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Turbotax 1040x

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Turbotax 1040x

Turbotax 1040x 16. Turbotax 1040x   Reporting Gains and Losses Table of Contents What's New Introduction Useful Items - You may want to see: Reporting Capital Gains and Losses Exception 1. Turbotax 1040x Exception 2. Turbotax 1040x File Form 1099-B or Form 1099-S with the IRS. Turbotax 1040x Capital Losses Capital Gain Tax Rates What's New Maximum capital gain rates. Turbotax 1040x . Turbotax 1040x  For 2013, the maximum capital gain rates are 0%, 15%, 20%, 25%, and 28%. Turbotax 1040x Introduction This chapter discusses how to report capital gains and losses from sales, exchanges, and other dispositions of investment property on Form 8949 and Schedule D (Form 1040). Turbotax 1040x The discussion includes the following topics. Turbotax 1040x How to report short-term gains and losses. Turbotax 1040x How to report long-term gains and losses. Turbotax 1040x How to figure capital loss carryovers. Turbotax 1040x How to figure your tax on a net capital gain. Turbotax 1040x If you sell or otherwise dispose of property used in a trade or business or for the production of income, see Publication 544, Sales and Other Dispositions of Assets, before completing Schedule D (Form 1040). Turbotax 1040x Useful Items - You may want to see: Publication 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income 8582 Passive Activity Loss Limitations 8949 Sales and Other Dispositions of Capital Assets Schedule D (Form 1040) Capital Gains and Losses Reporting Capital Gains and Losses Generally, report capital gains and losses on Form 8949. Turbotax 1040x Complete Form 8949 before you complete line 1b, 2, 3, 8b, 9, or 10 of Schedule D (Form 1040). Turbotax 1040x Use Form 8949 to report: The sale or exchange of a capital asset not reported on another form or schedule; Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit; and Nonbusiness bad debts. Turbotax 1040x Use Schedule D (Form 1040): To figure the overall gain or loss from transactions reported on Form 8949; To report a gain from Form 6252 or Part I of Form 4797; To report a gain or loss from Form 4684, 6781, or 8824; To report capital gain distributions not reported directly on Form 1040 or Form 1040A; To report a capital loss carryover from the previous tax year to the current tax year; To report your share of a gain or (loss) from a partnership, S corporation, estate, or trust; To report transactions reported to you on a Form 1099-B (or substitute statement) showing basis was reported to the IRS and to which none of the Form 8949 adjustments or codes apply; and To report undistributed long-term capital gains from Form 2439. Turbotax 1040x On Form 8949, enter all sales and exchanges of capital assets, including stocks, bonds, etc. Turbotax 1040x , and real estate (if not reported on Form 4684, 4797, 6252, 6781, 8824, or line 1a or 8a of Schedule D). Turbotax 1040x Include these transactions even if you did not receive a Form 1099-B or 1099-S (or substitute statement) for the transaction. Turbotax 1040x Report short-term gains or losses in Part I. Turbotax 1040x Report long-term gains or losses in Part II. Turbotax 1040x Use as many Forms 8949 as you need. Turbotax 1040x Exceptions to filing Form 8949 and Schedule D (Form 1040). Turbotax 1040x   There are certain situations where you may not have to file Form 8949 and/or Schedule D (Form 1040). Turbotax 1040x Exception 1. Turbotax 1040x   You do not have to file Form 8949 or Schedule D (Form 1040) if you have no capital losses and your only capital gains are capital gain distributions from Form(s) 1099-DIV, box 2a (or substitute statements). Turbotax 1040x (If any Form(s) 1099-DIV (or substitute statements) you receive have an amount in box 2b (unrecaptured section 1250 gain), box 2c (section 1202 gain), or box 2d (collectibles (28%) gain), you do not qualify for this exception. Turbotax 1040x ) If you qualify for this exception, report your capital gain distributions directly on line 13 of Form 1040 (and check the box on line 13). Turbotax 1040x Also use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax. Turbotax 1040x You can report your capital gain distributions on line 10 of Form 1040A, instead of on Form 1040, if none of the Forms 1099-DIV (or substitute statements) you received have an amount in box 2b, 2c, or 2d, and you do not have to file Form 1040. Turbotax 1040x Exception 2. Turbotax 1040x   You must file Schedule D (Form 1040), but generally do not have to file Form 8949, if Exception 1 does not apply and your only capital gains and losses are: Capital gain distributions; A capital loss carryover; A gain from Form 2439 or 6252 or Part I of Form 4797; A gain or loss from Form 4684, 6781, or 8824; A gain or loss from a partnership, S corporation, estate, or trust; or Gains and losses from transactions for which you received a Form 1099-B (or substitute statement) that shows the basis was reported to the IRS and for which you do not need to make any adjustments in column (g) of Form 8949 or enter any codes in column (f) of Form 8949. Turbotax 1040x Installment sales. Turbotax 1040x   You cannot use the installment method to report a gain from the sale of stock or securities traded on an established securities market. Turbotax 1040x You must report the entire gain in the year of sale (the year in which the trade date occurs). Turbotax 1040x Passive activity gains and losses. Turbotax 1040x    If you have gains or losses from a passive activity, you may also have to report them on Form 8582. Turbotax 1040x In some cases, the loss may be limited under the passive activity rules. Turbotax 1040x Refer to Form 8582 and its instructions for more information about reporting capital gains and losses from a passive activity. Turbotax 1040x Form 1099-B transactions. Turbotax 1040x   If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive Form 1099-B or substitute statement from the broker. Turbotax 1040x Use the Form 1099-B or the substitute statement to complete Form 8949. Turbotax 1040x If you sold a covered security in 2013, your broker should send you a Form 1099-B (or substitute statement) that shows your basis. Turbotax 1040x This will help you complete Form 8949. Turbotax 1040x Generally, a covered security is a security you acquired after 2010. Turbotax 1040x   Report the gross proceeds shown in box 2a of Form 1099-B as the sales price in column (d) of either Part I or Part II of Form 8949, whichever applies. Turbotax 1040x However, if the broker advises you, in box 2a of Form 1099-B, that gross proceeds (sales price) less commissions and option premiums were reported to the IRS, enter that net sales price in column (d) of either Part I or Part II of Form 8949, whichever applies. Turbotax 1040x    Include in column (g) any expense of sale, such as broker's fees, commissions, state and local transfer taxes, and option premiums, unless you reported the net sales price in column (d). Turbotax 1040x If you include an expense of sale in column (g), enter “E” in column (f). Turbotax 1040x Form 1099-CAP transactions. Turbotax 1040x   If a corporation in which you own stock has had a change in control or a substantial change in capital structure, you should receive Form 1099-CAP or a substitute statement from the corporation. Turbotax 1040x Use the Form 1099-CAP or substitute statement to fill in Form 8949. Turbotax 1040x If your computations show that you would have a loss because of the change, do not enter any amounts on Form 8949 or Schedule D (Form 1040). Turbotax 1040x You cannot claim a loss on Schedule D (Form 1040) as a result of this transaction. Turbotax 1040x   Report the aggregate amount received shown in box 2 of Form 1099-CAP as the sales price in column (d) of either Part I or Part II of Form 8949, whichever applies. Turbotax 1040x Form 1099-S transactions. Turbotax 1040x   If you sold or traded reportable real estate, you generally should receive from the real estate reporting person a Form 1099-S showing the gross proceeds. Turbotax 1040x    “Reportable real estate” is defined as any present or future ownership interest in any of the following: Improved or unimproved land, including air space; Inherently permanent structures, including any residential, commercial, or industrial building; A condominium unit and its accessory fixtures and common elements, including land; and Stock in a cooperative housing corporation (as defined in section 216 of the Internal Revenue Code). Turbotax 1040x   A “real estate reporting person” could include the buyer's attorney, your attorney, the title or escrow company, a mortgage lender, your broker, the buyer's broker, or the person acquiring the biggest interest in the property. Turbotax 1040x   Your Form 1099-S will show the gross proceeds from the sale or exchange in box 2. Turbotax 1040x See the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040) for how to report these transactions and include them in Part I or Part II of Form 8949 as appropriate. Turbotax 1040x However, report like-kind exchanges on Form 8824 instead. Turbotax 1040x   It is unlawful for any real estate reporting person to separately charge you for complying with the requirement to file Form 1099-S. Turbotax 1040x Nominees. Turbotax 1040x   If you receive gross proceeds as a nominee (that is, the gross proceeds are in your name but actually belong to someone else), see the Instructions for Form 8949 for how to report these amounts on Form 8949. Turbotax 1040x File Form 1099-B or Form 1099-S with the IRS. Turbotax 1040x   If you received gross proceeds as a nominee in 2013, you must file a Form 1099-B or Form 1099-S for those proceeds with the IRS. Turbotax 1040x Send the Form 1099-B or Form 1099-S with a Form 1096, Annual Summary and Transmittal of U. Turbotax 1040x S. Turbotax 1040x Information Returns, to your Internal Revenue Service Center by February 28, 2014 (March 31, 2014, if you file Form 1099-B or Form 1099-S electronically). Turbotax 1040x Give the actual owner of the proceeds Copy B of the Form 1099-B or Form 1099-S by February 18, 2014. Turbotax 1040x On Form 1099-B, you should be listed as the “Payer. Turbotax 1040x ” The other owner should be listed as the “Recipient. Turbotax 1040x ” On Form 1099-S, you should be listed as the “Filer. Turbotax 1040x ” The other owner should be listed as the “Transferor. Turbotax 1040x ” You do not have to file a Form 1099-B or Form 1099-S to show proceeds for your spouse. Turbotax 1040x For more information about the reporting requirements and the penalties for failure to file (or furnish) certain information returns, see the General Instructions for Certain Information Returns. Turbotax 1040x If you are filing electronically see Publication 1220. Turbotax 1040x Sale of property bought at various times. Turbotax 1040x   If you sell a block of stock or other property that you bought at various times, report the short-term gain or loss from the sale on one row in Part I of Form 8949, and the long-term gain or loss on one row in Part II of Form 8949. Turbotax 1040x Write “Various” in column (b) for the “Date acquired. Turbotax 1040x ” Sale expenses. Turbotax 1040x    On Form 8949, include in column (g) any expense of sale, such as broker's fees, commissions, state and local transfer taxes, and option premiums, unless you reported the net sales price in column (d). Turbotax 1040x If you include an expense of sale in column (g), enter “E” in column (f). Turbotax 1040x   For more information about adjustments to basis, see chapter 13. Turbotax 1040x Short-term gains and losses. Turbotax 1040x   Capital gain or loss on the sale or trade of investment property held 1 year or less is a short-term capital gain or loss. Turbotax 1040x You report it in Part I of Form 8949. Turbotax 1040x   You combine your share of short-term capital gain or loss from partnerships, S corporations, estates, and trusts, and any short-term capital loss carryover, with your other short-term capital gains and losses to figure your net short-term capital gain or loss on line 7 of Schedule D (Form 1040). Turbotax 1040x Long-term gains and losses. Turbotax 1040x    A capital gain or loss on the sale or trade of investment property held more than 1 year is a long-term capital gain or loss. Turbotax 1040x You report it in Part II of Form 8949. Turbotax 1040x   You report the following in Part II of Schedule D (Form 1040): Undistributed long-term capital gains from a mutual fund (or other regulated investment company) or real estate investment trust (REIT); Your share of long-term capital gains or losses from partnerships, S corporations, estates, and trusts; All capital gain distributions from mutual funds and REITs not reported directly on line 10 of Form 1040A or line 13 of Form 1040; and Long-term capital loss carryovers. Turbotax 1040x    The result after combining these items with your other long-term capital gains and losses is your net long-term capital gain or loss (Schedule D (Form 1040), line 15). Turbotax 1040x Total net gain or loss. Turbotax 1040x   To figure your total net gain or loss, combine your net short-term capital gain or loss (Schedule D (Form 1040), line 7) with your net long-term capital gain or loss (Schedule D (Form 1040), line 15). Turbotax 1040x Enter the result on Schedule D (Form 1040), Part III, line 16. Turbotax 1040x If your losses are more than your gains, see Capital Losses , next. Turbotax 1040x If both lines 15 and 16 of your Schedule D (Form 1040) are gains and your taxable income on your Form 1040 is more than zero, see Capital Gain Tax Rates , later. Turbotax 1040x Capital Losses If your capital losses are more than your capital gains, you can claim a capital loss deduction. Turbotax 1040x Report the amount of the deduction on line 13 of Form 1040, in parentheses. Turbotax 1040x Limit on deduction. Turbotax 1040x   Your allowable capital loss deduction, figured on Schedule D (Form 1040), is the lesser of: $3,000 ($1,500 if you are married and file a separate return); or Your total net loss as shown on line 16 of Schedule D (Form 1040). Turbotax 1040x   You can use your total net loss to reduce your income dollar for dollar, up to the $3,000 limit. Turbotax 1040x Capital loss carryover. Turbotax 1040x   If you have a total net loss on line 16 of Schedule D (Form 1040) that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. Turbotax 1040x If part of the loss is still unused, you can carry it over to later years until it is completely used up. Turbotax 1040x   When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it and whether or not you filed a return for the current year. Turbotax 1040x   When you carry over a loss, it remains long term or short term. Turbotax 1040x A long-term capital loss you carry over to the next tax year will reduce that year's long-term capital gains before it reduces that year's short-term capital gains. Turbotax 1040x Figuring your carryover. Turbotax 1040x   The amount of your capital loss carryover is the amount of your total net loss that is more than the lesser of: Your allowable capital loss deduction for the year; or Your taxable income increased by your allowable capital loss deduction for the year and your deduction for personal exemptions. Turbotax 1040x   If your deductions are more than your gross income for the tax year, use your negative taxable income in computing the amount in item (2). Turbotax 1040x    Complete the Capital Loss Carryover Worksheet in the Instructions for Schedule D or Publication 550 to determine the part of your capital loss that you can carry over. Turbotax 1040x Example. Turbotax 1040x Bob and Gloria sold securities in 2013. Turbotax 1040x The sales resulted in a capital loss of $7,000. Turbotax 1040x They had no other capital transactions. Turbotax 1040x Their taxable income was $26,000. Turbotax 1040x On their joint 2013 return, they can deduct $3,000. Turbotax 1040x The unused part of the loss, $4,000 ($7,000 − $3,000), can be carried over to 2014. Turbotax 1040x If their capital loss had been $2,000, their capital loss deduction would have been $2,000. Turbotax 1040x They would have no carryover. Turbotax 1040x Use short-term losses first. Turbotax 1040x   When you figure your capital loss carryover, use your short-term capital losses first, even if you incurred them after a long-term capital loss. Turbotax 1040x If you have not reached the limit on the capital loss deduction after using the short-term capital losses, use the long-term capital losses until you reach the limit. Turbotax 1040x Decedent's capital loss. Turbotax 1040x    A capital loss sustained by a decedent during his or her last tax year (or carried over to that year from an earlier year) can be deducted only on the final income tax return filed for the decedent. Turbotax 1040x The capital loss limits discussed earlier still apply in this situation. Turbotax 1040x The decedent's estate cannot deduct any of the loss or carry it over to following years. Turbotax 1040x Joint and separate returns. Turbotax 1040x   If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. Turbotax 1040x However, if you and your spouse once filed a joint return and are now filing separate returns, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss. Turbotax 1040x Capital Gain Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Turbotax 1040x These lower rates are called the maximum capital gain rates. Turbotax 1040x The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Turbotax 1040x For 2013, the maximum capital gain rates are 0%, 15%, 20%, 25%, and 28%. Turbotax 1040x See Table 16-1 for details. Turbotax 1040x If you figure your tax using the maximum capital gain rate and the regular tax computation results in a lower tax, the regular tax computation applies. Turbotax 1040x Example. Turbotax 1040x All of your net capital gain is from selling collectibles, so the capital gain rate would be 28%. Turbotax 1040x If you are otherwise subject to a rate lower than 28%, the 28% rate does not apply. Turbotax 1040x Investment interest deducted. Turbotax 1040x   If you claim a deduction for investment interest, you may have to reduce the amount of your net capital gain that is eligible for the capital gain tax rates. Turbotax 1040x Reduce it by the amount of the net capital gain you choose to include in investment income when figuring the limit on your investment interest deduction. Turbotax 1040x This is done on the Schedule D Tax Worksheet or the Qualified Dividends and Capital Gain Tax Worksheet. Turbotax 1040x For more information about the limit on investment interest, see Interest Expenses in chapter 3 of Publication 550. Turbotax 1040x Table 16-1. Turbotax 1040x What Is Your Maximum Capital Gain Rate? IF your net capital gain is from . Turbotax 1040x . Turbotax 1040x . Turbotax 1040x THEN your  maximum capital gain rate is . Turbotax 1040x . Turbotax 1040x . Turbotax 1040x a collectibles gain 28% an eligible gain on qualified small business stock minus the section 1202 exclusion 28% an unrecaptured section 1250 gain 25% other gain1 and the regular tax rate that would apply is 39. Turbotax 1040x 6% 20% other gain1 and the regular tax rate that would apply is 25%, 28%, 33%, or 35% 15% other gain1 and the regular tax rate that would apply is 10% or 15% 0% 1 Other gain means any gain that is not collectibles gain, gain on qualified small business stock, or unrecaptured section 1250 gain. Turbotax 1040x     Collectibles gain or loss. Turbotax 1040x   This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year. Turbotax 1040x   Collectibles gain includes gain from sale of an interest in a partnership, S corporation, or trust due to unrealized appreciation of collectibles. Turbotax 1040x Gain on qualified small business stock. Turbotax 1040x    If you realized a gain from qualified small business stock that you held more than 5 years, you generally can exclude some or all of your gain under section 1202. Turbotax 1040x The eligible gain minus your section 1202 exclusion is a 28% rate gain. Turbotax 1040x See Gains on Qualified Small Business Stock in chapter 4 of Publication 550. Turbotax 1040x Unrecaptured section 1250 gain. Turbotax 1040x    Generally, this is any part of your capital gain from selling section 1250 property (real property) that is due to depreciation (but not more than your net section 1231 gain), reduced by any net loss in the 28% group. Turbotax 1040x Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions to figure your unrecaptured section 1250 gain. Turbotax 1040x For more information about section 1250 property and section 1231 gain, see chapter 3 of Publication 544. Turbotax 1040x Tax computation using maximum capital gain rates. Turbotax 1040x   Use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet (whichever applies) to figure your tax if you have qualified dividends or net capital gain. Turbotax 1040x You have net capital gain if Schedule D (Form 1040), lines 15 and 16, are both gains. Turbotax 1040x Schedule D Tax Worksheet. Turbotax 1040x   Use the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions to figure your tax if: You have to file Schedule D (Form 1040); and Schedule D (Form 1040), line 18 (28% rate gain) or line 19 (unrecaptured section 1250 gain), is more than zero. Turbotax 1040x Qualified Dividends and Capital Gain Tax Worksheet. Turbotax 1040x   If you do not have to use the Schedule D Tax Worksheet (as explained above) and any of the following apply, use the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040 or Form 1040A (whichever you file) to figure your tax. Turbotax 1040x You received qualified dividends. Turbotax 1040x (See Qualified Dividends in chapter 8. Turbotax 1040x ) You do not have to file Schedule D (Form 1040) and you received capital gain distributions. Turbotax 1040x (See Exceptions to filing Form 8949 and Schedule D (Form 1040) , earlier. Turbotax 1040x ) Schedule D (Form 1040), lines 15 and 16, are both more than zero. Turbotax 1040x Alternative minimum tax. Turbotax 1040x   These capital gain rates are also used in figuring alternative minimum tax. Turbotax 1040x Prev  Up  Next   Home   More Online Publications
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Understanding your CP2501 Notice

You need to contact us. We've received information not reported on your tax return.


What you need to do

  • Read your notice carefully — it explains the information we received.
  • Complete the notice's response form whether or not the information is right or wrong.

You may want to...

  • Contact the business or person reporting the information if it is wrong. Ask them to correct it.
  • Order a transcript of your return.
  • Make sure your earlier returns don't have the same mistake.
  • Fill out the section on the response form to allow someone (such as an accountant) to contact us on your behalf.
  • Contact us with any unanswered questions you have.
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Answers to Common Questions

Is the notice a bill?
No. It informs you about the information we've received.

What do I need to do?
Complete the notice's response form.

What do I do if the information is wrong?
The response form has instructions on what to do if the new information is wrong. You also may want to contact whoever reported the information and ask them to correct it.

I want to check a copy of my original return. I don't have one. How can I get one?
You can order a transcript of your return. You also can get one by completing and sending us a Form 4506-T, Request for Transcript of Tax Return.

I don't want a transcript of my return. I want a copy. How can I get one?
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The information is wrong because someone else is using my name and Social Security number. What can I do?
You can visit our Identity theft information to find out more about what you can do. You also should call us and let us know.

Why did it take you so long to contact me about this matter?
Our computer systems match the information you report on your tax return with information reported by employers, banks, businesses, and others. This matching takes several months to complete.


Tips for next year

You can avoid future problems by:

  • keeping accurate and full records
  • waiting until you get all of your income statements to file your tax return
  • checking the records you get from your employer, mortgage company, bank, or other sources of income (W-2s, 1098s, 1099s, etc.) to make sure they're correct
  • including all your income on your tax return
  • following the instructions on how to report income, expenses and deductions
  • filing an amended tax return for any information you receive after you've filed your return

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about how to file electronically.

Page Last Reviewed or Updated: 28-Feb-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Turbotax 1040x

Turbotax 1040x 1. Turbotax 1040x   Overview of Depreciation Table of Contents Introduction Useful Items - You may want to see: What Property Can Be Depreciated?Property You Own Property Used in Your Business or Income-Producing Activity Property Having a Determinable Useful Life Property Lasting More Than One Year What Property Cannot Be Depreciated?Land Excepted Property When Does Depreciation Begin and End?Placed in Service Idle Property Cost or Other Basis Fully Recovered Retired From Service What Method Can You Use To Depreciate Your Property?Property You Placed in Service Before 1987 Property Owned or Used in 1986 Intangible Property Corporate or Partnership Property Acquired in a Nontaxable Transfer Election To Exclude Property From MACRS What Is the Basis of Your Depreciable Property?Cost as Basis Other Basis Adjusted Basis How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions?Filing an Amended Return Changing Your Accounting Method Introduction Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. Turbotax 1040x It is an allowance for the wear and tear, deterioration, or obsolescence of the property. Turbotax 1040x This chapter discusses the general rules for depreciating property and answers the following questions. Turbotax 1040x What property can be depreciated? What property cannot be depreciated? When does depreciation begin and end? What method can you use to depreciate your property? What is the basis of your depreciable property? How do you treat repairs and improvements? Do you have to file Form 4562? How do you correct depreciation deductions? Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Turbotax 1040x What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. Turbotax 1040x You also can depreciate certain intangible property, such as patents, copyrights, and computer software. Turbotax 1040x To be depreciable, the property must meet all the following requirements. Turbotax 1040x It must be property you own. Turbotax 1040x It must be used in your business or income-producing activity. Turbotax 1040x It must have a determinable useful life. Turbotax 1040x It must be expected to last more than one year. Turbotax 1040x The following discussions provide information about these requirements. Turbotax 1040x Property You Own To claim depreciation, you usually must be the owner of the property. Turbotax 1040x You are considered as owning property even if it is subject to a debt. Turbotax 1040x Example 1. Turbotax 1040x You made a down payment to purchase rental property and assumed the previous owner's mortgage. Turbotax 1040x You own the property and you can depreciate it. Turbotax 1040x Example 2. Turbotax 1040x You bought a new van that you will use only for your courier business. Turbotax 1040x You will be making payments on the van over the next 5 years. Turbotax 1040x You own the van and you can depreciate it. Turbotax 1040x Leased property. Turbotax 1040x   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). Turbotax 1040x This means you bear the burden of exhaustion of the capital investment in the property. Turbotax 1040x Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Turbotax 1040x You can, however, depreciate any capital improvements you make to the property. Turbotax 1040x See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. Turbotax 1040x   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Turbotax 1040x However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property. Turbotax 1040x Incidents of ownership. Turbotax 1040x   Incidents of ownership in property include the following. Turbotax 1040x The legal title to the property. Turbotax 1040x The legal obligation to pay for the property. Turbotax 1040x The responsibility to pay maintenance and operating expenses. Turbotax 1040x The duty to pay any taxes on the property. Turbotax 1040x The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. Turbotax 1040x Life tenant. Turbotax 1040x   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Turbotax 1040x However, see Certain term interests in property under Excepted Property, later. Turbotax 1040x Cooperative apartments. Turbotax 1040x   If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment. Turbotax 1040x   Figure your depreciation deduction as follows. Turbotax 1040x Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. Turbotax 1040x If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Turbotax 1040x Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. Turbotax 1040x Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Turbotax 1040x Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Turbotax 1040x Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Turbotax 1040x Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. Turbotax 1040x Multiply the result of (2) by the percentage you figured in (3). Turbotax 1040x This is your depreciation on the stock. Turbotax 1040x   Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or income-producing property. Turbotax 1040x You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income. Turbotax 1040x Example. Turbotax 1040x You figure your share of the cooperative housing corporation's depreciation to be $30,000. Turbotax 1040x Your adjusted basis in the stock of the corporation is $50,000. Turbotax 1040x You use one half of your apartment solely for business purposes. Turbotax 1040x Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). Turbotax 1040x Change to business use. Turbotax 1040x   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. Turbotax 1040x The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Turbotax 1040x The fair market value of the property on the date you change your apartment to business use. Turbotax 1040x This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Turbotax 1040x The corporation's adjusted basis in the property on that date. Turbotax 1040x Do not subtract depreciation when figuring the corporation's adjusted basis. Turbotax 1040x   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. Turbotax 1040x The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Turbotax 1040x   For a discussion of fair market value and adjusted basis, see Publication 551. Turbotax 1040x Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Turbotax 1040x If you use property to produce income (investment use), the income must be taxable. Turbotax 1040x You cannot depreciate property that you use solely for personal activities. Turbotax 1040x Partial business or investment use. Turbotax 1040x   If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use. Turbotax 1040x For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities. Turbotax 1040x    You must keep records showing the business, investment, and personal use of your property. Turbotax 1040x For more information on the records you must keep for listed property, such as a car, see What Records Must Be Kept in chapter 5. Turbotax 1040x    Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. Turbotax 1040x For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. Turbotax 1040x Office in the home. Turbotax 1040x   If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. Turbotax 1040x For information about depreciating your home office, see Publication 587. Turbotax 1040x Inventory. Turbotax 1040x   You cannot depreciate inventory because it is not held for use in your business. Turbotax 1040x Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Turbotax 1040x   If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory. Turbotax 1040x See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. Turbotax 1040x   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. Turbotax 1040x If it is unclear, examine carefully all the facts in the operation of the particular business. Turbotax 1040x The following example shows how a careful examination of the facts in two similar situations results in different conclusions. Turbotax 1040x Example. Turbotax 1040x Maple Corporation is in the business of leasing cars. Turbotax 1040x At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. Turbotax 1040x Maple does not have a showroom, used car lot, or individuals to sell the cars. Turbotax 1040x Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. Turbotax 1040x Maple can depreciate the leased cars because the cars are not held primarily for sale to customers in the ordinary course of business, but are leased. Turbotax 1040x If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit is intended, the cars are treated as inventory and are not depreciable property. Turbotax 1040x In this situation, the cars are held primarily for sale to customers in the ordinary course of business. Turbotax 1040x Containers. Turbotax 1040x   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. Turbotax 1040x However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. Turbotax 1040x They qualify as property used in your business. Turbotax 1040x Title to the containers does not pass to the buyer. Turbotax 1040x   To determine if these requirements are met, consider the following questions. Turbotax 1040x Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title? Does your invoice treat the containers as separate items? Do any of your records state your basis in the containers? Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Turbotax 1040x This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Turbotax 1040x Property Lasting More Than One Year To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service. Turbotax 1040x Example. Turbotax 1040x You maintain a library for use in your profession. Turbotax 1040x You can depreciate it. Turbotax 1040x However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. Turbotax 1040x Instead, you deduct their cost as a business expense. Turbotax 1040x What Property Cannot Be Depreciated? Certain property cannot be depreciated. Turbotax 1040x This includes land and certain excepted property. Turbotax 1040x Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. Turbotax 1040x The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Turbotax 1040x Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Turbotax 1040x These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Turbotax 1040x Example. Turbotax 1040x You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Turbotax 1040x Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. Turbotax 1040x If you replace the building, you would have to destroy the bushes and trees right next to it. Turbotax 1040x These bushes and trees are closely associated with the building, so they have a determinable useful life. Turbotax 1040x Therefore, you can depreciate them. Turbotax 1040x Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Turbotax 1040x Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. Turbotax 1040x Property placed in service and disposed of in the same year. Turbotax 1040x Determining when property is placed in service is explained later. Turbotax 1040x Equipment used to build capital improvements. Turbotax 1040x You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Turbotax 1040x See Uniform Capitalization Rules in Publication 551. Turbotax 1040x Section 197 intangibles. Turbotax 1040x You must amortize these costs. Turbotax 1040x Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. Turbotax 1040x Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. Turbotax 1040x See Intangible Property , later. Turbotax 1040x Certain term interests. Turbotax 1040x Certain term interests in property. Turbotax 1040x   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Turbotax 1040x A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust. Turbotax 1040x Related persons. Turbotax 1040x   For a description of related persons, see Related Persons, later. Turbotax 1040x For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. Turbotax 1040x Basis adjustments. Turbotax 1040x   If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed. Turbotax 1040x   If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest holder. Turbotax 1040x However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. Turbotax 1040x The term interest is held by an organization exempt from tax. Turbotax 1040x The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States. Turbotax 1040x Exceptions. Turbotax 1040x   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Turbotax 1040x They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser. Turbotax 1040x When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Turbotax 1040x You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Turbotax 1040x Placed in Service You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Turbotax 1040x Even if you are not using the property, it is in service when it is ready and available for its specific use. Turbotax 1040x Example 1. Turbotax 1040x Donald Steep bought a machine for his business. Turbotax 1040x The machine was delivered last year. Turbotax 1040x However, it was not installed and operational until this year. Turbotax 1040x It is considered placed in service this year. Turbotax 1040x If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year. Turbotax 1040x Example 2. Turbotax 1040x On April 6, Sue Thorn bought a house to use as residential rental property. Turbotax 1040x She made several repairs and had it ready for rent on July 5. Turbotax 1040x At that time, she began to advertise it for rent in the local newspaper. Turbotax 1040x The house is considered placed in service in July when it was ready and available for rent. Turbotax 1040x She can begin to depreciate it in July. Turbotax 1040x Example 3. Turbotax 1040x James Elm is a building contractor who specializes in constructing office buildings. Turbotax 1040x He bought a truck last year that had to be modified to lift materials to second-story levels. Turbotax 1040x The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. Turbotax 1040x The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought. Turbotax 1040x Conversion to business use. Turbotax 1040x   If you place property in service in a personal activity, you cannot claim depreciation. Turbotax 1040x However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. Turbotax 1040x You place the property in service in the business or income-producing activity on the date of the change. Turbotax 1040x Example. Turbotax 1040x You bought a home and used it as your personal home several years before you converted it to rental property. Turbotax 1040x Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Turbotax 1040x You can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time. Turbotax 1040x Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). Turbotax 1040x For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Turbotax 1040x Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Turbotax 1040x You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Turbotax 1040x See What Is the Basis of Your Depreciable Property , later. Turbotax 1040x Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Turbotax 1040x You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Turbotax 1040x You sell or exchange the property. Turbotax 1040x You convert the property to personal use. Turbotax 1040x You abandon the property. Turbotax 1040x You transfer the property to a supplies or scrap account. Turbotax 1040x The property is destroyed. Turbotax 1040x If you included the property in a general asset account, see How Do You Use General Asset Accounts in chapter 4 for the rules that apply when you dispose of that property. Turbotax 1040x What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. Turbotax 1040x MACRS is discussed in chapter 4. Turbotax 1040x You cannot use MACRS to depreciate the following property. Turbotax 1040x Property you placed in service before 1987. Turbotax 1040x Certain property owned or used in 1986. Turbotax 1040x Intangible property. Turbotax 1040x Films, video tapes, and recordings. Turbotax 1040x Certain corporate or partnership property acquired in a nontaxable transfer. Turbotax 1040x Property you elected to exclude from MACRS. Turbotax 1040x The following discussions describe the property listed above and explain what depreciation method should be used. Turbotax 1040x Property You Placed in Service Before 1987 You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). Turbotax 1040x Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. Turbotax 1040x For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. Turbotax 1040x Use of real property changed. Turbotax 1040x   You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Turbotax 1040x Improvements made after 1986. Turbotax 1040x   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Turbotax 1040x Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Turbotax 1040x For more information about improvements, see How Do You Treat Repairs and Improvements , later and Additions and Improvements under Which Recovery Period Applies in chapter 4. Turbotax 1040x Property Owned or Used in 1986 You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. Turbotax 1040x If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. Turbotax 1040x For the following discussions, do not treat property as owned before you placed it in service. Turbotax 1040x If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. Turbotax 1040x Personal property. Turbotax 1040x   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. Turbotax 1040x You or someone related to you owned or used the property in 1986. Turbotax 1040x You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change. Turbotax 1040x You lease the property to a person (or someone related to this person) who owned or used the property in 1986. Turbotax 1040x You acquired the property in a transaction in which: The user of the property did not change, and The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above. Turbotax 1040x Real property. Turbotax 1040x   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. Turbotax 1040x You or someone related to you owned the property in 1986. Turbotax 1040x You lease the property to a person who owned the property in 1986 (or someone related to that person). Turbotax 1040x You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. Turbotax 1040x MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. Turbotax 1040x It does not apply to the carried-over part of the basis. Turbotax 1040x Exceptions. Turbotax 1040x   The rules above do not apply to the following. Turbotax 1040x Residential rental property or nonresidential real property. Turbotax 1040x Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention. Turbotax 1040x For information on how to figure depreciation under ACRS, see Publication 534. Turbotax 1040x Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. Turbotax 1040x Related persons. Turbotax 1040x   For this purpose, the following are related persons. Turbotax 1040x An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. Turbotax 1040x A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. Turbotax 1040x Two corporations that are members of the same controlled group. Turbotax 1040x A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. Turbotax 1040x The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Turbotax 1040x The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Turbotax 1040x A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. Turbotax 1040x Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation. Turbotax 1040x A corporation and a partnership if the same persons own both of the following. Turbotax 1040x More than 10% of the value of the outstanding stock of the corporation. Turbotax 1040x More than 10% of the capital or profits interest in the partnership. Turbotax 1040x The executor and beneficiary of any estate. Turbotax 1040x A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. Turbotax 1040x Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. Turbotax 1040x The related person and a person who is engaged in trades or businesses under common control. Turbotax 1040x See section 52(a) and 52(b) of the Internal Revenue Code. Turbotax 1040x When to determine relationship. Turbotax 1040x   You must determine whether you are related to another person at the time you acquire the property. Turbotax 1040x   A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. Turbotax 1040x For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits. Turbotax 1040x Constructive ownership of stock or partnership interest. Turbotax 1040x   To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules. Turbotax 1040x Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Turbotax 1040x However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation. Turbotax 1040x An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. Turbotax 1040x An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner. Turbotax 1040x For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. Turbotax 1040x However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership interest. Turbotax 1040x Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. Turbotax 1040x However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). Turbotax 1040x You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated. Turbotax 1040x Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. Turbotax 1040x To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. Turbotax 1040x Subtract the salvage value, if any, from the adjusted basis. Turbotax 1040x The balance is the total depreciation you can take over the useful life of the property. Turbotax 1040x Divide the balance by the number of years in the useful life. Turbotax 1040x This gives you your yearly depreciation deduction. Turbotax 1040x Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. Turbotax 1040x If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Turbotax 1040x Example. Turbotax 1040x In April, Frank bought a patent for $5,100 that is not a section 197 intangible. Turbotax 1040x He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. Turbotax 1040x He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. Turbotax 1040x He only used the patent for 9 months during the first year, so he multiplies $300 by 9/12 to get his deduction of $225 for the first year. Turbotax 1040x Next year, Frank can deduct $300 for the full year. Turbotax 1040x Patents and copyrights. Turbotax 1040x   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. Turbotax 1040x The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. Turbotax 1040x However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis. Turbotax 1040x Computer software. Turbotax 1040x   Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business. Turbotax 1040x   However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Turbotax 1040x It is readily available for purchase by the general public. Turbotax 1040x It is subject to a nonexclusive license. Turbotax 1040x It has not been substantially modified. Turbotax 1040x   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. Turbotax 1040x If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. Turbotax 1040x    Tax-exempt use property subject to a lease. Turbotax 1040x   The useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), cannot be less than 125% of the lease term. Turbotax 1040x Certain created intangibles. Turbotax 1040x   You can amortize certain intangibles created on or after December 31, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. Turbotax 1040x For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. Turbotax 1040x   The following are not eligible. Turbotax 1040x Any intangible asset acquired from another person. Turbotax 1040x Created financial interests. Turbotax 1040x Any intangible asset that has a useful life that can be estimated with reasonable accuracy. Turbotax 1040x Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance. Turbotax 1040x Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. Turbotax 1040x   You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. Turbotax 1040x For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities. Turbotax 1040x Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. Turbotax 1040x Motion picture films or video tapes. Turbotax 1040x Sound recordings. Turbotax 1040x Copyrights. Turbotax 1040x Books. Turbotax 1040x Patents. Turbotax 1040x Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. Turbotax 1040x The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. Turbotax 1040x For more information, see section 167(g) of the Internal Revenue Code. Turbotax 1040x Films, video tapes, and recordings. Turbotax 1040x   You cannot use MACRS for motion picture films, video tapes, and sound recordings. Turbotax 1040x For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. Turbotax 1040x You can depreciate this property using either the straight line method or the income forecast method. Turbotax 1040x Participations and residuals. Turbotax 1040x   You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. Turbotax 1040x The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year after the property is placed in service. Turbotax 1040x For this purpose, participations and residuals are defined as costs which by contract vary with the amount of income earned in connection with the property. Turbotax 1040x   Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid. Turbotax 1040x Videocassettes. Turbotax 1040x   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. Turbotax 1040x If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. Turbotax 1040x Corporate or Partnership Property Acquired in a Nontaxable Transfer MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. Turbotax 1040x You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. Turbotax 1040x However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis. Turbotax 1040x The nontaxable transfers covered by this rule include the following. Turbotax 1040x A distribution in complete liquidation of a subsidiary. Turbotax 1040x A transfer to a corporation controlled by the transferor. Turbotax 1040x An exchange of property solely for corporate stock or securities in a reorganization. Turbotax 1040x A contribution of property to a partnership in exchange for a partnership interest. Turbotax 1040x A partnership distribution of property to a partner. Turbotax 1040x Election To Exclude Property From MACRS If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. Turbotax 1040x You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and attaching a statement as described in the instructions for Form 4562. Turbotax 1040x You must make this election by the return due date (including extensions) for the tax year you place your property in service. Turbotax 1040x However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). Turbotax 1040x Attach the election to the amended return and write “Filed pursuant to section 301. Turbotax 1040x 9100-2” on the election statement. Turbotax 1040x File the amended return at the same address you filed the original return. Turbotax 1040x Use of standard mileage rate. Turbotax 1040x   If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. Turbotax 1040x See Publication 463 for a discussion of the standard mileage rate. Turbotax 1040x What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Turbotax 1040x To determine basis, you need to know the cost or other basis of your property. Turbotax 1040x Cost as Basis The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception , below), freight charges, and installation and testing fees. Turbotax 1040x The cost includes the amount you pay in cash, debt obligations, other property, or services. Turbotax 1040x Exception. Turbotax 1040x   You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Turbotax 1040x If you make that choice, you cannot include those sales taxes as part of your cost basis. Turbotax 1040x Assumed debt. Turbotax 1040x   If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt. Turbotax 1040x Example. Turbotax 1040x You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. Turbotax 1040x Your total cost is $140,000, the cash you paid plus the mortgage you assumed. Turbotax 1040x Settlement costs. Turbotax 1040x   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. Turbotax 1040x These generally are shown on your settlement statement and include the following. Turbotax 1040x Legal and recording fees. Turbotax 1040x Abstract fees. Turbotax 1040x Survey charges. Turbotax 1040x Owner's title insurance. Turbotax 1040x Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Turbotax 1040x   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. Turbotax 1040x Property you construct or build. Turbotax 1040x   If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. Turbotax 1040x For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. Turbotax 1040x Other Basis Other basis usually refers to basis that is determined by the way you received the property. Turbotax 1040x For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. Turbotax 1040x If you acquired property in this or some other way, see Publication 551 to determine your basis. Turbotax 1040x Property changed from personal use. Turbotax 1040x   If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. Turbotax 1040x The fair market value (FMV) of the property on the date of the change in use. Turbotax 1040x Your original cost or other basis adjusted as follows. Turbotax 1040x Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. Turbotax 1040x Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. Turbotax 1040x Example. Turbotax 1040x Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. Turbotax 1040x Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Turbotax 1040x Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. Turbotax 1040x Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). Turbotax 1040x On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Turbotax 1040x The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000). Turbotax 1040x Property acquired in a nontaxable transaction. Turbotax 1040x   Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. Turbotax 1040x Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. Turbotax 1040x See Like-kind exchanges and involuntary conversions. Turbotax 1040x under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. Turbotax 1040x   There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. Turbotax 1040x See How Do You Use General Asset Accounts in chapter 4. Turbotax 1040x Adjusted Basis To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Turbotax 1040x These events could include the following. Turbotax 1040x Installing utility lines. Turbotax 1040x Paying legal fees for perfecting the title. Turbotax 1040x Settling zoning issues. Turbotax 1040x Receiving rebates. Turbotax 1040x Incurring a casualty or theft loss. Turbotax 1040x For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. Turbotax 1040x If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property. Turbotax 1040x For more information, see What Is the Basis for Depreciation in chapter 4. Turbotax 1040x . Turbotax 1040x Basis adjustment for depreciation allowed or allowable. Turbotax 1040x   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Turbotax 1040x Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Turbotax 1040x Depreciation allowable is depreciation you are entitled to deduct. Turbotax 1040x   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Turbotax 1040x   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Turbotax 1040x How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. Turbotax 1040x Improvement means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. Turbotax 1040x You generally deduct the cost of repairing business property in the same way as any other business expense. Turbotax 1040x However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Turbotax 1040x Example. Turbotax 1040x You repair a small section on one corner of the roof of a rental house. Turbotax 1040x You deduct the cost of the repair as a rental expense. Turbotax 1040x However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. Turbotax 1040x You depreciate the cost of the new roof. Turbotax 1040x Improvements to rented property. Turbotax 1040x   You can depreciate permanent improvements you make to business property you rent from someone else. Turbotax 1040x Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. Turbotax 1040x Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. Turbotax 1040x A section 179 deduction for the current year or a section 179 carryover from a prior year. Turbotax 1040x See chapter 2 for information on the section 179 deduction. Turbotax 1040x Depreciation for property placed in service during the current year. Turbotax 1040x Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Turbotax 1040x See chapter 5 for information on listed property. Turbotax 1040x A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040). Turbotax 1040x Amortization of costs if the current year is the first year of the amortization period. Turbotax 1040x Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. Turbotax 1040x S. Turbotax 1040x Income Tax Return for an S Corporation) regardless of when it was placed in service. Turbotax 1040x You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. Turbotax 1040x Table 1-1 presents an overview of the purpose of the various parts of Form 4562. Turbotax 1040x Employee. Turbotax 1040x   Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or the standard mileage rate. Turbotax 1040x Instead, use either Form 2106 or Form 2106-EZ. Turbotax 1040x Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. Turbotax 1040x How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Turbotax 1040x See Filing an Amended Return , next. Turbotax 1040x If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Turbotax 1040x See Changing Your Accounting Method , later. Turbotax 1040x Filing an Amended Return You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Turbotax 1040x You claimed the incorrect amount because of a mathematical error made in any year. Turbotax 1040x You claimed the incorrect amount because of a posting error made in any year. Turbotax 1040x You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Turbotax 1040x You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Turbotax 1040x Adoption of accounting method defined. Turbotax 1040x   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. Turbotax 1040x   For an exception to this 2-year rule, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Turbotax 1040x irs. Turbotax 1040x gov/pub/irs-irbs/irb11-04. Turbotax 1040x pdf. Turbotax 1040x (Note. Turbotax 1040x Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Turbotax 1040x For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Turbotax 1040x irs. Turbotax 1040x gov/pub/irs-irbs/irb12-14. Turbotax 1040x pdf. Turbotax 1040x )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Turbotax 1040x irs. Turbotax 1040x gov/pub/irs-irbs/irb07-29. Turbotax 1040x pdf. Turbotax 1040x When to file. Turbotax 1040x   If an amended return is allowed, you must file it by the later of the following. Turbotax 1040x 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Turbotax 1040x A return filed before an unextended due date is considered filed on that due date. Turbotax 1040x 2 years from the time you paid your tax for that year. Turbotax 1040x Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Turbotax 1040x You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. Turbotax 1040x The following are examples of a change in method of accounting for depreciation. Turbotax 1040x A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns. Turbotax 1040x A change in the treatment of an asset from nondepreciable to depreciable or vice versa. Turbotax 1040x A change in the depreciation method, period of recovery, or convention of a depreciable asset. Turbotax 1040x A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. Turbotax 1040x A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance). Turbotax 1040x Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. Turbotax 1040x An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. Turbotax 1040x A change in use of an asset in the hands of the same taxpayer. Turbotax 1040x Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). Turbotax 1040x If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. Turbotax 1040x Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. Turbotax 1040x You must submit a request for a letter ruling to make a late election or revoke an election. Turbotax 1040x Any change in the placed in service date of a depreciable asset. Turbotax 1040x See section 1. Turbotax 1040x 446-1(e)(2)(ii)(d) of the regulations for more information and examples. Turbotax 1040x IRS approval. Turbotax 1040x   In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2011-14. Turbotax 1040x If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C. Turbotax 1040x B. Turbotax 1040x 680. Turbotax 1040x Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. Turbotax 1040x Additional guidance. Turbotax 1040x    For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Turbotax 1040x irs. Turbotax 1040x gov/pub/irs-irbs/irb11-04. Turbotax 1040x pdf. Turbotax 1040x (Note. Turbotax 1040x Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Turbotax 1040x For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Turbotax 1040x irs. Turbotax 1040x gov/pub/irs-irbs/irb12-14. Turbotax 1040x pdf. Turbotax 1040x )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Turbotax 1040x irs. Turbotax 1040x gov/pub/irs-irbs/irb07-29. Turbotax 1040x pdf. Turbotax 1040x Table 1-1. Turbotax 1040x Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. Turbotax 1040x For more information, see Form 4562 and its instructions. Turbotax 1040x Part Purpose I • Electing the section 179 deduction • Figuring the maximum section 179 deduction for the current year • Figuring any section 179 deduction carryover to the next year II • Reporting the special depreciation allowance for property (other than listed property) placed in service during the tax year • Reporting depreciation deductions on property being depreciated under any method other than Modified Accelerated Cost Recovery System (MACRS) III • Reporting MACRS depreciation deductions for property placed in service before this year • Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current year IV • Summarizing other parts V • Reporting the special depreciation allowance for automobiles and other listed property • Reporting MACRS depreciation on automobiles and other listed property • Reporting the section 179 cost elected for automobiles and other listed property • Reporting information on the use of automobiles and other transportation vehicles VI • Reporting amortization deductions Section 481(a) adjustment. Turbotax 1040x   If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. Turbotax 1040x The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. Turbotax 1040x If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. Turbotax 1040x A negative section 481(a) adjustment results in a decrease in taxable income. Turbotax 1040x It is taken into account in the year of change and is reported on your business tax returns as “other expenses. Turbotax 1040x ” A positive section 481(a) adjustment results in an increase in taxable income. Turbotax 1040x It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. Turbotax 1040x ” However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. Turbotax 1040x Make the election by completing the appropriate line on Form 3115. Turbotax 1040x   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. Turbotax 1040x Prev  Up  Next   Home   More Online Publications