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Income Tax Software

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Income Tax Software

Income tax software 13. Income tax software   Basis of Property Table of Contents Introduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds Introduction This chapter discusses how to figure your basis in property. Income tax software It is divided into the following sections. Income tax software Cost basis. Income tax software Adjusted basis. Income tax software Basis other than cost. Income tax software Your basis is the amount of your investment in property for tax purposes. Income tax software Use the basis to figure gain or loss on the sale, exchange, or other disposition of property. Income tax software Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses. Income tax software If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Income tax software Only the basis allocated to the business or investment use of the property can be depreciated. Income tax software Your original basis in property is adjusted (increased or decreased) by certain events. Income tax software For example, if you make improvements to the property, increase your basis. Income tax software If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis. Income tax software Keep accurate records of all items that affect the basis of your property. Income tax software For more information on keeping records, see chapter 1. Income tax software Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 551 Basis of Assets 946 How To Depreciate Property Cost Basis The basis of property you buy is usually its cost. Income tax software The cost is the amount you pay in cash, debt obligations, other property, or services. Income tax software Your cost also includes amounts you pay for the following items: Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if you assume liability for the seller). Income tax software In addition, the basis of real estate and business assets may include other items. Income tax software Loans with low or no interest. Income tax software    If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus any amount considered to be unstated interest. Income tax software You generally have unstated interest if your interest rate is less than the applicable federal rate. Income tax software   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Income tax software Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Income tax software If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Income tax software Lump sum purchase. Income tax software   If you buy buildings and the land on which they stand for a lump sum, allocate the cost basis among the land and the buildings. Income tax software Allocate the cost basis according to the respective fair market values (FMVs) of the land and buildings at the time of purchase. Income tax software Figure the basis of each asset by multiplying the lump sum by a fraction. Income tax software The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Income tax software    If you are not certain of the FMVs of the land and buildings, you can allocate the basis according to their assessed values for real estate tax purposes. Income tax software Fair market value (FMV). Income tax software   FMV is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. Income tax software Sales of similar property on or about the same date may be helpful in figuring the FMV of the property. Income tax software Assumption of mortgage. Income tax software   If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Income tax software Settlement costs. Income tax software   Your basis includes the settlement fees and closing costs you paid for buying the property. Income tax software (A fee for buying property is a cost that must be paid even if you buy the property for cash. Income tax software ) Do not include fees and costs for getting a loan on the property in your basis. Income tax software   The following are some of the settlement fees or closing costs you can include in the basis of your property. Income tax software Abstract fees (abstract of title fees). Income tax software Charges for installing utility services. Income tax software Legal fees (including fees for the title search and preparation of the sales contract and deed). Income tax software Recording fees. Income tax software Survey fees. Income tax software Transfer taxes. Income tax software Owner's title insurance. Income tax software Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Income tax software   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Income tax software   The following are some of the settlement fees and closing costs you cannot include in the basis of property. Income tax software Casualty insurance premiums. Income tax software Rent for occupancy of the property before closing. Income tax software Charges for utilities or other services related to occupancy of the property before closing. Income tax software Charges connected with getting a loan, such as points (discount points, loan origination fees), mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender. Income tax software Fees for refinancing a mortgage. Income tax software Real estate taxes. Income tax software   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Income tax software You cannot deduct them as an expense. Income tax software    If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Income tax software Do not include that amount in the basis of your property. Income tax software If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Income tax software Points. Income tax software   If you pay points to get a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Income tax software Generally, you deduct the points over the term of the loan. Income tax software For more information on how to deduct points, see chapter 23. Income tax software Points on home mortgage. Income tax software   Special rules may apply to points you and the seller pay when you get a mortgage to buy your main home. Income tax software If certain requirements are met, you can deduct the points in full for the year in which they are paid. Income tax software Reduce the basis of your home by any seller-paid points. Income tax software Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. Income tax software The result is the adjusted basis. Income tax software Increases to Basis Increase the basis of any property by all items properly added to a capital account. Income tax software Examples of items that increase basis are shown in Table 13-1. Income tax software These include the items discussed below. Income tax software Improvements. Income tax software   Add to your basis in property the cost of improvements having a useful life of more than 1 year, that increase the value of the property, lengthen its life, or adapt it to a different use. Income tax software For example, improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway. Income tax software Assessments for local improvements. Income tax software   Add to the basis of property assessments for improvements such as streets and sidewalks if they increase the value of the property assessed. Income tax software Do not deduct them as taxes. Income tax software However, you can deduct as taxes assessments for maintenance or repairs, or for meeting interest charges related to the improvements. Income tax software Example. Income tax software Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. Income tax software Add the assessment to your property's basis. Income tax software In this example, the assessment is a depreciable asset. Income tax software Decreases to Basis Decrease the basis of any property by all items that represent a return of capital for the period during which you held the property. Income tax software Examples of items that decrease basis are shown in Table 13-1. Income tax software These include the items discussed below. Income tax software Table 13-1. Income tax software Examples of Adjustments to Basis Increases to Basis Decreases to Basis • Capital improvements: • Exclusion from income of   Putting an addition on your home subsidies for energy conservation   Replacing an entire roof measures   Paving your driveway     Installing central air conditioning • Casualty or theft loss deductions   Rewiring your home and insurance reimbursements       • Assessments for local improvements:     Water connections     Extending utility service lines to the property • Postponed gain from the sale of a home   Sidewalks • Alternative motor vehicle credit  (Form 8910)   Roads       • Alternative fuel vehicle refueling     property credit (Form 8911)           • Residential energy credits (Form 5695)       • Casualty losses: • Depreciation and section 179 deduction   Restoring damaged property     • Nontaxable corporate distributions • Legal fees:     Cost of defending and perfecting a title • Certain canceled debt excluded from   Fees for getting a reduction of an assessment income     • Zoning costs • Easements           • Adoption tax benefits Casualty and theft losses. Income tax software   If you have a casualty or theft loss, decrease the basis in your property by any insurance proceeds or other reimbursement and by any deductible loss not covered by insurance. Income tax software    You must increase your basis in the property by the amount you spend on repairs that restore the property to its pre-casualty condition. Income tax software   For more information on casualty and theft losses, see chapter 25. Income tax software Depreciation and section 179 deduction. Income tax software   Decrease the basis of your qualifying business property by any section 179 deduction you take and the depreciation you deducted, or could have deducted (including any special depreciation allowance), on your tax returns under the method of depreciation you selected. Income tax software   For more information about depreciation and the section 179 deduction, see Publication 946 and the Instructions for Form 4562. Income tax software Example. Income tax software You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. Income tax software You added an improvement to the duplex that cost $10,000. Income tax software In February last year, the duplex was damaged by fire. Income tax software Up to that time, you had been allowed depreciation of $23,000. Income tax software You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. Income tax software You deducted a casualty loss of $1,000 on your income tax return for last year. Income tax software You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. Income tax software You must use the duplex's adjusted basis after the restoration to determine depreciation for the rest of the property's recovery period. Income tax software Figure the adjusted basis of the duplex as follows: Original cost of duplex $35,000 Addition to duplex 10,000 Total cost of duplex $45,000 Minus: Depreciation 23,000 Adjusted basis before casualty $22,000 Minus: Insurance proceeds $19,700     Deducted casualty loss 1,000     Salvage proceeds 1,300 22,000 Adjusted basis after casualty $-0- Add: Cost of restoring duplex 19,000 Adjusted basis after restoration $19,000 Note. Income tax software Your basis in the land is its original cost of $5,000. Income tax software Easements. Income tax software   The amount you receive for granting an easement is generally considered to be proceeds from the sale of an interest in real property. Income tax software It reduces the basis of the affected part of the property. Income tax software If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Income tax software   If the gain is on a capital asset, see chapter 16 for information about how to report it. Income tax software If the gain is on property used in a trade or business, see Publication 544 for information about how to report it. Income tax software Exclusion of subsidies for energy conservation measures. Income tax software   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Income tax software Reduce the basis of the property for which you received the subsidy by the excluded amount. Income tax software For more information about this subsidy, see chapter 12. Income tax software Postponed gain from sale of home. Income tax software    If you postponed gain from the sale of your main home under rules in effect before May 7, 1997, you must reduce the basis of the home you acquired as a replacement by the amount of the postponed gain. Income tax software For more information on the rules for the sale of a home, see chapter 15. Income tax software Basis Other Than Cost There are many times when you cannot use cost as basis. Income tax software In these cases, the fair market value or the adjusted basis of the property can be used. Income tax software Fair market value (FMV) and adjusted basis were discussed earlier. Income tax software Property Received for Services If you receive property for your services, include the FMV of the property in income. Income tax software The amount you include in income becomes your basis. Income tax software If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Income tax software Restricted property. Income tax software   If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested. Income tax software However, this rule does not apply if you make an election to include in income the FMV of the property at the time it is transferred to you, less any amount you paid for it. Income tax software Property is substantially vested when it is transferable or when it is not subject to a substantial risk of forfeiture (you do not have a good chance of losing it). Income tax software For more information, see Restricted Property in Publication 525. Income tax software Bargain purchases. Income tax software   A bargain purchase is a purchase of an item for less than its FMV. Income tax software If, as compensation for services, you buy goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Income tax software Your basis in the property is its FMV (your purchase price plus the amount you include in income). Income tax software   If the difference between your purchase price and the FMV is a qualified employee discount, do not include the difference in income. Income tax software However, your basis in the property is still its FMV. Income tax software See Employee Discounts in Publication 15-B. Income tax software Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Income tax software A taxable gain or deductible loss also is known as a recognized gain or loss. Income tax software If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Income tax software Involuntary Conversions If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property. Income tax software Similar or related property. Income tax software   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the same as the converted property's basis on the date of the conversion, with the following adjustments. Income tax software Decrease the basis by the following. Income tax software Any loss you recognize on the involuntary conversion. Income tax software Any money you receive that you do not spend on similar property. Income tax software Increase the basis by the following. Income tax software Any gain you recognize on the involuntary conversion. Income tax software Any cost of acquiring the replacement property. Income tax software Money or property not similar or related. Income tax software    If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the conversion. Income tax software Example. Income tax software The state condemned your property. Income tax software The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. Income tax software You realized a gain of $5,000 ($31,000 − $26,000). Income tax software You bought replacement property similar in use to the converted property for $29,000. Income tax software You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Income tax software Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Income tax software The basis of the replacement property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of replacement property $26,000 Allocating the basis. Income tax software   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Income tax software Basis for depreciation. Income tax software   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Income tax software For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Income tax software Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Income tax software If you receive property in a nontaxable exchange, its basis is generally the same as the basis of the property you transferred. Income tax software See Nontaxable Trades in chapter 14. Income tax software Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Income tax software To qualify as a like-kind exchange, the property traded and the property received must be both of the following. Income tax software Qualifying property. Income tax software Like-kind property. Income tax software The basis of the property you receive is generally the same as the adjusted basis of the property you gave up. Income tax software If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid. Income tax software Qualifying property. Income tax software   In a like-kind exchange, you must hold for investment or for productive use in your trade or business both the property you give up and the property you receive. Income tax software Like-kind property. Income tax software   There must be an exchange of like-kind property. Income tax software Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Income tax software The exchange of real estate for real estate and personal property for similar personal property are exchanges of like-kind property. Income tax software Example. Income tax software You trade in an old truck used in your business with an adjusted basis of $1,700 for a new one costing $6,800. Income tax software The dealer allows you $2,000 on the old truck, and you pay $4,800. Income tax software This is a like-kind exchange. Income tax software The basis of the new truck is $6,500 (the adjusted basis of the old one, $1,700, plus the amount you paid, $4,800). Income tax software If you sell your old truck to a third party for $2,000 instead of trading it in and then buy a new one from the dealer, you have a taxable gain of $300 on the sale (the $2,000 sale price minus the $1,700 adjusted basis). Income tax software The basis of the new truck is the price you pay the dealer. Income tax software Partially nontaxable exchanges. Income tax software   A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Income tax software The basis of the property you receive is the same as the adjusted basis of the property you gave up, with the following adjustments. Income tax software Decrease the basis by the following amounts. Income tax software Any money you receive. Income tax software Any loss you recognize on the exchange. Income tax software Increase the basis by the following amounts. Income tax software Any additional costs you incur. Income tax software Any gain you recognize on the exchange. Income tax software If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Income tax software Allocation of basis. Income tax software   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Income tax software The rest is the basis of the like-kind property. Income tax software More information. Income tax software   See Like-Kind Exchanges in chapter 1 of Publication 544 for more information. Income tax software Basis for depreciation. Income tax software   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind exchange. Income tax software For information, see What Is the Basis of Your Depreciable Property? in chapter 1 of Publication 946. Income tax software Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Income tax software The same rule applies to a transfer by your former spouse that is incident to divorce. Income tax software However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Income tax software If the property transferred to you is a series E, series EE, or series I U. Income tax software S. Income tax software savings bond, the transferor must include in income the interest accrued to the date of transfer. Income tax software Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. Income tax software For more information on these bonds, see chapter 7. Income tax software At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Income tax software For more information about the transfer of property from a spouse, see chapter 14. Income tax software Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Income tax software FMV less than donor's adjusted basis. Income tax software   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Income tax software Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Income tax software Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Income tax software See Adjusted Basis , earlier. Income tax software Example. Income tax software You received an acre of land as a gift. Income tax software At the time of the gift, the land had an FMV of $8,000. Income tax software The donor's adjusted basis was $10,000. Income tax software After you received the property, no events occurred to increase or decrease your basis. Income tax software If you later sell the property for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis at the time of the gift ($10,000) as your basis to figure gain. Income tax software If you sell the property for $7,000, you will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss. Income tax software If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Income tax software Business property. Income tax software   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Income tax software FMV equal to or greater than donor's adjusted basis. Income tax software   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Income tax software Increase your basis by all or part of any gift tax paid, depending on the date of the gift, explained later. Income tax software   Also, for figuring gain or loss from a sale or other disposition or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Income tax software See Adjusted Basis , earlier. Income tax software   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Income tax software Figure the increase by multiplying the gift tax paid by a fraction. Income tax software The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Income tax software   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Income tax software The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Income tax software Example. Income tax software In 2013, you received a gift of property from your mother that had an FMV of $50,000. Income tax software Her adjusted basis was $20,000. Income tax software The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Income tax software She paid a gift tax of $7,320 on the property. Income tax software Your basis is $26,076, figured as follows: Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000     Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Income tax software 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Income tax software If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Income tax software However, your basis cannot exceed the FMV of the gift at the time it was given to you. Income tax software Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Income tax software The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. Income tax software The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes. Income tax software The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. Income tax software If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Income tax software For more information, see the instructions to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Income tax software Property inherited from a decedent who died in 2010. Income tax software   If you inherited property from a decedent who died in 2010, special rules may apply. Income tax software For more information, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Income tax software Community property. Income tax software   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Income tax software When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Income tax software For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Income tax software Example. Income tax software You and your spouse owned community property that had a basis of $80,000. Income tax software When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Income tax software The FMV of the community interest was $100,000. Income tax software The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Income tax software The basis of the other half to your spouse's heirs is also $50,000. Income tax software For more information about community property, see Publication 555, Community Property. Income tax software Property Changed From Personal to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you can begin to depreciate the property at the time of the change. Income tax software To do so, you must figure its basis for depreciation at the time of the change. Income tax software An example of changing property held for personal use to business or rental use would be renting out your former personal residence. Income tax software Basis for depreciation. Income tax software   The basis for depreciation is the lesser of the following amounts. Income tax software The FMV of the property on the date of the change. Income tax software Your adjusted basis on the date of the change. Income tax software Example. Income tax software Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. Income tax software You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Income tax software Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Income tax software Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Income tax software On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Income tax software The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it is less than your adjusted basis ($178,000). Income tax software Sale of property. Income tax software   If you later sell or dispose of property changed to business or rental use, the basis you use will depend on whether you are figuring gain or loss. Income tax software Gain. Income tax software   The basis for figuring a gain is your adjusted basis in the property when you sell the property. Income tax software Example. Income tax software Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Income tax software Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Income tax software Loss. Income tax software   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Income tax software Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Income tax software Example. Income tax software Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. Income tax software In this case, you would start with the FMV on the date of the change to rental use ($180,000), because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Income tax software Reduce that amount ($180,000) by the depreciation deductions ($37,500). Income tax software The basis for loss is $142,500 ($180,000 − $37,500). Income tax software Stocks and Bonds The basis of stocks or bonds you buy generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Income tax software If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier. Income tax software You must adjust the basis of stocks for certain events that occur after purchase. Income tax software For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock. Income tax software This rule applies only when the additional stock received is identical to the stock held. Income tax software Also reduce your basis when you receive nontaxable distributions. Income tax software They are a return of capital. Income tax software Example. Income tax software In 2011 you bought 100 shares of XYZ stock for $1,000 or $10 a share. Income tax software In 2012 you bought 100 shares of XYZ stock for $1,600 or $16 a share. Income tax software In 2013 XYZ declared a 2-for-1 stock split. Income tax software You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share. Income tax software Other basis. Income tax software   There are other ways to figure the basis of stocks or bonds depending on how you acquired them. Income tax software For detailed information, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Income tax software Identifying stocks or bonds sold. Income tax software   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stocks or bonds. Income tax software If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Income tax software For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Income tax software Mutual fund shares. Income tax software   If you sell mutual fund shares you acquired at various times and prices and left on deposit in an account kept by a custodian or agent, you can elect to use an average basis. Income tax software For more information, see Publication 550. Income tax software Bond premium. Income tax software   If you buy a taxable bond at a premium and elect to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. Income tax software See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Income tax software Although you cannot deduct the premium on a tax-exempt bond, you must amortize the premium each year and reduce your basis in the bond by the amortized amount. Income tax software Original issue discount (OID) on debt instruments. Income tax software   You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. Income tax software See Original Issue Discount (OID) in chapter 7 and Publication 1212, Guide To Original Issue Discount (OID) Instruments. Income tax software Tax-exempt obligations. Income tax software    OID on tax-exempt obligations is generally not taxable. Income tax software However, when you dispose of a tax-exempt obligation issued after September 3, 1982, and acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Income tax software The accrued OID is added to the basis of the obligation to determine your gain or loss. Income tax software See chapter 4 of Publication 550. Income tax software Prev  Up  Next   Home   More Online Publications
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Income tax software 5. Income tax software   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 software This chapter discusses the records you need to keep to prove these expenses. Income tax software If you keep timely and accurate records, you will have support to show the IRS if your tax return is ever examined. Income tax software You will also have proof of expenses that your employer may require if you are reimbursed under an accountable plan. Income tax software These plans are discussed in chapter 6 under Reimbursements . Income tax software How To Prove Expenses Table 5-1 is a summary of records you need to prove each expense discussed in this publication. Income tax software You must be able to prove the elements listed across the top portion of the chart. Income tax software You prove them by having the information and receipts (where needed) for the expenses listed in the first column. Income tax software You cannot deduct amounts that you approximate or estimate. Income tax software You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. Income tax software You must generally prepare a written record for it to be considered adequate. Income tax software This is because written evidence is more reliable than oral evidence alone. Income tax software However, if you prepare a record on a computer, it is considered an adequate record. Income tax software 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 software You should also keep documentary evidence that, together with your record, will support each element of an expense. Income tax software Documentary evidence. Income tax software   You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Income tax software Exception. Income tax software   Documentary evidence is not needed if any of the following conditions apply. Income tax software 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 software ( Accountable plans and per diem allowances are discussed in chapter 6. Income tax software ) Your expense, other than lodging, is less than $75. Income tax software You have a transportation expense for which a receipt is not readily available. Income tax software Adequate evidence. Income tax software   Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. Income tax software   For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information. Income tax software The name and location of the hotel. Income tax software The dates you stayed there. Income tax software Separate amounts for charges such as lodging, meals, and telephone calls. Income tax software   A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information. Income tax software The name and location of the restaurant. Income tax software The number of people served. Income tax software The date and amount of the expense. Income tax software If a charge is made for items other than food and beverages, the receipt must show that this is the case. Income tax software Canceled check. Income tax software   A canceled check, together with a bill from the payee, ordinarily establishes the cost. Income tax software 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 software Duplicate information. Income tax software   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 software   You do not have to record amounts your employer pays directly for any ticket or other travel item. Income tax software 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 software Timely-kept records. Income tax software   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 software A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. Income tax software   You do not need to write down the elements of every expense on the day of the expense. Income tax software 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 software   If you give your employer, client, or customer an expense account statement, it can also be considered a timely-kept record. Income tax software This is true if you copy it from your account book, diary, log, statement of expense, trip sheets, or similar record. Income tax software Proving business purpose. Income tax software   You must generally provide a written statement of the business purpose of an expense. Income tax software However, the degree of proof varies according to the circumstances in each case. Income tax software 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 software Example. Income tax software 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 software 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 software You could also establish the date of each trip with a receipt, record of delivery, or other documentary evidence. Income tax software Confidential information. Income tax software   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 software 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 software 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 software 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 software 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 software Documentary evidence can be receipts, paid bills, or similar evidence. Income tax software 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 software 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 software Invoices of deliveries establish when you used the car for business. Income tax software Table 5-1. Income tax software How To Prove Certain Business Expenses IF you have expenses for . Income tax software . Income tax software THEN you must keep records that show details of the following elements . Income tax software . Income tax software . Income tax software   Amount Time Place or  Description Business Purpose Business Relationship Travel Cost of each separate expense for travel, lodging, and meals. Income tax software Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. Income tax software Dates you left and returned for each trip and number of days spent on business. Income tax software Destination or area of your travel (name of city, town, or other designation). Income tax software Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Income tax software    Relationship: N/A Entertainment Cost of each separate expense. Income tax software Incidental expenses such as taxis, telephones, etc. Income tax software , may be totaled on a daily basis. Income tax software Date of entertainment. Income tax software (Also see Business Purpose. Income tax software ) Name and address or location of place of entertainment. Income tax software Type of entertainment if not otherwise apparent. Income tax software (Also see Business Purpose. Income tax software ) Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Income tax software  For entertainment, the nature of the business discussion or activity. Income tax software 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 software    Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. Income tax software  For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal. Income tax software Gifts Cost of the gift. Income tax software Date of the gift. Income tax software Description of the gift. Income tax software   Transportation Cost of each separate expense. Income tax software 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 software Date of the expense. Income tax software For car expenses, the date of the use of the car. Income tax software Your business destination. Income tax software Purpose: Business purpose for the expense. Income tax software    Relationship: N/A Sampling. Income tax software   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 software 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 software Example. Income tax software 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 software There is no other business use of the car, but you and your family use the car for personal purposes. Income tax software 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 software Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Income tax software 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 software Exceptional circumstances. Income tax software   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 software This applies if all the following are true. Income tax software 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 software 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 software You have presented other evidence for the element that is the best proof possible under the circumstances. Income tax software Destroyed records. Income tax software   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 software Reasons beyond your control include fire, flood, and other casualties. Income tax software    Table 5-2. Income tax software 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 software ) 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 software Separating expenses. Income tax software   Each separate payment is generally considered a separate expense. Income tax software 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 software You must record them separately in your records. Income tax software Season or series tickets. Income tax software   If you buy season or series tickets for business use, you must treat each ticket in the series as a separate item. Income tax software 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 software You must keep records to show whether you use each ticket as a gift or entertainment. Income tax software 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 software See Entertainment tickets in chapter 2. Income tax software Combining items. Income tax software   You can make one daily entry in your record for reasonable categories of expenses. Income tax software Examples are taxi fares, telephone calls, or other incidental travel costs. Income tax software Meals should be in a separate category. Income tax software You can include tips for meal-related services with the costs of the meals. Income tax software   Expenses of a similar nature occurring during the course of a single event are considered a single expense. Income tax software 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 software Car expenses. Income tax software   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 software 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 software Example. Income tax software 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 software You can account for these using a single record of miles driven. Income tax software Gift expenses. Income tax software   You do not always have to record the name of each recipient of a gift. Income tax software 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 software 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 software Allocating total cost. Income tax software   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 software To do so, you must establish the number of persons who participated in the event. Income tax software   An allocation would be needed, for example, if you did not have a business relationship with all of your guests. Income tax software See Allocating between business and nonbusiness in chapter 2. Income tax software If your return is examined. Income tax software    If your return is examined, you may have to provide additional information to the IRS. Income tax software 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 software    THIS IS NOT AN OFFICIAL INTERNAL REVENUE FORM Table 5-3. Income tax software Weekly Traveling Expense and Entertainment Record From: To: Name: Expenses Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total 1. Income tax software Travel Expenses: Airlines                                 Excess Baggage                                 Bus – Train                                 Cab and Limousine                                 Tips                                 Porter                                 2. Income tax software Meals and Lodging:  Breakfast                                 Lunch                                 Dinner                                 Hotel and Motel  (Detail in Schedule B)                                 3. Income tax software Entertainment  (Detail in Schedule C)                                 4. Income tax software Other Expenses:  Postage                                 Telephone & Telegraph                                 Stationery & Printing                                 Stenographer                                 Sample Room                                 Advertising                                 Assistant(s)                                 Trade Shows                                 5. Income tax software Car Expenses: (List all car expenses - the division between business and personal expenses may be made at the end of the year. Income tax software ) (Detail mileage in Schedule A. Income tax software ) Gas, oil, lube, wash                                 Repairs, parts                                 Tires, supplies                                 Parking fees, tolls                                 6. Income tax software Other (Identify)                                 Total                                 Note: Attach receipted bills for (1) ALL lodging and (2) any other expenses of $75. Income tax software 00 or more. Income tax software 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 software 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 software A return filed early is considered filed on the due date. Income tax software For a more complete explanation of how long to keep records, see Publication 583, Starting a Business and Keeping Records. Income tax software You must keep records of the business use of your car for each year of the recovery period. Income tax software See More-than-50%-use test in chapter 4 under Depreciation Deduction. Income tax software Reimbursed for expenses. Income tax software   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 software However, you may have to prove your expenses if any of the following conditions apply. Income tax software You claim deductions for expenses that are more than reimbursements. Income tax software Your expenses are reimbursed under a nonaccountable plan. Income tax software Your employer does not use adequate accounting procedures to verify expense accounts. Income tax software You are related to your employer as defined under Per Diem and Car Allowances , in chapter 6. Income tax software Reimbursements , adequate accounting , and nonaccountable plans are discussed in chapter 6. Income tax software Examples of Records Table 5-2 and Table 5-3 are examples of worksheets which can be used for tracking business expenses. Income tax software Prev  Up  Next   Home   More Online Publications