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Income Tax Preparation Seniors

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Income Tax Preparation Seniors

Income tax preparation seniors 1. Income tax preparation seniors   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. Income tax preparation seniors Amount realized on a recourse debt. Income tax preparation seniors Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. Income tax preparation seniors S. Income tax preparation seniors Individual Income Tax Return 1040X Amended U. Income tax preparation seniors S. Income tax preparation seniors Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. Income tax preparation seniors However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Income tax preparation seniors See chapter 5 for information about getting publications and forms. Income tax preparation seniors Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Income tax preparation seniors An exchange is a transfer of property for other property or services. Income tax preparation seniors The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Income tax preparation seniors Sale or lease. Income tax preparation seniors    Some agreements that seem to be leases may really be conditional sales contracts. Income tax preparation seniors The intention of the parties to the agreement can help you distinguish between a sale and a lease. Income tax preparation seniors   There is no test or group of tests to prove what the parties intended when they made the agreement. Income tax preparation seniors You should consider each agreement based on its own facts and circumstances. Income tax preparation seniors For more information, see chapter 3 in Publication 535, Business Expenses. Income tax preparation seniors Cancellation of a lease. Income tax preparation seniors    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Income tax preparation seniors Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. Income tax preparation seniors Copyright. Income tax preparation seniors    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. Income tax preparation seniors It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. Income tax preparation seniors Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Income tax preparation seniors   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. Income tax preparation seniors For more information, see Section 1231 Gains and Losses in chapter 3. Income tax preparation seniors Easement. Income tax preparation seniors   The amount received for granting an easement is subtracted from the basis of the property. Income tax preparation seniors If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Income tax preparation seniors If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. Income tax preparation seniors   Any amount received that is more than the basis to be reduced is a taxable gain. Income tax preparation seniors The transaction is reported as a sale of property. Income tax preparation seniors   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. Income tax preparation seniors However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. Income tax preparation seniors   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Income tax preparation seniors Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. Income tax preparation seniors See Gain or Loss From Condemnations, later. Income tax preparation seniors Property transferred to satisfy debt. Income tax preparation seniors   A transfer of property to satisfy a debt is an exchange. Income tax preparation seniors Note's maturity date extended. Income tax preparation seniors   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Income tax preparation seniors Also, it is not considered a closed and completed transaction that would result in a gain or loss. Income tax preparation seniors However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. Income tax preparation seniors Each case must be determined by its own facts. Income tax preparation seniors For more information, see Regulations section 1. Income tax preparation seniors 1001-3. Income tax preparation seniors Transfer on death. Income tax preparation seniors   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. Income tax preparation seniors No taxable gain or deductible loss results from the transfer. Income tax preparation seniors Bankruptcy. Income tax preparation seniors   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Income tax preparation seniors Consequently, the transfer generally does not result in gain or loss. Income tax preparation seniors For more information, see Publication 908, Bankruptcy Tax Guide. Income tax preparation seniors Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Income tax preparation seniors A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Income tax preparation seniors A loss is the adjusted basis of the property that is more than the amount you realize. Income tax preparation seniors   Table 1-1. Income tax preparation seniors How To Figure Whether You Have a Gain or Loss IF your. Income tax preparation seniors . Income tax preparation seniors . Income tax preparation seniors THEN you have a. Income tax preparation seniors . Income tax preparation seniors . Income tax preparation seniors Adjusted basis is more than the amount realized, Loss. Income tax preparation seniors Amount realized is more than the adjusted basis, Gain. Income tax preparation seniors Basis. Income tax preparation seniors   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Income tax preparation seniors The basis of property you buy is usually its cost. Income tax preparation seniors However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Income tax preparation seniors See Basis Other Than Cost in Publication 551, Basis of Assets. Income tax preparation seniors Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. Income tax preparation seniors See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Income tax preparation seniors Adjusted basis. Income tax preparation seniors   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Income tax preparation seniors Increases include costs of any improvements having a useful life of more than 1 year. Income tax preparation seniors Decreases include depreciation and casualty losses. Income tax preparation seniors For more details and additional examples, see Adjusted Basis in Publication 551. Income tax preparation seniors Amount realized. Income tax preparation seniors   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. Income tax preparation seniors The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Income tax preparation seniors Fair market value. Income tax preparation seniors   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. Income tax preparation seniors If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Income tax preparation seniors If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Income tax preparation seniors Example. Income tax preparation seniors You used a building in your business that cost you $70,000. Income tax preparation seniors You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Income tax preparation seniors You sold the building for $100,000 plus property having an FMV of $20,000. Income tax preparation seniors The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Income tax preparation seniors The selling expenses were $4,000. Income tax preparation seniors Your gain on the sale is figured as follows. Income tax preparation seniors Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. Income tax preparation seniors   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Income tax preparation seniors Recognized gains must be included in gross income. Income tax preparation seniors Recognized losses are deductible from gross income. Income tax preparation seniors However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Income tax preparation seniors See Nontaxable Exchanges, later. Income tax preparation seniors Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. Income tax preparation seniors Interest in property. Income tax preparation seniors   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. Income tax preparation seniors If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Income tax preparation seniors Your basis in the property is disregarded. Income tax preparation seniors This rule does not apply if all interests in the property are disposed of at the same time. Income tax preparation seniors Example 1. Income tax preparation seniors Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Income tax preparation seniors You decide to sell your life interest in the farm. Income tax preparation seniors The entire amount you receive is a recognized gain. Income tax preparation seniors Your basis in the farm is disregarded. Income tax preparation seniors Example 2. Income tax preparation seniors The facts are the same as in Example 1, except that your brother joins you in selling the farm. Income tax preparation seniors The entire interest in the property is sold, so your basis in the farm is not disregarded. Income tax preparation seniors Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Income tax preparation seniors Canceling a sale of real property. Income tax preparation seniors   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. Income tax preparation seniors If the buyer returns the property in the year of sale, no gain or loss is recognized. Income tax preparation seniors This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. Income tax preparation seniors If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. Income tax preparation seniors When the property is returned in a later year, you acquire a new basis in the property. Income tax preparation seniors That basis is equal to the amount you pay to the buyer. Income tax preparation seniors Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. Income tax preparation seniors You have a gain if the amount realized is more than your adjusted basis in the property. Income tax preparation seniors However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Income tax preparation seniors Bargain sales to charity. Income tax preparation seniors   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Income tax preparation seniors If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. Income tax preparation seniors The adjusted basis of the part sold is figured as follows. Income tax preparation seniors Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. Income tax preparation seniors This allocation rule does not apply if a charitable contribution deduction is not allowable. Income tax preparation seniors   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Income tax preparation seniors Example. Income tax preparation seniors You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. Income tax preparation seniors Your adjusted basis in the property is $4,000. Income tax preparation seniors Your gain on the sale is $1,200, figured as follows. Income tax preparation seniors Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. Income tax preparation seniors You must subtract depreciation you took or could have taken from the basis of the business or rental part. Income tax preparation seniors However, see the special rule below for a home used partly for business or rental. Income tax preparation seniors You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Income tax preparation seniors Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. Income tax preparation seniors Any gain on the personal part of the property is a capital gain. Income tax preparation seniors You cannot deduct a loss on the personal part. Income tax preparation seniors Home used partly for business or rental. Income tax preparation seniors    If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Income tax preparation seniors See Property Used Partly for Business or Rental, in Publication 523. Income tax preparation seniors Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. Income tax preparation seniors You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. Income tax preparation seniors However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. Income tax preparation seniors Figure the loss you can deduct as follows. Income tax preparation seniors Use the lesser of the property's adjusted basis or fair market value at the time of the change. Income tax preparation seniors Add to (1) the cost of any improvements and other increases to basis since the change. Income tax preparation seniors Subtract from (2) depreciation and any other decreases to basis since the change. Income tax preparation seniors Subtract the amount you realized on the sale from the result in (3). Income tax preparation seniors If the amount you realized is more than the result in (3), treat this result as zero. Income tax preparation seniors The result in (4) is the loss you can deduct. Income tax preparation seniors Example. Income tax preparation seniors You changed your main home to rental property 5 years ago. Income tax preparation seniors At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Income tax preparation seniors This year, you sold the property for $55,000. Income tax preparation seniors You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Income tax preparation seniors Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. Income tax preparation seniors Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. Income tax preparation seniors   If you have a gain on the sale, you generally must recognize the full amount of the gain. Income tax preparation seniors You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Income tax preparation seniors   You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Income tax preparation seniors However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Income tax preparation seniors   For more information, see Business Use or Rental of Home in Publication 523. Income tax preparation seniors In addition, special rules apply if the home sold was acquired in a like-kind exchange. Income tax preparation seniors See Special Situations in Publication 523. Income tax preparation seniors Also see Like-Kind Exchanges, later. Income tax preparation seniors Abandonments The abandonment of property is a disposition of property. Income tax preparation seniors You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Income tax preparation seniors Generally, abandonment is not treated as a sale or exchange of the property. Income tax preparation seniors If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Income tax preparation seniors If your adjusted basis is more than the amount you realize (if any), then you have a loss. Income tax preparation seniors Loss from abandonment of business or investment property is deductible as a loss. Income tax preparation seniors A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Income tax preparation seniors This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Income tax preparation seniors If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Income tax preparation seniors The abandonment loss is deducted in the tax year in which the loss is sustained. Income tax preparation seniors If the abandoned property is secured by debt, special rules apply. Income tax preparation seniors The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). Income tax preparation seniors For more information, including examples, see chapter 3 of Publication 4681. Income tax preparation seniors You cannot deduct any loss from abandonment of your home or other property held for personal use only. Income tax preparation seniors Cancellation of debt. Income tax preparation seniors   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. Income tax preparation seniors This income is separate from any loss realized from abandonment of the property. Income tax preparation seniors   You must report this income on your tax return unless one of the following applies. Income tax preparation seniors The cancellation is intended as a gift. Income tax preparation seniors The debt is qualified farm debt. Income tax preparation seniors The debt is qualified real property business debt. Income tax preparation seniors You are insolvent or bankrupt. Income tax preparation seniors The debt is qualified principal residence indebtedness. Income tax preparation seniors File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Income tax preparation seniors For more information, including other exceptions and exclusion, see Publication 4681. Income tax preparation seniors Forms 1099-A and 1099-C. Income tax preparation seniors   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. Income tax preparation seniors However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. Income tax preparation seniors The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Income tax preparation seniors For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Income tax preparation seniors Foreclosures and Repossessions If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Income tax preparation seniors The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Income tax preparation seniors This is true even if you voluntarily return the property to the lender. Income tax preparation seniors You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Income tax preparation seniors Buyer's (borrower's) gain or loss. Income tax preparation seniors   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Income tax preparation seniors The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Income tax preparation seniors See Gain or Loss From Sales and Exchanges, earlier. Income tax preparation seniors You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Income tax preparation seniors Amount realized on a nonrecourse debt. Income tax preparation seniors   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. Income tax preparation seniors The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Income tax preparation seniors Example 1. Income tax preparation seniors Chris bought a new car for $15,000. Income tax preparation seniors He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Income tax preparation seniors Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Income tax preparation seniors The credit company repossessed the car because he stopped making loan payments. Income tax preparation seniors The balance due after taking into account the payments Chris made was $10,000. Income tax preparation seniors The fair market value of the car when repossessed was $9,000. Income tax preparation seniors The amount Chris realized on the repossession is $10,000. Income tax preparation seniors That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. Income tax preparation seniors Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Income tax preparation seniors He has a $5,000 nondeductible loss. Income tax preparation seniors Example 2. Income tax preparation seniors Abena paid $200,000 for her home. Income tax preparation seniors She paid $15,000 down and borrowed the remaining $185,000 from a bank. Income tax preparation seniors Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Income tax preparation seniors The bank foreclosed on the loan because Abena stopped making payments. Income tax preparation seniors When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. Income tax preparation seniors The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Income tax preparation seniors She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Income tax preparation seniors She has a $5,000 realized gain. Income tax preparation seniors Amount realized on a recourse debt. Income tax preparation seniors   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Income tax preparation seniors You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Income tax preparation seniors The amount realized does not include the canceled debt that is your income from cancellation of debt. Income tax preparation seniors See Cancellation of debt, below. Income tax preparation seniors Seller's (lender's) gain or loss on repossession. Income tax preparation seniors   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Income tax preparation seniors For more information, see Repossession in Publication 537. Income tax preparation seniors    Table 1-2. Income tax preparation seniors Worksheet for Foreclosures and Repossessions Part 1. Income tax preparation seniors Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Income tax preparation seniors Complete this part only  if you were personally liable for the debt. Income tax preparation seniors Otherwise,  go to Part 2. Income tax preparation seniors   1. Income tax preparation seniors Enter the amount of outstanding debt immediately before the transfer of   property reduced by any amount for which you remain personally liable after   the transfer of property   2. Income tax preparation seniors Enter the fair market value of the transferred property   3. Income tax preparation seniors Ordinary income from cancellation of debt upon foreclosure or    repossession. Income tax preparation seniors * Subtract line 2 from line 1. Income tax preparation seniors   If less than zero, enter zero   Part 2. Income tax preparation seniors Figure your gain or loss from foreclosure or repossession. Income tax preparation seniors   4. Income tax preparation seniors If you completed Part 1, enter the smaller of line 1 or line 2. Income tax preparation seniors   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Income tax preparation seniors Enter any proceeds you received from the foreclosure sale   6. Income tax preparation seniors Add lines 4 and 5   7. Income tax preparation seniors Enter the adjusted basis of the transferred property   8. Income tax preparation seniors Gain or loss from foreclosure or repossession. Income tax preparation seniors Subtract line 7  from line 6   * The income may not be taxable. Income tax preparation seniors See Cancellation of debt. Income tax preparation seniors Cancellation of debt. Income tax preparation seniors   If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. Income tax preparation seniors This income is separate from any gain or loss realized from the foreclosure or repossession. Income tax preparation seniors Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Income tax preparation seniors    You can use Table 1-2 to figure your income from cancellation of debt. Income tax preparation seniors   You must report this income on your tax return unless one of the following applies. Income tax preparation seniors The cancellation is intended as a gift. Income tax preparation seniors The debt is qualified farm debt. Income tax preparation seniors The debt is qualified real property business debt. Income tax preparation seniors You are insolvent or bankrupt. Income tax preparation seniors The debt is qualified principal residence indebtedness. Income tax preparation seniors File Form 982 to report the income exclusion. Income tax preparation seniors Example 1. Income tax preparation seniors Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). Income tax preparation seniors In this case, the amount he realizes is $9,000. Income tax preparation seniors This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Income tax preparation seniors Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Income tax preparation seniors He has a $6,000 nondeductible loss. Income tax preparation seniors He also is treated as receiving ordinary income from cancellation of debt. Income tax preparation seniors That income is $1,000 ($10,000 − $9,000). Income tax preparation seniors This is the part of the canceled debt not included in the amount realized. Income tax preparation seniors Example 2. Income tax preparation seniors Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). Income tax preparation seniors In this case, the amount she realizes is $170,000. Income tax preparation seniors This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Income tax preparation seniors Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Income tax preparation seniors She has a $5,000 nondeductible loss. Income tax preparation seniors She also is treated as receiving ordinary income from cancellation of debt. Income tax preparation seniors (The debt is not exempt from tax as discussed under Cancellation of debt, above. Income tax preparation seniors ) That income is $10,000 ($180,000 − $170,000). Income tax preparation seniors This is the part of the canceled debt not included in the amount realized. Income tax preparation seniors Forms 1099-A and 1099-C. Income tax preparation seniors   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. Income tax preparation seniors However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. Income tax preparation seniors The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Income tax preparation seniors For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Income tax preparation seniors Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Income tax preparation seniors Involuntary conversions are also called involuntary exchanges. Income tax preparation seniors Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Income tax preparation seniors You report the gain or deduct the loss on your tax return for the year you realize it. Income tax preparation seniors You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. Income tax preparation seniors However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Income tax preparation seniors Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Income tax preparation seniors Your basis for the new property is the same as your basis for the converted property. Income tax preparation seniors This means that the gain is deferred until a taxable sale or exchange occurs. Income tax preparation seniors If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. Income tax preparation seniors This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Income tax preparation seniors If you have a gain or loss from the destruction or theft of property, see Publication 547. Income tax preparation seniors Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Income tax preparation seniors The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. Income tax preparation seniors The owner receives a condemnation award (money or property) in exchange for the property taken. Income tax preparation seniors A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Income tax preparation seniors Example. Income tax preparation seniors A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Income tax preparation seniors After the local government took action to condemn your property, you went to court to keep it. Income tax preparation seniors But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Income tax preparation seniors This is a condemnation of private property for public use. Income tax preparation seniors Threat of condemnation. Income tax preparation seniors   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. Income tax preparation seniors You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Income tax preparation seniors   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. Income tax preparation seniors If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. Income tax preparation seniors Reports of condemnation. Income tax preparation seniors   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. Income tax preparation seniors You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Income tax preparation seniors If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. Income tax preparation seniors Example. Income tax preparation seniors Your property lies along public utility lines. Income tax preparation seniors The utility company has the authority to condemn your property. Income tax preparation seniors The company informs you that it intends to acquire your property by negotiation or condemnation. Income tax preparation seniors A threat of condemnation exists when you receive the notice. Income tax preparation seniors Related property voluntarily sold. Income tax preparation seniors   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. Income tax preparation seniors A substantial economic relationship exists if together the properties were one economic unit. Income tax preparation seniors You also must show that the condemned property could not reasonably or adequately be replaced. Income tax preparation seniors You can elect to postpone reporting the gain by buying replacement property. Income tax preparation seniors See Postponement of Gain, later. Income tax preparation seniors Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. Income tax preparation seniors If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Income tax preparation seniors You can postpone reporting gain from a condemnation if you buy replacement property. Income tax preparation seniors If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. Income tax preparation seniors See Postponement of Gain, later. Income tax preparation seniors If your net condemnation award is less than your adjusted basis, you have a loss. Income tax preparation seniors If your loss is from property you held for personal use, you cannot deduct it. Income tax preparation seniors You must report any deductible loss in the tax year it happened. Income tax preparation seniors You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Income tax preparation seniors Main home condemned. Income tax preparation seniors   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Income tax preparation seniors You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Income tax preparation seniors For information on this exclusion, see Publication 523. Income tax preparation seniors If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. Income tax preparation seniors See Postponement of Gain, later. Income tax preparation seniors Table 1-3. Income tax preparation seniors Worksheet for Condemnations Part 1. Income tax preparation seniors Gain from severance damages. Income tax preparation seniors  If you did not receive severance damages, skip Part 1 and go to Part 2. Income tax preparation seniors   1. Income tax preparation seniors Enter gross severance damages received   2. Income tax preparation seniors Enter your expenses in getting severance damages   3. Income tax preparation seniors Subtract line 2 from line 1. Income tax preparation seniors If less than zero, enter -0-   4. Income tax preparation seniors Enter any special assessment on remaining property taken out of your award   5. Income tax preparation seniors Net severance damages. Income tax preparation seniors Subtract line 4 from line 3. Income tax preparation seniors If less than zero, enter -0-   6. Income tax preparation seniors Enter the adjusted basis of the remaining property   7. Income tax preparation seniors Gain from severance damages. Income tax preparation seniors Subtract line 6 from line 5. Income tax preparation seniors If less than zero, enter -0-   8. Income tax preparation seniors Refigured adjusted basis of the remaining property. Income tax preparation seniors Subtract line 5 from line 6. Income tax preparation seniors If less than zero, enter -0-   Part 2. Income tax preparation seniors Gain or loss from condemnation award. Income tax preparation seniors   9. Income tax preparation seniors Enter the gross condemnation award received   10. Income tax preparation seniors Enter your expenses in getting the condemnation award   11. Income tax preparation seniors If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Income tax preparation seniors If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Income tax preparation seniors Otherwise, enter -0-   12. Income tax preparation seniors Add lines 10 and 11   13. Income tax preparation seniors Net condemnation award. Income tax preparation seniors Subtract line 12 from line 9   14. Income tax preparation seniors Enter the adjusted basis of the condemned property   15. Income tax preparation seniors Gain from condemnation award. Income tax preparation seniors If line 14 is more than line 13, enter -0-. Income tax preparation seniors Otherwise, subtract line 14 from  line 13 and skip line 16   16. Income tax preparation seniors Loss from condemnation award. Income tax preparation seniors Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Income tax preparation seniors )   Part 3. Income tax preparation seniors Postponed gain from condemnation. Income tax preparation seniors  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. Income tax preparation seniors )   17. Income tax preparation seniors If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Income tax preparation seniors Otherwise, enter -0-   18. Income tax preparation seniors If line 15 is more than zero, enter the amount from line 13. Income tax preparation seniors Otherwise, enter -0-   19. Income tax preparation seniors Add lines 17 and 18. Income tax preparation seniors If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Income tax preparation seniors Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Income tax preparation seniors Subtract line 20 from line 19. Income tax preparation seniors If less than zero, enter -0-   22. Income tax preparation seniors If you completed Part 1, add lines 7 and 15. Income tax preparation seniors Otherwise, enter the amount from line 15. Income tax preparation seniors If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Income tax preparation seniors Recognized gain. Income tax preparation seniors Enter the smaller of line 21 or line 22. Income tax preparation seniors   24. Income tax preparation seniors Postponed gain. Income tax preparation seniors Subtract line 23 from line 22. Income tax preparation seniors If less than zero, enter -0-   Condemnation award. Income tax preparation seniors   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Income tax preparation seniors The award is also the amount you are paid for the sale of your property under threat of condemnation. Income tax preparation seniors Payment of your debts. Income tax preparation seniors   Amounts taken out of the award to pay your debts are considered paid to you. Income tax preparation seniors Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. Income tax preparation seniors Example. Income tax preparation seniors The state condemned your property for public use. Income tax preparation seniors The award was set at $200,000. Income tax preparation seniors The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Income tax preparation seniors You are considered to have received the entire $200,000 as a condemnation award. Income tax preparation seniors Interest on award. Income tax preparation seniors   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Income tax preparation seniors You must report the interest separately as ordinary income. Income tax preparation seniors Payments to relocate. Income tax preparation seniors   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. Income tax preparation seniors Do not include them in your income. Income tax preparation seniors Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Income tax preparation seniors Net condemnation award. Income tax preparation seniors   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. Income tax preparation seniors If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. Income tax preparation seniors This is discussed later under Special assessment taken out of award. Income tax preparation seniors Severance damages. Income tax preparation seniors    Severance damages are not part of the award paid for the property condemned. Income tax preparation seniors They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. Income tax preparation seniors   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. Income tax preparation seniors Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. Income tax preparation seniors   The contracting parties should agree on the specific amount of severance damages in writing. Income tax preparation seniors If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Income tax preparation seniors   You cannot make a completely new allocation of the total award after the transaction is completed. Income tax preparation seniors However, you can show how much of the award both parties intended for severance damages. Income tax preparation seniors The severance damages part of the award is determined from all the facts and circumstances. Income tax preparation seniors Example. Income tax preparation seniors You sold part of your property to the state under threat of condemnation. Income tax preparation seniors The contract you and the condemning authority signed showed only the total purchase price. Income tax preparation seniors It did not specify a fixed sum for severance damages. Income tax preparation seniors However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Income tax preparation seniors You may treat this part as severance damages. Income tax preparation seniors Treatment of severance damages. Income tax preparation seniors   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Income tax preparation seniors Use them to reduce the basis of the remaining property. Income tax preparation seniors If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. Income tax preparation seniors   If your net severance damages are more than the basis of your retained property, you have a gain. Income tax preparation seniors You may be able to postpone reporting the gain. Income tax preparation seniors See Postponement of Gain, later. Income tax preparation seniors    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. Income tax preparation seniors Net severance damages. Income tax preparation seniors   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Income tax preparation seniors You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. Income tax preparation seniors The balance is your net severance damages. Income tax preparation seniors Expenses of obtaining a condemnation award and severance damages. Income tax preparation seniors   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Income tax preparation seniors Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Income tax preparation seniors If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Income tax preparation seniors Example. Income tax preparation seniors You receive a condemnation award and severance damages. Income tax preparation seniors One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Income tax preparation seniors You had legal expenses for the entire condemnation proceeding. Income tax preparation seniors You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Income tax preparation seniors You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Income tax preparation seniors Special assessment retained out of award. Income tax preparation seniors   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. Income tax preparation seniors An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Income tax preparation seniors Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Income tax preparation seniors   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Income tax preparation seniors Example. Income tax preparation seniors To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Income tax preparation seniors You were awarded $5,000 for this and spent $300 to get the award. Income tax preparation seniors Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Income tax preparation seniors The city then paid you only $4,300. Income tax preparation seniors Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Income tax preparation seniors If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). Income tax preparation seniors The net award would not change, even if you later paid the assessment from the amount you received. Income tax preparation seniors Severance damages received. Income tax preparation seniors   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. Income tax preparation seniors Any balance of the special assessment is used to reduce the condemnation award. Income tax preparation seniors Example. Income tax preparation seniors You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Income tax preparation seniors You spent $300 to obtain the severance damages. Income tax preparation seniors A special assessment of $800 was retained out of the award. Income tax preparation seniors The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Income tax preparation seniors Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Income tax preparation seniors Part business or rental. Income tax preparation seniors   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. Income tax preparation seniors Figure your gain or loss separately because gain or loss on each part may be treated differently. Income tax preparation seniors   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. Income tax preparation seniors Example. Income tax preparation seniors You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Income tax preparation seniors You rented half the building and lived in the other half. Income tax preparation seniors You paid $25,000 for the building and spent an additional $1,000 for a new roof. Income tax preparation seniors You claimed allowable depreciation of $4,600 on the rental half. Income tax preparation seniors You spent $200 in legal expenses to obtain the condemnation award. Income tax preparation seniors Figure your gain or loss as follows. Income tax preparation seniors     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. Income tax preparation seniors Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. Income tax preparation seniors Your basis for the new property is the same as your basis for the old. Income tax preparation seniors Money or unlike property received. Income tax preparation seniors   You ordinarily must report the gain if you receive money or unlike property. Income tax preparation seniors You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. Income tax preparation seniors You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. Income tax preparation seniors See Controlling interest in a corporation, later. Income tax preparation seniors   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Income tax preparation seniors If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. Income tax preparation seniors   The basis of the replacement property is its cost, reduced by the postponed gain. Income tax preparation seniors Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. Income tax preparation seniors See Controlling interest in a corporation, later. Income tax preparation seniors You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Income tax preparation seniors Postponing gain on severance damages. Income tax preparation seniors   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. Income tax preparation seniors See Treatment of severance damages, earlier. Income tax preparation seniors You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). Income tax preparation seniors   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. Income tax preparation seniors If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. Income tax preparation seniors   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Income tax preparation seniors Postponing gain on the sale of related property. Income tax preparation seniors   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. Income tax preparation seniors You must meet the requirements explained earlier under Related property voluntarily sold. Income tax preparation seniors You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). Income tax preparation seniors Buying replacement property from a related person. Income tax preparation seniors   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Income tax preparation seniors For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Income tax preparation seniors   This rule applies to the following taxpayers. Income tax preparation seniors C corporations. Income tax preparation seniors Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Income tax preparation seniors All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. Income tax preparation seniors   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Income tax preparation seniors If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Income tax preparation seniors If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Income tax preparation seniors Exception. Income tax preparation seniors   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Income tax preparation seniors Advance payment. Income tax preparation seniors   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). Income tax preparation seniors Replacement property. Income tax preparation seniors   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Income tax preparation seniors You do not have to use the actual funds from the condemnation award to acquire the replacement property. Income tax preparation seniors Property you acquire by gift or inheritance does not qualify as replacement property. Income tax preparation seniors Similar or related in service or use. Income tax preparation seniors   Your replacement property must be similar or related in service or use to the property it replaces. Income tax preparation seniors   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. Income tax preparation seniors For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Income tax preparation seniors Owner-user. Income tax preparation seniors   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Income tax preparation seniors Example. Income tax preparation seniors Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Income tax preparation seniors Your replacement property is not similar or related in service or use to the condemned property. Income tax preparation seniors To be similar or related in service or use, your replacement property must also be used by you as your home. Income tax preparation seniors Owner-investor. Income tax preparation seniors   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. Income tax preparation seniors You decide this by determining all the following information. Income tax preparation seniors Whether the properties are of similar service to you. Income tax preparation seniors The nature of the business risks connected with the properties. Income tax preparation seniors What the properties demand of you in the way of management, service, and relations to your tenants. Income tax preparation seniors Example. Income tax preparation seniors You owned land and a building you rented to a manufacturing company. Income tax preparation seniors The building was condemned. Income tax preparation seniors During the replacement period, you had a new building built on other land you already owned. Income tax preparation seniors You rented out the new building for use as a wholesale grocery warehouse. Income tax preparation seniors The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. Income tax preparation seniors Your management activities. Income tax preparation seniors The amount and kind of services you provide to your tenants. Income tax preparation seniors The nature of your business risks connected with the properties. Income tax preparation seniors Leasehold replaced with fee simple property. Income tax preparation seniors   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. Income tax preparation seniors   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. Income tax preparation seniors A leasehold is property held under a lease, usually for a term of years. Income tax preparation seniors Outdoor advertising display replaced with real property. Income tax preparation seniors   You can elect to treat an outdoor advertising display as real property. Income tax preparation seniors If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. Income tax preparation seniors For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. Income tax preparation seniors   You can make this election only if you did not claim a section 179 deduction for the display. Income tax preparation seniors You cannot cancel this election unless you get the consent of the IRS. Income tax preparation seniors   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. Income tax preparation seniors Substituting replacement property. Income tax preparation seniors   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Income tax preparation seniors But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Income tax preparation seniors Controlling interest in a corporation. Income tax preparation seniors   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. Income tax preparation seniors You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. Income tax preparation seniors Basis adjustment to corporation's property. Income tax preparation seniors   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Income tax preparation seniors You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). Income tax preparation seniors   Allocate this reduction to the following classes of property in the order shown below. Income tax preparation seniors Property that is similar or related in service or use to the condemned property. Income tax preparation seniors Depreciable property not reduced in (1). Income tax preparation seniors All other property. Income tax preparation seniors If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. Income tax preparation seniors The reduced basis of any single property cannot be less than zero. Income tax preparation seniors Main home replaced. Income tax preparation seniors   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. Income tax preparation seniors The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Income tax preparation seniors   You must reduce the basis of your replacement property by the postponed gain. Income tax preparation seniors Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. Income tax preparation seniors Example. Income tax preparation seniors City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Income tax preparation seniors The city paid you a condemnation award of $400,000. Income tax preparation seniors Your adjusted basis in the property was $80,000. Income tax preparation seniors You realize a gain of $320,000 ($400,000 − $80,000). Income tax preparation seniors You purchased a new home for $100,000. Income tax preparation seniors You can exclude $250,000 of the realized gain from your gross income. Income tax preparation seniors The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). Income tax preparation seniors You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Income tax preparation seniors The remaining $20,000 of realized gain is postponed. Income tax preparation seniors Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Income tax preparation seniors Replacement period. Income tax preparation seniors   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Income tax preparation seniors This is the replacement period. Income tax preparation seniors   The replacement period for a condemnation begins on the earlier of the following dates. Income tax preparation seniors The date on which you disposed of the condemned property. Income tax preparation seniors The date on which the threat of condemnation began. Income tax preparation seniors   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Income tax preparation seniors However, see the exceptions below. Income tax preparation seniors Three-year replacement period for certain property. Income tax preparation seniors   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Income tax preparation seniors However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. Income tax preparation seniors Five-year replacement period for certain property. Income tax preparation seniors   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. Income tax preparation seniors Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. Income tax preparation seniors Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. Income tax preparation seniors Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Income tax preparation seniors Extended replacement period for taxpayers affected by other federally declared disasters. Income tax preparation seniors    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. Income tax preparation seniors For more information visit www. Income tax preparation seniors irs. Income tax preparation seniors gov/uac/Tax-Relief-in-Disaster-Situations. Income tax preparation seniors Weather-related sales of livestock in an area eligible for federal assistance. Income tax preparation seniors   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Income tax preparation seniors    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. Income tax preparation seniors See Notice 2006-82. Income tax preparation seniors You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Income tax preparation seniors irs. Income tax preparation seniors gov/irb/2006-39_IRB/ar13. Income tax preparation seniors html. Income tax preparation seniors    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Income tax preparation seniors If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. Income tax preparation seniors You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Income tax preparation seniors irs. Income tax preparation seniors gov/irb/2013-45_IRB/ar04. Income tax preparation seniors html. Income tax preparation seniors The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Income tax preparation seniors Determining when gain is realized. Income tax preparation seniors   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Income tax preparation seniors If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. Income tax preparation seniors   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Income tax preparation seniors A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. Income tax preparation seniors   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Income tax preparation seniors All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Income tax preparation seniors All or part of the award is actually or constructively received. Income tax preparation seniors For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. Income tax preparation seniors Replacement property bought before the condemnation. Income tax preparation seniors   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. Income tax preparation seniors Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Income tax preparation seniors Example. Income tax preparation seniors On April 3, 2012, city authorities notified you that your property would be condemned. Income tax preparation seniors On June 5, 2012, you acquired property to replace the property to be condemned. Income tax preparation seniors You still had the new property when the city took possession of your old property on September 4, 2013. Income tax preparation seniors You have made a replacement within the replacement period. Income tax preparation seniors Extension. Income tax preparation seniors   You can request an extension of the replacement period from the IRS director for your area. Income tax preparation seniors You should apply before the end of the replacement period. Income tax preparation seniors Your request should explain in detail why you need an extension. Income tax preparation seniors The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Income tax preparation seniors An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Income tax preparation seniors   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Income tax preparation seniors Extensions are usually limited to a period of 1 year or less. Income tax preparation seniors The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Income tax preparation seniors If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri
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Income tax preparation seniors 5. Income tax preparation seniors   Recordkeeping Table of Contents How To Prove ExpensesWhat Are Adequate Records? What If I Have Incomplete Records? Separating and Combining Expenses How Long To Keep Records and Receipts Examples of Records If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove (substantiate) certain elements of expense. Income tax preparation seniors This chapter discusses the records you need to keep to prove these expenses. Income tax preparation seniors If you keep timely and accurate records, you will have support to show the IRS if your tax return is ever examined. Income tax preparation seniors You will also have proof of expenses that your employer may require if you are reimbursed under an accountable plan. Income tax preparation seniors These plans are discussed in chapter 6 under Reimbursements . Income tax preparation seniors How To Prove Expenses Table 5-1 is a summary of records you need to prove each expense discussed in this publication. Income tax preparation seniors You must be able to prove the elements listed across the top portion of the chart. Income tax preparation seniors You prove them by having the information and receipts (where needed) for the expenses listed in the first column. Income tax preparation seniors You cannot deduct amounts that you approximate or estimate. Income tax preparation seniors You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. Income tax preparation seniors You must generally prepare a written record for it to be considered adequate. Income tax preparation seniors This is because written evidence is more reliable than oral evidence alone. Income tax preparation seniors However, if you prepare a record on a computer, it is considered an adequate record. Income tax preparation seniors What Are Adequate Records? You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. Income tax preparation seniors You should also keep documentary evidence that, together with your record, will support each element of an expense. Income tax preparation seniors Documentary evidence. Income tax preparation seniors   You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Income tax preparation seniors Exception. Income tax preparation seniors   Documentary evidence is not needed if any of the following conditions apply. Income tax preparation seniors You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging. Income tax preparation seniors ( Accountable plans and per diem allowances are discussed in chapter 6. Income tax preparation seniors ) Your expense, other than lodging, is less than $75. Income tax preparation seniors You have a transportation expense for which a receipt is not readily available. Income tax preparation seniors Adequate evidence. Income tax preparation seniors   Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. Income tax preparation seniors   For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information. Income tax preparation seniors The name and location of the hotel. Income tax preparation seniors The dates you stayed there. Income tax preparation seniors Separate amounts for charges such as lodging, meals, and telephone calls. Income tax preparation seniors   A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information. Income tax preparation seniors The name and location of the restaurant. Income tax preparation seniors The number of people served. Income tax preparation seniors The date and amount of the expense. Income tax preparation seniors If a charge is made for items other than food and beverages, the receipt must show that this is the case. Income tax preparation seniors Canceled check. Income tax preparation seniors   A canceled check, together with a bill from the payee, ordinarily establishes the cost. Income tax preparation seniors However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose. Income tax preparation seniors Duplicate information. Income tax preparation seniors   You do not have to record information in your account book or other record that duplicates information shown on a receipt as long as your records and receipts complement each other in an orderly manner. Income tax preparation seniors   You do not have to record amounts your employer pays directly for any ticket or other travel item. Income tax preparation seniors However, if you charge these items to your employer, through a credit card or otherwise, you must keep a record of the amounts you spend. Income tax preparation seniors Timely-kept records. Income tax preparation seniors   You should record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence. Income tax preparation seniors A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. Income tax preparation seniors   You do not need to write down the elements of every expense on the day of the expense. Income tax preparation seniors If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record. Income tax preparation seniors   If you give your employer, client, or customer an expense account statement, it can also be considered a timely-kept record. Income tax preparation seniors This is true if you copy it from your account book, diary, log, statement of expense, trip sheets, or similar record. Income tax preparation seniors Proving business purpose. Income tax preparation seniors   You must generally provide a written statement of the business purpose of an expense. Income tax preparation seniors However, the degree of proof varies according to the circumstances in each case. Income tax preparation seniors If the business purpose of an expense is clear from the surrounding circumstances, then you do not need to give a written explanation. Income tax preparation seniors Example. Income tax preparation seniors If you are a sales representative who calls on customers on an established sales route, you do not have to give a written explanation of the business purpose for traveling that route. Income tax preparation seniors You can satisfy the requirements by recording the length of the delivery route once, the date of each trip at or near the time of the trips, and the total miles you drove the car during the tax year. Income tax preparation seniors You could also establish the date of each trip with a receipt, record of delivery, or other documentary evidence. Income tax preparation seniors Confidential information. Income tax preparation seniors   You do not need to put confidential information relating to an element of a deductible expense (such as the place, business purpose, or business relationship) in your account book, diary, or other record. Income tax preparation seniors However, you do have to record the information elsewhere at or near the time of the expense and have it available to fully prove that element of the expense. Income tax preparation seniors What If I Have Incomplete Records? If you do not have complete records to prove an element of an expense, then you must prove the element with: Your own written or oral statement containing specific information about the element, and Other supporting evidence that is sufficient to establish the element. Income tax preparation seniors If the element is the description of a gift, or the cost, time, place, or date of an expense, the supporting evidence must be either direct evidence or documentary evidence. Income tax preparation seniors Direct evidence can be written statements or the oral testimony of your guests or other witnesses setting forth detailed information about the element. Income tax preparation seniors Documentary evidence can be receipts, paid bills, or similar evidence. Income tax preparation seniors If the element is either the business relationship of your guests or the business purpose of the amount spent, the supporting evidence can be circumstantial rather than direct. Income tax preparation seniors For example, the nature of your work, such as making deliveries, provides circumstantial evidence of the use of your car for business purposes. Income tax preparation seniors Invoices of deliveries establish when you used the car for business. Income tax preparation seniors Table 5-1. Income tax preparation seniors How To Prove Certain Business Expenses IF you have expenses for . Income tax preparation seniors . Income tax preparation seniors THEN you must keep records that show details of the following elements . Income tax preparation seniors . Income tax preparation seniors . Income tax preparation seniors   Amount Time Place or  Description Business Purpose Business Relationship Travel Cost of each separate expense for travel, lodging, and meals. Income tax preparation seniors Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. Income tax preparation seniors Dates you left and returned for each trip and number of days spent on business. Income tax preparation seniors Destination or area of your travel (name of city, town, or other designation). Income tax preparation seniors Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Income tax preparation seniors    Relationship: N/A Entertainment Cost of each separate expense. Income tax preparation seniors Incidental expenses such as taxis, telephones, etc. Income tax preparation seniors , may be totaled on a daily basis. Income tax preparation seniors Date of entertainment. Income tax preparation seniors (Also see Business Purpose. Income tax preparation seniors ) Name and address or location of place of entertainment. Income tax preparation seniors Type of entertainment if not otherwise apparent. Income tax preparation seniors (Also see Business Purpose. Income tax preparation seniors ) Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Income tax preparation seniors  For entertainment, the nature of the business discussion or activity. Income tax preparation seniors If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity. Income tax preparation seniors    Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. Income tax preparation seniors  For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal. Income tax preparation seniors Gifts Cost of the gift. Income tax preparation seniors Date of the gift. Income tax preparation seniors Description of the gift. Income tax preparation seniors   Transportation Cost of each separate expense. Income tax preparation seniors For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year. Income tax preparation seniors Date of the expense. Income tax preparation seniors For car expenses, the date of the use of the car. Income tax preparation seniors Your business destination. Income tax preparation seniors Purpose: Business purpose for the expense. Income tax preparation seniors    Relationship: N/A Sampling. Income tax preparation seniors   You can keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year. Income tax preparation seniors You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year. Income tax preparation seniors Example. Income tax preparation seniors You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. Income tax preparation seniors There is no other business use of the car, but you and your family use the car for personal purposes. Income tax preparation seniors You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Income tax preparation seniors Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Income tax preparation seniors Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year. Income tax preparation seniors Exceptional circumstances. Income tax preparation seniors   You can satisfy the substantiation requirements with other evidence if, because of the nature of the situation in which an expense is made, you cannot get a receipt. Income tax preparation seniors This applies if all the following are true. Income tax preparation seniors You were unable to obtain evidence for an element of the expense or use that completely satisfies the requirements explained earlier under What Are Adequate Records . Income tax preparation seniors You are unable to obtain evidence for an element that completely satisfies the two rules listed earlier under What If I Have Incomplete Records . Income tax preparation seniors You have presented other evidence for the element that is the best proof possible under the circumstances. Income tax preparation seniors Destroyed records. Income tax preparation seniors   If you cannot produce a receipt because of reasons beyond your control, you can prove a deduction by reconstructing your records or expenses. Income tax preparation seniors Reasons beyond your control include fire, flood, and other casualties. Income tax preparation seniors    Table 5-2. Income tax preparation seniors Daily Business Mileage and Expense Log Name:       Odometer Readings Expenses Date Destination  (City, Town, or Area) Business Purpose Start Stop Miles  this trip Type  (Gas, oil, tolls, etc. Income tax preparation seniors ) Amount                                                                                                                   Weekly  Total             Total Year-to-Date             Separating and Combining Expenses This section explains when expenses must be kept separate and when expenses can be combined. Income tax preparation seniors Separating expenses. Income tax preparation seniors   Each separate payment is generally considered a separate expense. Income tax preparation seniors For example, if you entertain a customer or client at dinner and then go to the theater, the dinner expense and the cost of the theater tickets are two separate expenses. Income tax preparation seniors You must record them separately in your records. Income tax preparation seniors Season or series tickets. Income tax preparation seniors   If you buy season or series tickets for business use, you must treat each ticket in the series as a separate item. Income tax preparation seniors To determine the cost of individual tickets, divide the total cost (but not more than face value) by the number of games or performances in the series. Income tax preparation seniors You must keep records to show whether you use each ticket as a gift or entertainment. Income tax preparation seniors Also, you must be able to prove the cost of nonluxury box seat tickets if you rent a skybox or other private luxury box for more than one event. Income tax preparation seniors See Entertainment tickets in chapter 2. Income tax preparation seniors Combining items. Income tax preparation seniors   You can make one daily entry in your record for reasonable categories of expenses. Income tax preparation seniors Examples are taxi fares, telephone calls, or other incidental travel costs. Income tax preparation seniors Meals should be in a separate category. Income tax preparation seniors You can include tips for meal-related services with the costs of the meals. Income tax preparation seniors   Expenses of a similar nature occurring during the course of a single event are considered a single expense. Income tax preparation seniors For example, if during entertainment at a cocktail lounge, you pay separately for each serving of refreshments, the total expense for the refreshments is treated as a single expense. Income tax preparation seniors Car expenses. Income tax preparation seniors   You can account for several uses of your car that can be considered part of a single use, such as a round trip or uninterrupted business use, with a single record. Income tax preparation seniors Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use. Income tax preparation seniors Example. Income tax preparation seniors You make deliveries at several different locations on a route that begins and ends at your employer's business premises and that includes a stop at the business premises between two deliveries. Income tax preparation seniors You can account for these using a single record of miles driven. Income tax preparation seniors Gift expenses. Income tax preparation seniors   You do not always have to record the name of each recipient of a gift. Income tax preparation seniors A general listing will be enough if it is evident that you are not trying to avoid the $25 annual limit on the amount you can deduct for gifts to any one person. Income tax preparation seniors For example, if you buy a large number of tickets to local high school basketball games and give one or two tickets to each of many customers, it is usually enough to record a general description of the recipients. Income tax preparation seniors Allocating total cost. Income tax preparation seniors   If you can prove the total cost of travel or entertainment but you cannot prove how much it cost for each person who participated in the event, you may have to allocate the total cost among you and your guests on a pro rata basis. Income tax preparation seniors To do so, you must establish the number of persons who participated in the event. Income tax preparation seniors   An allocation would be needed, for example, if you did not have a business relationship with all of your guests. Income tax preparation seniors See Allocating between business and nonbusiness in chapter 2. Income tax preparation seniors If your return is examined. Income tax preparation seniors    If your return is examined, you may have to provide additional information to the IRS. Income tax preparation seniors This information could be needed to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed. Income tax preparation seniors    THIS IS NOT AN OFFICIAL INTERNAL REVENUE FORM Table 5-3. Income tax preparation seniors Weekly Traveling Expense and Entertainment Record From: To: Name: Expenses Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total 1. Income tax preparation seniors Travel Expenses: Airlines                                 Excess Baggage                                 Bus – Train                                 Cab and Limousine                                 Tips                                 Porter                                 2. Income tax preparation seniors Meals and Lodging:  Breakfast                                 Lunch                                 Dinner                                 Hotel and Motel  (Detail in Schedule B)                                 3. Income tax preparation seniors Entertainment  (Detail in Schedule C)                                 4. Income tax preparation seniors Other Expenses:  Postage                                 Telephone & Telegraph                                 Stationery & Printing                                 Stenographer                                 Sample Room                                 Advertising                                 Assistant(s)                                 Trade Shows                                 5. Income tax preparation seniors Car Expenses: (List all car expenses - the division between business and personal expenses may be made at the end of the year. Income tax preparation seniors ) (Detail mileage in Schedule A. Income tax preparation seniors ) Gas, oil, lube, wash                                 Repairs, parts                                 Tires, supplies                                 Parking fees, tolls                                 6. Income tax preparation seniors Other (Identify)                                 Total                                 Note: Attach receipted bills for (1) ALL lodging and (2) any other expenses of $75. Income tax preparation seniors 00 or more. Income tax preparation seniors Schedule A – Car Mileage: End                 Start                 Total                 Business Mileage                 Schedule B – Lodging Hotel or Motel Name                 City                 Schedule C – Entertainment Date Item Place Amount Business Purpose Business Relationship                                             WEEKLY REIMBURSEMENTS:     Travel and transportation expenses     Other reimbursements     TOTAL   How Long To Keep Records and Receipts You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Income tax preparation seniors Generally, this means you must keep records that support your deduction (or an item of income) for 3 years from the date you file the income tax return on which the deduction is claimed. Income tax preparation seniors A return filed early is considered filed on the due date. Income tax preparation seniors For a more complete explanation of how long to keep records, see Publication 583, Starting a Business and Keeping Records. Income tax preparation seniors You must keep records of the business use of your car for each year of the recovery period. Income tax preparation seniors See More-than-50%-use test in chapter 4 under Depreciation Deduction. Income tax preparation seniors Reimbursed for expenses. Income tax preparation seniors   Employees who give their records and documentation to their employers and are reimbursed for their expenses generally do not have to keep copies of this information. Income tax preparation seniors However, you may have to prove your expenses if any of the following conditions apply. Income tax preparation seniors You claim deductions for expenses that are more than reimbursements. Income tax preparation seniors Your expenses are reimbursed under a nonaccountable plan. Income tax preparation seniors Your employer does not use adequate accounting procedures to verify expense accounts. Income tax preparation seniors You are related to your employer as defined under Per Diem and Car Allowances , in chapter 6. Income tax preparation seniors Reimbursements , adequate accounting , and nonaccountable plans are discussed in chapter 6. Income tax preparation seniors Examples of Records Table 5-2 and Table 5-3 are examples of worksheets which can be used for tracking business expenses. Income tax preparation seniors Prev  Up  Next   Home   More Online Publications