSAs. Freetaxusa2010 Distributions from, Distributions From an HSA Last-month rule, Last-month rule. Freetaxusa2010 Partnerships, Reporting Contributions on Your Return Qualifying for, Qualifying for an HSA Rollovers, Rollovers S corporations, Reporting Contributions on Your Return When to contribute, When To Contribute Help (see Tax help) High deductible health plan, High deductible health plan (HDHP). Freetaxusa2010 , High deductible health plan (HDHP). Freetaxusa2010 M Medical expenses, qualified, Qualified medical expenses. Freetaxusa2010 , Qualified medical expenses. Freetaxusa2010 , Qualified medical expenses. Freetaxusa2010 , Qualified medical expenses. Freetaxusa2010 Medical savings accounts, Medical Savings Accounts (MSAs), Medicare Advantage MSAs Balance in, Balance in an Archer MSA Contributions to, Contributions to an MSA Deemed distributions, Deemed distributions from Archer MSAs. Freetaxusa2010 Distributions from, Distributions From an MSA Medicare Advantage MSAs, Medicare Advantage MSAs Qualifying for, Qualifying for an Archer MSA When to contribute, When To Contribute Medicare Advantage MSAs, Medicare Advantage MSAs P Preventive care, High deductible health plan (HDHP). Freetaxusa2010 Publications (see Tax help) Q Qualified HSA funding distribution, Qualified HSA funding distribution. Freetaxusa2010 T Tax help, How To Get Tax Help Testing period Last-month rule, Testing period. Freetaxusa2010 Qualified HSA funding distribution, Funding distribution – testing period. Freetaxusa2010 TTY/TDD information, How To Get Tax Help Prev  Up     Home   More Online Publications
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Alternative Dispute Resolution (ADR)

Mediation is an informal, confidential, and flexible dispute resolution process in which an Appeals Officer trained in mediation techniques serves as an impartial third party facilitating negotiations between the disputing parties.


The Appeals mediators help resolve disputes by identifying the core issues, possible obstacles to settlement, and working with the parties to develop resolution strategies. The Appeals mediator has no power to render a decision or to force either party to accept a settlement. With our Fast Track Settlement program, however, the Appeals mediator may suggest settlement proposals.


Our various mediation programs are designed to serve different types of taxpayers at specific stages of the IRS examination or collection process.

 

If you’re an experienced tax practitioner and know which mediation program you’re interested in, the links in the table below will take you to pages with information, including the application process. If this is all new to you and you have a disagreement with IRS but are not sure whether mediation is right for you, please check out the Appeals Mediation Programs Online Self-Help Tool, which is designed to:

  • Help you understand when to discuss mediation with the IRS person assigned to your case
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  • Explain each program
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Type of Taxpayer Stage of IRS Process
Pre-Filing Examination Collection Appeals
Large Business and International

Compliance Assurance Process

Fast Track Settlement
 

Early Referral

 

Post Appeals Mediation

Small Business/Self-Employed  

Fast Track Settlement
 

Early Referral

Fast Track Mediation

Tax Exempt/Government Entities  

Fast Track Settlement
 

Early Referral

 

 

Page Last Reviewed or Updated: 10-Jan-2014

The Freetaxusa2010

Freetaxusa2010 8. Freetaxusa2010   Amortization Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: How To Deduct Amortization Starting a BusinessBusiness Start-Up Costs Costs of Organizing a Corporation Costs of Organizing a Partnership How To Amortize Getting a Lease Section 197 IntangiblesSection 197 Intangibles Defined Assets That Are Not Section 197 Intangibles Safe Harbor for Creative Property Costs Anti-Churning Rules Incorrect Amount of Amortization Deducted Disposition of Section 197 Intangibles Reforestation Costs Geological and Geophysical Costs Pollution Control FacilitiesNew identifiable treatment facility. Freetaxusa2010 Research and Experimental Costs Optional Write-off of Certain Tax Preferences Introduction Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. Freetaxusa2010 It is similar to the straight line method of depreciation. Freetaxusa2010 The various amortizable costs covered in this chapter are included in the list below. Freetaxusa2010 However, this chapter does not discuss amortization of bond premium. Freetaxusa2010 For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. Freetaxusa2010 Topics - This chapter discusses: Deducting amortization Amortizing costs of starting a business Amortizing costs of getting a lease Amortizing costs of section 197 intangibles Amortizing reforestation costs Amortizing costs of geological and geophysical costs Amortizing costs of pollution control facilities Amortizing costs of research and experimentation Amortizing costs of certain tax preferences Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 4626 Alternative Minimum Tax—Corporations 6251 Alternative Minimum Tax—Individuals See chapter 12 for information about getting publications and forms. Freetaxusa2010 How To Deduct Amortization To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return. Freetaxusa2010 To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. Freetaxusa2010 For example, in 2012, you began to amortize a lease. Freetaxusa2010 In 2013, you began to amortize a second lease. Freetaxusa2010 Report amortization from the new lease on line 42 of your 2013 Form 4562. Freetaxusa2010 Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. Freetaxusa2010 If you do not have any new amortizable expenses for the current year, you are not required to complete Form 4562 (unless you are claiming depreciation). Freetaxusa2010 Report the current year's deduction for amortization that began in a prior year directly on the “Other deduction” or “Other expense line” of your return. Freetaxusa2010 Starting a Business When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. Freetaxusa2010 Generally, you recover costs for particular assets through depreciation deductions. Freetaxusa2010 However, you generally cannot recover other costs until you sell the business or otherwise go out of business. Freetaxusa2010 For a discussion on how to treat these costs, see If your attempt to go into business is unsuccessful under Capital Expenses in chapter 1. Freetaxusa2010 For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. Freetaxusa2010 The costs that are not deducted currently can be amortized ratably over a 180-month period. Freetaxusa2010 The amortization period starts with the month you begin operating your active trade or business. Freetaxusa2010 You are not required to attach a statement to make this election. Freetaxusa2010 You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Freetaxusa2010 Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. Freetaxusa2010 See Regulations sections 1. Freetaxusa2010 195-1, 1. Freetaxusa2010 248-1, and 1. Freetaxusa2010 709-1. Freetaxusa2010 For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Freetaxusa2010 Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. Freetaxusa2010 If the election is made, you must attach any statement required by Regulations sections 1. Freetaxusa2010 195-1(b), 1. Freetaxusa2010 248-1(c), and 1. Freetaxusa2010 709-1(c), as in effect before September 9, 2008. Freetaxusa2010 Note. Freetaxusa2010 You can apply the provisions of Regulations sections 1. Freetaxusa2010 195-1, 1. Freetaxusa2010 248-1, and 1. Freetaxusa2010 709-1 to all business start-up and organizational costs paid or incurred after October 22, 2004, provided the period of limitations on assessment has not expired for the year of the election. Freetaxusa2010 Otherwise, the provisions under Regulations sections 1. Freetaxusa2010 195-1(b), 1. Freetaxusa2010 248-1(c), and 1. Freetaxusa2010 709-1(c), as in effect before September 9, 2008, will apply. Freetaxusa2010 For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organization costs over an amortization period of 60 months or more. Freetaxusa2010 See How To Make the Election , later. Freetaxusa2010 The cost must qualify as one of the following. Freetaxusa2010 A business start-up cost. Freetaxusa2010 An organizational cost for a corporation. Freetaxusa2010 An organizational cost for a partnership. Freetaxusa2010 Business Start-Up Costs Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. Freetaxusa2010 Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit; and for the production of income in anticipation of the activity becoming an active trade or business. Freetaxusa2010 Qualifying costs. Freetaxusa2010   A start-up cost is amortizable if it meets both of the following tests. Freetaxusa2010 It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into). Freetaxusa2010 It is a cost you pay or incur before the day your active trade or business begins. Freetaxusa2010   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Freetaxusa2010 Advertisements for the opening of the business. Freetaxusa2010 Salaries and wages for employees who are being trained and their instructors. Freetaxusa2010 Travel and other necessary costs for securing prospective distributors, suppliers, or customers. Freetaxusa2010 Salaries and fees for executives and consultants, or for similar professional services. Freetaxusa2010 Nonqualifying costs. Freetaxusa2010   Start-up costs do not include deductible interest, taxes, or research and experimental costs. Freetaxusa2010 See Research and Experimental Costs , later. Freetaxusa2010 Purchasing an active trade or business. Freetaxusa2010   Amortizable start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. Freetaxusa2010 These are costs that help you decide whether to purchase a business. Freetaxusa2010 Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. Freetaxusa2010 Example. Freetaxusa2010 On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. Freetaxusa2010 They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. Freetaxusa2010 In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. Freetaxusa2010 The letter stated that a binding commitment would result only after a purchase agreement was signed. Freetaxusa2010 The law firm and accounting firm continued to provide services including a review of XYZ's books and records and the preparation of a purchase agreement. Freetaxusa2010 On October 22nd, you signed a purchase agreement with XYZ, Inc. Freetaxusa2010 All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. Freetaxusa2010 Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Freetaxusa2010 Disposition of business. Freetaxusa2010   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. Freetaxusa2010 However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. Freetaxusa2010 Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Freetaxusa2010 Qualifying costs. Freetaxusa2010   To qualify as an organizational cost, it must be: For the creation of the corporation, Chargeable to a capital account (see chapter 1), Amortized over the life of the corporation if the corporation had a fixed life, and Incurred before the end of the first tax year in which the corporation is in business. Freetaxusa2010   A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year. Freetaxusa2010   Examples of organizational costs include: The cost of temporary directors. Freetaxusa2010 The cost of organizational meetings. Freetaxusa2010 State incorporation fees. Freetaxusa2010 The cost of legal services. Freetaxusa2010 Nonqualifying costs. Freetaxusa2010   The following items are capital expenses that cannot be amortized: Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs. Freetaxusa2010 Costs associated with the transfer of assets to the corporation. Freetaxusa2010 Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. Freetaxusa2010 Qualifying costs. Freetaxusa2010   A partnership can amortize an organizational cost only if it meets all the following tests. Freetaxusa2010 It is for the creation of the partnership and not for starting or operating the partnership trade or business. Freetaxusa2010 It is chargeable to a capital account (see chapter 1). Freetaxusa2010 It could be amortized over the life of the partnership if the partnership had a fixed life. Freetaxusa2010 It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. Freetaxusa2010 However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. Freetaxusa2010 It is for a type of item normally expected to benefit the partnership throughout its entire life. Freetaxusa2010   Organizational costs include the following fees. Freetaxusa2010 Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. Freetaxusa2010 Accounting fees for services incident to the organization of the partnership. Freetaxusa2010 Filing fees. Freetaxusa2010 Nonqualifying costs. Freetaxusa2010   The following costs cannot be amortized. Freetaxusa2010 The cost of acquiring assets for the partnership or transferring assets to the partnership. Freetaxusa2010 The cost of admitting or removing partners, other than at the time the partnership is first organized. Freetaxusa2010 The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. Freetaxusa2010 The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. Freetaxusa2010 These “syndication fees” are capital expenses that cannot be depreciated or amortized. Freetaxusa2010 Liquidation of partnership. Freetaxusa2010   If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. Freetaxusa2010 However, these costs can be deducted only to the extent they qualify as a loss from a business. Freetaxusa2010 How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). Freetaxusa2010 You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. Freetaxusa2010 Once you choose an amortization period, you cannot change it. Freetaxusa2010 To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. Freetaxusa2010 The result is the amount you can deduct for each month. Freetaxusa2010 Cash method partnership. Freetaxusa2010   A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. Freetaxusa2010 However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. Freetaxusa2010 How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. Freetaxusa2010 You may also be required to attach an accompanying statement (described later) to your return. Freetaxusa2010 For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. Freetaxusa2010 Generally, for start-up or organizational costs paid or incurred before September 9, 2008, and after October 22, 2004, unless you choose to apply Regulations sections 1. Freetaxusa2010 195-1, 1. Freetaxusa2010 248-1, and 1. Freetaxusa2010 709-1, you must also attach an accompanying statement to elect to amortize the costs. Freetaxusa2010 If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. Freetaxusa2010 See Starting a Business , earlier, for more information. Freetaxusa2010 Generally, you must file the return by the due date (including any extensions). Freetaxusa2010 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). Freetaxusa2010 For more information, see the instructions for Part VI of Form 4562. Freetaxusa2010 You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Freetaxusa2010 Note. Freetaxusa2010 The election to either amortize or capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business. Freetaxusa2010 If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. Freetaxusa2010 A shareholder or partner cannot make this election. Freetaxusa2010 You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Freetaxusa2010 Only the corporation or partnership can amortize these costs. Freetaxusa2010 However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. Freetaxusa2010 These costs qualify as business start-up costs if you acquire the partnership interest. Freetaxusa2010 Start-up costs election statement. Freetaxusa2010   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. Freetaxusa2010 A description of the business to which the start-up costs relate. Freetaxusa2010 A description of each start-up cost incurred. Freetaxusa2010 The month your active business began (or was acquired). Freetaxusa2010 The number of months in your amortization period (which is generally 180 months). Freetaxusa2010 Filing the statement early. Freetaxusa2010   You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. Freetaxusa2010 If you file the statement early, the election becomes effective in the month of the tax year your active business begins. Freetaxusa2010 Revised statement. Freetaxusa2010   You can file a revised statement to include any start-up costs not included in your original statement. Freetaxusa2010 However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. Freetaxusa2010 You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. Freetaxusa2010 Organizational costs election statement. Freetaxusa2010   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. Freetaxusa2010 A description of each cost. Freetaxusa2010 The amount of each cost. Freetaxusa2010 The date each cost was incurred. Freetaxusa2010 The month your corporation or partnership began active business (or acquired the business). Freetaxusa2010 The number of months in your amortization period (which is generally 180 months). Freetaxusa2010 Partnerships. Freetaxusa2010   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. Freetaxusa2010   You do not need to separately list any partnership organizational cost that is less than $10. Freetaxusa2010 Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. Freetaxusa2010   After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership's original return and statement. Freetaxusa2010 Getting a Lease If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease. Freetaxusa2010 The term of the lease for amortization purposes generally includes all renewal options (and any other period for which you and the lessor reasonably expect the lease to be renewed). Freetaxusa2010 However, renewal periods are not included if 75% or more of the cost of acquiring the lease is for the term of the lease remaining on the acquisition date (not including any period for which you may choose to renew, extend, or continue the lease). Freetaxusa2010 For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. Freetaxusa2010 How to amortize. Freetaxusa2010   Enter your deduction in Part VI of Form 4562 if you are deducting amortization that begins during the current year, or on the appropriate line of your tax return if you are not otherwise required to file Form 4562. Freetaxusa2010 Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. Freetaxusa2010 You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. Freetaxusa2010 You may not be able to amortize section 197 intangibles acquired in a transaction that did not result in a significant change in ownership or use. Freetaxusa2010 See Anti-Churning Rules, later. Freetaxusa2010 Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). Freetaxusa2010 The 15-year period begins with the later of: The month the intangible is acquired, or The month the trade or business or activity engaged in for the production of income begins. Freetaxusa2010 You cannot deduct amortization for the month you dispose of the intangible. Freetaxusa2010 If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs. Freetaxusa2010 You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. Freetaxusa2010 Tax-exempt use property subject to a lease. Freetaxusa2010   The amortization period for any section 197 intangible leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), shall not be less than 125 percent of the lease term. Freetaxusa2010 Cost attributable to other property. Freetaxusa2010   The rules for section 197 intangibles do not apply to any amount that is included in determining the cost of property that is not a section 197 intangible. Freetaxusa2010 For example, if the cost of computer software is not separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules do not apply. Freetaxusa2010 Similarly, none of the cost of acquiring real property held for the production of rental income is considered the cost of goodwill, going concern value, or any other section 197 intangible. Freetaxusa2010 Section 197 Intangibles Defined The following assets are section 197 intangibles and must be amortized over 180 months: Goodwill; Going concern value; Workforce in place; Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers; A patent, copyright, formula, process, design, pattern, know-how, format, or similar item; A customer-based intangible; A supplier-based intangible; Any item similar to items (3) through (7); A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals); A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business; Any franchise, trademark, or trade name; and A contract for the use of, or a term interest in, any item in this list. Freetaxusa2010 You cannot amortize any of the intangibles listed in items (1) through (8) that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. Freetaxusa2010 Goodwill. Freetaxusa2010   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. Freetaxusa2010 Going concern value. Freetaxusa2010   This is the additional value of a trade or business that attaches to property because the property is an integral part of an ongoing business activity. Freetaxusa2010 It includes value based on the ability of a business to continue to function and generate income even though there is a change in ownership (but does not include any other section 197 intangible). Freetaxusa2010 It also includes value based on the immediate use or availability of an acquired trade or business, such as the use of earnings during any period in which the business would not otherwise be available or operational. Freetaxusa2010 Workforce in place, etc. Freetaxusa2010   This includes the composition of a workforce (for example, its experience, education, or training). Freetaxusa2010 It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes. Freetaxusa2010   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. Freetaxusa2010 Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. Freetaxusa2010 Business books and records, etc. Freetaxusa2010   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. Freetaxusa2010 It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers. Freetaxusa2010 Patents, copyrights, etc. Freetaxusa2010   This includes package design, computer software, and any interest in a film, sound recording, videotape, book, or other similar property, except as discussed later under Assets That Are Not Section 197 Intangibles . Freetaxusa2010 Customer-based intangible. Freetaxusa2010   This is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. Freetaxusa2010 For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. Freetaxusa2010 A customer base. Freetaxusa2010 A circulation base. Freetaxusa2010 An undeveloped market or market growth. Freetaxusa2010 Insurance in force. Freetaxusa2010 A mortgage servicing contract. Freetaxusa2010 An investment management contract. Freetaxusa2010 Any other relationship with customers involving the future provision of goods or services. Freetaxusa2010   Accounts receivable or other similar rights to income for goods or services provided to customers before the acquisition of a trade or business are not section 197 intangibles. Freetaxusa2010 Supplier-based intangible. Freetaxusa2010   A supplier-based intangible is the value resulting from the future acquisitions, (through contract or other relationships with suppliers in the ordinary course of business) of goods or services that you will sell or use. Freetaxusa2010 The amount you pay or incur for supplier-based intangibles includes, for example, any portion of the purchase price of an acquired trade or business that is attributable to the existence of a favorable relationship with persons providing distribution services (such as a favorable shelf or display space or a retail outlet), or the existence of favorable supply contracts. Freetaxusa2010 Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. Freetaxusa2010 Also, see Assets That Are Not Section 197 Intangibles below. Freetaxusa2010 Government-granted license, permit, etc. Freetaxusa2010   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. Freetaxusa2010 For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license. Freetaxusa2010 Covenant not to compete. Freetaxusa2010   Section 197 intangibles include a covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business, or a substantial portion of a trade or business. Freetaxusa2010 An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. Freetaxusa2010   An arrangement that requires the former owner to perform services (or to provide property or the use of property) is not similar to a covenant not to compete to the extent the amount paid under the arrangement represents reasonable compensation for those services or for that property or its use. Freetaxusa2010 Franchise, trademark, or trade name. Freetaxusa2010   A franchise, trademark, or trade name is a section 197 intangible. Freetaxusa2010 You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. Freetaxusa2010 For information on currently deductible contingent payments, see chapter 11. Freetaxusa2010 Professional sports franchise. Freetaxusa2010   A franchise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player contracts) is a section 197 intangible amortizable over a 15-year period. Freetaxusa2010 Contract for the use of, or a term interest in, a section 197 intangible. Freetaxusa2010   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. Freetaxusa2010 It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. Freetaxusa2010 Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. Freetaxusa2010 Any interest in a corporation, partnership, trust, or estate. Freetaxusa2010 Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. Freetaxusa2010 Any interest in land. Freetaxusa2010 Most computer software. Freetaxusa2010 (See Computer software , later. Freetaxusa2010 ) Any of the following assets not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Freetaxusa2010 An interest in a film, sound recording, video tape, book, or similar property. Freetaxusa2010 A right to receive tangible property or services under a contract or from a governmental agency. Freetaxusa2010 An interest in a patent or copyright. Freetaxusa2010 Certain rights that have a fixed duration or amount. Freetaxusa2010 (See Rights of fixed duration or amount , later. Freetaxusa2010 ) An interest under either of the following. Freetaxusa2010 An existing lease or sublease of tangible property. Freetaxusa2010 A debt that was in existence when the interest was acquired. Freetaxusa2010 A right to service residential mortgages unless the right is acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Freetaxusa2010 Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. Freetaxusa2010 Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. Freetaxusa2010 You generally must use the straight line method over its useful life. Freetaxusa2010 For certain intangibles, the depreciation period is specified in the law and regulations. Freetaxusa2010 For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. Freetaxusa2010 For more information on depreciating intangible property, see Intangible Property under What Method Can You Use To Depreciate Your Property? in chapter 1 of Publication 946. Freetaxusa2010 Computer software. Freetaxusa2010   Section 197 intangibles do not include the following types of computer software. Freetaxusa2010 Software that meets all the following requirements. Freetaxusa2010 It is, or has been, readily available for purchase by the general public. Freetaxusa2010 It is subject to a nonexclusive license. Freetaxusa2010 It has not been substantially modified. Freetaxusa2010 This requirement is considered met if the cost of all modifications is not more than the greater of 25% of the price of the publicly available unmodified software or $2,000. Freetaxusa2010 Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Freetaxusa2010 Computer software defined. Freetaxusa2010   Computer software includes all programs designed to cause a computer to perform a desired function. Freetaxusa2010 It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Freetaxusa2010 Rights of fixed duration or amount. Freetaxusa2010   Section 197 intangibles do not include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: Has a fixed life of less than 15 years, or Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recovery. Freetaxusa2010 However, this does not apply to the following intangibles. Freetaxusa2010 Goodwill. Freetaxusa2010 Going concern value. Freetaxusa2010 A covenant not to compete. Freetaxusa2010 A franchise, trademark, or trade name. Freetaxusa2010 A customer-related information base, customer-based intangible, or similar item. Freetaxusa2010 Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. Freetaxusa2010 You may amortize these costs ratably over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial accounting purposes. Freetaxusa2010 If, during the 15-year period, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. Freetaxusa2010 Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. Freetaxusa2010 Amortize these costs using the rules of Revenue Procedure 2004-36. Freetaxusa2010 For more information, see Revenue Procedure 2004-36, 2004-24 I. Freetaxusa2010 R. Freetaxusa2010 B. Freetaxusa2010 1063, available at  www. Freetaxusa2010 irs. Freetaxusa2010 gov/irb/2004-24_IRB/ar16. Freetaxusa2010 html. Freetaxusa2010 A change in the treatment of creative property costs is a change in method of accounting. Freetaxusa2010 Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them did not result in a significant change in ownership or use. Freetaxusa2010 These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. Freetaxusa2010 Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. Freetaxusa2010 You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. Freetaxusa2010 You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user did not change. Freetaxusa2010 You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). Freetaxusa2010 This applies only if the transaction in which you granted the right and the transaction in which you acquired the intangible are part of a series of related transactions. Freetaxusa2010 See Related person , later, for more information. Freetaxusa2010 Exceptions. Freetaxusa2010   The anti-churning rules do not apply in the following situations. Freetaxusa2010 You acquired the intangible from a decedent and its basis was stepped up to its fair market value. Freetaxusa2010 The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. Freetaxusa2010 This exception does not apply if the transaction in which you acquired the intangible and the transaction in which the seller or transferor acquired it are part of a series of related transactions. Freetaxusa2010 The gain-recognition exception, discussed later, applies. Freetaxusa2010 Related person. Freetaxusa2010   For purposes of the anti-churning rules, the following are related persons. Freetaxusa2010 An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Freetaxusa2010 ), and lineal descendants (children, grandchildren, etc. Freetaxusa2010 ). Freetaxusa2010 A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. Freetaxusa2010 Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 20%” is substituted for “at least 80%” in that definition and the determination is made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. Freetaxusa2010 (For an exception, see section 1. Freetaxusa2010 197-2(h)(6)(iv) of the regulations. Freetaxusa2010 ) A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or indirectly, by or for the trust or grantor of the trust. Freetaxusa2010 The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Freetaxusa2010 The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Freetaxusa2010 The executor and beneficiary of an estate. Freetaxusa2010 A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). Freetaxusa2010 A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the corporation and more than 20% of the capital or profits interest in the partnership. Freetaxusa2010 Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 20% of the value of the outstanding stock of each corporation. Freetaxusa2010 Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. Freetaxusa2010 A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. Freetaxusa2010 Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). Freetaxusa2010 When to determine relationship. Freetaxusa2010   Persons are treated as related if the relationship existed at the following time. Freetaxusa2010 In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. Freetaxusa2010 In the case of a series of related transactions (or a series of transactions that comprise a qualified stock purchase under section 338(d)(3) of the Internal Revenue Code), immediately before the earliest transaction or immediately after the last transaction. Freetaxusa2010 Ownership of stock. Freetaxusa2010   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Freetaxusa2010 Rule 1. Freetaxusa2010   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Freetaxusa2010 Rule 2. Freetaxusa2010   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Freetaxusa2010 Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Freetaxusa2010 Rule 3. Freetaxusa2010   An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Freetaxusa2010 Rule 4. Freetaxusa2010   For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a person under Rule 1 as actually owned by that person. Freetaxusa2010 Do not treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make another person the constructive owner of the stock. Freetaxusa2010 Gain-recognition exception. Freetaxusa2010   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. Freetaxusa2010 That person would not be related to you (as described under Related person , earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. Freetaxusa2010 That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. Freetaxusa2010 See chapter 2 in Publication 544 for information on making this choice. Freetaxusa2010   If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. Freetaxusa2010 Notification. Freetaxusa2010   If the person you acquired the intangible from chooses to recognize gain under the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. Freetaxusa2010 Anti-abuse rule. Freetaxusa2010   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. Freetaxusa2010 To avoid the requirement that the intangible be acquired after August 10, 1993. Freetaxusa2010 To avoid any of the anti-churning rules. Freetaxusa2010 More information. Freetaxusa2010   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. Freetaxusa2010 197-2(h). Freetaxusa2010 Incorrect Amount of Amortization Deducted If you later discover that you deducted an incorrect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. Freetaxusa2010 See Amended Return , next. Freetaxusa2010 If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. Freetaxusa2010 See Changing Your Accounting Method , later. Freetaxusa2010 Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. Freetaxusa2010 A mathematical error made in any year. Freetaxusa2010 A posting error made in any year. Freetaxusa2010 An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. Freetaxusa2010 When to file. Freetaxusa2010   If an amended return is allowed, you must file it by the later of the following dates. Freetaxusa2010 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Freetaxusa2010 (A return filed early is considered filed on the due date. Freetaxusa2010 ) 2 years from the time you paid your tax for that year. Freetaxusa2010 Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Freetaxusa2010 File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. Freetaxusa2010 The following are examples of a change in method of accounting for amortization. Freetaxusa2010 A change in the amortization method, period of recovery, or convention of an amortizable asset. Freetaxusa2010 A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. Freetaxusa2010 A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. Freetaxusa2010 Changes in amortization that are not a change in method of accounting include the following: A change in computing amortization in the tax year in which your use of the asset changes. Freetaxusa2010 An adjustment in the useful life of an amortizable asset. Freetaxusa2010 Generally, the making of a late amortization election or the revocation of a timely valid amortization election. Freetaxusa2010 Any change in the placed-in-service date of an amortizable asset. Freetaxusa2010 See Regulations section 1. Freetaxusa2010 446-1(e)(2)(ii)(a) for more information and examples. Freetaxusa2010 Automatic approval. Freetaxusa2010   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. Freetaxusa2010 For a list of automatic accounting method changes, see the Instructions for Form 3115. Freetaxusa2010 Also see the Instructions for Form 3115 for more information on getting approval, automatic approval procedures, and a list of exceptions to the automatic approval process. Freetaxusa2010 For more information, see Revenue Procedure 2006-12, as modified by Revenue Procedure 2006-37, and Revenue Procedure 2008-52, as amplified, clarified, and modified by Revenue Procedure 2009-39, as clarified and modified by Revenue Procedure 2011-14, as modified and amplified by Revenue Procedure 2011-22, as modified by Revenue Procedure 2012-39, or any successor. Freetaxusa2010 See Revenue Procedure 2006-12, 2006-3 I. Freetaxusa2010 R. Freetaxusa2010 B. Freetaxusa2010 310, available at  www. Freetaxusa2010 irs. Freetaxusa2010 gov/irb/2006-03_IRB/ar14. Freetaxusa2010 html. Freetaxusa2010  See Revenue Procedure 2006-37, 2006-38 I. Freetaxusa2010 R. Freetaxusa2010 B. Freetaxusa2010 499, available at  www. Freetaxusa2010 irs. Freetaxusa2010 gov/irb/2006-38_IRB/ar10. Freetaxusa2010 html. Freetaxusa2010  See Revenue Procedure 2008-52, 2008-36 I. Freetaxusa2010 R. Freetaxusa2010 B. Freetaxusa2010 587, available at www. Freetaxusa2010 irs. Freetaxusa2010 gov/irb/2008-36_IRB/ar09. Freetaxusa2010 html. Freetaxusa2010  See Revenue Procedure 2009-39, 2009-38 I. Freetaxusa2010 R. Freetaxusa2010 B. Freetaxusa2010 371, available at  www. Freetaxusa2010 irs. Freetaxusa2010 gov/irb/2009-38_IRB/ar08. Freetaxusa2010 html. Freetaxusa2010  See Revenue Procedure 2011-14, 2011-4 I. Freetaxusa2010 R. Freetaxusa2010 B. Freetaxusa2010 330, available at  www. Freetaxusa2010 irs. Freetaxusa2010 gov/irb/2011-04_IRB/ar08. Freetaxusa2010 html. Freetaxusa2010  See Revenue Procedure 2011-22, 2011-18 I. Freetaxusa2010 R. Freetaxusa2010 B. Freetaxusa2010 737, available at  www. Freetaxusa2010 irs. Freetaxusa2010 gov/irb/2011-18_IRB/ar08. Freetaxusa2010 html. Freetaxusa2010 Also, see Revenue Procedure 2012-39, 2012-41 I. Freetaxusa2010 R. Freetaxusa2010 B. Freetaxusa2010 470 available at www. Freetaxusa2010 irs. Freetaxusa2010 gov/irb/2012-41_IRB/index. Freetaxusa2010 html. Freetaxusa2010 Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. Freetaxusa2010 If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). Freetaxusa2010 If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. Freetaxusa2010 Any remaining gain, or any loss, is a section 1231 gain or loss. Freetaxusa2010 If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. Freetaxusa2010 For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. Freetaxusa2010 Nondeductible loss. Freetaxusa2010   You cannot deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transactions) as other section 197 intangibles you still have. Freetaxusa2010 Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. Freetaxusa2010 Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. Freetaxusa2010 The numerator is the adjusted basis of each remaining intangible on the date of the disposition. Freetaxusa2010 The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. Freetaxusa2010 Covenant not to compete. Freetaxusa2010   A covenant not to compete, or similar arrangement, is not considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant. Freetaxusa2010 Nonrecognition transfers. Freetaxusa2010   If you acquire a section 197 intangible in a nonrecognition transfer, you are treated as the transferor with respect to the part of your adjusted basis in the intangible that is not more than the transferor's adjusted basis. Freetaxusa2010 You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. Freetaxusa2010 Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. Freetaxusa2010   In a like-kind exchange or involuntary conversion of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that is not more than your adjusted basis in the exchanged or converted intangible over the remaining amortization period of the exchanged or converted intangible. Freetaxusa2010 Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. Freetaxusa2010 Example. Freetaxusa2010 You own a section 197 intangible you have amortized for 4 full years. Freetaxusa2010 It has a remaining unamortized basis of $30,000. Freetaxusa2010 You exchange the asset plus $10,000 for a like-kind section 197 intangible. Freetaxusa2010 The nonrecognition provisions of like-kind exchanges apply. Freetaxusa2010 You amortize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset. Freetaxusa2010 You amortize the other $10,000 of adjusted basis over a new 15-year period. Freetaxusa2010 For more information, see Regulations section 1. Freetaxusa2010 197-2(g). Freetaxusa2010 Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. Freetaxusa2010 See Reforestation Costs in chapter 7. Freetaxusa2010 You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. Freetaxusa2010 There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. Freetaxusa2010 The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. Freetaxusa2010 A partner, shareholder, or beneficiary cannot make that election. Freetaxusa2010 A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. Freetaxusa2010 , of a partnership or S corporation. Freetaxusa2010 The amortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each. Freetaxusa2010 Qualifying costs. Freetaxusa2010   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Freetaxusa2010 Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. Freetaxusa2010 They include costs for the following items. Freetaxusa2010 Site preparation. Freetaxusa2010 Seeds or seedlings. Freetaxusa2010 Labor. Freetaxusa2010 Tools. Freetaxusa2010 Depreciation on equipment used in planting and seeding. Freetaxusa2010 Qualifying costs do not include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income. Freetaxusa2010 Qualified timber property. Freetaxusa2010   Qualified timber property is property that contains trees in significant commercial quantities. Freetaxusa2010 It can be a woodlot or other site that you own or lease. Freetaxusa2010 The property qualifies only if it meets all of the following requirements. Freetaxusa2010 It is located in the United States. Freetaxusa2010 It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products. Freetaxusa2010 It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. Freetaxusa2010 Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. Freetaxusa2010 Amortization period. Freetaxusa2010   The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. Freetaxusa2010 You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. Freetaxusa2010 Life tenant and remainderman. Freetaxusa2010   If one person holds the property for life with the remainder going to another person, the life tenant is entitled to the full amortization for qualifying reforestation costs incurred by the life tenant. Freetaxusa2010 Any remainder interest in the property is ignored for amortization purposes. Freetaxusa2010 Recapture. Freetaxusa2010   If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortization you took. Freetaxusa2010 See chapter 3 of Publication 544 for more information. Freetaxusa2010 How to make the election. Freetaxusa2010   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. Freetaxusa2010 A description of the costs and the dates you incurred them. Freetaxusa2010 A description of the type of timber being grown and the purpose for which it is grown. Freetaxusa2010 Attach a separate statement for each property for which you amortize reforestation costs. Freetaxusa2010   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. Freetaxusa2010 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). Freetaxusa2010 Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. Freetaxusa2010 9100-2” on Form 4562. Freetaxusa2010 File the amended return at the same address you filed the original return. Freetaxusa2010 Revoking the election. Freetaxusa2010   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. Freetaxusa2010 Your application to revoke the election must include your name, address, the years for which your election was in effect, and your reason for revoking it. Freetaxusa2010 Please provide your daytime telephone number (optional), in case we need to contact you. Freetaxusa2010 You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your election is to end. Freetaxusa2010    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. Freetaxusa2010 NW, IR-5300 Washington, DC 20224 Geological and Geophysical Costs You can amortize the cost of geological and geophysical expenses paid or incurred in connection with oil and gas exploration or development within the United States. Freetaxusa2010 These costs can be amortized ratably over a 24-month period beginning on the mid-point of the tax year in which the expenses were paid or incurred. Freetaxusa2010 For major integrated oil companies (as defined in section 167(h)(5)), these costs must be amortized ratably over a 5-year period for costs paid or incurred after May 17, 2006 (a 7-year period for costs paid or incurred after December 19, 2007). Freetaxusa2010 If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. Freetaxusa2010 Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. Freetaxusa2010 However, see Atmospheric pollution control facilities for an exception. Freetaxusa2010 The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. Freetaxusa2010 Also, you can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost. Freetaxusa2010 You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. Freetaxusa2010 See chapter 3 of Publication 946. Freetaxusa2010 A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property in operation before 1976, to reduce or control water or atmospheric pollution or contamination. Freetaxusa2010 The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Freetaxusa2010 The facility must be certified by state and federal certifying authorities. Freetaxusa2010 The facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. Freetaxusa2010 Also, it must not significantly change the nature of the manufacturing or production process or facility. Freetaxusa2010 The federal certifying authority will not certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its operation (such as through sales of recovered wastes). Freetaxusa2010 The federal certifying authority will describe the nature of the potential cost recovery. Freetaxusa2010 You must then reduce the amortizable basis of the facility by this potential recovery. Freetaxusa2010 New identifiable treatment facility. Freetaxusa2010   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. Freetaxusa2010 It does not include a building and its structural components unless the building is exclusively a treatment facility. Freetaxusa2010 Atmospheric pollution control facilities. Freetaxusa2010   Certain atmospheric pollution control facilities can be amortized over 84 months. Freetaxusa2010 To qualify, the following must apply. Freetaxusa2010 The facility must be acquired and placed in service after April 11, 2005. Freetaxusa2010 If acquired, the original use must begin with you after April 11, 2005. Freetaxusa2010 The facility must be used in connection with an electric generation plant or other property placed in operation after December 31, 1975, that is primarily coal fired. Freetaxusa2010 If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. Freetaxusa2010 Basis reduction for corporations. Freetaxusa2010   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. Freetaxusa2010 More information. Freetaxusa2010   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. Freetaxusa2010 Research and Experimental Costs You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below). Freetaxusa2010 If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. Freetaxusa2010 The amortization period begins the month you first receive an economic benefit from the costs. Freetaxusa2010 For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. Freetaxusa2010 Optional write-off method. Freetaxusa2010   Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. Freetaxusa2010 For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. Freetaxusa2010 Costs you can amortize. Freetaxusa2010   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. Freetaxusa2010 You paid or incurred the costs in your trade or business. Freetaxusa2010 You are not deducting the costs currently. Freetaxusa2010 How to make the election. Freetaxusa2010   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. Freetaxusa2010 Generally, you must file the return by the due date (including extensions). Freetaxusa2010 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). Freetaxusa2010 Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Freetaxusa2010 9100-2” on Form 4562. Freetaxusa2010 File the amended return at the same address you filed the original return. Freetaxusa2010   Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. Freetaxusa2010 Optional Write-off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. Freetaxusa2010 If you make this election, there is no AMT adjustment. Freetaxusa2010 The applicable costs and the optional recovery periods are as follows: Circulation costs — 3 years, Intangible drilling and development costs — 60 months, Mining exploration and development costs — 10 years, and Research and experimental costs — 10 years. Freetaxusa2010 How to make the election. Freetaxusa2010   To elect to amortize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which the election begins: Your name, address, and taxpayer identification number; and The type of cost and the specific amount of the cost for which you are making the election. Freetaxusa2010   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. Freetaxusa2010 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). Freetaxusa2010 Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Freetaxusa2010 9100-2” on Form 4562. Freetaxusa2010 File the amended return at the same address you filed the original return. Freetaxusa2010 Revoking the election. Freetaxusa2010   You must obtain consent from the IRS to revoke your election. Freetaxusa2010 Your request to revoke the election must be submitted to the IRS in the form of a letter ruling before the end of the tax year in which the optional recovery period ends. Freetaxusa2010 The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. Freetaxusa2010 If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. Freetaxusa2010 Prev  Up  Next   Home   More Online Publications