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Www irs govefile Publication 957 - Main Content Table of Contents 1. Www irs govefile What is Back Pay?Reporting Back Pay Back Pay Under a Statute Nonstatutory Back Pay Format for Report to the SSA Questions 2. Www irs govefile Special Wage PaymentsReporting Special Wage Payments Reporting Nonstatutory (Nonqualified) Stock Options as Special Wage Payments Nonqualified Deferred Compensation and Section 457 Plans Additional Reporting Examples for Nonqualified Deferred Compensation (NQDC) PlansSpecial rule for box 11 of Form W-2 (distributions and deferral in the same year). Www irs govefile 1. Www irs govefile What is Back Pay? Back pay is pay received in a tax year(s) for actual or deemed employment in an earlier tax year(s). Www irs govefile For social security coverage and benefit purposes, all back pay, whether or not under a statute, is wages if it is payment for covered employment. Www irs govefile Damages for personal injury, interest, penalties, and legal fees included with back pay awards are not wages. Www irs govefile Report all back pay. Www irs govefile However, the tax year(s) for which back pay is credited as wages for social security purposes is different if it is awarded under a statute. Www irs govefile See Back Pay Under a Statute , later, for more information. Www irs govefile Reporting Back Pay The Internal Revenue Service (IRS) and the SSA consider back pay awards to be wages. Www irs govefile However, for income tax purposes, the IRS treats all back pay as wages in the year paid. Www irs govefile Employers should use Form W-2, Wage and Tax Statement, or electronic wage reports to report back pay as wages in the year they actually pay the employee. Www irs govefile The SSA no longer accepts reports on tapes, cartridges, and diskettes. Www irs govefile Example. Www irs govefile In 2012, Terry Morris earned wages of $50,000. Www irs govefile In the same year, she received $100,000 in settlement of a back pay case against her employer that covered the periods January 2007 through December 2011. Www irs govefile Her employer properly reflected social security wages of $110,100 and Medicare wages of $150,000 on her 2012 Form W-2. Www irs govefile However, if an employer did not include back pay wages on a previously filed Form W-2, magnetic media, or electronically filed wage report, the employer should prepare a wage correction report, Form W-2c, Corrected Wage and Tax Statement, or electronically filed report, to add the back pay award to the wages previously reported. Www irs govefile Example. Www irs govefile If, in the above example, Terry Morris' employer had prepared her 2012 Form W-2 reporting social security and Medicare wages of only $50,000 each, the employer would have to correct that report. Www irs govefile A Form W-2c correcting the 2012 Form W-2 would show previously reported social security and Medicare wages of $50,000 and the correct amount of $110,100 for social security wages and $150,000 for Medicare wages. Www irs govefile SSA treatment of back pay under a statute. Www irs govefile   Under the law, the SSA credits back pay awarded under a statute to an individual's earnings record in the period(s) the wages should have been paid. Www irs govefile This is important because wages not credited to the proper year may result in lower social security benefits or failure to meet the requirements for benefits. Www irs govefile   However, back pay under statute payments will remain posted to the employee's social security earnings record in the year reported on Form W-2 (or Form W-2c) unless the employer or employee notifies the SSA (in a separate, special report) of the back pay under a statute payment. Www irs govefile Then, the SSA can allocate the statutory back pay to the appropriate periods. Www irs govefile   If a back pay award is not made under a statute, the SSA credits back pay as wages in the year paid. Www irs govefile    If employers do notify the SSA of this payment, they should prepare a special report (with the information noted below) and send it to: Social Security Administration Attn: CPS Back Pay Staff 7-B-15 SWT 1500 Woodlawn Drive Baltimore, MD 21241-0001 Be sure to send this special report to the above address because the SSA handles it separately from other reports. Www irs govefile    If you paid the back pay award in the same tax year to which it applies, report the wages on that year's Form W-2. Www irs govefile No further action is necessary. Www irs govefile Example. Www irs govefile In 2012, Judy Wilson received a salary of $30,000 and a back pay under statute award of $2,000 for the period January through June 2012. Www irs govefile Her employer properly reported wages of $32,000 for social security and Medicare on her 2012 Form W-2. Www irs govefile No further action is necessary. Www irs govefile Information the SSA needs to properly credit back pay under a statute (special report). Www irs govefile   After you complete the special report, you or the employee should send it to the SSA when or after you submit the Form W-2 (on paper or electronically) to the SSA for the year you pay the statutory back pay to the employee. Www irs govefile There is no statute of limitations on the filing of the special report to enable the SSA to allocate the wages. Www irs govefile The special report must include the following information. Www irs govefile The employer's name, address, and employer identification number (EIN). Www irs govefile A signed statement citing the federal or state statute under which the payment was made. Www irs govefile If the statute is not identified, the SSA will assume the payment was not under a statute and will not allocate to earlier period(s). Www irs govefile The name and telephone number of a person to contact. Www irs govefile The SSA may have additional questions concerning the back pay case or the individual employee's information. Www irs govefile A list of employees receiving the payment and the following information for each employee: The tax year you paid and reported the back pay. Www irs govefile The employee's social security number (SSN). Www irs govefile The employee's name (as shown on his or her social security card). Www irs govefile The amount of the back pay award excluding any amounts specifically designated otherwise, for example, damages for personal injury, interest, penalties, and legal fees. Www irs govefile The period(s) the back pay award covers (beginning and ending dates—month and year). Www irs govefile The other wages paid subject to social security and/or Medicare taxes and reported in the same year as the back pay award (if none, show zero)*. Www irs govefile Do not include the back pay award shown in that wage report. Www irs govefile If you originally submitted the report under an establishment number, show that number and the amount of money that is to remain under that establishment number. Www irs govefile The amount to allocate to each reporting period*. Www irs govefile This includes any amount you want allocated (if applicable) to the tax year of the award payment. Www irs govefile If you do not give the SSA specific amounts to allocate, the SSA does the allocation by dividing the back pay award by the number of months or years covered by the award. Www irs govefile *Note. Www irs govefile   For periods before January 1, 1978 (before January 1, 1981, for state and local government employers covered by a Section 218 agreement), show the wage amounts for each calendar quarter ending March 31, June 30, September 30, and December 31. Www irs govefile For all tax years, show and identify the social security and/or Medicare Qualified Government Employment (MQGE) wages (where applicable) separately. Www irs govefile MQGE is applicable to federal employees beginning in 1983, and for certain state and local government employees beginning in 1986. Www irs govefile For tax years 1991 and later, list the social security and Medicare wages separately. Www irs govefile If you originally reported the individual's wages under an establishment or payroll record unit number, show the amount of wages to remain in the award year for that number and furnish that number to the SSA along with the EIN. Www irs govefile Back Pay Under a Statute Back pay awarded under a statute is a payment by an employer following an award, determination, or agreement approved or sanctioned by a court or government agency responsible for enforcing a federal or state statute that protects an employee's right to employment or wages. Www irs govefile Examples of pertinent statutes include: Age Discrimination in Employment Act, Americans with Disabilities Act, Equal Pay Act, Fair Labor Standards Act, National Labor Relations Act, State minimum wage laws, and State statutes that protect rights to employment and wages. Www irs govefile Payments based on laws that have a similar effect to those listed above also may qualify as payments made under a statute. Www irs govefile Back pay awards, under some of the statutes listed above, may be compensation for personal injury and not pay for employment. Www irs govefile Such awards are not wages for social security coverage purposes. Www irs govefile If a court-approved or sanctioned settlement agreement states that the agreement is not an admission of discrimination, liability, or act of wrongdoing, the statement does not change the nature of a back pay award. Www irs govefile The payments made in such a settlement may still be back pay and wages under the rules discussed here. Www irs govefile Nonstatutory Back Pay A payment for back wages negotiated between an employer and employee without an award, determination, or agreement approved or sanctioned by a court or government agency, the payment is not made under a statute. Www irs govefile Delayed wage payments and retroactive pay increases resulting from union negotiation or payments under local ordinances or regulations are back pay and are wages. Www irs govefile However, they are not payments made under a statute. Www irs govefile If you are uncertain whether the back pay award was under a qualified statute, you may need to contact your personnel department or legal counsel or the attorney who filed the suit. Www irs govefile Format for Report to the SSA Use the format shown in Table 1, later, to send the SSA the information needed to properly credit back pay under a statute. Www irs govefile In a cover letter, include: Name and address of the employer, Statute under which you paid the back pay, Name and telephone number of the employer contact, and Signature of the reporting official. Www irs govefile Under certain circumstances, back pay may be a special wage payment and excluded from wages counted under the social security earnings test. Www irs govefile If you pay back pay to an employee age 61 or older, report it to the SSA in accordance with this section. Www irs govefile Read Special Wage Payments, later, for additional reporting instructions. Www irs govefile Questions If you have questions concerning back pay under a statute, call the SSA at 1-800-772-6270. Www irs govefile Exception. Www irs govefile   If you are a state or local government employer who was covered by an agreement under Section 218 of the Social Security Act before January 1, 1987, and you paid a back pay award before January 1, 1987, which you did not report to the SSA, contact your state Social Security Administrator's office. Www irs govefile Table 1. Www irs govefile Format for Report (Under Covering Letter) to Request SSA to Allocate Back Pay Under Statute Wages Employer's EIN: xx-xxxxxxx Tax Year in Which Award Payment Was Paid: 2012 (1) SSN and Employee Name (2)1 Award Amount and Period(s) (3)2,3 Other Soc. Www irs govefile Sec. Www irs govefile /Med. Www irs govefile Wages Paid In Award Year (4)3 Allocation     Soc. Www irs govefile Sec. Www irs govefile Med. Www irs govefile /MQGE Year Soc. Www irs govefile Sec. Www irs govefile Med. Www irs govefile /MQGE xxx-xx-xxxx HELEN T. Www irs govefile SMITH $100,000 1/2009 - 12/2012 $40,000 $40,000 2009 2010 2011 2012 $20,000 25,000 27,000 28,000 $20,000 25,000 27,000 28,000 xxx-xx-xxxx SAM W. Www irs govefile EVANS 30,000 7/89-12/91 -0- -0- 1989 1990 1991   6,000 12,000 12,000 xxx-xx-xxxx ROLAND S. Www irs govefile ADAMS 15,000 7/80-12/81 -0- -0- 9/80 12/80 1981 3,500 3,500 8,000   1Exclude amounts specifically designated as damages, penalties, etc. Www irs govefile  2Exclude the amount of back pay, if any, included in that amount. Www irs govefile  3For periods before January 1, 1978 (and for state and local government (Section 218) employers before January 1, 1981), show the wage amounts by calendar quarters. Www irs govefile The social security and/or Medicare Qualified Government Employment (MQGE) wages (where applicable) must be shown separately FOR ALL YEARS. Www irs govefile (Wages subject ONLY to MQGE would be shown in the Medicare/MQGE column; no wages would be shown in the Soc. Www irs govefile Sec. Www irs govefile column. Www irs govefile ) For tax years 1991 and later, the social security and Medicare wages must be listed separately. Www irs govefile Explanation of examples. Www irs govefile Helen T. Www irs govefile Smith–The back pay award, excluding interest, was $100,000 for the periods 1/2009-12/2012. Www irs govefile In 2012, this employee was also paid $40,000 in other wages. Www irs govefile (Her Form W-2 for 2012 reported $110,100 for social security and $140,000 for Medicare. Www irs govefile The SSA allocation will result in adjusted posted wages of $68,000 for social security and $68,000 for Medicare for 2012. Www irs govefile ) Sam W. Www irs govefile Evans–The back pay award was $30,000 for the periods 7/89-12/91. Www irs govefile This employee was hired in 1989 and was subject to MQGE only. Www irs govefile He was no longer employed by this governmental employer in 2012. Www irs govefile (His Form W-2 for 2012 reported $30,000 for social security and $30,000 for Medicare. Www irs govefile After the SSA allocation, he will not have any net posted wages for 2012. Www irs govefile ) Roland S. Www irs govefile Adams–The back pay award was $15,000 for the periods 7/80-12/81. Www irs govefile He was no longer employed by this state and local government (Section 218) employer in 2012. Www irs govefile (His Form W-2 for 2012 reported $15,000 for social security and $15,000 for Medicare; after the SSA allocation, he will not have any net posted wages for 2012. Www irs govefile ) If the state Social Security Administrator's office needs more information, they can contact the SSA at the following address:   Social Security Administration Office of Income Security Programs Office of Earnings and Program Integrity Policy 6401 Security Boulevard 2506 OPS Baltimore, MD 21235 2. Www irs govefile Special Wage Payments A special wage payment (SWP) is an amount paid by an employer to an employee (or former employee) for services performed in a prior year. Www irs govefile Employers should report to the SSA special wage payments made to employees and former employees who are recipients of social security retirement benefits. Www irs govefile Special wage payments made to a retired employee receiving social security or to an employee who continues to work while receiving social security benefits may reduce the benefits the individual receives if not reported to the SSA. Www irs govefile Special wage payments may include (but are not limited to): Accumulated sick and vacation pay, Back pay, Bonuses, Deferred compensation, Payments because of retirement, Sales commissions, Severance pay, and Stock options. Www irs govefile Note. Www irs govefile Payments made after retirement that are part of the normal payroll cycle should not be routinely reported as special wage payments. Www irs govefile Earnings Test. Www irs govefile   Benefits paid to a social security beneficiary under full retirement age may be reduced if the beneficiary continues to work. Www irs govefile The SSA uses the information in boxes 1, 3, and 5 of Form W-2 to determine the beneficiary's current year earnings. Www irs govefile Special wage payments, which are for services performed in a prior year, will increase the current year earnings on Form W-2, which also may result in a reduction in the beneficiary's benefits. Www irs govefile If a benefit is reduced because of a special wage payment, the beneficiary must get documentation from the employer before the SSA can restore the deducted portion. Www irs govefile Therefore, employer reports of special wage payments help prevent incorrect benefit reductions. Www irs govefile Reporting Special Wage Payments Employers must report special wage payments for income tax purposes and social security and Medicare taxes in the year received. Www irs govefile Report income, social security, and/or Medicare taxes for special wage payments on Form W-2. Www irs govefile See Nonqualified Deferred Compensation and Section 457 Plans, later, for reporting nonqualified deferred compensation plan deferrals and payments on Form W-2. Www irs govefile In addition, report to the SSA special wage payments made during the reporting year to retired employees and employees who continue to work while receiving social security benefits. Www irs govefile Submit reports after the close of the tax year. Www irs govefile To avoid delays in processing, submit reports in time to reach the SSA by April 1. Www irs govefile Use one of the following reporting methods. Www irs govefile Electronic reporting. Www irs govefile   Special wage payment files can be sent electronically by logging onto Business Services Online (BSO) via the socialsecurity. Www irs govefile gov website. Www irs govefile BSO enables organizations and authorized individuals to conduct business with and submit confidential information to the Social Security Administration. Www irs govefile You must register to use this website. Www irs govefile The web address is www. Www irs govefile socialsecurity. Www irs govefile gov/bso/bsowelcome. Www irs govefile htm. Www irs govefile   Use the specifications and record layout shown in  Table 2, later. Www irs govefile Only one file at a time may be submitted. Www irs govefile If your file is large (>10MB), or you have a slow internet connection, the transmission will be faster if the file is zipped. Www irs govefile A zipped file contains a file that has been compressed to reduce its file size. Www irs govefile WinZip and PKZIP are examples of acceptable compression packages. Www irs govefile   Electronic submissions not meeting the specifications in Table 2 will be rejected. Www irs govefile Paper listing. Www irs govefile   A paper listing can be used to report special wage payments to several employees. Www irs govefile Use the format shown in Table 3, later. Www irs govefile Submit paper listings to the local SSA office nearest your place of business. Www irs govefile Visit www. Www irs govefile socialsecurity. Www irs govefile gov/locator to find a Social Security office near you. Www irs govefile Form SSA-131. Www irs govefile   Use Form SSA-131 to report special wage payments made to an employee. Www irs govefile Also use this form to report nonqualified deferred compensation and section 457 plan deferrals and payments that could not be reported in box 11 of Form W-2. Www irs govefile    This image is too large to be displayed in the current screen. Www irs govefile Please click the link to view the image. Www irs govefile Publication 957 Reporting Back Pay to the Social Security Administration Instructions for Form SSA–131   EMPLOYER INSTRUCTIONS FOR COMPLETING SPECIAL WAGE PAYMENT FORM 1. Www irs govefile Provide the EIN that was used or will be used to report the employee's wages on the Form W-2. Www irs govefile 2. Www irs govefile Enter the date the employee retired. Www irs govefile Enter “Not Retired” if the employee has not retired. Www irs govefile 3. Www irs govefile Enter the date that the employee last performed services; was not expected to return to work; and was not subject to recall to render additional services. Www irs govefile This date should be the same as or earlier than the date in item “2”. Www irs govefile Enter “Not Retired” if the employee has not retired. Www irs govefile 4. Www irs govefile Enter the wages that were paid to the employee in the tax year that were for services that were performed in years prior to the tax year or that were paid on account of retirement. Www irs govefile  Examples (not all inclusive) of payments to be included: Payments in lieu of vacation that were earned in a year prior to the tax year. Www irs govefile Accumulated sick payments which were paid in a lump sum based on “retirement” as the sole condition of payment. Www irs govefile Accumulated sick payments paid at or after the date in item 3, which were earned in a year prior to the tax year. Www irs govefile Payments “on account of retirement”–dismissal, severance or termination pay paid because of retirement. Www irs govefile Bonuses which are paid pursuant to a prior contract, agreement or promise causing the employee to expect such payments regularly; or announced to induce the employee to work more steadily, rapidly or efficiently or to remain with the employer. Www irs govefile Stock Options. Www irs govefile   Do not include in item “4” payments: For annual, sick, holiday, or vacation pay if used (absence from work) prior to the date of retirement (earlier of items “2” or “3”). Www irs govefile That were reported or will be reported under “Nonqualified Plans” on the Form W-2. Www irs govefile That were deducted from the employee's wages and paid to a deferred compensation plan (e. Www irs govefile g. Www irs govefile , 401k). Www irs govefile Employees health and dental plan benefits (non-covered/non-taxable for Social Security Wages). Www irs govefile Bonuses earned and paid in the tax year. Www irs govefile 5. Www irs govefile Check whether payments listed in item 4 will be made for years after the tax year. Www irs govefile If yes, please show the amounts and years in which these will be paid, if known. Www irs govefile 6. Www irs govefile Nonqualified deferred compensation and section 457 plans only. Www irs govefile If you were unable to report nonqualified deferred compensation or section 457 plan payments and deferrals (contributions) on Form W-2 because both payments and deferrals occurred during the year, show the amount of wages earned by the employee during the tax year. Www irs govefile Generally, the wages earned will be the compensation reported in block 1 of Form W-2 less payments from a nonqualified deferred compensation (or 457) plan, but including any amounts deferred under the plan during the tax year (See IRS Publication 957). Www irs govefile Paperwork/Privacy Act Notice: This report is authorized by regulation 20 CFR 404. Www irs govefile 702. Www irs govefile The information that you provide will be used in making a determination regarding the amount of Social Security benefits payable to the above named individual. Www irs govefile While your response is voluntary, if you do not respond we may not be able to make a correct determination regarding the amount of Social Security benefits payable to the above named individual for the year in question. Www irs govefile We may also use the information you give us when we match records by computer. Www irs govefile Matching programs compare our records with those of other Federal, State, or local government agencies. Www irs govefile Many agencies may use matching programs to find or prove that a person qualifies for benefits paid by the Federal Government. Www irs govefile The law allows us to do this even if you do not agree to it. Www irs govefile Explanations about these and other reasons why information you provide us may be used or given out are available in Social Security Offices. Www irs govefile If you want to learn more about this, contact any Social Security Office. Www irs govefile The Paperwork Reduction Act: This information collection meets the clearance requirements of 44 U. Www irs govefile S. Www irs govefile C. Www irs govefile §3507, as amended by Section 2 of the Paperwork Reduction Act of 1995. Www irs govefile You are not required to answer these questions unless we display a valid Office of Management and Budget control number. Www irs govefile We estimate that it will take you about 20 minutes to read the instructions, gather the necessary facts, and answer the questions. Www irs govefile Form SSA-131 (8-2001) EF (06-2002)   Submit Form SSA-131 to the SSA office nearest your place of business. Www irs govefile Or, the employee can submit it to the SSA office handling the claim. Www irs govefile You or the employee must submit this form before the SSA can exclude the special wage payments for purposes of the earnings test. Www irs govefile If reporting on more than one employee, complete a separate Form SSA-131 for each employee or use the paper listing format (except for reporting nonqualified and section 457 plan deferrals and payments) in Table 3. Www irs govefile Do not report payments from nonqualified deferred compensation or section 457 plans that were reported in box 11 of Form W-2. Www irs govefile Use Form SSA-131 if deferrals to and payments from nonqualified or section 457 plans occurred during the tax year. Www irs govefile Reporting Nonstatutory (Nonqualified) Stock Options as Special Wage Payments A nonstatutory (nonqualified) option to purchase stock which is exercised in a year after the year in which the option was earned is a special wage payment. Www irs govefile It should not count for the social security earnings test. Www irs govefile Nonstatutory (nonqualified) options exercised as special wage payments by retired employees or employees who continue to work while receiving social security benefits should be reported by employers using the above reporting methods. Www irs govefile Nonqualified Deferred Compensation and Section 457 Plans A nonqualified deferred compensation plan is a plan or arrangement established and maintained by an employer for one or more of its employees that provides for the deferral of compensation, but does not meet the requirements for a tax-qualified deferred compensation plan. Www irs govefile For social security and Medicare purposes, deferred compensation plans for employees of state and local governments (section 457 plans) are treated the same as nonqualified plans. Www irs govefile Nonqualified and section 457 plans are reported differently than other special wage payments. Www irs govefile See Reporting Amounts Deferred to Nonqualified and Section 457 Plans below for specific instructions. Www irs govefile Reporting Amounts Deferred to Nonqualified and Section 457 Plans Generally, when the related services are performed, nonqualified deferred compensation is subject to social security and Medicare tax when deferred. Www irs govefile However, if nonqualified and section 457 plans contain provisions that delay the employee's right to receive payments from the plan, a period of substantial risk of forfeiture exists. Www irs govefile The plans' deferrals, or contributions, are not subject to social security and Medicare taxes until the period of substantial risk of forfeiture ends. Www irs govefile No risk of forfeiture. Www irs govefile   If there is no risk of forfeiture, report wage amounts deferred to a nonqualified deferred compensation or section 457 plan in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. Www irs govefile Example. Www irs govefile Company X's nonqualified deferred compensation plan allows the deferral of up to $20,000 of employee salaries each year. Www irs govefile The plan has no risk of forfeiture. Www irs govefile In 2012, Employee A defers $20,000 to the plan from a total salary of $200,000. Www irs govefile Form W-2 Completion Amount Box 1 $200,000 Box 3* 110,100 Box 5 200,000 *Wage base maximum for tax year 2012 Risk of forfeiture lapses before retirement. Www irs govefile   If the substantial risk of forfeiture lapses before the employee retires, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. Www irs govefile The accumulated deferrals are reported along with any other social security and Medicare wages earned during the year. Www irs govefile   Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. Www irs govefile If the employee continues working, future deferrals are social security and Medicare wages when they are earned. Www irs govefile    Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services. Www irs govefile Risk of forfeiture lapses at retirement. Www irs govefile   When an employee's right to a payment is contingent upon working until retirement, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, as social security and/or Medicare wages in the year of retirement. Www irs govefile Add the amount to other wages paid in that year, and enter in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. Www irs govefile   Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. Www irs govefile    Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services. Www irs govefile Example—risk of forfeiture. Www irs govefile At the end of the risk-of-forfeiture period for Company Y's nonqualified deferred compensation plan, Employee B's accumulated deferrals, plus interest earned by the plan, are $120,000, not including B's $20,000 deferral for this year. Www irs govefile B's wages, including this year's deferred amount, are $80,000. Www irs govefile Form W-2 Completion Amount Box 1 $60,000 Box 3* 110,100 Box 5 200,000 Box 11 120,000 *Wage base maximum for tax year 2012 Reporting Payments From Nonqualified and Nongovernmental Section 457 Plans When an employee or former employee retires and begins receiving payments (distributions) from a nonqualified or nongovernmental section 457 plan, report the payments in boxes 1 and 11 of Form W-2. Www irs govefile Report payments (distributions) from a governmental section 457 plan on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Www irs govefile Example. Www irs govefile Employee D retired from the XYZ company and began receiving social security benefits. Www irs govefile XYZ paid D a $12,000 bonus upon retirement for sales made in a prior year, and D received $25,000 in payments from XYZ's nonqualified deferred compensation plan. Www irs govefile In addition, D agreed to continue performing services for XYZ, but on a part-time basis for wages of $15,000 per year. Www irs govefile D made no deferrals to the nonqualified plan this year. Www irs govefile Form W-2 Completion Amount Box 1 $52,000 Box 3 27,000 Box 5 27,000 Box 11 25,000 Report the $12,000 bonus to the SSA using electronic reporting, a paper listing, or Form SSA-131. Www irs govefile For more information, see Reporting Special Wage Payments , earlier. Www irs govefile Reporting Payments and Deferrals in the Same Year Do not complete box 11 when payments (distributions) are made from a nonqualified plan and deferrals are reported in boxes 3 and/or 5 of Form W-2 (including current year deferrals). Www irs govefile Report to the SSA on Form SSA-131 the total amount the employee earned during the tax year. Www irs govefile Normally, the amount earned is the amount reported in box 1 of Form W-2 less payments from a nonqualified or section 457 plan, but including any amounts deferred under the plan during the tax year. Www irs govefile See Form SSA-131 and its instructions, earlier. Www irs govefile Example. Www irs govefile Employee K retired this year from Company XYZ and began receiving social security benefits. Www irs govefile During the year he earned wages of $50,000 and deferred $35,000 of the wages into the company's nonqualified deferred compensation plan. Www irs govefile K also received $75,000 in payments from the company's nonqualified plan. Www irs govefile Form W-2 Completion Amount Special Wage Payment $75,000 Wages 50,000 Minus: deferral 35,000 Total reported in Box 1 $90,000     Wages including deferral reported in  Boxes 3 and 5 $50,000     Leave Box 11 blank. Www irs govefile File Form SSA-131 -0-     Form SSA-131 Completion Amount from Box 1 of Form W-2 $90,000 Minus: payments from a nonqualified plan 75,000 Plus: amounts deferred into the plan during the year 35,000 Total wages earned for purposes of Form SSA-131 (item 6) $50,000 Additional Reporting Examples for Nonqualified Deferred Compensation (NQDC) Plans It is not necessary to show amounts deferred during the year under an NQDC plan subject to section 409A. Www irs govefile If you report section 409A deferrals, show the amount in box 12 of Form W-2 using code Y. Www irs govefile For more information, see Notice 2008-115, 2008-52 I. Www irs govefile R. Www irs govefile B. Www irs govefile 1367, available at www. Www irs govefile irs. Www irs govefile gov/irb/2008-52_IRB/ar10. Www irs govefile html. Www irs govefile Special reporting rules apply when an NQDC plan is not compliant with section 409A (when there has been a “plan failure”). Www irs govefile Income included under section 409A from an NQDC plan is reported in box 1 and box 12 of Form W-2 using code Z. Www irs govefile See Notice 2008-115. Www irs govefile The following examples use small dollar amounts for illustrative purposes. Www irs govefile However, the amount reported in box 3 of Form W-2 is always limited by the social security earnings wage base (for example, $110,100 for 2012). Www irs govefile The term “vested” in the following examples means that the amount deferred is not subject to a substantial risk of forfeiture. Www irs govefile Conversely, the term “not vested” means that the amount deferred is subject to a substantial risk of forfeiture. Www irs govefile The examples assume that the NQDC plan is in compliance with section 409A, and that amounts deferred under the plan are not includible in gross income as they are deferred. Www irs govefile For purposes of the examples, it is assumed that the regular pay of the employee is remuneration for employment and wages for employment tax purposes except to the extent the deferral of a portion of the regular pay results in a reduction in wages. Www irs govefile Example 1: Deferral that is immediately vested (no substantial risk of forfeiture) with no distributions and no vesting of prior-year deferrals. Www irs govefile For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into her employer’s NQDC plan. Www irs govefile The deferral of $20 was vested upon deferral and there was an employer match of $10 under the plan, which was also vested. Www irs govefile Regular pay = $200; Deferral, vested = $20; Employer match, vested = $10. Www irs govefile Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 vested deferral) $180 Box 3 ($200 Regular pay plus $10 Employer match, vested) 210 Box 5 ($200 Regular pay plus $10 Employer match, vested) 210 Box 11 -0- Example 2: Deferral with delayed vesting (substantial risk of forfeiture) of employee and employer portions (no distributions and no vesting of prior-year deferrals). Www irs govefile For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s nonqualified deferred compensation plan. Www irs govefile The deferral of $20 was not vested upon deferral, and there was an employer match of $10 under the plan, which was also not vested. Www irs govefile Regular pay = $200; Deferral, not vested = $20; Employer match, not vested = $10. Www irs govefile Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 Deferral, not vested) $180 Box 3 ($200 Regular pay minus $20 Deferral, not vested) 180 Box 5 ($200 Regular pay minus $20 Deferral, not vested) 180 Box 11 -0- Example 3: Deferral that is immediately vested with prior-year deferrals and investment earnings on the prior-year deferrals that are now vesting (no distributions). Www irs govefile For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s nonqualified deferred compensation plan. Www irs govefile The deferral of $20 was vested upon deferral. Www irs govefile During the year, $100 of prior-year deferrals and $15 of investment earnings on the $100 of prior-year deferrals became vested. Www irs govefile Regular pay = $200; Deferral, vested = $20; Vesting of prior-year deferrals = $100; Vesting of investment earnings on $100 of prior-year deferral = $15. Www irs govefile Form W-2 Completion Amount Box 1 ($200 Regular pay minus $20 Deferral, vested) $180 Box 3 ($200 Regular pay plus $100 vested prior-year deferral plus $15 earnings on deferral) 315 Box 5 ($200 Regular pay plus $100 vested prior-year deferral plus $15 vested investment earnings on prior year deferral) 315 Box 11 ($100 vested prior-year deferral plus $15 earnings) 115 Example 4: No deferrals but there are distributions (no vesting of prior-year deferrals). Www irs govefile For the year, the employee’s regular pay was $100, and the employee deferred no pay into the employer’s NQDC plan. Www irs govefile There was no vesting of prior-year deferrals under the plan. Www irs govefile During the year, there were total distributions of $50 from the plan to the employee. Www irs govefile Regular pay = $100; Distribution = $50. Www irs govefile Form W-2 Completion Amount Box 1 ($100 Regular pay plus $50 Distribution) $150 Box 3 ($100 Regular pay ) 100 Box 5 ($100 Regular pay) 100 Box 11 ($50 Distribution) 50 Special rule for box 11 of Form W-2 (distributions and deferral in the same year). Www irs govefile   If, in the same year, there are NQDC distributions and there are deferrals that are reportable in boxes 3 and/or 5 (current or prior-year deferrals) of Form W-2, do not complete box 11. Www irs govefile Instead, report on Form SSA-131 the total amount the employee earned during the year. Www irs govefile * Submit the SSA-131 to the nearest SSA office or give it to the employee. Www irs govefile   *Generally, the amount earned by the employee during the tax year for purposes of item 6 of Form SSA-131 is the amount reported in box 1 of Form W-2 plus current-year deferrals that are vested (employee and employer portions) less distributions. Www irs govefile Do not consider prior-year deferrals that are vesting in the current year. Www irs govefile If there was a plan failure, the box 1 amount in this calculation should be as if there were no plan failure. Www irs govefile Example 5: Deferral that is immediately vested and there are distributions (no vesting of prior-year deferrals). Www irs govefile For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. Www irs govefile There was also an employer match of $10. Www irs govefile The deferral and employer match were vested upon deferral. Www irs govefile There was no vesting of prior-year deferrals under the plan. Www irs govefile During the year, there were total distributions of $50 from the plan to the employee. Www irs govefile Regular pay = $200; Deferral, vested = $20; Employer match, vested = $10; Distribution = $50. Www irs govefile Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 Deferral, vested) $230 Boxes 3 and 5 ($200 Regular pay plus $10 vested employer match) 210 Leave Box 11 blank. Www irs govefile File Form SSA-131 -0-     Form SSA-131 Completion Item 6 - amount of wages earned by the employee during the tax year ($230 from Box 1 of Form W-2 minus $50 Distribution plus $30 vested current year employee deferral and employer match) $210 Example 6: Deferral with delayed vesting and there are distributions (no vesting of prior-year deferrals). Www irs govefile For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. Www irs govefile The deferral was not vested upon deferral. Www irs govefile There was no vesting of prior-year deferrals under the plan. Www irs govefile During the year, there were total distributions of $50 from the plan to the employee. Www irs govefile Regular pay = $200; Deferral, not vested = $20; Distribution = $50. Www irs govefile Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 Deferral, not vested) $230 Boxes 3 and 5 ($200 Regular pay minus $20 deferral that is not vested) 180 Box 11 ($50 Distribution). Www irs govefile 50 Example 7: Deferral that is immediately vested and there are distributions (also vesting of prior-year deferrals and earnings on those prior-year deferrals). Www irs govefile For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. Www irs govefile The deferral was vested upon deferral. Www irs govefile There was vesting of $100 of prior-year deferrals and $15 of earnings on the $100 prior-year deferral under the plan. Www irs govefile During the year, there were total distributions of $50 from the plan to the employee. Www irs govefile Regular pay = $200; Deferral, vested = $20; Distribution = $50; Vesting of prior-year deferrals ($100) and earnings on those prior-year deferrals ($15) = $115. Www irs govefile Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 Regular pay minus $20 vested deferral $230 Boxes 3 and 5 ($200 Regular pay Plus $115 vested prior deferral (with vested earnings on the deferral)) 315 Leave Box 11 blank. Www irs govefile File Form SSA-131 -0-     Form SSA-131 Completion Item 6, amount of wages earned by the employee during the tax year ($230 from Box 1 of Form W-2 minus $50 Distribution plus $20 vested current year deferral) $200 Example 8: Deferral with delayed vesting and there are distributions (vesting of prior-year deferrals, including employer matches, and earnings on those deferrals). Www irs govefile For the year, the employee’s regular pay was $200, and the employee deferred $20 of the pay into the employer’s NQDC plan. Www irs govefile The deferral was not vested upon deferral. Www irs govefile There was also vesting of prior-year deferrals and employer matches and earnings on these amounts under the plan ($115). Www irs govefile During the year, there were total distributions of $50 from the plan to the employee. Www irs govefile Regular pay = $200; Deferral, not vested = $20; Distribution = $50; Vesting of prior-year deferrals and employer match = $100 plus earnings on that $100 of $15. Www irs govefile Form W-2 Completion Amount Box 1 ($50 Special Wage Payment (Distribution) plus $200 regular pay minus $20 Deferral, not vested) $230 Boxes 3 and 5 ($200 Regular pay plus $115 vested prior-year deferral and prior year employer match and earning on the prior year amounts minus $20 deferral that is not vested) 295 Leave Box 11 blank. Www irs govefile File Form SSA-131 -0-     Form SSA-131 Completion Item 6 ($230 Amount from Box 1 of Form W-2 minus $50 Distribution) $180 Table 2. Www irs govefile Specifications for Electronic Reporting of Special Wage Payments Record Position  Field Size   Description Start End 1 3 3 Record Type—must include only the capital letters “SWP” 4 12 9 SSN—must be numeric and may not be all zeros 13 27 15 Last Name—all capitals and no punctuation; may have blanks on right only 28 38 11 First Name—all capitals and no punctuation; may have blanks on right only 39 39 1 Middle Initial—must be either a capital letter or blank 40 48 9 EIN—must be numeric and may not be all zeros 49 59 11 Payment—must be numeric; may not be all zeros; last two digits on right are assumed to be cents; no period or dollar sign 60 63 4 Payment Year—must be only a four-digit year 64 66 3 SSA Office Code—must be numeric and may be all zeros 67 67 1 Payment Type Code—must be the capital letter “T” 68 117 50 Filler  The record format is a fixed length of 117. Www irs govefile  The file format is ASCII. Www irs govefile  Submit only one file at a time. Www irs govefile   Table 3. Www irs govefile Sample—Paper Listing for Reporting Special Wage Payments to Several Employees Report of Special Wage PaymentsTax Year: Page of A. Www irs govefile Employer Name: EIN:   Address: Contact Name:     Phone: ( )   . Www irs govefile 1) B. Www irs govefile Employee Name: (Last) (First) (MI)   C. Www irs govefile SSN: D. Www irs govefile SWP:$ E. Www irs govefile Type: Other: 2) B. Www irs govefile Employee Name: (Last) (First) (MI)   C. Www irs govefile SSN: D. Www irs govefile SWP:$ E. Www irs govefile Type: Other: 3) B. Www irs govefile Employee Name: (Last) (First) (MI)   C. Www irs govefile SSN: D. Www irs govefile SWP:$ E. Www irs govefile Type: Other: 4) B. Www irs govefile Employee Name: (Last) (First) (MI)   C. Www irs govefile SSN: D. Www irs govefile SWP:$ E. Www irs govefile Type: Other: 5) B. Www irs govefile Employee Name: (Last) (First) (MI)   C. Www irs govefile SSN: D. Www irs govefile SWP:$ E. Www irs govefile Type: Other:     INSTRUCTIONS:   Enter tax year and page number. Www irs govefile   A. Www irs govefile Employer name, employer identification number (EIN), address, the name of a contact person, and a phone number where the contact person can be reached during normal business hours. Www irs govefile   B. Www irs govefile Employee's name. Www irs govefile   C. Www irs govefile Employee's social security number (SSN). Www irs govefile   D. Www irs govefile Total amount of special wage payments made to the employee. Www irs govefile   E. Www irs govefile Type of special wage payment from the following list: (1) Vacation Pay, (2) Sick Pay, (3) Severance Pay,  (4) Bonus, (5) Deferred Compensation, (6) Stock Options, and (7) Other—Please explain. Www irs govefile   Do not use a paper listing for nonqualified deferred compensation and section 457 plan deferrals and payments that could not be reported in block 11 of Form W-2. Www irs govefile (Get Form SSA-131. 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LT 39 (Letter 3228) Frequently Asked Questions (FAQs)

What is the notice telling me?

This is a reminder notice required by law informing you that you owe overdue tax.

What do I have to do?

If you are already working with us to resolve the balance, no action is required. You should contact us if you have unanswered questions about the overdue taxes or wrote or called us over 30 days ago and have not received a response. If you are able to pay the amount owed, send us full payment as outlined in the letter. If you are unable to full pay or believe that the overdue tax is incorrect, call us to resolve the account.

How much time do I have?

To avoid enforcement action, contact us within 10 days of the date on the letter.

What happens if I don't pay?

Enforced collection action may be taken to collect the amount you owe, including the filing of a Notice of Federal Tax Lien, or garnishment of your wages or other income sources, and/or bank accounts. A lien is a public notice to your creditors that the government has a right to your interests in your current assets and assets you acquire after we file the lien; it can affect your ability to obtain credit.

Who should I contact?

Contact us at the phone number shown on the letter.

What if I don't agree or have already taken corrective action?

If you do not agree with this notice, call us immediately at the number printed at the top of the notice. We will do our best to help you. If you called us about this matter before, but we did not correct the problem, you may want to contact the Office of the Taxpayer Advocate.

If you have already paid or arranged for an installment agreement, you should still call us at the number printed at the top of the notice to make sure your account reflects this.

Page Last Reviewed or Updated: 03-Feb-2014

The Www Irs Govefile

Www irs govefile 2. Www irs govefile   Electing the Section 179 Deduction Table of Contents Introduction Useful Items - You may want to see: What Property Qualifies?Eligible Property Property Acquired for Business Use Property Acquired by Purchase What Property Does Not Qualify?Land and Improvements Excepted Property How Much Can You Deduct?Dollar Limits Business Income Limit Partnerships and Partners S Corporations Other Corporations How Do You Elect the Deduction? When Must You Recapture the Deduction? Introduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Www irs govefile This is the section 179 deduction. Www irs govefile You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. Www irs govefile Estates and trusts cannot elect the section 179 deduction. Www irs govefile This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special rules for partnerships and corporations), and how to elect it. Www irs govefile It also explains when and how to recapture the deduction. Www irs govefile Useful Items - You may want to see: Publication 537 Installment Sales 544 Sales and Other Dispositions of Assets 954 Tax Incentives for Distressed Communities Form (and Instructions) 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. Www irs govefile What Property Qualifies? To qualify for the section 179 deduction, your property must meet all the following requirements. Www irs govefile It must be eligible property. Www irs govefile It must be acquired for business use. Www irs govefile It must have been acquired by purchase. Www irs govefile It must not be property described later under What Property Does Not Qualify . Www irs govefile The following discussions provide information about these requirements and exceptions. Www irs govefile Eligible Property To qualify for the section 179 deduction, your property must be one of the following types of depreciable property. Www irs govefile Tangible personal property. Www irs govefile Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services, A research facility used in connection with any of the activities in (a) above, or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Www irs govefile Single purpose agricultural (livestock) or horticultural structures. Www irs govefile See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures. Www irs govefile Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Www irs govefile Off-the-shelf computer software. Www irs govefile Qualified real property (described below). Www irs govefile Tangible personal property. Www irs govefile   Tangible personal property is any tangible property that is not real property. Www irs govefile It includes the following property. Www irs govefile Machinery and equipment. Www irs govefile Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs. Www irs govefile Gasoline storage tanks and pumps at retail service stations. Www irs govefile Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals. Www irs govefile   The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. Www irs govefile For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law. Www irs govefile Off-the-shelf computer software. Www irs govefile   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. Www irs govefile This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. Www irs govefile It includes any program designed to cause a computer to perform a desired function. Www irs govefile However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software. Www irs govefile Qualified real property. Www irs govefile   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. Www irs govefile If this election is made, the term “section 179 property” will include any qualified real property that is: Qualified leasehold improvement property, Qualified restaurant property, or Qualified retail improvement property. Www irs govefile The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 in 2013. Www irs govefile For more information, see Special rules for qualified section 179 real property, later. Www irs govefile Also, see Election for certain qualified section 179 real property, later, for information on how to make this election. Www irs govefile Qualified leasehold improvement property. Www irs govefile   Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. Www irs govefile   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Www irs govefile A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Www irs govefile Examples include the following. Www irs govefile A complete liquidation of a subsidiary. Www irs govefile A transfer to a corporation controlled by the transferor. Www irs govefile An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Www irs govefile Qualified restaurant property. Www irs govefile   Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2014. Www irs govefile Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals. Www irs govefile Qualified retail improvement property. Www irs govefile   Generally, this is any improvement (placed in service after December 31, 2008, and before January 1, 2014) to an interior portion of nonresidential real property if it meets the following requirements. Www irs govefile The portion is open to the general public and is used in the retail trade or business of selling tangible property to the general public. Www irs govefile The improvement is placed in service more than 3 years after the date the building was first placed in service. Www irs govefile The expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building. Www irs govefile In addition, an improvement made by the lessor does not qualify as qualified retail improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Www irs govefile A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Www irs govefile Examples include the following. Www irs govefile A complete liquidation of a subsidiary. Www irs govefile A transfer to a corporation controlled by the transferor. Www irs govefile An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Www irs govefile Property Acquired for Business Use To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Www irs govefile Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify. Www irs govefile Partial business use. Www irs govefile   When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. Www irs govefile If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. Www irs govefile Use the resulting business cost to figure your section 179 deduction. Www irs govefile Example. Www irs govefile May Oak bought and placed in service an item of section 179 property costing $11,000. Www irs govefile She used the property 80% for her business and 20% for personal purposes. Www irs govefile The business part of the cost of the property is $8,800 (80% × $11,000). Www irs govefile Property Acquired by Purchase To qualify for the section 179 deduction, your property must have been acquired by purchase. Www irs govefile For example, property acquired by gift or inheritance does not qualify. Www irs govefile Property is not considered acquired by purchase in the following situations. Www irs govefile It is acquired by one component member of a controlled group from another component member of the same group. Www irs govefile Its basis is determined either— In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or Under the stepped-up basis rules for property acquired from a decedent. Www irs govefile It is acquired from a related person. Www irs govefile Related persons. Www irs govefile   Related persons are described under Related persons earlier. Www irs govefile However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears. Www irs govefile Example. Www irs govefile Ken Larch is a tailor. Www irs govefile He bought two industrial sewing machines from his father. Www irs govefile He placed both machines in service in the same year he bought them. Www irs govefile They do not qualify as section 179 property because Ken and his father are related persons. Www irs govefile He cannot claim a section 179 deduction for the cost of these machines. Www irs govefile What Property Does Not Qualify? Certain property does not qualify for the section 179 deduction. Www irs govefile This includes the following. Www irs govefile Land and Improvements Land and land improvements do not qualify as section 179 property. Www irs govefile Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences. Www irs govefile Excepted Property Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property. Www irs govefile Certain property you lease to others (if you are a noncorporate lessor). Www irs govefile Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Www irs govefile Air conditioning or heating units. Www irs govefile Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code. Www irs govefile Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income. Www irs govefile Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months. Www irs govefile Leased property. Www irs govefile   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. Www irs govefile This rule does not apply to corporations. Www irs govefile However, you can claim a section 179 deduction for the cost of the following property. Www irs govefile Property you manufacture or produce and lease to others. Www irs govefile Property you purchase and lease to others if both the following tests are met. Www irs govefile The term of the lease (including options to renew) is less than 50% of the property's class life. Www irs govefile For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property. Www irs govefile Property used for lodging. Www irs govefile   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. Www irs govefile However, this does not apply to the following types of property. Www irs govefile Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to those using the lodging facilities. Www irs govefile Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients. Www irs govefile Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures. Www irs govefile Any energy property. Www irs govefile Energy property. Www irs govefile   Energy property is property that meets the following requirements. Www irs govefile It is one of the following types of property. Www irs govefile Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat, except for equipment used to generate energy to heat a swimming pool. Www irs govefile Equipment placed in service after December 31, 2005, and before January 1, 2017, that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. Www irs govefile Equipment used to produce, distribute, or use energy derived from a geothermal deposit. Www irs govefile For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage. Www irs govefile Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017. Www irs govefile The construction, reconstruction, or erection of the property must be completed by you. Www irs govefile For property you acquire, the original use of the property must begin with you. Www irs govefile The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property. Www irs govefile   For periods before February 14, 2008, energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990). Www irs govefile How Much Can You Deduct? Your section 179 deduction is generally the cost of the qualifying property. Www irs govefile However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Www irs govefile These limits apply to each taxpayer, not to each business. Www irs govefile However, see Married Individuals under Dollar Limits , later. Www irs govefile For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. Www irs govefile See Do the Passenger Automobile Limits Apply in chapter 5 . Www irs govefile If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. Www irs govefile Trade-in of other property. Www irs govefile   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid. Www irs govefile Example. Www irs govefile Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. Www irs govefile They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. Www irs govefile The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. Www irs govefile They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van. Www irs govefile Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Www irs govefile Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200). Www irs govefile Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 generally cannot be more than $500,000. Www irs govefile If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. Www irs govefile You do not have to claim the full $500,000. Www irs govefile Qualified real property (described earlier) that you elected to treat as section 179 real property is limited to $250,000 of the maximum deduction of $500,000 for 2013. Www irs govefile The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property in service for only a part of a 12-month tax year. Www irs govefile After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your actual section 179 deduction. Www irs govefile Example. Www irs govefile In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. Www irs govefile You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. Www irs govefile This is the maximum amount you can deduct. Www irs govefile Your $25,000 deduction for the saw completely recovered its cost. Www irs govefile Your basis for depreciation is zero. Www irs govefile The basis for depreciation of your machinery is $25,000. Www irs govefile You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery. Www irs govefile Situations affecting dollar limit. Www irs govefile   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. Www irs govefile The general dollar limit is affected by any of the following situations. Www irs govefile The cost of your section 179 property placed in service exceeds $2,000,000. Www irs govefile Your business is an enterprise zone business. Www irs govefile You placed in service a sport utility or certain other vehicles. Www irs govefile You are married filing a joint or separate return. Www irs govefile Costs exceeding $2,000,000 If the cost of your qualifying section 179 property placed in service in a year is more than $2,000,000, you generally must reduce the dollar limit (but not below zero) by the amount of cost over $2,000,000. Www irs govefile If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. Www irs govefile Example. Www irs govefile In 2013, Jane Ash placed in service machinery costing $2,100,000. Www irs govefile This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000). Www irs govefile Enterprise Zone Businesses An increased section 179 deduction is available to enterprise zone businesses for qualified zone property placed in service during the tax year, in an empowerment zone. Www irs govefile For more information including the definitions of “enterprise zone business” and “qualified zone property,” see sections 1397A, 1397C, and 1397D of the Internal Revenue Code. Www irs govefile The dollar limit on the section 179 deduction is increased by the smaller of: $35,000, or The cost of section 179 property that is also qualified zone property placed in service before January 1, 2014 (including such property placed in service by your spouse, even if you are filing a separate return). Www irs govefile Note. Www irs govefile   You take into account only 50% (instead of 100%) of the cost of qualified zone property placed in service in a year when figuring the reduced dollar limit for costs exceeding $2,000,000 (explained earlier). Www irs govefile Sport Utility and Certain Other Vehicles You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year. Www irs govefile This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Www irs govefile However, the $25,000 limit does not apply to any vehicle: Designed to seat more than nine passengers behind the driver's seat, Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from the passenger compartment, or That has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. Www irs govefile Married Individuals If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. Www irs govefile If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Www irs govefile If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2,000,000. Www irs govefile You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. Www irs govefile If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Www irs govefile Example. Www irs govefile Jack Elm is married. Www irs govefile He and his wife file separate returns. Www irs govefile Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. Www irs govefile His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. Www irs govefile Their combined dollar limit is $470,000. Www irs govefile This is because they must figure the limit as if they were one taxpayer. Www irs govefile They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000. Www irs govefile They elect to allocate the $470,000 dollar limit as follows. Www irs govefile $446,500 ($470,000 x 95%) to Mr. Www irs govefile Elm's machinery. Www irs govefile $23,500 ($470,000 x 5%) to Mrs. Www irs govefile Elm's equipment. Www irs govefile If they did not make an election to allocate their costs in this way, they would have to allocate $235,000 ($470,000 × 50%) to each of them. Www irs govefile Joint return after filing separate returns. Www irs govefile   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Www irs govefile The dollar limit (after reduction for any cost of section 179 property over $2,000,000). Www irs govefile The total cost of section 179 property you and your spouse elected to expense on your separate returns. Www irs govefile Example. Www irs govefile The facts are the same as in the previous example except that Jack elected to deduct $30,000 of the cost of section 179 property on his separate return and his wife elected to deduct $2,000. Www irs govefile After the due date of their returns, they file a joint return. Www irs govefile Their dollar limit for the section 179 deduction is $32,000. Www irs govefile This is the lesser of the following amounts. Www irs govefile $470,000—The dollar limit less the cost of section 179 property over $2,000,000. Www irs govefile $32,000—The total they elected to expense on their separate returns. Www irs govefile Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Www irs govefile Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Www irs govefile Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Www irs govefile Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. Www irs govefile See Special rules for qualified section 179 property under Carryover of disallowed deduction, later. Www irs govefile Taxable income. Www irs govefile   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Www irs govefile Net income or loss from a trade or business includes the following items. Www irs govefile Section 1231 gains (or losses). Www irs govefile Interest from working capital of your trade or business. Www irs govefile Wages, salaries, tips, or other pay earned as an employee. Www irs govefile For information about section 1231 gains and losses, see chapter 3 in Publication 544. Www irs govefile   In addition, figure taxable income without regard to any of the following. Www irs govefile The section 179 deduction. Www irs govefile The self-employment tax deduction. Www irs govefile Any net operating loss carryback or carryforward. Www irs govefile Any unreimbursed employee business expenses. Www irs govefile Two different taxable income limits. Www irs govefile   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. Www irs govefile You may have to figure the limit for this other deduction taking into account the section 179 deduction. Www irs govefile If so, complete the following steps. Www irs govefile Step Action 1 Figure taxable income without the section 179 deduction or the other deduction. Www irs govefile 2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. Www irs govefile 3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. Www irs govefile 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Www irs govefile 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. Www irs govefile 6 Figure your actual section 179 deduction using the taxable income figured in Step 5. Www irs govefile 7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. Www irs govefile 8 Figure your actual other deduction using the taxable income figured in Step 7. Www irs govefile Example. Www irs govefile On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. Www irs govefile It elects to expense the entire $500,000 cost under section 179. Www irs govefile In June, the corporation gave a charitable contribution of $10,000. Www irs govefile A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. Www irs govefile The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. Www irs govefile XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. Www irs govefile XYZ figures its section 179 deduction and its deduction for charitable contributions as follows. Www irs govefile Step 1– Taxable income figured without either deduction is $520,000. Www irs govefile Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000. Www irs govefile Step 3– $20,000 ($520,000 − $500,000). Www irs govefile Step 4– Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Www irs govefile Step 5– $518,000 ($520,000 − $2,000). Www irs govefile Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Www irs govefile Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction. Www irs govefile Step 7– $20,000 ($520,000 − $500,000). Www irs govefile Step 8– Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Www irs govefile Carryover of disallowed deduction. Www irs govefile   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Www irs govefile This disallowed deduction amount is shown on line 13 of Form 4562. Www irs govefile You use the amount you carry over to determine your section 179 deduction in the next year. Www irs govefile Enter that amount on line 10 of your Form 4562 for the next year. Www irs govefile   If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried forward. Www irs govefile Your selections must be shown in your books and records. Www irs govefile For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. Www irs govefile If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year. Www irs govefile   If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must deduct the costs being carried forward from the earliest year first. Www irs govefile Special rules for qualified section 179 real property. Www irs govefile   You can carry over to 2013 a 2012 deduction attributable to qualified section 179 real property that you elected to expense but were unable to take because of the business income limitation. Www irs govefile Any such 2012 carryover amounts that are not deducted in 2013, plus any 2013 disallowed section 179 expense deductions attributable to qualified real property, are not carried over to 2014. Www irs govefile Instead these amounts are treated as property placed in service on the first day of 2013 for purposes of computing depreciation (including the special depreciation allowance, if applicable). Www irs govefile See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information. Www irs govefile If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. Www irs govefile Instead, you must add it back to the property's basis. Www irs govefile Partnerships and Partners The section 179 deduction limits apply both to the partnership and to each partner. Www irs govefile The partnership determines its section 179 deduction subject to the limits. Www irs govefile It then allocates the deduction among its partners. Www irs govefile Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Www irs govefile ) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. Www irs govefile To determine any reduction in the dollar limit for costs over $2,000,000, the partner does not include any of the cost of section 179 property placed in service by the partnership. Www irs govefile After the dollar limit (reduced for any nonpartnership section 179 costs over $2,000,000) is applied, any remaining cost of the partnership and nonpartnership section 179 property is subject to the business income limit. Www irs govefile Partnership's taxable income. Www irs govefile   For purposes of the business income limit, figure the partnership's taxable income by adding together the net income and losses from all trades or businesses actively conducted by the partnership during the year. Www irs govefile See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). Www irs govefile However, figure taxable income without regard to credits, tax-exempt income, the section 179 deduction, and guaranteed payments under section 707(c) of the Internal Revenue Code. Www irs govefile Partner's share of partnership's taxable income. Www irs govefile   For purposes of the business income limit, the taxable income of a partner engaged in the active conduct of one or more of a partnership's trades or businesses includes his or her allocable share of taxable income derived from the partnership's active conduct of any trade or business. Www irs govefile Example. Www irs govefile In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. Www irs govefile The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). Www irs govefile Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. Www irs govefile The partnership's taxable income from the active conduct of all its trades or businesses for the year was $600,000, so it can deduct the full $475,000. Www irs govefile It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners. Www irs govefile In addition to being a partner in Beech Partnership, Dean is also a partner in the Cedar Partnership, which allocated to him a $30,000 section 179 deduction and $35,000 of its taxable income from the active conduct of its business. Www irs govefile He also conducts a business as a sole proprietor and, in 2013, placed in service in that business qualifying section 179 property costing $55,000. Www irs govefile He had a net loss of $5,000 from that business for the year. Www irs govefile Dean does not have to include section 179 partnership costs to figure any reduction in his dollar limit, so his total section 179 costs for the year are not more than $2,000,000 and his dollar limit is not reduced. Www irs govefile His maximum section 179 deduction is $500,000. Www irs govefile He elects to expense all of the $70,000 in section 179 deductions allocated from the partnerships ($40,000 from Beech Partnership plus $30,000 from Cedar Partnership), plus $55,000 of his sole proprietorship's section 179 costs, and notes that information in his books and records. Www irs govefile However, his deduction is limited to his business taxable income of $80,000 ($50,000 from Beech Partnership, plus $35,000 from Cedar Partnership minus $5,000 loss from his sole proprietorship). Www irs govefile He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. Www irs govefile He allocates the carryover amount to the cost of section 179 property placed in service in his sole proprietorship, and notes that allocation in his books and records. Www irs govefile Different tax years. Www irs govefile   For purposes of the business income limit, if the partner's tax year and that of the partnership differ, the partner's share of the partnership's taxable income for a tax year is generally the partner's distributive share for the partnership tax year that ends with or within the partner's tax year. Www irs govefile Example. Www irs govefile John and James Oak are equal partners in Oak Partnership. Www irs govefile Oak Partnership uses a tax year ending January 31. Www irs govefile John and James both use a tax year ending December 31. Www irs govefile For its tax year ending January 31, 2013, Oak Partnership's taxable income from the active conduct of its business is $80,000, of which $70,000 was earned during 2012. Www irs govefile John and James each include $40,000 (each partner's entire share) of partnership taxable income in computing their business income limit for the 2013 tax year. Www irs govefile Adjustment of partner's basis in partnership. Www irs govefile   A partner must reduce the basis of his or her partnership interest by the total amount of section 179 expenses allocated from the partnership even if the partner cannot currently deduct the total amount. Www irs govefile If the partner disposes of his or her partnership interest, the partner's basis for determining gain or loss is increased by any outstanding carryover of disallowed section 179 expenses allocated from the partnership. Www irs govefile Adjustment of partnership's basis in section 179 property. Www irs govefile   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. Www irs govefile This reduction of basis must be made even if a partner cannot deduct all or part of the section 179 deduction allocated to that partner by the partnership because of the limits. Www irs govefile S Corporations Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. Www irs govefile The deduction limits apply to an S corporation and to each shareholder. Www irs govefile The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits. Www irs govefile Figuring taxable income for an S corporation. Www irs govefile   To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you total the net income and losses from all trades or businesses actively conducted by the S corporation during the year. Www irs govefile   To figure the net income (or loss) from a trade or business actively conducted by an S corporation, you take into account the items from that trade or business that are passed through to the shareholders and used in determining each shareholder's tax liability. Www irs govefile However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. Www irs govefile For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. Www irs govefile In figuring the taxable income of an S corporation, disregard any limits on the amount of an S corporation item that must be taken into account when figuring a shareholder's taxable income. Www irs govefile Other Corporations A corporation's taxable income from its active conduct of any trade or business is its taxable income figured with the following changes. Www irs govefile It is figured before deducting the section 179 deduction, any net operating loss deduction, and special deductions (as reported on the corporation's income tax return). Www irs govefile It is adjusted for items of income or deduction included in the amount figured in 1, above, not derived from a trade or business actively conducted by the corporation during the tax year. Www irs govefile How Do You Elect the Deduction? You elect to take the section 179 deduction by completing Part I of Form 4562. Www irs govefile If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I. Www irs govefile For property placed in service in 2013, file Form 4562 with either of the following. Www irs govefile Your original 2013 tax return, whether or not you file it timely. Www irs govefile An amended return for 2013 filed within the time prescribed by law. Www irs govefile An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Www irs govefile The amended return must also include any resulting adjustments to taxable income. Www irs govefile You must keep records that show the specific identification of each piece of qualifying section 179 property. Www irs govefile These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Www irs govefile Election for certain qualified section 179 real property. Www irs govefile   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. Www irs govefile If you elect to treat this property as section 179 property, you must elect the application of the special rules for qualified real property described in section 179(f) of the Internal Revenue Code. Www irs govefile   To make the election, attach a statement indicating you are “electing the application of section 179(f) of the Internal Revenue Code” with either of the following. Www irs govefile Your original 2013 tax return, whether or not you file it timely. Www irs govefile An amended return for 2013 filed within the time prescribed by law. Www irs govefile The amended return must also include any adjustments to taxable income. Www irs govefile   The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. Www irs govefile It must specify one or more of the three types of qualified property (described under Qualified real property ) to which the election applies, the cost of each such type, and the portion of the cost of each such property to be taken into account. Www irs govefile Also, report this on line 6 of Form 4562. Www irs govefile    The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000. Www irs govefile Revoking an election. Www irs govefile   An election (or any specification made in the election) to take a section 179 deduction for 2013 can be revoked without IRS approval by filing an amended return. Www irs govefile The amended return must be filed within the time prescribed by law. Www irs govefile The amended return must also include any resulting adjustments to taxable income. Www irs govefile Once made, the revocation is irrevocable. Www irs govefile When Must You Recapture the Deduction? You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Www irs govefile In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797. Www irs govefile You also increase the basis of the property by the recapture amount. Www irs govefile Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 . Www irs govefile If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Www irs govefile Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. Www irs govefile For qualified real property (described earlier), see Notice 2013-59 for determining the portion of the gain that is attributable to section 1245 property upon the sale or other disposition of qualified real property. Www irs govefile If the property is listed property (described in chapter 5 ), do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Www irs govefile Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement. Www irs govefile Figuring the recapture amount. Www irs govefile   To figure the amount to recapture, take the following steps. Www irs govefile Figure the depreciation that would have been allowable on the section 179 deduction you claimed. Www irs govefile Begin with the year you placed the property in service and include the year of recapture. Www irs govefile Subtract the depreciation figured in (1) from the section 179 deduction you claimed. Www irs govefile The result is the amount you must recapture. Www irs govefile Example. Www irs govefile In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Www irs govefile The property is not listed property. Www irs govefile The property is 3-year property. Www irs govefile He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. Www irs govefile He used the property only for business in 2011 and 2012. Www irs govefile In 2013, he used the property 40% for business and 60% for personal use. Www irs govefile He figures his recapture amount as follows. Www irs govefile Section 179 deduction claimed (2011) $5,000. Www irs govefile 00 Minus: Allowable depreciation using Table A-1 (instead of section 179 deduction):   2011 $1,666. Www irs govefile 50   2012 2,222. Www irs govefile 50   2013 ($740. Www irs govefile 50 × 40% (business)) 296. Www irs govefile 20 4,185. Www irs govefile 20 2013 — Recapture amount $ 814. Www irs govefile 80 Paul must include $814. Www irs govefile 80 in income for 2013. Www irs govefile If any qualified zone property placed in service during the year ceases to be used in an empowerment zone by an enterprise zone business in a later year, the benefit of the increased section 179 deduction must be reported as other income on your return. Www irs govefile Prev  Up  Next   Home   More Online Publications