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1040ez Tax Forms Downloads

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1040ez tax forms downloads 2. 1040ez tax forms downloads   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. 1040ez tax forms downloads This is the section 179 deduction. 1040ez tax forms downloads You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. 1040ez tax forms downloads Estates and trusts cannot elect the section 179 deduction. 1040ez tax forms downloads 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. 1040ez tax forms downloads It also explains when and how to recapture the deduction. 1040ez tax forms downloads 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. 1040ez tax forms downloads What Property Qualifies? To qualify for the section 179 deduction, your property must meet all the following requirements. 1040ez tax forms downloads It must be eligible property. 1040ez tax forms downloads It must be acquired for business use. 1040ez tax forms downloads It must have been acquired by purchase. 1040ez tax forms downloads It must not be property described later under What Property Does Not Qualify . 1040ez tax forms downloads The following discussions provide information about these requirements and exceptions. 1040ez tax forms downloads Eligible Property To qualify for the section 179 deduction, your property must be one of the following types of depreciable property. 1040ez tax forms downloads Tangible personal property. 1040ez tax forms downloads 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. 1040ez tax forms downloads Single purpose agricultural (livestock) or horticultural structures. 1040ez tax forms downloads See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures. 1040ez tax forms downloads Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. 1040ez tax forms downloads Off-the-shelf computer software. 1040ez tax forms downloads Qualified real property (described below). 1040ez tax forms downloads Tangible personal property. 1040ez tax forms downloads   Tangible personal property is any tangible property that is not real property. 1040ez tax forms downloads It includes the following property. 1040ez tax forms downloads Machinery and equipment. 1040ez tax forms downloads 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. 1040ez tax forms downloads Gasoline storage tanks and pumps at retail service stations. 1040ez tax forms downloads Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals. 1040ez tax forms downloads   The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. 1040ez tax forms downloads 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. 1040ez tax forms downloads Off-the-shelf computer software. 1040ez tax forms downloads   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. 1040ez tax forms downloads 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. 1040ez tax forms downloads It includes any program designed to cause a computer to perform a desired function. 1040ez tax forms downloads 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. 1040ez tax forms downloads Qualified real property. 1040ez tax forms downloads   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads For more information, see Special rules for qualified section 179 real property, later. 1040ez tax forms downloads Also, see Election for certain qualified section 179 real property, later, for information on how to make this election. 1040ez tax forms downloads Qualified leasehold improvement property. 1040ez tax forms downloads   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. 1040ez tax forms downloads   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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Examples include the following. 1040ez tax forms downloads A complete liquidation of a subsidiary. 1040ez tax forms downloads A transfer to a corporation controlled by the transferor. 1040ez tax forms downloads An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. 1040ez tax forms downloads Qualified restaurant property. 1040ez tax forms downloads   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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Qualified retail improvement property. 1040ez tax forms downloads   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. 1040ez tax forms downloads 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. 1040ez tax forms downloads The improvement is placed in service more than 3 years after the date the building was first placed in service. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Examples include the following. 1040ez tax forms downloads A complete liquidation of a subsidiary. 1040ez tax forms downloads A transfer to a corporation controlled by the transferor. 1040ez tax forms downloads An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Partial business use. 1040ez tax forms downloads   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. 1040ez tax forms downloads If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. 1040ez tax forms downloads Use the resulting business cost to figure your section 179 deduction. 1040ez tax forms downloads Example. 1040ez tax forms downloads May Oak bought and placed in service an item of section 179 property costing $11,000. 1040ez tax forms downloads She used the property 80% for her business and 20% for personal purposes. 1040ez tax forms downloads The business part of the cost of the property is $8,800 (80% × $11,000). 1040ez tax forms downloads Property Acquired by Purchase To qualify for the section 179 deduction, your property must have been acquired by purchase. 1040ez tax forms downloads For example, property acquired by gift or inheritance does not qualify. 1040ez tax forms downloads Property is not considered acquired by purchase in the following situations. 1040ez tax forms downloads It is acquired by one component member of a controlled group from another component member of the same group. 1040ez tax forms downloads 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. 1040ez tax forms downloads It is acquired from a related person. 1040ez tax forms downloads Related persons. 1040ez tax forms downloads   Related persons are described under Related persons earlier. 1040ez tax forms downloads 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. 1040ez tax forms downloads Example. 1040ez tax forms downloads Ken Larch is a tailor. 1040ez tax forms downloads He bought two industrial sewing machines from his father. 1040ez tax forms downloads He placed both machines in service in the same year he bought them. 1040ez tax forms downloads They do not qualify as section 179 property because Ken and his father are related persons. 1040ez tax forms downloads He cannot claim a section 179 deduction for the cost of these machines. 1040ez tax forms downloads What Property Does Not Qualify? Certain property does not qualify for the section 179 deduction. 1040ez tax forms downloads This includes the following. 1040ez tax forms downloads Land and Improvements Land and land improvements do not qualify as section 179 property. 1040ez tax forms downloads Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences. 1040ez tax forms downloads 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. 1040ez tax forms downloads Certain property you lease to others (if you are a noncorporate lessor). 1040ez tax forms downloads Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. 1040ez tax forms downloads Air conditioning or heating units. 1040ez tax forms downloads Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code. 1040ez tax forms downloads 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. 1040ez tax forms downloads Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months. 1040ez tax forms downloads Leased property. 1040ez tax forms downloads   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. 1040ez tax forms downloads This rule does not apply to corporations. 1040ez tax forms downloads However, you can claim a section 179 deduction for the cost of the following property. 1040ez tax forms downloads Property you manufacture or produce and lease to others. 1040ez tax forms downloads Property you purchase and lease to others if both the following tests are met. 1040ez tax forms downloads The term of the lease (including options to renew) is less than 50% of the property's class life. 1040ez tax forms downloads 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. 1040ez tax forms downloads Property used for lodging. 1040ez tax forms downloads   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. 1040ez tax forms downloads However, this does not apply to the following types of property. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures. 1040ez tax forms downloads Any energy property. 1040ez tax forms downloads Energy property. 1040ez tax forms downloads   Energy property is property that meets the following requirements. 1040ez tax forms downloads It is one of the following types of property. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Equipment used to produce, distribute, or use energy derived from a geothermal deposit. 1040ez tax forms downloads For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage. 1040ez tax forms downloads Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017. 1040ez tax forms downloads The construction, reconstruction, or erection of the property must be completed by you. 1040ez tax forms downloads For property you acquire, the original use of the property must begin with you. 1040ez tax forms downloads 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. 1040ez tax forms downloads   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). 1040ez tax forms downloads How Much Can You Deduct? Your section 179 deduction is generally the cost of the qualifying property. 1040ez tax forms downloads However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. 1040ez tax forms downloads These limits apply to each taxpayer, not to each business. 1040ez tax forms downloads However, see Married Individuals under Dollar Limits , later. 1040ez tax forms downloads For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. 1040ez tax forms downloads See Do the Passenger Automobile Limits Apply in chapter 5 . 1040ez tax forms downloads 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. 1040ez tax forms downloads Trade-in of other property. 1040ez tax forms downloads   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. 1040ez tax forms downloads Example. 1040ez tax forms downloads Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. 1040ez tax forms downloads They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. 1040ez tax forms downloads The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. 1040ez tax forms downloads They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van. 1040ez tax forms downloads Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. 1040ez tax forms downloads Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200). 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads You do not have to claim the full $500,000. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Example. 1040ez tax forms downloads In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. 1040ez tax forms downloads You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. 1040ez tax forms downloads This is the maximum amount you can deduct. 1040ez tax forms downloads Your $25,000 deduction for the saw completely recovered its cost. 1040ez tax forms downloads Your basis for depreciation is zero. 1040ez tax forms downloads The basis for depreciation of your machinery is $25,000. 1040ez tax forms downloads You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery. 1040ez tax forms downloads Situations affecting dollar limit. 1040ez tax forms downloads   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. 1040ez tax forms downloads The general dollar limit is affected by any of the following situations. 1040ez tax forms downloads The cost of your section 179 property placed in service exceeds $2,000,000. 1040ez tax forms downloads Your business is an enterprise zone business. 1040ez tax forms downloads You placed in service a sport utility or certain other vehicles. 1040ez tax forms downloads You are married filing a joint or separate return. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Example. 1040ez tax forms downloads In 2013, Jane Ash placed in service machinery costing $2,100,000. 1040ez tax forms downloads This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000). 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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). 1040ez tax forms downloads Note. 1040ez tax forms downloads   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). 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Married Individuals If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. 1040ez tax forms downloads If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. 1040ez tax forms downloads Example. 1040ez tax forms downloads Jack Elm is married. 1040ez tax forms downloads He and his wife file separate returns. 1040ez tax forms downloads Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. 1040ez tax forms downloads His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. 1040ez tax forms downloads Their combined dollar limit is $470,000. 1040ez tax forms downloads This is because they must figure the limit as if they were one taxpayer. 1040ez tax forms downloads They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000. 1040ez tax forms downloads They elect to allocate the $470,000 dollar limit as follows. 1040ez tax forms downloads $446,500 ($470,000 x 95%) to Mr. 1040ez tax forms downloads Elm's machinery. 1040ez tax forms downloads $23,500 ($470,000 x 5%) to Mrs. 1040ez tax forms downloads Elm's equipment. 1040ez tax forms downloads 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. 1040ez tax forms downloads Joint return after filing separate returns. 1040ez tax forms downloads   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. 1040ez tax forms downloads The dollar limit (after reduction for any cost of section 179 property over $2,000,000). 1040ez tax forms downloads The total cost of section 179 property you and your spouse elected to expense on your separate returns. 1040ez tax forms downloads Example. 1040ez tax forms downloads 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. 1040ez tax forms downloads After the due date of their returns, they file a joint return. 1040ez tax forms downloads Their dollar limit for the section 179 deduction is $32,000. 1040ez tax forms downloads This is the lesser of the following amounts. 1040ez tax forms downloads $470,000—The dollar limit less the cost of section 179 property over $2,000,000. 1040ez tax forms downloads $32,000—The total they elected to expense on their separate returns. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. 1040ez tax forms downloads Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. 1040ez tax forms downloads See Special rules for qualified section 179 property under Carryover of disallowed deduction, later. 1040ez tax forms downloads Taxable income. 1040ez tax forms downloads   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. 1040ez tax forms downloads Net income or loss from a trade or business includes the following items. 1040ez tax forms downloads Section 1231 gains (or losses). 1040ez tax forms downloads Interest from working capital of your trade or business. 1040ez tax forms downloads Wages, salaries, tips, or other pay earned as an employee. 1040ez tax forms downloads For information about section 1231 gains and losses, see chapter 3 in Publication 544. 1040ez tax forms downloads   In addition, figure taxable income without regard to any of the following. 1040ez tax forms downloads The section 179 deduction. 1040ez tax forms downloads The self-employment tax deduction. 1040ez tax forms downloads Any net operating loss carryback or carryforward. 1040ez tax forms downloads Any unreimbursed employee business expenses. 1040ez tax forms downloads Two different taxable income limits. 1040ez tax forms downloads   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. 1040ez tax forms downloads You may have to figure the limit for this other deduction taking into account the section 179 deduction. 1040ez tax forms downloads If so, complete the following steps. 1040ez tax forms downloads Step Action 1 Figure taxable income without the section 179 deduction or the other deduction. 1040ez tax forms downloads 2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. 1040ez tax forms downloads 3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. 1040ez tax forms downloads 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. 1040ez tax forms downloads 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. 1040ez tax forms downloads 6 Figure your actual section 179 deduction using the taxable income figured in Step 5. 1040ez tax forms downloads 7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. 1040ez tax forms downloads 8 Figure your actual other deduction using the taxable income figured in Step 7. 1040ez tax forms downloads Example. 1040ez tax forms downloads On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. 1040ez tax forms downloads It elects to expense the entire $500,000 cost under section 179. 1040ez tax forms downloads In June, the corporation gave a charitable contribution of $10,000. 1040ez tax forms downloads A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. 1040ez tax forms downloads The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. 1040ez tax forms downloads XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. 1040ez tax forms downloads XYZ figures its section 179 deduction and its deduction for charitable contributions as follows. 1040ez tax forms downloads Step 1– Taxable income figured without either deduction is $520,000. 1040ez tax forms downloads Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000. 1040ez tax forms downloads Step 3– $20,000 ($520,000 − $500,000). 1040ez tax forms downloads 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. 1040ez tax forms downloads Step 5– $518,000 ($520,000 − $2,000). 1040ez tax forms downloads Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. 1040ez tax forms downloads Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction. 1040ez tax forms downloads Step 7– $20,000 ($520,000 − $500,000). 1040ez tax forms downloads 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. 1040ez tax forms downloads Carryover of disallowed deduction. 1040ez tax forms downloads   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. 1040ez tax forms downloads This disallowed deduction amount is shown on line 13 of Form 4562. 1040ez tax forms downloads You use the amount you carry over to determine your section 179 deduction in the next year. 1040ez tax forms downloads Enter that amount on line 10 of your Form 4562 for the next year. 1040ez tax forms downloads   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. 1040ez tax forms downloads Your selections must be shown in your books and records. 1040ez tax forms downloads For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. 1040ez tax forms downloads If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year. 1040ez tax forms downloads   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. 1040ez tax forms downloads Special rules for qualified section 179 real property. 1040ez tax forms downloads   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. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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). 1040ez tax forms downloads See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information. 1040ez tax forms downloads 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. 1040ez tax forms downloads Instead, you must add it back to the property's basis. 1040ez tax forms downloads Partnerships and Partners The section 179 deduction limits apply both to the partnership and to each partner. 1040ez tax forms downloads The partnership determines its section 179 deduction subject to the limits. 1040ez tax forms downloads It then allocates the deduction among its partners. 1040ez tax forms downloads Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 1040ez tax forms downloads ) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Partnership's taxable income. 1040ez tax forms downloads   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. 1040ez tax forms downloads See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). 1040ez tax forms downloads 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. 1040ez tax forms downloads Partner's share of partnership's taxable income. 1040ez tax forms downloads   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. 1040ez tax forms downloads Example. 1040ez tax forms downloads In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. 1040ez tax forms downloads The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). 1040ez tax forms downloads Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. 1040ez tax forms downloads 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. 1040ez tax forms downloads It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads He had a net loss of $5,000 from that business for the year. 1040ez tax forms downloads 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. 1040ez tax forms downloads His maximum section 179 deduction is $500,000. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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). 1040ez tax forms downloads He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. 1040ez tax forms downloads 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. 1040ez tax forms downloads Different tax years. 1040ez tax forms downloads   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. 1040ez tax forms downloads Example. 1040ez tax forms downloads John and James Oak are equal partners in Oak Partnership. 1040ez tax forms downloads Oak Partnership uses a tax year ending January 31. 1040ez tax forms downloads John and James both use a tax year ending December 31. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Adjustment of partner's basis in partnership. 1040ez tax forms downloads   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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Adjustment of partnership's basis in section 179 property. 1040ez tax forms downloads   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. 1040ez tax forms downloads 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. 1040ez tax forms downloads S Corporations Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. 1040ez tax forms downloads The deduction limits apply to an S corporation and to each shareholder. 1040ez tax forms downloads The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits. 1040ez tax forms downloads Figuring taxable income for an S corporation. 1040ez tax forms downloads   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. 1040ez tax forms downloads   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. 1040ez tax forms downloads However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. 1040ez tax forms downloads For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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). 1040ez tax forms downloads 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. 1040ez tax forms downloads How Do You Elect the Deduction? You elect to take the section 179 deduction by completing Part I of Form 4562. 1040ez tax forms downloads If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I. 1040ez tax forms downloads For property placed in service in 2013, file Form 4562 with either of the following. 1040ez tax forms downloads Your original 2013 tax return, whether or not you file it timely. 1040ez tax forms downloads An amended return for 2013 filed within the time prescribed by law. 1040ez tax forms downloads 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. 1040ez tax forms downloads The amended return must also include any resulting adjustments to taxable income. 1040ez tax forms downloads You must keep records that show the specific identification of each piece of qualifying section 179 property. 1040ez tax forms downloads These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. 1040ez tax forms downloads Election for certain qualified section 179 real property. 1040ez tax forms downloads   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. 1040ez tax forms downloads 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. 1040ez tax forms downloads   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. 1040ez tax forms downloads Your original 2013 tax return, whether or not you file it timely. 1040ez tax forms downloads An amended return for 2013 filed within the time prescribed by law. 1040ez tax forms downloads The amended return must also include any adjustments to taxable income. 1040ez tax forms downloads   The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. 1040ez tax forms downloads 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. 1040ez tax forms downloads Also, report this on line 6 of Form 4562. 1040ez tax forms downloads    The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000. 1040ez tax forms downloads Revoking an election. 1040ez tax forms downloads   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. 1040ez tax forms downloads The amended return must be filed within the time prescribed by law. 1040ez tax forms downloads The amended return must also include any resulting adjustments to taxable income. 1040ez tax forms downloads Once made, the revocation is irrevocable. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads You also increase the basis of the property by the recapture amount. 1040ez tax forms downloads Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 . 1040ez tax forms downloads If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. 1040ez tax forms downloads Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. 1040ez tax forms downloads 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. 1040ez tax forms downloads 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. 1040ez tax forms downloads Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement. 1040ez tax forms downloads Figuring the recapture amount. 1040ez tax forms downloads   To figure the amount to recapture, take the following steps. 1040ez tax forms downloads Figure the depreciation that would have been allowable on the section 179 deduction you claimed. 1040ez tax forms downloads Begin with the year you placed the property in service and include the year of recapture. 1040ez tax forms downloads Subtract the depreciation figured in (1) from the section 179 deduction you claimed. 1040ez tax forms downloads The result is the amount you must recapture. 1040ez tax forms downloads Example. 1040ez tax forms downloads In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. 1040ez tax forms downloads The property is not listed property. 1040ez tax forms downloads The property is 3-year property. 1040ez tax forms downloads He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. 1040ez tax forms downloads He used the property only for business in 2011 and 2012. 1040ez tax forms downloads In 2013, he used the property 40% for business and 60% for personal use. 1040ez tax forms downloads He figures his recapture amount as follows. 1040ez tax forms downloads Section 179 deduction claimed (2011) $5,000. 1040ez tax forms downloads 00 Minus: Allowable depreciation using Table A-1 (instead of section 179 deduction):   2011 $1,666. 1040ez tax forms downloads 50   2012 2,222. 1040ez tax forms downloads 50   2013 ($740. 1040ez tax forms downloads 50 × 40% (business)) 296. 1040ez tax forms downloads 20 4,185. 1040ez tax forms downloads 20 2013 — Recapture amount $ 814. 1040ez tax forms downloads 80 Paul must include $814. 1040ez tax forms downloads 80 in income for 2013. 1040ez tax forms downloads 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. 1040ez tax forms downloads Prev  Up  Next   Home   More Online Publications
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The 1040ez Tax Forms Downloads

1040ez tax forms downloads 3. 1040ez tax forms downloads   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. 1040ez tax forms downloads Other income (nonpassive income). 1040ez tax forms downloads Expenses. 1040ez tax forms downloads Additional information. 1040ez tax forms downloads Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. 1040ez tax forms downloads Basis. 1040ez tax forms downloads How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. 1040ez tax forms downloads Including mutual fund or REMIC expenses in income. 1040ez tax forms downloads Nondeductible ExpensesUsed as collateral. 1040ez tax forms downloads Short-sale expenses. 1040ez tax forms downloads Expenses for both tax-exempt and taxable income. 1040ez tax forms downloads State income taxes. 1040ez tax forms downloads Nondeductible amount. 1040ez tax forms downloads Basis adjustment. 1040ez tax forms downloads How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . 1040ez tax forms downloads Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. 1040ez tax forms downloads Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. 1040ez tax forms downloads The at-risk rules and passive activity rules are explained briefly in this section. 1040ez tax forms downloads The limit on investment interest is explained later in this chapter under Interest Expenses . 1040ez tax forms downloads The 2% limit is explained later in this chapter under Expenses of Producing Income . 1040ez tax forms downloads At-risk rules. 1040ez tax forms downloads   Special at-risk rules apply to most income-producing activities. 1040ez tax forms downloads These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. 1040ez tax forms downloads Generally, this is the cash and the adjusted basis of property you contribute to the activity. 1040ez tax forms downloads It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. 1040ez tax forms downloads For more information, see Publication 925. 1040ez tax forms downloads Passive activity losses and credits. 1040ez tax forms downloads   The amount of losses and tax credits you can claim from passive activities is limited. 1040ez tax forms downloads Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. 1040ez tax forms downloads Also, you can use credits from passive activities only against tax on the income from passive activities. 1040ez tax forms downloads There are exceptions for certain activities, such as rental real estate activities. 1040ez tax forms downloads Passive activity. 1040ez tax forms downloads   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. 1040ez tax forms downloads However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. 1040ez tax forms downloads More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. 1040ez tax forms downloads You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. 1040ez tax forms downloads  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. 1040ez tax forms downloads However, it does not include rental activities or certain activities treated as incidental to holding property for investment. 1040ez tax forms downloads   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. 1040ez tax forms downloads Other income (nonpassive income). 1040ez tax forms downloads    Generally, you can use losses from passive activities only to offset income from passive activities. 1040ez tax forms downloads You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. 1040ez tax forms downloads Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. 1040ez tax forms downloads It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. 1040ez tax forms downloads This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. 1040ez tax forms downloads   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. 1040ez tax forms downloads Expenses. 1040ez tax forms downloads   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. 1040ez tax forms downloads However, this interest and other expenses may be subject to other limits. 1040ez tax forms downloads These limits are explained in the rest of this chapter. 1040ez tax forms downloads Additional information. 1040ez tax forms downloads   For more information about determining and reporting income and losses from passive activities, see Publication 925. 1040ez tax forms downloads Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. 1040ez tax forms downloads For information on business interest, see chapter 4 of Publication 535. 1040ez tax forms downloads You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. 1040ez tax forms downloads Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. 1040ez tax forms downloads You can deduct investment interest subject to the limit discussed later. 1040ez tax forms downloads However, you cannot deduct interest you incurred to produce tax-exempt income. 1040ez tax forms downloads See Tax-exempt income under Nondeductible Expenses, later. 1040ez tax forms downloads You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. 1040ez tax forms downloads Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. 1040ez tax forms downloads Investment property. 1040ez tax forms downloads   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. 1040ez tax forms downloads It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). 1040ez tax forms downloads Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). 1040ez tax forms downloads Partners, shareholders, and beneficiaries. 1040ez tax forms downloads   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. 1040ez tax forms downloads Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. 1040ez tax forms downloads Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. 1040ez tax forms downloads The allocation is not affected by the use of property that secures the debt. 1040ez tax forms downloads Example 1. 1040ez tax forms downloads You borrow $10,000 and use $8,000 to buy stock. 1040ez tax forms downloads You use the other $2,000 to buy items for your home. 1040ez tax forms downloads Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. 1040ez tax forms downloads The other 20% is nondeductible personal interest. 1040ez tax forms downloads Debt proceeds received in cash. 1040ez tax forms downloads   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. 1040ez tax forms downloads Debt proceeds deposited in account. 1040ez tax forms downloads   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. 1040ez tax forms downloads But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. 1040ez tax forms downloads Example 2. 1040ez tax forms downloads Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. 1040ez tax forms downloads You did not buy the household items until June 1. 1040ez tax forms downloads You had deposited the $2,000 in the bank. 1040ez tax forms downloads You had no other transactions on the bank account until June. 1040ez tax forms downloads You did not sell the stock, and you made no principal payments on the debt. 1040ez tax forms downloads You paid interest from another account. 1040ez tax forms downloads The $8,000 is treated as being used for an investment purpose. 1040ez tax forms downloads The $2,000 is treated as being used for an investment purpose for the 3-month period. 1040ez tax forms downloads Your total interest expense for 3 months on this debt is investment interest. 1040ez tax forms downloads In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. 1040ez tax forms downloads Amounts paid within 30 days. 1040ez tax forms downloads   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. 1040ez tax forms downloads This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. 1040ez tax forms downloads   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. 1040ez tax forms downloads Payments on debt may require new allocation. 1040ez tax forms downloads   As you repay a debt used for more than one purpose, you must reallocate the balance. 1040ez tax forms downloads You must first reduce the amount allocated to personal purposes by the repayment. 1040ez tax forms downloads You then reallocate the rest of the debt to find what part is for investment purposes. 1040ez tax forms downloads Example 3. 1040ez tax forms downloads If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. 1040ez tax forms downloads The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. 1040ez tax forms downloads Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. 1040ez tax forms downloads Pass-through entities. 1040ez tax forms downloads   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. 1040ez tax forms downloads If you contribute to the capital of the entity, you can make the allocation using any reasonable method. 1040ez tax forms downloads Additional allocation rules. 1040ez tax forms downloads   For more information about allocating interest expense, see chapter 4 of Publication 535. 1040ez tax forms downloads When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. 1040ez tax forms downloads If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. 1040ez tax forms downloads For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. 1040ez tax forms downloads Example. 1040ez tax forms downloads You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. 1040ez tax forms downloads On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. 1040ez tax forms downloads If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. 1040ez tax forms downloads If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. 1040ez tax forms downloads Interest paid in advance. 1040ez tax forms downloads   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. 1040ez tax forms downloads You can deduct in each year only the interest for that year. 1040ez tax forms downloads Interest on margin accounts. 1040ez tax forms downloads   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. 1040ez tax forms downloads You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. 1040ez tax forms downloads Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. 1040ez tax forms downloads   You cannot deduct any interest on money borrowed for personal reasons. 1040ez tax forms downloads Limit on interest deduction for market discount bonds. 1040ez tax forms downloads   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. 1040ez tax forms downloads This limit does not apply if you accrue the market discount and include it in your income currently. 1040ez tax forms downloads   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. 1040ez tax forms downloads Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . 1040ez tax forms downloads Interest not deducted due to limit. 1040ez tax forms downloads   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. 1040ez tax forms downloads Choosing to deduct disallowed interest expense before the year of disposition. 1040ez tax forms downloads   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. 1040ez tax forms downloads The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. 1040ez tax forms downloads Net interest income. 1040ez tax forms downloads   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. 1040ez tax forms downloads Limit on interest deduction for short-term obligations. 1040ez tax forms downloads   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. 1040ez tax forms downloads   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). 1040ez tax forms downloads The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . 1040ez tax forms downloads Interest not deducted due to limit. 1040ez tax forms downloads   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. 1040ez tax forms downloads Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. 1040ez tax forms downloads Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. 1040ez tax forms downloads You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. 1040ez tax forms downloads The interest carried over is treated as investment interest paid or accrued in that next year. 1040ez tax forms downloads You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. 1040ez tax forms downloads Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. 1040ez tax forms downloads Investment income. 1040ez tax forms downloads   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). 1040ez tax forms downloads Investment income does not include Alaska Permanent Fund dividends. 1040ez tax forms downloads It also does not include qualified dividends or net capital gain unless you choose to include them. 1040ez tax forms downloads Choosing to include qualified dividends. 1040ez tax forms downloads   Investment income generally does not include qualified dividends, discussed in chapter 1. 1040ez tax forms downloads However, you can choose to include all or part of your qualified dividends in investment income. 1040ez tax forms downloads   You make this choice by completing Form 4952, line 4g, according to its instructions. 1040ez tax forms downloads   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. 1040ez tax forms downloads Choosing to include net capital gain. 1040ez tax forms downloads    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). 1040ez tax forms downloads However, you can choose to include all or part of your net capital gain in investment income. 1040ez tax forms downloads   You make this choice by completing Form 4952, line 4g, according to its instructions. 1040ez tax forms downloads   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. 1040ez tax forms downloads   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. 1040ez tax forms downloads    Before making either choice, consider the overall effect on your tax liability. 1040ez tax forms downloads Compare your tax if you make one or both of these choices with your tax if you do not. 1040ez tax forms downloads Investment income of child reported on parent's return. 1040ez tax forms downloads   Investment income includes the part of your child's interest and dividend income you choose to report on your return. 1040ez tax forms downloads If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. 1040ez tax forms downloads Include it on line 4a of Form 4952. 1040ez tax forms downloads Example. 1040ez tax forms downloads Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. 1040ez tax forms downloads You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. 1040ez tax forms downloads Also enter $200 on Form 1040, line 21. 1040ez tax forms downloads Your investment income includes this $200. 1040ez tax forms downloads Child's qualified dividends. 1040ez tax forms downloads   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. 1040ez tax forms downloads However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. 1040ez tax forms downloads   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). 1040ez tax forms downloads Child's Alaska Permanent Fund dividends. 1040ez tax forms downloads   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. 1040ez tax forms downloads To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. 1040ez tax forms downloads Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. 1040ez tax forms downloads Subtract the result from the amount on Form 8814, line 12. 1040ez tax forms downloads Example. 1040ez tax forms downloads Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. 1040ez tax forms downloads You choose to report this on your return. 1040ez tax forms downloads You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. 1040ez tax forms downloads You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. 1040ez tax forms downloads You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. 1040ez tax forms downloads Child's capital gain distributions. 1040ez tax forms downloads   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. 1040ez tax forms downloads However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. 1040ez tax forms downloads   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). 1040ez tax forms downloads Investment expenses. 1040ez tax forms downloads   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. 1040ez tax forms downloads Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. 1040ez tax forms downloads Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. 1040ez tax forms downloads See Expenses of Producing Income , later, for a discussion of the 2% limit. 1040ez tax forms downloads Losses from passive activities. 1040ez tax forms downloads   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). 1040ez tax forms downloads See Publication 925 for information about passive activities. 1040ez tax forms downloads Example. 1040ez tax forms downloads Ted is a partner in a partnership that operates a business. 1040ez tax forms downloads However, he does not materially participate in the partnership's business. 1040ez tax forms downloads Ted's interest in the partnership is considered a passive activity. 1040ez tax forms downloads Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. 1040ez tax forms downloads His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. 1040ez tax forms downloads His investment interest expense is $8,000. 1040ez tax forms downloads Ted also has income from the partnership of $2,000. 1040ez tax forms downloads Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. 1040ez tax forms downloads His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. 1040ez tax forms downloads Form 4952 Use Form 4952 to figure your deduction for investment interest. 1040ez tax forms downloads See Form 4952 for more information. 1040ez tax forms downloads Exception to use of Form 4952. 1040ez tax forms downloads   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. 1040ez tax forms downloads Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. 1040ez tax forms downloads You do not have any other deductible investment expenses. 1040ez tax forms downloads You have no carryover of investment interest expense from 2012. 1040ez tax forms downloads   If you meet all of these tests, you can deduct all of your investment interest. 1040ez tax forms downloads    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. 1040ez tax forms downloads If the bond yields taxable interest, you can choose to amortize the premium. 1040ez tax forms downloads This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. 1040ez tax forms downloads If you make this choice, you must reduce your basis in the bond by the amortization for the year. 1040ez tax forms downloads If the bond yields tax-exempt interest, you must amortize the premium. 1040ez tax forms downloads This amortized amount is not deductible in determining taxable income. 1040ez tax forms downloads However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. 1040ez tax forms downloads Bond premium. 1040ez tax forms downloads   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). 1040ez tax forms downloads For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. 1040ez tax forms downloads Special rules to determine amounts payable on a bond. 1040ez tax forms downloads   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. 1040ez tax forms downloads 171-3. 1040ez tax forms downloads Basis. 1040ez tax forms downloads   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. 1040ez tax forms downloads However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. 1040ez tax forms downloads See Regulations section 1. 1040ez tax forms downloads 171-1(e). 1040ez tax forms downloads Dealers. 1040ez tax forms downloads   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. 1040ez tax forms downloads   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. 1040ez tax forms downloads How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. 1040ez tax forms downloads Constant yield method. 1040ez tax forms downloads   Figure the bond premium amortization for each accrual period as follows. 1040ez tax forms downloads Step 1: Determine your yield. 1040ez tax forms downloads   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. 1040ez tax forms downloads Figure the yield as of the date you got the bond. 1040ez tax forms downloads It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. 1040ez tax forms downloads   If you do not know the yield, consult your broker or tax advisor. 1040ez tax forms downloads Databases available to them are likely to show the yield at the date of purchase. 1040ez tax forms downloads Step 2: Determine the accrual periods. 1040ez tax forms downloads   You can choose the accrual periods to use. 1040ez tax forms downloads They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. 1040ez tax forms downloads The computation is simplest if accrual periods are the same as the intervals between interest payment dates. 1040ez tax forms downloads Step 3: Determine the bond premium for the accrual period. 1040ez tax forms downloads   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. 1040ez tax forms downloads Then subtract the result from the qualified stated interest for the period. 1040ez tax forms downloads   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. 1040ez tax forms downloads After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. 1040ez tax forms downloads Example. 1040ez tax forms downloads On February 1, 2012, you bought a taxable bond for $110,000. 1040ez tax forms downloads The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). 1040ez tax forms downloads The bond pays qualified stated interest of $10,000 on February 1 of each year. 1040ez tax forms downloads Your yield is 8. 1040ez tax forms downloads 07439% compounded annually. 1040ez tax forms downloads You choose to use annual accrual periods ending on February 1 of each year. 1040ez tax forms downloads To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. 1040ez tax forms downloads When you subtract the result ($8,881. 1040ez tax forms downloads 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. 1040ez tax forms downloads 17. 1040ez tax forms downloads Special rules to figure amortization. 1040ez tax forms downloads   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. 1040ez tax forms downloads 171-3. 1040ez tax forms downloads Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. 1040ez tax forms downloads Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. 1040ez tax forms downloads Straight-line method. 1040ez tax forms downloads   Under this method, the amount of your bond premium amortization is the same each month. 1040ez tax forms downloads Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. 1040ez tax forms downloads Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). 1040ez tax forms downloads This gives you your bond premium amortization for the year. 1040ez tax forms downloads Revenue Ruling 82-10 method. 1040ez tax forms downloads   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. 1040ez tax forms downloads This method is explained in Revenue Ruling 82-10, 1982-1 C. 1040ez tax forms downloads B. 1040ez tax forms downloads 46. 1040ez tax forms downloads Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. 1040ez tax forms downloads You should attach a statement to your return that you are making this choice under section 171. 1040ez tax forms downloads See How To Report Amortization, next. 1040ez tax forms downloads This choice is binding for the year you make it and for later tax years. 1040ez tax forms downloads It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. 1040ez tax forms downloads You can change your decision to amortize bond premium only with the written approval of the IRS. 1040ez tax forms downloads To request approval, use Form 3115. 1040ez tax forms downloads For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. 1040ez tax forms downloads You can find Revenue Procedure 2011-14 at www. 1040ez tax forms downloads irs. 1040ez tax forms downloads gov/irb/2011-04_IRB/ar08. 1040ez tax forms downloads html. 1040ez tax forms downloads How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. 1040ez tax forms downloads Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. 1040ez tax forms downloads Under your last entry on line 1, put a subtotal of all interest listed on line 1. 1040ez tax forms downloads Below this subtotal, print “ABP Adjustment,” and the total interest you received. 1040ez tax forms downloads Subtract this amount from the subtotal, and enter the result on line 2. 1040ez tax forms downloads Bond premium amortization more than interest. 1040ez tax forms downloads   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. 1040ez tax forms downloads    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. 1040ez tax forms downloads Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. 1040ez tax forms downloads Pre-1998 election to amortize bond premium. 1040ez tax forms downloads   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. 1040ez tax forms downloads Bonds acquired before October 23, 1986. 1040ez tax forms downloads   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. 1040ez tax forms downloads Bonds acquired after October 22, 1986, but before 1988. 1040ez tax forms downloads    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. 1040ez tax forms downloads Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). 1040ez tax forms downloads To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. 1040ez tax forms downloads The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. 1040ez tax forms downloads The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. 1040ez tax forms downloads The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. 1040ez tax forms downloads For information on how to report expenses of producing income, see How To Report Investment Expenses , later. 1040ez tax forms downloads Attorney or accounting fees. 1040ez tax forms downloads   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. 1040ez tax forms downloads However, in some cases, attorney or accounting fees are part of the basis of property. 1040ez tax forms downloads See Basis of Investment Property in chapter 4. 1040ez tax forms downloads Automatic investment service and dividend reinvestment plans. 1040ez tax forms downloads   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. 1040ez tax forms downloads Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. 1040ez tax forms downloads Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. 1040ez tax forms downloads   A corporation in which you own stock also may have a dividend reinvestment plan. 1040ez tax forms downloads This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. 1040ez tax forms downloads   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. 1040ez tax forms downloads If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. 1040ez tax forms downloads Deduct the charges in the year you pay them. 1040ez tax forms downloads Clerical help and office rent. 1040ez tax forms downloads   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. 1040ez tax forms downloads Cost of replacing missing securities. 1040ez tax forms downloads   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. 1040ez tax forms downloads You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. 1040ez tax forms downloads   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. 1040ez tax forms downloads Under certain types of insurance policies, you can recover some of the expenses. 1040ez tax forms downloads   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. 1040ez tax forms downloads If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. 1040ez tax forms downloads Fees to collect income. 1040ez tax forms downloads   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. 1040ez tax forms downloads Fees to buy or sell. 1040ez tax forms downloads   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. 1040ez tax forms downloads You must add the fee to the cost of the property. 1040ez tax forms downloads See Basis of Investment Property in chapter 4. 1040ez tax forms downloads    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. 1040ez tax forms downloads They can be used only to figure gain or loss from the sale. 1040ez tax forms downloads See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. 1040ez tax forms downloads Investment counsel and advice. 1040ez tax forms downloads   You can deduct fees you pay for counsel and advice about investments that produce taxable income. 1040ez tax forms downloads This includes amounts you pay for investment advisory services. 1040ez tax forms downloads Safe deposit box rent. 1040ez tax forms downloads   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. 1040ez tax forms downloads If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. 1040ez tax forms downloads See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. 1040ez tax forms downloads State and local transfer taxes. 1040ez tax forms downloads   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. 1040ez tax forms downloads If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. 1040ez tax forms downloads If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. 1040ez tax forms downloads Trustee's commissions for revocable trust. 1040ez tax forms downloads   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. 1040ez tax forms downloads However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. 1040ez tax forms downloads   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. 1040ez tax forms downloads You cannot deduct the entire amount in the year you pay it. 1040ez tax forms downloads Investment expenses from pass-through entities. 1040ez tax forms downloads   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. 1040ez tax forms downloads A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). 1040ez tax forms downloads A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). 1040ez tax forms downloads Publicly-offered mutual funds are discussed later. 1040ez tax forms downloads   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. 1040ez tax forms downloads Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). 1040ez tax forms downloads   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. 1040ez tax forms downloads Including mutual fund or REMIC expenses in income. 1040ez tax forms downloads   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. 1040ez tax forms downloads You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. 1040ez tax forms downloads If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). 1040ez tax forms downloads If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. 1040ez tax forms downloads If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. 1040ez tax forms downloads Publicly-offered mutual funds. 1040ez tax forms downloads   Most mutual funds are publicly offered. 1040ez tax forms downloads These mutual funds, generally, are traded on an established securities exchange. 1040ez tax forms downloads These funds do not pass investment expenses through to you. 1040ez tax forms downloads Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. 1040ez tax forms downloads As a result, you cannot deduct the expenses on your return. 1040ez tax forms downloads   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. 1040ez tax forms downloads    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. 1040ez tax forms downloads Contact your mutual fund if you are not sure whether it is publicly offered. 1040ez tax forms downloads Nondeductible Expenses Some expenses that you incur as an investor are not deductible. 1040ez tax forms downloads Stockholders' meetings. 1040ez tax forms downloads   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. 1040ez tax forms downloads This is true even if your purpose in attending is to get information that would be useful in making further investments. 1040ez tax forms downloads Investment-related seminar. 1040ez tax forms downloads   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. 1040ez tax forms downloads Single-premium life insurance, endowment, and annuity contracts. 1040ez tax forms downloads   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. 1040ez tax forms downloads Used as collateral. 1040ez tax forms downloads   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. 1040ez tax forms downloads Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. 1040ez tax forms downloads Borrowing on insurance. 1040ez tax forms downloads   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. 1040ez tax forms downloads This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. 1040ez tax forms downloads Tax-exempt income. 1040ez tax forms downloads   You cannot deduct expenses you incur to produce tax-exempt income. 1040ez tax forms downloads Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. 1040ez tax forms downloads Short-sale expenses. 1040ez tax forms downloads   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. 1040ez tax forms downloads However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. 1040ez tax forms downloads Short sales are discussed in Short Sales in chapter 4. 1040ez tax forms downloads Expenses for both tax-exempt and taxable income. 1040ez tax forms downloads   You may have expenses that are for both tax-exempt and taxable income. 1040ez tax forms downloads If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. 1040ez tax forms downloads You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. 1040ez tax forms downloads   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. 1040ez tax forms downloads If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. 1040ez tax forms downloads To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. 1040ez tax forms downloads Example. 1040ez tax forms downloads You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. 1040ez tax forms downloads In earning this income, you had $500 of expenses. 1040ez tax forms downloads You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. 1040ez tax forms downloads 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. 1040ez tax forms downloads You cannot deduct $400 (80% of $500) of the expenses. 1040ez tax forms downloads You can deduct $100 (the rest of the expenses) because they are for the taxable interest. 1040ez tax forms downloads State income taxes. 1040ez tax forms downloads   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. 1040ez tax forms downloads But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. 1040ez tax forms downloads Interest expense and carrying charges on straddles. 1040ez tax forms downloads   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. 1040ez tax forms downloads The nondeductible interest and carrying charges are added to the basis of the straddle property. 1040ez tax forms downloads However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. 1040ez tax forms downloads  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. 1040ez tax forms downloads   Interest includes any amount you pay or incur in connection with personal property used in a short sale. 1040ez tax forms downloads However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. 1040ez tax forms downloads   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). 1040ez tax forms downloads Nondeductible amount. 1040ez tax forms downloads   Figure the nondeductible interest and carrying charges on straddle property as follows. 1040ez tax forms downloads Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. 1040ez tax forms downloads Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. 1040ez tax forms downloads Basis adjustment. 1040ez tax forms downloads   Add the nondeductible amount to the basis of your straddle property. 1040ez tax forms downloads How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). 1040ez tax forms downloads Enter your deductible investment interest expense on Schedule A (Form1040), line 14. 1040ez tax forms downloads Include any deductible short sale expenses. 1040ez tax forms downloads (See Short Sales in chapter 4 for information on these expenses. 1040ez tax forms downloads ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. 1040ez tax forms downloads Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. 1040ez tax forms downloads List the type and amount of each expense on the dotted lines next to line 23. 1040ez tax forms downloads (If necessary, you can show the required information on an attached statement. 1040ez tax forms downloads ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. 1040ez tax forms downloads When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. 1040ez tax forms downloads If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. 1040ez tax forms downloads Also see When To Deduct Investment Interest , earlier in this chapter. 1040ez tax forms downloads Unpaid expenses owed to related party. 1040ez tax forms downloads   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. 1040ez tax forms downloads The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. 1040ez tax forms downloads If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. 1040ez tax forms downloads   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . 1040ez tax forms downloads It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. 1040ez tax forms downloads   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. 1040ez tax forms downloads This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. 1040ez tax forms downloads Prev  Up  Next   Home   More Online Publications