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Www 1040 com 8. Www 1040 com   Amortization Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: How To Deduct Amortization Starting a BusinessBusiness Start-Up Costs Costs of Organizing a Corporation Costs of Organizing a Partnership How To Amortize Getting a Lease Section 197 IntangiblesSection 197 Intangibles Defined Assets That Are Not Section 197 Intangibles Safe Harbor for Creative Property Costs Anti-Churning Rules Incorrect Amount of Amortization Deducted Disposition of Section 197 Intangibles Reforestation Costs Geological and Geophysical Costs Pollution Control FacilitiesNew identifiable treatment facility. Www 1040 com Research and Experimental Costs Optional Write-off of Certain Tax Preferences Introduction Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. Www 1040 com It is similar to the straight line method of depreciation. Www 1040 com The various amortizable costs covered in this chapter are included in the list below. Www 1040 com However, this chapter does not discuss amortization of bond premium. Www 1040 com For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. Www 1040 com Topics - This chapter discusses: Deducting amortization Amortizing costs of starting a business Amortizing costs of getting a lease Amortizing costs of section 197 intangibles Amortizing reforestation costs Amortizing costs of geological and geophysical costs Amortizing costs of pollution control facilities Amortizing costs of research and experimentation Amortizing costs of certain tax preferences Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 4626 Alternative Minimum Tax—Corporations 6251 Alternative Minimum Tax—Individuals See chapter 12 for information about getting publications and forms. Www 1040 com How To Deduct Amortization To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return. Www 1040 com To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. Www 1040 com For example, in 2012, you began to amortize a lease. Www 1040 com In 2013, you began to amortize a second lease. Www 1040 com Report amortization from the new lease on line 42 of your 2013 Form 4562. Www 1040 com Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. Www 1040 com If you do not have any new amortizable expenses for the current year, you are not required to complete Form 4562 (unless you are claiming depreciation). Www 1040 com Report the current year's deduction for amortization that began in a prior year directly on the “Other deduction” or “Other expense line” of your return. Www 1040 com Starting a Business When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. Www 1040 com Generally, you recover costs for particular assets through depreciation deductions. Www 1040 com However, you generally cannot recover other costs until you sell the business or otherwise go out of business. Www 1040 com For a discussion on how to treat these costs, see If your attempt to go into business is unsuccessful under Capital Expenses in chapter 1. Www 1040 com For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. Www 1040 com The costs that are not deducted currently can be amortized ratably over a 180-month period. Www 1040 com The amortization period starts with the month you begin operating your active trade or business. Www 1040 com You are not required to attach a statement to make this election. Www 1040 com You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Www 1040 com Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. Www 1040 com See Regulations sections 1. Www 1040 com 195-1, 1. Www 1040 com 248-1, and 1. Www 1040 com 709-1. Www 1040 com For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Www 1040 com Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. Www 1040 com If the election is made, you must attach any statement required by Regulations sections 1. Www 1040 com 195-1(b), 1. Www 1040 com 248-1(c), and 1. Www 1040 com 709-1(c), as in effect before September 9, 2008. Www 1040 com Note. Www 1040 com You can apply the provisions of Regulations sections 1. Www 1040 com 195-1, 1. Www 1040 com 248-1, and 1. Www 1040 com 709-1 to all business start-up and organizational costs paid or incurred after October 22, 2004, provided the period of limitations on assessment has not expired for the year of the election. Www 1040 com Otherwise, the provisions under Regulations sections 1. Www 1040 com 195-1(b), 1. Www 1040 com 248-1(c), and 1. Www 1040 com 709-1(c), as in effect before September 9, 2008, will apply. Www 1040 com For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organization costs over an amortization period of 60 months or more. Www 1040 com See How To Make the Election , later. Www 1040 com The cost must qualify as one of the following. Www 1040 com A business start-up cost. Www 1040 com An organizational cost for a corporation. Www 1040 com An organizational cost for a partnership. Www 1040 com Business Start-Up Costs Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. Www 1040 com Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit; and for the production of income in anticipation of the activity becoming an active trade or business. Www 1040 com Qualifying costs. Www 1040 com   A start-up cost is amortizable if it meets both of the following tests. Www 1040 com It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into). Www 1040 com It is a cost you pay or incur before the day your active trade or business begins. Www 1040 com   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Www 1040 com Advertisements for the opening of the business. Www 1040 com Salaries and wages for employees who are being trained and their instructors. Www 1040 com Travel and other necessary costs for securing prospective distributors, suppliers, or customers. Www 1040 com Salaries and fees for executives and consultants, or for similar professional services. Www 1040 com Nonqualifying costs. Www 1040 com   Start-up costs do not include deductible interest, taxes, or research and experimental costs. Www 1040 com See Research and Experimental Costs , later. Www 1040 com Purchasing an active trade or business. Www 1040 com   Amortizable start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. Www 1040 com These are costs that help you decide whether to purchase a business. Www 1040 com Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. Www 1040 com Example. Www 1040 com On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. Www 1040 com They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. Www 1040 com In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. Www 1040 com The letter stated that a binding commitment would result only after a purchase agreement was signed. Www 1040 com The law firm and accounting firm continued to provide services including a review of XYZ's books and records and the preparation of a purchase agreement. Www 1040 com On October 22nd, you signed a purchase agreement with XYZ, Inc. Www 1040 com All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. Www 1040 com Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Www 1040 com Disposition of business. Www 1040 com   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. Www 1040 com However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. Www 1040 com Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Www 1040 com Qualifying costs. Www 1040 com   To qualify as an organizational cost, it must be: For the creation of the corporation, Chargeable to a capital account (see chapter 1), Amortized over the life of the corporation if the corporation had a fixed life, and Incurred before the end of the first tax year in which the corporation is in business. Www 1040 com   A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year. Www 1040 com   Examples of organizational costs include: The cost of temporary directors. Www 1040 com The cost of organizational meetings. Www 1040 com State incorporation fees. Www 1040 com The cost of legal services. Www 1040 com Nonqualifying costs. Www 1040 com   The following items are capital expenses that cannot be amortized: Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs. Www 1040 com Costs associated with the transfer of assets to the corporation. Www 1040 com Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. Www 1040 com Qualifying costs. Www 1040 com   A partnership can amortize an organizational cost only if it meets all the following tests. Www 1040 com It is for the creation of the partnership and not for starting or operating the partnership trade or business. Www 1040 com It is chargeable to a capital account (see chapter 1). Www 1040 com It could be amortized over the life of the partnership if the partnership had a fixed life. Www 1040 com It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. Www 1040 com However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. Www 1040 com It is for a type of item normally expected to benefit the partnership throughout its entire life. Www 1040 com   Organizational costs include the following fees. Www 1040 com Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. Www 1040 com Accounting fees for services incident to the organization of the partnership. Www 1040 com Filing fees. Www 1040 com Nonqualifying costs. Www 1040 com   The following costs cannot be amortized. Www 1040 com The cost of acquiring assets for the partnership or transferring assets to the partnership. Www 1040 com The cost of admitting or removing partners, other than at the time the partnership is first organized. Www 1040 com The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. Www 1040 com The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. Www 1040 com These “syndication fees” are capital expenses that cannot be depreciated or amortized. Www 1040 com Liquidation of partnership. Www 1040 com   If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. Www 1040 com However, these costs can be deducted only to the extent they qualify as a loss from a business. Www 1040 com How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). Www 1040 com You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. Www 1040 com Once you choose an amortization period, you cannot change it. Www 1040 com To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. Www 1040 com The result is the amount you can deduct for each month. Www 1040 com Cash method partnership. Www 1040 com   A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. Www 1040 com However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. Www 1040 com How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. Www 1040 com You may also be required to attach an accompanying statement (described later) to your return. Www 1040 com For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. Www 1040 com Generally, for start-up or organizational costs paid or incurred before September 9, 2008, and after October 22, 2004, unless you choose to apply Regulations sections 1. Www 1040 com 195-1, 1. Www 1040 com 248-1, and 1. Www 1040 com 709-1, you must also attach an accompanying statement to elect to amortize the costs. Www 1040 com If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. Www 1040 com See Starting a Business , earlier, for more information. Www 1040 com Generally, you must file the return by the due date (including any extensions). Www 1040 com 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 6 months of the due date of the return (excluding extensions). Www 1040 com For more information, see the instructions for Part VI of Form 4562. Www 1040 com You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Www 1040 com Note. Www 1040 com The election to either amortize or capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business. Www 1040 com If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. Www 1040 com A shareholder or partner cannot make this election. Www 1040 com You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Www 1040 com Only the corporation or partnership can amortize these costs. Www 1040 com However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. Www 1040 com These costs qualify as business start-up costs if you acquire the partnership interest. Www 1040 com Start-up costs election statement. Www 1040 com   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. Www 1040 com A description of the business to which the start-up costs relate. Www 1040 com A description of each start-up cost incurred. Www 1040 com The month your active business began (or was acquired). Www 1040 com The number of months in your amortization period (which is generally 180 months). Www 1040 com Filing the statement early. Www 1040 com   You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. Www 1040 com If you file the statement early, the election becomes effective in the month of the tax year your active business begins. Www 1040 com Revised statement. Www 1040 com   You can file a revised statement to include any start-up costs not included in your original statement. Www 1040 com However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. Www 1040 com You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. Www 1040 com Organizational costs election statement. Www 1040 com   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. Www 1040 com A description of each cost. Www 1040 com The amount of each cost. Www 1040 com The date each cost was incurred. Www 1040 com The month your corporation or partnership began active business (or acquired the business). Www 1040 com The number of months in your amortization period (which is generally 180 months). Www 1040 com Partnerships. Www 1040 com   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. Www 1040 com   You do not need to separately list any partnership organizational cost that is less than $10. Www 1040 com Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. Www 1040 com   After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership's original return and statement. Www 1040 com Getting a Lease If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease. Www 1040 com The term of the lease for amortization purposes generally includes all renewal options (and any other period for which you and the lessor reasonably expect the lease to be renewed). Www 1040 com However, renewal periods are not included if 75% or more of the cost of acquiring the lease is for the term of the lease remaining on the acquisition date (not including any period for which you may choose to renew, extend, or continue the lease). Www 1040 com For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. Www 1040 com How to amortize. Www 1040 com   Enter your deduction in Part VI of Form 4562 if you are deducting amortization that begins during the current year, or on the appropriate line of your tax return if you are not otherwise required to file Form 4562. Www 1040 com Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. Www 1040 com You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. Www 1040 com You may not be able to amortize section 197 intangibles acquired in a transaction that did not result in a significant change in ownership or use. Www 1040 com See Anti-Churning Rules, later. Www 1040 com Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). Www 1040 com The 15-year period begins with the later of: The month the intangible is acquired, or The month the trade or business or activity engaged in for the production of income begins. Www 1040 com You cannot deduct amortization for the month you dispose of the intangible. Www 1040 com If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs. Www 1040 com You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. Www 1040 com Tax-exempt use property subject to a lease. Www 1040 com   The amortization period for any section 197 intangible 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), shall not be less than 125 percent of the lease term. Www 1040 com Cost attributable to other property. Www 1040 com   The rules for section 197 intangibles do not apply to any amount that is included in determining the cost of property that is not a section 197 intangible. Www 1040 com For example, if the cost of computer software is not separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules do not apply. Www 1040 com Similarly, none of the cost of acquiring real property held for the production of rental income is considered the cost of goodwill, going concern value, or any other section 197 intangible. Www 1040 com Section 197 Intangibles Defined The following assets are section 197 intangibles and must be amortized over 180 months: Goodwill; Going concern value; Workforce in place; Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers; A patent, copyright, formula, process, design, pattern, know-how, format, or similar item; A customer-based intangible; A supplier-based intangible; Any item similar to items (3) through (7); A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals); A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business; Any franchise, trademark, or trade name; and A contract for the use of, or a term interest in, any item in this list. Www 1040 com You cannot amortize any of the intangibles listed in items (1) through (8) that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. Www 1040 com Goodwill. Www 1040 com   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. Www 1040 com Going concern value. Www 1040 com   This is the additional value of a trade or business that attaches to property because the property is an integral part of an ongoing business activity. Www 1040 com It includes value based on the ability of a business to continue to function and generate income even though there is a change in ownership (but does not include any other section 197 intangible). Www 1040 com It also includes value based on the immediate use or availability of an acquired trade or business, such as the use of earnings during any period in which the business would not otherwise be available or operational. Www 1040 com Workforce in place, etc. Www 1040 com   This includes the composition of a workforce (for example, its experience, education, or training). Www 1040 com It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes. Www 1040 com   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. Www 1040 com Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. Www 1040 com Business books and records, etc. Www 1040 com   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. Www 1040 com It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers. Www 1040 com Patents, copyrights, etc. Www 1040 com   This includes package design, computer software, and any interest in a film, sound recording, videotape, book, or other similar property, except as discussed later under Assets That Are Not Section 197 Intangibles . Www 1040 com Customer-based intangible. Www 1040 com   This is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. Www 1040 com For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. Www 1040 com A customer base. Www 1040 com A circulation base. Www 1040 com An undeveloped market or market growth. Www 1040 com Insurance in force. Www 1040 com A mortgage servicing contract. Www 1040 com An investment management contract. Www 1040 com Any other relationship with customers involving the future provision of goods or services. Www 1040 com   Accounts receivable or other similar rights to income for goods or services provided to customers before the acquisition of a trade or business are not section 197 intangibles. Www 1040 com Supplier-based intangible. Www 1040 com   A supplier-based intangible is the value resulting from the future acquisitions, (through contract or other relationships with suppliers in the ordinary course of business) of goods or services that you will sell or use. Www 1040 com The amount you pay or incur for supplier-based intangibles includes, for example, any portion of the purchase price of an acquired trade or business that is attributable to the existence of a favorable relationship with persons providing distribution services (such as a favorable shelf or display space or a retail outlet), or the existence of favorable supply contracts. Www 1040 com Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. Www 1040 com Also, see Assets That Are Not Section 197 Intangibles below. Www 1040 com Government-granted license, permit, etc. Www 1040 com   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. Www 1040 com For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license. Www 1040 com Covenant not to compete. Www 1040 com   Section 197 intangibles include a covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business, or a substantial portion of a trade or business. Www 1040 com An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. Www 1040 com   An arrangement that requires the former owner to perform services (or to provide property or the use of property) is not similar to a covenant not to compete to the extent the amount paid under the arrangement represents reasonable compensation for those services or for that property or its use. Www 1040 com Franchise, trademark, or trade name. Www 1040 com   A franchise, trademark, or trade name is a section 197 intangible. Www 1040 com You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. Www 1040 com For information on currently deductible contingent payments, see chapter 11. Www 1040 com Professional sports franchise. Www 1040 com   A franchise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player contracts) is a section 197 intangible amortizable over a 15-year period. Www 1040 com Contract for the use of, or a term interest in, a section 197 intangible. Www 1040 com   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. Www 1040 com It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. Www 1040 com Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. Www 1040 com Any interest in a corporation, partnership, trust, or estate. Www 1040 com Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. Www 1040 com Any interest in land. Www 1040 com Most computer software. Www 1040 com (See Computer software , later. Www 1040 com ) Any of the following assets not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Www 1040 com An interest in a film, sound recording, video tape, book, or similar property. Www 1040 com A right to receive tangible property or services under a contract or from a governmental agency. Www 1040 com An interest in a patent or copyright. Www 1040 com Certain rights that have a fixed duration or amount. Www 1040 com (See Rights of fixed duration or amount , later. Www 1040 com ) An interest under either of the following. Www 1040 com An existing lease or sublease of tangible property. Www 1040 com A debt that was in existence when the interest was acquired. Www 1040 com A right to service residential mortgages unless the right is acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Www 1040 com Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. Www 1040 com Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. Www 1040 com You generally must use the straight line method over its useful life. Www 1040 com For certain intangibles, the depreciation period is specified in the law and regulations. Www 1040 com For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. Www 1040 com For more information on depreciating intangible property, see Intangible Property under What Method Can You Use To Depreciate Your Property? in chapter 1 of Publication 946. Www 1040 com Computer software. Www 1040 com   Section 197 intangibles do not include the following types of computer software. Www 1040 com Software that meets all the following requirements. Www 1040 com It is, or has been, readily available for purchase by the general public. Www 1040 com It is subject to a nonexclusive license. Www 1040 com It has not been substantially modified. Www 1040 com This requirement is considered met if the cost of all modifications is not more than the greater of 25% of the price of the publicly available unmodified software or $2,000. Www 1040 com Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Www 1040 com Computer software defined. Www 1040 com   Computer software includes all programs designed to cause a computer to perform a desired function. Www 1040 com It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Www 1040 com Rights of fixed duration or amount. Www 1040 com   Section 197 intangibles do not include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: Has a fixed life of less than 15 years, or Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recovery. Www 1040 com However, this does not apply to the following intangibles. Www 1040 com Goodwill. Www 1040 com Going concern value. Www 1040 com A covenant not to compete. Www 1040 com A franchise, trademark, or trade name. Www 1040 com A customer-related information base, customer-based intangible, or similar item. Www 1040 com Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. Www 1040 com You may amortize these costs ratably over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial accounting purposes. Www 1040 com If, during the 15-year period, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. Www 1040 com Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. Www 1040 com Amortize these costs using the rules of Revenue Procedure 2004-36. Www 1040 com For more information, see Revenue Procedure 2004-36, 2004-24 I. Www 1040 com R. Www 1040 com B. Www 1040 com 1063, available at  www. Www 1040 com irs. Www 1040 com gov/irb/2004-24_IRB/ar16. Www 1040 com html. Www 1040 com A change in the treatment of creative property costs is a change in method of accounting. Www 1040 com Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them did not result in a significant change in ownership or use. Www 1040 com These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. Www 1040 com Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. Www 1040 com You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. Www 1040 com You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user did not change. Www 1040 com You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). Www 1040 com This applies only if the transaction in which you granted the right and the transaction in which you acquired the intangible are part of a series of related transactions. Www 1040 com See Related person , later, for more information. Www 1040 com Exceptions. Www 1040 com   The anti-churning rules do not apply in the following situations. Www 1040 com You acquired the intangible from a decedent and its basis was stepped up to its fair market value. Www 1040 com The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. Www 1040 com This exception does not apply if the transaction in which you acquired the intangible and the transaction in which the seller or transferor acquired it are part of a series of related transactions. Www 1040 com The gain-recognition exception, discussed later, applies. Www 1040 com Related person. Www 1040 com   For purposes of the anti-churning rules, the following are related persons. Www 1040 com An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Www 1040 com ), and lineal descendants (children, grandchildren, etc. Www 1040 com ). Www 1040 com A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. Www 1040 com Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 20%” is substituted for “at least 80%” in that definition and the determination is made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. Www 1040 com (For an exception, see section 1. Www 1040 com 197-2(h)(6)(iv) of the regulations. Www 1040 com ) A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or indirectly, by or for the trust or grantor of the trust. Www 1040 com The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Www 1040 com 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. Www 1040 com The executor and beneficiary of an estate. Www 1040 com A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). Www 1040 com A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the corporation and more than 20% of the capital or profits interest in the partnership. Www 1040 com Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 20% of the value of the outstanding stock of each corporation. Www 1040 com Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. Www 1040 com A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. Www 1040 com Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). Www 1040 com When to determine relationship. Www 1040 com   Persons are treated as related if the relationship existed at the following time. Www 1040 com In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. Www 1040 com In the case of a series of related transactions (or a series of transactions that comprise a qualified stock purchase under section 338(d)(3) of the Internal Revenue Code), immediately before the earliest transaction or immediately after the last transaction. Www 1040 com Ownership of stock. Www 1040 com   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Www 1040 com Rule 1. Www 1040 com   Stock 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. Www 1040 com Rule 2. Www 1040 com   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Www 1040 com Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Www 1040 com Rule 3. Www 1040 com   An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Www 1040 com Rule 4. Www 1040 com   For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a person under Rule 1 as actually owned by that person. Www 1040 com Do not treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make another person the constructive owner of the stock. Www 1040 com Gain-recognition exception. Www 1040 com   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. Www 1040 com That person would not be related to you (as described under Related person , earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. Www 1040 com That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. Www 1040 com See chapter 2 in Publication 544 for information on making this choice. Www 1040 com   If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. Www 1040 com Notification. Www 1040 com   If the person you acquired the intangible from chooses to recognize gain under the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. Www 1040 com Anti-abuse rule. Www 1040 com   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. Www 1040 com To avoid the requirement that the intangible be acquired after August 10, 1993. Www 1040 com To avoid any of the anti-churning rules. Www 1040 com More information. Www 1040 com   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. Www 1040 com 197-2(h). Www 1040 com Incorrect Amount of Amortization Deducted If you later discover that you deducted an incorrect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. Www 1040 com See Amended Return , next. Www 1040 com If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. Www 1040 com See Changing Your Accounting Method , later. Www 1040 com Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. Www 1040 com A mathematical error made in any year. Www 1040 com A posting error made in any year. Www 1040 com An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. Www 1040 com When to file. Www 1040 com   If an amended return is allowed, you must file it by the later of the following dates. Www 1040 com 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Www 1040 com (A return filed early is considered filed on the due date. Www 1040 com ) 2 years from the time you paid your tax for that year. Www 1040 com Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Www 1040 com File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. Www 1040 com The following are examples of a change in method of accounting for amortization. Www 1040 com A change in the amortization method, period of recovery, or convention of an amortizable asset. Www 1040 com A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. Www 1040 com A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. Www 1040 com Changes in amortization that are not a change in method of accounting include the following: A change in computing amortization in the tax year in which your use of the asset changes. Www 1040 com An adjustment in the useful life of an amortizable asset. Www 1040 com Generally, the making of a late amortization election or the revocation of a timely valid amortization election. Www 1040 com Any change in the placed-in-service date of an amortizable asset. Www 1040 com See Regulations section 1. Www 1040 com 446-1(e)(2)(ii)(a) for more information and examples. Www 1040 com Automatic approval. Www 1040 com   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. Www 1040 com For a list of automatic accounting method changes, see the Instructions for Form 3115. Www 1040 com Also see the Instructions for Form 3115 for more information on getting approval, automatic approval procedures, and a list of exceptions to the automatic approval process. Www 1040 com For more information, see Revenue Procedure 2006-12, as modified by Revenue Procedure 2006-37, and Revenue Procedure 2008-52, as amplified, clarified, and modified by Revenue Procedure 2009-39, as clarified and modified by Revenue Procedure 2011-14, as modified and amplified by Revenue Procedure 2011-22, as modified by Revenue Procedure 2012-39, or any successor. Www 1040 com See Revenue Procedure 2006-12, 2006-3 I. Www 1040 com R. Www 1040 com B. Www 1040 com 310, available at  www. Www 1040 com irs. Www 1040 com gov/irb/2006-03_IRB/ar14. Www 1040 com html. Www 1040 com  See Revenue Procedure 2006-37, 2006-38 I. Www 1040 com R. Www 1040 com B. Www 1040 com 499, available at  www. Www 1040 com irs. Www 1040 com gov/irb/2006-38_IRB/ar10. Www 1040 com html. Www 1040 com  See Revenue Procedure 2008-52, 2008-36 I. Www 1040 com R. Www 1040 com B. Www 1040 com 587, available at www. Www 1040 com irs. Www 1040 com gov/irb/2008-36_IRB/ar09. Www 1040 com html. Www 1040 com  See Revenue Procedure 2009-39, 2009-38 I. Www 1040 com R. Www 1040 com B. Www 1040 com 371, available at  www. Www 1040 com irs. Www 1040 com gov/irb/2009-38_IRB/ar08. Www 1040 com html. Www 1040 com  See Revenue Procedure 2011-14, 2011-4 I. Www 1040 com R. Www 1040 com B. Www 1040 com 330, available at  www. Www 1040 com irs. Www 1040 com gov/irb/2011-04_IRB/ar08. Www 1040 com html. Www 1040 com  See Revenue Procedure 2011-22, 2011-18 I. Www 1040 com R. Www 1040 com B. Www 1040 com 737, available at  www. Www 1040 com irs. Www 1040 com gov/irb/2011-18_IRB/ar08. Www 1040 com html. Www 1040 com Also, see Revenue Procedure 2012-39, 2012-41 I. Www 1040 com R. Www 1040 com B. Www 1040 com 470 available at www. Www 1040 com irs. Www 1040 com gov/irb/2012-41_IRB/index. Www 1040 com html. Www 1040 com Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. Www 1040 com If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). Www 1040 com If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. Www 1040 com Any remaining gain, or any loss, is a section 1231 gain or loss. Www 1040 com If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. Www 1040 com For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. Www 1040 com Nondeductible loss. Www 1040 com   You cannot deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transactions) as other section 197 intangibles you still have. Www 1040 com Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. Www 1040 com Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. Www 1040 com The numerator is the adjusted basis of each remaining intangible on the date of the disposition. Www 1040 com The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. Www 1040 com Covenant not to compete. Www 1040 com   A covenant not to compete, or similar arrangement, is not considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant. Www 1040 com Nonrecognition transfers. Www 1040 com   If you acquire a section 197 intangible in a nonrecognition transfer, you are treated as the transferor with respect to the part of your adjusted basis in the intangible that is not more than the transferor's adjusted basis. Www 1040 com You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. Www 1040 com Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. Www 1040 com   In a like-kind exchange or involuntary conversion of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that is not more than your adjusted basis in the exchanged or converted intangible over the remaining amortization period of the exchanged or converted intangible. Www 1040 com Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. Www 1040 com Example. Www 1040 com You own a section 197 intangible you have amortized for 4 full years. Www 1040 com It has a remaining unamortized basis of $30,000. Www 1040 com You exchange the asset plus $10,000 for a like-kind section 197 intangible. Www 1040 com The nonrecognition provisions of like-kind exchanges apply. Www 1040 com You amortize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset. Www 1040 com You amortize the other $10,000 of adjusted basis over a new 15-year period. Www 1040 com For more information, see Regulations section 1. Www 1040 com 197-2(g). Www 1040 com Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. Www 1040 com See Reforestation Costs in chapter 7. Www 1040 com You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. Www 1040 com There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. Www 1040 com The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. Www 1040 com A partner, shareholder, or beneficiary cannot make that election. Www 1040 com A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. Www 1040 com , of a partnership or S corporation. Www 1040 com The amortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each. Www 1040 com Qualifying costs. Www 1040 com   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Www 1040 com Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. Www 1040 com They include costs for the following items. Www 1040 com Site preparation. Www 1040 com Seeds or seedlings. Www 1040 com Labor. Www 1040 com Tools. Www 1040 com Depreciation on equipment used in planting and seeding. Www 1040 com Qualifying costs do not include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income. Www 1040 com Qualified timber property. Www 1040 com   Qualified timber property is property that contains trees in significant commercial quantities. Www 1040 com It can be a woodlot or other site that you own or lease. Www 1040 com The property qualifies only if it meets all of the following requirements. Www 1040 com It is located in the United States. Www 1040 com It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products. Www 1040 com It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. Www 1040 com Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. Www 1040 com Amortization period. Www 1040 com   The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. Www 1040 com You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. Www 1040 com Life tenant and remainderman. Www 1040 com   If one person holds the property for life with the remainder going to another person, the life tenant is entitled to the full amortization for qualifying reforestation costs incurred by the life tenant. Www 1040 com Any remainder interest in the property is ignored for amortization purposes. Www 1040 com Recapture. Www 1040 com   If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortization you took. Www 1040 com See chapter 3 of Publication 544 for more information. Www 1040 com How to make the election. Www 1040 com   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. Www 1040 com A description of the costs and the dates you incurred them. Www 1040 com A description of the type of timber being grown and the purpose for which it is grown. Www 1040 com Attach a separate statement for each property for which you amortize reforestation costs. Www 1040 com   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. Www 1040 com 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 6 months of the due date of the return (excluding extensions). Www 1040 com Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. Www 1040 com 9100-2” on Form 4562. Www 1040 com File the amended return at the same address you filed the original return. Www 1040 com Revoking the election. Www 1040 com   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. Www 1040 com Your application to revoke the election must include your name, address, the years for which your election was in effect, and your reason for revoking it. Www 1040 com Please provide your daytime telephone number (optional), in case we need to contact you. Www 1040 com You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your election is to end. Www 1040 com    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. Www 1040 com NW, IR-5300 Washington, DC 20224 Geological and Geophysical Costs You can amortize the cost of geological and geophysical expenses paid or incurred in connection with oil and gas exploration or development within the United States. Www 1040 com These costs can be amortized ratably over a 24-month period beginning on the mid-point of the tax year in which the expenses were paid or incurred. Www 1040 com For major integrated oil companies (as defined in section 167(h)(5)), these costs must be amortized ratably over a 5-year period for costs paid or incurred after May 17, 2006 (a 7-year period for costs paid or incurred after December 19, 2007). Www 1040 com If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. Www 1040 com Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. Www 1040 com However, see Atmospheric pollution control facilities for an exception. Www 1040 com The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. Www 1040 com Also, you can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost. Www 1040 com You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. Www 1040 com See chapter 3 of Publication 946. Www 1040 com A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property in operation before 1976, to reduce or control water or atmospheric pollution or contamination. Www 1040 com The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Www 1040 com The facility must be certified by state and federal certifying authorities. Www 1040 com The facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. Www 1040 com Also, it must not significantly change the nature of the manufacturing or production process or facility. Www 1040 com The federal certifying authority will not certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its operation (such as through sales of recovered wastes). Www 1040 com The federal certifying authority will describe the nature of the potential cost recovery. Www 1040 com You must then reduce the amortizable basis of the facility by this potential recovery. Www 1040 com New identifiable treatment facility. Www 1040 com   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. Www 1040 com It does not include a building and its structural components unless the building is exclusively a treatment facility. Www 1040 com Atmospheric pollution control facilities. Www 1040 com   Certain atmospheric pollution control facilities can be amortized over 84 months. Www 1040 com To qualify, the following must apply. Www 1040 com The facility must be acquired and placed in service after April 11, 2005. Www 1040 com If acquired, the original use must begin with you after April 11, 2005. Www 1040 com The facility must be used in connection with an electric generation plant or other property placed in operation after December 31, 1975, that is primarily coal fired. Www 1040 com If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. Www 1040 com Basis reduction for corporations. Www 1040 com   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. Www 1040 com More information. Www 1040 com   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. Www 1040 com Research and Experimental Costs You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below). Www 1040 com If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. Www 1040 com The amortization period begins the month you first receive an economic benefit from the costs. Www 1040 com For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. Www 1040 com Optional write-off method. Www 1040 com   Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. Www 1040 com For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. Www 1040 com Costs you can amortize. Www 1040 com   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. Www 1040 com You paid or incurred the costs in your trade or business. Www 1040 com You are not deducting the costs currently. Www 1040 com How to make the election. Www 1040 com   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. Www 1040 com Generally, you must file the return by the due date (including extensions). Www 1040 com 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 6 months of the due date of the return (excluding extensions). Www 1040 com Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Www 1040 com 9100-2” on Form 4562. Www 1040 com File the amended return at the same address you filed the original return. Www 1040 com   Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. Www 1040 com Optional Write-off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. Www 1040 com If you make this election, there is no AMT adjustment. Www 1040 com The applicable costs and the optional recovery periods are as follows: Circulation costs — 3 years, Intangible drilling and development costs — 60 months, Mining exploration and development costs — 10 years, and Research and experimental costs — 10 years. Www 1040 com How to make the election. Www 1040 com   To elect to amortize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which the election begins: Your name, address, and taxpayer identification number; and The type of cost and the specific amount of the cost for which you are making the election. Www 1040 com   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. Www 1040 com 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 6 months of the due date of the return (excluding extensions). Www 1040 com Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Www 1040 com 9100-2” on Form 4562. Www 1040 com File the amended return at the same address you filed the original return. Www 1040 com Revoking the election. Www 1040 com   You must obtain consent from the IRS to revoke your election. Www 1040 com Your request to revoke the election must be submitted to the IRS in the form of a letter ruling before the end of the tax year in which the optional recovery period ends. Www 1040 com The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. Www 1040 com If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. Www 1040 com Prev  Up  Next   Home   More Online Publications
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Www 1040 com 2. Www 1040 com   American Opportunity Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible StudentException. Www 1040 com Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Refundable Part of Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. Www 1040 com They are the American opportunity credit (this chapter) and the lifetime learning credit ( chapter 3 ). Www 1040 com This chapter explains: Who can claim the American opportunity credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. Www 1040 com What is the tax benefit of the American opportunity credit. Www 1040 com   For the tax year, you may be able to claim an American opportunity credit of up to $2,500 for qualified education expenses paid for each eligible student. Www 1040 com   A tax credit reduces the amount of income tax you may have to pay. Www 1040 com Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Www 1040 com Forty percent of the American opportunity credit may be refundable. Www 1040 com This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. Www 1040 com   Your allowable American opportunity credit may be limited by the amount of your income. Www 1040 com Also, the nonrefundable part of the credit may be limited by the amount of your tax. Www 1040 com Overview of the American opportunity credit. Www 1040 com   See Table 2-1, Overview of the American Opportunity Credit , for the basics of this credit. Www 1040 com The details are discussed in this chapter. Www 1040 com Can you claim more than one education credit this year. Www 1040 com   For each student, you can elect for any year only one of the credits. Www 1040 com For example, if you elect to take the American opportunity credit for a child on your 2013 tax return, you cannot use that same child's qualified education expenses to figure the lifetime learning credit for 2013. Www 1040 com   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity credit on a per-student, per-year basis. Www 1040 com If you pay qualified education expenses for a student (or students) for whom you do not claim the American opportunity credit, you can use the adjusted qualified education expenses of that student (or those students) in figuring your lifetime learning credit. Www 1040 com This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Www 1040 com Differences between the American opportunity and lifetime learning credits. Www 1040 com   There are several differences between these two credits. Www 1040 com For example, you can claim the American opportunity credit based on the same student's expenses for no more than 4 tax years, which includes any tax years you claimed the Hope Scholarship Credit for that student. Www 1040 com However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. Www 1040 com The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. Www 1040 com If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses for the American opportunity credit or the lifetime learning credit. Www 1040 com If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit. Www 1040 com Table 2-1. Www 1040 com Overview of the American Opportunity Credit Maximum credit Up to $2,500 credit per eligible student Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable; the rest is nonrefundable Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) Hope Scholarship Credit was claimed) Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period that begins during the tax year Felony drug conviction As of the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Can You Claim the Credit The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return. Www 1040 com Who Can Claim the Credit Generally, you can claim the American opportunity credit if all three of the following requirements are met. Www 1040 com You pay qualified education expenses of higher education. Www 1040 com You pay the education expenses for an eligible student. Www 1040 com The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Www 1040 com Student qualifications. Www 1040 com   Generally, you can take the American opportunity credit for a student only if all of the following four requirements are met. Www 1040 com As of the beginning of 2013, the student had not completed the first four years of postsecondary education (generally, the freshman through senior years of college), as determined by the eligible educational institution. Www 1040 com For this purpose, do not include academic credit awarded solely because of the student's performance on proficiency examinations. Www 1040 com Neither the American opportunity credit nor the Hope Scholarship Credit has been claimed (by you or anyone else) for this student for any four tax years before 2013. Www 1040 com If the American opportunity credit (and Hope Scholarship Credit) has been claimed for this student for any three or fewer tax years before 2013, this requirement is met. Www 1040 com For at least one academic period beginning (or treated as beginning) in 2013, the student both: Was enrolled in a program that leads to a degree, certificate, or other recognized educational credential; and Carried at least one-half the normal full-time workload for his or her course of study. Www 1040 com The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Www 1040 com However, the standard may not be lower than any of those established by the U. Www 1040 com S. Www 1040 com Department of Education under the Higher Education Act of 1965. Www 1040 com For purposes of whether the student satisfies this third requirement for 2013, treat an academic period beginning in the first three months of 2014 as if it began in 2013 if qualified education expenses for the student were paid in 2013 for that academic period. Www 1040 com See Prepaid expenses, later. Www 1040 com As of the end of 2013, the student had not been convicted of a federal or state felony for possessing or distributing a controlled substance. Www 1040 com Example 1. Www 1040 com Sharon was eligible for the Hope Scholarship Credit for 2007 and 2008 and for the American opportunity credit for 2010 and 2012. Www 1040 com Her parents claimed the Hope Scholarship Credit for Sharon on their tax returns for 2007 and 2008 and claimed the American opportunity credit for Sharon on their 2010 tax return. Www 1040 com Sharon claimed the American opportunity credit on her 2012 tax return. Www 1040 com The American opportunity credit and Hope Scholarship Credit have been claimed for Sharon for four tax years before 2013. Www 1040 com Therefore, the American opportunity credit cannot be claimed by Sharon for 2013. Www 1040 com If Sharon were to file Form 8863 for 2013, she would check “Yes” for Part III, line 23, and would be eligible to claim only the lifetime learning credit. Www 1040 com Example 2. Www 1040 com Wilbert was eligible for the American opportunity credit for 2009, 2010, 2011, and 2013. Www 1040 com His parents claimed the American opportunity credit for Wilbert on their tax returns for 2009, 2010, and 2011. Www 1040 com No one claimed an American opportunity credit or Hope Scholarship Credit for Wilbert for any other tax year. Www 1040 com The American opportunity credit and Hope Scholarship Credit have been claimed for Wilbert for only three tax years before 2013. Www 1040 com Therefore, Wilbert meets the second requirement to be eligible for the American opportunity credit. Www 1040 com If Wilbert were to file Form 8863 for 2013, he would check “No” for Part III, line 23. Www 1040 com If Wilbert meets all of the other requirements, he is eligible for the American opportunity credit. Www 1040 com Example 3. Www 1040 com Glenda enrolls on a full-time basis in a degree program for the 2014 Spring semester, which begins in January 2014. Www 1040 com Glenda pays her tuition for the 2014 Spring semester in December 2013. Www 1040 com Because the tuition Glenda paid in 2013 relates to an academic period that begins in the first 3 months of 2014, her eligibility to claim an American opportunity credit in 2013 is determined as if the 2014 Spring semester began in 2013. Www 1040 com If the requirements above are not met for any student, you cannot take the American opportunity credit for that student. Www 1040 com You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. Www 1040 com Note. Www 1040 com Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. Www 1040 com “Qualified education expenses” are defined later under Qualified Education Expenses . Www 1040 com “Eligible students” are defined later under Who Is an Eligible Student . Www 1040 com A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Www 1040 com You may find Figure 2-1, Can You Claim the American Opportunity Credit for 2013 , later, helpful in determining if you can claim an American opportunity credit on your tax return. Www 1040 com This image is too large to be displayed in the current screen. Www 1040 com Please click the link to view the image. Www 1040 com Figure 2-1 Can you claim the American opportunity credit for 2012? Who Cannot Claim the Credit You cannot claim the American opportunity credit for 2013 if any of the following apply. Www 1040 com Your filing status is married filing separately. Www 1040 com You are listed as a dependent on another person's tax return (such as your parents'). Www 1040 com See Who Can Claim a Dependent's Expenses , later. Www 1040 com Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more in the case of a joint return). Www 1040 com MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Www 1040 com You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. Www 1040 com More information on nonresident aliens can be found in Publication 519, U. Www 1040 com S. Www 1040 com Tax Guide for Aliens. Www 1040 com What Expenses Qualify The American opportunity credit is based on adjusted qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Www 1040 com Generally, the credit is allowed for adjusted qualified education expenses paid in 2013 for an academic period beginning in 2013 or beginning in the first three months of 2014. Www 1040 com For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning January 2014, you can use that $1,500 in figuring your 2013 credit. Www 1040 com Academic period. Www 1040 com   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Www 1040 com In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Www 1040 com Paid with borrowed funds. Www 1040 com   You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. Www 1040 com Use the expenses to figure the American opportunity credit for the year in which the expenses are paid, not the year in which the loan is repaid. Www 1040 com Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. Www 1040 com Student withdraws from class(es). Www 1040 com   You can claim an American opportunity credit for qualified education expenses not refunded when a student withdraws. Www 1040 com Qualified Education Expenses For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Www 1040 com Eligible educational institution. Www 1040 com   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Www 1040 com S. Www 1040 com Department of Education. Www 1040 com It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Www 1040 com The educational institution should be able to tell you if it is an eligible educational institution. Www 1040 com   Certain educational institutions located outside the United States also participate in the U. Www 1040 com S. Www 1040 com Department of Education's Federal Student Aid (FSA) programs. Www 1040 com Related expenses. Www 1040 com   Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. Www 1040 com   However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution. Www 1040 com Prepaid expenses. Www 1040 com   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. Www 1040 com See Academic period, earlier. Www 1040 com For example, if you pay $2,000 in December 2013, for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). Www 1040 com    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Www 1040 com   In the following examples, assume that each student is an eligible student at an eligible educational institution. Www 1040 com Example 1. Www 1040 com Jefferson is a sophomore in University V's degree program in dentistry. Www 1040 com This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Www 1040 com Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense. Www 1040 com Example 2. Www 1040 com Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. Www 1040 com The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Www 1040 com William bought his books from a friend; Grace bought hers at College W's bookstore. Www 1040 com Both are qualified education expenses for the American opportunity credit. Www 1040 com Example 3. Www 1040 com When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Www 1040 com This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. Www 1040 com No portion of the fee covers personal expenses. Www 1040 com Although labeled as a student activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense. Www 1040 com No Double Benefit Allowed You cannot do any of the following. Www 1040 com Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses. Www 1040 com Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student. Www 1040 com Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit. Www 1040 com Figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP) using the same expenses you used to figure the American opportunity credit. Www 1040 com See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. Www 1040 com Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. Www 1040 com See Adjustments to Qualified Education Expenses, next. Www 1040 com Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. Www 1040 com The result is the amount of adjusted qualified education expenses for each student. Www 1040 com Tax-free educational assistance. Www 1040 com   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Www 1040 com See Academic period, earlier. Www 1040 com   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Www 1040 com This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Www 1040 com   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. Www 1040 com If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. Www 1040 com   Tax-free educational assistance includes: The tax-free parts of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). Www 1040 com Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Www 1040 com Generally, any scholarship or fellowship is treated as tax free. Www 1040 com However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. Www 1040 com The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www 1040 com The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www 1040 com You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. Www 1040 com For examples, see Coordination with Pell grants and other scholarships, later. Www 1040 com Refunds. Www 1040 com   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Www 1040 com Some tax-free educational assistance received after 2013 may be treated as a refund. Www 1040 com See Tax-free educational assistance, earlier. Www 1040 com Refunds received in 2013. Www 1040 com   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Www 1040 com Refunds received after 2013 but before your income tax return is filed. Www 1040 com   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. Www 1040 com Refunds received after 2013 and after your income tax return is filed. Www 1040 com   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. Www 1040 com See Credit recapture, next. Www 1040 com Credit recapture. Www 1040 com    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Www 1040 com You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Www 1040 com You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you claimed the refigured credit(s). Www 1040 com Include that amount as an additional tax for the year the refund or tax-free assistance was received. Www 1040 com Example. Www 1040 com   You paid $7,000 tuition and fees in August 2013, and your child began college in September 2013. Www 1040 com You filed your 2013 tax return on February 17, 2014, and claimed an American opportunity credit of $2,500. Www 1040 com After you filed your return, you received a refund of $4,000. Www 1040 com You must refigure your 2013 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. Www 1040 com The refigured credit is $2,250. Www 1040 com The increase to your tax liability is also $250. Www 1040 com Include the difference of $250 as additional tax on your 2014 tax return. Www 1040 com See the instructions for your 2014 income tax return to determine where to include this tax. Www 1040 com If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Www 1040 com Amounts that do not reduce qualified education expenses. Www 1040 com   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Www 1040 com   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Www 1040 com The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www 1040 com The use of the money is not restricted. Www 1040 com Example 1. Www 1040 com Joan paid $3,000 for tuition and $5,000 for room and board at University X. Www 1040 com The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. Www 1040 com To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. Www 1040 com The terms of the scholarship state that it can be used to pay any of Joan's college expenses. Www 1040 com University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. Www 1040 com Joan does not report any portion of the scholarship as income on her tax return. Www 1040 com In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. Www 1040 com The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan proceeds. Www 1040 com Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship). Www 1040 com Example 2. Www 1040 com The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. Www 1040 com Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. Www 1040 com Joan is treated as having paid $3,000 in qualified education expenses. Www 1040 com Coordination with Pell grants and other scholarships. Www 1040 com   In some cases, you may be able to reduce your tax liability by including scholarships in income. Www 1040 com If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. Www 1040 com The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Www 1040 com Example 1—No scholarship. Www 1040 com Bill Pass, age 28 and unmarried, enrolled full-time in 2013 as a first-year student at a local college to earn a degree in law enforcement. Www 1040 com This was his first year of postsecondary education. Www 1040 com During 2013, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2013 semester. Www 1040 com He and the college meet all the requirements for the American opportunity credit. Www 1040 com Bill's AGI and his MAGI, for purposes of figuring his credit, are $30,000. Www 1040 com Bill takes the standard deduction of $5,950 and personal exemption of $3,800, reducing his AGI to taxable income of $20,250. Www 1040 com His income tax liability, before credits, is $2,599 and Bill claims no credits other than the American opportunity credit. Www 1040 com He figures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and tax after credits of $99. Www 1040 com Example 2—Scholarship excluded from income. Www 1040 com The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. Www 1040 com Under the terms of his scholarship, it may be used to pay any educational expenses, including room and board. Www 1040 com If Bill excludes the scholarship from income, he will be deemed (for purposes of computing his education credit) to have used the scholarship to pay for tuition, required fees, and course materials. Www 1040 com His adjusted qualified education expenses will be zero and he will not have an education credit. Www 1040 com Therefore, Bill's tax after credits would be $2,599. Www 1040 com Example 3—Scholarship partially included in income. Www 1040 com The facts are the same as in Example 2—Scholarship excluded from income. Www 1040 com If, unlike Example 2, Bill includes $4,000 of the scholarship in income, he will be deemed to have used that amount to pay for room and board. Www 1040 com The remaining $1,600 of the $5,600 scholarship will reduce his qualified education expenses and his adjusted qualified education expenses will be $4,000. Www 1040 com Bill's AGI will increase to $34,000, his taxable income will increase to $24,250, and his tax before credits will increase to $3,199. Www 1040 com Based on his adjusted qualified education expenses of $4,000, Bill would be able to claim an American opportunity tax credit of $2,500 and his tax after credits would be $699. Www 1040 com Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. Www 1040 com This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Www 1040 com Sports, games, hobbies, and noncredit courses. Www 1040 com   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. Www 1040 com However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. Www 1040 com Comprehensive or bundled fees. Www 1040 com   Some eligible educational institutions combine all of their fees for an academic period into one amount. Www 1040 com If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed earlier, contact the institution. Www 1040 com The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. Www 1040 com See Figuring the Credit , later, for more information about Form 1098-T. Www 1040 com Who Is an Eligible Student To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. Www 1040 com This is a student who meets all of the following requirements. Www 1040 com The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. Www 1040 com This includes any tax year(s) in which you claimed the Hope Scholarship Credit for the same student. Www 1040 com The student had not completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2013. Www 1040 com For at least one academic period beginning in 2013, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. Www 1040 com The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2013. Www 1040 com These requirements are also shown in Figure 2-2, Who is an Eligible Student for the American Opportunity Credit , later. Www 1040 com Completion of first 4 years. Www 1040 com   A student has completed the first 4 years of postsecondary education if the institution at which the student is enrolled awards the student 4 years of academic credit at that institution for coursework completed by the student before 2013. Www 1040 com This student generally would not be an eligible student for purposes of the American opportunity credit. Www 1040 com Exception. Www 1040 com   Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 4 years of postsecondary education. Www 1040 com Enrolled at least half-time. Www 1040 com   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. Www 1040 com   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Www 1040 com However, the standard may not be lower than any of those established by the U. Www 1040 com S. Www 1040 com Department of Education under the Higher Education Act of 1965. Www 1040 com Please click here for the text description of the image. Www 1040 com Figure 2-2 Example 1. Www 1040 com Mack graduated from high school in June 2012. Www 1040 com In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2012 fall and 2013 spring semesters. Www 1040 com For the 2013 fall semester, Mack was enrolled less than half-time. Www 1040 com Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2012 and at least one academic period that began during 2013, he is an eligible student for tax years 2012 and 2013 (including the 2013 fall semester when he enrolled at College U on less than a half-time basis). Www 1040 com Example 2. Www 1040 com After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2013 spring semester. Www 1040 com College V classified Shelly as a second-semester senior (fourth year) for the 2013 spring semester and as a first-semester graduate student (fifth year) for the 2013 fall semester. Www 1040 com Because College V did not classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2013, Shelly is an eligible student for tax year 2013. Www 1040 com Therefore, the qualified education expenses paid for the 2013 spring semester and the 2013 fall semester are taken into account in calculating the American opportunity credit for 2013. Www 1040 com Example 3. Www 1040 com During the 2012 fall semester, Larry was a high school student who took classes on a half-time basis at College X. Www 1040 com Larry was not enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. Www 1040 com Because Larry was not enrolled in a degree program at College X during 2012, Larry was not an eligible student for tax year 2012. Www 1040 com Example 4. Www 1040 com The facts are the same as in Example 3. Www 1040 com During the 2013 spring semester, Larry again attended College X but not as part of a degree program. Www 1040 com Larry graduated from high school in June 2013. Www 1040 com For the 2013 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. Www 1040 com Because Larry was enrolled in a degree program at College X for the 2013 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2013. Www 1040 com Therefore, the qualified education expenses paid for classes taken at College X during both the 2013 spring semester (during which Larry was not enrolled in a degree program) and the 2013 fall semester are taken into account in computing any American opportunity credit. Www 1040 com Example 5. Www 1040 com Dee graduated from high school in June 2012. Www 1040 com In January 2013, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. Www 1040 com Dee completed the program in December 2013, and was awarded a certificate. Www 1040 com In January 2014, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Www 1040 com Dee is an eligible student for both tax years 2013 and 2014 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years. Www 1040 com Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year. Www 1040 com For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. Www 1040 com You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Www 1040 com IF you. Www 1040 com . Www 1040 com . Www 1040 com THEN only. Www 1040 com . Www 1040 com . Www 1040 com claim an exemption on  your tax return for a  dependent who is an  eligible student you can claim the American opportunity credit based on that dependent's expenses. Www 1040 com The dependent cannot claim the credit. Www 1040 com do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the American opportunity credit. Www 1040 com You cannot claim the credit based on this dependent's expenses. Www 1040 com Expenses paid by dependent. Www 1040 com   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Www 1040 com Include these expenses when figuring the amount of your American opportunity credit. Www 1040 com    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. Www 1040 com Expenses paid by you. Www 1040 com   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American opportunity credit. Www 1040 com If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the American opportunity credit. Www 1040 com Expenses paid by others. Www 1040 com   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. Www 1040 com In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Www 1040 com If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Www 1040 com Example. Www 1040 com In 2013, Ms. Www 1040 com Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Www 1040 com For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Www 1040 com Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim an American opportunity credit. Www 1040 com If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. Www 1040 com If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit. Www 1040 com Tuition reduction. Www 1040 com    When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. Www 1040 com If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. Www 1040 com For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www 1040 com Figuring the Credit The amount of the American opportunity credit (per eligible student) is the sum of: 100% of the first $2,000 of qualified education expenses you paid for the eligible student, and 25% of the next $2,000 of qualified education expenses you paid for that student. Www 1040 com The maximum amount of American opportunity credit you can claim in 2013 is $2,500 multiplied by the number of eligible students. Www 1040 com You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of adjusted qualified education expenses. Www 1040 com However, the credit may be reduced based on your MAGI. Www 1040 com See Effect of the Amount of Your Income on the Amount of Your Credit , later. Www 1040 com Example. Www 1040 com Jack and Kay Ford are married and file a joint tax return. Www 1040 com For 2013, they claim an exemption for their dependent daughter on their tax return. Www 1040 com Their MAGI is $70,000. Www 1040 com Their daughter is in her junior (third) year of studies at the local university. Www 1040 com Jack and Kay paid qualified education expenses of $4,300 in 2013. Www 1040 com Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Www 1040 com Jack and Kay can claim a $2,500 American opportunity credit in 2013. Www 1040 com This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. Www 1040 com Form 1098-T. Www 1040 com   To help you figure your American opportunity credit, the student should receive Form 1098-T, Tuition Statement. Www 1040 com Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. Www 1040 com An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Www 1040 com However, the amounts in boxes 1 and 2 of Form 1098-T might be different than what you paid. Www 1040 com When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Www 1040 com   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. Www 1040 com    The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number. Www 1040 com Effect of the Amount of Your Income on the Amount of Your Credit The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). Www 1040 com You cannot claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). Www 1040 com Modified adjusted gross income (MAGI). Www 1040 com   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Www 1040 com MAGI when using Form 1040A. Www 1040 com   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Www 1040 com MAGI when using Form 1040. Www 1040 com   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Www 1040 com You can use Worksheet 2-1, next, to figure your MAGI. Www 1040 com    Worksheet 2-1. Www 1040 com MAGI for the American Opportunity Credit 1. Www 1040 com Enter your adjusted gross income  (Form 1040, line 38)   1. Www 1040 com   2. Www 1040 com Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Www 1040 com       3. Www 1040 com Enter your foreign housing deduction (Form 2555, line 50)   3. Www 1040 com       4. Www 1040 com Enter the amount of income from Puerto Rico you are excluding   4. Www 1040 com       5. Www 1040 com Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Www 1040 com       6. Www 1040 com Add the amounts on lines 2, 3, 4, and 5   6. Www 1040 com   7. Www 1040 com Add the amounts on lines 1 and 6. Www 1040 com  This is your modified adjusted  gross income. Www 1040 com Enter here and  on Form 8863, line 3   7. Www 1040 com   Phaseout. Www 1040 com   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 2-7, of Form 8863, Part I. Www 1040 com The same method is shown in the following example. Www 1040 com Example. Www 1040 com You are filing a joint return and your MAGI is $165,000. Www 1040 com In 2013, you paid $5,000 of qualified education expenses. Www 1040 com You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses). Www 1040 com Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. Www 1040 com The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. Www 1040 com The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). Www 1040 com The result is the amount of your phased out (reduced) American opportunity credit ($1,875). Www 1040 com      $2,500 × $180,000 − $165,000  $20,000 = $1,875   Refundable Part of Credit Forty percent of the American opportunity credit is refundable for most taxpayers. Www 1040 com However, if you were under age 24 at the end of 2013 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Www 1040 com Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only. Www 1040 com You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you. Www 1040 com You were: Under age 18 at the end of 2013, or Age 18 at the end of 2013 and your earned income (defined below) was less than one-half of your support (defined below), or Over age 18 and under age 24 at the end of 2013 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below). Www 1040 com At least one of your parents was alive at the end of 2013. Www 1040 com You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2013. Www 1040 com Earned income. Www 1040 com   Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. Www 1040 com Earned income includes the part of any scholarship or fellowship that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship. Www 1040 com Earned income does not include that part of the compensation for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. Www 1040 com   If you are a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of your share of the net profits from that trade or business (after subtracting the deduction for one-half of self-employment tax). Www 1040 com However, if capital is not an income-producing factor and your personal services produced the business income, the 30% limit does not apply. Www 1040 com Support. Www 1040 com   Your support includes food, shelter, clothing, medical and dental care, education, and the like. Www 1040 com Generally, the amount of the item of support will be the amount of expenses incurred by the one furnishing such item. Www 1040 com If the item of support is in the form of property or lodging, measure the amount of such item of support by its fair market value. Www 1040 com However, a scholarship received by you is not considered support if you are a full-time student. Www 1040 com See Publication 501 for details. Www 1040 com Full-time student. Www 1040 com   You are a full-time student for 2013 if during any part of any 5 calendar months during the year you were enrolled as a full-time student at an eligible educational institution (defined earlier), or took a full-time, on-farm training course given by such an institution or by a state, county, or local government agency. Www 1040 com Claiming the Credit You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Www 1040 com Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. Www 1040 com Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 40. Www 1040 com A filled-in Form 8863 is shown at the end of this publication. Www 1040 com Note. Www 1040 com In Appendix A. Www 1040 com at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. Www 1040 com Prev  Up  Next   Home   More Online Publications