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Turbotax For Military Members

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Turbotax For Military Members

Turbotax for military members 2. Turbotax for military members   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Turbotax for military members Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. Turbotax for military members S. Turbotax for military members or foreign source income. Turbotax for military members This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. Turbotax for military members S. Turbotax for military members Virgin Islands (USVI). Turbotax for military members Generally, the same rules that apply for determining U. Turbotax for military members S. Turbotax for military members source income also apply for determining possession source income. Turbotax for military members However, there are some important exceptions to these rules. Turbotax for military members Both the general rules and the exceptions are discussed in this chapter. Turbotax for military members U. Turbotax for military members S. Turbotax for military members income rule. Turbotax for military members   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. Turbotax for military members Table 2-1 shows the general rules for determining whether income is from sources within the United States. Turbotax for military members Table 2-1. Turbotax for military members General Rules for Determining U. Turbotax for military members S. Turbotax for military members Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Turbotax for military members Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. Turbotax for military members For more information, see Regulations section 1. Turbotax for military members 863-1(b). Turbotax for military members Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. Turbotax for military members Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. Turbotax for military members Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. Turbotax for military members It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. Turbotax for military members Services performed wholly within a relevant possession. Turbotax for military members   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. Turbotax for military members However, there is an exception for income earned as a member of the U. Turbotax for military members S. Turbotax for military members Armed Forces or a civilian spouse. Turbotax for military members U. Turbotax for military members S. Turbotax for military members Armed Forces. Turbotax for military members   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. Turbotax for military members However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. Turbotax for military members Civilian spouse of active duty member of the U. Turbotax for military members S. Turbotax for military members Armed Forces. Turbotax for military members   If you are a bona fide resident of a U. Turbotax for military members S. Turbotax for military members possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Turbotax for military members Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. Turbotax for military members S. Turbotax for military members possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. Turbotax for military members Services performed partly inside and partly outside a relevant possession. Turbotax for military members   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Turbotax for military members Compensation (other than certain fringe benefits) is sourced on a time basis. Turbotax for military members Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Turbotax for military members   Or, you may be permitted to use an alternative basis to determine the source of compensation. Turbotax for military members See Alternative basis , later. Turbotax for military members   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Turbotax for military members In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Turbotax for military members Time basis. Turbotax for military members   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Turbotax for military members Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. Turbotax for military members The time period for which the income is made does not have to be a year. Turbotax for military members Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Turbotax for military members Example. Turbotax for military members In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Turbotax for military members Your Puerto Rico source income is $60,000, figured as follows. Turbotax for military members       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. Turbotax for military members   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Turbotax for military members Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. Turbotax for military members You determine the period to which the income is attributable based on the facts and circumstances of your case. Turbotax for military members For more information on multi-year compensation, see Treasury Decision (T. Turbotax for military members D. Turbotax for military members ) 9212 and Regulations section 1. Turbotax for military members 861-4, 2005-35 I. Turbotax for military members R. Turbotax for military members B. Turbotax for military members 429, available at www. Turbotax for military members irs. Turbotax for military members gov/irb/2005-35_IRB/ar14. Turbotax for military members html. Turbotax for military members Certain fringe benefits sourced on a geographical basis. Turbotax for military members   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. Turbotax for military members Housing. Turbotax for military members Education. Turbotax for military members Local transportation. Turbotax for military members Tax reimbursement. Turbotax for military members Hazardous or hardship duty pay. Turbotax for military members Moving expense reimbursement. Turbotax for military members For information on determining the source of the fringe benefits listed above, see Regulations section 1. Turbotax for military members 861-4. Turbotax for military members Alternative basis. Turbotax for military members   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. Turbotax for military members If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. Turbotax for military members De minimis exception. Turbotax for military members   There is an exception to the rule for determining the source of income earned in a possession. Turbotax for military members Generally, you will not have income from a possession if during a tax year you: Are a U. Turbotax for military members S. Turbotax for military members citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. Turbotax for military members This exception began with income earned during your 2008 tax year. Turbotax for military members Pensions. Turbotax for military members   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. Turbotax for military members The contribution portion is sourced according to where services were performed that earned the pension. Turbotax for military members The investment earnings portion is sourced according to the location of the pension trust. Turbotax for military members Example. Turbotax for military members You are a U. Turbotax for military members S. Turbotax for military members citizen who worked in Puerto Rico for a U. Turbotax for military members S. Turbotax for military members company. Turbotax for military members All services were performed in Puerto Rico. Turbotax for military members Upon retirement you remained in Puerto Rico and began receiving your pension from the U. Turbotax for military members S. Turbotax for military members pension trust of your employer. Turbotax for military members Distributions from the U. Turbotax for military members S. Turbotax for military members pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. Turbotax for military members S. Turbotax for military members source income. Turbotax for military members Investment Income This category includes such income as interest, dividends, rents, and royalties. Turbotax for military members Interest income. Turbotax for military members   The source of interest income is generally determined by the residence of the payer. Turbotax for military members Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. Turbotax for military members   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. Turbotax for military members See Regulations section 1. Turbotax for military members 937-2(i) for more information. Turbotax for military members Dividends. Turbotax for military members   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. Turbotax for military members There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. Turbotax for military members For more information, see Regulations section 1. Turbotax for military members 937-2(g). Turbotax for military members Rental income. Turbotax for military members   Rents from property located in a relevant possession are treated as income from sources within that possession. Turbotax for military members Royalties. Turbotax for military members   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. Turbotax for military members   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. Turbotax for military members Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. Turbotax for military members The most common situations are discussed below. Turbotax for military members Real property. Turbotax for military members   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. Turbotax for military members The location of the property generally determines the source of income from the sale. Turbotax for military members For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. Turbotax for military members If, however, the home you sold was located in the United States, the gain is U. Turbotax for military members S. Turbotax for military members source income. Turbotax for military members Personal property. Turbotax for military members   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. Turbotax for military members Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. Turbotax for military members If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. Turbotax for military members   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. Turbotax for military members The rules applying to sales of inventory are discussed below. Turbotax for military members For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. Turbotax for military members Inventory. Turbotax for military members   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Turbotax for military members The source of income from the sale of inventory depends on whether the inventory was purchased or produced. Turbotax for military members Purchased. Turbotax for military members   Income from the sale of inventory that you purchased is sourced where you sell the property. Turbotax for military members Generally, this is where title to the property passes to the buyer. Turbotax for military members Produced. Turbotax for military members   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. Turbotax for military members For information on making the allocation, see Regulations section 1. Turbotax for military members 863-3(f). Turbotax for military members Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. Turbotax for military members S. Turbotax for military members citizen or resident alien prior to becoming a bona fide resident of a possession. Turbotax for military members You are subject to these special rules if you meet both of the following conditions. Turbotax for military members For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. Turbotax for military members For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). Turbotax for military members If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Turbotax for military members Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. Turbotax for military members S. Turbotax for military members tax return. Turbotax for military members (See chapter 3 for additional filing information. Turbotax for military members ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. Turbotax for military members These rules apply to dispositions after April 11, 2005. Turbotax for military members For details, see Regulations section 1. Turbotax for military members 937-2(f)(1) and Examples 1 and 2 of section 1. Turbotax for military members 937-2(k). Turbotax for military members Example 1. Turbotax for military members In 2007, Cheryl Jones, a U. Turbotax for military members S. Turbotax for military members citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. Turbotax for military members S. Turbotax for military members corporation listed on the New York Stock Exchange. Turbotax for military members On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Turbotax for military members Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. Turbotax for military members On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. Turbotax for military members On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Turbotax for military members Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. Turbotax for military members The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. Turbotax for military members This existing special rule applies if you are a U. Turbotax for military members S. Turbotax for military members citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. Turbotax for military members S. Turbotax for military members assets during the 10-year period beginning when you became a bona fide resident. Turbotax for military members The gain is U. Turbotax for military members S. Turbotax for military members source income that generally is subject to U. Turbotax for military members S. Turbotax for military members tax if the property is either (1) located in the United States; (2) stock issued by a U. Turbotax for military members S. Turbotax for military members corporation or a debt obligation of a U. Turbotax for military members S. Turbotax for military members person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). Turbotax for military members See chapter 3 for filing information. Turbotax for military members Special election. Turbotax for military members   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Turbotax for military members Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. Turbotax for military members This election overrides both of the special rules discussed earlier. Turbotax for military members   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. Turbotax for military members Marketable securities. Turbotax for military members   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Turbotax for military members Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. Turbotax for military members S. Turbotax for military members holding periods. Turbotax for military members   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. Turbotax for military members The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. Turbotax for military members This is your gain (or loss) that is treated as being from sources within the relevant possession. Turbotax for military members If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. Turbotax for military members Example 2. Turbotax for military members Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. Turbotax for military members S. Turbotax for military members and possession holding periods. Turbotax for military members Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. Turbotax for military members Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). Turbotax for military members By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Turbotax for military members Other personal property. Turbotax for military members   For personal property other than marketable securities, use a time-based allocation. Turbotax for military members Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. Turbotax for military members      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. Turbotax for military members Example 3. Turbotax for military members In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. Turbotax for military members On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. Turbotax for military members On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. Turbotax for military members She had owned the interest for a total of 1,720 days. Turbotax for military members Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. Turbotax for military members The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). Turbotax for military members By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Turbotax for military members Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Turbotax for military members Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. Turbotax for military members These rules do not apply to amounts paid as salary or other compensation for services. Turbotax for military members See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. Turbotax for military members Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. Turbotax for military members These circumstances are listed below. Turbotax for military members You have an office or other fixed place of business in the relevant possession to which the income can be attributed. Turbotax for military members That office or place of business is a material factor in producing the income. Turbotax for military members The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Turbotax for military members An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Turbotax for military members The three kinds of income from sources outside the relevant possession to which these rules apply are the following. Turbotax for military members Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. Turbotax for military members Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. Turbotax for military members Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. Turbotax for military members Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Turbotax for military members Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. Turbotax for military members Example. Turbotax for military members Marcy Jackson is a bona fide resident of American Samoa. Turbotax for military members Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. Turbotax for military members A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Turbotax for military members Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. Turbotax for military members The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. Turbotax for military members However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. Turbotax for military members Prev  Up  Next   Home   More Online Publications
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SOI Tax Stats - Individual Tax Statistics

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Here you will find links to various studies relating to the individual taxpayer.

 

Individual Income Tax Numerous studies which provide statistics on income, deductions, tax, and credits reported on individual Form 1040 income tax returns and associated schedules are available in this area. Find statistics on high income tax returns, income tax rates, nonfarm sole proprietorships, data by geographic areas, and more...

Estate Tax

Estate Tax Statistics OneSheet

This annual study includes information on gross estate and its composition, deductions, and tax; and information on the age, sex, and marital status of decedents. Basic estate tax return data by year in which returns are filed are produced each year. Also included are data on nonresident aliens who had more than $60,000 of assets in the United States. These data come from taxpayers filing Form 706.
International Numerous studies which provide statistics on the individual taxpayer in the international context. Find statistics on foreign recipients of U.S. income, foreign trusts, individual foreign earned income and the foreign tax credit, international boycotts and nonresident alien estate tax returns. These data come from taxpayers filing Forms 706-NA, 1042-S, 1116, 2555, 3520, 5713 and more.
Personal Wealth This periodic study provides estimates of personal wealth of top wealth holders that are generated from estate tax return data using the "estate multiplier" technique, in conjunction with both filing-year and year-of-death estate databases.

Income from Trusts and Estates

Snapshot of Estate and Trust Income Tax Statistics

The U.S. Income Tax Return for Estates and Trusts (Form 1041) is used to report the income, deductions, gains, and losses of estates and trusts, as well as distributions to beneficiaries and income tax liability. Entities are classified into types based on their purpose.  

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Page Last Reviewed or Updated: 24-Mar-2014

The Turbotax For Military Members

Turbotax for military members Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. Turbotax for military members Property not disposed of or abandoned. Turbotax for military members Special rule for normal retirements from item accounts. Turbotax for military members Abandoned property. Turbotax for military members Single item accounts. Turbotax for military members Multiple property account. Turbotax for military members Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. Turbotax for military members If your property qualified for MACRS, you must depreciate it under MACRS. Turbotax for military members See Publication 946. Turbotax for military members However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Turbotax for military members Also, you can elect to exclude certain property from being depreciated under MACRS. Turbotax for military members Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. Turbotax for military members Intangible property. Turbotax for military members   You cannot depreciate intangible property under ACRS or MACRS. Turbotax for military members You depreciate intangible property using any other reasonable method, usually, the straight line method. Turbotax for military members Note. Turbotax for military members The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. Turbotax for military members For more information, see chapter 12 of Publication 535. Turbotax for military members Public utility property. Turbotax for military members   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. Turbotax for military members This type of property is subject to depreciation under a special rule. Turbotax for military members Videocassettes. Turbotax for military members   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. Turbotax for military members You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. Turbotax for military members The straight line method, salvage value, and useful life are discussed later under Methods To Use. Turbotax for military members You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. Turbotax for military members How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. Turbotax for military members These methods are straight line and declining balance. Turbotax for military members To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. Turbotax for military members They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. Turbotax for military members The amount of the deduction in any year also depends on which method of depreciation you choose. Turbotax for military members Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. Turbotax for military members The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Turbotax for military members Your original basis is usually the purchase price. Turbotax for military members However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. Turbotax for military members Adjusted basis. Turbotax for military members   Events will often change the basis of property. Turbotax for military members When this occurs, the changed basis is called the adjusted basis. Turbotax for military members Some events, such as improvements you make, increase basis. Turbotax for military members Events such as deducting casualty losses and depreciation decrease basis. Turbotax for military members If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. Turbotax for military members   Publication 551 explains how to figure basis for property acquired in different ways. Turbotax for military members It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. Turbotax for military members Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. Turbotax for military members It is the length of time over which you will make yearly depreciation deductions of your basis in the property. Turbotax for military members It is how long it will continue to be useful to you, not how long the property will last. Turbotax for military members Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. Turbotax for military members The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Turbotax for military members Consider all these factors before you arrive at a useful life for your property. Turbotax for military members The useful life of the same type of property varies from user to user. Turbotax for military members When you determine the useful life of your property, keep in mind your own experience with similar property. Turbotax for military members You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. Turbotax for military members Change in useful life. Turbotax for military members   You base your estimate of useful life on certain facts. Turbotax for military members If these facts change significantly, you can adjust your estimate of the remaining useful life. Turbotax for military members However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. Turbotax for military members Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. Turbotax for military members You generally cannot depreciate property below a reasonable salvage value. Turbotax for military members Determining salvage value. Turbotax for military members   Salvage value is the estimated value of property at the end of its useful life. Turbotax for military members It is what you expect to get for the property if you sell it after you can no longer use it productively. Turbotax for military members You must estimate the salvage value of a piece of property when you first acquire it. Turbotax for military members   Salvage value is affected both by how you use the property and how long you use it. Turbotax for military members If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. Turbotax for military members However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. Turbotax for military members Changing salvage value. Turbotax for military members   Once you determine the salvage value for property, you should not change it merely because prices have changed. Turbotax for military members However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. Turbotax for military members When you redetermine the salvage value, take into account the facts that exist at the time. Turbotax for military members Net salvage. Turbotax for military members   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. Turbotax for military members You can choose either salvage value or net salvage when you figure depreciation. Turbotax for military members You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. Turbotax for military members However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Turbotax for military members Your salvage value can never be less than zero. Turbotax for military members Ten percent rule. Turbotax for military members   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. Turbotax for military members You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. Turbotax for military members If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. Turbotax for military members Methods To Use Two methods of depreciation are the straight line and declining balance methods. Turbotax for military members If ACRS or MACRS does not apply, you can use one of these methods. Turbotax for military members The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. Turbotax for military members Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. Turbotax for military members One of these methods was the straight line method. Turbotax for military members This method was also used for intangible property. Turbotax for military members It lets you deduct the same amount of depreciation each year. Turbotax for military members To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Turbotax for military members Subtract the salvage value, if any, from the adjusted basis. Turbotax for military members The balance is the total amount of depreciation you can take over the useful life of the property. Turbotax for military members Divide the balance by the number of years remaining in the useful life. Turbotax for military members This gives you the amount of your yearly depreciation deduction. Turbotax for military members 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 for military members 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 for military members Example. Turbotax for military members In April 1994, Frank bought a franchise for $5,600. Turbotax for military members It expires in 10 years. Turbotax for military members This property is intangible property that cannot be depreciated under MACRS. Turbotax for military members Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. Turbotax for military members He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). Turbotax for military members He must prorate the $560 for his 9 months of use in 1994. Turbotax for military members This gives him a deduction of $420 ($560 ÷ 9/12). Turbotax for military members In 1995, Frank can deduct $560 for the full year. Turbotax for military members Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. Turbotax for military members The rate cannot be more than twice the straight line rate. Turbotax for military members Rate of depreciation. Turbotax for military members   Under this method, you must determine your declining balance rate of depreciation. Turbotax for military members The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. Turbotax for military members (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. Turbotax for military members ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. Turbotax for military members Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. Turbotax for military members Depreciation deductions. Turbotax for military members   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. Turbotax for military members This gives you the amount of your deduction. Turbotax for military members For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). Turbotax for military members To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Turbotax for military members Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). Turbotax for military members Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). Turbotax for military members Your depreciation deduction for the second year is $1,600. Turbotax for military members   As you can see from this example, your adjusted basis in the property gets smaller each year. Turbotax for military members Also, under this method, deductions are larger in the earlier years and smaller in the later years. Turbotax for military members You can make a change to the straight line method without consent. Turbotax for military members Salvage value. Turbotax for military members   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. Turbotax for military members However, you cannot depreciate the property below its reasonable salvage value. Turbotax for military members Determine salvage value using the rules discussed earlier, including the special 10% rule. Turbotax for military members Example. Turbotax for military members If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. Turbotax for military members But if your estimate of salvage value was $900, you can only deduct $100. Turbotax for military members This is because $100 is the amount that would lower your adjusted basis to equal salvage value. Turbotax for military members Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. Turbotax for military members You can group the videocassettes by title for making this projection. Turbotax for military members You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. Turbotax for military members The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. Turbotax for military members For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. Turbotax for military members How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. Turbotax for military members If you change your method of depreciation, it is generally a change in your method of accounting. Turbotax for military members You must get IRS consent before making the change. Turbotax for military members However, you do not need permission for certain changes in your method of depreciation. Turbotax for military members The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. Turbotax for military members For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. Turbotax for military members Change to the straight line method. Turbotax for military members   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. Turbotax for military members However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. Turbotax for military members When the change is made, figure depreciation based on your adjusted basis in the property at that time. Turbotax for military members Your adjusted basis takes into account all previous depreciation deductions. Turbotax for military members Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. Turbotax for military members   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. Turbotax for military members You cannot make the change on an amended return filed after the due date of the original return (including extensions). Turbotax for military members   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. Turbotax for military members   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. Turbotax for military members Changes that require permission. Turbotax for military members   For most other changes in method of depreciation, you must get permission from the IRS. Turbotax for military members To request a change in method of depreciation, file Form 3115. Turbotax for military members File the application within the first 180 days of the tax year the change is to become effective. Turbotax for military members In most cases, there is a user fee that must accompany Form 3115. Turbotax for military members See the instructions for Form 3115 to determine if a fee is required. Turbotax for military members Changes granted automatically. Turbotax for military members   The IRS automatically approves certain changes of a method of depreciation. Turbotax for military members But, you must file Form 3115 for these automatic changes. Turbotax for military members   However, IRS can deny permission if Form 3115 is not filed on time. Turbotax for military members For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. Turbotax for military members B. Turbotax for military members 420. Turbotax for military members Changes for which approval is not automatic. Turbotax for military members   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. Turbotax for military members   You must request and receive permission for these changes. Turbotax for military members To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. Turbotax for military members Change from an improper method. Turbotax for military members   If the IRS disallows the method you are using, you do not need permission to change to a proper method. Turbotax for military members You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. Turbotax for military members If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. Turbotax for military members However, you must file the amended return before the filing date for the next tax year. Turbotax for military members Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. Turbotax for military members You can do this by selling, exchanging, or abandoning the item of property. Turbotax for military members You can also withdraw it from use without disposing of it. Turbotax for military members For example, you could place it in a supplies or scrap account. Turbotax for military members Retirements can be either normal or abnormal depending on all facts and circumstances. Turbotax for military members The rules discussed next do not apply to MACRS and ACRS property. Turbotax for military members Normal retirement. Turbotax for military members   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. Turbotax for military members A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. Turbotax for military members Abnormal retirement. Turbotax for military members   A retirement can be abnormal if you withdraw the property early or under other circumstances. Turbotax for military members For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. Turbotax for military members Gain or loss on retirement. Turbotax for military members   There are special rules for figuring the gain or loss on retirement of property. Turbotax for military members The gain or loss will depend on several factors. Turbotax for military members These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. Turbotax for military members A single property account contains only one item of property. Turbotax for military members A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. Turbotax for military members Sale or exchange. Turbotax for military members   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. Turbotax for military members See Publication 544. Turbotax for military members Property not disposed of or abandoned. Turbotax for military members   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. Turbotax for military members You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. Turbotax for military members However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. Turbotax for military members   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. Turbotax for military members Special rule for normal retirements from item accounts. Turbotax for military members   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. Turbotax for military members However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. Turbotax for military members   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. Turbotax for military members Abandoned property. Turbotax for military members   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. Turbotax for military members However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. Turbotax for military members Basis of property retired. Turbotax for military members   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. Turbotax for military members Single item accounts. Turbotax for military members   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. Turbotax for military members This is generally the cost or other basis of the item of property less depreciation. Turbotax for military members See Publication 551. Turbotax for military members Multiple property account. Turbotax for military members   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. Turbotax for military members If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. Turbotax for military members   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. Turbotax for military members The method of depreciation used for the multiple property account is used. Turbotax for military members You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. Turbotax for military members Prev  Up  Next   Home   More Online Publications