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Irs Addendum Form

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Irs Addendum Form

Irs addendum form 1. Irs addendum form   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Irs addendum form Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Irs addendum form The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Irs addendum form If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Irs addendum form Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Irs addendum form Rental income is any payment you receive for the use or occupation of property. Irs addendum form In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Irs addendum form When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Irs addendum form Most individual taxpayers use the cash method. Irs addendum form Cash method. Irs addendum form   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Irs addendum form You constructively receive income when it is made available to you, for example, by being credited to your bank account. Irs addendum form Accrual method. Irs addendum form    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Irs addendum form You generally deduct your expenses when you incur them, rather than when you pay them. Irs addendum form More information. Irs addendum form   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Irs addendum form Types of Income The following are common types of rental income. Irs addendum form Advance rent. Irs addendum form   Advance rent is any amount you receive before the period that it covers. Irs addendum form Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Irs addendum form Example. Irs addendum form On March 18, 2013, you signed a 10-year lease to rent your property. Irs addendum form During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Irs addendum form You must include $19,200 in your rental income in the first year. Irs addendum form Canceling a lease. Irs addendum form   If your tenant pays you to cancel a lease, the amount you receive is rent. Irs addendum form Include the payment in your income in the year you receive it regardless of your method of accounting. Irs addendum form Expenses paid by tenant. Irs addendum form   If your tenant pays any of your expenses, those payments are rental income. Irs addendum form Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Irs addendum form For more information, see Rental Expenses , later. Irs addendum form Example 1. Irs addendum form Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Irs addendum form Under the terms of the lease, your tenant does not have to pay this bill. Irs addendum form Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Irs addendum form You can deduct the utility payment made by your tenant as a rental expense. Irs addendum form Example 2. Irs addendum form While you are out of town, the furnace in your rental property stops working. Irs addendum form Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Irs addendum form Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Irs addendum form You can deduct the repair payment made by your tenant as a rental expense. Irs addendum form Property or services. Irs addendum form   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Irs addendum form   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Irs addendum form Example. Irs addendum form Your tenant is a house painter. Irs addendum form He offers to paint your rental property instead of paying 2 months rent. Irs addendum form You accept his offer. Irs addendum form Include in your rental income the amount the tenant would have paid for 2 months rent. Irs addendum form You can deduct that same amount as a rental expense for painting your property. Irs addendum form Security deposits. Irs addendum form   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Irs addendum form But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Irs addendum form    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Irs addendum form Include it in your income when you receive it. Irs addendum form Other Sources of Rental Income Lease with option to buy. Irs addendum form   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Irs addendum form If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Irs addendum form Part interest. Irs addendum form   If you own a part interest in rental property, you must report your part of the rental income from the property. Irs addendum form Rental of property also used as your home. Irs addendum form   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Irs addendum form However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Irs addendum form See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Irs addendum form Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Irs addendum form Personal use of rental property. Irs addendum form   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Irs addendum form Also, your rental expense deductions may be limited. Irs addendum form See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Irs addendum form Part interest. Irs addendum form   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Irs addendum form Example. Irs addendum form Roger owns a one-half undivided interest in a rental house. Irs addendum form Last year he paid $968 for necessary repairs on the property. Irs addendum form Roger can deduct $484 (50% × $968) as a rental expense. Irs addendum form He is entitled to reimbursement for the remaining half from the co-owner. Irs addendum form When To Deduct You generally deduct your rental expenses in the year you pay them. Irs addendum form If you use the accrual method, see Publication 538 for more information. Irs addendum form Types of Expenses Listed below are the most common rental expenses. Irs addendum form Advertising. Irs addendum form Auto and travel expenses. Irs addendum form Cleaning and maintenance. Irs addendum form Commissions. Irs addendum form Depreciation. Irs addendum form Insurance. Irs addendum form Interest (other). Irs addendum form Legal and other professional fees. Irs addendum form Local transportation expenses. Irs addendum form Management fees. Irs addendum form Mortgage interest paid to banks, etc. Irs addendum form Points. Irs addendum form Rental payments. Irs addendum form Repairs. Irs addendum form Taxes. Irs addendum form Utilities. Irs addendum form Some of these expenses, as well as other less common ones, are discussed below. Irs addendum form Depreciation. Irs addendum form   Depreciation is a capital expense. Irs addendum form It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Irs addendum form   You can begin to depreciate rental property when it is ready and available for rent. Irs addendum form See Placed in Service under When Does Depreciation Begin and End in chapter 2. Irs addendum form Insurance premiums paid in advance. Irs addendum form   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Irs addendum form You cannot deduct the total premium in the year you pay it. Irs addendum form See chapter 6 of Publication 535 for information on deductible premiums. Irs addendum form Interest expense. Irs addendum form   You can deduct mortgage interest you pay on your rental property. Irs addendum form When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Irs addendum form Chapter 4 of Publication 535 explains mortgage interest in detail. Irs addendum form Expenses paid to obtain a mortgage. Irs addendum form   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Irs addendum form These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Irs addendum form Form 1098, Mortgage Interest Statement. Irs addendum form   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. Irs addendum form If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Irs addendum form Attach a statement to your return showing the name and address of the other person. Irs addendum form On the dotted line next to line 13, enter “See attached. Irs addendum form ” Legal and other professional fees. Irs addendum form   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Irs addendum form For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Irs addendum form You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Irs addendum form Local benefit taxes. Irs addendum form   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Irs addendum form These charges are nondepreciable capital expenditures and must be added to the basis of your property. Irs addendum form However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Irs addendum form Local transportation expenses. Irs addendum form   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Irs addendum form However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Irs addendum form See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Irs addendum form   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Irs addendum form For 2013, the standard mileage rate for business use is 56. Irs addendum form 5 cents per mile. Irs addendum form For more information, see chapter 4 of Publication 463. Irs addendum form    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Irs addendum form In addition, you must complete Form 4562, Part V, and attach it to your tax return. Irs addendum form Pre-rental expenses. Irs addendum form   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Irs addendum form Rental of equipment. Irs addendum form   You can deduct the rent you pay for equipment that you use for rental purposes. Irs addendum form However, in some cases, lease contracts are actually purchase contracts. Irs addendum form If so, you cannot deduct these payments. Irs addendum form You can recover the cost of purchased equipment through depreciation. Irs addendum form Rental of property. Irs addendum form   You can deduct the rent you pay for property that you use for rental purposes. Irs addendum form If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Irs addendum form Travel expenses. Irs addendum form   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Irs addendum form You must properly allocate your expenses between rental and nonrental activities. Irs addendum form You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Irs addendum form The cost of improvements is recovered by taking depreciation. Irs addendum form For information on travel expenses, see chapter 1 of Publication 463. Irs addendum form    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Irs addendum form Uncollected rent. Irs addendum form   If you are a cash basis taxpayer, do not deduct uncollected rent. Irs addendum form Because you have not included it in your income, it is not deductible. Irs addendum form   If you use an accrual method, report income when you earn it. Irs addendum form If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Irs addendum form See chapter 10 of Publication 535 for more information about business bad debts. Irs addendum form Vacant rental property. Irs addendum form   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Irs addendum form However, you cannot deduct any loss of rental income for the period the property is vacant. Irs addendum form Vacant while listed for sale. Irs addendum form   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Irs addendum form If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Irs addendum form Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Irs addendum form These charges are also called loan origination fees, maximum loan charges, or premium charges. Irs addendum form Any of these charges (points) that are solely for the use of money are interest. Irs addendum form Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Irs addendum form The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Irs addendum form In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Irs addendum form The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Irs addendum form If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Irs addendum form De minimis OID. Irs addendum form   The OID is de minimis if it is less than one-fourth of 1% (. Irs addendum form 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Irs addendum form   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Irs addendum form On a constant-yield basis over the term of the loan. Irs addendum form On a straight line basis over the term of the loan. Irs addendum form In proportion to stated interest payments. Irs addendum form In its entirety at maturity of the loan. Irs addendum form You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Irs addendum form Example. Irs addendum form Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Irs addendum form The loan is to be repaid over 30 years. Irs addendum form During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Irs addendum form When the loan was made, she paid $1,500 in points to the lender. Irs addendum form The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Irs addendum form Carol determines that the points (OID) she paid are de minimis based on the following computation. Irs addendum form Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Irs addendum form 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Irs addendum form Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Irs addendum form Under the straight line method, she can deduct $50 each year for 30 years. Irs addendum form Constant-yield method. Irs addendum form   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Irs addendum form   You figure your deduction for the first year in the following manner. Irs addendum form Determine the issue price of the loan. Irs addendum form If you paid points on the loan, the issue price generally is the difference between the principal and the points. Irs addendum form Multiply the result in (1) by the yield to maturity (defined later). Irs addendum form Subtract any qualified stated interest payments (defined later) from the result in (2). Irs addendum form This is the OID you can deduct in the first year. Irs addendum form Yield to maturity (YTM). Irs addendum form   This rate is generally shown in the literature you receive from your lender. Irs addendum form If you do not have this information, consult your lender or tax advisor. Irs addendum form In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Irs addendum form Qualified stated interest (QSI). Irs addendum form   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Irs addendum form Example—Year 1. Irs addendum form The facts are the same as in the previous example. Irs addendum form The yield to maturity on Carol's loan is 10. Irs addendum form 2467%, compounded annually. Irs addendum form She figured the amount of points (OID) she could deduct in 2013 as follows. Irs addendum form Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Irs addendum form 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Irs addendum form To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Irs addendum form Then follow steps (2) and (3), earlier. Irs addendum form Example—Year 2. Irs addendum form Carol figured the deduction for 2014 as follows. Irs addendum form Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Irs addendum form 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Irs addendum form    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Irs addendum form A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Irs addendum form However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Irs addendum form Points when loan refinance is more than the previous outstanding balance. Irs addendum form   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Irs addendum form For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Irs addendum form Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Irs addendum form Improvements. Irs addendum form   You must capitalize any expense you pay to improve your rental property. Irs addendum form An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Irs addendum form Betterments. Irs addendum form   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Irs addendum form Restoration. Irs addendum form   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Irs addendum form Adaptation. Irs addendum form   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Irs addendum form Separate the costs of repairs and improvements, and keep accurate records. Irs addendum form You will need to know the cost of improvements when you sell or depreciate your property. Irs addendum form The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Irs addendum form Table 1-1. Irs addendum form Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications
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The Irs Addendum Form

Irs addendum form 7. Irs addendum form   Costs You Can Deduct or Capitalize Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Carrying Charges Research and Experimental CostsProduct. Irs addendum form Costs not included. Irs addendum form Intangible Drilling Costs Exploration CostsPartnerships and S corporations. Irs addendum form Development Costs Circulation Costs Business Start-Up and Organizational Costs Reforestation Costs Retired Asset Removal Costs Barrier Removal CostsOther barrier removals. Irs addendum form Film and Television Production Costs What's New Film and television productions costs. Irs addendum form  The election to expense film and television production costs does not apply to productions that begin after December 31, 2013. Irs addendum form See Film and Television Production Costs , later. Irs addendum form Introduction This chapter discusses costs you can elect to deduct or capitalize. Irs addendum form You generally deduct a cost as a current business expense by subtracting it from your income in either the year you incur it or the year you pay it. Irs addendum form If you capitalize a cost, you may be able to recover it over a period of years through periodic deductions for amortization, depletion, or depreciation. Irs addendum form When you capitalize a cost, you add it to the basis of property to which it relates. Irs addendum form A partnership, corporation, estate, or trust makes the election to deduct or capitalize the costs discussed in this chapter except for exploration costs for mineral deposits. Irs addendum form Each individual partner, shareholder, or beneficiary elects whether to deduct or capitalize exploration costs. Irs addendum form You may be subject to the alternative minimum tax (AMT) if you deduct research and experimental, intangible drilling, exploration, development, circulation, or business organizational costs. Irs addendum form For more information on the alternative minimum tax, see the instructions for the following forms. Irs addendum form Form 6251, Alternative Minimum Tax—Individuals. Irs addendum form Form 4626, Alternative Minimum Tax—Corporations. Irs addendum form Topics - This chapter discusses: Carrying charges Research and experimental costs Intangible drilling costs Exploration costs Development costs Circulation costs Qualified disaster expenses Business start-up and organizational costs Reforestation costs Retired asset removal costs Barrier removal costs Film and television production costs Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 3468 Investment Credit 8826 Disabled Access Credit See chapter 12 for information about getting publications and forms. Irs addendum form Carrying Charges Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Irs addendum form Certain carrying charges must be capitalized under the uniform capitalization rules. Irs addendum form (For information on capitalization of interest, see chapter 4 . Irs addendum form ) You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible. Irs addendum form You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. Irs addendum form For unimproved and unproductive real property, your election is good for only 1 year. Irs addendum form You must decide whether to capitalize carrying charges each year the property remains unimproved and unproductive. Irs addendum form For other real property, your election to capitalize carrying charges remains in effect until construction or development is completed. Irs addendum form For personal property, your election is effective until the date you install or first use it, whichever is later. Irs addendum form How to make the election. Irs addendum form   To make the election to capitalize a carrying charge, attach a statement to your original tax return for the year the election is to be effective indicating which charges you are electing to capitalize. Irs addendum form However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Irs addendum form Attach the statement to the amended return and write “Filed pursuant to section 301. Irs addendum form 9100-2” on the statement. Irs addendum form File the amended return at the same address you filed the original return. Irs addendum form Research and Experimental Costs The costs of research and experimentation are generally capital expenses. Irs addendum form However, you can elect to deduct these costs as a current business expense. Irs addendum form Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change. Irs addendum form If you meet certain requirements, you may elect to defer and amortize research and experimental costs. Irs addendum form For information on electing to defer and amortize these costs, see Research and Experimental Costs in chapter 8. Irs addendum form Research and experimental costs defined. Irs addendum form   Research and experimental costs are reasonable costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. Irs addendum form Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product. Irs addendum form Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the nature of the product or improvement being developed or the level of technological advancement. Irs addendum form      The costs of obtaining a patent, including attorneys' fees paid or incurred in making and perfecting a patent application, are research and experimental costs. Irs addendum form However, costs paid or incurred to obtain another's patent are not research and experimental costs. Irs addendum form Product. Irs addendum form   The term “product” includes any of the following items. Irs addendum form Formula. Irs addendum form Invention. Irs addendum form Patent. Irs addendum form Pilot model. Irs addendum form Process. Irs addendum form Technique. Irs addendum form Property similar to the items listed above. Irs addendum form It also includes products used by you in your trade or business or held for sale, lease, or license. Irs addendum form Costs not included. Irs addendum form   Research and experimental costs do not include expenses for any of the following activities. Irs addendum form Advertising or promotions. Irs addendum form Consumer surveys. Irs addendum form Efficiency surveys. Irs addendum form Management studies. Irs addendum form Quality control testing. Irs addendum form Research in connection with literary, historical, or similar projects. Irs addendum form The acquisition of another's patent, model, production, or process. Irs addendum form When and how to elect. Irs addendum form   You make the election to deduct research and experimental costs by deducting them on your tax return for the year in which you first pay or incur research and experimental costs. Irs addendum form If you do not make the election to deduct research and experimental costs in the first year in which you pay or incur the costs, you can deduct the costs in a later year only with approval from the IRS. Irs addendum form Deducting or Amortizing Research and Experimentation Costs IF you . Irs addendum form . Irs addendum form . Irs addendum form THEN . Irs addendum form . Irs addendum form . Irs addendum form Elect to deduct research and experimental costs as a current business expense Deduct all research and experimental costs in the first year you pay or incur the costs and all later years. Irs addendum form Do not deduct research and experimental costs as a current business expense If you meet the requirements, amortize them over at least 60 months, starting with the month you first receive an economic benefit from the research. Irs addendum form See Research and Experimental Costs in chapter 8. Irs addendum form Research credit. Irs addendum form   If you pay or incur qualified research expenses, you may be able to take the research credit. Irs addendum form For more information see Form 6765, Credit for Increasing Research Activities and its instructions. Irs addendum form Intangible Drilling Costs The costs of developing oil, gas, or geothermal wells are ordinarily capital expenditures. Irs addendum form You can usually recover them through depreciation or depletion. Irs addendum form However, you can elect to deduct intangible drilling costs (IDCs) as a current business expense. Irs addendum form These are certain drilling and development costs for wells in the United States in which you hold an operating or working interest. Irs addendum form You can deduct only costs for drilling or preparing a well for the production of oil, gas, or geothermal steam or hot water. Irs addendum form You can elect to deduct only the costs of items with no salvage value. Irs addendum form These include wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production. Irs addendum form Your cost for any drilling or development work done by contractors under any form of contract is also an IDC. Irs addendum form However, see Amounts paid to contractor that must be capitalized , later. Irs addendum form You can also elect to deduct the cost of drilling exploratory bore holes to determine the location and delineation of offshore hydrocarbon deposits if the shaft is capable of conducting hydrocarbons to the surface on completion. Irs addendum form It does not matter whether there is any intent to produce hydrocarbons. Irs addendum form If you do not elect to deduct your IDCs as a current business expense, you can elect to deduct them over the 60-month period beginning with the month they were paid or incurred. Irs addendum form Amounts paid to contractor that must be capitalized. Irs addendum form   Amounts paid to a contractor must be capitalized if they are either: Amounts properly allocable to the cost of depreciable property, or Amounts paid only out of production or proceeds from production if these amounts are depletable income to the recipient. Irs addendum form How to make the election. Irs addendum form   You elect to deduct IDCs as a current business expense by taking the deduction on your income tax return for the first tax year you have eligible costs. Irs addendum form No formal statement is required. Irs addendum form If you file Schedule C (Form 1040), enter these costs under “Other expenses. Irs addendum form ”   For oil and gas wells, your election is binding for the year it is made and for all later years. Irs addendum form For geothermal wells, your election can be revoked by the filing of an amended return on which you do not take the deduction. Irs addendum form You can file the amended return for the year up to the normal time of expiration for filing a claim for credit or refund, generally, within 3 years after the date you filed the original return or within 2 years after the date you paid the tax, whichever is later. Irs addendum form Energy credit for costs of geothermal wells. Irs addendum form   If you capitalize the drilling and development costs of geothermal wells that you place in service during the tax year, you may be able to claim a business energy credit. Irs addendum form See the Instructions for Form 3468 for more information. Irs addendum form Nonproductive well. Irs addendum form   If you capitalize your IDCs, you have another option if the well is nonproductive. Irs addendum form You can deduct the IDCs of the nonproductive well as an ordinary loss. Irs addendum form You must indicate and clearly state your election on your tax return for the year the well is completed. Irs addendum form Once made, the election for oil and gas wells is binding for all later years. Irs addendum form You can revoke your election for a geothermal well by filing an amended return that does not claim the loss. Irs addendum form Costs incurred outside the United States. Irs addendum form   You cannot deduct as a current business expense all the IDCs paid or incurred for an oil, gas, or geothermal well located outside the United States. Irs addendum form However, you can elect to include the costs in the adjusted basis of the well to figure depletion or depreciation. Irs addendum form If you do not make this election, you can deduct the costs over the 10-year period beginning with the tax year in which you paid or incurred them. Irs addendum form These rules do not apply to a nonproductive well. Irs addendum form Exploration Costs The costs of determining the existence, location, extent, or quality of any mineral deposit are ordinarily capital expenditures if the costs lead to the development of a mine. Irs addendum form You recover these costs through depletion as the mineral is removed from the ground. Irs addendum form However, you can elect to deduct domestic exploration costs paid or incurred before the beginning of the development stage of the mine (except those for oil and gas wells). Irs addendum form How to make the election. Irs addendum form   You elect to deduct exploration costs by taking the deduction on your income tax return, or on an amended income tax return, for the first tax year for which you wish to deduct the costs paid or incurred during the tax year. Irs addendum form Your return must adequately describe and identify each property or mine, and clearly state how much is being deducted for each one. Irs addendum form The election applies to the tax year you make this election and all later tax years. Irs addendum form Partnerships and S corporations. Irs addendum form   Each partner, not the partnership, elects whether to capitalize or to deduct that partner's share of exploration costs. Irs addendum form Each shareholder, not the S corporation, elects whether to capitalize or to deduct that shareholder's share of exploration costs. Irs addendum form Reduced corporate deductions for exploration costs. Irs addendum form   A corporation (other than an S corporation) can deduct only 70% of its domestic exploration costs. Irs addendum form It must capitalize the remaining 30% of costs and amortize them over the 60-month period starting with the month the exploration costs are paid or incurred. Irs addendum form A corporation may also elect to capitalize and amortize mining exploration costs over a 10-year period. Irs addendum form For more information on this method of amortization, see Internal Revenue Code section 59(e). Irs addendum form   The 30% the corporation capitalizes cannot be added to its basis in the property to figure cost depletion. Irs addendum form However, the amount amortized is treated as additional depreciation and is subject to recapture as ordinary income on a disposition of the property. Irs addendum form See Section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Irs addendum form   These rules also apply to the deduction of development costs by corporations. Irs addendum form See Development Costs , later. Irs addendum form Recapture of exploration expenses. Irs addendum form   When your mine reaches the producing stage, you must recapture any exploration costs you elected to deduct. Irs addendum form Use either of the following methods. Irs addendum form Method 1—Include the deducted costs in gross income for the tax year the mine reaches the producing stage. Irs addendum form Your election must be clearly indicated on the return. Irs addendum form Increase your adjusted basis in the mine by the amount included in income. Irs addendum form Generally, you must elect this recapture method by the due date (including extensions) of your return. Irs addendum form However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Irs addendum form Make the election on your amended return and write “Filed pursuant to section 301. Irs addendum form 9100-2” on the form where you are including the income. Irs addendum form File the amended return at the same address you filed the original return. Irs addendum form Method 2—Do not claim any depletion deduction for the tax year the mine reaches the producing stage and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Irs addendum form   You also must recapture deducted exploration costs if you receive a bonus or royalty from mine property before it reaches the producing stage. Irs addendum form Do not claim any depletion deduction for the tax year you receive the bonus or royalty and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Irs addendum form   Generally, if you dispose of the mine before you have fully recaptured the exploration costs you deducted, recapture the balance by treating all or part of your gain as ordinary income. Irs addendum form Under these circumstances, you generally treat as ordinary income all of your gain if it is less than your adjusted exploration costs with respect to the mine. Irs addendum form If your gain is more than your adjusted exploration costs, treat as ordinary income only a part of your gain, up to the amount of your adjusted exploration costs. Irs addendum form Foreign exploration costs. Irs addendum form   If you pay or incur exploration costs for a mine or other natural deposit located outside the United States, you cannot deduct all the costs in the current year. Irs addendum form You can elect to include the costs (other than for an oil, gas, or geothermal well) in the adjusted basis of the mineral property to figure cost depletion. Irs addendum form (Cost depletion is discussed in chapter 9 . Irs addendum form ) If you do not make this election, you must deduct the costs over the 10-year period beginning with the tax year in which you pay or incur them. Irs addendum form These rules also apply to foreign development costs. Irs addendum form Development Costs You can deduct costs paid or incurred during the tax year for developing a mine or any other natural deposit (other than an oil or gas well) located in the United States. Irs addendum form These costs must be paid or incurred after the discovery of ores or minerals in commercially marketable quantities. Irs addendum form Development costs also include depreciation on improvements used in the development of ores or minerals and costs incurred for you by a contractor. Irs addendum form Development costs do not include the costs for the acquisition or improvement of depreciable property. Irs addendum form Instead of deducting development costs in the year paid or incurred, you can elect to treat the cost as deferred expenses and deduct them ratably as the units of produced ores or minerals benefited by the expenses are sold. Irs addendum form This election applies each tax year to expenses paid or incurred in that year. Irs addendum form Once made, the election is binding for the year and cannot be revoked for any reason. Irs addendum form How to make the election. Irs addendum form   The election to deduct development costs ratably as the ores or minerals are sold must be made for each mine or other natural deposit by a clear indication on your return or by a statement filed with the IRS office where you file your return. Irs addendum form Generally, you must make the election by the due date of the return (including extensions). Irs addendum form However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Irs addendum form Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Irs addendum form 9100-2. Irs addendum form ” File the amended return at the same address you filed the original return. Irs addendum form Foreign development costs. Irs addendum form   The rules discussed earlier for foreign exploration costs apply to foreign development costs. Irs addendum form Reduced corporate deductions for development costs. Irs addendum form   The rules discussed earlier for reduced corporate deductions for exploration costs also apply to corporate deductions for development costs. Irs addendum form Circulation Costs A publisher can deduct as a current business expense the costs of establishing, maintaining, or increasing the circulation of a newspaper, magazine, or other periodical. Irs addendum form For example, a publisher can deduct the cost of hiring extra employees for a limited time to get new subscriptions through telephone calls. Irs addendum form Circulation costs are deductible even if they normally would be capitalized. Irs addendum form This rule does not apply to the following costs that must be capitalized. Irs addendum form The purchase of land or depreciable property. Irs addendum form The acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical, including the purchase of another publisher's list of subscribers. Irs addendum form Other treatment of circulation costs. Irs addendum form   If you do not want to deduct circulation costs as a current business expense, you can elect one of the following ways to recover these costs. Irs addendum form Capitalize all circulation costs that are properly chargeable to a capital account (see chapter 1 ). Irs addendum form Amortize circulation costs over the 3-year period beginning with the tax year they were paid or incurred. Irs addendum form How to make the election. Irs addendum form   You elect to capitalize circulation costs by attaching a statement to your return for the first tax year the election applies. Irs addendum form Your election is binding for the year it is made and for all later years, unless you get IRS approval to revoke it. Irs addendum form Business Start-Up and Organizational Costs Business start-up and organizational costs are generally capital expenditures. Irs addendum form However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. Irs addendum form The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Irs addendum form Any remaining costs must be amortized. Irs addendum form For information about amortizing start-up and organizational costs, see chapter 8 . Irs addendum form Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Irs addendum form Organizational costs include the costs of creating a corporation. Irs addendum form For more information on start-up and organizational costs, see chapter 8 . Irs addendum form How to make the election. Irs addendum form   You elect to deduct the start-up or organizational costs by claiming the deduction on your income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins. Irs addendum form However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Irs addendum form Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Irs addendum form 9100-2. Irs addendum form ” File the amended return at the same address you filed the original return. Irs addendum form The election applies when computing taxable income for the current tax year and all subsequent years. Irs addendum form Reforestation Costs Reforestation costs are generally capital expenditures. Irs addendum form However, you can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Irs addendum form The remaining costs can be amortized over an 84-month period. Irs addendum form For information about amortizing reforestation costs, see chapter 8 . Irs addendum form Qualifying reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Irs addendum form Qualified timber property is property that contains trees in significant commercial quantities. Irs addendum form See chapter 8 for more information on qualifying reforestation costs and qualified timber property. Irs addendum form If you elect to deduct qualified reforestation costs, create and maintain separate timber accounts for each qualified timber property and include all reforestation costs and the dates each was applied. Irs addendum form Do not include this qualified timber property in any account (for example, depletion block) for which depletion is allowed. Irs addendum form How to make the election. Irs addendum form   You elect to deduct qualifying reforestation costs by claiming the deduction on your timely filed income tax return (including extensions) for the tax year the expenses were paid or incurred. Irs addendum form If Form T (Timber), Forest Activities Schedule, is required, complete Part IV of Form T. Irs addendum form If Form T is not required, attach a statement containing the following information for each qualified timber property for which an election is being made. Irs addendum form The unique stand identification numbers. Irs addendum form The total number of acres reforested during the tax year. Irs addendum form The nature of the reforestation treatments. Irs addendum form The total amounts of qualified reforestation expenditures eligible to be amortized or deducted. Irs addendum form   If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Irs addendum form Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Irs addendum form 9100-2. Irs addendum form ” File the amended return at the same address you filed the original return. Irs addendum form The election applies when computing taxable income for the current tax year and all subsequent years. Irs addendum form   For additional information on reforestation costs, see chapter 8 . Irs addendum form Recapture. Irs addendum form   This deduction may have to be recaptured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not elected to deduct the expenditure. Irs addendum form For more information on recapturing the deduction, see Depreciation Recapture in Publication 544. Irs addendum form Retired Asset Removal Costs If you retire and remove a depreciable asset in connection with the installation or production of a replacement asset, you can deduct the costs of removing the retired asset. Irs addendum form However, if you replace a component (part) of a depreciable asset, capitalize the removal costs if the replacement is an improvement and deduct the costs if the replacement is a repair. Irs addendum form Barrier Removal Costs The cost of an improvement to a business asset is normally a capital expense. Irs addendum form However, you can elect to deduct the costs of making a facility or public transportation vehicle more accessible to and usable by those who are disabled or elderly. Irs addendum form You must own or lease the facility or vehicle for use in connection with your trade or business. Irs addendum form A facility is all or any part of buildings, structures, equipment, roads, walks, parking lots, or similar real or personal property. Irs addendum form A public transportation vehicle is a vehicle, such as a bus or railroad car, that provides transportation service to the public (including service for your customers, even if you are not in the business of providing transportation services). Irs addendum form You cannot deduct any costs that you paid or incurred to completely renovate or build a facility or public transportation vehicle or to replace depreciable property in the normal course of business. Irs addendum form Deduction limit. Irs addendum form   The most you can deduct as a cost of removing barriers to the disabled and the elderly for any tax year is $15,000. Irs addendum form However, you can add any costs over this limit to the basis of the property and depreciate these excess costs. Irs addendum form Partners and partnerships. Irs addendum form   The $15,000 limit applies to a partnership and also to each partner in the partnership. Irs addendum form A partner can allocate the $15,000 limit in any manner among the partner's individually incurred costs and the partner's distributive share of partnership costs. Irs addendum form If the partner cannot deduct the entire share of partnership costs, the partnership can add any costs not deducted to the basis of the improved property. Irs addendum form   A partnership must be able to show that any amount added to basis was not deducted by the partner and that it was over a partner's $15,000 limit (as determined by the partner). Irs addendum form If the partnership cannot show this, it is presumed that the partner was able to deduct the distributive share of the partnership's costs in full. Irs addendum form Example. Irs addendum form Emilio Azul's distributive share of ABC partnership's deductible expenses for the removal of architectural barriers was $14,000. Irs addendum form Emilio had $12,000 of similar expenses in his sole proprietorship. Irs addendum form He elected to deduct $7,000 of them. Irs addendum form Emilio allocated the remaining $8,000 of the $15,000 limit to his share of ABC's expenses. Irs addendum form Emilio can add the excess $5,000 of his own expenses to the basis of the property used in his business. Irs addendum form Also, if ABC can show that Emilio could not deduct $6,000 ($14,000 – $8,000) of his share of the partnership's expenses because of how Emilio applied the limit, ABC can add $6,000 to the basis of its property. Irs addendum form Qualification standards. Irs addendum form   You can deduct your costs as a current expense only if the barrier removal meets the guidelines and requirements issued by the Architectural and Transportation Barriers Compliance Board under the Americans with Disabilities Act (ADA) of 1990. Irs addendum form You can view the Americans with Disabilities Act at www. Irs addendum form ada. Irs addendum form gov/pubs/ada. Irs addendum form htm. Irs addendum form   The following is a list of some architectural barrier removal costs that can be deducted. Irs addendum form Ground and floor surfaces. Irs addendum form Walks. Irs addendum form Parking lots. Irs addendum form Ramps. Irs addendum form Entrances. Irs addendum form Doors and doorways. Irs addendum form Stairs. Irs addendum form Floors. Irs addendum form Toilet rooms. Irs addendum form Water fountains. Irs addendum form Public telephones. Irs addendum form Elevators. Irs addendum form Controls. Irs addendum form Signage. Irs addendum form Alarms. Irs addendum form Protruding objects. Irs addendum form Symbols of accessibility. Irs addendum form You can find the ADA guidelines and requirements for architectural barrier removal at www. Irs addendum form usdoj. Irs addendum form gov/crt/ada/reg3a. Irs addendum form html. Irs addendum form   The costs for removal of transportation barriers from rail facilities, buses, and rapid and light rail vehicles are deductible. Irs addendum form You can find the guidelines and requirements for transportation barrier removal at www. Irs addendum form fta. Irs addendum form dot. Irs addendum form gov. Irs addendum form   Also, you can access the ADA website at www. Irs addendum form ada. Irs addendum form gov for additional information. Irs addendum form Other barrier removals. Irs addendum form   To be deductible, expenses of removing any barrier not covered by the above standards must meet all three of the following tests. Irs addendum form The removed barrier must be a substantial barrier to access or use of a facility or public transportation vehicle by persons who have a disability or are elderly. Irs addendum form The removed barrier must have been a barrier for at least one major group of persons who have a disability or are elderly (such as people who are blind, deaf, or wheelchair users). Irs addendum form The barrier must be removed without creating any new barrier that significantly impairs access to or use of the facility or vehicle by a major group of persons who have a disability or are elderly. Irs addendum form How to make the election. Irs addendum form   If you elect to deduct your costs for removing barriers to the disabled or the elderly, claim the deduction on your income tax return (partnership return for partnerships) for the tax year the expenses were paid or incurred. Irs addendum form Identify the deduction as a separate item. Irs addendum form The election applies to all the qualifying costs you have during the year, up to the $15,000 limit. Irs addendum form If you make this election, you must maintain adequate records to support your deduction. Irs addendum form   For your election to be valid, you generally must file your return by its due date, including extensions. Irs addendum form However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Irs addendum form Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Irs addendum form 9100-2. Irs addendum form ” File the amended return at the same address you filed the original return. Irs addendum form Your election is irrevocable after the due date, including extensions, of your return. Irs addendum form Disabled access credit. Irs addendum form   If you make your business accessible to persons with disabilities and your business is an eligible small business, you may be able to claim the disabled access credit. Irs addendum form If you choose to claim the credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Irs addendum form   For more information, see Form 8826, Disabled Access Credit. Irs addendum form Film and Television Production Costs Film and television production costs are generally capital expenses. Irs addendum form However, you can elect to deduct costs paid or incurred for certain productions commencing before January 1, 2014. Irs addendum form For more information, see section 181 of the Internal Revenue Code and the related Treasury Regulations. Irs addendum form Prev  Up  Next   Home   More Online Publications