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Military Com

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Military Com

Military com Publication 15-B - Main Content Table of Contents 1. Military com Fringe Benefit OverviewAre Fringe Benefits Taxable? Cafeteria Plans Simple Cafeteria Plans 2. Military com Fringe Benefit Exclusion RulesAccident and Health Benefits Achievement Awards Adoption Assistance Athletic Facilities De Minimis (Minimal) Benefits Dependent Care Assistance Educational Assistance Employee Discounts Employee Stock Options Employer-Provided Cell Phones Group-Term Life Insurance Coverage Health Savings Accounts Lodging on Your Business Premises Meals Moving Expense Reimbursements No-Additional-Cost Services Retirement Planning Services Transportation (Commuting) Benefits Tuition Reduction Working Condition Benefits 3. Military com Fringe Benefit Valuation RulesGeneral Valuation Rule Cents-Per-Mile Rule Commuting Rule Lease Value Rule Unsafe Conditions Commuting Rule 4. Military com Rules for Withholding, Depositing, and ReportingTransfer of property. Military com Amount of deposit. Military com Limitation. Military com Conformity rules. Military com Election not to withhold income tax. Military com How To Get Tax Help 1. Military com Fringe Benefit Overview A fringe benefit is a form of pay for the performance of services. Military com For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work. Military com Performance of services. Military com   A person who performs services for you does not have to be your employee. Military com A person may perform services for you as an independent contractor, partner, or director. Military com Also, for fringe benefit purposes, treat a person who agrees not to perform services (such as under a covenant not to compete) as performing services. Military com Provider of benefit. Military com   You are the provider of a fringe benefit if it is provided for services performed for you. Military com You are considered the provider of a fringe benefit even if a third party, such as your client or customer, provides the benefit to your employee for services the employee performs for you. Military com For example, if, in exchange for goods or services, your customer provides day care services as a fringe benefit to your employees for services they provide for you as their employer, then you are the provider of this fringe benefit even though the customer is actually providing the day care. Military com Recipient of benefit. Military com   The person who performs services for you is considered the recipient of a fringe benefit provided for those services. Military com That person may be considered the recipient even if the benefit is provided to someone who did not perform services for you. Military com For example, your employee may be the recipient of a fringe benefit you provide to a member of the employee's family. Military com Are Fringe Benefits Taxable? Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. Military com Section 2 discusses the exclusions that apply to certain fringe benefits. Military com Any benefit not excluded under the rules discussed in section 2 is taxable. Military com Including taxable benefits in pay. Military com   You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts. Military com Any amount the law excludes from pay. Military com Any amount the recipient paid for the benefit. Military com The rules used to determine the value of a fringe benefit are discussed in section 3. Military com   If the recipient of a taxable fringe benefit is your employee, the benefit is subject to employment taxes and must be reported on Form W-2, Wage and Tax Statement. Military com However, you can use special rules to withhold, deposit, and report the employment taxes. Military com These rules are discussed in section 4. Military com   If the recipient of a taxable fringe benefit is not your employee, the benefit is not subject to employment taxes. Military com However, you may have to report the benefit on one of the following information returns. Military com If the recipient receives the benefit as: Use: An independent contractor Form 1099-MISC, Miscellaneous Income A partner Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Military com For more information, see the instructions for the forms listed above. Military com Cafeteria Plans A cafeteria plan, including a flexible spending arrangement, is a written plan that allows your employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages. Military com If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not make the qualified benefit taxable. Military com Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. Military com However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Military com Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay. Military com Qualified benefits. Military com   A cafeteria plan can include the following benefits discussed in section 2. Military com Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance). Military com Adoption assistance. Military com Dependent care assistance. Military com Group-term life insurance coverage (including costs that cannot be excluded from wages). Military com Health savings accounts (HSAs). Military com Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services. Military com Benefits not allowed. Military com   A cafeteria plan cannot include the following benefits discussed in section 2. Military com Archer MSAs. Military com See Accident and Health Benefits in section 2. Military com Athletic facilities. Military com De minimis (minimal) benefits. Military com Educational assistance. Military com Employee discounts. Military com Employer-provided cell phones. Military com Lodging on your business premises. Military com Meals. Military com Moving expense reimbursements. Military com No-additional-cost services. Military com Transportation (commuting) benefits. Military com Tuition reduction. Military com Working condition benefits. Military com It also cannot include scholarships or fellowships (discussed in Publication 970, Tax Benefits for Education). Military com $2,500 limit on a health flexible spending arrangement (FSA). Military com   For plan years beginning after December 31, 2012, a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $2,500. Military com For plan years beginning after December 31, 2013, the limit is unchanged at $2,500. Military com   A cafeteria plan offering a health FSA must be amended to specify the $2,500 limit (or any lower limit set by the employer). Military com While cafeteria plans generally must be amended on a prospective basis, an amendment that is adopted on or before December 31, 2014, may be made effective retroactively, provided that in operation the cafeteria plan meets the limit for plan years beginning after December 31, 2012. Military com A cafeteria plan that does not limit health FSA contributions to the dollar limit is not a cafeteria plan and all benefits offered under the plan are includible in the employee's gross income. Military com   For more information, see Notice 2012-40, 2012-26 I. Military com R. Military com B. Military com 1046, available at www. Military com irs. Military com gov/irb/2012-26_IRB/ar09. Military com html. Military com Employee. Military com   For these plans, treat the following individuals as employees. Military com A current common-law employee. Military com See section 2 in Publication 15 (Circular E) for more information. Military com A full-time life insurance agent who is a current statutory employee. Military com A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Military com Exception for S corporation shareholders. Military com   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Military com A 2% shareholder for this purpose is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Military com Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Military com Plans that favor highly compensated employees. Military com   If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. Military com A plan you maintain under a collective bargaining agreement does not favor highly compensated employees. Military com   A highly compensated employee for this purpose is any of the following employees. Military com An officer. Military com A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock. Military com An employee who is highly compensated based on the facts and circumstances. Military com A spouse or dependent of a person described in (1), (2), or (3). Military com Plans that favor key employees. Military com   If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. Military com A plan favors key employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key employees. Military com However, a plan you maintain under a collective bargaining agreement does not favor key employees. Military com   A key employee during 2014 is generally an employee who is either of the following. Military com An officer having annual pay of more than $170,000. Military com An employee who for 2014 is either of the following. Military com A 5% owner of your business. Military com A 1% owner of your business whose annual pay was more than $150,000. Military com Simple Cafeteria Plans Eligible employers meeting contribution requirements and eligibility and participation requirements can establish a simple cafeteria plan. Military com Simple cafeteria plans are treated as meeting the nondiscrimination requirements of a cafeteria plan and certain benefits under a cafeteria plan. Military com Eligible employer. Military com   You are an eligible employer if you employ an average of 100 or fewer employees during either of the 2 preceding years. Military com If your business was not in existence throughout the preceding year, you are eligible if you reasonably expect to employ an average of 100 or fewer employees in the current year. Military com If you establish a simple cafeteria plan in a year that you employ an average of 100 or fewer employees, you are considered an eligible employer for any subsequent year as long as you do not employ an average of 200 or more employees in a subsequent year. Military com Eligibility and participation requirements. Military com   These requirements are met if all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate and each employee eligible to participate in the plan may elect any benefit available under the plan. Military com You may elect to exclude from the plan employees who: Are under age 21 before the close of the plan year, Have less than 1 year of service with you as of any day during the plan year, Are covered under a collective bargaining agreement, or Are nonresident aliens working outside the United States whose income did not come from a U. Military com S. Military com source. Military com Contribution requirements. Military com   You must make a contribution to provide qualified benefits on behalf of each qualified employee in an amount equal to: A uniform percentage (not less than 2%) of the employee’s compensation for the plan year, or An amount which is at least 6% of the employee’s compensation for the plan year or twice the amount of the salary reduction contributions of each qualified employee, whichever is less. Military com If the contribution requirements are met using option (2), the rate of contribution to any salary reduction contribution of a highly compensated or key employee can not be greater than the rate of contribution to any other employee. Military com More information. Military com   For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations. Military com 2. Military com Fringe Benefit Exclusion Rules This section discusses the exclusion rules that apply to fringe benefits. Military com These rules exclude all or part of the value of certain benefits from the recipient's pay. Military com The excluded benefits are not subject to federal income tax withholding. Military com Also, in most cases, they are not subject to social security, Medicare, or federal unemployment (FUTA) tax and are not reported on Form W-2. Military com This section discusses the exclusion rules for the following fringe benefits. Military com Accident and health benefits. Military com Achievement awards. Military com Adoption assistance. Military com Athletic facilities. Military com De minimis (minimal) benefits. Military com Dependent care assistance. Military com Educational assistance. Military com Employee discounts. Military com Employee stock options. Military com Employer-provided cell phones. Military com Group-term life insurance coverage. Military com Health savings accounts (HSAs). Military com Lodging on your business premises. Military com Meals. Military com Moving expense reimbursements. Military com No-additional-cost services. Military com Retirement planning services. Military com Transportation (commuting) benefits. Military com Tuition reduction. Military com Working condition benefits. Military com See Table 2-1, later, for an overview of the employment tax treatment of these benefits. Military com Table 2-1. Military com Special Rules for Various Types of Fringe Benefits (For more information, see the full discussion in this section. Military com ) Treatment Under Employment Taxes Type of Fringe Benefit Income Tax Withholding Social Security and Medicare (including Additional Medicare Tax when wages are paid in excess of $200,000) Federal Unemployment (FUTA) Accident and health benefits Exempt1,2, except for long-term care benefits provided through a flexible spending or similar arrangement. Military com Exempt, except for certain payments to S corporation employees who are 2% shareholders. Military com Exempt Achievement awards Exempt1 up to $1,600 for qualified plan awards ($400 for nonqualified awards). Military com Adoption assistance Exempt1,3 Taxable Taxable Athletic facilities Exempt if substantially all use during the calendar year is by employees, their spouses, and their dependent children and the facility is operated by the employer on premises owned or leased by the employer. Military com De minimis (minimal) benefits Exempt Exempt Exempt Dependent care assistance Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return). Military com Educational assistance Exempt up to $5,250 of benefits each year. Military com (See Educational Assistance , later in this section. Military com ) Employee discounts Exempt3 up to certain limits. Military com (See Employee Discounts , later in this section. Military com ) Employee stock options See Employee Stock Options , later in this section. Military com Employer-provided cell phones Exempt if provided primarily for noncompensatory business purposes. Military com Group-term life insurance coverage Exempt Exempt1,4, 7 up to cost of $50,000 of coverage. Military com (Special rules apply to former employees. Military com ) Exempt Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits. Military com (See Health Savings Accounts , later in this section. Military com ) Lodging on your business premises Exempt1 if furnished for your convenience as a condition of employment. Military com Meals Exempt if furnished on your business premises for your convenience. Military com Exempt if de minimis. Military com Moving expense reimbursements Exempt1 if expenses would be deductible if the employee had paid them. Military com No-additional-cost services Exempt3 Exempt3 Exempt3 Retirement planning services Exempt5 Exempt5 Exempt5 Transportation (commuting) benefits Exempt1 up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($130), qualified parking ($250), or qualified bicycle commuting reimbursement6 ($20). Military com (See Transportation (Commuting) Benefits , later in this section. Military com ) Exempt if de minimis. Military com Tuition reduction Exempt3 if for undergraduate education (or graduate education if the employee performs teaching or research activities). Military com Working condition benefits Exempt Exempt Exempt 1 Exemption does not apply to S corporation employees who are 2% shareholders. Military com 2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees. Military com 3 Exemption does not apply to certain highly compensated employees under a program that favors those employees. Military com 4 Exemption does not apply to certain key employees under a plan that favors those employees. Military com 5 Exemption does not apply to services for tax preparation, accounting, legal, or brokerage services. Military com 6 If the employee receives a qualified bicycle commuting reimbursement in a qualified bicycle commuting month, the employee cannot receive commuter highway vehicle, transit pass, or qualified parking benefits in that same month. Military com 7 You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. Military com Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Military com Also, show it in box 12 with code “C. Military com ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. Military com Accident and Health Benefits This exclusion applies to contributions you make to an accident or health plan for an employee, including the following. Military com Contributions to the cost of accident or health insurance including qualified long-term care insurance. Military com Contributions to a separate trust or fund that directly or through insurance provides accident or health benefits. Military com Contributions to Archer MSAs or health savings accounts (discussed in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans). Military com This exclusion also applies to payments you directly or indirectly make to an employee under an accident or health plan for employees that are either of the following. Military com Payments or reimbursements of medical expenses. Military com Payments for specific injuries or illnesses (such as the loss of the use of an arm or leg). Military com The payments must be figured without regard to any period of absence from work. Military com Accident or health plan. Military com   This is an arrangement that provides benefits for your employees, their spouses, their dependents, and their children (under age 27) in the event of personal injury or sickness. Military com The plan may be insured or noninsured and does not need to be in writing. Military com Employee. Military com   For this exclusion, treat the following individuals as employees. Military com A current common-law employee. Military com A full-time life insurance agent who is a current statutory employee. Military com A retired employee. Military com A former employee you maintain coverage for based on the employment relationship. Military com A widow or widower of an individual who died while an employee. Military com A widow or widower of a retired employee. Military com For the exclusion of contributions to an accident or health plan, a leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Military com Special rule for certain government plans. Military com   For certain government accident and health plans, payments to a deceased plan participant's beneficiary may qualify for the exclusion from gross income if the other requirements for exclusion are met. Military com See section 105(j) for details. Military com Exception for S corporation shareholders. Military com   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Military com A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Military com Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Military com Exclusion from wages. Military com   You can generally exclude the value of accident or health benefits you provide to an employee from the employee's wages. Military com Exception for certain long-term care benefits. Military com   You cannot exclude contributions to the cost of long-term care insurance from an employee's wages subject to federal income tax withholding if the coverage is provided through a flexible spending or similar arrangement. Military com This is a benefit program that reimburses specified expenses up to a maximum amount that is reasonably available to the employee and is less than five times the total cost of the insurance. Military com However, you can exclude these contributions from the employee's wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. Military com S corporation shareholders. Military com   Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee's wages subject to federal income tax withholding. Military com However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. Military com Exception for highly compensated employees. Military com   If your plan is a self-insured medical reimbursement plan that favors highly compensated employees, you must include all or part of the amounts you pay to these employees in their wages subject to federal income tax withholding. Military com However, you can exclude these amounts (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. Military com   A self-insured plan is a plan that reimburses your employees for medical expenses not covered by an accident or health insurance policy. Military com   A highly compensated employee for this exception is any of the following individuals. Military com One of the five highest paid officers. Military com An employee who owns (directly or indirectly) more than 10% in value of the employer's stock. Military com An employee who is among the highest paid 25% of all employees (other than those who can be excluded from the plan). Military com   For more information on this exception, see section 105(h) of the Internal Revenue Code and its regulations. Military com COBRA premiums. Military com   The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a current or former employee under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA). Military com The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary. Military com Achievement Awards This exclusion applies to the value of any tangible personal property you give to an employee as an award for either length of service or safety achievement. Military com The exclusion does not apply to awards of cash, cash equivalents, gift certificates, or other intangible property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, and other securities. Military com The award must meet the requirements for employee achievement awards discussed in chapter 2 of Publication 535, Business Expenses. Military com Employee. Military com   For this exclusion, treat the following individuals as employees. Military com A current employee. Military com A former common-law employee you maintain coverage for in consideration of or based on an agreement relating to prior service as an employee. Military com A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Military com Exception for S corporation shareholders. Military com   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Military com A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Military com Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Military com Exclusion from wages. Military com   You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their cost is not more than the amount you can deduct as a business expense for the year. Military com The excludable annual amount is $1,600 ($400 for awards that are not “qualified plan awards”). Military com See chapter 2 of Publication 535 for more information about the limit on deductions for employee achievement awards. Military com    To determine for 2014 whether an achievement award is a “qualified plan award” under the deduction rules described in Publication 535, treat any employee who received more than $115,000 in pay for 2013 as a highly compensated employee. Military com   If the cost of awards given to an employee is more than your allowable deduction, include in the employee's wages the larger of the following amounts. Military com The part of the cost that is more than your allowable deduction (up to the value of the awards). Military com The amount by which the value of the awards exceeds your allowable deduction. Military com Exclude the remaining value of the awards from the employee's wages. Military com Adoption Assistance An adoption assistance program is a separate written plan of an employer that meets all of the following requirements. Military com It benefits employees who qualify under rules set up by you, which do not favor highly compensated employees or their dependents. Military com To determine whether your plan meets this test, do not consider employees excluded from your plan who are covered by a collective bargaining agreement, if there is evidence that adoption assistance was a subject of good-faith bargaining. Military com It does not pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents). Military com A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. Military com You give reasonable notice of the plan to eligible employees. Military com Employees provide reasonable substantiation that payments or reimbursements are for qualifying expenses. Military com For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Military com The employee was a 5% owner at any time during the year or the preceding year. Military com The employee received more than $115,000 in pay for the preceding year. Military com You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Military com You must exclude all payments or reimbursements you make under an adoption assistance program for an employee's qualified adoption expenses from the employee's wages subject to federal income tax withholding. Military com However, you cannot exclude these payments from wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. Military com For more information, see the Instructions for Form 8839, Qualified Adoption Expenses. Military com You must report all qualifying adoption expenses you paid or reimbursed under your adoption assistance program for each employee for the year in box 12 of the employee's Form W-2. Military com Use code “T” to identify this amount. Military com Exception for S corporation shareholders. Military com   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. Military com A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Military com Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, including using the benefit as a reduction in distributions to the 2% shareholder. Military com Athletic Facilities You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. Military com For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, has not attained the age of 25. Military com On-premises facility. Military com   The athletic facility must be located on premises you own or lease. Military com It does not have to be located on your business premises. Military com However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort. Military com Employee. Military com   For this exclusion, treat the following individuals as employees. Military com A current employee. Military com A former employee who retired or left on disability. Military com A widow or widower of an individual who died while an employee. Military com A widow or widower of a former employee who retired or left on disability. Military com A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Military com A partner who performs services for a partnership. Military com De Minimis (Minimal) Benefits You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. Military com A de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable. Military com Cash and cash equivalent fringe benefits (for example, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit, except for occasional meal money or transportation fare. Military com Examples of de minimis benefits include the following. Military com Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes. Military com See Employer-Provided Cell Phones , later in this section, for details. Military com Occasional personal use of a company copying machine if you sufficiently control its use so that at least 85% of its use is for business purposes. Military com Holiday gifts, other than cash, with a low fair market value. Military com Group-term life insurance payable on the death of an employee's spouse or dependent if the face amount is not more than $2,000. Military com Meals. Military com See Meals , later in this section, for details. Military com Occasional parties or picnics for employees and their guests. Military com Occasional tickets for theater or sporting events. Military com Transportation fare. Military com See Transportation (Commuting) Benefits , later in this section, for details. Military com Employee. Military com   For this exclusion, treat any recipient of a de minimis benefit as an employee. Military com Dependent Care Assistance This exclusion applies to household and dependent care services you directly or indirectly pay for or provide to an employee under a dependent care assistance program that covers only your employees. Military com The services must be for a qualifying person's care and must be provided to allow the employee to work. Military com These requirements are basically the same as the tests the employee would have to meet to claim the dependent care credit if the employee paid for the services. Military com For more information, see Qualifying Person Test and Work-Related Expense Test in Publication 503, Child and Dependent Care Expenses. Military com Employee. Military com   For this exclusion, treat the following individuals as employees. Military com A current employee. Military com A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Military com Yourself (if you are a sole proprietor). Military com A partner who performs services for a partnership. Military com Exclusion from wages. Military com   You can exclude the value of benefits you provide to an employee under a dependent care assistance program from the employee's wages if you reasonably believe that the employee can exclude the benefits from gross income. Military com   An employee can generally exclude from gross income up to $5,000 of benefits received under a dependent care assistance program each year. Military com This limit is reduced to $2,500 for married employees filing separate returns. Military com   However, the exclusion cannot be more than the smaller of the earned income of either the employee or employee's spouse. Military com Special rules apply to determine the earned income of a spouse who is either a student or not able to care for himself or herself. Military com For more information on the earned income limit, see Publication 503. Military com Exception for highly compensated employees. Military com   You cannot exclude dependent care assistance from the wages of a highly compensated employee unless the benefits provided under the program do not favor highly compensated employees and the program meets the requirements described in section 129(d) of the Internal Revenue Code. Military com   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Military com The employee was a 5% owner at any time during the year or the preceding year. Military com The employee received more than $115,000 in pay for the preceding year. Military com You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Military com Form W-2. Military com   Report the value of all dependent care assistance you provide to an employee under a dependent care assistance program in box 10 of the employee's Form W-2. Military com Include any amounts you cannot exclude from the employee's wages in boxes 1, 3, and 5. Military com Report both the nontaxable portion of assistance (up to $5,000) and any assistance above the amount that is non-taxable to the employee. Military com Example. Military com   Company A provides a dependent care assistance flexible spending arrangement to its employees through a cafeteria plan. Military com In addition, it provides occasional on-site dependent care to its employees at no cost. Military com Emily, an employee of company A, had $4,500 deducted from her pay for the dependent care flexible spending arrangement. Military com In addition, Emily used the on-site dependent care several times. Military com The fair market value of the on-site care was $700. Military com Emily's Form W-2 should report $5,200 of dependent care assistance in box 10 ($4,500 flexible spending arrangement plus $700 on-site dependent care). Military com Boxes 1, 3, and 5 should include $200 (the amount in excess of the nontaxable assistance), and applicable taxes should be withheld on that amount. Military com Educational Assistance This exclusion applies to educational assistance you provide to employees under an educational assistance program. Military com The exclusion also applies to graduate level courses. Military com Educational assistance means amounts you pay or incur for your employees' education expenses. Military com These expenses generally include the cost of books, equipment, fees, supplies, and tuition. Military com However, these expenses do not include the cost of a course or other education involving sports, games, or hobbies, unless the education: Has a reasonable relationship to your business, or Is required as part of a degree program. Military com Education expenses do not include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at the end of the course. Military com Nor do they include the cost of lodging, meals, or transportation. Military com Educational assistance program. Military com   An educational assistance program is a separate written plan that provides educational assistance only to your employees. Military com The program qualifies only if all of the following tests are met. Military com The program benefits employees who qualify under rules set up by you that do not favor highly compensated employees. Military com To determine whether your program meets this test, do not consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining. Military com The program does not provide more than 5% of its benefits during the year for shareholders or owners. Military com A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. Military com The program does not allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance. Military com You give reasonable notice of the program to eligible employees. Military com Your program can cover former employees if their employment is the reason for the coverage. Military com   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Military com The employee was a 5% owner at any time during the year or the preceding year. Military com The employee received more than $115,000 in pay for the preceding year. Military com You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Military com Employee. Military com   For this exclusion, treat the following individuals as employees. Military com A current employee. Military com A former employee who retired, left on disability, or was laid off. Military com A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Military com Yourself (if you are a sole proprietor). Military com A partner who performs services for a partnership. Military com Exclusion from wages. Military com   You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance program from the employee's wages each year. Military com Assistance over $5,250. Military com   If you do not have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits. Military com Working condition benefits may be excluded from wages. Military com Property or a service provided is a working condition benefit to the extent that if the employee paid for it, the amount paid would have been deductible as a business or depreciation expense. Military com See Working Condition Benefits , later, in this section. Military com Employee Discounts This exclusion applies to a price reduction you give an employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. Military com However, it does not apply to discounts on real property or discounts on personal property of a kind commonly held for investment (such as stocks or bonds). Military com Employee. Military com   For this exclusion, treat the following individuals as employees. Military com A current employee. Military com A former employee who retired or left on disability. Military com A widow or widower of an individual who died while an employee. Military com A widow or widower of an employee who retired or left on disability. Military com A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Military com A partner who performs services for a partnership. Military com Exclusion from wages. Military com   You can generally exclude the value of an employee discount you provide an employee from the employee's wages, up to the following limits. Military com For a discount on services, 20% of the price you charge nonemployee customers for the service. Military com For a discount on merchandise or other property, your gross profit percentage times the price you charge nonemployee customers for the property. Military com   Determine your gross profit percentage in the line of business based on all property you offer to customers (including employee customers) and your experience during the tax year immediately before the tax year in which the discount is available. Military com To figure your gross profit percentage, subtract the total cost of the property from the total sales price of the property and divide the result by the total sales price of the property. Military com Exception for highly compensated employees. Military com   You cannot exclude from the wages of a highly compensated employee any part of the value of a discount that is not available on the same terms to one of the following groups. Military com All of your employees. Military com A group of employees defined under a reasonable classification you set up that does not favor highly compensated employees. Military com   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Military com The employee was a 5% owner at any time during the year or the preceding year. Military com The employee received more than $115,000 in pay for the preceding year. Military com You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Military com Employee Stock Options There are three kinds of stock options—incentive stock options, employee stock purchase plan options, and nonstatutory (nonqualified) stock options. Military com Wages for social security, Medicare, and federal unemployment (FUTA) taxes do not include remuneration resulting from the exercise, after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or from any disposition of stock acquired by exercising such an option. Military com The IRS will not apply these taxes to an exercise before October 23, 2004, of an incentive stock option or an employee stock purchase plan option or to a disposition of stock acquired by such exercise. Military com Additionally, federal income tax withholding is not required on the income resulting from a disqualifying disposition of stock acquired by the exercise after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or on income equal to the discount portion of stock acquired by the exercise, after October 22, 2004, of an employee stock purchase plan option resulting from any disposition of the stock. Military com The IRS will not apply federal income tax withholding upon the disposition of stock acquired by the exercise, before October 23, 2004, of an incentive stock option or an employee stock purchase plan option. Military com However, the employer must report as income in box 1 of Form W-2, (a) the discount portion of stock acquired by the exercise of an employee stock purchase plan option upon disposition of the stock, and (b) the spread (between the exercise price and the fair market value of the stock at the time of exercise) upon a disqualifying disposition of stock acquired by the exercise of an incentive stock option or an employee stock purchase plan option. Military com An employer must report the excess of the fair market value of stock received upon exercise of a nonstatutory stock option over the amount paid for the stock option on Form W-2 in boxes 1, 3 (up to the social security wage base), 5, and in box 12 using the code “V. Military com ” See Regulations section 1. Military com 83-7. Military com An employee who transfers his or her interest in nonstatutory stock options to the employee's former spouse incident to a divorce is not required to include an amount in gross income upon the transfer. Military com The former spouse, rather than the employee, is required to include an amount in gross income when the former spouse exercises the stock options. Military com See Revenue Ruling 2002-22 and Revenue Ruling 2004-60 for details. Military com You can find Revenue Ruling 2002-22 on page 849 of Internal Revenue Bulletin 2002-19 at www. Military com irs. Military com gov/pub/irs-irbs/irb02-19. Military com pdf. Military com See Revenue Ruling 2004-60, 2004-24 I. Military com R. Military com B. Military com 1051, available at www. Military com irs. Military com gov/irb/2004-24_IRB/ar13. Military com html. Military com For more information about employee stock options, see sections 421, 422, and 423 of the Internal Revenue Code and their related regulations. Military com Employer-Provided Cell Phones The value of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. Military com Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis fringe benefit. Military com For the rules relating to these types of benefits, see De Minimis (Minimal) Benefits , earlier in this section, and Working Condition Benefits , later in this section. Military com Noncompensatory business purposes. Military com   You provide a cell phone primarily for noncompensatory business purposes if there are substantial business reasons for providing the cell phone. Military com Examples of substantial business reasons include the employer's: Need to contact the employee at all times for work-related emergencies, Requirement that the employee be available to speak with clients at times when the employee is away from the office, and Need to speak with clients located in other time zones at times outside the employee's normal workday. Military com Cell phones provided to promote goodwill, boost morale, or attract prospective employees. Military com   You cannot exclude from an employee's wages the value of a cell phone provided to promote goodwill of an employee, to attract a prospective employee, or as a means of providing additional compensation to an employee. Military com Additional information. Military com   For additional information on the tax treatment of employer-provided cell phones, see Notice 2011-72, 2011-38 I. Military com R. Military com B. Military com 407, available at  www. Military com irs. Military com gov/irb/2011-38_IRB/ar07. Military com html. Military com Group-Term Life Insurance Coverage This exclusion applies to life insurance coverage that meets all the following conditions. Military com It provides a general death benefit that is not included in income. Military com You provide it to a group of employees. Military com See The 10-employee rule , later. Military com It provides an amount of insurance to each employee based on a formula that prevents individual selection. Military com This formula must use factors such as the employee's age, years of service, pay, or position. Military com You provide it under a policy you directly or indirectly carry. Military com Even if you do not pay any of the policy's cost, you are considered to carry it if you arrange for payment of its cost by your employees and charge at least one employee less than, and at least one other employee more than, the cost of his or her insurance. Military com Determine the cost of the insurance, for this purpose, as explained under Coverage over the limit , later. Military com Group-term life insurance does not include the following insurance. Military com Insurance that does not provide general death benefits, such as travel insurance or a policy providing only accidental death benefits. Military com Life insurance on the life of your employee's spouse or dependent. Military com However, you may be able to exclude the cost of this insurance from the employee's wages as a de minimis benefit. Military com See De Minimis (Minimal) Benefits , earlier in this section. Military com Insurance provided under a policy that provides a permanent benefit (an economic value that extends beyond 1 policy year, such as paid-up or cash surrender value), unless certain requirements are met. Military com See Regulations section 1. Military com 79-1 for details. Military com Employee. Military com   For this exclusion, treat the following individuals as employees. Military com A current common-law employee. Military com A full-time life insurance agent who is a current statutory employee. Military com An individual who was formerly your employee under (1) or (2). Military com A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction and control. Military com Exception for S corporation shareholders. Military com   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Military com A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Military com Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Military com The 10-employee rule. Military com   Generally, life insurance is not group-term life insurance unless you provide it to at least 10 full-time employees at some time during the year. Military com   For this rule, count employees who choose not to receive the insurance unless, to receive it, they must contribute to the cost of benefits other than the group-term life insurance. Military com For example, count an employee who could receive insurance by paying part of the cost, even if that employee chooses not to receive it. Military com However, do not count an employee who must pay part or all of the cost of permanent benefits to get insurance, unless that employee chooses to receive it. Military com A permanent benefit is an economic value extending beyond one policy year (for example, a paid-up or cash-surrender value) that is provided under a life insurance policy. Military com Exceptions. Military com   Even if you do not meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance. Military com   Under the first exception, you do not have to meet the 10-employee rule if all the following conditions are met. Military com If evidence that the employee is insurable is required, it is limited to a medical questionnaire (completed by the employee) that does not require a physical. Military com You provide the insurance to all your full-time employees or, if the insurer requires the evidence mentioned in (1), to all full-time employees who provide evidence the insurer accepts. Military com You figure the coverage based on either a uniform percentage of pay or the insurer's coverage brackets that meet certain requirements. Military com See Regulations section 1. Military com 79-1 for details. Military com   Under the second exception, you do not have to meet the 10-employee rule if all the following conditions are met. Military com You provide the insurance under a common plan covering your employees and the employees of at least one other employer who is not related to you. Military com The insurance is restricted to, but mandatory for, all your employees who belong to, or are represented by, an organization (such as a union) that carries on substantial activities besides obtaining insurance. Military com Evidence of whether an employee is insurable does not affect an employee's eligibility for insurance or the amount of insurance that employee gets. Military com   To apply either exception, do not consider employees who were denied insurance for any of the following reasons. Military com They were 65 or older. Military com They customarily work 20 hours or less a week or 5 months or less in a calendar year. Military com They have not been employed for the waiting period given in the policy. Military com This waiting period cannot be more than 6 months. Military com Exclusion from wages. Military com   You can generally exclude the cost of up to $50,000 of group-term life insurance from the wages of an insured employee. Military com You can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. Military com In addition, you do not have to withhold federal income tax or pay FUTA tax on any group-term life insurance you provide to an employee. Military com Coverage over the limit. Military com   You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. Military com Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Military com Also, show it in box 12 with code “C. Military com ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. Military com   Figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands of dollars of all insurance coverage over $50,000 (figured to the nearest $100) by the cost shown in Table 2-2. Military com For all coverage provided within the calendar year, use the employee's age on the last day of the employee's tax year. Military com You must prorate the cost from the table if less than a full month of coverage is involved. Military com Table 2-2. Military com Cost Per $1,000 of Protection For 1 Month Age Cost Under 25 $ . Military com 05 25 through 29 . Military com 06 30 through 34 . Military com 08 35 through 39 . Military com 09 40 through 44 . Military com 10 45 through 49 . Military com 15 50 through 54 . Military com 23 55 through 59 . Military com 43 60 through 64 . Military com 66 65 through 69 1. Military com 27 70 and older 2. Military com 06 You figure the total cost to include in the employee's wages by multiplying the monthly cost by the number of full months' coverage at that cost. Military com Example. Military com Tom's employer provides him with group-term life insurance coverage of $200,000. Military com Tom is 45 years old, is not a key employee, and pays $100 per year toward the cost of the insurance. Military com Tom's employer must include $170 in his wages. Military com The $200,000 of insurance coverage is reduced by $50,000. Military com The yearly cost of $150,000 of coverage is $270 ($. Military com 15 x 150 x 12), and is reduced by the $100 Tom pays for the insurance. Military com The employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. Military com The employer also enters $170 in box 12 with code “C. Military com ” Coverage for dependents. Military com   Group-term life insurance coverage paid by the employer for the spouse or dependents of an employee may be excludable from income as a de minimis fringe benefit if the face amount is not more than $2,000. Military com If the face amount is greater than $2,000, the entire cost of the dependent coverage must be included in income unless the amount over $2,000 is purchased with employee contributions on an after-tax basis. Military com The cost of the insurance is determined by using Table 2-2. Military com Former employees. Military com   When group-term life insurance over $50,000 is provided to an employee (including retirees) after his or her termination, the employee share of social security and Medicare taxes on that period of coverage is paid by the former employee with his or her tax return and is not collected by the employer. Military com You are not required to collect those taxes. Military com Use the table above to determine the amount of social security and Medicare taxes owed by the former employee for coverage provided after separation from service. Military com Report those uncollected amounts separately in box 12 of Form W-2 using codes “M” and “N. Military com ” See the General Instructions for Forms W-2 and W-3 and the Instructions for Form 941. Military com Exception for key employees. Military com   Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include the entire cost of the insurance in your key employees' wages. Military com This exception generally does not apply to church plans. Military com When figuring social security and Medicare taxes, you must also include the entire cost in the employees' wages. Military com Include the cost in boxes 1, 3, and 5 of Form W-2. Military com However, you do not have to withhold federal income tax or pay FUTA tax on the cost of any group-term life insurance you provide to an employee. Military com   For this purpose, the cost of the insurance is the greater of the following amounts. Military com The premiums you pay for the employee's insurance. Military com See Regulations section 1. Military com 79-4T(Q&A 6) for more information. Military com The cost you figure using Table 2-2. Military com   For this exclusion, a key employee during 2014 is an employee or former employee who is one of the following individuals. Military com See section 416(i) of the Internal Revenue Code for more information. Military com An officer having annual pay of more than $170,000. Military com An individual who for 2014 was either of the following. Military com A 5% owner of your business. Military com A 1% owner of your business whose annual pay was more than $150,000. Military com   A former employee who was a key employee upon retirement or separation from service is also a key employee. Military com   Your plan does not favor key employees as to participation if at least one of the following is true. Military com It benefits at least 70% of your employees. Military com At least 85% of the participating employees are not key employees. Military com It benefits employees who qualify under a set of rules you set up that do not favor key employees. Military com   Your plan meets this participation test if it is part of a cafeteria plan (discussed in section 1) and it meets the participation test for those plans. Military com   When applying this test, do not consider employees who: Have not completed 3 years of service, Are part-time or seasonal, Are nonresident aliens who receive no U. Military com S. Military com source earned income from you, or Are not included in the plan but are in a unit of employees covered by a collective bargaining agreement, if the benefits provided under the plan were the subject of good-faith bargaining between you and employee representatives. Military com   Your plan does not favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. Military com Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay. Military com S corporation shareholders. Military com   Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the cost of all group-term life insurance coverage you provide the 2% shareholder in his or her wages. Military com When figuring social security and Medicare taxes, you must also include the cost of this coverage in the 2% shareholder's wages. Military com Include the cost in boxes 1, 3, and 5 of Form W-2. Military com However, you do not have to withhold federal income tax or pay federal unemployment tax on the cost of any group-term life insurance coverage you provide to the 2% shareholder. Military com Health Savings Accounts A Health Savings Account (HSA) is an account owned by a qualified individual who is generally your employee or former employee. Military com Any contributions that you make to an HSA become the employee's property and cannot be withdrawn by you. Military com Contributions to the account are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Military com The medical expenses must not be reimbursable by insurance or other sources and their payment from HSA funds (distribution) will not give rise to a medical expense deduction on the individual's federal income tax return. Military com For more information about HSAs, visit the Department of Treasury's website at www. Military com treasury. Military com gov and enter “HSA” in the search box. Military com Eligibility. Military com   A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance except for permitted insurance listed under section 223(c)(3) or insurance for accidents, disability, dental care, vision care, or long-term care. Military com For calendar year 2014, a qualifying HDHP must have a deductible of at least $1,250 for self-only coverage or $2,500 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $6,350 for self-only coverage and $12,700 for family coverage. Military com   There are no income limits that restrict an individual's eligibility to contribute to an HSA nor is there a requirement that the account owner have earned income to make a contribution. Military com Exceptions. Military com   An individual is not a qualified individual if he or she can be claimed as a dependent on another person's tax return. Military com Also, an employee's participation in a health flexible spending arrangement (FSA) or health reimbursement arrangement (HRA) generally disqualifies the individual (and employer) from making contributions to his or her HSA. Military com However, an individual may qualify to participate in an HSA if he or she is participating in only a limited-purpose FSA or HRA or a post-deductible FSA. Military com For more information, see Other employee health plans in Publication 969. Military com Employer contributions. Military com   Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. Military com For 2014, you can contribute up to $3,300 for self-only coverage or $6,550 for family coverage to a qualified individual's HSA. Military com   The contribution amounts listed above are increased by $1,000 for a qualified individual who is age 55 or older at any time during the year. Military com For two qualified individuals who are married to each other and who each are age 55 or older at any time during the year, each spouse's contribution limit is increased by $1,000 provided each spouse has a separate HSA. Military com No contributions can be made to an individual's HSA after he or she becomes enrolled in Medicare Part A or Part B. Military com Nondiscrimination rules. Military com    Your contribution amount to an employee's HSA must be comparable for all employees who have comparable coverage during the same period. Military com Otherwise, there will be an excise tax equal to 35% of the amount you contributed to all employees' HSAs. Military com   For guidance on employer comparable contributions to HSAs under section 4980G in instances where an employee has not established an HSA by December 31 and in instances where an employer accelerates contributions for the calendar year for employees who have incurred qualified medical expenses, see Regulations section 54. Military com 4980G-4. Military com Exception. Military com   The Tax Relief and Health Care Act of 2006 allows employers to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee. Military com A highly compensated employee for 2014 is an employee who meets either of the following tests. Military com The employee was a 5% owner at any time during the year or the preceding year. Military com The employee received more than $115,000 in pay for the preceding year. Military com You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Military com Partnerships and S corporations. Military com   Partners and 2% shareholders of an S corporation are not eligible for salary reduction (pre-tax) contributions to an HSA. Military com Employer contributions to the HSA of a bona fide partner or 2% shareholder are treated as distributions or guaranteed payments as determined by the facts and circumstances. Military com Cafeteria plans. Military com   You may contribute to an employee's HSA using a cafeteria plan and your contributions are not subject to the statutory comparability rules. Military com However, cafeteria plan nondiscrimination rules still apply. Military com For example, contributions under a cafeteria plan to employee HSAs cannot be greater for higher-paid employees than they are for lower-paid employees. Military com Contributions that favor lower-paid employees are not prohibited. Military com Reporting requirements. Military com   You must report your contributions to an employee's HSA in box 12 of Form W-2 using code “W. Military com ” The trustee or custodian of the HSA, generally a bank or insurance company, reports distributions from the HSA using Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. Military com Lodging on Your Business Premises You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests. Military com It is furnished on your business premises. Military com It is furnished for your convenience. Military com The employee must accept it as a condition of employment. Military com Different tests may apply to lodging furnished by educational institutions. Military com See section 119(d) of the Internal Revenue Code for details. Military com The exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging. Military com On your business premises. Military com   For this exclusion, your business premises is generally your employee's place of work. Military com For special rules that apply to lodging furnished in a camp located in a foreign country, see section 119(c) of the Internal Revenue Code and its regulations. Military com For your convenience. Military com   Whether or not you furnish lodging for your convenience as an employer depends on all the facts and circumstances. Military com You furnish the lodging to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. Military com This is true even if a law or an employment contract provides that the lodging is furnished as pay. Military com However, a written statement that the lodging is furnished for your convenience is not sufficient. Military com Condition of employment. Military com   Lodging meets this test if you require your employees to accept the lodging because they need to live on your business premises to be able to properly perform their duties. Military com Examples include employees who must be available at all times and employees who could not perform their required duties without being furnished the lodging. Military com   It does not matter whether you must furnish the lodging as pay under the terms of an employment contract or a law fixing the terms of employment. Military com Example. Military com A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. Military com If Joan chooses to live at the hospital, the hospital cannot exclude the value of the lodging from her wages because she is not required to live at the hospital to properly perform the duties of her employment. Military com S corporation shareholders. Military com   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. Military com A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Military com Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Military com Meals This section discusses the exclusion rules that apply to de minimis meals and meals on your business premises. Military com De Minimis Meals You can exclude any occasional meal or meal money you provide to an employee if it has so little value (taking into account how frequently you provide meals to your employees) that accounting for it would be unreasonable or administratively impracticable. Military com The exclusion applies, for example, to the following items. Military com Coffee, doughnuts, or soft drinks. Military com Occasional meals or meal money provided to enable an employee to work overtime. Military com However, the exclusion does not apply to meal money figured on the basis of hours worked. Military com Occasional parties or picnics for employees and their guests. Military com This exclusion also applies to meals you provide at an employer-operated eating facility for employees if the annual revenue from the facility equals or exceeds the direct costs of the facility. Military com For this purpose, your revenue from providing a meal is considered equal to the facility's direct operating costs to provide that meal if its value can be excluded from an employee's wages as explained under Meals on Your Business Premises , later. Military com If food or beverages you furnish to employees qualify as a de minimis benefit, you can deduct their full cost. Military com The 50% limit on deductions for the cost of meals does not apply. Military com The deduction limit on meals is discussed in chapter 2 of Publication 535. Military com Employee. Military com   For this exclusion, treat any recipient of a de minimis meal as
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The Military Com

Military com 1. Military com   Gain or Loss Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesGain or Loss From Sales and Exchanges Abandonments Foreclosures and RepossessionsAmount realized on a nonrecourse debt. Military com Amount realized on a recourse debt. Military com Involuntary ConversionsCondemnations Nontaxable ExchangesLike-Kind Exchanges Other Nontaxable Exchanges Transfers to Spouse Rollover of Gain From Publicly Traded Securities Gains on Sales of Qualified Small Business Stock Exclusion of Gain From Sale of DC Zone Assets Topics - This chapter discusses: Sales and exchanges Abandonments Foreclosures and repossessions Involuntary conversions Nontaxable exchanges Transfers to spouse Rollovers and exclusions for certain capital gains Useful Items - You may want to see: Publication 523 Selling Your Home 537 Installment Sales 547 Casualties, Disasters, and Thefts 550 Investment Income and Expenses 551 Basis of Assets 908 Bankruptcy Tax Guide 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1040 U. Military com S. Military com Individual Income Tax Return 1040X Amended U. Military com S. Military com Individual Income Tax Return 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets Although the discussions in this chapter may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. Military com However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Military com See chapter 5 for information about getting publications and forms. Military com Sales and Exchanges A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Military com An exchange is a transfer of property for other property or services. Military com The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss. Military com Sale or lease. Military com    Some agreements that seem to be leases may really be conditional sales contracts. Military com The intention of the parties to the agreement can help you distinguish between a sale and a lease. Military com   There is no test or group of tests to prove what the parties intended when they made the agreement. Military com You should consider each agreement based on its own facts and circumstances. Military com For more information, see chapter 3 in Publication 535, Business Expenses. Military com Cancellation of a lease. Military com    Payments received by a tenant for the cancellation of a lease are treated as an amount realized from the sale of property. Military com Payments received by a landlord (lessor) for the cancellation of a lease are essentially a substitute for rental payments and are taxed as ordinary income in the year in which they are received. Military com Copyright. Military com    Payments you receive for granting the exclusive use of (or right to exploit) a copyright throughout its life in a particular medium are treated as received from the sale of property. Military com It does not matter if the payments are a fixed amount or a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work, or an amount based on the number of copies sold, performances given, or exhibitions made. Military com Nor does it matter if the payments are made over the same period as that covering the grantee's use of the copyrighted work. Military com   If the copyright was used in your trade or business and you held it longer than a year, the gain or loss may be a section 1231 gain or loss. Military com For more information, see Section 1231 Gains and Losses in chapter 3. Military com Easement. Military com   The amount received for granting an easement is subtracted from the basis of the property. Military com If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Military com If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received. Military com   Any amount received that is more than the basis to be reduced is a taxable gain. Military com The transaction is reported as a sale of property. Military com   If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. Military com However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement. Military com   If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Military com Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. Military com See Gain or Loss From Condemnations, later. Military com Property transferred to satisfy debt. Military com   A transfer of property to satisfy a debt is an exchange. Military com Note's maturity date extended. Military com   The extension of a note's maturity date is not treated as an exchange of an outstanding note for a new and different note. Military com Also, it is not considered a closed and completed transaction that would result in a gain or loss. Military com However, an extension will be treated as a taxable exchange of the outstanding note for a new and materially different note if the changes in the terms of the note are significant. Military com Each case must be determined by its own facts. Military com For more information, see Regulations section 1. Military com 1001-3. Military com Transfer on death. Military com   The transfer of property of a decedent to an executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or exchange or other disposition. Military com No taxable gain or deductible loss results from the transfer. Military com Bankruptcy. Military com   Generally, a transfer (other than by sale or exchange) of property from a debtor to a bankruptcy estate is not treated as a disposition. Military com Consequently, the transfer generally does not result in gain or loss. Military com For more information, see Publication 908, Bankruptcy Tax Guide. Military com Gain or Loss From Sales and Exchanges You usually realize gain or loss when property is sold or exchanged. Military com A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. Military com A loss is the adjusted basis of the property that is more than the amount you realize. Military com   Table 1-1. Military com How To Figure Whether You Have a Gain or Loss IF your. Military com . Military com . Military com THEN you have a. Military com . Military com . Military com Adjusted basis is more than the amount realized, Loss. Military com Amount realized is more than the adjusted basis, Gain. Military com Basis. Military com   You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. Military com The basis of property you buy is usually its cost. Military com However, if you acquired the property by gift, inheritance, or in some way other than buying it, you must use a basis other than its cost. Military com See Basis Other Than Cost in Publication 551, Basis of Assets. Military com Special rules apply to property acquired from a decedent who died in 2010 and the executor made the election to file Form 8939, Allocation of Increase in Basis for Property Received From a Decedent. Military com See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Military com Adjusted basis. Military com   The adjusted basis of property is your original cost or other basis plus (increased by) certain additions and minus (decreased by) certain deductions. Military com Increases include costs of any improvements having a useful life of more than 1 year. Military com Decreases include depreciation and casualty losses. Military com For more details and additional examples, see Adjusted Basis in Publication 551. Military com Amount realized. Military com   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (defined below) of all property or services you receive. Military com The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Military com Fair market value. Military com   Fair market value (FMV) is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. Military com If parties with adverse interests place a value on property in an arm's-length transaction, that is strong evidence of FMV. Military com If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary. Military com Example. Military com You used a building in your business that cost you $70,000. Military com You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. Military com You sold the building for $100,000 plus property having an FMV of $20,000. Military com The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. Military com The selling expenses were $4,000. Military com Your gain on the sale is figured as follows. Military com Amount realized:     Cash $100,000   FMV of property received 20,000   Real estate taxes assumed by buyer 3,000   Mortgage assumed by  buyer 17,000   Total 140,000   Minus: Selling expenses 4,000 $136,000 Adjusted basis:     Cost of building $70,000   Improvements 20,000   Total $90,000   Minus: Depreciation 10,000   Adjusted basis   $80,000 Gain on sale $56,000 Amount recognized. Military com   Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. Military com Recognized gains must be included in gross income. Military com Recognized losses are deductible from gross income. Military com However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. Military com See Nontaxable Exchanges, later. Military com Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft. Military com Interest in property. Military com   The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. Military com If you received the interest as a gift, inheritance, or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Military com Your basis in the property is disregarded. Military com This rule does not apply if all interests in the property are disposed of at the same time. Military com Example 1. Military com Your father dies and leaves his farm to you for life with a remainder interest to your younger brother. Military com You decide to sell your life interest in the farm. Military com The entire amount you receive is a recognized gain. Military com Your basis in the farm is disregarded. Military com Example 2. Military com The facts are the same as in Example 1, except that your brother joins you in selling the farm. Military com The entire interest in the property is sold, so your basis in the farm is not disregarded. Military com Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm. Military com Canceling a sale of real property. Military com   If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. Military com If the buyer returns the property in the year of sale, no gain or loss is recognized. Military com This cancellation of the sale in the same year it occurred places both you and the buyer in the same positions you were in before the sale. Military com If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. Military com When the property is returned in a later year, you acquire a new basis in the property. Military com That basis is equal to the amount you pay to the buyer. Military com Bargain Sale If you sell or exchange property for less than fair market value with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. Military com You have a gain if the amount realized is more than your adjusted basis in the property. Military com However, you do not have a loss if the amount realized is less than the adjusted basis of the property. Military com Bargain sales to charity. Military com   A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. Military com If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each. Military com The adjusted basis of the part sold is figured as follows. Military com Adjusted basis of entire property × Amount realized (fair market value of part sold)   Fair market value of entire property   Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. Military com This allocation rule does not apply if a charitable contribution deduction is not allowable. Military com   See Publication 526, Charitable Contributions, for information on figuring your charitable contribution. Military com Example. Military com You sold property with a fair market value of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. Military com Your adjusted basis in the property is $4,000. Military com Your gain on the sale is $1,200, figured as follows. Military com Sales price $2,000 Minus: Adjusted basis of part sold ($4,000 × ($2,000 ÷ $10,000)) 800 Gain on the sale $1,200 Property Used Partly for Business or Rental Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange as though you had sold two separate pieces of property. Military com You must subtract depreciation you took or could have taken from the basis of the business or rental part. Military com However, see the special rule below for a home used partly for business or rental. Military com You must allocate the selling price, selling expenses, and the basis of the property between the business or rental part and the personal part. Military com Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. Military com Any gain on the personal part of the property is a capital gain. Military com You cannot deduct a loss on the personal part. Military com Home used partly for business or rental. Military com    If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Military com See Property Used Partly for Business or Rental, in Publication 523. Military com Property Changed to Business or Rental Use You cannot deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale. Military com You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. Military com However, if the adjusted basis of the property at the time of the change was more than its fair market value, the loss you can deduct is limited. Military com Figure the loss you can deduct as follows. Military com Use the lesser of the property's adjusted basis or fair market value at the time of the change. Military com Add to (1) the cost of any improvements and other increases to basis since the change. Military com Subtract from (2) depreciation and any other decreases to basis since the change. Military com Subtract the amount you realized on the sale from the result in (3). Military com If the amount you realized is more than the result in (3), treat this result as zero. Military com The result in (4) is the loss you can deduct. Military com Example. Military com You changed your main home to rental property 5 years ago. Military com At the time of the change, the adjusted basis of your home was $75,000 and the fair market value was $70,000. Military com This year, you sold the property for $55,000. Military com You made no improvements to the property but you have depreciation expense of $12,620 over the 5 prior years. Military com Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows. Military com Lesser of adjusted basis or fair market value at time of the change $70,000 Plus: Cost of any improvements and any other additions to basis after the change -0-   70,000 Minus: Depreciation and any other decreases to basis after the change 12,620   57,380 Minus: Amount you realized from the sale 55,000 Deductible loss $2,380 Gain. Military com   If you have a gain on the sale, you generally must recognize the full amount of the gain. Military com You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier. Military com   You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Military com However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use. Military com   For more information, see Business Use or Rental of Home in Publication 523. Military com In addition, special rules apply if the home sold was acquired in a like-kind exchange. Military com See Special Situations in Publication 523. Military com Also see Like-Kind Exchanges, later. Military com Abandonments The abandonment of property is a disposition of property. Military com You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Military com Generally, abandonment is not treated as a sale or exchange of the property. Military com If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Military com If your adjusted basis is more than the amount you realize (if any), then you have a loss. Military com Loss from abandonment of business or investment property is deductible as a loss. Military com A loss from an abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Military com This rule also applies to leasehold improvements the lessor made for the lessee that were abandoned. Military com If the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed later under Foreclosure and Repossessions. Military com The abandonment loss is deducted in the tax year in which the loss is sustained. Military com If the abandoned property is secured by debt, special rules apply. Military com The tax consequences of abandonment of property that is secured by debt depend on whether you are personally liable for the debt (recourse debt) or you are not personally liable for the debt (nonrecourse debt). Military com For more information, including examples, see chapter 3 of Publication 4681. Military com You cannot deduct any loss from abandonment of your home or other property held for personal use only. Military com Cancellation of debt. Military com   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you may realize ordinary income equal to the canceled debt. Military com This income is separate from any loss realized from abandonment of the property. Military com   You must report this income on your tax return unless one of the following applies. Military com The cancellation is intended as a gift. Military com The debt is qualified farm debt. Military com The debt is qualified real property business debt. Military com You are insolvent or bankrupt. Military com The debt is qualified principal residence indebtedness. Military com File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the income exclusion. Military com For more information, including other exceptions and exclusion, see Publication 4681. Military com Forms 1099-A and 1099-C. Military com   If you abandon property that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your loss from the abandonment. Military com However, if your debt is canceled and the lender must file Form 1099-C, the lender may include the information about the abandonment on that form instead of on Form 1099-A, and send you Form 1099-C only. Military com The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Military com For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Military com Foreclosures and Repossessions If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Military com The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Military com This is true even if you voluntarily return the property to the lender. Military com You also may realize ordinary income from cancellation of debt if the loan balance is more than the fair market value of the property. Military com Buyer's (borrower's) gain or loss. Military com   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Military com The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Military com See Gain or Loss From Sales and Exchanges, earlier. Military com You can use Table 1-2 to figure your gain or loss from a foreclosure or repossession. Military com Amount realized on a nonrecourse debt. Military com   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full debt canceled by the transfer. Military com The full canceled debt is included even if the fair market value of the property is less than the canceled debt. Military com Example 1. Military com Chris bought a new car for $15,000. Military com He paid $2,000 down and borrowed the remaining $13,000 from the dealer's credit company. Military com Chris is not personally liable for the loan (nonrecourse debt), but pledges the new car as security. Military com The credit company repossessed the car because he stopped making loan payments. Military com The balance due after taking into account the payments Chris made was $10,000. Military com The fair market value of the car when repossessed was $9,000. Military com The amount Chris realized on the repossession is $10,000. Military com That is the outstanding amount of the debt canceled by the repossession, even though the car's fair market value is less than $10,000. Military com Chris figures his gain or loss on the repossession by comparing the amount realized ($10,000) with his adjusted basis ($15,000). Military com He has a $5,000 nondeductible loss. Military com Example 2. Military com Abena paid $200,000 for her home. Military com She paid $15,000 down and borrowed the remaining $185,000 from a bank. Military com Abena is not personally liable for the loan (nonrecourse debt), but pledges the house as security. Military com The bank foreclosed on the loan because Abena stopped making payments. Military com When the bank foreclosed on the loan, the balance due was $180,000, the fair market value of the house was $170,000, and Abena's adjusted basis was $175,000 due to a casualty loss she had deducted. Military com The amount Abena realized on the foreclosure is $180,000, the balance due and debt canceled by the foreclosure. Military com She figures her gain or loss by comparing the amount realized ($180,000) with her adjusted basis ($175,000). Military com She has a $5,000 realized gain. Military com Amount realized on a recourse debt. Military com   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Military com You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Military com The amount realized does not include the canceled debt that is your income from cancellation of debt. Military com See Cancellation of debt, below. Military com Seller's (lender's) gain or loss on repossession. Military com   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Military com For more information, see Repossession in Publication 537. Military com    Table 1-2. Military com Worksheet for Foreclosures and Repossessions Part 1. Military com Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Military com Complete this part only  if you were personally liable for the debt. Military com Otherwise,  go to Part 2. Military com   1. Military com Enter the amount of outstanding debt immediately before the transfer of   property reduced by any amount for which you remain personally liable after   the transfer of property   2. Military com Enter the fair market value of the transferred property   3. Military com Ordinary income from cancellation of debt upon foreclosure or    repossession. Military com * Subtract line 2 from line 1. Military com   If less than zero, enter zero   Part 2. Military com Figure your gain or loss from foreclosure or repossession. Military com   4. Military com If you completed Part 1, enter the smaller of line 1 or line 2. Military com   If you did not complete Part 1, enter the outstanding debt immediately before   the transfer of property   5. Military com Enter any proceeds you received from the foreclosure sale   6. Military com Add lines 4 and 5   7. Military com Enter the adjusted basis of the transferred property   8. Military com Gain or loss from foreclosure or repossession. Military com Subtract line 7  from line 6   * The income may not be taxable. Military com See Cancellation of debt. Military com Cancellation of debt. Military com   If property that is repossessed or foreclosed on secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the fair market value of the property. Military com This income is separate from any gain or loss realized from the foreclosure or repossession. Military com Report the income from cancellation of a debt related to a business or rental activity as business or rental income. Military com    You can use Table 1-2 to figure your income from cancellation of debt. Military com   You must report this income on your tax return unless one of the following applies. Military com The cancellation is intended as a gift. Military com The debt is qualified farm debt. Military com The debt is qualified real property business debt. Military com You are insolvent or bankrupt. Military com The debt is qualified principal residence indebtedness. Military com File Form 982 to report the income exclusion. Military com Example 1. Military com Assume the same facts as in Example 1 under Amount realized on a nonrecourse debt, earlier, except Chris is personally liable for the car loan (recourse debt). Military com In this case, the amount he realizes is $9,000. Military com This is the lesser of the canceled debt ($10,000) or the car's fair market value ($9,000). Military com Chris figures his gain or loss on the repossession by comparing the amount realized ($9,000) with his adjusted basis ($15,000). Military com He has a $6,000 nondeductible loss. Military com He also is treated as receiving ordinary income from cancellation of debt. Military com That income is $1,000 ($10,000 − $9,000). Military com This is the part of the canceled debt not included in the amount realized. Military com Example 2. Military com Assume the same facts as in Example 2 under Amount realized on a nonrecourse debt, earlier, except Abena is personally liable for the loan (recourse debt). Military com In this case, the amount she realizes is $170,000. Military com This is the lesser of the canceled debt ($180,000) or the fair market value of the house ($170,000). Military com Abena figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($175,000). Military com She has a $5,000 nondeductible loss. Military com She also is treated as receiving ordinary income from cancellation of debt. Military com (The debt is not exempt from tax as discussed under Cancellation of debt, above. Military com ) That income is $10,000 ($180,000 − $170,000). Military com This is the part of the canceled debt not included in the amount realized. Military com Forms 1099-A and 1099-C. Military com   A lender who acquires an interest in your property in a foreclosure or repossession should send you Form 1099-A showing the information you need to figure your gain or loss. Military com However, if the lender also cancels part of your debt and must file Form 1099-C, the lender may include the information about the foreclosure or repossession on that form instead of on Form 1099-A and send you Form 1099-C only. Military com The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Military com For foreclosures or repossessions occurring in 2013, these forms should be sent to you by January 31, 2014. Military com Involuntary Conversions An involuntary conversion occurs when your property is destroyed, stolen, condemned, or disposed of under the threat of condemnation and you receive other property or money in payment, such as insurance or a condemnation award. Military com Involuntary conversions are also called involuntary exchanges. Military com Gain or loss from an involuntary conversion of your property is usually recognized for tax purposes unless the property is your main home. Military com You report the gain or deduct the loss on your tax return for the year you realize it. Military com You cannot deduct a loss from an involuntary conversion of property you held for personal use unless the loss resulted from a casualty or theft. Military com However, depending on the type of property you receive, you may not have to report a gain on an involuntary conversion. Military com Generally, you do not report the gain if you receive property that is similar or related in service or use to the converted property. Military com Your basis for the new property is the same as your basis for the converted property. Military com This means that the gain is deferred until a taxable sale or exchange occurs. Military com If you receive money or property that is not similar or related in service or use to the involuntarily converted property and you buy qualifying replacement property within a certain period of time, you can elect to postpone reporting the gain on the property purchased. Military com This publication explains the treatment of a gain or loss from a condemnation or disposition under the threat of condemnation. Military com If you have a gain or loss from the destruction or theft of property, see Publication 547. Military com Condemnations A condemnation is the process by which private property is legally taken for public use without the owner's consent. Military com The property may be taken by the federal government, a state government, a political subdivision, or a private organization that has the power to legally take it. Military com The owner receives a condemnation award (money or property) in exchange for the property taken. Military com A condemnation is like a forced sale, the owner being the seller and the condemning authority being the buyer. Military com Example. Military com A local government authorized to acquire land for public parks informed you that it wished to acquire your property. Military com After the local government took action to condemn your property, you went to court to keep it. Military com But, the court decided in favor of the local government, which took your property and paid you an amount fixed by the court. Military com This is a condemnation of private property for public use. Military com Threat of condemnation. Military com   A threat of condemnation exists if a representative of a government body or a public official authorized to acquire property for public use informs you that the government body or official has decided to acquire your property. Military com You must have reasonable grounds to believe that, if you do not sell voluntarily, your property will be condemned. Military com   The sale of your property to someone other than the condemning authority will also qualify as an involuntary conversion, provided you have reasonable grounds to believe that your property will be condemned. Military com If the buyer of this property knows at the time of purchase that it will be condemned and sells it to the condemning authority, this sale also qualifies as an involuntary conversion. Military com Reports of condemnation. Military com   A threat of condemnation exists if you learn of a decision to acquire your property for public use through a report in a newspaper or other news medium, and this report is confirmed by a representative of the government body or public official involved. Military com You must have reasonable grounds to believe that they will take necessary steps to condemn your property if you do not sell voluntarily. Military com If you relied on oral statements made by a government representative or public official, the Internal Revenue Service (IRS) may ask you to get written confirmation of the statements. Military com Example. Military com Your property lies along public utility lines. Military com The utility company has the authority to condemn your property. Military com The company informs you that it intends to acquire your property by negotiation or condemnation. Military com A threat of condemnation exists when you receive the notice. Military com Related property voluntarily sold. Military com   A voluntary sale of your property may be treated as a forced sale that qualifies as an involuntary conversion if the property had a substantial economic relationship to property of yours that was condemned. Military com A substantial economic relationship exists if together the properties were one economic unit. Military com You also must show that the condemned property could not reasonably or adequately be replaced. Military com You can elect to postpone reporting the gain by buying replacement property. Military com See Postponement of Gain, later. Military com Gain or Loss From Condemnations If your property was condemned or disposed of under the threat of condemnation, figure your gain or loss by comparing the adjusted basis of your condemned property with your net condemnation award. Military com If your net condemnation award is more than the adjusted basis of the condemned property, you have a gain. Military com You can postpone reporting gain from a condemnation if you buy replacement property. Military com If only part of your property is condemned, you can treat the cost of restoring the remaining part to its former usefulness as the cost of replacement property. Military com See Postponement of Gain, later. Military com If your net condemnation award is less than your adjusted basis, you have a loss. Military com If your loss is from property you held for personal use, you cannot deduct it. Military com You must report any deductible loss in the tax year it happened. Military com You can use Part 2 of Table 1-3 to figure your gain or loss from a condemnation award. Military com Main home condemned. Military com   If you have a gain because your main home is condemned, you generally can exclude the gain from your income as if you had sold or exchanged your home. Military com You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). Military com For information on this exclusion, see Publication 523. Military com If your gain is more than you can exclude but you buy replacement property, you may be able to postpone reporting the rest of the gain. Military com See Postponement of Gain, later. Military com Table 1-3. Military com Worksheet for Condemnations Part 1. Military com Gain from severance damages. Military com  If you did not receive severance damages, skip Part 1 and go to Part 2. Military com   1. Military com Enter gross severance damages received   2. Military com Enter your expenses in getting severance damages   3. Military com Subtract line 2 from line 1. Military com If less than zero, enter -0-   4. Military com Enter any special assessment on remaining property taken out of your award   5. Military com Net severance damages. Military com Subtract line 4 from line 3. Military com If less than zero, enter -0-   6. Military com Enter the adjusted basis of the remaining property   7. Military com Gain from severance damages. Military com Subtract line 6 from line 5. Military com If less than zero, enter -0-   8. Military com Refigured adjusted basis of the remaining property. Military com Subtract line 5 from line 6. Military com If less than zero, enter -0-   Part 2. Military com Gain or loss from condemnation award. Military com   9. Military com Enter the gross condemnation award received   10. Military com Enter your expenses in getting the condemnation award   11. Military com If you completed Part 1, and line 4 is more than line 3, subtract line 3 from line 4. Military com If you did not complete Part 1, but a special assessment was taken out of your award, enter that amount. Military com Otherwise, enter -0-   12. Military com Add lines 10 and 11   13. Military com Net condemnation award. Military com Subtract line 12 from line 9   14. Military com Enter the adjusted basis of the condemned property   15. Military com Gain from condemnation award. Military com If line 14 is more than line 13, enter -0-. Military com Otherwise, subtract line 14 from  line 13 and skip line 16   16. Military com Loss from condemnation award. Military com Subtract line 13 from line 14     (Note: You cannot deduct the amount on line 16 if the condemned property was held for personal use. Military com )   Part 3. Military com Postponed gain from condemnation. Military com  (Complete only if line 7 or line 15 is more than zero and you bought qualifying replacement property or made expenditures to restore the usefulness of your remaining property. Military com )   17. Military com If you completed Part 1, and line 7 is more than zero, enter the amount from line 5. Military com Otherwise, enter -0-   18. Military com If line 15 is more than zero, enter the amount from line 13. Military com Otherwise, enter -0-   19. Military com Add lines 17 and 18. Military com If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   20. Military com Enter the total cost of replacement property and any expenses to restore the usefulness of your remaining property   21. Military com Subtract line 20 from line 19. Military com If less than zero, enter -0-   22. Military com If you completed Part 1, add lines 7 and 15. Military com Otherwise, enter the amount from line 15. Military com If the condemned property was your main home, subtract from this total the gain you excluded from your income and enter the result   23. Military com Recognized gain. Military com Enter the smaller of line 21 or line 22. Military com   24. Military com Postponed gain. Military com Subtract line 23 from line 22. Military com If less than zero, enter -0-   Condemnation award. Military com   A condemnation award is the money you are paid or the value of other property you receive for your condemned property. Military com The award is also the amount you are paid for the sale of your property under threat of condemnation. Military com Payment of your debts. Military com   Amounts taken out of the award to pay your debts are considered paid to you. Military com Amounts the government pays directly to the holder of a mortgage or lien against your property are part of your award, even if the debt attaches to the property and is not your personal liability. Military com Example. Military com The state condemned your property for public use. Military com The award was set at $200,000. Military com The state paid you only $148,000 because it paid $50,000 to your mortgage holder and $2,000 accrued real estate taxes. Military com You are considered to have received the entire $200,000 as a condemnation award. Military com Interest on award. Military com   If the condemning authority pays you interest for its delay in paying your award, it is not part of the condemnation award. Military com You must report the interest separately as ordinary income. Military com Payments to relocate. Military com   Payments you receive to relocate and replace housing because you have been displaced from your home, business, or farm as a result of federal or federally assisted programs are not part of the condemnation award. Military com Do not include them in your income. Military com Replacement housing payments used to buy new property are included in the property's basis as part of your cost. Military com Net condemnation award. Military com   A net condemnation award is the total award you received, or are considered to have received, for the condemned property minus your expenses of obtaining the award. Military com If only a part of your property was condemned, you also must reduce the award by any special assessment levied against the part of the property you retain. Military com This is discussed later under Special assessment taken out of award. Military com Severance damages. Military com    Severance damages are not part of the award paid for the property condemned. Military com They are paid to you if part of your property is condemned and the value of the part you keep is decreased because of the condemnation. Military com   For example, you may receive severance damages if your property is subject to flooding because you sell flowage easement rights (the condemned property) under threat of condemnation. Military com Severance damages also may be given to you if, because part of your property is condemned for a highway, you must replace fences, dig new wells or ditches, or plant trees to restore your remaining property to the same usefulness it had before the condemnation. Military com   The contracting parties should agree on the specific amount of severance damages in writing. Military com If this is not done, all proceeds from the condemning authority are considered awarded for your condemned property. Military com   You cannot make a completely new allocation of the total award after the transaction is completed. Military com However, you can show how much of the award both parties intended for severance damages. Military com The severance damages part of the award is determined from all the facts and circumstances. Military com Example. Military com You sold part of your property to the state under threat of condemnation. Military com The contract you and the condemning authority signed showed only the total purchase price. Military com It did not specify a fixed sum for severance damages. Military com However, at settlement, the condemning authority gave you closing papers showing clearly the part of the purchase price that was for severance damages. Military com You may treat this part as severance damages. Military com Treatment of severance damages. Military com   Your net severance damages are treated as the amount realized from an involuntary conversion of the remaining part of your property. Military com Use them to reduce the basis of the remaining property. Military com If the amount of severance damages is based on damage to a specific part of the property you kept, reduce the basis of only that part by the net severance damages. Military com   If your net severance damages are more than the basis of your retained property, you have a gain. Military com You may be able to postpone reporting the gain. Military com See Postponement of Gain, later. Military com    You can use Part 1 of Table 1-3 to figure any gain from severance damages and to refigure the adjusted basis of the remaining part of your property. Military com Net severance damages. Military com   To figure your net severance damages, you first must reduce your severance damages by your expenses in obtaining the damages. Military com You then reduce them by any special assessment (described later) levied against the remaining part of the property and retained out of the award by the condemning authority. Military com The balance is your net severance damages. Military com Expenses of obtaining a condemnation award and severance damages. Military com   Subtract the expenses of obtaining a condemnation award, such as legal, engineering, and appraisal fees, from the total award. Military com Also, subtract the expenses of obtaining severance damages, which may include similar expenses, from the severance damages paid to you. Military com If you cannot determine which part of your expenses is for each part of the condemnation proceeds, you must make a proportionate allocation. Military com Example. Military com You receive a condemnation award and severance damages. Military com One-fourth of the total was designated as severance damages in your agreement with the condemning authority. Military com You had legal expenses for the entire condemnation proceeding. Military com You cannot determine how much of your legal expenses is for each part of the condemnation proceeds. Military com You must allocate one-fourth of your legal expenses to the severance damages and the other three-fourths to the condemnation award. Military com Special assessment retained out of award. Military com   When only part of your property is condemned, a special assessment levied against the remaining property may be retained by the governing body out of your condemnation award. Military com An assessment may be levied if the remaining part of your property benefited by the improvement resulting from the condemnation. Military com Examples of improvements that may cause a special assessment are widening a street and installing a sewer. Military com   To figure your net condemnation award, you must reduce the amount of the award by the assessment retained out of the award. Military com Example. Military com To widen the street in front of your home, the city condemned a 25-foot deep strip of your land. Military com You were awarded $5,000 for this and spent $300 to get the award. Military com Before paying the award, the city levied a special assessment of $700 for the street improvement against your remaining property. Military com The city then paid you only $4,300. Military com Your net award is $4,000 ($5,000 total award minus $300 expenses in obtaining the award and $700 for the special assessment retained). Military com If the $700 special assessment was not retained out of the award and you were paid $5,000, your net award would be $4,700 ($5,000 − $300). Military com The net award would not change, even if you later paid the assessment from the amount you received. Military com Severance damages received. Military com   If severance damages are included in the condemnation proceeds, the special assessment retained out of the severance damages is first used to reduce the severance damages. Military com Any balance of the special assessment is used to reduce the condemnation award. Military com Example. Military com You were awarded $4,000 for the condemnation of your property and $1,000 for severance damages. Military com You spent $300 to obtain the severance damages. Military com A special assessment of $800 was retained out of the award. Military com The $1,000 severance damages are reduced to zero by first subtracting the $300 expenses and then $700 of the special assessment. Military com Your $4,000 condemnation award is reduced by the $100 balance of the special assessment, leaving a $3,900 net condemnation award. Military com Part business or rental. Military com   If you used part of your condemned property as your home and part as business or rental property, treat each part as a separate property. Military com Figure your gain or loss separately because gain or loss on each part may be treated differently. Military com   Some examples of this type of property are a building in which you live and operate a grocery, and a building in which you live on the first floor and rent out the second floor. Military com Example. Military com You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. Military com You rented half the building and lived in the other half. Military com You paid $25,000 for the building and spent an additional $1,000 for a new roof. Military com You claimed allowable depreciation of $4,600 on the rental half. Military com You spent $200 in legal expenses to obtain the condemnation award. Military com Figure your gain or loss as follows. Military com     Resi- dential Part Busi- ness Part 1) Condemnation award received $12,000 $12,000 2) Minus: Legal expenses, $200 100 100 3) Net condemnation award $11,900 $11,900 4) Adjusted basis:       ½ of original cost, $25,000 $12,500 $12,500   Plus: ½ of cost of roof, $1,000 500 500   Total $13,000 $13,000 5) Minus: Depreciation   4,600 6) Adjusted basis, business part   $8,400 7) (Loss) on residential property ($1,100)   8) Gain on business property $3,500 The loss on the residential part of the property is not deductible. Military com Postponement of Gain Do not report the gain on condemned property if you receive only property that is similar or related in service or use to the condemned property. Military com Your basis for the new property is the same as your basis for the old. Military com Money or unlike property received. Military com   You ordinarily must report the gain if you receive money or unlike property. Military com You can elect to postpone reporting the gain if you buy property that is similar or related in service or use to the condemned property within the replacement period, discussed later. Military com You also can elect to postpone reporting the gain if you buy a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the condemned property. Military com See Controlling interest in a corporation, later. Military com   To postpone reporting all the gain, you must buy replacement property costing at least as much as the amount realized for the condemned property. Military com If the cost of the replacement property is less than the amount realized, you must report the gain up to the unspent part of the amount realized. Military com   The basis of the replacement property is its cost, reduced by the postponed gain. Military com Also, if your replacement property is stock in a corporation that owns property similar or related in service or use, the corporation generally will reduce its basis in its assets by the amount by which you reduce your basis in the stock. Military com See Controlling interest in a corporation, later. Military com You can use Part 3 of Table 1-3 to figure the gain you must report and your postponed gain. Military com Postponing gain on severance damages. Military com   If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. Military com See Treatment of severance damages, earlier. Military com You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain). Military com   You also can make this election if you spend the severance damages, together with other money you received for the condemned property (if resulting in gain), to acquire nearby property that will allow you to continue your business. Military com If suitable nearby property is not available and you are forced to sell the remaining property and relocate in order to continue your business, see Postponing gain on the sale of related property, next. Military com   If you restore the remaining property to its former usefulness, you can treat the cost of restoring it as the cost of replacement property. Military com Postponing gain on the sale of related property. Military com   If you sell property that is related to the condemned property and then buy replacement property, you can elect to postpone reporting gain on the sale. Military com You must meet the requirements explained earlier under Related property voluntarily sold. Military com You can postpone reporting all your gain if the replacement property costs at least as much as the amount realized from the sale plus your net condemnation award (if resulting in gain) plus your net severance damages, if any (if resulting in gain). Military com Buying replacement property from a related person. Military com   Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. Military com For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. Military com   This rule applies to the following taxpayers. Military com C corporations. Military com Partnerships in which more than 50% of the capital or profits interest is owned by  C corporations. Military com All others (including individuals, partnerships (other than those in (2)), and S corporations) if the total realized gain for the tax year on all involuntarily converted properties on which there is realized gain of more than $100,000. Military com   For taxpayers described in (3) above, gains cannot be offset with any losses when determining whether the total gain is more than $100,000. Military com If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. Military com If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. Military com Exception. Military com   This rule does not apply if the related person acquired the property from an unrelated person within the replacement period. Military com Advance payment. Military com   If you pay a contractor in advance to build your replacement property, you have not bought replacement property unless it is finished before the end of the replacement period (discussed later). Military com Replacement property. Military com   To postpone reporting gain, you must buy replacement property for the specific purpose of replacing your condemned property. Military com You do not have to use the actual funds from the condemnation award to acquire the replacement property. Military com Property you acquire by gift or inheritance does not qualify as replacement property. Military com Similar or related in service or use. Military com   Your replacement property must be similar or related in service or use to the property it replaces. Military com   If the condemned property is real property you held for productive use in your trade or business or for investment (other than property held mainly for sale), like-kind property to be held either for productive use in trade or business or for investment will be treated as property similar or related in service or use. Military com For a discussion of like-kind property, see Like-Kind Property under Like-Kind Exchanges, later. Military com Owner-user. Military com   If you are an owner-user, similar or related in service or use means that replacement property must function in the same way as the property it replaces. Military com Example. Military com Your home was condemned and you invested the proceeds from the condemnation in a grocery store. Military com Your replacement property is not similar or related in service or use to the condemned property. Military com To be similar or related in service or use, your replacement property must also be used by you as your home. Military com Owner-investor. Military com   If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. Military com You decide this by determining all the following information. Military com Whether the properties are of similar service to you. Military com The nature of the business risks connected with the properties. Military com What the properties demand of you in the way of management, service, and relations to your tenants. Military com Example. Military com You owned land and a building you rented to a manufacturing company. Military com The building was condemned. Military com During the replacement period, you had a new building built on other land you already owned. Military com You rented out the new building for use as a wholesale grocery warehouse. Military com The replacement property is also rental property, so the two properties are considered similar or related in service or use if there is a similarity in all the following areas. Military com Your management activities. Military com The amount and kind of services you provide to your tenants. Military com The nature of your business risks connected with the properties. Military com Leasehold replaced with fee simple property. Military com   Fee simple property you will use in your trade or business or for investment can qualify as replacement property that is similar or related in service or use to a condemned leasehold if you use it in the same business and for the identical purpose as the condemned leasehold. Military com   A fee simple property interest generally is a property interest that entitles the owner to the entire property with unconditional power to dispose of it during his or her lifetime. Military com A leasehold is property held under a lease, usually for a term of years. Military com Outdoor advertising display replaced with real property. Military com   You can elect to treat an outdoor advertising display as real property. Military com If you make this election and you replace the display with real property in which you hold a different kind of interest, your replacement property can qualify as like-kind property. Military com For example, real property bought to replace a destroyed billboard and leased property on which the billboard was located qualify as property of a like-kind. Military com   You can make this election only if you did not claim a section 179 deduction for the display. Military com You cannot cancel this election unless you get the consent of the IRS. Military com   An outdoor advertising display is a sign or device rigidly assembled and permanently attached to the ground, a building, or any other permanent structure used to display a commercial or other advertisement to the public. Military com Substituting replacement property. Military com   Once you designate certain property as replacement property on your tax return, you cannot substitute other qualified property. Military com But, if your previously designated replacement property does not qualify, you can substitute qualified property if you acquire it within the replacement period. Military com Controlling interest in a corporation. Military com   You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. Military com You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. Military com Basis adjustment to corporation's property. Military com   The basis of property held by the corporation at the time you acquired control must be reduced by your postponed gain, if any. Military com You are not required to reduce the adjusted basis of the corporation's properties below your adjusted basis in the corporation's stock (determined after reduction by your postponed gain). Military com   Allocate this reduction to the following classes of property in the order shown below. Military com Property that is similar or related in service or use to the condemned property. Military com Depreciable property not reduced in (1). Military com All other property. Military com If two or more properties fall in the same class, allocate the reduction to each property in proportion to the adjusted basis of all the properties in that class. Military com The reduced basis of any single property cannot be less than zero. Military com Main home replaced. Military com   If your gain from a condemnation of your main home is more than you can exclude from your income (see Main home condemned under Gain or Loss From Condemnations, earlier), you can postpone reporting the rest of the gain by buying replacement property that is similar or related in service or use. Military com The replacement property must cost at least as much as the amount realized from the condemnation minus the excluded gain. Military com   You must reduce the basis of your replacement property by the postponed gain. Military com Also, if you postpone reporting any part of your gain under these rules, you are treated as having owned and used the replacement property as your main home for the period you owned and used the condemned property as your main home. Military com Example. Military com City authorities condemned your home that you had used as a personal residence for 5 years prior to the condemnation. Military com The city paid you a condemnation award of $400,000. Military com Your adjusted basis in the property was $80,000. Military com You realize a gain of $320,000 ($400,000 − $80,000). Military com You purchased a new home for $100,000. Military com You can exclude $250,000 of the realized gain from your gross income. Military com The amount realized is then treated as being $150,000 ($400,000 − $250,000) and the gain realized is $70,000 ($150,000 amount realized − $80,000 adjusted basis). Military com You must recognize $50,000 of the gain ($150,000 amount realized − $100,000 cost of new home). Military com The remaining $20,000 of realized gain is postponed. Military com Your basis in the new home is $80,000 ($100,000 cost − $20,000 gain postponed). Military com Replacement period. Military com   To postpone reporting your gain from a condemnation, you must buy replacement property within a certain period of time. Military com This is the replacement period. Military com   The replacement period for a condemnation begins on the earlier of the following dates. Military com The date on which you disposed of the condemned property. Military com The date on which the threat of condemnation began. Military com   The replacement period generally ends 2 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Military com However, see the exceptions below. Military com Three-year replacement period for certain property. Military com   If real property held for use in a trade or business or for investment (not including property held primarily for sale) is condemned, the replacement period ends 3 years after the end of the first tax year in which any part of the gain on the condemnation is realized. Military com However, this 3-year replacement period cannot be used if you replace the condemned property by acquiring control of a corporation owning property that is similar or related in service or use. Military com Five-year replacement period for certain property. Military com   The replacement period ends 5 years after the end of the first tax year in which any part of the gain is realized on the compulsory or involuntary conversion of the following qualified property. Military com Property in any Midwestern disaster area compulsorily or involuntarily converted on or after the applicable disaster date as a result of severe storms, tornadoes, or flooding, but only if substantially all of the use of the replacement property is in a Midwestern disaster area. Military com Property in the Kansas disaster area compulsorily or involuntarily converted after May 3, 2007, but only if substantially all of the use of the replacement property is in the Kansas disaster area. Military com Property in the Hurricane Katrina disaster area compulsorily or involuntarily converted after August 24, 2005, as a result of Hurricane Katrina, but only if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Military com Extended replacement period for taxpayers affected by other federally declared disasters. Military com    If you are affected by a federally declared disaster, the IRS may grant disaster relief by extending the periods to perform certain tax-related acts for 2013, including the replacement period, by up to one year. Military com For more information visit www. Military com irs. Military com gov/uac/Tax-Relief-in-Disaster-Situations. Military com Weather-related sales of livestock in an area eligible for federal assistance. Military com   Generally, if the sale or exchange of livestock is due to drought, flood, or other weather-related conditions in an area eligible for federal assistance, the replacement period ends 4 years after the close of the first tax year in which you realize any part of your gain from the sale or exchange. Military com    If the weather-related conditions continue for longer than 3 years, the replacement period may be extended on a regional basis until the end of your first drought-free year for the applicable region. Military com See Notice 2006-82. Military com You can find Notice 2006-82 on page 529 of Internal Revenue Bulletin 2006-39 at www. Military com irs. Military com gov/irb/2006-39_IRB/ar13. Military com html. Military com    Each year, the IRS publishes a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Military com If you qualified for a 4-year replacement period for livestock sold or exchanged on account of drought and your replacement period is scheduled to expire at the end of 2013 (or at the end of the tax year that includes August 31, 2013), see Notice 2013-62. Military com You can find Notice 2013-62 on page 466 of Internal Revenue Bulletin 2013-45 at www. Military com irs. Military com gov/irb/2013-45_IRB/ar04. Military com html. Military com The replacement period will be extended under Notice 2006-82 if the applicable region is on the list included in Notice 2013-62. Military com Determining when gain is realized. Military com   If you are a cash basis taxpayer, you realize gain when you receive payments that are more than your basis in the property. Military com If the condemning authority makes deposits with the court, you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis. Military com   This applies even if the amounts received are only partial or advance payments and the full award has not yet been determined. Military com A replacement will be too late if you wait for a final determination that does not take place in the applicable replacement period after you first realize gain. Military com   For accrual basis taxpayers, gain (if any) accrues in the earlier year when either of the following occurs. Military com All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. Military com All or part of the award is actually or constructively received. Military com For example, if you have an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award is still contested. Military com Replacement property bought before the condemnation. Military com   If you buy your replacement property after there is a threat of condemnation but before the actual condemnation and you still hold the replacement property at the time of the condemnation, you have bought your replacement property within the replacement period. Military com Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period. Military com Example. Military com On April 3, 2012, city authorities notified you that your property would be condemned. Military com On June 5, 2012, you acquired property to replace the property to be condemned. Military com You still had the new property when the city took possession of your old property on September 4, 2013. Military com You have made a replacement within the replacement period. Military com Extension. Military com   You can request an extension of the replacement period from the IRS director for your area. Military com You should apply before the end of the replacement period. Military com Your request should explain in detail why you need an extension. Military com The IRS will consider a request filed within a reasonable time after the replacement period if you can show reasonable cause for the delay. Military com An extension of the replacement period will be granted if you can show reasonable cause for not making the replacement within the regular period. Military com   Ordinarily, requests for extensions are granted near the end of the replacement period or the extended replacement period. Military com Extensions are usually limited to a period of 1 year or less. Military com The high market value or scarcity of replacement property is not a sufficient reason for granting an extension. Military com If your replacement property is being built and you clearly show that the replacement or restoration cannot be made within the replacement peri