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Irs Amended Return

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Irs Amended Return

Irs amended return 10. Irs amended return   Retirement Plans, Pensions, and Annuities Table of Contents What's New Reminder IntroductionThe General Rule. Irs amended return Individual retirement arrangements (IRAs). Irs amended return Civil service retirement benefits. Irs amended return Useful Items - You may want to see: General InformationIn-plan rollovers to designated Roth accounts. Irs amended return How To Report Cost (Investment in the Contract) Taxation of Periodic PaymentsExclusion limited to cost. Irs amended return Exclusion not limited to cost. Irs amended return Simplified Method Taxation of Nonperiodic PaymentsLump-Sum Distributions RolloversIn-plan rollovers to designated Roth accounts. Irs amended return Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and Beneficiaries What's New For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). Irs amended return However, these distributions are taken into account when determining the modified adjusted gross income threshold. Irs amended return Distributions from a nonqualified retirement plan are included in net investment income. Irs amended return See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Irs amended return Reminder Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. Irs amended return For more information, see Designated Roth accounts discussed later. Irs amended return Introduction This chapter discusses the tax treatment of distributions you receive from: An employee pension or annuity from a qualified plan, A disability retirement, and A purchased commercial annuity. Irs amended return What is not covered in this chapter. Irs amended return   The following topics are not discussed in this chapter. Irs amended return The General Rule. Irs amended return   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). Irs amended return For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. Irs amended return For more information about the General Rule, see Publication 939, General Rule for Pensions and Annuities. Irs amended return Individual retirement arrangements (IRAs). Irs amended return   Information on the tax treatment of amounts you receive from an IRA is in chapter 17. Irs amended return Civil service retirement benefits. Irs amended return    If you are retired from the federal government (regular, phased, or disability retirement), see Publication 721, Tax Guide to U. Irs amended return S. Irs amended return Civil Service Retirement Benefits. Irs amended return Publication 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died. Irs amended return Useful Items - You may want to see: Publication 575 Pension and Annuity Income 721 Tax Guide to U. Irs amended return S. Irs amended return Civil Service Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Irs amended return 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts General Information Designated Roth accounts. Irs amended return   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. Irs amended return Elective deferrals that are designated as Roth contributions are included in your income. Irs amended return However, qualified distributions are not included in your income. Irs amended return See Publication 575 for more information. Irs amended return In-plan rollovers to designated Roth accounts. Irs amended return   If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Irs amended return The rollover of any untaxed amounts must be included in income. Irs amended return See Publication 575 for more information. Irs amended return More than one program. Irs amended return   If you receive benefits from more than one program under a single trust or plan of your employer, such as a pension plan and a profit-sharing plan, you may have to figure the taxable part of each pension or annuity contract separately. Irs amended return Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract. Irs amended return Section 457 deferred compensation plans. Irs amended return    If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. Irs amended return If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. Irs amended return You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. Irs amended return You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. Irs amended return   Your 457(b) plan may have a designated Roth account option. Irs amended return If so, you may be able to roll over amounts to the designated Roth account or make contributions. Irs amended return Elective deferrals to a designated Roth account are included in your income. Irs amended return Qualified distributions from a designated Roth account are not subject to tax. Irs amended return   This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. Irs amended return For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income. Irs amended return   For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575. Irs amended return Disability pensions. Irs amended return   If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. Irs amended return You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Irs amended return Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Irs amended return    You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Irs amended return For information on the credit for the elderly or the disabled, see chapter 33. Irs amended return   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Irs amended return Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b. Irs amended return    Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. Irs amended return For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Irs amended return   For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5. Irs amended return Retired public safety officers. Irs amended return   An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term disability insurance. Irs amended return See Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information. Irs amended return Railroad retirement benefits. Irs amended return   Part of any railroad retirement benefits you receive is treated for tax purposes as social security benefits, and part is treated as an employee pension. Irs amended return For information about railroad retirement benefits treated as social security benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Irs amended return For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Publication 575. Irs amended return Withholding and estimated tax. Irs amended return   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. Irs amended return You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. Irs amended return If you choose not to have tax withheld, or you do not have enough tax withheld, you may have to pay estimated tax. Irs amended return   If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. Irs amended return Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. Irs amended return See Direct rollover option under Rollovers, later. Irs amended return   For more information, see Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Irs amended return Qualified plans for self-employed individuals. Irs amended return   Qualified plans set up by self-employed individuals are sometimes called Keogh or H. Irs amended return R. Irs amended return 10 plans. Irs amended return Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. Irs amended return They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees. Irs amended return    Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. Irs amended return If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. Irs amended return For more information about qualified plans, see Publication 560, Retirement Plans for Small Business. Irs amended return Purchased annuities. Irs amended return   If you receive pension or annuity payments from a privately purchased annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. Irs amended return For more information about the General Rule, get Publication 939. Irs amended return Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts. Irs amended return Loans. Irs amended return   If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. Irs amended return This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign. Irs amended return This means that you must include in income all or part of the amount borrowed. Irs amended return Even if you do not have to treat the loan as a nonperiodic distribution, you may not be able to deduct the interest on the loan in some situations. Irs amended return For details, see Loans Treated as Distributions in Publication 575. Irs amended return For information on the deductibility of interest, see chapter 23. Irs amended return Tax-free exchange. Irs amended return   No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. Irs amended return However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income. Irs amended return See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts. Irs amended return How To Report If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. Irs amended return If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a. Irs amended return If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. Irs amended return If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a. Irs amended return More than one annuity. Irs amended return   If you receive more than one annuity and at least one of them is not fully taxable, enter the total amount received from all annuities on Form 1040, line 16a, or Form 1040A, line 12a, and enter the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Irs amended return If all the annuities you receive are fully taxable, enter the total of all of them on Form 1040, line 16b, or Form 1040A, line 12b. Irs amended return Joint return. Irs amended return   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on Form 1040, line 16a, or Form 1040A, line 12a, and report the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Irs amended return Cost (Investment in the Contract) Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. Irs amended return Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. Irs amended return This includes the amounts your employer contributed that were taxable to you when paid. Irs amended return Cost does not include any amounts you deducted or were excluded from your income. Irs amended return From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that were not included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment. Irs amended return Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed. Irs amended return Designated Roth accounts. Irs amended return   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Irs amended return Your cost will also include any in-plan Roth rollovers you included in income. Irs amended return Foreign employment contributions. Irs amended return   If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. Irs amended return See Foreign employment contributions under Cost (Investment in the Contract) in Publication 575. Irs amended return Taxation of Periodic Payments Fully taxable payments. Irs amended return   Generally, if you did not pay any part of the cost of your employee pension or annuity and your employer did not withhold part of the cost from your pay while you worked, the amounts you receive each year are fully taxable. Irs amended return You must report them on your income tax return. Irs amended return Partly taxable payments. Irs amended return   If you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. Irs amended return The rest of the amount you receive is generally taxable. Irs amended return You figure the tax-free part of the payment using either the Simplified Method or the General Rule. Irs amended return Your annuity starting date and whether or not your plan is qualified determine which method you must or may use. Irs amended return   If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. Irs amended return Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan. Irs amended return   If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. Irs amended return   If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. Irs amended return Exclusion limit. Irs amended return   Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. Irs amended return Once your annuity starting date is determined, it does not change. Irs amended return If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. Irs amended return That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. Irs amended return Exclusion limited to cost. Irs amended return   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. Irs amended return Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Irs amended return This deduction is not subject to the 2%-of-adjusted-gross-income limit. Irs amended return Exclusion not limited to cost. Irs amended return   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Irs amended return If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. Irs amended return The total exclusion may be more than your cost. Irs amended return Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Irs amended return For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Irs amended return For any other annuity, this number is the number of monthly annuity payments under the contract. Irs amended return Who must use the Simplified Method. Irs amended return   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both: Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments. Irs amended return Guaranteed payments. Irs amended return   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Irs amended return If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Irs amended return How to use the Simplified Method. Irs amended return    Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2013. Irs amended return Single-life annuity. Irs amended return    If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Irs amended return Enter on line 3 the number shown for your age at the annuity starting date. Irs amended return Multiple-lives annuity. Irs amended return   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Irs amended return Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date. Irs amended return   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Irs amended return Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Irs amended return    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year. Irs amended return Example. Irs amended return Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Irs amended return Bill's annuity starting date is January 1, 2013. Irs amended return The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Irs amended return Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Irs amended return Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Irs amended return Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Irs amended return Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. Irs amended return His completed worksheet is shown in Worksheet 10-A. Irs amended return Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Irs amended return Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Irs amended return The full amount of any annuity payments received after 310 payments are paid must be included in gross income. Irs amended return If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Irs amended return This deduction is not subject to the 2%-of-adjusted- gross-income limit. Irs amended return Worksheet 10-A. Irs amended return Simplified Method Worksheet for Bill Smith 1. Irs amended return Enter the total pension or annuity payments received this year. Irs amended return Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a 1. Irs amended return 14,400 2. Irs amended return Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. Irs amended return See Cost (Investment in the Contract) , earlier 2. Irs amended return 31,000       Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Irs amended return Otherwise, go to line 3. Irs amended return         3. Irs amended return Enter the appropriate number from Table 1 below. Irs amended return But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. Irs amended return 310     4. Irs amended return Divide line 2 by the number on line 3 4. Irs amended return 100     5. Irs amended return Multiply line 4 by the number of months for which this year's payments were made. Irs amended return If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Irs amended return Otherwise, go to line 6 5. Irs amended return 1,200     6. Irs amended return Enter any amounts previously recovered tax free in years after 1986. Irs amended return This is the amount shown on line 10 of your worksheet for last year 6. Irs amended return -0-     7. Irs amended return Subtract line 6 from line 2 7. Irs amended return 31,000     8. Irs amended return Enter the smaller of line 5 or line 7 8. Irs amended return 1,200 9. Irs amended return Taxable amount for year. Irs amended return Subtract line 8 from line 1. Irs amended return Enter the result, but not less than zero. Irs amended return Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b 9. Irs amended return 13,200   Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Irs amended return If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. Irs amended return     10. Irs amended return Was your annuity starting date before 1987? □ Yes. Irs amended return STOP. Irs amended return Do not complete the rest of this worksheet. Irs amended return  ☑ No. Irs amended return Add lines 6 and 8. Irs amended return This is the amount you have recovered tax free through 2013. Irs amended return You will need this number if you need to fill out this worksheet next year 10. Irs amended return 1,200 11. Irs amended return Balance of cost to be recovered. Irs amended return Subtract line 10 from line 2. Irs amended return If zero, you will not have to complete this worksheet next year. Irs amended return The payments you receive next year will generally be fully taxable 11. Irs amended return 29,800 TABLE 1 FOR LINE 3 ABOVE   AND your annuity starting date was— IF the age at annuity starting date was. Irs amended return . Irs amended return . Irs amended return before November 19, 1996, enter on line 3. Irs amended return . Irs amended return . Irs amended return after November 18, 1996, enter on line 3. Irs amended return . Irs amended return . Irs amended return 55 or under 300 360 56–60 260 310 61–65 240 260 66–70 170 210 71 or older 120 160 TABLE 2 FOR LINE 3 ABOVE IF the combined ages at annuity starting date were. Irs amended return . Irs amended return . Irs amended return   THEN enter on line 3. Irs amended return . Irs amended return . Irs amended return 110 or under   410 111–120   360 121–130   310 131–140   260 141 or older   210 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Irs amended return Who must use the General Rule. Irs amended return   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. Irs amended return Annuity starting before November 19, 1996. Irs amended return   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. Irs amended return You also had to use it for any fixed-period annuity. Irs amended return If you did not have to use the General Rule, you could have chosen to use it. Irs amended return If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. Irs amended return   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Irs amended return Who cannot use the General Rule. Irs amended return   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. Irs amended return See Who must use the Simplified Method , earlier. Irs amended return More information. Irs amended return   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. Irs amended return Taxation of Nonperiodic Payments Nonperiodic distributions are also known as amounts not received as an annuity. Irs amended return They include all payments other than periodic payments and corrective distributions. Irs amended return Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration. Irs amended return Corrective distributions of excess plan contributions. Irs amended return   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. Irs amended return To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Irs amended return For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. Irs amended return Figuring the taxable amount of nonperiodic payments. Irs amended return   How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. Irs amended return If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. Irs amended return If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. Irs amended return Annuity starting date. Irs amended return   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. Irs amended return Distribution on or after annuity starting date. Irs amended return   If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income. Irs amended return Distribution before annuity starting date. Irs amended return   If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. Irs amended return You exclude from your gross income the part that you allocate to the cost. Irs amended return You include the remainder in your gross income. Irs amended return   If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). Irs amended return This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. Irs amended return    Distributions from nonqualified plans are subject to the net investment income tax. Irs amended return See the Instructions for Form 8960. Irs amended return   For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575. Irs amended return Lump-Sum Distributions This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. Irs amended return If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier. Irs amended return A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). Irs amended return A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution. Irs amended return The participant's entire balance from a plan does not include certain forfeited amounts. Irs amended return It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. Irs amended return For more information about distributions that do not qualify as lump-sum distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575. Irs amended return If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. Irs amended return The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Irs amended return The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Irs amended return You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part. Irs amended return Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. Irs amended return The tax figured on Form 4972 is added to the regular tax figured on your other income. Irs amended return This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax. Irs amended return How to treat the distribution. Irs amended return   If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part. Irs amended return Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income. Irs amended return Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). Irs amended return Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). Irs amended return Roll over all or part of the distribution. Irs amended return See Rollovers , later. Irs amended return No tax is currently due on the part rolled over. Irs amended return Report any part not rolled over as ordinary income. Irs amended return Report the entire taxable part of the distribution as ordinary income on your tax return. Irs amended return   The first three options are explained in the following discussions. Irs amended return Electing optional lump-sum treatment. Irs amended return   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. Irs amended return If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant. Irs amended return Taxable and tax-free parts of the distribution. Irs amended return    The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. Irs amended return You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free. Irs amended return Cost. Irs amended return   In general, your cost is the total of: The plan participant's nondeductible contributions to the plan, The plan participant's taxable costs of any life insurance contract distributed, Any employer contributions that were taxable to the plan participant, and Repayments of any loans that were taxable to the plan participant. Irs amended return You must reduce this cost by amounts previously distributed tax free. Irs amended return Net unrealized appreciation (NUA). Irs amended return   The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. Irs amended return (For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Publication 575. Irs amended return ) Capital Gain Treatment Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. Irs amended return The amount treated as capital gain is taxed at a 20% rate. Irs amended return You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Irs amended return Complete Part II of Form 4972 to choose the 20% capital gain election. Irs amended return For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575. Irs amended return 10-Year Tax Option The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. Irs amended return You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. Irs amended return You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Irs amended return The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. Irs amended return You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part. Irs amended return Complete Part III of Form 4972 to choose the 10-year tax option. Irs amended return You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. Irs amended return Publication 575 illustrates how to complete Form 4972 to figure the separate tax. Irs amended return Rollovers If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. Irs amended return For this purpose, the following plans are qualified retirement plans. Irs amended return A qualified employee plan. Irs amended return A qualified employee annuity. Irs amended return A tax-sheltered annuity plan (403(b) plan). Irs amended return An eligible state or local government section 457 deferred compensation plan. Irs amended return Eligible rollover distributions. Irs amended return   Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. Irs amended return For information about exceptions to eligible rollover distributions, see Publication 575. Irs amended return Rollover of nontaxable amounts. Irs amended return   You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. Irs amended return The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA. Irs amended return   If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. Irs amended return   Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. Irs amended return To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. Irs amended return For more information, see the Form 8606 instructions. Irs amended return Direct rollover option. Irs amended return   You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA. Irs amended return If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. Irs amended return Payment to you option. Irs amended return   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. Irs amended return However, the full amount is treated as distributed to you even though you actually receive only 80%. Irs amended return You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA. Irs amended return (See Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Irs amended return )    If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld. Irs amended return Time for making rollover. Irs amended return   You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan. Irs amended return (If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended for the period during which the distribution is in a frozen deposit in a financial institution. Irs amended return )   The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. Irs amended return   The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution. Irs amended return Qualified domestic relations order (QDRO). Irs amended return   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. Irs amended return If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee. Irs amended return You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. Irs amended return See Rollovers in Publication 575 for more information on benefits received under a QDRO. Irs amended return Rollover by surviving spouse. Irs amended return   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. Irs amended return The rollover rules apply to you as if you were the employee. Irs amended return You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. Irs amended return For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later. Irs amended return    A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. Irs amended return However, see Rollovers by nonspouse beneficiary next. Irs amended return Rollovers by nonspouse beneficiary. Irs amended return   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. Irs amended return The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. Irs amended return The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. Irs amended return For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs). Irs amended return Retirement bonds. Irs amended return   If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA (as discussed in Publication 590) or a qualified employer plan. Irs amended return Designated Roth accounts. Irs amended return   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. Irs amended return If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution or you can roll over the entire amount (or any portion) to a Roth IRA. Irs amended return For more information on rollovers from designated Roth accounts, see Rollovers in Publication 575. Irs amended return In-plan rollovers to designated Roth accounts. Irs amended return   If you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Irs amended return The rollover of any untaxed amounts must be included in income. Irs amended return See Designated Roth accounts under Rollovers in Publication 575 for more information. Irs amended return Rollovers to Roth IRAs. Irs amended return   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. Irs amended return   You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. Irs amended return You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. Irs amended return In addition, the 10% tax on early distributions does not apply. Irs amended return More information. Irs amended return   For more information on the rules for rolling over distributions, see Rollovers in Publication 575. Irs amended return Special Additional Taxes To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. Irs amended return Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. Irs amended return These special additional taxes are the taxes on: Early distributions, and Excess accumulation (not receiving minimum distributions). Irs amended return These taxes are discussed in the following sections. Irs amended return If you must pay either of these taxes, report them on Form 5329. Irs amended return However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. Irs amended return Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58. Irs amended return Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. Irs amended return This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception. Irs amended return Tax on Early Distributions Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. Irs amended return This tax applies to the part of the distribution that you must include in gross income. Irs amended return For this purpose, a qualified retirement plan is: A qualified employee plan, A qualified employee annuity plan, A tax-sheltered annuity plan, or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). Irs amended return 5% rate on certain early distributions from deferred annuity contracts. Irs amended return   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. Irs amended return A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. Irs amended return On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. Irs amended return Attach an explanation to your return. Irs amended return Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period. Irs amended return   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from an eligible retirement plan to a Roth IRA, you take a distribution from the Roth IRA, you may have to pay the additional 10% tax on early distributions. Irs amended return You generally must pay the 10% additional tax on any amount attributable to the part of the rollover that you had to include in income. Irs amended return The additional tax is figured on Form 5329. Irs amended return For more information, see Form 5329 and its instructions. Irs amended return For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Publication 590. Irs amended return Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. Irs amended return   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from a 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. Irs amended return You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan rollover that you had to include in income. Irs amended return The additional tax is figured on Form 5329. Irs amended return For more information, see Form 5329 and its instructions. Irs amended return For information on qualified distributions from designated Roth accounts, see Designated Roth accounts under Taxation of Periodic Payments in Publication 575. Irs amended return Exceptions to tax. Irs amended return    Certain early distributions are excepted from the early distribution tax. Irs amended return If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. Irs amended return If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. Irs amended return Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. Irs amended return On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions. Irs amended return    If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. Irs amended return Enter exception number “12” on line 2. Irs amended return General exceptions. Irs amended return   The tax does not apply to distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after your separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. Irs amended return Additional exceptions for qualified retirement plans. Irs amended return   The tax does not apply to distributions that are: From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees), From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order, From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% (or 7. Irs amended return 5% if you or your spouse are age 65 or older) of your adjusted gross income, whether or not you itemize your deductions for the year, From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election, From an employee stock ownership plan for dividends on employer securities held by the plan, From a qualified retirement plan due to an IRS levy of the plan, From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions, or Phased retirement annuity payments made to federal employees. Irs amended return See Pub. Irs amended return 721 for more information on the phased retirement program. Irs amended return Qualified public safety employees. Irs amended return   If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. Irs amended return You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50. Irs amended return Qualified reservist distributions. Irs amended return   A qualified reservist distribution is not subject to the additional tax on early distributions. Irs amended return A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. Irs amended return You must have been ordered or called to active duty after September 11, 2001. Irs amended return For more information, see Qualified reservist distributions under Special Additional Taxes in Publication 575. Irs amended return Additional exceptions for nonqualified annuity contracts. Irs amended return   The tax does not apply to distributions from: A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982, A deferred annuity contract under a qualified personal injury settlement, A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually). Irs amended return Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). Irs amended return The payments each year cannot be less than the required minimum distribution. Irs amended return Required distributions not made. Irs amended return   If the actual distributions to you in any year are less than the minimum required distribution for that year, you are subject to an additional tax. Irs amended return The tax equals 50% of the part of the required minimum distribution that was not distributed. Irs amended return   For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan)(for benefits accruing after 1986). Irs amended return Waiver. Irs amended return   The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. Irs amended return See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax. Irs amended return State insurer delinquency proceedings. Irs amended return   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. Irs amended return If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. Irs amended return Under certain conditions, you will not have to pay the 50% excise tax. Irs amended return Required beginning date. Irs amended return   Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. Irs amended return However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you have not retired. Irs amended return   If you reached age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. Irs amended return Your required distribution then must be made for 2014 by December 31, 2014. Irs amended return 5% owners. Irs amended return   If you are a 5% owner, you must begin to receive distributions by April 1 of the year that follows the calendar year in which you reach age 70½. Irs amended return   You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer. Irs amended return Age 70½. Irs amended return   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. Irs amended return   For example, if you are retired and your 70th birthday was on June 30, 2013, you were age 70½ on December 30, 2013. Irs amended return If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014. Irs amended return Required distributions. Irs amended return   By the required beginning date, as explained earlier, you must either: Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period). Irs amended return Additional information. Irs amended return   For more information on this rule, see Tax on Excess Accumulation in Publication 575. Irs amended return Form 5329. Irs amended return   You must file Form 5329 if you owe tax because you did not receive a minimum required distribution from your qualified retirement plan. Irs amended return Survivors and Beneficiaries Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. Irs amended return However, some special rules apply. Irs amended return See Publication 575 for more information. Irs amended return Survivors of employees. Irs amended return   If you are entitled to receive a survivor annuity on the death of an employee who died, you can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. Irs amended return You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee. Irs amended return Survivors of retirees. Irs amended return   If you receive benefits as a survivor under a joint and survivor annuity, include those benefits in income in the same way the retiree would have included them in income. Irs amended return If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable. Irs amended return    If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. Irs amended return The resulting tax-free amount will then remain fixed. Irs amended return Any increases in the survivor annuity are fully taxable. Irs amended return    If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. Irs amended return This amount remains fixed even if the annuity payments are increased or decreased. Irs amended return See Simplified Method , earlier. Irs amended return   In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost. Irs amended return Estate tax deduction. Irs amended return   If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. Irs amended return You can deduct the part of the total estate tax that was based on the annuity. Irs amended return The deceased annuitant must have died after the annuity starting date. Irs amended return (For details, see section 1. Irs amended return 691(d)-1 of the regulations. Irs amended return ) Deduct it in equal amounts over your remaining life expectancy. Irs amended return   If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction. Irs amended return   You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. Irs amended return This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Irs amended return See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction. Irs amended return Prev  Up  Next   Home   More Online Publications
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Defense Nuclear Facilities Safety Board

The Defense Nuclear Facilities Safety Board reviews the content and implementation of health and safety standards at Department of Energy Defense Nuclear Facilities. The board also makes recommendations to the President and Secretary of Energy regarding health and safety issues at Defense Nuclear Facilities.

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Phone Number: (202) 694-7000

The Irs Amended Return

Irs amended return Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. Irs amended return Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. Irs amended return Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. Irs amended return Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. Irs amended return However, a joint undertaking merely to share expenses is not a partnership. Irs amended return For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. Irs amended return The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. Irs amended return Organizations formed after 1996. Irs amended return   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. Irs amended return An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. Irs amended return An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. Irs amended return An insurance company. Irs amended return Certain banks. Irs amended return An organization wholly owned by a state, local, or foreign government. Irs amended return An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Irs amended return Certain foreign organizations identified in section 301. Irs amended return 7701-2(b)(8) of the regulations. Irs amended return A tax-exempt organization. Irs amended return A real estate investment trust. Irs amended return An organization classified as a trust under section 301. Irs amended return 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. Irs amended return Any other organization that elects to be classified as a corporation by filing Form 8832. Irs amended return For more information, see the instructions for Form 8832. Irs amended return Limited liability company. Irs amended return   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Irs amended return Unlike a partnership, none of the members of an LLC are personally liable for its debts. Irs amended return An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. Irs amended return 7701-3. Irs amended return See Form 8832 and section 301. Irs amended return 7701-3 of the regulations for more details. Irs amended return A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. Irs amended return Organizations formed before 1997. Irs amended return   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. Irs amended return Community property. Irs amended return    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. Irs amended return They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. Irs amended return A change in reporting position will be treated for federal tax purposes as a conversion of the entity. Irs amended return   A qualified entity is a business entity that meets all the following requirements. Irs amended return The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. Irs amended return No person other than one or both spouses would be considered an owner for federal tax purposes. Irs amended return The business entity is not treated as a corporation. Irs amended return   For more information about community property, see Publication 555, Community Property. Irs amended return Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Irs amended return Family Partnership Members of a family can be partners. Irs amended return However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. Irs amended return If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. Irs amended return If capital is not a material income-producing factor, they joined together in good faith to conduct a business. Irs amended return They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. Irs amended return Capital is material. Irs amended return   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. Irs amended return Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. Irs amended return Capital is not material. Irs amended return   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. Irs amended return Capital interest. Irs amended return   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. Irs amended return The owner withdraws from the partnership. Irs amended return The partnership liquidates. Irs amended return   The mere right to share in earnings and profits is not a capital interest in the partnership. Irs amended return Gift of capital interest. Irs amended return   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. Irs amended return It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. Irs amended return The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. Irs amended return Purchase. Irs amended return   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. Irs amended return The fair market value of the purchased interest is considered donated capital. Irs amended return For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). Irs amended return Example. Irs amended return A father sold 50% of his business to his son. Irs amended return The resulting partnership had a profit of $60,000. Irs amended return Capital is a material income-producing factor. Irs amended return The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. Irs amended return The $24,000 must be allocated to the father as compensation. Irs amended return Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. Irs amended return The son's share of partnership profit cannot be more than $18,000. Irs amended return Business owned and operated by spouses. Irs amended return   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. Irs amended return If so, they should report income or loss from the business on Form 1065. Irs amended return They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. Irs amended return However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. Irs amended return Qualified Joint Venture Election. Irs amended return   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. Irs amended return A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. Irs amended return   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. Irs amended return All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. Irs amended return Each spouse takes into account his or her respective share of these items as a sole proprietor. Irs amended return Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). Irs amended return For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. Irs amended return e. Irs amended return , based on their respective interests in the venture). Irs amended return   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. Irs amended return Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. Irs amended return   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. Irs amended return However, this may not be true if either spouse exceeds the social security tax limitation. Irs amended return   For more information on qualified joint ventures, go to IRS. Irs amended return gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. Irs amended return ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. Irs amended return The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. Irs amended return The agreement or modifications can be oral or written. Irs amended return Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. Irs amended return This filing date does not include any extension of time. Irs amended return If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. Irs amended return Terminating a Partnership A partnership terminates when one of the following events takes place. Irs amended return All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. Irs amended return At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. Irs amended return Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. Irs amended return See section 1. Irs amended return 708-1(b) of the regulations for more information on the termination of a partnership. Irs amended return For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. Irs amended return 708-1(c) and 1. Irs amended return 708-1(d) of the regulations. Irs amended return Date of termination. Irs amended return   The partnership's tax year ends on the date of termination. Irs amended return For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. Irs amended return For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. Irs amended return Short period return. Irs amended return   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. Irs amended return The return is due the 15th day of the fourth month following the date of termination. Irs amended return See Partnership Return (Form 1065), later, for information about filing Form 1065. Irs amended return Conversion of partnership into limited liability company (LLC). Irs amended return   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. Irs amended return The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. Irs amended return   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. Irs amended return Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. Irs amended return If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. Irs amended return For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. Irs amended return   The same rules apply if an LLC classified as a partnership is converted into a partnership. Irs amended return IRS e-file (Electronic Filing) Please click here for the text description of the image. Irs amended return e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). Irs amended return Other partnerships generally have the option to file electronically. Irs amended return For details about IRS e-file, see the Form 1065 instructions. Irs amended return Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. Irs amended return All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. Irs amended return However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. Irs amended return Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. Irs amended return Investing partnership. Irs amended return   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. Irs amended return They own the property as co-owners. Irs amended return They reserve the right separately to take or dispose of their shares of any property acquired or retained. Irs amended return They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. Irs amended return Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. Irs amended return Operating agreement partnership. Irs amended return   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. Irs amended return They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. Irs amended return They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. Irs amended return They do not jointly sell services or the property produced or extracted. Irs amended return Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. Irs amended return However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. Irs amended return Electing the exclusion. Irs amended return   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. Irs amended return This filing date includes any extension of time. Irs amended return See Regulations section 1. Irs amended return 761-2(b) for the procedures to follow. Irs amended return Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. Irs amended return The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. Irs amended return The return must be signed by a general partner. Irs amended return If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. Irs amended return A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. Irs amended return See the Instructions for Form 1065 for more information about who must file Form 1065. Irs amended return Partnership Distributions Partnership distributions include the following. Irs amended return A withdrawal by a partner in anticipation of the current year's earnings. Irs amended return A distribution of the current year's or prior years' earnings not needed for working capital. Irs amended return A complete or partial liquidation of a partner's interest. Irs amended return A distribution to all partners in a complete liquidation of the partnership. Irs amended return A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. Irs amended return If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. Irs amended return Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. Irs amended return Effect on partner's basis. Irs amended return   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. Irs amended return See Adjusted Basis under Basis of Partner's Interest, later. Irs amended return Effect on partnership. Irs amended return   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. Irs amended return The partnership may be able to elect to adjust the basis of its undistributed property. Irs amended return Certain distributions treated as a sale or exchange. Irs amended return   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. Irs amended return Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. Irs amended return Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. Irs amended return   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Irs amended return   This treatment does not apply to the following distributions. Irs amended return A distribution of property to the partner who contributed the property to the partnership. Irs amended return Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. Irs amended return Substantially appreciated inventory items. Irs amended return   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. Irs amended return However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. Irs amended return Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. Irs amended return Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. Irs amended return If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. Irs amended return For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. Irs amended return Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Irs amended return Example. Irs amended return The adjusted basis of Jo's partnership interest is $14,000. Irs amended return She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. Irs amended return Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. Irs amended return Any gain on the land will be recognized when she sells or otherwise disposes of it. Irs amended return The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. Irs amended return Marketable securities treated as money. Irs amended return   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. Irs amended return This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. Irs amended return   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). Irs amended return   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. Irs amended return Loss on distribution. Irs amended return   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. Irs amended return The adjusted basis of the partner's interest in the partnership exceeds the distribution. Irs amended return The partner's entire interest in the partnership is liquidated. Irs amended return The distribution is in money, unrealized receivables, or inventory items. Irs amended return   There are exceptions to these general rules. Irs amended return See the following discussions. Irs amended return Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. Irs amended return Distribution of partner's debt. Irs amended return   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). Irs amended return   The partner is treated as having satisfied the debt for its fair market value. Irs amended return If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. Irs amended return   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. Irs amended return Net precontribution gain. Irs amended return   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. Irs amended return   The gain recognized is the lesser of the following amounts. Irs amended return The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. Irs amended return The “net precontribution gain” of the partner. Irs amended return This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. Irs amended return For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. Irs amended return   The character of the gain is determined by reference to the character of the net precontribution gain. Irs amended return This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. Irs amended return For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. Irs amended return Effect on basis. Irs amended return   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. Irs amended return Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. Irs amended return See Basis of Partner's Interest , later. Irs amended return   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. Irs amended return Exceptions. Irs amended return   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. Irs amended return For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. Irs amended return   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. Irs amended return Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. Irs amended return However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Irs amended return Example 1. Irs amended return The adjusted basis of Emily's partnership interest is $30,000. Irs amended return She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. Irs amended return Her basis for the property is $20,000. Irs amended return Example 2. Irs amended return The adjusted basis of Steve's partnership interest is $10,000. Irs amended return He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. Irs amended return His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). Irs amended return Complete liquidation of partner's interest. Irs amended return   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. Irs amended return Partner's holding period. Irs amended return   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. Irs amended return If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. Irs amended return Basis divided among properties. Irs amended return   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. Irs amended return For property distributed after August 5, 1997, allocate the basis using the following rules. Irs amended return Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. Irs amended return If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Irs amended return Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. Irs amended return If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. Irs amended return If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Irs amended return Allocating a basis increase. Irs amended return   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. Irs amended return If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. Irs amended return Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. Irs amended return Example. Irs amended return Eun's basis in her partnership interest is $55,000. Irs amended return In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. Irs amended return Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. Irs amended return Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. Irs amended return To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). Irs amended return This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). Irs amended return She first allocates $35,000 to property A (its unrealized appreciation). Irs amended return The remaining $5,000 is allocated between the properties based on their fair market values. Irs amended return $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. Irs amended return Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). Irs amended return Allocating a basis decrease. Irs amended return   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. Irs amended return Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. Irs amended return If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. Irs amended return Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). Irs amended return Example. Irs amended return Armando's basis in his partnership interest is $20,000. Irs amended return In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. Irs amended return Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. Irs amended return Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. Irs amended return To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). Irs amended return This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). Irs amended return He allocates the entire $10,000 to property D (its unrealized depreciation). Irs amended return Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). Irs amended return Distributions before August 6, 1997. Irs amended return   For property distributed before August 6, 1997, allocate the basis using the following rules. Irs amended return Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. Irs amended return If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. Irs amended return Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. Irs amended return Partner's interest more than partnership basis. Irs amended return   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. Irs amended return Special adjustment to basis. Irs amended return   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. Irs amended return To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. Irs amended return Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. Irs amended return   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. Irs amended return However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. Irs amended return   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. Irs amended return If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. Irs amended return   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. Irs amended return The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. Irs amended return Example. Irs amended return Chin Ho purchased a 25% interest in X partnership for $17,000 cash. Irs amended return At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. Irs amended return Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. Irs amended return Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. Irs amended return The value of the inventory received was 25% of the value of all partnership inventory. Irs amended return (It is immaterial whether the inventory he received was on hand when he acquired his interest. Irs amended return ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. Irs amended return His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). Irs amended return The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. Irs amended return The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). Irs amended return His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). Irs amended return The remaining $11,500 is allocated to his new basis for the other property he received. Irs amended return Mandatory adjustment. Irs amended return   A partner does not always have a choice of making this special adjustment to basis. Irs amended return The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. Irs amended return The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. Irs amended return If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. Irs amended return The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. Irs amended return Required statement. Irs amended return   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. Irs amended return The statement must provide information necessary for the partner to compute the special basis adjustment. Irs amended return Marketable securities. Irs amended return   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. Irs amended return See Marketable securities treated as money under Partner's Gain or Loss, earlier. Irs amended return The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. Irs amended return Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. Irs amended return These transactions include the following. Irs amended return Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. Irs amended return Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. Irs amended return Payments by accrual basis partnership to cash basis partner. Irs amended return   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. Irs amended return However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. Irs amended return Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Irs amended return A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. Irs amended return This treatment is for purposes of determining gross income and deductible business expenses only. Irs amended return For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Irs amended return Guaranteed payments are not subject to income tax withholding. Irs amended return The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. Irs amended return They are also listed on Schedules K and K-1 of the partnership return. Irs amended return The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. Irs amended return Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. Irs amended return Generally, organizational and syndication expenses are not deductible by the partnership. Irs amended return However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). Irs amended return Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. Irs amended return Minimum payment. Irs amended return   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. Irs amended return Example. Irs amended return Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. Irs amended return The partnership has net income of $20,000. Irs amended return Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). Irs amended return The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). Irs amended return Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. Irs amended return If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. Irs amended return Self-employed health insurance premiums. Irs amended return   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. Irs amended return The partnership can deduct the payments as a business expense, and the partner must include them in gross income. Irs amended return However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. Irs amended return   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. Irs amended return The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. Irs amended return For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. Irs amended return Including payments in partner's income. Irs amended return   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. Irs amended return Example 1. Irs amended return Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. Irs amended return Her distributive share of the partnership income is 10%. Irs amended return The partnership has $50,000 of ordinary income after deducting the guaranteed payment. Irs amended return She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. Irs amended return Example 2. Irs amended return Lamont is a calendar year taxpayer who is a partner in a partnership. Irs amended return The partnership uses a fiscal year that ended January 31, 2013. Irs amended return Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. Irs amended return He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. Irs amended return Payments resulting in loss. Irs amended return   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. Irs amended return The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. Irs amended return Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. Irs amended return Losses. Irs amended return   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. Irs amended return   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. Irs amended return   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. Irs amended return   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. Irs amended return If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. Irs amended return Gains. Irs amended return   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. Irs amended return More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). Irs amended return The property in the hands of the transferee immediately after the transfer is not a capital asset. Irs amended return Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. Irs amended return More than 50% ownership. Irs amended return   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. Irs amended return An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. Irs amended return An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. Irs amended return For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. Irs amended return If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. Irs amended return However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. Irs amended return Example. Irs amended return Individuals A and B and Trust T are equal partners in Partnership ABT. Irs amended return A's husband, AH, is the sole beneficiary of Trust T. Irs amended return Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. Irs amended return As a result, A is a more-than-50% partner. Irs amended return This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. Irs amended return More information. Irs amended return   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Irs amended return Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. Irs amended return This applies whether a partnership is being formed or is already operating. Irs amended return The partnership's holding period for the property includes the partner's holding period. Irs amended return The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. Irs amended return The exchange is not subject to the rules explained later under Disposition of Partner's Interest. Irs amended return Disguised sales. Irs amended return   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. Irs amended return The distribution would not have been made but for the contribution. Irs amended return The partner's right to the distribution does not depend on the success of partnership operations. Irs amended return   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. Irs amended return However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. Irs amended return If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. Irs amended return Form 8275 required. Irs amended return   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. Irs amended return For exceptions to this requirement, see section 1. Irs amended return 707-3(c)(2) of the regulations. Irs amended return   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. Irs amended return   Form 8275 must include the following information. Irs amended return A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. Irs amended return A description of the transferred property or money, including its value. Irs amended return A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. Irs amended return See section 1. Irs amended return 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. Irs amended return Contribution to partnership treated as investment company. Irs amended return   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. Irs amended return   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. Irs amended return These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. Irs amended return For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. Irs amended return Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. Irs amended return   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. Irs amended return Contribution to foreign partnership. Irs amended return   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. Irs amended return Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. Irs amended return The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. Irs amended return   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. Irs amended return See the form instructions for more information. Irs amended return Basis of contributed property. Irs amended return   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. Irs amended return Allocations to account for built-in gain or loss. Irs amended return   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. Irs amended return The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. Irs amended return This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. Irs amended return   The partnership can use different allocation methods for different items of contributed property. Irs amended return A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. Irs amended return See section 1. Irs amended return 704-3 of the regulations for allocation methods generally considered reasonable. Irs amended return   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. Irs amended return If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. Irs amended return However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. Irs amended return Example. Irs amended return Areta and Sofia formed an equal partnership. Irs amended return Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. Irs amended return The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. Irs amended return In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. Irs amended return Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. Irs amended return To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. Irs amended return However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. Irs amended return The entire $400 must be allocated to Areta. Irs amended return Distribution of contributed property to another partner. Irs amended return   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. Irs amended return   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. Irs amended return This amount is the difference between the property's basis and its fair market value at the time of contribution. Irs amended return The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. Irs amended return Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. Irs amended return Disposition of certain contributed property. Irs amended return   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. Irs amended return Unrealized receivables. Irs amended return If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. Irs amended return Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. Irs amended return When reading the definition, substitute “partner” for “partnership. Irs amended return ” Inventory items. Irs amended return If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. Irs amended return Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. Irs amended return Capital loss property. Irs amended return If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. Irs amended return The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. Irs amended return Substituted basis property. Irs amended return If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. Irs amended return Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. Irs amended return Capital interest. Irs amended return   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Irs amended return This determination generally is made at the time of receipt of the partnership interest. Irs amended return The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. Irs amended return The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. Irs amended return   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. Irs amended return Profits interest. Irs amended return   A profits interest is a partnership interest other than a capital interest. Irs amended return If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. Irs amended return However, this does not apply in the following situations. Irs amended return The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. Irs amended return Within 2 years of receipt, the partner disposes of the profits interest. Irs amended return The profits interest is a limited partnership interest in a publicly traded partnership. Irs amended return   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. Irs amended return Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. Irs amended return If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. Irs amended return Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. Irs amended return Interest acquired by gift, etc. Irs amended return   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. Irs amended return Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). Irs amended return The basis of an interest in a partnership is increased or decreased by certain items. Irs amended return Increases. Irs amended return   A partner's basis is increased by the following items. Irs amended return The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. Irs amended return The partner's distributive share of taxable and nontaxable partnership income. Irs amended return The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. Irs amended return Decreases. Irs amended return   The partner's basis is decreased (but never below zero) by the following items. Irs amended return The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. Irs amended return The partner's distributive share of the partnership losses (including capital losses). Irs amended return The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. Irs amended return This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. Irs amended return The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner. Irs amended return Partner's liabilities assumed by partnership. Irs amended return   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. Irs amended return This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. Irs amended return The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. Irs amended return See Effect of Partnership Liabilities , later. Irs amended return Example 1. Irs amended return Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. Irs amended return The partnership assumed payment of the mortgage. Irs amended return The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. Irs amended return If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. Irs amended return The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. Irs amended return However, this gain would not increase the basis of his partnership interest. Irs amended return Book value of partner's interest. Irs amended return   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. Irs amended return Example. Irs amended return Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. Irs amended return His partner contributes $1,000 cash. Irs amended return While each partner has increased his capital account by $1,000, which will be re