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Taxact 2012 Return

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Taxact 2012 Return

Taxact 2012 return 3. Taxact 2012 return   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Taxact 2012 return Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. Taxact 2012 return Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Taxact 2012 return 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. Taxact 2012 return Any remaining gain is a section 1231 gain. Taxact 2012 return Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. Taxact 2012 return Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Taxact 2012 return Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Taxact 2012 return 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). Taxact 2012 return Do not take that gain into account as section 1231 gain. Taxact 2012 return Section 1231 transactions. Taxact 2012 return   The following transactions result in gain or loss subject to section 1231 treatment. Taxact 2012 return Sales or exchanges of real property or depreciable personal property. Taxact 2012 return This property must be used in a trade or business and held longer than 1 year. Taxact 2012 return Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Taxact 2012 return Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Taxact 2012 return Sales or exchanges of leaseholds. Taxact 2012 return The leasehold must be used in a trade or business and held longer than 1 year. Taxact 2012 return Sales or exchanges of cattle and horses. Taxact 2012 return The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Taxact 2012 return Sales or exchanges of other livestock. Taxact 2012 return This livestock does not include poultry. Taxact 2012 return It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Taxact 2012 return Sales or exchanges of unharvested crops. Taxact 2012 return The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. Taxact 2012 return You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). Taxact 2012 return Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Taxact 2012 return Cutting of timber or disposal of timber, coal, or iron ore. Taxact 2012 return The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Taxact 2012 return Condemnations. Taxact 2012 return The condemned property must have been held longer than 1 year. Taxact 2012 return 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. Taxact 2012 return It cannot be property held for personal use. Taxact 2012 return Casualties and thefts. Taxact 2012 return The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). Taxact 2012 return You must have held the property longer than 1 year. Taxact 2012 return 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. Taxact 2012 return For more information on casualties and thefts, see Publication 547. Taxact 2012 return Property for sale to customers. Taxact 2012 return   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Taxact 2012 return 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. Taxact 2012 return Example. Taxact 2012 return You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Taxact 2012 return Customers make deposits on the reels, which you refund if the reels are returned within a year. Taxact 2012 return If they are not returned, you keep each deposit as the agreed-upon sales price. Taxact 2012 return Most reels are returned within the 1-year period. Taxact 2012 return You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Taxact 2012 return Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Taxact 2012 return Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Taxact 2012 return Copyrights. Taxact 2012 return    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). Taxact 2012 return The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Taxact 2012 return Treatment as ordinary or capital. Taxact 2012 return   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Taxact 2012 return If you have a net section 1231 loss, it is ordinary loss. Taxact 2012 return If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. Taxact 2012 return The rest, if any, is long-term capital gain. Taxact 2012 return Nonrecaptured section 1231 losses. Taxact 2012 return   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. Taxact 2012 return Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. Taxact 2012 return These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Taxact 2012 return Example. Taxact 2012 return In 2013, Ben has a $2,000 net section 1231 gain. Taxact 2012 return 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. Taxact 2012 return From 2008 through 2012 he had the following section 1231 gains and losses. Taxact 2012 return 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. Taxact 2012 return 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 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 otherwise nontaxable) as ordinary income. Taxact 2012 return 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. Taxact 2012 return This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Taxact 2012 return On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Taxact 2012 return Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Taxact 2012 return Whether the adjusted basis was figured using depreciation or amortization another person claimed. Taxact 2012 return Corporate distributions. Taxact 2012 return   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Taxact 2012 return General asset accounts. Taxact 2012 return   Different rules apply to dispositions of property you depreciated using a general asset account. Taxact 2012 return For information on these rules, see Publication 946. Taxact 2012 return 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 on the property. Taxact 2012 return See Gain Treated as Ordinary Income, later. Taxact 2012 return Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Taxact 2012 return See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Taxact 2012 return Section 1245 property defined. Taxact 2012 return   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. Taxact 2012 return Personal property (either tangible or intangible). Taxact 2012 return Other tangible property (except buildings and their structural components) used as any of the following. Taxact 2012 return See Buildings and structural components below. Taxact 2012 return An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Taxact 2012 return A research facility in any of the activities in (a). Taxact 2012 return A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Taxact 2012 return That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Taxact 2012 return Amortization of certified pollution control facilities. Taxact 2012 return The section 179 expense deduction. Taxact 2012 return Deduction for clean-fuel vehicles and certain refueling property. Taxact 2012 return Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Taxact 2012 return Deduction for certain qualified refinery property. Taxact 2012 return Deduction for qualified energy efficient commercial building property. Taxact 2012 return Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Taxact 2012 return (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Taxact 2012 return ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). Taxact 2012 return Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Taxact 2012 return Deduction for qualified tertiary injectant expenses. Taxact 2012 return Certain reforestation expenditures. Taxact 2012 return Deduction for election to expense qualified advanced mine safety equipment property. Taxact 2012 return Single purpose agricultural (livestock) or horticultural structures. Taxact 2012 return Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Taxact 2012 return Any railroad grading or tunnel bore. Taxact 2012 return Buildings and structural components. Taxact 2012 return   Section 1245 property does not include buildings and structural components. Taxact 2012 return The term building includes a house, barn, warehouse, or garage. Taxact 2012 return The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Taxact 2012 return   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Taxact 2012 return 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. Taxact 2012 return   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. Taxact 2012 return Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. Taxact 2012 return Facility for bulk storage of fungible commodities. Taxact 2012 return   This term includes oil or gas storage tanks and grain storage bins. Taxact 2012 return Bulk storage means the storage of a commodity in a large mass before it is used. Taxact 2012 return For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Taxact 2012 return To be fungible, a commodity must be such that one part may be used in place of another. Taxact 2012 return   Stored materials that vary in composition, size, and weight are not fungible. Taxact 2012 return Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. Taxact 2012 return For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Taxact 2012 return 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. Taxact 2012 return The depreciation and amortization allowed or allowable on the property. Taxact 2012 return The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Taxact 2012 return A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Taxact 2012 return For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. Taxact 2012 return See Gifts and Transfers at Death, later. Taxact 2012 return Use Part III of Form 4797 to figure the ordinary income part of the gain. Taxact 2012 return Depreciation taken on other property or taken by other taxpayers. Taxact 2012 return   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Taxact 2012 return Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Taxact 2012 return 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). Taxact 2012 return Depreciation and amortization. Taxact 2012 return   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Taxact 2012 return Ordinary depreciation deductions. Taxact 2012 return Any special depreciation allowance you claimed. Taxact 2012 return Amortization deductions for all the following costs. Taxact 2012 return Acquiring a lease. Taxact 2012 return Lessee improvements. Taxact 2012 return Certified pollution control facilities. Taxact 2012 return Certain reforestation expenses. Taxact 2012 return Section 197 intangibles. Taxact 2012 return Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Taxact 2012 return Franchises, trademarks, and trade names acquired before August 11, 1993. Taxact 2012 return The section 179 deduction. Taxact 2012 return Deductions for all the following costs. Taxact 2012 return Removing barriers to the disabled and the elderly. Taxact 2012 return Tertiary injectant expenses. Taxact 2012 return Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Taxact 2012 return Environmental cleanup costs. Taxact 2012 return Certain reforestation expenses. Taxact 2012 return Qualified disaster expenses. Taxact 2012 return Any basis reduction for the investment credit (minus any basis increase for credit recapture). Taxact 2012 return Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Taxact 2012 return Example. Taxact 2012 return You file your returns on a calendar year basis. Taxact 2012 return In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. Taxact 2012 return You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Taxact 2012 return You did not take the section 179 deduction. Taxact 2012 return You sold the truck in May 2013 for $7,000. Taxact 2012 return The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Taxact 2012 return Figure the gain treated as ordinary income as follows. Taxact 2012 return 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. Taxact 2012 return   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. Taxact 2012 return   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. Taxact 2012 return Depreciation allowed or allowable. Taxact 2012 return   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. Taxact 2012 return However, 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. Taxact 2012 return 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. Taxact 2012 return   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Taxact 2012 return Multiple asset accounts. Taxact 2012 return   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. Taxact 2012 return Example. Taxact 2012 return In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Taxact 2012 return All of the depreciation was recorded in a single depreciation account. Taxact 2012 return After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Taxact 2012 return You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Taxact 2012 return However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. Taxact 2012 return Normal retirement. Taxact 2012 return   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. Taxact 2012 return Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Taxact 2012 return To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Taxact 2012 return Section 1250 property defined. Taxact 2012 return   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Taxact 2012 return It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Taxact 2012 return A fee simple interest in land is not included because it is not depreciable. Taxact 2012 return   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Taxact 2012 return Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. Taxact 2012 return For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Taxact 2012 return For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Taxact 2012 return If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Taxact 2012 return You will not have additional depreciation if any of the following conditions apply to the property disposed of. Taxact 2012 return 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; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Taxact 2012 return In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. Taxact 2012 return The property was residential low-income rental property you held for 162/3 years or longer. Taxact 2012 return For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. Taxact 2012 return You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Taxact 2012 return The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Taxact 2012 return These properties are depreciated using the straight line method. Taxact 2012 return In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Taxact 2012 return Depreciation taken by other taxpayers or on other property. Taxact 2012 return   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Taxact 2012 return Example. Taxact 2012 return Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Taxact 2012 return Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. Taxact 2012 return On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. Taxact 2012 return At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Taxact 2012 return Depreciation allowed or allowable. Taxact 2012 return   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. Taxact 2012 return If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. Taxact 2012 return Retired or demolished property. Taxact 2012 return   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. Taxact 2012 return Example. Taxact 2012 return A wing of your building is totally destroyed by fire. Taxact 2012 return The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. Taxact 2012 return Figuring straight line depreciation. Taxact 2012 return   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. Taxact 2012 return If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. Taxact 2012 return   Salvage value and useful life are not used for the ACRS method of depreciation. Taxact 2012 return Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Taxact 2012 return   The straight line method is applied without any basis reduction for the investment credit. Taxact 2012 return Property held by lessee. Taxact 2012 return   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. Taxact 2012 return This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. Taxact 2012 return The same rule applies to the cost of acquiring a lease. Taxact 2012 return   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Taxact 2012 return However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. Taxact 2012 return Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. Taxact 2012 return The percentages for these types of real property are as follows. Taxact 2012 return Nonresidential real property. Taxact 2012 return   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Taxact 2012 return For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Taxact 2012 return Residential rental property. Taxact 2012 return   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. Taxact 2012 return The percentage for periods before 1976 is zero. Taxact 2012 return Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Taxact 2012 return Low-income housing. Taxact 2012 return    Low-income housing includes all the following types of residential rental property. Taxact 2012 return Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Taxact 2012 return Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Taxact 2012 return Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. Taxact 2012 return Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Taxact 2012 return   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Taxact 2012 return If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. Taxact 2012 return Foreclosure. Taxact 2012 return   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. Taxact 2012 return Example. Taxact 2012 return On June 1, 2001, you acquired low-income housing property. Taxact 2012 return On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. Taxact 2012 return The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Taxact 2012 return The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. Taxact 2012 return Therefore, 70% of the additional depreciation is treated as ordinary income. Taxact 2012 return Holding period. Taxact 2012 return   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Taxact 2012 return For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Taxact 2012 return If you sold it on January 2, 2013, the holding period is exactly 192 full months. Taxact 2012 return The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Taxact 2012 return Holding period for constructed, reconstructed, or erected property. Taxact 2012 return   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. Taxact 2012 return Property acquired by gift or received in a tax-free transfer. Taxact 2012 return   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. Taxact 2012 return   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. Taxact 2012 return See Low-Income Housing With Two or More Elements, next. Taxact 2012 return Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. Taxact 2012 return The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Taxact 2012 return The following are the types of separate elements. Taxact 2012 return A separate improvement (defined below). Taxact 2012 return The basic section 1250 property plus improvements not qualifying as separate improvements. Taxact 2012 return The units placed in service at different times before all the section 1250 property is finished. Taxact 2012 return For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. Taxact 2012 return As a result, the apartment house consists of three separate elements. Taxact 2012 return The 36-month test for separate improvements. Taxact 2012 return   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. Taxact 2012 return Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. Taxact 2012 return Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). Taxact 2012 return $5,000. Taxact 2012 return The 1-year test. Taxact 2012 return   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. Taxact 2012 return The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Taxact 2012 return In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. Taxact 2012 return Example. Taxact 2012 return The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Taxact 2012 return During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Taxact 2012 return The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. Taxact 2012 return However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Taxact 2012 return Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Taxact 2012 return Addition to the capital account. Taxact 2012 return   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. Taxact 2012 return   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Taxact 2012 return For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. Taxact 2012 return The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Taxact 2012 return The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. Taxact 2012 return   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Taxact 2012 return If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. Taxact 2012 return Unadjusted basis. Taxact 2012 return   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. Taxact 2012 return However, the cost of components retired before that date is not included in the unadjusted basis. Taxact 2012 return Holding period. Taxact 2012 return   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Taxact 2012 return The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. Taxact 2012 return The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. Taxact 2012 return The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Taxact 2012 return   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. Taxact 2012 return Use the first day of a calendar month that is closest to the middle of the tax year. Taxact 2012 return If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Taxact 2012 return Figuring ordinary income attributable to each separate element. Taxact 2012 return   Figure ordinary income attributable to each separate element as follows. Taxact 2012 return   Step 1. Taxact 2012 return Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. Taxact 2012 return   Step 2. Taxact 2012 return Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). Taxact 2012 return   Step 3. Taxact 2012 return Multiply the result in Step 2 by the applicable percentage for the element. Taxact 2012 return Example. Taxact 2012 return You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Taxact 2012 return The property consisted of four elements (W, X, Y, and Z). Taxact 2012 return Step 1. Taxact 2012 return The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Taxact 2012 return The sum of the additional depreciation for all the elements is $24,000. Taxact 2012 return Step 2. Taxact 2012 return The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Taxact 2012 return Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Taxact 2012 return $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Taxact 2012 return Step 3. Taxact 2012 return The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Taxact 2012 return From these facts, the sum of the ordinary income for each element is figured as follows. Taxact 2012 return   Step 1 Step 2 Step 3 Ordinary Income W . Taxact 2012 return 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Taxact 2012 return 25 5,000 92% 4,600 Z . Taxact 2012 return 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. Taxact 2012 return In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Taxact 2012 return In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Taxact 2012 return Figure the additional depreciation for the periods after 1975. Taxact 2012 return Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Taxact 2012 return Stop here if this is residential rental property or if (2) is equal to or more than (1). Taxact 2012 return This is the gain treated as ordinary income because of additional depreciation. Taxact 2012 return Subtract (2) from (1). Taxact 2012 return Figure the additional depreciation for periods after 1969 but before 1976. Taxact 2012 return Add the lesser of (4) or (5) to the result in (3). Taxact 2012 return This is the gain treated as ordinary income because of additional depreciation. Taxact 2012 return A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Taxact 2012 return Use Form 4797, Part III, to figure the ordinary income part of the gain. Taxact 2012 return Corporations. Taxact 2012 return   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Taxact 2012 return The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. Taxact 2012 return Report this additional ordinary income on Form 4797, Part III, line 26 (f). Taxact 2012 return Installment Sales 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. Taxact 2012 return This applies even if no payments are received in that year. Taxact 2012 return If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Taxact 2012 return For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Taxact 2012 return If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. Taxact 2012 return To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Taxact 2012 return Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Taxact 2012 return For a detailed discussion of installment sales, see Publication 537. Taxact 2012 return Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Taxact 2012 return However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. Taxact 2012 return For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Taxact 2012 return See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Taxact 2012 return Part gift and part sale or exchange. Taxact 2012 return   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. Taxact 2012 return If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. Taxact 2012 return However, see Bargain sale to charity, later. Taxact 2012 return Example. Taxact 2012 return You transferred depreciable personal property to your son for $20,000. Taxact 2012 return When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Taxact 2012 return You took depreciation of $30,000. Taxact 2012 return You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. Taxact 2012 return You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. Taxact 2012 return You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. Taxact 2012 return Gift to charitable organization. Taxact 2012 return   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. Taxact 2012 return Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Taxact 2012 return   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. Taxact 2012 return For more information, see Giving Property That Has Increased in Value in Publication 526. Taxact 2012 return Bargain sale to charity. Taxact 2012 return   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. Taxact 2012 return First, figure the ordinary income as if you had sold the property at its fair market value. Taxact 2012 return Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. Taxact 2012 return See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Taxact 2012 return Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Taxact 2012 return Example. Taxact 2012 return You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Taxact 2012 return Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Taxact 2012 return If you had sold the property at its fair market value, your ordinary income would have been $5,000. Taxact 2012 return Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Taxact 2012 return Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. Taxact 2012 return For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Taxact 2012 return However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. Taxact 2012 return Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. Taxact 2012 return Example 1. Taxact 2012 return Janet Smith owned depreciable property that, upon her death, was inherited by her son. Taxact 2012 return No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. Taxact 2012 return However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. Taxact 2012 return Example 2. Taxact 2012 return The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Taxact 2012 return If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. Taxact 2012 return Ordinary income from depreciation must be reported by the trust on the transfer. Taxact 2012 return Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. Taxact 2012 return For information on like-kind exchanges and involuntary conversions, see chapter 1. Taxact 2012 return Depreciable personal property. Taxact 2012 return   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. Taxact 2012 return The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Taxact 2012 return The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Taxact 2012 return Example 1. Taxact 2012 return You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Taxact 2012 return The old machine cost you $5,000 two years ago. Taxact 2012 return You took depreciation deductions of $3,950. Taxact 2012 return Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. Taxact 2012 return Example 2. Taxact 2012 return You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Taxact 2012 return This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). Taxact 2012 return You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Taxact 2012 return Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Taxact 2012 return All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Taxact 2012 return Example 3. Taxact 2012 return A fire destroyed office machinery you bought for $116,000. Taxact 2012 return The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Taxact 2012 return You received a $117,000 insurance payment, realizing a gain of $92,640. Taxact 2012 return You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. Taxact 2012 return $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. Taxact 2012 return The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. Taxact 2012 return The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Taxact 2012 return 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. Taxact 2012 return Depreciable real property. Taxact 2012 return   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. Taxact 2012 return The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. Taxact 2012 return The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. Taxact 2012 return   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. Taxact 2012 return Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Taxact 2012 return Example. Taxact 2012 return The state paid you $116,000 when it condemned your depreciable real property for public use. Taxact 2012 return You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). Taxact 2012 return You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Taxact 2012 return You choose to postpone reporting the gain. Taxact 2012 return If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. Taxact 2012 return The ordinary income to be reported is $6,000, which is the greater of the following amounts. Taxact 2012 return The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. Taxact 2012 return The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. Taxact 2012 return   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Taxact 2012 return Basis of property acquired. Taxact 2012 return   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. Taxact 2012 return   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). Taxact 2012 return However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Taxact 2012 return Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. Taxact 2012 return Add the fair market value (or cost) of the other property acquired to the result in (1). Taxact 2012 return Divide the result in (1) by the result in (2). Taxact 2012 return Multiply the total basis by the result in (3). Taxact 2012 return This is the basis of the depreciable real property acquired. Taxact 2012 return If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Taxact 2012 return Subtract the result in (4) from the total basis. Taxact 2012 return This is the basis of the other property acquired. Taxact 2012 return If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Taxact 2012 return Example 1. Taxact 2012 return In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. Taxact 2012 return The property's adjusted basis was $38,400, with additional depreciation of $14,932. Taxact 2012 return On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Taxact 2012 return Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Taxact 2012 return You chose to postpone reporting the gain under the involuntary conversion rules. Taxact 2012 return Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. Taxact 2012 return The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Taxact 2012 return The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Taxact 2012 return If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. Taxact 2012 return Example 2. Taxact 2012 return John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Taxact 2012 return He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Taxact 2012 return He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Taxact 2012 return Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. Taxact 2012 return The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Taxact 2012 return The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Taxact 2012 return The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Taxact 2012 return The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Taxact 2012 return 4. Taxact 2012 return The basis of the depreciable real property is $12,000. Taxact 2012 return This is the $30,000 total basis multiplied by the 0. Taxact 2012 return 4 figured in (3). Taxact 2012 return The basis of the other property (land) is $18,000. Taxact 2012 return This is the $30,000 total basis minus the $12,000 figured in (4). Taxact 2012 return The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. Taxact 2012 return Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. Taxact 2012 return Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Taxact 2012 return See chapter 2. Taxact 2012 return In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. Taxact 2012 return In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Taxact 2012 return These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Taxact 2012 return The comparison should take into account all the following facts and circumstances. Taxact 2012 return The original cost and reproduction cost of construction, erection, or production. Taxact 2012 return The remaining economic useful life. Taxact 2012 return The state of obsolescence. Taxact 2012 return The anticipated expenditures required to maintain, renovate, or modernize the properties. Taxact 2012 return Like-kind exchanges and involuntary conversions. Taxact 2012 return   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Taxact 2012 return The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. Taxact 2012 return The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. Taxact 2012 return   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Taxact 2012 return The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. Taxact 2012 return If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. Taxact 2012 return Example. Taxact 2012 return A fire destroyed your property with a total fair market value of $50,000. Taxact 2012 return It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Taxact 2012 return You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. Taxact 2012 return The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Taxact 2012 return You choose to postpone reporting your gain from the involuntary conversion. Taxact 2012 return You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Taxact 2012 return The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. Taxact 2012 return The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Taxact 2012 return The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Taxact 2012 return Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Taxact 2012 return The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. Taxact 2012 return All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. Taxact 2012 return Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Taxact 2012 return However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. 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The Taxact 2012 Return

Taxact 2012 return Publication 15 - Main Content Table of Contents 1. Taxact 2012 return Employer Identification Number (EIN) 2. Taxact 2012 return Who Are Employees?Relief provisions. Taxact 2012 return Business Owned and Operated by Spouses 3. Taxact 2012 return Family Employees 4. Taxact 2012 return Employee's Social Security Number (SSN)Registering for SSNVS. Taxact 2012 return 5. Taxact 2012 return Wages and Other CompensationAccountable plan. Taxact 2012 return Nonaccountable plan. Taxact 2012 return Per diem or other fixed allowance. Taxact 2012 return 50% test. Taxact 2012 return Health Savings Accounts and medical savings accounts. Taxact 2012 return Nontaxable fringe benefits. Taxact 2012 return When fringe benefits are treated as paid. Taxact 2012 return Valuation of fringe benefits. Taxact 2012 return Withholding on fringe benefits. Taxact 2012 return Depositing taxes on fringe benefits. Taxact 2012 return 6. Taxact 2012 return TipsOrdering rule. Taxact 2012 return 7. Taxact 2012 return Supplemental Wages 8. Taxact 2012 return Payroll Period 9. Taxact 2012 return Withholding From Employees' WagesIncome Tax Withholding Social Security and Medicare Taxes Part-Time Workers 10. Taxact 2012 return Required Notice to Employees About the Earned Income Credit (EIC) 11. Taxact 2012 return Depositing TaxesWhen To Deposit How To Deposit Deposit Penalties 12. Taxact 2012 return Filing Form 941 or Form 944 13. Taxact 2012 return Reporting Adjustments to Form 941 or Form 944Current Period Adjustments Prior Period Adjustments Wage Repayments 14. Taxact 2012 return Federal Unemployment (FUTA) TaxSuccessor employer. Taxact 2012 return Household employees. Taxact 2012 return When to deposit. Taxact 2012 return Household employees. Taxact 2012 return Electronic filing by reporting agents. Taxact 2012 return 16. Taxact 2012 return How To Use the Income Tax Withholding TablesWage Bracket Method Percentage Method Alternative Methods of Income Tax Withholding How To Get Tax Help 1. Taxact 2012 return Employer Identification Number (EIN) If you are required to report employment taxes or give tax statements to employees or annuitants, you need an EIN. Taxact 2012 return The EIN is a nine-digit number the IRS issues. Taxact 2012 return The digits are arranged as follows: 00-0000000. Taxact 2012 return It is used to identify the tax accounts of employers and certain others who have no employees. Taxact 2012 return Use your EIN on all of the items you send to the IRS and SSA. Taxact 2012 return For more information, see Publication 1635, Employer Identification Number: Understanding Your EIN. Taxact 2012 return If you do not have an EIN, you may apply for one online. Taxact 2012 return Go to the IRS. Taxact 2012 return gov and click on the Apply for an EIN Online link under Tools. Taxact 2012 return You may also apply for an EIN by calling 1-800-829-4933, or you can fax or mail Form SS-4, Application for Employer Identification Number, to the IRS. Taxact 2012 return Do not use an SSN in place of an EIN. Taxact 2012 return You should have only one EIN. Taxact 2012 return If you have more than one and are not sure which one to use, call 1-800-829-4933 or 1-800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability). Taxact 2012 return Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. Taxact 2012 return The IRS will tell you which number to use. Taxact 2012 return If you took over another employer's business (see Successor employer in section 9), do not use that employer's EIN. Taxact 2012 return If you have applied for an EIN but do not have your EIN by the time a return is due, file a paper return and write “Applied For” and the date you applied for it in the space shown for the number. Taxact 2012 return 2. Taxact 2012 return Who Are Employees? Generally, employees are defined either under common law or under statutes for certain situations. Taxact 2012 return See Publication 15-A for details on statutory employees and nonemployees. Taxact 2012 return Employee status under common law. Taxact 2012 return   Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. Taxact 2012 return This is so even when you give the employee freedom of action. Taxact 2012 return What matters is that you have the right to control the details of how the services are performed. Taxact 2012 return See Publication 15-A for more information on how to determine whether an individual providing services is an independent contractor or an employee. Taxact 2012 return   Generally, people in business for themselves are not employees. Taxact 2012 return For example, doctors, lawyers, veterinarians, and others in an independent trade in which they offer their services to the public are usually not employees. Taxact 2012 return However, if the business is incorporated, corporate officers who work in the business are employees of the corporation. Taxact 2012 return   If an employer-employee relationship exists, it does not matter what it is called. Taxact 2012 return The employee may be called an agent or independent contractor. Taxact 2012 return It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time. Taxact 2012 return Statutory employees. Taxact 2012 return   If someone who works for you is not an employee under the common law rules discussed earlier, do not withhold federal income tax from his or her pay, unless backup withholding applies. Taxact 2012 return Although the following persons may not be common law employees, they are considered employees by statute for social security, Medicare, and FUTA tax purposes under certain conditions. Taxact 2012 return An agent (or commission) driver who delivers food, beverages (other than milk), laundry, or dry cleaning for someone else. Taxact 2012 return A full-time life insurance salesperson who sells primarily for one company. Taxact 2012 return A homeworker who works by guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to someone that person designates. Taxact 2012 return A traveling or city salesperson (other than an agent-driver or commission-driver) who works full time (except for sideline sales activities) for one firm or person getting orders from customers. Taxact 2012 return The orders must be for merchandise for resale or supplies for use in the customer's business. Taxact 2012 return The customers must be retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses dealing with food or lodging. Taxact 2012 return    Statutory nonemployees. Taxact 2012 return   Direct sellers, qualified real estate agents, and certain companion sitters are, by law, considered nonemployees. Taxact 2012 return They are generally treated as self-employed for all federal tax purposes, including income and employment taxes. Taxact 2012 return H-2A agricultural workers. Taxact 2012 return   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. Taxact 2012 return Treating employees as nonemployees. Taxact 2012 return   You will generally be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold these taxes because you treated an employee as a nonemployee. Taxact 2012 return You may be able to calculate your liability using special section 3509 rates for the employee share of social security and Medicare taxes and the federal income tax withholding. Taxact 2012 return The applicable rates depend on whether you filed required Forms 1099. Taxact 2012 return You cannot recover the employee share of social security, or Medicare tax, or income tax withholding from the employee if the tax is paid under section 3509. Taxact 2012 return You are liable for the income tax withholding regardless of whether the employee paid income tax on the wages. Taxact 2012 return You continue to owe the full employer share of social security and Medicare taxes. Taxact 2012 return The employee remains liable for the employee share of social security and Medicare taxes. Taxact 2012 return See Internal Revenue Code section 3509 for details. Taxact 2012 return Also see the Instructions for Form 941-X. Taxact 2012 return   Section 3509 rates are not available if you intentionally disregard the requirement to withhold taxes from the employee or if you withheld income taxes but not social security or Medicare taxes. Taxact 2012 return Section 3509 is not available for reclassifying statutory employees. Taxact 2012 return See Statutory employees , earlier in this section. Taxact 2012 return   If the employer issued required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. Taxact 2012 return 2% plus 20% of the employee rate (see the Instructions for Form 941-X). Taxact 2012 return For Medicare taxes; employer rate of 1. Taxact 2012 return 45% plus 20% of the employee rate of 1. Taxact 2012 return 45%, for a total rate of 1. Taxact 2012 return 74% of wages. Taxact 2012 return For Additional Medicare Tax; 0. Taxact 2012 return 18% (20% of the employee rate of 0. Taxact 2012 return 9%) of wages subject to Additional Medicare Tax. Taxact 2012 return For income tax withholding, the rate is 1. Taxact 2012 return 5% of wages. Taxact 2012 return   If the employer did not issue required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. Taxact 2012 return 2% plus 40% of the employee rate (see the Instructions for Form 941-X). Taxact 2012 return For Medicare taxes; employer rate of 1. Taxact 2012 return 45% plus 40% of the employee rate of 1. Taxact 2012 return 45%, for a total rate of 2. Taxact 2012 return 03% of wages. Taxact 2012 return For Additional Medicare Tax; 0. Taxact 2012 return 36% (40% of the employee rate of 0. Taxact 2012 return 9%) of wages subject to Additional Medicare Tax. Taxact 2012 return For income tax withholding, the rate is 3. Taxact 2012 return 0% of wages. Taxact 2012 return Relief provisions. Taxact 2012 return   If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. Taxact 2012 return To get this relief, you must file all required federal tax returns, including information returns, on a basis consistent with your treatment of the worker. Taxact 2012 return You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. Taxact 2012 return See Publication 1976, Do You Qualify for Relief Under Section 530. Taxact 2012 return IRS help. Taxact 2012 return   If you want the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Taxact 2012 return Voluntary Classification Settlement Program (VCSP). Taxact 2012 return   Employers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to voluntarily reclassify their workers as employees for future tax periods may be eligible to participate in the VCSP if certain requirements are met. Taxact 2012 return To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). Taxact 2012 return For more information visit IRS. Taxact 2012 return gov and enter “VCSP” in the search box. Taxact 2012 return Business Owned and Operated by Spouses If you and your spouse jointly own and operate a business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Taxact 2012 return See Publication 541, Partnerships, for more details. Taxact 2012 return The partnership is considered the employer of any employees, and is liable for any employment taxes due on wages paid to its employees. Taxact 2012 return Exception—Qualified joint venture. Taxact 2012 return   For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are spouses filing a joint income tax return, can elect not to be treated as a partnership for federal tax purposes. Taxact 2012 return A qualified joint venture conducts a trade or business where: The only members of the joint venture are spouses who file a joint income tax return, Both spouses materially participate (see Material participation in the Instructions for Schedule C (Form 1040), line G) in the trade or business (mere joint ownership of property is not enough), Both spouses elect to not be treated as a partnership, and The business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or limited liability company (LLC). Taxact 2012 return   To make the election, all items of income, gain, loss, deduction, and credit must be divided between the spouses, in accordance with each spouse's interest in the venture, and reported on separate Schedules C or F as sole proprietors. Taxact 2012 return Each spouse must also file a separate Schedule SE to pay self-employment taxes, as applicable. Taxact 2012 return   Spouses using the qualified joint venture rules are treated as sole proprietors for federal tax purposes and generally do not need an EIN. Taxact 2012 return If employment taxes are owed by the qualified joint venture, either spouse may report and pay the employment taxes due on the wages paid to the employees using the EIN of that spouse's sole proprietorship. Taxact 2012 return Generally, filing as a qualified joint venture will not increase the spouses' total tax owed on the joint income tax return. Taxact 2012 return However, it gives each spouse credit for social security earnings on which retirement benefits are based and for Medicare coverage without filing a partnership return. Taxact 2012 return    Note. Taxact 2012 return If your spouse is your employee, not your partner, see One spouse employed by another in section 3. Taxact 2012 return   For more information on qualified joint ventures, visit IRS. Taxact 2012 return gov and enter “qualified joint venture” in the search box. Taxact 2012 return Exception—Community income. Taxact 2012 return   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Taxact 2012 return S. Taxact 2012 return possession, you can treat the business either as a sole proprietorship (of the spouse who carried on the business) or a partnership. Taxact 2012 return You may still make an election to be taxed as a qualified joint venture instead of a partnership. Taxact 2012 return See Exception—Qualified joint venture , earlier. Taxact 2012 return 3. Taxact 2012 return Family Employees Child employed by parents. Taxact 2012 return   Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Taxact 2012 return If these payments are for work other than in a trade or business, such as domestic work in the parent's private home, they are not subject to social security and Medicare taxes until the child reaches age 21. Taxact 2012 return However, see Covered services of a child or spouse , later in this section. Taxact 2012 return Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, are not subject to FUTA tax. Taxact 2012 return Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home, or unless the payments are for work other than in a trade or business and are less than $50 in the quarter or the child is not regularly employed to do such work. Taxact 2012 return One spouse employed by another. Taxact 2012 return   The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax. Taxact 2012 return However, the payments for services of one spouse employed by another in other than a trade or business, such as domestic service in a private home, are not subject to social security, Medicare, and FUTA taxes. Taxact 2012 return Covered services of a child or spouse. Taxact 2012 return   The wages for the services of a child or spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for: A corporation, even if it is controlled by the child's parent or the individual's spouse; A partnership, even if the child's parent is a partner, unless each partner is a parent of the child; A partnership, even if the individual's spouse is a partner; or An estate, even if it is the estate of a deceased parent. Taxact 2012 return Parent employed by son or daughter. Taxact 2012 return   When the employer is a son or daughter employing his or her parent the following rules apply. Taxact 2012 return Payments for the services of a parent in the son’s or daughter’s (the employer’s) trade or business are subject to income tax withholding and social security and Medicare taxes. Taxact 2012 return Payments for the services of a parent not in the son’s or daughter’s (the employer’s) trade or business are generally not subject to social security and Medicare taxes. Taxact 2012 return    Social security and Medicare taxes do apply to payments made to a parent for domestic services if all of the following apply: The parent is employed by his or her son or daughter; The son or daughter (the employer) has a child or stepchild living in the home; The son or daughter (the employer) is a widow or widower, divorced, or living with a spouse who, because of a mental or physical condition, cannot care for the child or stepchild for at least 4 continuous weeks in a calendar quarter; and The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition. Taxact 2012 return   Payments made to a parent employed by his or her child are not subject to FUTA tax, regardless of the type of services provided. Taxact 2012 return 4. Taxact 2012 return Employee's Social Security Number (SSN) You are required to get each employee's name and SSN and to enter them on Form W-2. Taxact 2012 return This requirement also applies to resident and nonresident alien employees. Taxact 2012 return You should ask your employee to show you his or her social security card. Taxact 2012 return The employee may show the card if it is available. Taxact 2012 return Do not accept a social security card that says “Not valid for employment. Taxact 2012 return ” A social security number issued with this legend does not permit employment. Taxact 2012 return You may, but are not required to, photocopy the social security card if the employee provides it. Taxact 2012 return If you do not provide the correct employee name and SSN on Form W-2, you may owe a penalty unless you have reasonable cause. Taxact 2012 return See Publication 1586, Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs, for information on the requirement to solicit the employee's SSN. Taxact 2012 return Applying for a social security card. Taxact 2012 return   Any employee who is legally eligible to work in the United States and does not have a social security card can get one by completing Form SS-5, Application for a Social Security Card, and submitting the necessary documentation. Taxact 2012 return You can get Form SS-5 at SSA offices, by calling 1-800-772-1213, or from the SSA website at www. Taxact 2012 return socialsecurity. Taxact 2012 return gov/online/ss-5. Taxact 2012 return html. Taxact 2012 return The employee must complete and sign Form SS-5; it cannot be filed by the employer. Taxact 2012 return You may be asked to supply a letter to accompany Form SS-5 if the employee has exceeded his or her yearly or lifetime limit for the number of replacement cards allowed. Taxact 2012 return Applying for a social security number. Taxact 2012 return   If you file Form W-2 on paper and your employee applied for an SSN but does not have one when you must file Form W-2, enter “Applied For” on the form. Taxact 2012 return If you are filing electronically, enter all zeros (000-00-000) in the social security number field. Taxact 2012 return When the employee receives the SSN, file Copy A of Form W-2c, Corrected Wage and Tax Statement, with the SSA to show the employee's SSN. Taxact 2012 return Furnish copies B, C, and 2 of Form W-2c to the employee. Taxact 2012 return Up to 25 Forms W-2c for each Form W-3c, Transmittal of Corrected Wage and Tax Statements, may now be filed per session over the Internet, with no limit on the number of sessions. Taxact 2012 return For more information, visit the SSA's Employer W-2 Filing Instructions & Information webpage at www. Taxact 2012 return socialsecurity. Taxact 2012 return gov/employer. Taxact 2012 return Advise your employee to correct the SSN on his or her original Form W-2. Taxact 2012 return Correctly record the employee's name and SSN. Taxact 2012 return   Record the name and number of each employee as they are shown on the employee's social security card. Taxact 2012 return If the employee's name is not correct as shown on the card (for example, because of marriage or divorce), the employee should request a corrected card from the SSA. Taxact 2012 return Continue to report the employee's wages under the old name until the employee shows you an updated social security card with the new name. Taxact 2012 return If the SSA issues the employee a replacement card after a name change, or a new card with a different social security number after a change in alien work status, file a Form W-2c to correct the name/SSN reported for the most recently filed Form W-2. Taxact 2012 return It is not necessary to correct other years if the previous name and number were used for years before the most recent Form W-2. Taxact 2012 return IRS individual taxpayer identification numbers (ITINs) for aliens. Taxact 2012 return   Do not accept an ITIN in place of an SSN for employee identification or for work. Taxact 2012 return An ITIN is only available to resident and nonresident aliens who are not eligible for U. Taxact 2012 return S. Taxact 2012 return employment and need identification for other tax purposes. Taxact 2012 return You can identify an ITIN because it is a nine-digit number, beginning with the number “9” with either a “7” or “8” as the fourth digit and is formatted like an SSN (for example, 9NN-7N-NNNN). Taxact 2012 return    An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN. Taxact 2012 return If the individual is currently eligible to work in the United States, instruct the individual to apply for an SSN and follow the instructions under Applying for a social security number, earlier. Taxact 2012 return Do not use an ITIN in place of an SSN on Form W-2. Taxact 2012 return Verification of social security numbers. Taxact 2012 return   Employers and authorized reporting agents can use the Social Security Number Verification Service (SSNVS) to instantly verify up to 10 names and SSNs (per screen) at a time, or submit an electronic file of up to 250,000 names and SSNs and usually receive the results the next business day. Taxact 2012 return Visit www. Taxact 2012 return socialsecurity. Taxact 2012 return gov/employer/ssnv. Taxact 2012 return htm for more information. Taxact 2012 return Registering for SSNVS. Taxact 2012 return   You must register online and receive authorization from your employer to use SSNVS. Taxact 2012 return To register, visit SSA's website at www. Taxact 2012 return ssa. Taxact 2012 return gov/employer and click on the Business Services Online link. Taxact 2012 return Follow the registration instructions to obtain a user identification (ID) and password. Taxact 2012 return You will need to provide the following information about yourself and your company. Taxact 2012 return Name. Taxact 2012 return SSN. Taxact 2012 return Date of birth. Taxact 2012 return Type of employer. Taxact 2012 return EIN. Taxact 2012 return Company name, address, and telephone number. Taxact 2012 return Email address. Taxact 2012 return   When you have completed the online registration process, SSA will mail a one-time activation code to your employer. Taxact 2012 return You must enter the activation code online to use SSNVS. Taxact 2012 return 5. Taxact 2012 return Wages and Other Compensation Wages subject to federal employment taxes generally include all pay you give to an employee for services performed. Taxact 2012 return The pay may be in cash or in other forms. Taxact 2012 return It includes salaries, vacation allowances, bonuses, commissions, and fringe benefits. Taxact 2012 return It does not matter how you measure or make the payments. Taxact 2012 return Amounts an employer pays as a bonus for signing or ratifying a contract in connection with the establishment of an employer-employee relationship and an amount paid to an employee for cancellation of an employment contract and relinquishment of contract rights are wages subject to social security, Medicare, and FUTA taxes and income tax withholding. Taxact 2012 return Also, compensation paid to a former employee for services performed while still employed is wages subject to employment taxes. Taxact 2012 return More information. Taxact 2012 return   See section 6 for a discussion of tips and section 7 for a discussion of supplemental wages. Taxact 2012 return Also, see section 15 for exceptions to the general rules for wages. Taxact 2012 return Publication 15-A provides additional information on wages, including nonqualified deferred compensation, and other compensation. Taxact 2012 return Publication 15-B provides information on other forms of compensation, including: Accident 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, and Working condition benefits. Taxact 2012 return Employee business expense reimbursements. Taxact 2012 return   A reimbursement or allowance arrangement is a system by which you pay the advances, reimbursements, and charges for your employees' business expenses. Taxact 2012 return How you report a reimbursement or allowance amount depends on whether you have an accountable or a nonaccountable plan. Taxact 2012 return If a single payment includes both wages and an expense reimbursement, you must specify the amount of the reimbursement. Taxact 2012 return   These rules apply to all ordinary and necessary employee business expenses that would otherwise qualify for a deduction by the employee. Taxact 2012 return Accountable plan. Taxact 2012 return   To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules. Taxact 2012 return They must have paid or incurred deductible expenses while performing services as your employees. Taxact 2012 return The reimbursement or advance must be paid for the expense and must not be an amount that would have otherwise been paid by the employee. Taxact 2012 return They must substantiate these expenses to you within a reasonable period of time. Taxact 2012 return They must return any amounts in excess of substantiated expenses within a reasonable period of time. Taxact 2012 return   Amounts paid under an accountable plan are not wages and are not subject to income, social security, Medicare, and FUTA taxes. Taxact 2012 return   If the expenses covered by this arrangement are not substantiated (or amounts in excess of substantiated expenses are not returned within a reasonable period of time), the amount paid under the arrangement in excess of the substantiated expenses is treated as paid under a nonaccountable plan. Taxact 2012 return This amount is subject to income, social security, Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period of time. Taxact 2012 return   A reasonable period of time depends on the facts and circumstances. Taxact 2012 return Generally, it is considered reasonable if your employees receive their advance within 30 days of the time they incur the expenses, adequately account for the expenses within 60 days after the expenses were paid or incurred, and return any amounts in excess of expenses within 120 days after the expenses were paid or incurred. Taxact 2012 return Also, it is considered reasonable if you give your employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days. Taxact 2012 return Nonaccountable plan. Taxact 2012 return   Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to income, social security, Medicare, and FUTA taxes. Taxact 2012 return Your payments are treated as paid under a nonaccountable plan if: Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or she does not use for business expenses, You advance or pay an amount to your employee regardless of whether you reasonably expect the employee to have business expenses related to your business, or You pay an amount as a reimbursement you would have otherwise paid as wages. Taxact 2012 return   See section 7 for more information on supplemental wages. Taxact 2012 return Per diem or other fixed allowance. Taxact 2012 return   You may reimburse your employees by travel days, miles, or some other fixed allowance under the applicable revenue procedure. Taxact 2012 return In these cases, your employee is considered to have accounted to you if your reimbursement does not exceed rates established by the Federal Government. Taxact 2012 return The 2013 standard mileage rate for auto expenses was 56. Taxact 2012 return 5 cents per mile. Taxact 2012 return The rate for 2014 is 56 cents per mile. Taxact 2012 return   The government per diem rates for meals and lodging in the continental United States are listed in Publication 1542, Per Diem Rates. Taxact 2012 return Other than the amount of these expenses, your employees' business expenses must be substantiated (for example, the business purpose of the travel or the number of business miles driven). Taxact 2012 return   If the per diem or allowance paid exceeds the amounts substantiated, you must report the excess amount as wages. Taxact 2012 return This excess amount is subject to income tax withholding and payment of social security, Medicare, and FUTA taxes. Taxact 2012 return Show the amount equal to the substantiated amount (for example, the nontaxable portion) in box 12 of Form W-2 using code “L. Taxact 2012 return ” Wages not paid in money. Taxact 2012 return   If in the course of your trade or business you pay your employees in a medium that is neither cash nor a readily negotiable instrument, such as a check, you are said to pay them “in kind. Taxact 2012 return ” Payments in kind may be in the form of goods, lodging, food, clothing, or services. Taxact 2012 return Generally, the fair market value of such payments at the time they are provided is subject to federal income tax withholding and social security, Medicare, and FUTA taxes. Taxact 2012 return   However, noncash payments for household work, agricultural labor, and service not in the employer's trade or business are exempt from social security, Medicare, and FUTA taxes. Taxact 2012 return Withhold income tax on these payments only if you and the employee agree to do so. Taxact 2012 return Nonetheless, noncash payments for agricultural labor, such as commodity wages, are treated as cash payments subject to employment taxes if the substance of the transaction is a cash payment. Taxact 2012 return Moving expenses. Taxact 2012 return   Reimbursed and employer-paid qualified moving expenses (those that would otherwise be deductible by the employee) paid under an accountable plan are not includible in an employee's income unless you have knowledge the employee deducted the expenses in a prior year. Taxact 2012 return Reimbursed and employer-paid nonqualified moving expenses are includible in income and are subject to employment taxes and income tax withholding. Taxact 2012 return For more information on moving expenses, see Publication 521, Moving Expenses. Taxact 2012 return Meals and lodging. Taxact 2012 return   The value of meals is not taxable income and is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the meals are furnished for the employer's convenience and on the employer's premises. Taxact 2012 return The value of lodging is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the lodging is furnished for the employer's convenience, on the employer's premises, and as a condition of employment. Taxact 2012 return    “For the convenience of the employer” means you have a substantial business reason for providing the meals and lodging other than to provide additional compensation to the employee. Taxact 2012 return For example, meals you provide at the place of work so that an employee is available for emergencies during his or her lunch period are generally considered to be for your convenience. Taxact 2012 return   However, whether meals or lodging are provided for the convenience of the employer depends on all of the facts and circumstances. Taxact 2012 return A written statement that the meals or lodging are for your convenience is not sufficient. Taxact 2012 return 50% test. Taxact 2012 return   If over 50% of the employees who are provided meals on an employer's business premises receive these meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. Taxact 2012 return If this 50% test is met, the value of the meals is excludable from income for all employees and is not subject to federal income tax withholding or employment taxes. Taxact 2012 return For more information, see Publication 15-B. Taxact 2012 return Health insurance plans. Taxact 2012 return   If you pay the cost of an accident or health insurance plan for your employees, including an employee's spouse and dependents, your payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. Taxact 2012 return Generally, this exclusion also applies to qualified long-term care insurance contracts. Taxact 2012 return However, for income tax withholding, the value of health insurance benefits must be included in the wages of S corporation employees who own more than 2% of the S corporation (2% shareholders). Taxact 2012 return For social security, Medicare, and FUTA taxes, the health insurance benefits are excluded from the wages only for employees and their dependents or for a class or classes of employees and their dependents. Taxact 2012 return See Announcement 92-16 for more information. Taxact 2012 return You can find Announcement 92-16 on page 53 of Internal Revenue Bulletin 1992-5. Taxact 2012 return Health Savings Accounts and medical savings accounts. Taxact 2012 return   Your contributions to an employee's Health Savings Account (HSA) or Archer medical savings account (MSA) are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding if it is reasonable to believe at the time of payment of the contributions they will be excludable from the income of the employee. Taxact 2012 return To the extent it is not reasonable to believe they will be excludable, your contributions are subject to these taxes. Taxact 2012 return Employee contributions to their HSAs or MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA taxes and income tax withholding. Taxact 2012 return However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan are not wages and are not subject to employment taxes or withholding. Taxact 2012 return For more information, see the Instructions for Form 8889, Health Savings Accounts (HSAs). Taxact 2012 return Medical care reimbursements. Taxact 2012 return   Generally, medical care reimbursements paid for an employee under an employer's self-insured medical reimbursement plan are not wages and are not subject to social security, Medicare, and FUTA taxes, or income tax withholding. Taxact 2012 return See Publication 15-B for an exception for highly compensated employees. Taxact 2012 return Differential wage payments. Taxact 2012 return   Differential wage payments are any payments made by an employer to an individual for a period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days and represent all or a portion of the wages the individual would have received from the employer if the individual were performing services for the employer. Taxact 2012 return   Differential wage payments are wages for income tax withholding, but are not subject to social security, Medicare, or FUTA taxes. Taxact 2012 return Employers should report differential wage payments in box 1 of Form W-2. Taxact 2012 return For more information about the tax treatment of differential wage payments, visit IRS. Taxact 2012 return gov and enter “employees in a combat zone” in the search box. Taxact 2012 return Fringe benefits. Taxact 2012 return   You generally must include fringe benefits in an employee's gross income (but see Nontaxable fringe benefits next). Taxact 2012 return The benefits are subject to income tax withholding and employment taxes. Taxact 2012 return Fringe benefits include cars you provide, flights on aircraft you provide, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events. Taxact 2012 return In general, the amount you must include is the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount the law excludes. Taxact 2012 return There are other special rules you and your employees may use to value certain fringe benefits. Taxact 2012 return See Publication 15-B for more information. Taxact 2012 return Nontaxable fringe benefits. Taxact 2012 return   Some fringe benefits are not taxable (or are minimally taxable) if certain conditions are met. Taxact 2012 return See Publication 15-B for details. Taxact 2012 return The following are some examples of nontaxable fringe benefits. Taxact 2012 return Services provided to your employees at no additional cost to you. Taxact 2012 return Qualified employee discounts. Taxact 2012 return Working condition fringes that are property or services the employee could deduct as a business expense if he or she had paid for it. Taxact 2012 return Examples include a company car for business use and subscriptions to business magazines. Taxact 2012 return Certain minimal value fringes (including an occasional cab ride when an employee must work overtime and meals you provide at eating places you run for your employees if the meals are not furnished at below cost). Taxact 2012 return Qualified transportation fringes subject to specified conditions and dollar limitations (including transportation in a commuter highway vehicle, any transit pass, and qualified parking). Taxact 2012 return Qualified moving expense reimbursement. Taxact 2012 return See Moving expenses , earlier in this section, for details. Taxact 2012 return The use of on-premises athletic facilities, if substantially all of the use is by employees, their spouses, and their dependent children. Taxact 2012 return Qualified tuition reduction an educational organization provides to its employees for education. Taxact 2012 return For more information, see Publication 970, Tax Benefits for Education. Taxact 2012 return Employer-provided cell phones provided primarily for a noncompensatory business reason. Taxact 2012 return   However, do not exclude the following fringe benefits from the income of highly compensated employees unless the benefit is available to other employees on a nondiscriminatory basis. Taxact 2012 return No-additional-cost services. Taxact 2012 return Qualified employee discounts. Taxact 2012 return Meals provided at an employer operated eating facility. Taxact 2012 return Reduced tuition for education. Taxact 2012 return  For more information, including the definition of a highly compensated employee, see Publication 15-B. Taxact 2012 return When fringe benefits are treated as paid. Taxact 2012 return   You may choose to treat certain noncash fringe benefits as paid by the pay period, by the quarter, or on any other basis you choose as long as you treat the benefits as paid at least once a year. Taxact 2012 return You do not have to make a formal choice of payment dates or notify the IRS of the dates you choose. Taxact 2012 return You do not have to make this choice for all employees. Taxact 2012 return You may change methods as often as you like, as long as you treat all benefits provided in a calendar year as paid by December 31 of the calendar year. Taxact 2012 return See Publication 15-B for more information, including a discussion of the special accounting rule for fringe benefits provided during November and December. Taxact 2012 return Valuation of fringe benefits. Taxact 2012 return   Generally, you must determine the value of fringe benefits no later than January 31 of the next year. Taxact 2012 return Before January 31, you may reasonably estimate the value of the fringe benefits for purposes of withholding and depositing on time. Taxact 2012 return Withholding on fringe benefits. Taxact 2012 return   You may add the value of fringe benefits to regular wages for a payroll period and figure withholding taxes on the total, or you may withhold federal income tax on the value of the fringe benefits at the optional flat 25% supplemental wage rate. Taxact 2012 return However, see Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages during the calendar year in section 7. Taxact 2012 return   You may choose not to withhold income tax on the value of an employee's personal use of a vehicle you provide. Taxact 2012 return You must, however, withhold social security and Medicare taxes on the use of the vehicle. Taxact 2012 return See Publication 15-B for more information on this election. Taxact 2012 return Depositing taxes on fringe benefits. Taxact 2012 return   Once you choose when fringe benefits are paid, you must deposit taxes in the same deposit period you treat the fringe benefits as paid. Taxact 2012 return To avoid a penalty, deposit the taxes following the general deposit rules for that deposit period. Taxact 2012 return   If you determine by January 31 you overestimated the value of a fringe benefit at the time you withheld and deposited for it, you may claim a refund for the overpayment or have it applied to your next employment tax return. Taxact 2012 return See Valuation of fringe benefits , earlier. Taxact 2012 return If you underestimated the value and deposited too little, you may be subject to a failure-to-deposit penalty. Taxact 2012 return See section 11 for information on deposit penalties. Taxact 2012 return   If you deposited the required amount of taxes but withheld a lesser amount from the employee, you can recover from the employee the social security, Medicare, or income taxes you deposited on his or her behalf, and included in the employee's Form W-2. Taxact 2012 return However, you must recover the income taxes before April 1 of the following year. Taxact 2012 return Sick pay. Taxact 2012 return   In general, sick pay is any amount you pay under a plan to an employee who is unable to work because of sickness or injury. Taxact 2012 return These amounts are sometimes paid by a third party, such as an insurance company or an employees' trust. Taxact 2012 return In either case, these payments are subject to social security, Medicare, and FUTA taxes. Taxact 2012 return Sick pay becomes exempt from these taxes after the end of 6 calendar months after the calendar month the employee last worked for the employer. Taxact 2012 return The payments are always subject to federal income tax. Taxact 2012 return See Publication 15-A for more information. Taxact 2012 return 6. Taxact 2012 return Tips Tips your employee receives from customers are generally subject to withholding. Taxact 2012 return Your employee must report cash tips to you by the 10th of the month after the month the tips are received. Taxact 2012 return The report should include tips you paid over to the employee for charge customers, tips the employee received directly from customers, and tips received from other employees under any tip-sharing arrangement. Taxact 2012 return Both directly and indirectly tipped employees must report tips to you. Taxact 2012 return No report is required for months when tips are less than $20. Taxact 2012 return Your employee reports the tips on Form 4070, Employee's Report of Tips to Employer, or on a similar statement. Taxact 2012 return The statement must be signed by the employee and must include: The employee's name, address, and SSN, Your name and address, The month or period the report covers, and The total of tips received during the month or period. Taxact 2012 return Both Forms 4070 and 4070-A, Employee's Daily Record of Tips, are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer. Taxact 2012 return You are permitted to establish a system for electronic tip reporting by employees. Taxact 2012 return See Regulations section 31. Taxact 2012 return 6053-1(d). Taxact 2012 return Collecting taxes on tips. Taxact 2012 return   You must collect income tax, employee social security tax, and employee Medicare tax on the employee's tips. Taxact 2012 return The withholding rules for withholding an employee's share of Medicare tax on tips also apply to withholding the Additional Medicare Tax once wages and tips exceed $200,000 in the calendar year. Taxact 2012 return If an employee reports to you in writing $20 or more of tips in a month, the tips are also subject to FUTA tax. Taxact 2012 return   You can collect these taxes from the employee's wages or from other funds he or she makes available. Taxact 2012 return See Tips treated as supplemental wages in section 7 for more information. Taxact 2012 return Stop collecting the employee social security tax when his or her wages and tips for tax year 2014 reach $117,000; collect the income and employee Medicare taxes for the whole year on all wages and tips. Taxact 2012 return You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the limit. Taxact 2012 return You are responsible for the employer Medicare tax for the whole year on all wages and tips. Taxact 2012 return File Form 941 or Form 944 to report withholding and employment taxes on tips. Taxact 2012 return Ordering rule. Taxact 2012 return   If, by the 10th of the month after the month for which you received an employee's report on tips, you do not have enough employee funds available to deduct the employee tax, you no longer have to collect it. Taxact 2012 return If there are not enough funds available, withhold taxes in the following order. Taxact 2012 return Withhold on regular wages and other compensation. Taxact 2012 return Withhold social security and Medicare taxes on tips. Taxact 2012 return Withhold income tax on tips. Taxact 2012 return Reporting tips. Taxact 2012 return   Report tips and any collected and uncollected social security and Medicare taxes on Form W-2 and on Form 941, lines 5b, 5c, and 5d (Form 944, lines 4b, 4c, and 4d). Taxact 2012 return Report an adjustment on Form 941, line 9 (Form 944, line 6), for the uncollected social security and Medicare taxes. Taxact 2012 return Enter the amount of uncollected social security tax and Medicare tax on Form W-2, box 12, with codes “A” and “B. Taxact 2012 return ” Do not include any uncollected Additional Medicare Tax in box 12 of Form W-2. Taxact 2012 return See section 13 and the General Instructions for Forms W-2 and W-3. Taxact 2012 return   Revenue Ruling 2012-18 provides guidance for employers regarding social security and Medicare taxes imposed on tips, including information on the reporting of the employer share of social security and Medicare taxes under section 3121(q), the difference between tips and service charges, and the section 45B credit. Taxact 2012 return See Revenue Ruling 2012-18, 2012-26 I. Taxact 2012 return R. Taxact 2012 return B. Taxact 2012 return 1032, available at www. Taxact 2012 return irs. Taxact 2012 return gov/irb/2012-26_IRB/ar07. Taxact 2012 return html. Taxact 2012 return Allocated tips. Taxact 2012 return   If you operate a large food or beverage establishment, you must report allocated tips under certain circumstances. Taxact 2012 return However, do not withhold income, social security, or Medicare taxes on allocated tips. Taxact 2012 return   A large food or beverage establishment is one that provides food or beverages for consumption on the premises, where tipping is customary, and where there were normally more than 10 employees on a typical business day during the preceding year. Taxact 2012 return   The tips may be allocated by one of three methods—hours worked, gross receipts, or good faith agreement. Taxact 2012 return For information about these allocation methods, including the requirement to file Forms 8027 electronically if 250 or more forms are filed, see the Instructions for Form 8027. Taxact 2012 return For information on filing Form 8027 electronically with the IRS, see Publication 1239. Taxact 2012 return Tip Rate Determination and Education Program. Taxact 2012 return   Employers may participate in the Tip Rate Determination and Education Program. Taxact 2012 return The program primarily consists of two voluntary agreements developed to improve tip income reporting by helping taxpayers to understand and meet their tip reporting responsibilities. Taxact 2012 return The two agreements are the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative Commitment (TRAC). Taxact 2012 return A tip agreement, the Gaming Industry Tip Compliance Agreement (GITCA), is available for the gaming (casino) industry. Taxact 2012 return To get more information about TRDA and TRAC agreements, see Publication 3144, Tips on Tips. Taxact 2012 return Additionally, visit IRS. Taxact 2012 return gov and enter “MSU tips” in the search box to get more information about GITCA, TRDA, or TRAC agreements. Taxact 2012 return 7. Taxact 2012 return Supplemental Wages Supplemental wages are wage payments to an employee that are not regular wages. Taxact 2012 return They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. Taxact 2012 return Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. Taxact 2012 return How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages. Taxact 2012 return See Regulations section 31. Taxact 2012 return 3402(g)-1 for additional guidance for wages paid after January 1, 2007. Taxact 2012 return Also see Revenue Ruling 2008-29, 2008-24 I. Taxact 2012 return R. Taxact 2012 return B. Taxact 2012 return 1149, available at www. Taxact 2012 return irs. Taxact 2012 return gov/irb/2008-24_IRB/ar08. Taxact 2012 return html. Taxact 2012 return Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages from you during the calendar year. Taxact 2012 return   Special rules apply to the extent supplemental wages paid to any one employee during the calendar year exceed $1 million. Taxact 2012 return If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 39. Taxact 2012 return 6% (or the highest rate of income tax for the year). Taxact 2012 return Withhold using the 39. Taxact 2012 return 6% rate without regard to the employee's Form W-4. Taxact 2012 return In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control. Taxact 2012 return For more information, see Treasury Decision 9276, 2006-37 I. Taxact 2012 return R. Taxact 2012 return B. Taxact 2012 return 423, available at www. Taxact 2012 return irs. Taxact 2012 return gov/irb/2006-37_IRB/ar09. Taxact 2012 return html. Taxact 2012 return Withholding on supplemental wage payments to an employee who does not receive $1 million of supplemental wages during the calendar year. Taxact 2012 return   If the supplemental wages paid to the employee during the calendar year are less than or equal to $1 million, the following rules apply in determining the amount of income tax to be withheld. Taxact 2012 return Supplemental wages combined with regular wages. Taxact 2012 return   If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period. Taxact 2012 return Supplemental wages identified separately from regular wages. Taxact 2012 return   If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages. Taxact 2012 return If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages. Taxact 2012 return Withhold a flat 25% (no other percentage allowed). Taxact 2012 return If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. Taxact 2012 return If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Taxact 2012 return Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Taxact 2012 return Subtract the tax withheld from the regular wages. Taxact 2012 return Withhold the remaining tax from the supplemental wages. Taxact 2012 return If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax. Taxact 2012 return If you did not withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b. Taxact 2012 return This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages. Taxact 2012 return Regardless of the method you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes. Taxact 2012 return Example 1. Taxact 2012 return You pay John Peters a base salary on the 1st of each month. Taxact 2012 return He is single and claims one withholding allowance. Taxact 2012 return In January he is paid $1,000. Taxact 2012 return Using the wage bracket tables, you withhold $50 from this amount. Taxact 2012 return In February, he receives salary of $1,000 plus a commission of $2,000, which you combine with regular wages and do not separately identify. Taxact 2012 return You figure the withholding based on the total of $3,000. Taxact 2012 return The correct withholding from the tables is $338. Taxact 2012 return Example 2. Taxact 2012 return You pay Sharon Warren a base salary on the 1st of each month. Taxact 2012 return She is single and claims one allowance. Taxact 2012 return Her May 1 pay is $2,000. Taxact 2012 return Using the wage bracket tables, you withhold $188. Taxact 2012 return On May 14 she receives a bonus of $1,000. Taxact 2012 return Electing to use supplemental wage withholding method 1-b, you: Add the bonus amount to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 = $3,000). Taxact 2012 return Determine the amount of withholding on the combined $3,000 amount to be $338 using the wage bracket tables. Taxact 2012 return Subtract the amount withheld from wages on the most recent base salary pay date (May 1) from the combined withholding amount ($338 – $188 = $150). Taxact 2012 return Withhold $150 from the bonus payment. Taxact 2012 return Example 3. Taxact 2012 return The facts are the same as in Example 2, except you elect to use the flat rate method of withholding on the bonus. Taxact 2012 return You withhold 25% of $1,000, or $250, from Sharon's bonus payment. Taxact 2012 return Example 4. Taxact 2012 return The facts are the same as in Example 2, except you elect to pay Sharon a second bonus of $2,000 on May 28. Taxact 2012 return Using supplemental wage withholding method 1-b, you: Add the first and second bonus amounts to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 + $2,000 = $5,000). Taxact 2012 return Determine the amount of withholding on the combined $5,000 amount to be $781 using the wage bracket tables. Taxact 2012 return Subtract the amounts withheld from wages on the most recent base salary pay date (May 1) and the amounts withheld from the first bonus payment from the combined withholding amount ($781 – $188 – $150 = $443). Taxact 2012 return Withhold $443 from the second bonus payment. Taxact 2012 return Tips treated as supplemental wages. Taxact 2012 return   Withhold income tax on tips from wages earned by the employee or from other funds the employee makes available. Taxact 2012 return If an employee receives regular wages and reports tips, figure income tax withholding as if the tips were supplemental wages. Taxact 2012 return If you have not withheld income tax from the regular wages, add the tips to the regular wages. Taxact 2012 return Then withhold income tax on the total. Taxact 2012 return If you withheld income tax from the regular wages, you can withhold on the tips by method 1-a or 1-b discussed earlier in this section under Supplemental wages identified separately from regular wages. Taxact 2012 return Vacation pay. Taxact 2012 return   Vacation pay is subject to withholding as if it were a regular wage payment. Taxact 2012 return When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. Taxact 2012 return If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it. Taxact 2012 return 8. Taxact 2012 return Payroll Period Your payroll period is a period of service for which you usually pay wages. Taxact 2012 return When you have a regular payroll period, withhold income tax for that time period even if your employee does not work the full period. Taxact 2012 return No regular payroll period. Taxact 2012 return   When you do not have a regular payroll period, withhold the tax as if you paid wages for a daily or miscellaneous payroll period. Taxact 2012 return Figure the number of days (including Sundays and holidays) in the period covered by the wage payment. Taxact 2012 return If the wages are unrelated to a specific length of time (for example, commissions paid on completion of a sale), count back the number of days from the payment period to the latest of: The last wage payment made during the same calendar year, The date employment began, if during the same calendar year, or January 1 of the same year. Taxact 2012 return Employee paid for period less than 1 week. Taxact 2012 return   When you pay an employee for a period of less than one week, and the employee signs a statement under penalties of perjury indicating he or she is not working for any other employer during the same week for wages subject to withholding, figure withholding based on a weekly payroll period. Taxact 2012 return If the employee later begins to work for another employer for wages subject to withholding, the employee must notify you within 10 days. Taxact 2012 return You then figure withholding based on the daily or miscellaneous period. Taxact 2012 return 9. Taxact 2012 return Withholding From Employees' Wages Income Tax Withholding Using Form W-4 to figure withholding. Taxact 2012 return   To know how much federal income tax to withhold from employees' wages, you should have a Form W-4 on file for each employee. Taxact 2012 return Encourage your employees to file an updated Form W-4 for 2014, especially if they owed taxes or received a large refund when filing their 2013 tax return. Taxact 2012 return Advise your employees to use the IRS Withholding Calculator on the IRS website at www. Taxact 2012 return irs. Taxact 2012 return gov/individuals for help in determining how many withholding allowances to claim on their Forms W-4. Taxact 2012 return   Ask all new employees to give you a signed Form W-4 when they start work. Taxact 2012 return Make the form effective with the first wage payment. Taxact 2012 return If a new employee does not give you a completed Form W-4, withhold income tax as if he or she is single, with no withholding allowances. Taxact 2012 return Form in Spanish. Taxact 2012 return   You can provide Formulario W-4(SP), Certificado de Exención de Retenciones del Empleado, in place of Form W-4, to your Spanish-speaking employees. Taxact 2012 return For more information, see Publicación 17(SP), El Impuesto Federal sobre los Ingresos (Para Personas Físicas). Taxact 2012 return The rules discussed in this section that apply to Form W-4 also apply to Formulario W-4(SP). Taxact 2012 return Electronic system to receive Form W-4. Taxact 2012 return   You may establish a system to electronically receive Forms W-4 from your employees. Taxact 2012 return See Regulations section 31. Taxact 2012 return 3402(f)(5)-1(c) for more information. Taxact 2012 return Effective date of Form W-4. Taxact 2012 return   A Form W-4 remains in effect until the employee gives you a new one. Taxact 2012 return When you receive a new Form W-4 from an employee, do not adjust withholding for pay periods before the effective date of the new form. Taxact 2012 return If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date when you received the replacement Form W-4. Taxact 2012 return For exceptions, see Exemption from federal income tax withholding , IRS review of requested Forms W-4 , and Invalid Forms W-4 , later in this section. Taxact 2012 return A Form W-4 that makes a change for the next calendar year will not take effect in the current calendar year. Taxact 2012 return Successor employer. Taxact 2012 return   If you are a successor employer (see Successor employer , later in this section), secure new Forms W-4 from the transferred employees unless the “Alternative Procedure” in section 5 of Revenue Procedure 2004-53 applies. Taxact 2012 return See Revenue Procedure 2004-53, 2004-34 I. Taxact 2012 return R. Taxact 2012 return B. Taxact 2012 return 320, available at www. Taxact 2012 return irs. Taxact 2012 return gov/irb/2004-34_IRB/ar13. Taxact 2012 return html. Taxact 2012 return Completing Form W-4. Taxact 2012 return   The amount of any federal income tax withholding must be based on marital status and withholding allowances. Taxact 2012 return Your employees may not base their withholding amounts on a fixed dollar amount or percentage. Taxact 2012 return However, an employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4. Taxact 2012 return Employees may claim fewer withholding allowances than they are entitled to claim. Taxact 2012 return They may wish to claim fewer allowances to ensure they have enough withholding or to offset the tax on other sources of taxable income not subject to withholding. Taxact 2012 return See Publication 505, Tax Withholding and Estimated Tax, for more information about completing Form W-4. Taxact 2012 return Along with Form W-4, you may wish to order Publication 505 for use by your employees. Taxact 2012 return Do not accept any withholding or estimated tax payments from your employees in addition to withholding based on their Form W-4. Taxact 2012 return If they require additional withholding, they should submit a new Form W-4 and, if necessary, pay estimated tax by filing Form 1040-ES, Estimated Tax for Individuals, or by using the Electronic Federal Tax Payment System (EFTPS) to make estimated tax payments. Taxact 2012 return Exemption from federal income tax withholding. Taxact 2012 return   Generally, an employee may claim exemption from federal income tax withholding because he or she had no income tax liability last year and expects none this year. Taxact 2012 return See the Form W-4 instructions for more information. Taxact 2012 return However, the wages are still subject to social security and Medicare taxes. Taxact 2012 return See also Invalid Forms W-4 , later in this section. Taxact 2012 return   A Form W-4 claiming exemption from withholding is effective when it is filed with the employer and only for that calendar year. Taxact 2012 return To continue to be exempt from withholding in the next calendar year, an employee must give you a new Form W-4 by February 15. Taxact 2012 return If the employee does not give you a new Form W-4 by February 15, begin withholding based on the last Form W-4 for the employee that did not claim an exemption from withholding or, if one was not filed, then withhold tax as if he or she is single with zero withholding allowances. Taxact 2012 return If the employee provides a new Form W-4 claiming exemption from withholding on February 16 or later, you may apply it to future wages but do not refund any taxes already withheld. Taxact 2012 return Withholding income taxes on the wages of nonresident alien employees. Taxact 2012 return   In general, you must withhold federal income taxes on the wages of nonresident alien employees. Taxact 2012 return However, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for exceptions to this general rule. Taxact 2012 return Also see section 3 of Publication 51 (Circular A), Agricultural Employer's Tax Guide, for guidance on H-2A visa workers. Taxact 2012 return Withholding adjustment for nonresident alien employees. Taxact 2012 return   For 2014, apply the procedure discussed next to figure the amount of income tax to withhold from the wages of nonresident alien employees performing services within the United States. Taxact 2012 return Nonresident alien students from India and business apprentices from India are not subject to this procedure. Taxact 2012 return Instructions. Taxact 2012 return   To figure how much income tax to withhold from the wages paid to a nonresident alien employee performing services in the United States, use the following steps. Taxact 2012 return Step 1. Taxact 2012 return   Add to the wages paid to the nonresident alien employee for the payroll period the amount shown in the chart below for the applicable payroll period. Taxact 2012 return    Amount to Add to Nonresident Alien Employee's Wages for Calculating Income Tax Withholding Only   Payroll Period Add Additional     Weekly $ 43. Taxact 2012 return 30     Biweekly 86. Taxact 2012 return 50     Semimonthly 93. Taxact 2012 return 80     Monthly 187. Taxact 2012 return 50     Quarterly 562. Taxact 2012 return 50     Semiannually 1,125. Taxact 2012 return 00     Annually 2,250. Taxact 2012 return 00     Daily or Miscellaneous (each day of the payroll period) 8. Taxact 2012 return 70   Step 2. Taxact 2012 return   Use the amount figured in Step 1 and the number of withholding allowances claimed (generally limited to one allowance) to figure income tax withholding. Taxact 2012 return Determine the value of withholding allowances by multiplying the number of withholding allowances claimed by the appropriate amount from Table 5. Taxact 2012 return Percentage Method—2014 Amount for One Withholding Allowance shown on page 41. Taxact 2012 return If you are using the Percentage Method Tables for Income Tax Withholding, provided on pages 43–44, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure the income tax withholding. Taxact 2012 return If you are using the Wage Bracket Method for Income Tax Withholding, provided on pages 45–64, use the amount figured in Step 1 and the number of withholding allowances to figure income tax withholding. Taxact 2012 return The amounts from the chart above are added to wages solely for calculating income tax withholding on the wages of the nonresident alien employee. Taxact 2012 return The amounts from the chart should not be included in any box on the employee's Form W-2 and do not increase the income tax liability of the employee. Taxact 2012 return Also, the amounts from the chart do not increase the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. Taxact 2012 return This procedure only applies to nonresident alien employees who have wages subject to income tax withholding. Taxact 2012 return Example. Taxact 2012 return An employer using the percentage method of withholding pays wages of $500 for a biweekly payroll period to a married nonresident alien employee. Taxact 2012 return The nonresident alien has properly completed Form W-4, entering marital status as “single” with one withholding allowance and indicating status as a nonresident alien on Form W-4, line 6 (see Nonresident alien employee's Form W-4 , later in this section). Taxact 2012 return The employer determines the wages to be used in the withholding tables by adding to the $500 amount of wages paid the amount of $86. Taxact 2012 return 50 from the chart under Step 1 ($586. Taxact 2012 return 50 total). Taxact 2012 return The employer then applies the applicable tables to determine the income tax withholding for nonresident aliens (see Step 2 ). Taxact 2012 return Reminder: If you use the Percentage Method Tables for Income Tax Withholding, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure income tax withholding. Taxact 2012 return The $86. Taxact 2012 return 50 added to wages for calculating income tax withholding is not reported on Form W-2, and does not increase the income tax liability of the employee. Taxact 2012 return Also, the $86. Taxact 2012 return 50 added to wages does not affect the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. Taxact 2012 return Supplemental wage payment. Taxact 2012 return   This procedure for determining the amount of income tax withholding does not apply to a supplemental wage payment (see section 7) if the 39. Taxact 2012 return 6% mandatory flat rate withholding applies or if the 25% optional flat rate withholding is being used to calculate income tax withholding on the supplemental wage payment. Taxact 2012 return Nonresident alien employee's Form W-4. Taxact 2012 return   When completing Forms W-4, nonresident aliens are required to: Not claim exemption from income tax withholding, Request withholding as if they are single, regardless of their actual marital status, Claim only one allowance (if the nonresident alien is a resident of Canada, Mexico, or South Korea, or a student or business apprentice from India, he or she may claim more than one allowance), and Write “Nonresident Alien” or “NRA” above the dotted line on line 6 of Form W-4. Taxact 2012 return   If you maintain an electronic Form W-4 system, you should provide a field for nonresident aliens to enter nonresident alien status in lieu of writing “Nonresident Alien” or “NRA” above the dotted line on line 6. Taxact 2012 return A nonresident alien employee may request additional withholding at his or her option for other purposes, although such additions should not be necessary for withholding to cover federal income tax liability related to employment. Taxact 2012 return Form 8233. Taxact 2012 return   If a nonresident alien employee claims a tax treaty exemption from withholding, the employee must submit Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, with respect to the income exempt under the treaty, instead of Form W-4. Taxact 2012 return See Publication 515 for details. Taxact 2012 return IRS review of requested Forms W-4. Taxact 2012 return   When requested by the IRS, you must make original Forms W-4 available for inspection by an IRS employee. Taxact 2012 return You may also be directed to send certain Forms W-4 to the IRS. Taxact 2012 return You may receive a notice from the IRS requiring you to submit a copy of Form W-4 for one or more of your named employees. Taxact 2012 return Send the requested copy or copies of Form W-4 to the IRS at the address provided and in the manner directed by the notice. Taxact 2012 return The IRS may also require you to submit copies of Form W-4 to the IRS as directed by Treasury Decision 9337, 2007-35 I. Taxact 2012 return R. Taxact 2012 return B. Taxact 2012 return 455, which is available at www. Taxact 2012 return irs. Taxact 2012 return gov/irb/2007-35_IRB/ar10. Taxact 2012 return html. Taxact 2012 return When we refer to Form W-4, the same rules apply to Formulario W-4(SP), its Spanish translation. Taxact 2012 return After submitting a copy of a requested Form W-4 to the IRS, continue to withhold federal income tax based on that Form W-4 if it is valid (see Invalid Forms W-4 , later in this section). Taxact 2012 return However, if the IRS later notifies you in writing the employee is not entitled to claim exemption from withholding or a claimed number of withholding allowances, withhold federal income tax based on the effective date, marital status, and maximum number of withholding allowances specified in the IRS notice (commonly referred to as a "lock-in letter