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Taxslayer 2011

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Taxslayer 2011

Taxslayer 2011 3. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Taxslayer 2011 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. Taxslayer 2011 Any remaining gain is a section 1231 gain. Taxslayer 2011 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. Taxslayer 2011 Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Taxslayer 2011 Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Taxslayer 2011 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). Taxslayer 2011 Do not take that gain into account as section 1231 gain. Taxslayer 2011 Section 1231 transactions. Taxslayer 2011   The following transactions result in gain or loss subject to section 1231 treatment. Taxslayer 2011 Sales or exchanges of real property or depreciable personal property. Taxslayer 2011 This property must be used in a trade or business and held longer than 1 year. Taxslayer 2011 Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Taxslayer 2011 Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Taxslayer 2011 Sales or exchanges of leaseholds. Taxslayer 2011 The leasehold must be used in a trade or business and held longer than 1 year. Taxslayer 2011 Sales or exchanges of cattle and horses. Taxslayer 2011 The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Taxslayer 2011 Sales or exchanges of other livestock. Taxslayer 2011 This livestock does not include poultry. Taxslayer 2011 It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Taxslayer 2011 Sales or exchanges of unharvested crops. Taxslayer 2011 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. Taxslayer 2011 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). Taxslayer 2011 Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Taxslayer 2011 Cutting of timber or disposal of timber, coal, or iron ore. Taxslayer 2011 The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Taxslayer 2011 Condemnations. Taxslayer 2011 The condemned property must have been held longer than 1 year. Taxslayer 2011 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. Taxslayer 2011 It cannot be property held for personal use. Taxslayer 2011 Casualties and thefts. Taxslayer 2011 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). Taxslayer 2011 You must have held the property longer than 1 year. Taxslayer 2011 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. Taxslayer 2011 For more information on casualties and thefts, see Publication 547. Taxslayer 2011 Property for sale to customers. Taxslayer 2011   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Taxslayer 2011 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. Taxslayer 2011 Example. Taxslayer 2011 You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Taxslayer 2011 Customers make deposits on the reels, which you refund if the reels are returned within a year. Taxslayer 2011 If they are not returned, you keep each deposit as the agreed-upon sales price. Taxslayer 2011 Most reels are returned within the 1-year period. Taxslayer 2011 You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Taxslayer 2011 Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Taxslayer 2011 Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Taxslayer 2011 Copyrights. Taxslayer 2011    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). Taxslayer 2011 The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Taxslayer 2011 Treatment as ordinary or capital. Taxslayer 2011   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Taxslayer 2011 If you have a net section 1231 loss, it is ordinary loss. Taxslayer 2011 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. Taxslayer 2011 The rest, if any, is long-term capital gain. Taxslayer 2011 Nonrecaptured section 1231 losses. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Taxslayer 2011 Example. Taxslayer 2011 In 2013, Ben has a $2,000 net section 1231 gain. Taxslayer 2011 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. Taxslayer 2011 From 2008 through 2012 he had the following section 1231 gains and losses. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Taxslayer 2011 On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Taxslayer 2011 Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Taxslayer 2011 Whether the adjusted basis was figured using depreciation or amortization another person claimed. Taxslayer 2011 Corporate distributions. Taxslayer 2011   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Taxslayer 2011 General asset accounts. Taxslayer 2011   Different rules apply to dispositions of property you depreciated using a general asset account. Taxslayer 2011 For information on these rules, see Publication 946. Taxslayer 2011 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. Taxslayer 2011 See Gain Treated as Ordinary Income, later. Taxslayer 2011 Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Taxslayer 2011 See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Taxslayer 2011 Section 1245 property defined. Taxslayer 2011   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. Taxslayer 2011 Personal property (either tangible or intangible). Taxslayer 2011 Other tangible property (except buildings and their structural components) used as any of the following. Taxslayer 2011 See Buildings and structural components below. Taxslayer 2011 An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Taxslayer 2011 A research facility in any of the activities in (a). Taxslayer 2011 A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Taxslayer 2011 That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Taxslayer 2011 Amortization of certified pollution control facilities. Taxslayer 2011 The section 179 expense deduction. Taxslayer 2011 Deduction for clean-fuel vehicles and certain refueling property. Taxslayer 2011 Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Taxslayer 2011 Deduction for certain qualified refinery property. Taxslayer 2011 Deduction for qualified energy efficient commercial building property. Taxslayer 2011 Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Taxslayer 2011 (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Taxslayer 2011 ) 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). Taxslayer 2011 Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Taxslayer 2011 Deduction for qualified tertiary injectant expenses. Taxslayer 2011 Certain reforestation expenditures. Taxslayer 2011 Deduction for election to expense qualified advanced mine safety equipment property. Taxslayer 2011 Single purpose agricultural (livestock) or horticultural structures. Taxslayer 2011 Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Taxslayer 2011 Any railroad grading or tunnel bore. Taxslayer 2011 Buildings and structural components. Taxslayer 2011   Section 1245 property does not include buildings and structural components. Taxslayer 2011 The term building includes a house, barn, warehouse, or garage. Taxslayer 2011 The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Taxslayer 2011   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Taxslayer 2011 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. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 Facility for bulk storage of fungible commodities. Taxslayer 2011   This term includes oil or gas storage tanks and grain storage bins. Taxslayer 2011 Bulk storage means the storage of a commodity in a large mass before it is used. Taxslayer 2011 For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Taxslayer 2011 To be fungible, a commodity must be such that one part may be used in place of another. Taxslayer 2011   Stored materials that vary in composition, size, and weight are not fungible. Taxslayer 2011 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. Taxslayer 2011 For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Taxslayer 2011 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. Taxslayer 2011 The depreciation and amortization allowed or allowable on the property. Taxslayer 2011 The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Taxslayer 2011 A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Taxslayer 2011 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. Taxslayer 2011 See Gifts and Transfers at Death, later. Taxslayer 2011 Use Part III of Form 4797 to figure the ordinary income part of the gain. Taxslayer 2011 Depreciation taken on other property or taken by other taxpayers. Taxslayer 2011   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Taxslayer 2011 Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Taxslayer 2011 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). Taxslayer 2011 Depreciation and amortization. Taxslayer 2011   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Taxslayer 2011 Ordinary depreciation deductions. Taxslayer 2011 Any special depreciation allowance you claimed. Taxslayer 2011 Amortization deductions for all the following costs. Taxslayer 2011 Acquiring a lease. Taxslayer 2011 Lessee improvements. Taxslayer 2011 Certified pollution control facilities. Taxslayer 2011 Certain reforestation expenses. Taxslayer 2011 Section 197 intangibles. Taxslayer 2011 Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Taxslayer 2011 Franchises, trademarks, and trade names acquired before August 11, 1993. Taxslayer 2011 The section 179 deduction. Taxslayer 2011 Deductions for all the following costs. Taxslayer 2011 Removing barriers to the disabled and the elderly. Taxslayer 2011 Tertiary injectant expenses. Taxslayer 2011 Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Taxslayer 2011 Environmental cleanup costs. Taxslayer 2011 Certain reforestation expenses. Taxslayer 2011 Qualified disaster expenses. Taxslayer 2011 Any basis reduction for the investment credit (minus any basis increase for credit recapture). Taxslayer 2011 Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Taxslayer 2011 Example. Taxslayer 2011 You file your returns on a calendar year basis. Taxslayer 2011 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. Taxslayer 2011 You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Taxslayer 2011 You did not take the section 179 deduction. Taxslayer 2011 You sold the truck in May 2013 for $7,000. Taxslayer 2011 The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Taxslayer 2011 Figure the gain treated as ordinary income as follows. Taxslayer 2011 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. Taxslayer 2011   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. Taxslayer 2011   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. Taxslayer 2011 Depreciation allowed or allowable. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Taxslayer 2011 Multiple asset accounts. Taxslayer 2011   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. Taxslayer 2011 Example. Taxslayer 2011 In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Taxslayer 2011 All of the depreciation was recorded in a single depreciation account. Taxslayer 2011 After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Taxslayer 2011 You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Taxslayer 2011 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. Taxslayer 2011 Normal retirement. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Taxslayer 2011 Section 1250 property defined. Taxslayer 2011   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Taxslayer 2011 It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Taxslayer 2011 A fee simple interest in land is not included because it is not depreciable. Taxslayer 2011   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Taxslayer 2011 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. Taxslayer 2011 For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Taxslayer 2011 For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Taxslayer 2011 If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Taxslayer 2011 You will not have additional depreciation if any of the following conditions apply to the property disposed of. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 The property was residential low-income rental property you held for 162/3 years or longer. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 These properties are depreciated using the straight line method. Taxslayer 2011 In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Taxslayer 2011 Depreciation taken by other taxpayers or on other property. Taxslayer 2011   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Taxslayer 2011 Example. Taxslayer 2011 Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Taxslayer 2011 Depreciation allowed or allowable. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 Retired or demolished property. Taxslayer 2011   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. Taxslayer 2011 Example. Taxslayer 2011 A wing of your building is totally destroyed by fire. Taxslayer 2011 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. Taxslayer 2011 Figuring straight line depreciation. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011   Salvage value and useful life are not used for the ACRS method of depreciation. Taxslayer 2011 Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Taxslayer 2011   The straight line method is applied without any basis reduction for the investment credit. Taxslayer 2011 Property held by lessee. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 The same rule applies to the cost of acquiring a lease. Taxslayer 2011   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 The percentages for these types of real property are as follows. Taxslayer 2011 Nonresidential real property. Taxslayer 2011   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Taxslayer 2011 For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Taxslayer 2011 Residential rental property. Taxslayer 2011   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%. Taxslayer 2011 The percentage for periods before 1976 is zero. Taxslayer 2011 Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Taxslayer 2011 Low-income housing. Taxslayer 2011    Low-income housing includes all the following types of residential rental property. Taxslayer 2011 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. Taxslayer 2011 Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Taxslayer 2011 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. Taxslayer 2011 Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Taxslayer 2011   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Taxslayer 2011 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. Taxslayer 2011 Foreclosure. Taxslayer 2011   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. Taxslayer 2011 Example. Taxslayer 2011 On June 1, 2001, you acquired low-income housing property. Taxslayer 2011 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. Taxslayer 2011 The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Taxslayer 2011 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. Taxslayer 2011 Therefore, 70% of the additional depreciation is treated as ordinary income. Taxslayer 2011 Holding period. Taxslayer 2011   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Taxslayer 2011 For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Taxslayer 2011 If you sold it on January 2, 2013, the holding period is exactly 192 full months. Taxslayer 2011 The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Taxslayer 2011 Holding period for constructed, reconstructed, or erected property. Taxslayer 2011   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. Taxslayer 2011 Property acquired by gift or received in a tax-free transfer. Taxslayer 2011   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. Taxslayer 2011   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. Taxslayer 2011 See Low-Income Housing With Two or More Elements, next. Taxslayer 2011 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. Taxslayer 2011 The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Taxslayer 2011 The following are the types of separate elements. Taxslayer 2011 A separate improvement (defined below). Taxslayer 2011 The basic section 1250 property plus improvements not qualifying as separate improvements. Taxslayer 2011 The units placed in service at different times before all the section 1250 property is finished. Taxslayer 2011 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. Taxslayer 2011 As a result, the apartment house consists of three separate elements. Taxslayer 2011 The 36-month test for separate improvements. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 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). Taxslayer 2011 $5,000. Taxslayer 2011 The 1-year test. Taxslayer 2011   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. Taxslayer 2011 The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Taxslayer 2011 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. Taxslayer 2011 Example. Taxslayer 2011 The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Taxslayer 2011 During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Taxslayer 2011 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. Taxslayer 2011 However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Taxslayer 2011 Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Taxslayer 2011 Addition to the capital account. Taxslayer 2011   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. Taxslayer 2011   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Taxslayer 2011 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. Taxslayer 2011 The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Taxslayer 2011 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. Taxslayer 2011   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Taxslayer 2011 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. Taxslayer 2011 Unadjusted basis. Taxslayer 2011   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. Taxslayer 2011 However, the cost of components retired before that date is not included in the unadjusted basis. Taxslayer 2011 Holding period. Taxslayer 2011   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Taxslayer 2011   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. Taxslayer 2011 Use the first day of a calendar month that is closest to the middle of the tax year. Taxslayer 2011 If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Taxslayer 2011 Figuring ordinary income attributable to each separate element. Taxslayer 2011   Figure ordinary income attributable to each separate element as follows. Taxslayer 2011   Step 1. Taxslayer 2011 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. Taxslayer 2011   Step 2. Taxslayer 2011 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). Taxslayer 2011   Step 3. Taxslayer 2011 Multiply the result in Step 2 by the applicable percentage for the element. Taxslayer 2011 Example. Taxslayer 2011 You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Taxslayer 2011 The property consisted of four elements (W, X, Y, and Z). Taxslayer 2011 Step 1. Taxslayer 2011 The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Taxslayer 2011 The sum of the additional depreciation for all the elements is $24,000. Taxslayer 2011 Step 2. Taxslayer 2011 The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Taxslayer 2011 Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Taxslayer 2011 $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Taxslayer 2011 Step 3. Taxslayer 2011 The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Taxslayer 2011 From these facts, the sum of the ordinary income for each element is figured as follows. Taxslayer 2011   Step 1 Step 2 Step 3 Ordinary Income W . Taxslayer 2011 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Taxslayer 2011 25 5,000 92% 4,600 Z . Taxslayer 2011 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. Taxslayer 2011 In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Taxslayer 2011 In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Taxslayer 2011 Figure the additional depreciation for the periods after 1975. Taxslayer 2011 Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Taxslayer 2011 Stop here if this is residential rental property or if (2) is equal to or more than (1). Taxslayer 2011 This is the gain treated as ordinary income because of additional depreciation. Taxslayer 2011 Subtract (2) from (1). Taxslayer 2011 Figure the additional depreciation for periods after 1969 but before 1976. Taxslayer 2011 Add the lesser of (4) or (5) to the result in (3). Taxslayer 2011 This is the gain treated as ordinary income because of additional depreciation. Taxslayer 2011 A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Taxslayer 2011 Use Form 4797, Part III, to figure the ordinary income part of the gain. Taxslayer 2011 Corporations. Taxslayer 2011   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Taxslayer 2011 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. Taxslayer 2011 Report this additional ordinary income on Form 4797, Part III, line 26 (f). Taxslayer 2011 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. Taxslayer 2011 This applies even if no payments are received in that year. Taxslayer 2011 If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Taxslayer 2011 For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Taxslayer 2011 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. Taxslayer 2011 To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Taxslayer 2011 Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Taxslayer 2011 For a detailed discussion of installment sales, see Publication 537. Taxslayer 2011 Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Taxslayer 2011 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. Taxslayer 2011 For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Taxslayer 2011 See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Taxslayer 2011 Part gift and part sale or exchange. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 However, see Bargain sale to charity, later. Taxslayer 2011 Example. Taxslayer 2011 You transferred depreciable personal property to your son for $20,000. Taxslayer 2011 When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Taxslayer 2011 You took depreciation of $30,000. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Gift to charitable organization. Taxslayer 2011   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. Taxslayer 2011 Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Taxslayer 2011   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. Taxslayer 2011 For more information, see Giving Property That Has Increased in Value in Publication 526. Taxslayer 2011 Bargain sale to charity. Taxslayer 2011   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. Taxslayer 2011 First, figure the ordinary income as if you had sold the property at its fair market value. Taxslayer 2011 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. Taxslayer 2011 See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Taxslayer 2011 Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Taxslayer 2011 Example. Taxslayer 2011 You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Taxslayer 2011 Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Taxslayer 2011 If you had sold the property at its fair market value, your ordinary income would have been $5,000. Taxslayer 2011 Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Taxslayer 2011 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. Taxslayer 2011 For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Example 1. Taxslayer 2011 Janet Smith owned depreciable property that, upon her death, was inherited by her son. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Example 2. Taxslayer 2011 The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Taxslayer 2011 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. Taxslayer 2011 Ordinary income from depreciation must be reported by the trust on the transfer. Taxslayer 2011 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. Taxslayer 2011 For information on like-kind exchanges and involuntary conversions, see chapter 1. Taxslayer 2011 Depreciable personal property. Taxslayer 2011   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. Taxslayer 2011 The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Taxslayer 2011 The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Taxslayer 2011 Example 1. Taxslayer 2011 You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Taxslayer 2011 The old machine cost you $5,000 two years ago. Taxslayer 2011 You took depreciation deductions of $3,950. Taxslayer 2011 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. Taxslayer 2011 Example 2. Taxslayer 2011 You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Taxslayer 2011 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). Taxslayer 2011 You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Taxslayer 2011 Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Taxslayer 2011 All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Taxslayer 2011 Example 3. Taxslayer 2011 A fire destroyed office machinery you bought for $116,000. Taxslayer 2011 The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Taxslayer 2011 You received a $117,000 insurance payment, realizing a gain of $92,640. Taxslayer 2011 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. Taxslayer 2011 $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. Taxslayer 2011 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. Taxslayer 2011 The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Taxslayer 2011 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. Taxslayer 2011 Depreciable real property. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011   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. Taxslayer 2011 Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Taxslayer 2011 Example. Taxslayer 2011 The state paid you $116,000 when it condemned your depreciable real property for public use. Taxslayer 2011 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). Taxslayer 2011 You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Taxslayer 2011 You choose to postpone reporting the gain. Taxslayer 2011 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. Taxslayer 2011 The ordinary income to be reported is $6,000, which is the greater of the following amounts. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Taxslayer 2011 Basis of property acquired. Taxslayer 2011   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. Taxslayer 2011   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). Taxslayer 2011 However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Taxslayer 2011 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. Taxslayer 2011 Add the fair market value (or cost) of the other property acquired to the result in (1). Taxslayer 2011 Divide the result in (1) by the result in (2). Taxslayer 2011 Multiply the total basis by the result in (3). Taxslayer 2011 This is the basis of the depreciable real property acquired. Taxslayer 2011 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). Taxslayer 2011 Subtract the result in (4) from the total basis. Taxslayer 2011 This is the basis of the other property acquired. Taxslayer 2011 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). Taxslayer 2011 Example 1. Taxslayer 2011 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. Taxslayer 2011 The property's adjusted basis was $38,400, with additional depreciation of $14,932. Taxslayer 2011 On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Taxslayer 2011 Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Taxslayer 2011 You chose to postpone reporting the gain under the involuntary conversion rules. Taxslayer 2011 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. Taxslayer 2011 The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Taxslayer 2011 The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Taxslayer 2011 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. Taxslayer 2011 Example 2. Taxslayer 2011 John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Taxslayer 2011 He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Taxslayer 2011 He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Taxslayer 2011 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. Taxslayer 2011 The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Taxslayer 2011 The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Taxslayer 2011 The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Taxslayer 2011 The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Taxslayer 2011 4. Taxslayer 2011 The basis of the depreciable real property is $12,000. Taxslayer 2011 This is the $30,000 total basis multiplied by the 0. Taxslayer 2011 4 figured in (3). Taxslayer 2011 The basis of the other property (land) is $18,000. Taxslayer 2011 This is the $30,000 total basis minus the $12,000 figured in (4). Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Taxslayer 2011 See chapter 2. Taxslayer 2011 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. Taxslayer 2011 In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Taxslayer 2011 These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Taxslayer 2011 The comparison should take into account all the following facts and circumstances. Taxslayer 2011 The original cost and reproduction cost of construction, erection, or production. Taxslayer 2011 The remaining economic useful life. Taxslayer 2011 The state of obsolescence. Taxslayer 2011 The anticipated expenditures required to maintain, renovate, or modernize the properties. Taxslayer 2011 Like-kind exchanges and involuntary conversions. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Example. Taxslayer 2011 A fire destroyed your property with a total fair market value of $50,000. Taxslayer 2011 It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Taxslayer 2011 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. Taxslayer 2011 The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Taxslayer 2011 You choose to postpone reporting your gain from the involuntary conversion. Taxslayer 2011 You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Taxslayer 2011 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. Taxslayer 2011 The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Taxslayer 2011 The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Taxslayer 2011 Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Taxslayer 2011 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. Taxslayer 2011 Prev  Up  Next   Home   More Online Publications
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Filing and Paying Your Business Taxes

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Electronic Payment Options 
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Filing

Electronic Filing Options for Business and Self-Employed Taxpayers
There are electronic filing options available for many of the taxes and forms that small businesses are required to file, such as excise and employment taxes, Forms 1120, 7004, 1041 and various information returns.

Employer Identification Number
An Employer Identification Number (EIN), also known as a federal tax identification number, is used to identify tax reports to the IRS.

Business Taxes
The form of business you operate determines what taxes you must pay and how you pay them.

Estimated Taxes
Federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. There are two ways to pay as you go: withholding and estimated taxes.

Employment Taxes for Small Businesses
If you have employees, you are responsible for several federal, state, and local taxes. As an employer, you must withhold Federal income tax withholding, social security and Medicare taxes, and Federal Unemployment Tax Act (FUTA) taxes.

Self-Employment Taxes
The self-employment tax is a social security and Medicare tax for individuals who work for themselves.

Reporting Information Returns
Your business may be required to file information returns to report certain types of payments made during the year.

e-File Form 940, 941 or 944 for Small Businesses
Learn your options for e-filing form 940, 941 or 944 for Small Businesses.

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The Taxslayer 2011

Taxslayer 2011 Publication 575 - Introductory Material Table of Contents What's New Reminders IntroductionThe General Rule. Taxslayer 2011 Individual retirement arrangements (IRAs). Taxslayer 2011 Civil service retirement benefits. Taxslayer 2011 Social security and equivalent tier 1 railroad retirement benefits. Taxslayer 2011 Tax-sheltered annuity plans (403(b) plans). Taxslayer 2011 Ordering forms and publications. Taxslayer 2011 Tax questions. Taxslayer 2011 Useful Items - You may want to see: What's New For purposes of the net investment income tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). Taxslayer 2011 However, these distributions are taken into account when determining the modified adjusted gross income threshold. Taxslayer 2011 Distributions from a nonqualified retirement plan are included in net investment income. Taxslayer 2011 See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Taxslayer 2011 Reminders Future developments. Taxslayer 2011  For the latest information about developments related to Publication 575, such as legislation enacted after it was published, go to www. Taxslayer 2011 irs. Taxslayer 2011 gov/pub575. Taxslayer 2011 In-plan Roth rollovers. Taxslayer 2011   Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. Taxslayer 2011 For more information, see In-plan Roth rollovers under Rollovers, discussed later. Taxslayer 2011 Photographs of missing children. Taxslayer 2011  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Taxslayer 2011 Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Taxslayer 2011 You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Taxslayer 2011 Introduction This publication discusses the tax treatment of distributions you receive from pension and annuity plans and also shows you how to report the income on your federal income tax return. Taxslayer 2011 How these distributions are taxed depends on whether they are periodic payments (amounts received as an annuity) that are paid at regular intervals over several years or nonperiodic payments (amounts not received as an annuity). Taxslayer 2011 What is covered in this publication?   This publication contains information that you need to understand the following topics. Taxslayer 2011 How to figure the tax-free part of periodic payments under a pension or annuity plan, including using a simple worksheet for payments under a qualified plan. Taxslayer 2011 How to figure the tax-free part of nonperiodic payments from qualified and nonqualified plans, and how to use the optional methods to figure the tax on lump-sum distributions from pension, stock bonus, and profit-sharing plans. Taxslayer 2011 How to roll over certain distributions from a retirement plan into another retirement plan or IRA. Taxslayer 2011 How to report disability payments, and how beneficiaries and survivors of employees and retirees must report benefits paid to them. Taxslayer 2011 How to report railroad retirement benefits. Taxslayer 2011 When additional taxes on certain distributions may apply (including the tax on early distributions and the tax on excess accumulation). Taxslayer 2011 For additional information on how to report pension or annuity payments on your federal income tax return, be sure to review the instructions on the back of Copies B, C, and 2 of the Form 1099-R that you received and the instructions for Form 1040, lines 16a and 16b (Form 1040A, lines 12a and 12b or Form 1040NR, lines 17a and 17b). Taxslayer 2011 A “corrected” Form 1099-R replaces the corresponding original Form 1099-R if the original Form 1099-R contained an error. Taxslayer 2011 Make sure you use the amounts shown on the corrected Form 1099-R when reporting information on your tax return. Taxslayer 2011 What is not covered in this publication?   The following topics are not discussed in this publication. Taxslayer 2011 The General Rule. Taxslayer 2011   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). Taxslayer 2011 For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. Taxslayer 2011 Although this publication will help you determine whether you can use the General Rule, it will not help you use it to determine the tax treatment of your pension or annuity income. Taxslayer 2011 For that and other information on the General Rule, see Publication 939, General Rule for Pensions and Annuities. Taxslayer 2011 Individual retirement arrangements (IRAs). Taxslayer 2011   Information on the tax treatment of amounts you receive from an IRA is in Publication 590, Individual Retirement Arrangements (IRAs). Taxslayer 2011 Civil service retirement benefits. Taxslayer 2011   If you are retired from the federal government (regular, phased, or disability retirement) or are the survivor or beneficiary of a federal employee or retiree who died, get Publication 721, Tax Guide to U. Taxslayer 2011 S. Taxslayer 2011 Civil Service Retirement Benefits. Taxslayer 2011 Publication 721 covers the tax treatment of federal retirement benefits, primarily those paid under the Civil Service Retirement System (CSRS) or the Federal Employees' Retirement System (FERS). Taxslayer 2011 It also covers benefits paid from the Thrift Savings Plan (TSP). Taxslayer 2011 Social security and equivalent tier 1 railroad retirement benefits. Taxslayer 2011   For information about the tax treatment of these benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Taxslayer 2011 However, this publication (575) covers the tax treatment of the non-social security equivalent benefit portion of tier 1 railroad retirement benefits, tier 2 benefits, vested dual benefits, and supplemental annuity benefits paid by the U. Taxslayer 2011 S. Taxslayer 2011 Railroad Retirement Board. Taxslayer 2011 Tax-sheltered annuity plans (403(b) plans). Taxslayer 2011   If you work for a public school or certain tax-exempt organizations, you may be eligible to participate in a 403(b) retirement plan offered by your employer. Taxslayer 2011 Although this publication covers the treatment of benefits under 403(b) plans and discusses in-plan Roth rollovers from 403(b) plans to designated Roth accounts, it does not cover other tax provisions that apply to these plans. Taxslayer 2011 For that and other information on 403(b) plans, see Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations. Taxslayer 2011 Comments and suggestions. Taxslayer 2011   We welcome your comments about this publication and your suggestions for future editions. Taxslayer 2011   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Taxslayer 2011 NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Taxslayer 2011 Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Taxslayer 2011   You can send your comments from www. Taxslayer 2011 irs. Taxslayer 2011 gov/formspubs/. Taxslayer 2011 Click on “More Information” and then on “Comment on Tax Forms and Publications. Taxslayer 2011 ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Taxslayer 2011 Ordering forms and publications. Taxslayer 2011   Visit www. Taxslayer 2011 irs. Taxslayer 2011 gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Taxslayer 2011 Internal Revenue Service 1201 N. Taxslayer 2011 Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Taxslayer 2011   If you have a tax question, check the information available on IRS. Taxslayer 2011 gov or call 1-800-829-1040. Taxslayer 2011 We cannot answer tax questions sent to either of the above addresses. Taxslayer 2011 Useful Items - You may want to see: Publication 524 Credit for the Elderly or the Disabled 525 Taxable and Nontaxable Income 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) 571 Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations 590 Individual Retirement Arrangements (IRAs) 721 Tax Guide to U. Taxslayer 2011 S. Taxslayer 2011 Civil Service Retirement Benefits 915 Social Security and Equivalent Railroad Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Taxslayer 2011 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts See How To Get Tax Help near the end of this publication for information about getting publications and forms. Taxslayer 2011 Prev  Up  Next   Home   More Online Publications