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Preparing Form 1040x

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Preparing Form 1040x

Preparing form 1040x 10. Preparing form 1040x   Self-Employment (SE) Tax Table of Contents Who Must Pay SE Tax?Special Rules and Exceptions Figuring Earnings Subject to SE Tax Farm Optional Method Using Both Optional Methods Reporting Self-Employment Tax The SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits. Preparing form 1040x Who Must Pay SE Tax? Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Preparing form 1040x Use Schedule SE to figure net earnings from self-employment. Preparing form 1040x Sole proprietor or independent contractor. Preparing form 1040x   If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ (Form 1040) to figure your earnings subject to SE tax. Preparing form 1040x SE tax rate. Preparing form 1040x    For 2013, the SE tax rate on net earnings is 15. Preparing form 1040x 3% (12. Preparing form 1040x 4% social security tax plus 2. Preparing form 1040x 9% Medicare tax). Preparing form 1040x Maximum earnings subject to self-employment tax. Preparing form 1040x    Only the first $113,700 of your combined wages, tips, and net earnings in 2013 is subject to any combination of the 12. Preparing form 1040x 4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax. Preparing form 1040x   All of your combined wages, tips, and net earnings in 2013 are subject to any combination of the 2. Preparing form 1040x 9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. Preparing form 1040x   If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $113,700, do not pay the 12. Preparing form 1040x 4% social security part of the SE tax on any of your net earnings. Preparing form 1040x However, you must pay the 2. Preparing form 1040x 9% Medicare part of the SE tax on all your net earnings. Preparing form 1040x Special Rules and Exceptions Aliens. Preparing form 1040x   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. Preparing form 1040x S. Preparing form 1040x citizens. Preparing form 1040x Nonresident aliens are not subject to SE tax unless an international social security agreement in effect determines that they are covered under the U. Preparing form 1040x S. Preparing form 1040x social security system. Preparing form 1040x However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. Preparing form 1040x S. Preparing form 1040x residents for self-employment tax purposes. Preparing form 1040x For more information on aliens, see Publication 519, U. Preparing form 1040x S. Preparing form 1040x Tax Guide for Aliens. Preparing form 1040x Child employed by parent. Preparing form 1040x   You are not subject to SE tax if you are under age 18 and you are working for your father or mother. Preparing form 1040x Church employee. Preparing form 1040x    If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108. Preparing form 1040x 28 or more in wages from the church or organization. Preparing form 1040x For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Preparing form 1040x Fishing crew member. Preparing form 1040x   If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply. Preparing form 1040x You do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch, unless the pay meets all the following conditions. Preparing form 1040x The pay is not more than $100 per trip. Preparing form 1040x The pay is received only if there is a minimum catch. Preparing form 1040x The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry. Preparing form 1040x You get a share of the catch or a share of the proceeds from the sale of the catch. Preparing form 1040x Your share depends on the amount of the catch. Preparing form 1040x The boat's operating crew normally numbers fewer than 10 individuals. Preparing form 1040x (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last four calendar quarters is fewer than 10. Preparing form 1040x ) Notary public. Preparing form 1040x   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax (see the Instructions for Schedule SE (Form 1040)). Preparing form 1040x State or local government employee. Preparing form 1040x   You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement. Preparing form 1040x Foreign government or international organization employee. Preparing form 1040x   You are subject to SE tax if both the following conditions are true. Preparing form 1040x You are a U. Preparing form 1040x S. Preparing form 1040x citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the Virgin Islands by: A foreign government, A wholly-owned agency of a foreign government, or An international organization. Preparing form 1040x Your employer is not required to withhold social security and Medicare taxes from your wages. Preparing form 1040x U. Preparing form 1040x S. Preparing form 1040x citizen or resident alien residing abroad. Preparing form 1040x    If you are a self-employed U. Preparing form 1040x S. Preparing form 1040x citizen or resident alien living outside the United States, in most cases you must pay SE tax. Preparing form 1040x Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion. Preparing form 1040x Exception. Preparing form 1040x    The United States has social security agreements with many countries to eliminate double taxation under two social security systems. Preparing form 1040x Under these agreements, you generally must only pay social security and Medicare taxes to the country in which you live. Preparing form 1040x The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country. Preparing form 1040x   For more information, see the Instructions for Schedule SE (Form 1040). Preparing form 1040x More Than One Business If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. Preparing form 1040x A loss from one business reduces your profit from another business. Preparing form 1040x Community Property Income If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business. Preparing form 1040x Gain or Loss Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Preparing form 1040x It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. Preparing form 1040x Lost Income Payments If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. Preparing form 1040x If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive. Preparing form 1040x Figuring Earnings Subject to SE Tax Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. Preparing form 1040x The regular method. Preparing form 1040x The nonfarm optional method. Preparing form 1040x The farm optional method. Preparing form 1040x You must use the regular method unless you are eligible to use one or both of the optional methods. Preparing form 1040x Why use an optional method?    You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies. Preparing form 1040x You want to receive credit for social security benefit coverage. Preparing form 1040x You incurred child or dependent care expenses for which you could claim a credit. Preparing form 1040x (An optional method may increase your earned income, which could increase your credit. Preparing form 1040x ) You are entitled to the earned income credit. Preparing form 1040x (An optional method may increase your earned income, which could increase your credit. Preparing form 1040x ) You are entitled to the additional child tax credit. Preparing form 1040x (An optional method may increase your earned income, which could increase your credit. Preparing form 1040x ) Effects of using an optional method. Preparing form 1040x   Using an optional method could increase your SE tax. Preparing form 1040x Paying more SE tax could result in your getting higher benefits when you retire. Preparing form 1040x   If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method. Preparing form 1040x   The optional methods may be used only to figure your SE tax. Preparing form 1040x To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax. Preparing form 1040x Regular Method Multiply your total earnings subject to SE tax by 92. Preparing form 1040x 35% (. Preparing form 1040x 9235) to get your net earnings under the regular method. Preparing form 1040x See Short Schedule SE, line 4, or Long Schedule SE, line 4a. Preparing form 1040x Net earnings figured using the regular method are also called actual net earnings. Preparing form 1040x Nonfarm Optional Method Use the nonfarm optional method only for earnings that do not come from farming. Preparing form 1040x You may use this method if you meet all the following tests. Preparing form 1040x You are self-employed on a regular basis. Preparing form 1040x This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Preparing form 1040x The net earnings can be from either farm or nonfarm earnings or both. Preparing form 1040x You have used this method less than 5 years. Preparing form 1040x (There is a 5-year lifetime limit. Preparing form 1040x ) The years do not have to be one after another. Preparing form 1040x Your net nonfarm profits were: Less than $5,024, and Less than 72. Preparing form 1040x 189% of your gross nonfarm income. Preparing form 1040x Net nonfarm profits. Preparing form 1040x   Net nonfarm profit generally is the total of the amounts from: Line 31, Schedule C (Form 1040), Line 3, Schedule C-EZ (Form 1040), Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J1, Schedule K-1 (Form 1065-B). Preparing form 1040x   However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. Preparing form 1040x Gross nonfarm income. Preparing form 1040x   Your gross nonfarm income generally is the total of the amounts from: Line 7, Schedule C (Form 1040), Line 1, Schedule C-EZ (Form 1040), Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J2, Schedule K-1 (Form 1065-B). Preparing form 1040x Figuring Nonfarm Net Earnings If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method. Preparing form 1040x Table 10-1. Preparing form 1040x Figuring Nonfarm Net Earnings IF your gross nonfarm income is. Preparing form 1040x . Preparing form 1040x . Preparing form 1040x THEN your net earnings are equal to. Preparing form 1040x . Preparing form 1040x . Preparing form 1040x $6,960 or less Two-thirds of your gross nonfarm income. Preparing form 1040x More than $6,960 $4,640 Actual net earnings. Preparing form 1040x   Your actual net earnings are 92. Preparing form 1040x 35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92. Preparing form 1040x 35% (. Preparing form 1040x 9235) to get actual net earnings). Preparing form 1040x Actual net earnings are equivalent to net earnings figured using the regular method. Preparing form 1040x Optional net earnings less than actual net earnings. Preparing form 1040x   You cannot use this method to report an amount less than your actual net earnings from self-employment. Preparing form 1040x Gross nonfarm income of $6,960 or less. Preparing form 1040x   The following examples illustrate how to figure net earnings when gross nonfarm income is $6,960 or less. Preparing form 1040x Example 1. Preparing form 1040x Net nonfarm profit less than $5,024 and less than 72. Preparing form 1040x 189% of gross nonfarm income. Preparing form 1040x Ann Green runs a craft business. Preparing form 1040x Her actual net earnings from self-employment were $800 in 2011 and $900 in 2012. Preparing form 1040x She meets the test for being self-employed on a regular basis. Preparing form 1040x She has used the nonfarm optional method less than 5 years. Preparing form 1040x Her gross income and net profit in 2013 are as follows: Gross nonfarm income $5,400 Net nonfarm profit $1,200 Ann's actual net earnings for 2013 are $1,108 ($1,200 × . Preparing form 1040x 9235). Preparing form 1040x Because her net profit is less than $5,024 and less than 72. Preparing form 1040x 189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 (2/3 × $5,400). Preparing form 1040x Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2013. Preparing form 1040x Example 2. Preparing form 1040x Net nonfarm profit less than $5,024 but not less than 72. Preparing form 1040x 189% of gross nonfarm income. Preparing form 1040x Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. Preparing form 1040x She must use the regular method to figure her net earnings. Preparing form 1040x She cannot use the nonfarm optional method because her net profit is not less than 72. Preparing form 1040x 189% of her gross income. Preparing form 1040x Example 3. Preparing form 1040x Net loss from a nonfarm business. Preparing form 1040x Assume that in Example 1 Ann has a net loss of $700. Preparing form 1040x She can use the nonfarm optional method and report $3,600 (2/3 × $5,400) as her net earnings. Preparing form 1040x Example 4. Preparing form 1040x Nonfarm net earnings less than $400. Preparing form 1040x Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. Preparing form 1040x In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400. Preparing form 1040x Gross nonfarm income of more than $6,960. Preparing form 1040x   The following examples illustrate how to figure net earnings when gross nonfarm income is more than $6,960. Preparing form 1040x Example 1. Preparing form 1040x Net nonfarm profit less than $5,024 and less than 72. Preparing form 1040x 189% of gross nonfarm income. Preparing form 1040x John White runs an appliance repair shop. Preparing form 1040x His actual net earnings from self-employment were $10,500 in 2011 and $9,500 in 2012. Preparing form 1040x He meets the test for being self-employed on a regular basis. Preparing form 1040x He has used the nonfarm optional method less than 5 years. Preparing form 1040x His gross income and net profit in 2013 are as follows: Gross nonfarm income $12,000 Net nonfarm profit $1,200 John's actual net earnings for 2013 are $1,108 ($1,200 × . Preparing form 1040x 9235). Preparing form 1040x Because his net profit is less than $5,024 and less than 72. Preparing form 1040x 189% of his gross income, he can use the nonfarm optional method to figure net earnings of $4,640. Preparing form 1040x Because these net earnings are higher than his actual net earnings, he can report net earnings of $4,640 for 2013. Preparing form 1040x Example 2. Preparing form 1040x Net nonfarm profit not less than $5,024. Preparing form 1040x Assume that in Example 1 John's net profit is $5,400. Preparing form 1040x He must use the regular method. Preparing form 1040x He cannot use the nonfarm optional method because his net nonfarm profit is not less than $5,024. Preparing form 1040x Example 3. Preparing form 1040x Net loss from a nonfarm business. Preparing form 1040x Assume that in Example 1 John has a net loss of $700. Preparing form 1040x He can use the nonfarm optional method and report $4,640 as his net earnings from self-employment. Preparing form 1040x Farm Optional Method Use the farm optional method only for earnings from a farming business. Preparing form 1040x See Publication 225 for information about this method. Preparing form 1040x Using Both Optional Methods If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment. Preparing form 1040x To figure your net earnings using both optional methods, you must: Figure your farm and nonfarm net earnings separately under each method. Preparing form 1040x Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method. Preparing form 1040x Add the net earnings figured under each method to arrive at your total net earnings from self-employment. Preparing form 1040x You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. Preparing form 1040x If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. Preparing form 1040x Example. Preparing form 1040x You are a self-employed farmer. Preparing form 1040x You also operate a retail grocery store. Preparing form 1040x Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2. Preparing form 1040x Table 10-2. Preparing form 1040x Example—Farm and Nonfarm Earnings Income and Earnings Farm Nonfarm Gross income $3,000 $6,000 Actual net earnings $900 $500 Optional net earnings (2/3 of gross income) $2,000 $4,000 Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2. Preparing form 1040x Method 1. Preparing form 1040x Using the regular method for both farm and nonfarm income. Preparing form 1040x Method 2. Preparing form 1040x Using the optional method for farm income and the regular method for nonfarm income. Preparing form 1040x Method 3. Preparing form 1040x Using the regular method for farm income and the optional method for nonfarm income. Preparing form 1040x Method 4. Preparing form 1040x Using the optional method for both farm and nonfarm income. Preparing form 1040x Note. Preparing form 1040x Actual net earnings is the same as net earnings figured using the regular method. Preparing form 1040x Table 10-3. Preparing form 1040x Example—Net Earnings Net Earnings 1 2 3 4 Actual  farm $ 900   $ 900   Optional  farm   $ 2,000   $ 2,000 Actual nonfarm $ 500 $ 500     Optional nonfarm     $4,000 $4,000 Amount you can report: $1,400 $2,500 $4,900 $4,640* *Limited to $4,640 because you used both optional methods. Preparing form 1040x Fiscal Year Filer If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Preparing form 1040x Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year. Preparing form 1040x Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. Preparing form 1040x Then enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. Preparing form 1040x Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. Preparing form 1040x However, certain taxpayers must use Section B—Long Schedule SE. Preparing form 1040x If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return. Preparing form 1040x Joint return. Preparing form 1040x   Even if you file a joint return, you cannot file a joint Schedule SE. Preparing form 1040x This is true whether one spouse or both spouses have earnings subject to SE tax. Preparing form 1040x If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. Preparing form 1040x However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. Preparing form 1040x Attach both schedules to the joint return. Preparing form 1040x More than one business. Preparing form 1040x   If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. Preparing form 1040x A loss from one business will reduce your profit from another business. Preparing form 1040x File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business. Preparing form 1040x Example. Preparing form 1040x You are the sole proprietor of two separate businesses. Preparing form 1040x You operate a restaurant that made a net profit of $25,000. Preparing form 1040x You also have a cabinetmaking business that had a net loss of $500. Preparing form 1040x You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. Preparing form 1040x You file Schedule SE showing total earnings subject to SE tax of $24,500. Preparing form 1040x Prev  Up  Next   Home   More Online Publications
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The Preparing Form 1040x

Preparing form 1040x 9. Preparing form 1040x   Dispositions of Property Used in Farming Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Preparing form 1040x Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sale Other Dispositions Other GainsExceptions. Preparing form 1040x Amount to report as ordinary income. Preparing form 1040x Applicable percentage. Preparing form 1040x Amount to report as ordinary income. Preparing form 1040x Applicable percentage. Preparing form 1040x Introduction When you dispose of property used in your farm business, your taxable gain or loss is usually treated as ordinary income (which is taxed at the same rates as wages and interest income) or capital gain (which is generally taxed at lower rates) under the rules for section 1231 transactions. Preparing form 1040x When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Preparing form 1040x Any gain remaining after applying the depreciation recapture rules is a section 1231 gain, which may be taxed as a capital gain. Preparing form 1040x Gains and losses from property used in farming are reported on Form 4797, Sales of Business Property. Preparing form 1040x Table 9-1 contains examples of items reported on Form 4797 and refers to the part of that form on which they first should be reported. Preparing form 1040x Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Other gains Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Preparing form 1040x Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (explained below). Preparing form 1040x Their treatment as ordinary or capital gains depends on whether you have a net gain or a net loss from all of your section 1231 transactions in the tax year. Preparing form 1040x Table 9-1. Preparing form 1040x Where to First Report Certain Items on Form 4797 Type of property Held 1 year  or less Held more than  1 year 1 Depreciable trade or business property:       a Sold or exchanged at a gain Part II Part III (1245, 1250)   b Sold or exchanged at a loss Part II Part I 2 Farmland held less than 10 years for which soil, water, or land clearing expenses were deducted:       a Sold at a gain Part II Part III (1252)   b Sold at a loss Part II Part I 3 All other farmland Part II Part I 4 Disposition of cost-sharing payment property described in section 126 Part II Part III (1255) 5 Cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 24 mos. Preparing form 1040x Held 24 mos. Preparing form 1040x  or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised cattle and horses sold at a gain Part II Part I 6 Livestock other than cattle and horses used in a trade or business for draft, breeding, dairy, or sporting purposes: Held less  than 12 mos. Preparing form 1040x Held 12 mos. Preparing form 1040x   or more   a Sold at a gain Part II Part III (1245)   b Sold at a loss Part II Part I   c Raised livestock sold at a gain Part II Part I If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Preparing form 1040x Do not take that gain into account as section 1231 gain. Preparing form 1040x Section 1231 transactions. Preparing form 1040x   Gain or loss on the following transactions is subject to section 1231 treatment. Preparing form 1040x Sale or exchange of cattle and horses. Preparing form 1040x The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 24 months or longer. Preparing form 1040x Sale or exchange of other livestock. Preparing form 1040x This livestock must be held for draft, breeding, dairy, or sporting purposes and held for 12 months or longer. Preparing form 1040x Other livestock includes hogs, mules, sheep, goats, donkeys, and other fur-bearing animals. Preparing form 1040x Other livestock does not include poultry. Preparing form 1040x Sale or exchange of depreciable personal property. Preparing form 1040x This property must be used in your business and held longer than 1 year. Preparing form 1040x Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Preparing form 1040x Examples of depreciable personal property include farm machinery and trucks. Preparing form 1040x It also includes amortizable section 197 intangibles. Preparing form 1040x Sale or exchange of real estate. Preparing form 1040x This property must be used in your business and held longer than 1 year. Preparing form 1040x Examples are your farm or ranch (including barns and sheds). Preparing form 1040x Sale or exchange of unharvested crops. Preparing form 1040x The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person, and the land must have been held longer than 1 year. Preparing form 1040x You cannot keep any right or option to reacquire the land directly or indirectly (other than a right customarily incident to a mortgage or other security transaction). Preparing form 1040x Growing crops sold with a leasehold on the land, even if sold to the same person in a single transaction, are not included. Preparing form 1040x Distributive share of partnership gains and losses. Preparing form 1040x Your distributive share must be from the sale or exchange of property listed above and held longer than 1 year (or for the required period for certain livestock). Preparing form 1040x Cutting or disposal of timber. Preparing form 1040x Special rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange, or you enter into a cutting contract, as described in chapter 8 under Timber . Preparing form 1040x Condemnation. Preparing form 1040x The condemned property (defined in chapter 11) must have been held longer than 1 year. Preparing form 1040x It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Preparing form 1040x It cannot be property held for personal use. Preparing form 1040x Casualty or theft. Preparing form 1040x The casualty or theft must have affected business property, property held for the production of rents or royalties, or investment property (such as notes and bonds). Preparing form 1040x You must have held the property longer than 1 year. Preparing form 1040x However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Preparing form 1040x Section 1231 does not apply to personal casualty gains and losses. Preparing form 1040x See chapter 11 for information on how to treat those gains and losses. Preparing form 1040x If the property is not held for the required holding period, the transaction is not subject to section 1231 treatment, and any gain or loss is ordinary income reported in Part II of Form 4797. Preparing form 1040x See Table 9-1. Preparing form 1040x Property for sale to customers. Preparing form 1040x   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Preparing form 1040x If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Preparing form 1040x Treatment as ordinary or capital. Preparing form 1040x   To determine the treatment of section 1231 gains and losses, combine all of your section 1231 gains and losses for the year. Preparing form 1040x If you have a net section 1231 loss, it is an ordinary loss. Preparing form 1040x If you have a net section 1231 gain, it is ordinary income up to your nonrecaptured section 1231 losses from previous years, explained next. Preparing form 1040x The rest, if any, is long-term capital gain. Preparing form 1040x Nonrecaptured section 1231 losses. Preparing form 1040x   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain by treating the gain as ordinary income. Preparing form 1040x These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Preparing form 1040x Example. Preparing form 1040x In 2013, Ben has a $2,000 net section 1231 gain. Preparing form 1040x To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Preparing form 1040x From 2008 through 2012 he had the following section 1231 gains and losses. Preparing form 1040x Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800   Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Preparing form 1040x 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 His remaining net section 1231 loss from 2010 is completely recaptured in 2013. Preparing form 1040x Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if it is otherwise nontaxable) as ordinary income. Preparing form 1040x To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Preparing form 1040x For more information, see chapter 3 of Publication 544. Preparing form 1040x Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable. Preparing form 1040x Any recognized gain that is more than the part that is ordinary income is a section 1231 gain. Preparing form 1040x See Treatment as ordinary or capital under Section 1231 Gains and Losses , earlier. Preparing form 1040x Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Preparing form 1040x Personal property (either tangible or intangible). Preparing form 1040x Other tangible property (except buildings and their structural components) used as any of the following. Preparing form 1040x See Buildings and structural components below. Preparing form 1040x An integral part of manufacturing, production, or extraction, or of furnishing certain services. Preparing form 1040x A research facility in any of the activities in (a). Preparing form 1040x A facility in any of the activities in (a) above, for the bulk storage of fungible commodities (discussed later). Preparing form 1040x That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Preparing form 1040x Amortization of certified pollution control facilities. Preparing form 1040x The section 179 expense deduction. Preparing form 1040x Deduction for clean-fuel vehicles and certain refueling property. Preparing form 1040x Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Preparing form 1040x Certain reforestation expenditures (as described under Reforestation Costs in chapter 7. Preparing form 1040x Single purpose agricultural (livestock) or horticultural structures. Preparing form 1040x Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Preparing form 1040x Buildings and structural components. Preparing form 1040x   Section 1245 property does not include buildings and structural components. Preparing form 1040x The term building includes a house, barn, warehouse, or garage. Preparing form 1040x The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Preparing form 1040x   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Preparing form 1040x Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Preparing form 1040x   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Preparing form 1040x Structures such as oil and gas storage tanks, grain storage bins, and silos are not treated as buildings, but as section 1245 property. Preparing form 1040x Facility for bulk storage of fungible commodities. Preparing form 1040x   This is a facility used mainly for the bulk storage of fungible commodities. Preparing form 1040x Bulk storage means storage of a commodity in a large mass before it is used. Preparing form 1040x For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Preparing form 1040x To be fungible, a commodity must be such that one part may be used in place of another. Preparing form 1040x Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Preparing form 1040x The depreciation (which includes any section 179 deduction claimed) and amortization allowed or allowable on the property. Preparing form 1040x The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Preparing form 1040x For any other disposition of section 1245 property, ordinary income is the lesser of (1) above or the amount by which its fair market value (FMV) is more than its adjusted basis. Preparing form 1040x For details, see chapter 3 of Publication 544. Preparing form 1040x Use Part III of Form 4797 to figure the ordinary income part of the gain. Preparing form 1040x Depreciation claimed on other property or claimed by other taxpayers. Preparing form 1040x   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Preparing form 1040x Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Preparing form 1040x For details on exchanges of property that are not taxable, see Like-Kind Exchanges in chapter 8. Preparing form 1040x Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift and part of the transfer is a sale or exchange). Preparing form 1040x Example. Preparing form 1040x Jeff Free paid $120,000 for a tractor in 2012. Preparing form 1040x On February 23, 2013, he traded it for a chopper and paid an additional $30,000. Preparing form 1040x To figure his depreciation deduction on the chopper for the current year, Jeff continues to use the basis of the tractor as he would have before the trade. Preparing form 1040x Jeff can also depreciate the additional $30,000 for the chopper. Preparing form 1040x Depreciation and amortization. Preparing form 1040x   Depreciation and amortization deductions that must be recaptured as ordinary income include (but are not limited to) the following items. Preparing form 1040x See Depreciation Recapture in chapter 3 of Publication 544 for more details. Preparing form 1040x Ordinary depreciation deductions. Preparing form 1040x Section 179 deduction (see chapter 7). Preparing form 1040x Any special depreciation allowance. Preparing form 1040x Amortization deductions for all the following costs. Preparing form 1040x Acquiring a lease. Preparing form 1040x Lessee improvements. Preparing form 1040x Pollution control facilities. Preparing form 1040x Reforestation expenses. Preparing form 1040x Section 197 intangibles. Preparing form 1040x Qualified disaster expenses. Preparing form 1040x Franchises, trademarks, and trade names acquired before August 11, 1993. Preparing form 1040x Example. Preparing form 1040x You file your returns on a calendar year basis. Preparing form 1040x In February 2011, you bought and placed in service for 100% use in your farming business a light-duty truck (5-year property) that cost $10,000. Preparing form 1040x You used the half-year convention and your MACRS deductions for the truck were $1,500 in 2011 and $2,550 in 2012. Preparing form 1040x You did not claim the section 179 expense deduction for the truck. Preparing form 1040x You sold it in May 2013 for $7,000. Preparing form 1040x The MACRS deduction in 2013, the year of sale, is $893 (½ of $1,785). Preparing form 1040x Figure the gain treated as ordinary income as follows. Preparing form 1040x 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $1,500 + $2,550 + $893) 4,943   4) Adjusted basis (subtract line 3 from line 2) $5,057 5) Gain realized (subtract line 4 from line 1) 1,943 6) Gain treated as ordinary income (lesser of line 3 or line 5) $1,943 Depreciation allowed or allowable. Preparing form 1040x   You generally use the greater of the depreciation allowed or allowable when figuring the part of gain to report as ordinary income. Preparing form 1040x If, in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Preparing form 1040x If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Preparing form 1040x This treatment applies only when figuring what part of the gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Preparing form 1040x Disposition of plants and animals. Preparing form 1040x   If you elect not to use the uniform capitalization rules (see chapter 6), you must treat any plant you produce as section 1245 property. Preparing form 1040x If you have a gain on the property's disposition, you must recapture the pre-productive expenses you would have capitalized if you had not made the election by treating the gain, up to the amount of these expenses, as ordinary income. Preparing form 1040x For section 1231 transactions, show these expenses as depreciation on Form 4797, Part III, line 22. Preparing form 1040x For plant sales that are reported on Schedule F (1040), Profit or Loss From Farming, this recapture rule does not change the reporting of income because the gain is already ordinary income. Preparing form 1040x You can use the farm-price method or the unit-livestock-price method discussed in  chapter 2 to figure these expenses. Preparing form 1040x Example. Preparing form 1040x Janet Maple sold her apple orchard in 2013 for $80,000. Preparing form 1040x Her adjusted basis at the time of sale was $60,000. Preparing form 1040x She bought the orchard in 2006, but the trees did not produce a crop until 2009. Preparing form 1040x Her pre-productive expenses were $6,000. Preparing form 1040x She elected not to use the uniform capitalization rules. Preparing form 1040x Janet must treat $6,000 of the gain as ordinary income. Preparing form 1040x Section 1250 Property Section 1250 property includes all real property subject to an allowance for depreciation that is not and never has been section 1245 property. Preparing form 1040x It includes buildings and structural components that are not section 1245 property (discussed earlier). Preparing form 1040x It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Preparing form 1040x A fee simple interest in land is not section 1250 property because, like land, it is not depreciable. Preparing form 1040x Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable. Preparing form 1040x To determine the additional depreciation on section 1250 property, see Depreciation Recapture in chapter 3 of Publication 544. Preparing form 1040x You will not have additional depreciation if any of the following apply to the property disposed of. Preparing form 1040x You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method and you have held the property longer than 1 year. Preparing form 1040x You chose the alternate ACRS (straight line) method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Preparing form 1040x The property was nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made) and you held it longer than 1 year. Preparing form 1040x These properties are depreciated using the straight line method. Preparing form 1040x Installment Sale If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Preparing form 1040x This applies even if no payments are received in that year. Preparing form 1040x If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Preparing form 1040x For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Preparing form 1040x If you dispose of more than one asset in a single transaction, you must separately figure the gain on each asset so that it may be properly reported. Preparing form 1040x To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Preparing form 1040x Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Preparing form 1040x For more information on installment sales, see chapter 10. Preparing form 1040x Other Dispositions Chapter 3 of Publication 544 discusses the tax treatment of the following transfers of depreciable property. Preparing form 1040x By gift. Preparing form 1040x At death. Preparing form 1040x In like-kind exchanges. Preparing form 1040x In involuntary conversions. Preparing form 1040x Publication 544 also explains how to handle a single transaction involving multiple properties. Preparing form 1040x Other Gains This section discusses gain on the disposition of farmland for which you were allowed either of the following. Preparing form 1040x Deductions for soil and water conservation expenditures (section 1252 property). Preparing form 1040x Exclusions from income for certain cost sharing payments (section 1255 property). Preparing form 1040x Section 1252 property. Preparing form 1040x   If you disposed of farmland you held more than 1 year and less than 10 years at a gain and you were allowed deductions for soil and water conservation expenses for the land, as discussed in chapter 5, you must treat part of the gain as ordinary income and treat the balance as section 1231 gain. Preparing form 1040x Exceptions. Preparing form 1040x   Do not treat gain on the following transactions as gain on section 1252 property. Preparing form 1040x Disposition of farmland by gift. Preparing form 1040x Transfer of farm property at death (except for income in respect of a decedent). Preparing form 1040x For more information, see Regulations section 1. Preparing form 1040x 1252-2. Preparing form 1040x Amount to report as ordinary income. Preparing form 1040x   You report as ordinary income the lesser of the following amounts. Preparing form 1040x Your gain (determined by subtracting the adjusted basis from the amount realized from a sale, exchange, or involuntary conversion, or the FMV for all other dispositions). Preparing form 1040x The total deductions allowed for soil and water conservation expenses multiplied by the applicable percentage, discussed next. Preparing form 1040x Applicable percentage. Preparing form 1040x   The applicable percentage is based on the length of time you held the land. Preparing form 1040x If you dispose of your farmland within 5 years after the date you acquired it, the percentage is 100%. Preparing form 1040x If you dispose of the land within the 6th through 9th year after you acquired it, the applicable percentage is reduced by 20% a year for each year or part of a year you hold the land after the 5th year. Preparing form 1040x If you dispose of the land 10 or more years after you acquired it, the percentage is 0%, and the entire gain is a section 1231 gain. Preparing form 1040x Example. Preparing form 1040x You acquired farmland on January 19, 2005. Preparing form 1040x On October 3, 2013, you sold the land at a $30,000 gain. Preparing form 1040x Between January 1 and October 3, 2013, you incur soil and water conservation expenditures of $15,000 for the land that are fully deductible in 2013. Preparing form 1040x The applicable percentage is 40% since you sold the land within the 8th year after you acquired it. Preparing form 1040x You treat $6,000 (40% of $15,000) of the $30,000 gain as ordinary income and the $24,000 balance as a section 1231 gain. Preparing form 1040x Section 1255 property. Preparing form 1040x   If you receive certain cost-sharing payments on property and you exclude those payments from income (as discussed in chapter 3), you may have to treat part of any gain as ordinary income and treat the balance as a section 1231 gain. Preparing form 1040x If you chose not to exclude these payments, you will not have to recognize ordinary income under this provision. Preparing form 1040x Amount to report as ordinary income. Preparing form 1040x   You report as ordinary income the lesser of the following amounts. Preparing form 1040x The applicable percentage of the total excluded cost-sharing payments. Preparing form 1040x The gain on the disposition of the property. Preparing form 1040x You do not report ordinary income under this rule to the extent the gain is recognized as ordinary income under sections 1231 through 1254, 1256, and 1257. Preparing form 1040x However, if applicable, gain reported under this rule must be reported regardless of any contrary provisions (including nonrecognition provisions) under any other section. Preparing form 1040x Applicable percentage. Preparing form 1040x   The applicable percentage of the excluded cost-sharing payments to be reported as ordinary income is based on the length of time you hold the property after receiving the payments. Preparing form 1040x If the property is held less than 10 years after you receive the payments, the percentage is 100%. Preparing form 1040x After 10 years, the percentage is reduced by 10% a year, or part of a year, until the rate is 0%. Preparing form 1040x Form 4797, Part III. Preparing form 1040x   Use Form 4797, Part III, to figure the ordinary income part of a gain from the sale, exchange, or involuntary conversion of section 1252 property and section 1255 property. Preparing form 1040x Prev  Up  Next   Home   More Online Publications