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Hand R Block Com

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Hand R Block Com

Hand r block com 11. Hand r block com   Other Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Reimbursement of Travel, Meals, and EntertainmentReimbursements Miscellaneous ExpensesMeaning of generally enforced. Hand r block com Kickbacks. Hand r block com Form 1099-MISC. Hand r block com Exception. Hand r block com Tax preparation fees. Hand r block com Covered executive branch official. Hand r block com Exceptions to denial of deduction. Hand r block com Indirect political contributions. Hand r block com Type of deduction. Hand r block com Repayment—$3,000 or less. Hand r block com Repayment—over $3,000. Hand r block com Method 1. Hand r block com Method 2. Hand r block com Repayment does not apply. Hand r block com Year of deduction (or credit). Hand r block com Telephone. Hand r block com What's New Standard mileage rate. Hand r block com  Beginning in 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use is 56. Hand r block com 5 cents per mile. Hand r block com For more information, see Car and truck expenses under Miscellaneous Expenses. Hand r block com Introduction This chapter covers business expenses that may not have been explained to you, as a business owner, in previous chapters of this publication. Hand r block com Topics - This chapter discusses: Travel, meals, and entertainment Bribes and kickbacks Charitable contributions Education expenses Lobbying expenses Penalties and fines Repayments (claim of right) Other miscellaneous expenses Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 463 Travel, Entertainment, Gift, and Car Expenses 526 Charitable Contributions 529 Miscellaneous Deductions 544 Sales and Other Dispositions of Assets 970 Tax Benefits for Education 1542 Per Diem Rates See chapter 12 for information about getting publications and forms. Hand r block com Reimbursement of Travel, Meals, and Entertainment The following discussion explains how to handle any reimbursements or allowances you may provide to your employees under a reimbursement or allowance arrangement for travel, meals, and entertainment expenses. Hand r block com If you are self-employed and report your income and expenses on Schedule C or C-EZ (Form 1040), see Publication 463. Hand r block com To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. Hand r block com Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business. Hand r block com For more information on travel, meals, and entertainment, including deductibility, see Publication 463. Hand r block com Reimbursements A “reimbursement or allowance arrangement” provides for payment of advances, reimbursements, and allowances for travel, meals, and entertainment expenses incurred by your employees during the ordinary course of business. Hand r block com If the expenses are substantiated, you can deduct the allowable amount on your tax return. Hand r block com Because of differences between accounting methods and tax law, the amount you can deduct for tax purposes may not be the same as the amount you deduct on your business books and records. Hand r block com For example, you can deduct 100% of the cost of meals on your business books and records. Hand r block com However, only 50% of these costs are allowed by law as a tax deduction. Hand r block com How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: An accountable plan, or A nonaccountable plan. Hand r block com If you reimburse these expenses under an accountable plan, deduct them as travel, meals, or entertainment expenses. Hand r block com If you reimburse these expenses under a nonaccountable plan, report the reimbursements as wages on Form W-2, Wage and Tax Statement, and deduct them as wages on the appropriate line of your tax return. Hand r block com If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement and report it accordingly. Hand r block com See Table 11-1 , Reporting Reimbursements. Hand r block com Accountable Plans An accountable plan requires your employees to meet all of the following requirements. Hand r block com Each employee must: Have paid or incurred deductible expenses while performing services as your employee, Adequately account to you for these expenses within a reasonable period of time, and Return any excess reimbursement or allowance within a reasonable period of time. Hand r block com An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. Hand r block com The advance is reasonably calculated not to exceed the amount of anticipated expenses. Hand r block com You make the advance within a reasonable period of time of your employee paying or incurring the expense. Hand r block com If any expenses reimbursed under this arrangement are not substantiated, or an excess reimbursement is not returned within a reasonable period of time by an employee, you cannot treat these expenses as reimbursed under an accountable plan. Hand r block com Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later. Hand r block com Adequate accounting. Hand r block com   Your employees must adequately account to you for their travel, meals, and entertainment expenses. Hand r block com They must give you documentary evidence of their travel, mileage, and other employee business expenses. Hand r block com This evidence should include items such as receipts, along with either a statement of expenses, an account book, a day-planner, or similar record in which the employee entered each expense at or near the time the expense was incurred. Hand r block com Excess reimbursement or allowance. Hand r block com   An excess reimbursement or allowance is any amount you pay to an employee that is more than the business-related expenses for which the employee adequately accounted. Hand r block com The employee must return any excess reimbursement or other expense allowance to you within a reasonable period of time. Hand r block com Reasonable period of time. Hand r block com   A reasonable period of time depends on the facts and circumstances. Hand r block com Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. Hand r block com You give an advance within 30 days of the time the employee pays or incurs the expense. Hand r block com Your employees adequately account for their expenses within 60 days after the expenses were paid or incurred. Hand r block com Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred. Hand r block com You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately account for outstanding advances and they comply within 120 days of the date of the statement. Hand r block com How to deduct. Hand r block com   You can claim a deduction for travel, meals, and entertainment expenses if you reimburse your employees for these expenses under an accountable plan. Hand r block com Generally, the amount you can deduct for meals and entertainment is subject to a 50% limit, discussed later. Hand r block com If you are a sole proprietor, or are filing as a single member limited liability company, deduct the travel reimbursement on line 24a and the deductible part of the meals and entertainment reimbursement on line 24b, Schedule C (Form 1040) or line 2, Schedule C-EZ (Form 1040). Hand r block com   If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120, U. Hand r block com S. Hand r block com Corporation Income Tax Return. Hand r block com If you are filing any other business income tax return, such as a partnership or S corporation return, deduct the reimbursement on the appropriate line of the return as provided in the instructions for that return. Hand r block com Table 11-1. Hand r block com Reporting Reimbursements IF the type of reimbursement (or other expense allowance) arrangement is under THEN the employer reports on Form W-2 An accountable plan with: Actual expense reimbursement:  Adequate accounting made and excess returned No amount. Hand r block com Actual expense reimbursement:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Hand r block com Per diem or mileage allowance up to the federal rate:  Adequate accounting made and excess returned No amount. Hand r block com Per diem or mileage allowance up to the federal rate:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Hand r block com The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Hand r block com Per diem or mileage allowance exceeds the federal rate:  Adequate accounting made up to the federal rate only and excess not returned The excess amount as wages in box 1. Hand r block com The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Hand r block com A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan The entire amount as wages in box 1. Hand r block com No reimbursement plan The entire amount as wages in box 1. Hand r block com Per Diem and Car Allowances You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. Hand r block com In these cases, your employee is considered to have accounted to you for the amount of the expense that does not exceed the rates established by the federal government. Hand r block com Your employee must actually substantiate to you the other elements of the expense, such as time, place, and business purpose. Hand r block com Federal rate. Hand r block com   The federal rate can be figured using any one of the following methods. Hand r block com For car expenses: The standard mileage rate. Hand r block com A fixed and variable rate (FAVR). Hand r block com For per diem amounts: The regular federal per diem rate. Hand r block com The standard meal allowance. Hand r block com The high-low rate. Hand r block com Car allowance. Hand r block com   Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. Hand r block com Beginning in 2013, the standard business mileage rate is 56. Hand r block com 5 cents per mile. Hand r block com   You can choose to reimburse your employees using a fixed and variable rate (FAVR) allowance. Hand r block com This is an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your employees' variable operating costs (such as gas, oil, etc. Hand r block com ) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc. Hand r block com ). Hand r block com For information on using a FAVR allowance, see Revenue Procedure 2010-51, available at www. Hand r block com irs. Hand r block com gov/irb/2010-51_IRB/ar14. Hand r block com html and Notice 2012-72, available at www. Hand r block com irs. Hand r block com gov/irb/2012-50_IRB/ar10. Hand r block com html. Hand r block com Per diem allowance. Hand r block com   If your employee actually substantiates to you the other elements (discussed earlier) of the expenses reimbursed using the per diem allowance, how you report and deduct the allowance depends on whether the allowance is for lodging and meal expenses or for meal expenses only and whether the allowance is more than the federal rate. Hand r block com Regular federal per diem rate. Hand r block com   The regular federal per diem rate is the highest amount the federal government will pay to its employees while away from home on travel. Hand r block com It has two components: Lodging expense, and Meal and incidental expense (M&IE). Hand r block com The rates are different for different locations. Hand r block com Publication 1542 lists the rates in the continental United States. Hand r block com Standard meal allowance. Hand r block com   The federal rate for meal and incidental expenses (M&IE) is the standard meal allowance. Hand r block com You can pay only an M&IE allowance to employees who travel away from home if: You pay the employee for actual expenses for lodging based on receipts submitted to you, You provide for the lodging, You pay for the actual expense of the lodging directly to the provider, You do not have a reasonable belief that lodging expenses were incurred by the employee, or The allowance is computed on a basis similar to that used in computing the employee's wages (that is, number of hours worked or miles traveled). Hand r block com Internet access. Hand r block com    Per diem rates are available on the Internet. Hand r block com You can access per diem rates at www. Hand r block com gsa. Hand r block com gov/perdiemrates. Hand r block com High-low method. Hand r block com   This is a simplified method of computing the federal per diem rate for travel within the continental United States. Hand r block com It eliminates the need to keep a current list of the per diem rate for each city. Hand r block com   Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 ($65 for M&IE) for certain high-cost locations. Hand r block com All other areas have a per diem amount of $163 ($52 for M&IE). Hand r block com The high-cost locations eligible for the higher per diem amount under the high-low method are listed in Publication 1542. Hand r block com   Effective October 1, 2013, the per diem rate for high-cost locations increased to $251 ($65 for M&IE). Hand r block com The rate for all other locations increased to $170 ($52 for M&IE). Hand r block com For October, November, and December 2013, you can either continue to use the rates described in the preceding paragraph or change to the new rates. Hand r block com However, you must use the same rate for all employees reimbursed under the high-low method. Hand r block com   For more information about the high-low method, see Notice 2013-65, available at www. Hand r block com irs. Hand r block com gov/irb/2013-44_IRB/ar13. Hand r block com html. Hand r block com See Publication 1542 (available on the Internet at IRS. Hand r block com gov) for the current per diem rates for all locations. Hand r block com Reporting per diem and car allowances. Hand r block com   The following discussion explains how to report per diem and car allowances. Hand r block com The manner in which you report them depends on how the allowance compares to the federal rate. Hand r block com See Table 11-1. Hand r block com Allowance less than or equal to the federal rate. Hand r block com   If your allowance for the employee is less than or equal to the appropriate federal rate, that allowance is not included as part of the employee's pay in box 1 of the employee's Form W-2. Hand r block com Deduct the allowance as travel expenses (including meals that may be subject to the 50% limit, discussed later). Hand r block com See How to deduct under Accountable Plans, earlier. Hand r block com Allowance more than the federal rate. Hand r block com   If your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items. Hand r block com   Include the allowance amount up to the federal rate in box 12 (code L) of the employee's Form W-2. Hand r block com Deduct it as travel expenses (as explained above). Hand r block com This part of the allowance is treated as reimbursed under an accountable plan. Hand r block com   Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. Hand r block com Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Hand r block com This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans. Hand r block com Meals and Entertainment Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment expenses you reimburse your employees. Hand r block com The deduction limit applies even if you reimburse them for 100% of the expenses. Hand r block com Application of the 50% limit. Hand r block com   The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant, or another location. Hand r block com It applies to expenses incurred at a business convention or reception, business meeting, or business luncheon at a club. Hand r block com The deduction limit may also apply to meals you furnish on your premises to your employees. Hand r block com Related expenses. Hand r block com   Taxes and tips relating to a meal or entertainment activity you reimburse to your employee under an accountable plan are included in the amount subject to the 50% limit. Hand r block com Reimbursements you make for expenses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. Hand r block com However, the cost of transportation to and from an otherwise allowable business meal or a business-related entertainment activity is not subject to the 50% limit. Hand r block com Amount subject to 50% limit. Hand r block com   If you provide your employees with a per diem allowance only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of the following. Hand r block com The per diem allowance. Hand r block com The federal rate for M&IE. Hand r block com   If you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages. Hand r block com If the per diem allowance you provide is less than the federal per diem rate for the area of travel, you can treat 40% of the per diem allowance as the amount for food and beverages. Hand r block com Meal expenses when subject to “hours of service” limits. Hand r block com   You can deduct 80% of the cost of reimbursed meals your employees consume while away from their tax home on business during, or incident to, any period subject to the Department of Transportation's “hours of service” limits. Hand r block com   See Publication 463 for a detailed discussion of individuals subject to the Department of Transportation's “hours of service” limits. Hand r block com De minimis (minimal) fringe benefit. Hand r block com   The 50% limit does not apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit. Hand r block com See Publication 15-B for additional information on de minimis fringe benefits. Hand r block com Company cafeteria or executive dining room. Hand r block com   The cost of food and beverages you provide primarily to your employees on your business premises is deductible. Hand r block com This includes the cost of maintaining the facilities for providing the food and beverages. Hand r block com These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit, as just discussed, or unless they are compensation to your employees (explained later). Hand r block com Employee activities. Hand r block com   The expense of providing recreational, social, or similar activities (including the use of a facility) for your employees is deductible and is not subject to the 50% limit. Hand r block com The benefit must be primarily for your employees who are not highly compensated. Hand r block com   For this purpose, a highly compensated employee is an employee who meets either of the following requirements. Hand r block com Owned a 10% or more interest in the business during the year or the preceding year. Hand r block com An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal descendants. Hand r block com Received more than $115,000 in pay for the preceding year. Hand r block com You can choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year. Hand r block com   For example, the expenses for food, beverages, and entertainment for a company-wide picnic are not subject to the 50% limit. Hand r block com Meals or entertainment treated as compensation. Hand r block com   The 50% limit does not apply to either of the following. Hand r block com Expenses for meals or entertainment that you treat as: Compensation to an employee who was the recipient of the meals or entertainment, and Wages subject to withholding of federal income tax. Hand r block com Expenses for meals or entertainment if: A recipient of the meals or entertainment who is not your employee has to include the expenses in gross income as compensation for services or as a prize or award, and You include that amount on a Form 1099 issued to the recipient, if a Form 1099 is required. Hand r block com Sales of meals or entertainment. Hand r block com   You can deduct the cost of meals or entertainment (including the use of facilities) you sell to the public. Hand r block com For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is a business expense that is fully deductible. Hand r block com The 50% limit does not apply to this expense. Hand r block com Providing meals or entertainment to general public to promote goodwill. Hand r block com   You can deduct the cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. Hand r block com The 50% limit does not apply to this expense. Hand r block com Director, stockholder, or employee meetings. Hand r block com   You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. Hand r block com You can provide some minor social activities, but the main purpose of the meeting must be your company's business. Hand r block com These expenses are subject to the 50% limit. Hand r block com Trade association meetings. Hand r block com   You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. Hand r block com These organizations include business leagues, chambers of commerce, real estate boards, and trade and professional associations. Hand r block com Nonaccountable Plans A nonaccountable plan is an arrangement that does not meet the requirements for an accountable plan. Hand r block com All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. Hand r block com The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. Hand r block com You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. Hand r block com Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions. Hand r block com Miscellaneous Expenses In addition to travel, meal, and entertainment expenses, there are other expenses you can deduct. Hand r block com Advertising expenses. Hand r block com   You generally can deduct reasonable advertising expenses that are directly related to your business activities. Hand r block com Generally, you cannot deduct amounts paid to influence legislation (i. Hand r block com e. Hand r block com , lobbying). Hand r block com See Lobbying expenses , later. Hand r block com   You can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it relates to business you reasonably expect to gain in the future. Hand r block com For example, the cost of advertising that encourages people to contribute to the Red Cross, to buy U. Hand r block com S. Hand r block com Savings Bonds, or to participate in similar causes is usually deductible. Hand r block com Anticipated liabilities. Hand r block com   Anticipated liabilities or reserves for anticipated liabilities are not deductible. Hand r block com For example, assume you sold 1-year TV service contracts this year totaling $50,000. Hand r block com From experience, you know you will have expenses of about $15,000 in the coming year for these contracts. Hand r block com You cannot deduct any of the $15,000 this year by charging expenses to a reserve or liability account. Hand r block com You can deduct your expenses only when you actually pay or accrue them, depending on your accounting method. Hand r block com Bribes and kickbacks. Hand r block com   Engaging in the payment of bribes or kickbacks is a serious criminal matter. Hand r block com Such activity could result in criminal prosecution. Hand r block com Any payments that appear to have been made, either directly or indirectly, to an official or employee of any government or an agency or instrumentality of any government are not deductible for tax purposes and are in violation of the law. Hand r block com   Payments paid directly or indirectly to a person in violation of any federal or state law (but only if that state law is generally enforced, defined below) that provides for a criminal penalty or for the loss of a license or privilege to engage in a trade or business are also not allowed as a deduction for tax purposes. Hand r block com Meaning of “generally enforced. Hand r block com ”   A state law is considered generally enforced unless it is never enforced or enforced only for infamous persons or persons whose violations are extraordinarily flagrant. Hand r block com For example, a state law is generally enforced unless proper reporting of a violation of the law results in enforcement only under unusual circumstances. Hand r block com Kickbacks. Hand r block com   A kickback is a payment for referring a client, patient, or customer. Hand r block com The common kickback situation occurs when money or property is given to someone as payment for influencing a third party to purchase from, use the services of, or otherwise deal with the person who pays the kickback. Hand r block com In many cases, the person whose business is being sought or enjoyed by the person who pays the kickback is not aware of the payment. Hand r block com   For example, the Yard Corporation is in the business of repairing ships. Hand r block com It returns 10% of the repair bills as kickbacks to the captains and chief officers of the vessels it repairs. Hand r block com Although this practice is considered an ordinary and necessary expense of getting business, it is clearly a violation of a state law that is generally enforced. Hand r block com These expenditures are not deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted. Hand r block com Form 1099-MISC. Hand r block com   It does not matter whether any kickbacks paid during the tax year are deductible on your income tax return in regards to information reporting. Hand r block com See Form 1099-MISC for more information. Hand r block com Car and truck expenses. Hand r block com   The costs of operating a car, truck, or other vehicle in your business are deductible. Hand r block com For more information on how to figure your deduction, see Publication 463. Hand r block com Charitable contributions. Hand r block com   Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. Hand r block com If the payments are charitable contributions or gifts, you cannot deduct them as business expenses. Hand r block com However, corporations (other than S corporations) can deduct charitable contributions on their income tax returns, subject to limitations. Hand r block com See the Instructions for Form 1120 for more information. Hand r block com Sole proprietors, partners in a partnership, or shareholders in an S corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Hand r block com Example. Hand r block com You paid $15 to a local church for a half-page ad in a program for a concert it is sponsoring. Hand r block com The purpose of the ad was to encourage readers to buy your products. Hand r block com Your payment is not a charitable contribution. Hand r block com You can deduct it as an advertising expense. Hand r block com Example. Hand r block com You made a $100,000 donation to a committee organized by the local Chamber of Commerce to bring a convention to your city, intended to increase business activity, including yours. Hand r block com Your payment is not a charitable contribution. Hand r block com You can deduct it as a business expense. Hand r block com See Publication 526 for a discussion of donated inventory, including capital gain property. Hand r block com Club dues and membership fees. Hand r block com   Generally, you cannot deduct amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or any other social purpose. Hand r block com This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Hand r block com Exception. Hand r block com   The following organizations are not treated as clubs organized for business, pleasure, recreation, or other social purpose unless one of the main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. Hand r block com Boards of trade. Hand r block com Business leagues. Hand r block com Chambers of commerce. Hand r block com Civic or public service organizations. Hand r block com Professional organizations such as bar associations and medical associations. Hand r block com Real estate boards. Hand r block com Trade associations. Hand r block com Credit card convenience fees. Hand r block com   Credit card companies charge a fee to businesses who accept their cards. Hand r block com This fee when paid or incurred by the business can be deducted as a business expense. Hand r block com Damages recovered. Hand r block com   Special rules apply to compensation you receive for damages sustained as a result of patent infringement, breach of contract or fiduciary duty, or antitrust violations. Hand r block com You must include this compensation in your income. Hand r block com However, you may be able to take a special deduction. Hand r block com The deduction applies only to amounts recovered for actual economic injury, not any additional amount. Hand r block com The deduction is the smaller of the following. Hand r block com The amount you received or accrued for damages in the tax year reduced by the amount you paid or incurred in the year to recover that amount. Hand r block com Your losses from the injury you have not deducted. Hand r block com Demolition expenses or losses. Hand r block com   Amounts paid or incurred to demolish a structure are not deductible. Hand r block com These amounts are added to the basis of the land where the demolished structure was located. Hand r block com Any loss for the remaining undepreciated basis of a demolished structure would not be recognized until the property is disposed of. Hand r block com Education expenses. Hand r block com   Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible. Hand r block com See Education Expenses in chapter 2. Hand r block com   You can also deduct the cost of your own education (including certain related travel) related to your trade or business. Hand r block com You must be able to show the education maintains or improves skills required in your trade or business, or that it is required by law or regulations, for keeping your license to practice, status, or job. Hand r block com For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law. Hand r block com   Education expenses you incur to meet the minimum requirements of your present trade or business, or those that qualify you for a new trade or business, are not deductible. Hand r block com This is true even if the education maintains or improves skills presently required in your business. Hand r block com For more information on education expenses, see Publication 970. Hand r block com Franchise, trademark, trade name. Hand r block com   If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense only if your payments are part of a series of payments that are: Contingent on productivity, use, or disposition of the item, Payable at least annually for the entire term of the transfer agreement, and Substantially equal in amount (or payable under a fixed formula). Hand r block com   When determining the term of the transfer agreement, include all renewal options and any other period for which you and the transferrer reasonably expect the agreement to be renewed. Hand r block com   A franchise includes an agreement that gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities within a specified area. Hand r block com Impairment-related expenses. Hand r block com   If you are disabled, you can deduct expenses necessary for you to be able to work (impairment-related expenses) as a business expense, rather than as a medical expense. Hand r block com   You are disabled if you have either of the following. Hand r block com A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed. Hand r block com A physical or mental impairment that substantially limits one or more of your major life activities. Hand r block com   The expense qualifies as a business expense if all the following apply. Hand r block com Your work clearly requires the expense for you to satisfactorily perform that work. Hand r block com The goods or services purchased are clearly not needed or used, other than incidentally, in your personal activities. Hand r block com Their treatment is not specifically provided for under other tax law provisions. Hand r block com Example. Hand r block com You are blind. Hand r block com You must use a reader to do your work, both at and away from your place of work. Hand r block com The reader's services are only for your work. Hand r block com You can deduct your expenses for the reader as a business expense. Hand r block com Internet-related expenses. Hand r block com   Generally, you can deduct internet-related expenses including domain registrations fees and webmaster consulting costs. Hand r block com If you are starting a business you may have to amortize these expenses as start-up costs. Hand r block com For more information about amortizing start-up and organizational costs, see chapter 8. Hand r block com Interview expense allowances. Hand r block com   Reimbursements you make to job candidates for transportation or other expenses related to interviews for possible employment are not wages. Hand r block com You can deduct the reimbursements as a business expense. Hand r block com However, expenses for food, beverages, and entertainment are subject to the 50% limit discussed earlier under Meals and Entertainment. Hand r block com Legal and professional fees. Hand r block com   Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. Hand r block com However, usually legal fees you pay to acquire business assets are not deductible. Hand r block com These costs are added to the basis of the property. Hand r block com   Fees that include payments for work of a personal nature (such as drafting a will, or damages arising from a personal injury) are not allowed as a business deduction on Schedule C or C-EZ. Hand r block com If the invoice includes both business and personal charges, compute the business portion as follows: multiply the total amount of the bill by a fraction, the numerator of which is the amount attributable to business matters, the denominator of which is the total amount paid. Hand r block com The result is the portion of the invoice attributable to business expenses. Hand r block com The portion attributable to personal matters is the difference between the total amount and the business portion (computed above). Hand r block com   Legal fees relating to personal tax advice may be deductible on Schedule A (Form 1040), if you itemize deductions. Hand r block com However, the deduction is subject to the 2% limitation on miscellaneous itemized deductions. Hand r block com See Publication 529, Miscellaneous Deductions. Hand r block com Tax preparation fees. Hand r block com   The cost of hiring a tax professional, such as a C. Hand r block com P. Hand r block com A. Hand r block com , to prepare that part of your tax return relating to your business as a sole proprietor is deductible on Schedule C or Schedule C-EZ. Hand r block com Any remaining cost may be deductible on Schedule A (Form 1040) if you itemize deductions. Hand r block com   You can also claim a business deduction for amounts paid or incurred in resolving asserted tax deficiencies for your business operated as a sole proprietor. Hand r block com Licenses and regulatory fees. Hand r block com   Licenses and regulatory fees for your trade or business paid annually to state or local governments generally are deductible. Hand r block com Some licenses and fees may have to be amortized. Hand r block com See chapter 8 for more information. Hand r block com Lobbying expenses. Hand r block com   Generally, lobbying expenses are not deductible. Hand r block com Lobbying expenses include amounts paid or incurred for any of the following activities. Hand r block com Influencing legislation. Hand r block com Participating in or intervening in any political campaign for, or against, any candidate for public office. Hand r block com Attempting to influence the general public, or segments of the public, about elections, legislative matters, or referendums. Hand r block com Communicating directly with covered executive branch officials (defined later) in any attempt to influence the official actions or positions of those officials. Hand r block com Researching, preparing, planning, or coordinating any of the preceding activities. Hand r block com   Your expenses for influencing legislation and communicating directly with a covered executive branch official include a portion of your labor costs and general and administrative costs of your business. Hand r block com For information on making this allocation, see section 1. Hand r block com 162-28 of the regulations. Hand r block com   You cannot claim a charitable or business expense deduction for amounts paid to an organization if both of the following apply. Hand r block com The organization conducts lobbying activities on matters of direct financial interest to your business. Hand r block com A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses. Hand r block com   If a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues. Hand r block com Covered executive branch official. Hand r block com   For purposes of this discussion, a covered executive branch official is any of the following. Hand r block com The President. Hand r block com The Vice President. Hand r block com Any officer or employee of the White House Office of the Executive Office of the President and the two most senior level officers of each of the other agencies in the Executive Office. Hand r block com Any individual who: Is serving in a position in Level I of the Executive Schedule under section 5312 of title 5, United States Code, Has been designated by the President as having Cabinet-level status, or Is an immediate deputy of an individual listed in item (a) or (b). Hand r block com Exceptions to denial of deduction. Hand r block com   The general denial of the deduction does not apply to the following. Hand r block com Expenses of appearing before, or communicating with, any committee or member of any local council or similar governing body concerning its legislation (local legislation) if the legislation is of direct interest to you or to you and an organization of which you are a member. Hand r block com An Indian tribal government is treated as a local council or similar governing body. Hand r block com Any in-house expenses for influencing legislation and communicating directly with a covered executive branch official if those expenses for the tax year do not exceed $2,000 (excluding overhead expenses). Hand r block com Expenses incurred by taxpayers engaged in the trade or business of lobbying (professional lobbyists) on behalf of another person (but does apply to payments by the other person to the lobbyist for lobbying activities). Hand r block com Moving machinery. Hand r block com   Generally, the cost of moving machinery from one city to another is a deductible expense. Hand r block com So is the cost of moving machinery from one plant to another, or from one part of your plant to another. Hand r block com You can deduct the cost of installing the machinery in the new location. Hand r block com However, you must capitalize the costs of installing or moving newly purchased machinery. Hand r block com Outplacement services. Hand r block com   The costs of outplacement services you provide to your employees to help them find new employment, such as career counseling, résumé assistance, skills assessment, etc. Hand r block com are deductible. Hand r block com   The costs of outplacement services may cover more than one deduction category. Hand r block com For example, deduct as a utilities expense the cost of telephone calls made under this service and deduct as rental expense the cost of renting machinery and equipment for this service. Hand r block com   For information on whether the value of outplacement services is includable in your employees' income, see Publication 15-B. Hand r block com Penalties and fines. Hand r block com   Penalties paid for late performance or nonperformance of a contract are generally deductible. Hand r block com For instance, you own and operate a construction company. Hand r block com Under a contract, you are to finish construction of a building by a certain date. Hand r block com Due to construction delays, the building is not completed and ready for occupancy on the date stipulated in the contract. Hand r block com You are now required to pay an additional amount for each day that completion is delayed beyond the completion date stipulated in the contract. Hand r block com These additional costs are deductible business expenses. Hand r block com   On the other hand, penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible. Hand r block com These fines or penalties include the following amounts. Hand r block com Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding. Hand r block com Paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and additional amounts and assessable penalties imposed by the Internal Revenue Code. Hand r block com Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal. Hand r block com Forfeited as collateral posted for a proceeding that could result in a fine or penalty. Hand r block com   Examples of nondeductible penalties and fines include the following. Hand r block com Fines for violating city housing codes. Hand r block com Fines paid by truckers for violating state maximum highway weight laws. Hand r block com Fines for violating air quality laws. Hand r block com Civil penalties for violating federal laws regarding mining safety standards and discharges into navigable waters. Hand r block com   A fine or penalty does not include any of the following. Hand r block com Legal fees and related expenses to defend yourself in a prosecution or civil action for a violation of the law imposing the fine or civil penalty. Hand r block com Court costs or stenographic and printing charges. Hand r block com Compensatory damages paid to a government. Hand r block com Political contributions. Hand r block com   Contributions or gifts paid to political parties or candidates are not deductible. Hand r block com In addition, expenses paid or incurred to take part in any political campaign of a candidate for public office are not deductible. Hand r block com Indirect political contributions. Hand r block com   You cannot deduct indirect political contributions and costs of taking part in political activities as business expenses. Hand r block com Examples of nondeductible expenses include the following. Hand r block com Advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate. Hand r block com Admission to a dinner or program (including, but not limited to, galas, dances, film presentations, parties, and sporting events) if any of the proceeds from the function are for, or intended for, the use of a political party or candidate. Hand r block com Admission to an inaugural ball, gala, parade, concert, or similar event if identified with a political party or candidate. Hand r block com Repairs. Hand r block com   The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. Hand r block com Routine maintenance that keeps your property in a normal efficient operating condition, but that does not materially increase the value or substantially prolong the useful life of the property, is deductible in the year that it is incurred. Hand r block com Otherwise, the cost must be capitalized and depreciated. Hand r block com See Form 4562 and its instructions for how to compute and claim the depreciation deduction. Hand r block com   The cost of repairs includes the costs of labor, supplies, and certain other items. Hand r block com The value of your own labor is not deductible. Hand r block com Examples of repairs include: Reconditioning floors (but not replacement), Repainting the interior and exterior walls of a building, Cleaning and repairing roofs and gutters, and Fixing plumbing leaks (but not replacement of fixtures). Hand r block com Repayments. Hand r block com   If you had to repay an amount you included in your income in an earlier year, you may be able to deduct the amount repaid for the year in which you repaid it. Hand r block com Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. Hand r block com Type of deduction. Hand r block com   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. Hand r block com For instance, if you repay an amount you previously reported as a capital gain, deduct the repayment as a capital loss on Form 8949. Hand r block com If you reported it as self-employment income, deduct it as a business deduction on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). Hand r block com   If you reported the amount as wages, unemployment compensation, or other nonbusiness ordinary income, enter it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is subject to the 2% limitation. Hand r block com However, if the repayment is over $3,000 and Method 1 (discussed later) applies, deduct it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is not subject to the 2% limitation. Hand r block com Repayment—$3,000 or less. Hand r block com   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Hand r block com Repayment—over $3,000. Hand r block com   If the amount you repaid was more than $3,000, you can deduct the repayment, as described earlier. Hand r block com However, you can instead choose to take a tax credit for the year of repayment if you included the income under a “claim of right. Hand r block com ” This means that at the time you included the income, it appeared that you had an unrestricted right to it. Hand r block com If you qualify for this choice, figure your tax under both methods and use the method that results in less tax. Hand r block com Method 1. Hand r block com   Figure your tax for 2013 claiming a deduction for the repaid amount. Hand r block com Method 2. Hand r block com   Figure your tax for 2013 claiming a credit for the repaid amount. Hand r block com Follow these steps. Hand r block com Figure your tax for 2013 without deducting the repaid amount. Hand r block com Refigure your tax from the earlier year without including in income the amount you repaid in 2013. Hand r block com Subtract the tax in (2) from the tax shown on your return for the earlier year. Hand r block com This is the amount of your credit. Hand r block com Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1). Hand r block com   If Method 1 results in less tax, deduct the amount repaid as discussed earlier under Type of deduction. Hand r block com   If Method 2 results in less tax, claim the credit on line 71 of Form 1040, and write “I. Hand r block com R. Hand r block com C. Hand r block com 1341” next to line 71. Hand r block com Example. Hand r block com For 2012, you filed a return and reported your income on the cash method. Hand r block com In 2013, you repaid $5,000 included in your 2012 gross income under a claim of right. Hand r block com Your filing status in 2013 and 2012 is single. Hand r block com Your income and tax for both years are as follows:   2012  With Income 2012  Without Income Taxable Income $15,000 $10,000 Tax $ 1,819 $ 1,069   2013  Without Deduction 2013  With Deduction Taxable Income $49,950 $44,950 Tax $8,423 $7,173 Your tax under Method 1 is $7,173. Hand r block com Your tax under Method 2 is $7,673, figured as follows: Tax previously determined for 2012 $ 1,819 Less: Tax as refigured − 1,069 Decrease in 2012 tax $ 750 Regular tax liability for 2013 $8,423 Less: Decrease in 2012 tax − 750 Refigured tax for 2013 $ 7,673 Because you pay less tax under Method 1, you should take a deduction for the repayment in 2013. Hand r block com Repayment does not apply. Hand r block com   This discussion does not apply to the following. Hand r block com Deductions for bad debts. Hand r block com Deductions from sales to customers, such as returns and allowances, and similar items. Hand r block com Deductions for legal and other expenses of contesting the repayment. Hand r block com Year of deduction (or credit). Hand r block com   If you use the cash method of accounting, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. Hand r block com If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper deduction under your accounting method. Hand r block com For example, if you use the accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment accrues. Hand r block com Subscriptions. Hand r block com   Subscriptions to professional, technical, and trade journals that deal with your business field are deductible. Hand r block com Supplies and materials. Hand r block com   Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the tax year. Hand r block com   If you keep incidental materials and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if all the following requirements are met. Hand r block com You do not keep a record of when they are used. Hand r block com You do not take an inventory of the amount on hand at the beginning and end of the tax year. Hand r block com This method does not distort your income. Hand r block com   You can also deduct the cost of books, professional instruments, equipment, etc. Hand r block com , if you normally use them within a year. Hand r block com However, if the usefulness of these items extends substantially beyond the year they are placed in service, you generally must recover their costs through depreciation. Hand r block com For more information regarding depreciation see Publication 946, How To Depreciate Property. Hand r block com Utilities. Hand r block com   Business expenses for heat, lights, power, telephone service, and water and sewerage are deductible. Hand r block com However, any part due to personal use is not deductible. Hand r block com Telephone. Hand r block com   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. Hand r block com However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses. Hand r block com Prev  Up  Next   Home   More Online Publications
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IRS Tax Tip 2014-42, March 27, 2014

The tax deadline’s almost here. If you haven’t yet filed, you may think you need to rush to find what you need to file your tax return. However, a quick and easy method to get help is to use IRS social media. It’s a convenient way to get the tax information and tools you need to help you file your federal tax return.

Consider using these IRS social media tools to help you navigate the tax deadline.

  • IRS2Go.  IRS's free mobile app gives you your refund status, tax news updates, IRS YouTube videos and lets you request your tax records. IRS2Go is available for the iPhone, iTouch or Android mobile devices.

  • YouTube.  IRS offers dozens of video tax tips on a variety of topics in English, Spanish and American Sign Language.

  • Twitter.  Tweets from @IRSnews provide tax-related announcements and daily tax tips. Tweets from @IRStaxpros offer news and guidance for tax professionals. Tweets from @IRSenEspanol have news and information in Spanish, The Taxpayer Advocate Service sends tweets from @YourVoiceAtIRS. @RecruitmentIRS provides updates for job seekers.

  • Podcasts.  IRS has short audio recordings that offer one tax-related topic per podcast. They are available through the Multimedia Center on the IRS website. Podcast transcripts are also available.

  • Tumblr.  Follow the IRS on Tumblr and never miss a post! IRS Tumblr is a microblogging platform where users can access IRS tax tips, videos and podcasts. The IRS uses Tumblr to share information about important programs. Access Tumblr from your browser, Smartphone, tablet or desktop.

  • Facebook.  IRS has four Facebook pages that provide news and information for taxpayers and tax return preparers. You can check the IRS pages to get updates on job openings or for tax assistance from the Taxpayer Advocate Service.

Protecting your privacy is a top priority at the IRS. The IRS uses social media tools to share public information, not to answer personal tax or account questions. You should never post your Social Security number or any other confidential information on social media sites.

Get connected and stay connected to the IRS with social media.

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Page Last Reviewed or Updated: 27-Mar-2014

The Hand R Block Com

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