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1040x calculator 8. 1040x calculator   Amortization Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: How To Deduct Amortization Starting a BusinessBusiness Start-Up Costs Costs of Organizing a Corporation Costs of Organizing a Partnership How To Amortize Getting a Lease Section 197 IntangiblesSection 197 Intangibles Defined Assets That Are Not Section 197 Intangibles Safe Harbor for Creative Property Costs Anti-Churning Rules Incorrect Amount of Amortization Deducted Disposition of Section 197 Intangibles Reforestation Costs Geological and Geophysical Costs Pollution Control FacilitiesNew identifiable treatment facility. 1040x calculator Research and Experimental Costs Optional Write-off of Certain Tax Preferences Introduction Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. 1040x calculator It is similar to the straight line method of depreciation. 1040x calculator The various amortizable costs covered in this chapter are included in the list below. 1040x calculator However, this chapter does not discuss amortization of bond premium. 1040x calculator For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. 1040x calculator Topics - This chapter discusses: Deducting amortization Amortizing costs of starting a business Amortizing costs of getting a lease Amortizing costs of section 197 intangibles Amortizing reforestation costs Amortizing costs of geological and geophysical costs Amortizing costs of pollution control facilities Amortizing costs of research and experimentation Amortizing costs of certain tax preferences Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 4626 Alternative Minimum Tax—Corporations 6251 Alternative Minimum Tax—Individuals See chapter 12 for information about getting publications and forms. 1040x calculator How To Deduct Amortization To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return. 1040x calculator To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. 1040x calculator For example, in 2012, you began to amortize a lease. 1040x calculator In 2013, you began to amortize a second lease. 1040x calculator Report amortization from the new lease on line 42 of your 2013 Form 4562. 1040x calculator Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. 1040x calculator If you do not have any new amortizable expenses for the current year, you are not required to complete Form 4562 (unless you are claiming depreciation). 1040x calculator Report the current year's deduction for amortization that began in a prior year directly on the “Other deduction” or “Other expense line” of your return. 1040x calculator Starting a Business When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. 1040x calculator Generally, you recover costs for particular assets through depreciation deductions. 1040x calculator However, you generally cannot recover other costs until you sell the business or otherwise go out of business. 1040x calculator For a discussion on how to treat these costs, see If your attempt to go into business is unsuccessful under Capital Expenses in chapter 1. 1040x calculator For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. 1040x calculator The costs that are not deducted currently can be amortized ratably over a 180-month period. 1040x calculator The amortization period starts with the month you begin operating your active trade or business. 1040x calculator You are not required to attach a statement to make this election. 1040x calculator You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. 1040x calculator Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. 1040x calculator See Regulations sections 1. 1040x calculator 195-1, 1. 1040x calculator 248-1, and 1. 1040x calculator 709-1. 1040x calculator For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. 1040x calculator Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. 1040x calculator If the election is made, you must attach any statement required by Regulations sections 1. 1040x calculator 195-1(b), 1. 1040x calculator 248-1(c), and 1. 1040x calculator 709-1(c), as in effect before September 9, 2008. 1040x calculator Note. 1040x calculator You can apply the provisions of Regulations sections 1. 1040x calculator 195-1, 1. 1040x calculator 248-1, and 1. 1040x calculator 709-1 to all business start-up and organizational costs paid or incurred after October 22, 2004, provided the period of limitations on assessment has not expired for the year of the election. 1040x calculator Otherwise, the provisions under Regulations sections 1. 1040x calculator 195-1(b), 1. 1040x calculator 248-1(c), and 1. 1040x calculator 709-1(c), as in effect before September 9, 2008, will apply. 1040x calculator For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organization costs over an amortization period of 60 months or more. 1040x calculator See How To Make the Election , later. 1040x calculator The cost must qualify as one of the following. 1040x calculator A business start-up cost. 1040x calculator An organizational cost for a corporation. 1040x calculator An organizational cost for a partnership. 1040x calculator Business Start-Up Costs Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. 1040x calculator Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit; and for the production of income in anticipation of the activity becoming an active trade or business. 1040x calculator Qualifying costs. 1040x calculator   A start-up cost is amortizable if it meets both of the following tests. 1040x calculator It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into). 1040x calculator It is a cost you pay or incur before the day your active trade or business begins. 1040x calculator   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. 1040x calculator Advertisements for the opening of the business. 1040x calculator Salaries and wages for employees who are being trained and their instructors. 1040x calculator Travel and other necessary costs for securing prospective distributors, suppliers, or customers. 1040x calculator Salaries and fees for executives and consultants, or for similar professional services. 1040x calculator Nonqualifying costs. 1040x calculator   Start-up costs do not include deductible interest, taxes, or research and experimental costs. 1040x calculator See Research and Experimental Costs , later. 1040x calculator Purchasing an active trade or business. 1040x calculator   Amortizable start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. 1040x calculator These are costs that help you decide whether to purchase a business. 1040x calculator Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. 1040x calculator Example. 1040x calculator On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. 1040x calculator They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. 1040x calculator In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. 1040x calculator The letter stated that a binding commitment would result only after a purchase agreement was signed. 1040x calculator The law firm and accounting firm continued to provide services including a review of XYZ's books and records and the preparation of a purchase agreement. 1040x calculator On October 22nd, you signed a purchase agreement with XYZ, Inc. 1040x calculator All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. 1040x calculator Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. 1040x calculator Disposition of business. 1040x calculator   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. 1040x calculator However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. 1040x calculator Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. 1040x calculator Qualifying costs. 1040x calculator   To qualify as an organizational cost, it must be: For the creation of the corporation, Chargeable to a capital account (see chapter 1), Amortized over the life of the corporation if the corporation had a fixed life, and Incurred before the end of the first tax year in which the corporation is in business. 1040x calculator   A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year. 1040x calculator   Examples of organizational costs include: The cost of temporary directors. 1040x calculator The cost of organizational meetings. 1040x calculator State incorporation fees. 1040x calculator The cost of legal services. 1040x calculator Nonqualifying costs. 1040x calculator   The following items are capital expenses that cannot be amortized: Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs. 1040x calculator Costs associated with the transfer of assets to the corporation. 1040x calculator Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. 1040x calculator Qualifying costs. 1040x calculator   A partnership can amortize an organizational cost only if it meets all the following tests. 1040x calculator It is for the creation of the partnership and not for starting or operating the partnership trade or business. 1040x calculator It is chargeable to a capital account (see chapter 1). 1040x calculator It could be amortized over the life of the partnership if the partnership had a fixed life. 1040x calculator It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. 1040x calculator However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. 1040x calculator It is for a type of item normally expected to benefit the partnership throughout its entire life. 1040x calculator   Organizational costs include the following fees. 1040x calculator Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. 1040x calculator Accounting fees for services incident to the organization of the partnership. 1040x calculator Filing fees. 1040x calculator Nonqualifying costs. 1040x calculator   The following costs cannot be amortized. 1040x calculator The cost of acquiring assets for the partnership or transferring assets to the partnership. 1040x calculator The cost of admitting or removing partners, other than at the time the partnership is first organized. 1040x calculator The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. 1040x calculator The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. 1040x calculator These “syndication fees” are capital expenses that cannot be depreciated or amortized. 1040x calculator Liquidation of partnership. 1040x calculator   If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. 1040x calculator However, these costs can be deducted only to the extent they qualify as a loss from a business. 1040x calculator How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). 1040x calculator You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. 1040x calculator Once you choose an amortization period, you cannot change it. 1040x calculator To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. 1040x calculator The result is the amount you can deduct for each month. 1040x calculator Cash method partnership. 1040x calculator   A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. 1040x calculator However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. 1040x calculator How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. 1040x calculator You may also be required to attach an accompanying statement (described later) to your return. 1040x calculator For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. 1040x calculator Generally, for start-up or organizational costs paid or incurred before September 9, 2008, and after October 22, 2004, unless you choose to apply Regulations sections 1. 1040x calculator 195-1, 1. 1040x calculator 248-1, and 1. 1040x calculator 709-1, you must also attach an accompanying statement to elect to amortize the costs. 1040x calculator If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. 1040x calculator See Starting a Business , earlier, for more information. 1040x calculator Generally, you must file the return by the due date (including any extensions). 1040x calculator However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040x calculator For more information, see the instructions for Part VI of Form 4562. 1040x calculator You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. 1040x calculator Note. 1040x calculator The election to either amortize or capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business. 1040x calculator If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. 1040x calculator A shareholder or partner cannot make this election. 1040x calculator You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. 1040x calculator Only the corporation or partnership can amortize these costs. 1040x calculator However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. 1040x calculator These costs qualify as business start-up costs if you acquire the partnership interest. 1040x calculator Start-up costs election statement. 1040x calculator   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. 1040x calculator A description of the business to which the start-up costs relate. 1040x calculator A description of each start-up cost incurred. 1040x calculator The month your active business began (or was acquired). 1040x calculator The number of months in your amortization period (which is generally 180 months). 1040x calculator Filing the statement early. 1040x calculator   You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. 1040x calculator If you file the statement early, the election becomes effective in the month of the tax year your active business begins. 1040x calculator Revised statement. 1040x calculator   You can file a revised statement to include any start-up costs not included in your original statement. 1040x calculator However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. 1040x calculator You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. 1040x calculator Organizational costs election statement. 1040x calculator   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. 1040x calculator A description of each cost. 1040x calculator The amount of each cost. 1040x calculator The date each cost was incurred. 1040x calculator The month your corporation or partnership began active business (or acquired the business). 1040x calculator The number of months in your amortization period (which is generally 180 months). 1040x calculator Partnerships. 1040x calculator   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. 1040x calculator   You do not need to separately list any partnership organizational cost that is less than $10. 1040x calculator Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. 1040x calculator   After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership's original return and statement. 1040x calculator Getting a Lease If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease. 1040x calculator The term of the lease for amortization purposes generally includes all renewal options (and any other period for which you and the lessor reasonably expect the lease to be renewed). 1040x calculator However, renewal periods are not included if 75% or more of the cost of acquiring the lease is for the term of the lease remaining on the acquisition date (not including any period for which you may choose to renew, extend, or continue the lease). 1040x calculator For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. 1040x calculator How to amortize. 1040x calculator   Enter your deduction in Part VI of Form 4562 if you are deducting amortization that begins during the current year, or on the appropriate line of your tax return if you are not otherwise required to file Form 4562. 1040x calculator Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. 1040x calculator You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. 1040x calculator You may not be able to amortize section 197 intangibles acquired in a transaction that did not result in a significant change in ownership or use. 1040x calculator See Anti-Churning Rules, later. 1040x calculator Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). 1040x calculator The 15-year period begins with the later of: The month the intangible is acquired, or The month the trade or business or activity engaged in for the production of income begins. 1040x calculator You cannot deduct amortization for the month you dispose of the intangible. 1040x calculator If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs. 1040x calculator You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. 1040x calculator Tax-exempt use property subject to a lease. 1040x calculator   The amortization period for any section 197 intangible leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), shall not be less than 125 percent of the lease term. 1040x calculator Cost attributable to other property. 1040x calculator   The rules for section 197 intangibles do not apply to any amount that is included in determining the cost of property that is not a section 197 intangible. 1040x calculator For example, if the cost of computer software is not separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules do not apply. 1040x calculator Similarly, none of the cost of acquiring real property held for the production of rental income is considered the cost of goodwill, going concern value, or any other section 197 intangible. 1040x calculator Section 197 Intangibles Defined The following assets are section 197 intangibles and must be amortized over 180 months: Goodwill; Going concern value; Workforce in place; Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers; A patent, copyright, formula, process, design, pattern, know-how, format, or similar item; A customer-based intangible; A supplier-based intangible; Any item similar to items (3) through (7); A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals); A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business; Any franchise, trademark, or trade name; and A contract for the use of, or a term interest in, any item in this list. 1040x calculator You cannot amortize any of the intangibles listed in items (1) through (8) that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. 1040x calculator Goodwill. 1040x calculator   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. 1040x calculator Going concern value. 1040x calculator   This is the additional value of a trade or business that attaches to property because the property is an integral part of an ongoing business activity. 1040x calculator It includes value based on the ability of a business to continue to function and generate income even though there is a change in ownership (but does not include any other section 197 intangible). 1040x calculator It also includes value based on the immediate use or availability of an acquired trade or business, such as the use of earnings during any period in which the business would not otherwise be available or operational. 1040x calculator Workforce in place, etc. 1040x calculator   This includes the composition of a workforce (for example, its experience, education, or training). 1040x calculator It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes. 1040x calculator   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. 1040x calculator Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. 1040x calculator Business books and records, etc. 1040x calculator   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. 1040x calculator It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers. 1040x calculator Patents, copyrights, etc. 1040x calculator   This includes package design, computer software, and any interest in a film, sound recording, videotape, book, or other similar property, except as discussed later under Assets That Are Not Section 197 Intangibles . 1040x calculator Customer-based intangible. 1040x calculator   This is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. 1040x calculator For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. 1040x calculator A customer base. 1040x calculator A circulation base. 1040x calculator An undeveloped market or market growth. 1040x calculator Insurance in force. 1040x calculator A mortgage servicing contract. 1040x calculator An investment management contract. 1040x calculator Any other relationship with customers involving the future provision of goods or services. 1040x calculator   Accounts receivable or other similar rights to income for goods or services provided to customers before the acquisition of a trade or business are not section 197 intangibles. 1040x calculator Supplier-based intangible. 1040x calculator   A supplier-based intangible is the value resulting from the future acquisitions, (through contract or other relationships with suppliers in the ordinary course of business) of goods or services that you will sell or use. 1040x calculator The amount you pay or incur for supplier-based intangibles includes, for example, any portion of the purchase price of an acquired trade or business that is attributable to the existence of a favorable relationship with persons providing distribution services (such as a favorable shelf or display space or a retail outlet), or the existence of favorable supply contracts. 1040x calculator Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. 1040x calculator Also, see Assets That Are Not Section 197 Intangibles below. 1040x calculator Government-granted license, permit, etc. 1040x calculator   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. 1040x calculator For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license. 1040x calculator Covenant not to compete. 1040x calculator   Section 197 intangibles include a covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business, or a substantial portion of a trade or business. 1040x calculator An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. 1040x calculator   An arrangement that requires the former owner to perform services (or to provide property or the use of property) is not similar to a covenant not to compete to the extent the amount paid under the arrangement represents reasonable compensation for those services or for that property or its use. 1040x calculator Franchise, trademark, or trade name. 1040x calculator   A franchise, trademark, or trade name is a section 197 intangible. 1040x calculator You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. 1040x calculator For information on currently deductible contingent payments, see chapter 11. 1040x calculator Professional sports franchise. 1040x calculator   A franchise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player contracts) is a section 197 intangible amortizable over a 15-year period. 1040x calculator Contract for the use of, or a term interest in, a section 197 intangible. 1040x calculator   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. 1040x calculator It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. 1040x calculator Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. 1040x calculator Any interest in a corporation, partnership, trust, or estate. 1040x calculator Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. 1040x calculator Any interest in land. 1040x calculator Most computer software. 1040x calculator (See Computer software , later. 1040x calculator ) Any of the following assets not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. 1040x calculator An interest in a film, sound recording, video tape, book, or similar property. 1040x calculator A right to receive tangible property or services under a contract or from a governmental agency. 1040x calculator An interest in a patent or copyright. 1040x calculator Certain rights that have a fixed duration or amount. 1040x calculator (See Rights of fixed duration or amount , later. 1040x calculator ) An interest under either of the following. 1040x calculator An existing lease or sublease of tangible property. 1040x calculator A debt that was in existence when the interest was acquired. 1040x calculator A right to service residential mortgages unless the right is acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. 1040x calculator Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. 1040x calculator Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. 1040x calculator You generally must use the straight line method over its useful life. 1040x calculator For certain intangibles, the depreciation period is specified in the law and regulations. 1040x calculator For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. 1040x calculator For more information on depreciating intangible property, see Intangible Property under What Method Can You Use To Depreciate Your Property? in chapter 1 of Publication 946. 1040x calculator Computer software. 1040x calculator   Section 197 intangibles do not include the following types of computer software. 1040x calculator Software that meets all the following requirements. 1040x calculator It is, or has been, readily available for purchase by the general public. 1040x calculator It is subject to a nonexclusive license. 1040x calculator It has not been substantially modified. 1040x calculator This requirement is considered met if the cost of all modifications is not more than the greater of 25% of the price of the publicly available unmodified software or $2,000. 1040x calculator Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. 1040x calculator Computer software defined. 1040x calculator   Computer software includes all programs designed to cause a computer to perform a desired function. 1040x calculator It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. 1040x calculator Rights of fixed duration or amount. 1040x calculator   Section 197 intangibles do not include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: Has a fixed life of less than 15 years, or Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recovery. 1040x calculator However, this does not apply to the following intangibles. 1040x calculator Goodwill. 1040x calculator Going concern value. 1040x calculator A covenant not to compete. 1040x calculator A franchise, trademark, or trade name. 1040x calculator A customer-related information base, customer-based intangible, or similar item. 1040x calculator Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. 1040x calculator You may amortize these costs ratably over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial accounting purposes. 1040x calculator If, during the 15-year period, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. 1040x calculator Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. 1040x calculator Amortize these costs using the rules of Revenue Procedure 2004-36. 1040x calculator For more information, see Revenue Procedure 2004-36, 2004-24 I. 1040x calculator R. 1040x calculator B. 1040x calculator 1063, available at  www. 1040x calculator irs. 1040x calculator gov/irb/2004-24_IRB/ar16. 1040x calculator html. 1040x calculator A change in the treatment of creative property costs is a change in method of accounting. 1040x calculator Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them did not result in a significant change in ownership or use. 1040x calculator These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. 1040x calculator Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. 1040x calculator You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. 1040x calculator You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user did not change. 1040x calculator You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). 1040x calculator This applies only if the transaction in which you granted the right and the transaction in which you acquired the intangible are part of a series of related transactions. 1040x calculator See Related person , later, for more information. 1040x calculator Exceptions. 1040x calculator   The anti-churning rules do not apply in the following situations. 1040x calculator You acquired the intangible from a decedent and its basis was stepped up to its fair market value. 1040x calculator The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. 1040x calculator This exception does not apply if the transaction in which you acquired the intangible and the transaction in which the seller or transferor acquired it are part of a series of related transactions. 1040x calculator The gain-recognition exception, discussed later, applies. 1040x calculator Related person. 1040x calculator   For purposes of the anti-churning rules, the following are related persons. 1040x calculator An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. 1040x calculator ), and lineal descendants (children, grandchildren, etc. 1040x calculator ). 1040x calculator A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. 1040x calculator Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 20%” is substituted for “at least 80%” in that definition and the determination is made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. 1040x calculator (For an exception, see section 1. 1040x calculator 197-2(h)(6)(iv) of the regulations. 1040x calculator ) A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or indirectly, by or for the trust or grantor of the trust. 1040x calculator The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 1040x calculator The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. 1040x calculator The executor and beneficiary of an estate. 1040x calculator A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). 1040x calculator A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the corporation and more than 20% of the capital or profits interest in the partnership. 1040x calculator Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 20% of the value of the outstanding stock of each corporation. 1040x calculator Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. 1040x calculator A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. 1040x calculator Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). 1040x calculator When to determine relationship. 1040x calculator   Persons are treated as related if the relationship existed at the following time. 1040x calculator In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. 1040x calculator In the case of a series of related transactions (or a series of transactions that comprise a qualified stock purchase under section 338(d)(3) of the Internal Revenue Code), immediately before the earliest transaction or immediately after the last transaction. 1040x calculator Ownership of stock. 1040x calculator   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. 1040x calculator Rule 1. 1040x calculator   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. 1040x calculator Rule 2. 1040x calculator   An individual is considered to own the stock directly or indirectly owned by or for his or her family. 1040x calculator Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. 1040x calculator Rule 3. 1040x calculator   An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. 1040x calculator Rule 4. 1040x calculator   For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a person under Rule 1 as actually owned by that person. 1040x calculator Do not treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make another person the constructive owner of the stock. 1040x calculator Gain-recognition exception. 1040x calculator   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. 1040x calculator That person would not be related to you (as described under Related person , earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. 1040x calculator That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. 1040x calculator See chapter 2 in Publication 544 for information on making this choice. 1040x calculator   If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. 1040x calculator Notification. 1040x calculator   If the person you acquired the intangible from chooses to recognize gain under the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. 1040x calculator Anti-abuse rule. 1040x calculator   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. 1040x calculator To avoid the requirement that the intangible be acquired after August 10, 1993. 1040x calculator To avoid any of the anti-churning rules. 1040x calculator More information. 1040x calculator   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. 1040x calculator 197-2(h). 1040x calculator Incorrect Amount of Amortization Deducted If you later discover that you deducted an incorrect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. 1040x calculator See Amended Return , next. 1040x calculator If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. 1040x calculator See Changing Your Accounting Method , later. 1040x calculator Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. 1040x calculator A mathematical error made in any year. 1040x calculator A posting error made in any year. 1040x calculator An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. 1040x calculator When to file. 1040x calculator   If an amended return is allowed, you must file it by the later of the following dates. 1040x calculator 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. 1040x calculator (A return filed early is considered filed on the due date. 1040x calculator ) 2 years from the time you paid your tax for that year. 1040x calculator Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. 1040x calculator File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. 1040x calculator The following are examples of a change in method of accounting for amortization. 1040x calculator A change in the amortization method, period of recovery, or convention of an amortizable asset. 1040x calculator A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. 1040x calculator A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. 1040x calculator Changes in amortization that are not a change in method of accounting include the following: A change in computing amortization in the tax year in which your use of the asset changes. 1040x calculator An adjustment in the useful life of an amortizable asset. 1040x calculator Generally, the making of a late amortization election or the revocation of a timely valid amortization election. 1040x calculator Any change in the placed-in-service date of an amortizable asset. 1040x calculator See Regulations section 1. 1040x calculator 446-1(e)(2)(ii)(a) for more information and examples. 1040x calculator Automatic approval. 1040x calculator   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. 1040x calculator For a list of automatic accounting method changes, see the Instructions for Form 3115. 1040x calculator Also see the Instructions for Form 3115 for more information on getting approval, automatic approval procedures, and a list of exceptions to the automatic approval process. 1040x calculator For more information, see Revenue Procedure 2006-12, as modified by Revenue Procedure 2006-37, and Revenue Procedure 2008-52, as amplified, clarified, and modified by Revenue Procedure 2009-39, as clarified and modified by Revenue Procedure 2011-14, as modified and amplified by Revenue Procedure 2011-22, as modified by Revenue Procedure 2012-39, or any successor. 1040x calculator See Revenue Procedure 2006-12, 2006-3 I. 1040x calculator R. 1040x calculator B. 1040x calculator 310, available at  www. 1040x calculator irs. 1040x calculator gov/irb/2006-03_IRB/ar14. 1040x calculator html. 1040x calculator  See Revenue Procedure 2006-37, 2006-38 I. 1040x calculator R. 1040x calculator B. 1040x calculator 499, available at  www. 1040x calculator irs. 1040x calculator gov/irb/2006-38_IRB/ar10. 1040x calculator html. 1040x calculator  See Revenue Procedure 2008-52, 2008-36 I. 1040x calculator R. 1040x calculator B. 1040x calculator 587, available at www. 1040x calculator irs. 1040x calculator gov/irb/2008-36_IRB/ar09. 1040x calculator html. 1040x calculator  See Revenue Procedure 2009-39, 2009-38 I. 1040x calculator R. 1040x calculator B. 1040x calculator 371, available at  www. 1040x calculator irs. 1040x calculator gov/irb/2009-38_IRB/ar08. 1040x calculator html. 1040x calculator  See Revenue Procedure 2011-14, 2011-4 I. 1040x calculator R. 1040x calculator B. 1040x calculator 330, available at  www. 1040x calculator irs. 1040x calculator gov/irb/2011-04_IRB/ar08. 1040x calculator html. 1040x calculator  See Revenue Procedure 2011-22, 2011-18 I. 1040x calculator R. 1040x calculator B. 1040x calculator 737, available at  www. 1040x calculator irs. 1040x calculator gov/irb/2011-18_IRB/ar08. 1040x calculator html. 1040x calculator Also, see Revenue Procedure 2012-39, 2012-41 I. 1040x calculator R. 1040x calculator B. 1040x calculator 470 available at www. 1040x calculator irs. 1040x calculator gov/irb/2012-41_IRB/index. 1040x calculator html. 1040x calculator Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. 1040x calculator If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). 1040x calculator If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. 1040x calculator Any remaining gain, or any loss, is a section 1231 gain or loss. 1040x calculator If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. 1040x calculator For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. 1040x calculator Nondeductible loss. 1040x calculator   You cannot deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transactions) as other section 197 intangibles you still have. 1040x calculator Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. 1040x calculator Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. 1040x calculator The numerator is the adjusted basis of each remaining intangible on the date of the disposition. 1040x calculator The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. 1040x calculator Covenant not to compete. 1040x calculator   A covenant not to compete, or similar arrangement, is not considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant. 1040x calculator Nonrecognition transfers. 1040x calculator   If you acquire a section 197 intangible in a nonrecognition transfer, you are treated as the transferor with respect to the part of your adjusted basis in the intangible that is not more than the transferor's adjusted basis. 1040x calculator You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. 1040x calculator Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. 1040x calculator   In a like-kind exchange or involuntary conversion of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that is not more than your adjusted basis in the exchanged or converted intangible over the remaining amortization period of the exchanged or converted intangible. 1040x calculator Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. 1040x calculator Example. 1040x calculator You own a section 197 intangible you have amortized for 4 full years. 1040x calculator It has a remaining unamortized basis of $30,000. 1040x calculator You exchange the asset plus $10,000 for a like-kind section 197 intangible. 1040x calculator The nonrecognition provisions of like-kind exchanges apply. 1040x calculator You amortize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset. 1040x calculator You amortize the other $10,000 of adjusted basis over a new 15-year period. 1040x calculator For more information, see Regulations section 1. 1040x calculator 197-2(g). 1040x calculator Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. 1040x calculator See Reforestation Costs in chapter 7. 1040x calculator You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. 1040x calculator There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. 1040x calculator The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. 1040x calculator A partner, shareholder, or beneficiary cannot make that election. 1040x calculator A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. 1040x calculator , of a partnership or S corporation. 1040x calculator The amortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each. 1040x calculator Qualifying costs. 1040x calculator   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. 1040x calculator Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. 1040x calculator They include costs for the following items. 1040x calculator Site preparation. 1040x calculator Seeds or seedlings. 1040x calculator Labor. 1040x calculator Tools. 1040x calculator Depreciation on equipment used in planting and seeding. 1040x calculator Qualifying costs do not include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income. 1040x calculator Qualified timber property. 1040x calculator   Qualified timber property is property that contains trees in significant commercial quantities. 1040x calculator It can be a woodlot or other site that you own or lease. 1040x calculator The property qualifies only if it meets all of the following requirements. 1040x calculator It is located in the United States. 1040x calculator It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products. 1040x calculator It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. 1040x calculator Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. 1040x calculator Amortization period. 1040x calculator   The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. 1040x calculator You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. 1040x calculator Life tenant and remainderman. 1040x calculator   If one person holds the property for life with the remainder going to another person, the life tenant is entitled to the full amortization for qualifying reforestation costs incurred by the life tenant. 1040x calculator Any remainder interest in the property is ignored for amortization purposes. 1040x calculator Recapture. 1040x calculator   If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortization you took. 1040x calculator See chapter 3 of Publication 544 for more information. 1040x calculator How to make the election. 1040x calculator   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. 1040x calculator A description of the costs and the dates you incurred them. 1040x calculator A description of the type of timber being grown and the purpose for which it is grown. 1040x calculator Attach a separate statement for each property for which you amortize reforestation costs. 1040x calculator   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. 1040x calculator However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040x calculator Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. 1040x calculator 9100-2” on Form 4562. 1040x calculator File the amended return at the same address you filed the original return. 1040x calculator Revoking the election. 1040x calculator   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. 1040x calculator Your application to revoke the election must include your name, address, the years for which your election was in effect, and your reason for revoking it. 1040x calculator Please provide your daytime telephone number (optional), in case we need to contact you. 1040x calculator You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your election is to end. 1040x calculator    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. 1040x calculator NW, IR-5300 Washington, DC 20224 Geological and Geophysical Costs You can amortize the cost of geological and geophysical expenses paid or incurred in connection with oil and gas exploration or development within the United States. 1040x calculator These costs can be amortized ratably over a 24-month period beginning on the mid-point of the tax year in which the expenses were paid or incurred. 1040x calculator For major integrated oil companies (as defined in section 167(h)(5)), these costs must be amortized ratably over a 5-year period for costs paid or incurred after May 17, 2006 (a 7-year period for costs paid or incurred after December 19, 2007). 1040x calculator If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. 1040x calculator Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. 1040x calculator However, see Atmospheric pollution control facilities for an exception. 1040x calculator The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. 1040x calculator Also, you can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost. 1040x calculator You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. 1040x calculator See chapter 3 of Publication 946. 1040x calculator A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property in operation before 1976, to reduce or control water or atmospheric pollution or contamination. 1040x calculator The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. 1040x calculator The facility must be certified by state and federal certifying authorities. 1040x calculator The facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. 1040x calculator Also, it must not significantly change the nature of the manufacturing or production process or facility. 1040x calculator The federal certifying authority will not certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its operation (such as through sales of recovered wastes). 1040x calculator The federal certifying authority will describe the nature of the potential cost recovery. 1040x calculator You must then reduce the amortizable basis of the facility by this potential recovery. 1040x calculator New identifiable treatment facility. 1040x calculator   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. 1040x calculator It does not include a building and its structural components unless the building is exclusively a treatment facility. 1040x calculator Atmospheric pollution control facilities. 1040x calculator   Certain atmospheric pollution control facilities can be amortized over 84 months. 1040x calculator To qualify, the following must apply. 1040x calculator The facility must be acquired and placed in service after April 11, 2005. 1040x calculator If acquired, the original use must begin with you after April 11, 2005. 1040x calculator The facility must be used in connection with an electric generation plant or other property placed in operation after December 31, 1975, that is primarily coal fired. 1040x calculator If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. 1040x calculator Basis reduction for corporations. 1040x calculator   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. 1040x calculator More information. 1040x calculator   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. 1040x calculator Research and Experimental Costs You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below). 1040x calculator If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. 1040x calculator The amortization period begins the month you first receive an economic benefit from the costs. 1040x calculator For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. 1040x calculator Optional write-off method. 1040x calculator   Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. 1040x calculator For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. 1040x calculator Costs you can amortize. 1040x calculator   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. 1040x calculator You paid or incurred the costs in your trade or business. 1040x calculator You are not deducting the costs currently. 1040x calculator How to make the election. 1040x calculator   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. 1040x calculator Generally, you must file the return by the due date (including extensions). 1040x calculator However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040x calculator Attach Form 4562 to the amended return and write “Filed pursuant to section 301. 1040x calculator 9100-2” on Form 4562. 1040x calculator File the amended return at the same address you filed the original return. 1040x calculator   Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. 1040x calculator Optional Write-off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. 1040x calculator If you make this election, there is no AMT adjustment. 1040x calculator The applicable costs and the optional recovery periods are as follows: Circulation costs — 3 years, Intangible drilling and development costs — 60 months, Mining exploration and development costs — 10 years, and Research and experimental costs — 10 years. 1040x calculator How to make the election. 1040x calculator   To elect to amortize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which the election begins: Your name, address, and taxpayer identification number; and The type of cost and the specific amount of the cost for which you are making the election. 1040x calculator   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. 1040x calculator However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040x calculator Attach Form 4562 to the amended return and write “Filed pursuant to section 301. 1040x calculator 9100-2” on Form 4562. 1040x calculator File the amended return at the same address you filed the original return. 1040x calculator Revoking the election. 1040x calculator   You must obtain consent from the IRS to revoke your election. 1040x calculator Your request to revoke the election must be submitted to the IRS in the form of a letter ruling before the end of the tax year in which the optional recovery period ends. 1040x calculator The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. 1040x calculator If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. 1040x calculator Prev  Up  Next   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1040x calculator 6. 1040x calculator   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. 1040x calculator Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. 1040x calculator Also use basis to figure depreciation, amortization, depletion, and casualty losses. 1040x calculator If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. 1040x calculator Only the basis allocated to the business or investment use of the property can be depreciated. 1040x calculator Your original basis in property is adjusted (increased or decreased) by certain events. 1040x calculator For example, if you make improvements to the property, increase your basis. 1040x calculator If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. 1040x calculator Keep accurate records of all items that affect the basis of your assets. 1040x calculator For information on keeping records, see chapter 1. 1040x calculator Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. 1040x calculator Cost Basis The basis of property you buy is usually its cost. 1040x calculator Cost is the amount you pay in cash, debt obligations, other property, or services. 1040x calculator Your cost includes amounts you pay for sales tax, freight, installation, and testing. 1040x calculator The basis of real estate and business assets will include other items, discussed later. 1040x calculator Basis generally does not include interest payments. 1040x calculator However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. 1040x calculator You also may have to capitalize (add to basis) certain other costs related to buying or producing property. 1040x calculator Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. 1040x calculator Loans with low or no interest. 1040x calculator   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. 1040x calculator You generally have unstated interest if your interest rate is less than the applicable federal rate. 1040x calculator See the discussion of unstated interest in Publication 537, Installment Sales. 1040x calculator Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. 1040x calculator If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. 1040x calculator Some of these expenses are discussed next. 1040x calculator Lump sum purchase. 1040x calculator   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. 1040x calculator Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. 1040x calculator Figure the basis of each asset by multiplying the lump sum by a fraction. 1040x calculator The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 1040x calculator Fair market value (FMV). 1040x calculator   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. 1040x calculator Sales of similar property on or about the same date may help in figuring the FMV of the property. 1040x calculator If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. 1040x calculator Real estate taxes. 1040x calculator   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 1040x calculator   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. 1040x calculator Whether or not you reimburse the seller, do not include that amount in the basis of your property. 1040x calculator Settlement costs. 1040x calculator   Your basis includes the settlement fees and closing costs for buying the property. 1040x calculator See Publication 551 for a detailed list of items you can and cannot include in basis. 1040x calculator   Do not include fees and costs for getting a loan on the property. 1040x calculator Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040x calculator Points. 1040x calculator   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. 1040x calculator You may be able to deduct the points currently or over the term of the loan. 1040x calculator For more information about deducting points, see Points in chapter 4 of Publication 535. 1040x calculator Assumption of a mortgage. 1040x calculator   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. 1040x calculator Example. 1040x calculator If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. 1040x calculator Constructing assets. 1040x calculator   If you build property or have assets built for you, your expenses for this construction are part of your basis. 1040x calculator Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 1040x calculator   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. 1040x calculator You must capitalize them (include them in the asset's basis). 1040x calculator Employee wages paid for the construction work, reduced by any employment credits allowed. 1040x calculator Depreciation on equipment you own while it is used in the construction. 1040x calculator Operating and maintenance costs for equipment used in the construction. 1040x calculator The cost of business supplies and materials used in the construction. 1040x calculator    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. 1040x calculator Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. 1040x calculator To determine the basis of these assets or separate items, there must be an allocation of basis. 1040x calculator Group of assets acquired. 1040x calculator   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. 1040x calculator Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 1040x calculator You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. 1040x calculator If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. 1040x calculator Farming business acquired. 1040x calculator   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. 1040x calculator Generally, reduce the purchase price by any cash received. 1040x calculator Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. 1040x calculator See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. 1040x calculator Transplanted embryo. 1040x calculator   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. 1040x calculator Allocate the rest of the purchase price to the basis of the calf. 1040x calculator Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. 1040x calculator Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. 1040x calculator You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 1040x calculator Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. 1040x calculator However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. 1040x calculator You produce property if you construct, build, install, manufacture, develop, improve, or create the property. 1040x calculator You are not subject to the uniform capitalization rules if the property is produced for personal use. 1040x calculator In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. 1040x calculator Plants. 1040x calculator   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. 1040x calculator Animals. 1040x calculator   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. 1040x calculator The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. 1040x calculator Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. 1040x calculator For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. 1040x calculator For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. 1040x calculator Exceptions. 1040x calculator   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. 1040x calculator   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. 1040x calculator See Accrual Method Required under Accounting Methods in chapter 2. 1040x calculator   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. 1040x calculator If you make this election, special rules apply. 1040x calculator This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. 1040x calculator This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. 1040x calculator    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. 1040x calculator See chapter 7, for additional information on depreciation. 1040x calculator Example. 1040x calculator You grow trees that have a preproductive period of more than 2 years. 1040x calculator The trees produce an annual crop. 1040x calculator You are an individual and the uniform capitalization rules apply to your farming business. 1040x calculator You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. 1040x calculator You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. 1040x calculator Preproductive period of more than 2 years. 1040x calculator   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. 1040x calculator Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. 1040x calculator Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. 1040x calculator More information. 1040x calculator   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. 1040x calculator 263A-4. 1040x calculator Table 6-1. 1040x calculator Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. 1040x calculator Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. 1040x calculator The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. 1040x calculator Increases to Basis Increase the basis of any property by all items properly added to a capital account. 1040x calculator These include the cost of any improvements having a useful life of more than 1 year. 1040x calculator The following costs increase the basis of property. 1040x calculator The cost of extending utility service lines to property. 1040x calculator Legal fees, such as the cost of defending and perfecting title. 1040x calculator Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. 1040x calculator Assessments for items such as paving roads and building ditches that increase the value of the property assessed. 1040x calculator Do not deduct these expenses as taxes. 1040x calculator However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. 1040x calculator If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. 1040x calculator See chapter 7. 1040x calculator Deducting vs. 1040x calculator capitalizing costs. 1040x calculator   Do not add to your basis costs you can deduct as current expenses. 1040x calculator For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. 1040x calculator However, you can elect either to deduct or to capitalize certain other costs. 1040x calculator See chapter 7 in Publication 535. 1040x calculator Decreases to Basis The following are some items that reduce the basis of property. 1040x calculator Section 179 deduction. 1040x calculator Deductions previously allowed or allowable for amortization, depreciation, and depletion. 1040x calculator Alternative motor vehicle credit. 1040x calculator See Form 8910. 1040x calculator Alternative fuel vehicle refueling property credit. 1040x calculator See Form 8911. 1040x calculator Residential energy efficient property credits. 1040x calculator See Form 5695. 1040x calculator Investment credit (part or all) taken. 1040x calculator Casualty and theft losses and insurance reimbursements. 1040x calculator Payments you receive for granting an easement. 1040x calculator Exclusion from income of subsidies for energy conservation measures. 1040x calculator Certain canceled debt excluded from income. 1040x calculator Rebates from a manufacturer or seller. 1040x calculator Patronage dividends received from a cooperative association as a result of a purchase of property. 1040x calculator See Patronage Dividends in chapter 3. 1040x calculator Gas-guzzler tax. 1040x calculator See Form 6197. 1040x calculator Some of these items are discussed next. 1040x calculator For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. 1040x calculator Depreciation and section 179 deduction. 1040x calculator   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. 1040x calculator For more information on these deductions, see chapter 7. 1040x calculator Section 179 deduction. 1040x calculator   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. 1040x calculator Depreciation. 1040x calculator   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. 1040x calculator If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. 1040x calculator If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 1040x calculator   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. 1040x calculator   See chapter 7 for information on figuring the depreciation you should have claimed. 1040x calculator   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. 1040x calculator Casualty and theft losses. 1040x calculator   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. 1040x calculator Also, decrease it by any deductible loss not covered by insurance. 1040x calculator See chapter 11 for information about figuring your casualty or theft loss. 1040x calculator   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. 1040x calculator To make this determination, compare the repaired property to the property before the casualty. 1040x calculator Easements. 1040x calculator   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. 1040x calculator It reduces the basis of the affected part of the property. 1040x calculator If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 1040x calculator See Easements and rights-of-way in chapter 3. 1040x calculator Exclusion from income of subsidies for energy conservation measures. 1040x calculator   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. 1040x calculator Reduce the basis of the property by the excluded amount. 1040x calculator Canceled debt excluded from income. 1040x calculator   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. 1040x calculator A debt includes any indebtedness for which you are liable or which attaches to property you hold. 1040x calculator   You can exclude your canceled debt from income if the debt is any of the following. 1040x calculator Debt canceled in a bankruptcy case or when you are insolvent. 1040x calculator Qualified farm debt. 1040x calculator Qualified real property business debt (provided you are not a C corporation). 1040x calculator Qualified principal residence indebtedness. 1040x calculator Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. 1040x calculator If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 1040x calculator If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. 1040x calculator   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. 1040x calculator For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. 1040x calculator For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. 1040x calculator For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. 1040x calculator Basis Other Than Cost There are times when you cannot use cost as basis. 1040x calculator In these situations, the fair market value or the adjusted basis of property may be used. 1040x calculator Examples are discussed next. 1040x calculator Property changed from personal to business or rental use. 1040x calculator   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. 1040x calculator An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. 1040x calculator   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 1040x calculator   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. 1040x calculator The basis for figuring a gain is your adjusted basis in the property when you sell the property. 1040x calculator Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 1040x calculator Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . 1040x calculator Property received for services. 1040x calculator   If you receive property for services, include the property's FMV in income. 1040x calculator The amount you include in income becomes your basis. 1040x calculator If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 1040x calculator Example. 1040x calculator George Smith is an accountant and also operates a farming business. 1040x calculator George agreed to do some accounting work for his neighbor in exchange for a dairy cow. 1040x calculator The accounting work and the cow are each worth $1,500. 1040x calculator George must include $1,500 in income for his accounting services. 1040x calculator George's basis in the cow is $1,500. 1040x calculator Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. 1040x calculator A taxable gain or deductible loss also is known as a recognized gain or loss. 1040x calculator A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. 1040x calculator If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. 1040x calculator Example. 1040x calculator You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. 1040x calculator You must report a taxable gain of $4,000 for the land. 1040x calculator The tractor has a basis of $6,000. 1040x calculator Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. 1040x calculator Similar or related property. 1040x calculator   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. 1040x calculator However, make the following adjustments. 1040x calculator Decrease the basis by the following amounts. 1040x calculator Any loss you recognize on the involuntary conversion. 1040x calculator Any money you receive that you do not spend on similar property. 1040x calculator Increase the basis by the following amounts. 1040x calculator Any gain you recognize on the involuntary conversion. 1040x calculator Any cost of acquiring the replacement property. 1040x calculator Money or property not similar or related. 1040x calculator   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. 1040x calculator Allocating the basis. 1040x calculator   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 1040x calculator Basis for depreciation. 1040x calculator   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. 1040x calculator For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 1040x calculator For more information about involuntary conversions, see chapter 11. 1040x calculator Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 1040x calculator A nontaxable gain or loss also is known as an unrecognized gain or loss. 1040x calculator If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 1040x calculator Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040x calculator For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. 1040x calculator There must also be an exchange of like-kind property. 1040x calculator For more information, see Like-Kind Exchanges in  chapter 8. 1040x calculator The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. 1040x calculator Example 1. 1040x calculator You traded a truck you used in your farming business for a new smaller truck to use in farming. 1040x calculator The adjusted basis of the old truck was $10,000. 1040x calculator The FMV of the new truck is $30,000. 1040x calculator Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. 1040x calculator Example 2. 1040x calculator You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). 1040x calculator You use both the field cultivator and the planter in your farming business. 1040x calculator The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. 1040x calculator   Exchange expenses generally are the closing costs that you pay. 1040x calculator They include such items as brokerage commissions, attorney fees, and deed preparation fees. 1040x calculator Add them to the basis of the like-kind property you receive. 1040x calculator Property plus cash. 1040x calculator   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. 1040x calculator Example. 1040x calculator You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. 1040x calculator Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). 1040x calculator Special rules for related persons. 1040x calculator   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. 1040x calculator Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. 1040x calculator Each person reports it on the tax return filed for the year in which the later disposition occurred. 1040x calculator If this rule applies, the basis of the property received in the original exchange will be its FMV. 1040x calculator For more information, see chapter 8. 1040x calculator Exchange of business property. 1040x calculator   Exchanging the property of one business for the property of another business generally is a multiple property exchange. 1040x calculator For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040x calculator Basis for depreciation. 1040x calculator   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. 1040x calculator For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 1040x calculator Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. 1040x calculator The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. 1040x calculator Decrease the basis by the following amounts. 1040x calculator Any money you receive. 1040x calculator Any loss you recognize on the exchange. 1040x calculator Increase the basis by the following amounts. 1040x calculator Any additional costs you incur. 1040x calculator Any gain you recognize on the exchange. 1040x calculator If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 1040x calculator Example 1. 1040x calculator You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. 1040x calculator You realize a gain of $40,000. 1040x calculator This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). 1040x calculator Include your gain in income (recognize gain) only to the extent of the cash received. 1040x calculator Your basis in the land you received is figured as follows. 1040x calculator Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. 1040x calculator You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. 1040x calculator You realize a gain of $7,250. 1040x calculator This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). 1040x calculator You include all the gain in your income (recognize gain) because the gain is less than the cash you received. 1040x calculator Your basis in the truck you received is figured as follows. 1040x calculator Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. 1040x calculator   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 1040x calculator The rest is the basis of the like-kind property. 1040x calculator Example. 1040x calculator You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. 1040x calculator You also received $1,000 cash and a truck that had an FMV of $3,000. 1040x calculator The truck is unlike property. 1040x calculator You realized a gain of $1,500. 1040x calculator This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). 1040x calculator You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. 1040x calculator Your basis in the properties you received is figured as follows. 1040x calculator Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). 1040x calculator This is the truck's FMV. 1040x calculator The rest ($12,500) is the basis of the tractor. 1040x calculator Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. 1040x calculator Example. 1040x calculator You used a tractor on your farm for 3 years. 1040x calculator Its adjusted basis is $22,000 and its FMV is $40,000. 1040x calculator You are interested in a new tractor, which sells for $60,000. 1040x calculator Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. 1040x calculator Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). 1040x calculator However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. 1040x calculator Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). 1040x calculator Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. 1040x calculator Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. 1040x calculator You also must know its FMV at the time it was given to you and any gift tax paid on it. 1040x calculator FMV equal to or greater than donor's adjusted basis. 1040x calculator   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. 1040x calculator Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 1040x calculator   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. 1040x calculator See Adjusted Basis , earlier. 1040x calculator   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. 1040x calculator Figure the increase by multiplying the gift tax paid by the following fraction. 1040x calculator Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. 1040x calculator The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 1040x calculator Example. 1040x calculator In 2013, you received a gift of property from your mother that had an FMV of $50,000. 1040x calculator Her adjusted basis was $20,000. 1040x calculator The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). 1040x calculator She paid a gift tax of $7,320. 1040x calculator Your basis, $26,076, is figured as follows. 1040x calculator Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . 1040x calculator 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. 1040x calculator If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. 1040x calculator However, your basis cannot exceed the FMV of the gift when it was given to you. 1040x calculator FMV less than donor's adjusted basis. 1040x calculator   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 1040x calculator Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. 1040x calculator Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. 1040x calculator (See Adjusted Basis , earlier. 1040x calculator )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. 1040x calculator Example. 1040x calculator You received farmland as a gift from your parents when they retired from farming. 1040x calculator At the time of the gift, the land had an FMV of $80,000. 1040x calculator Your parents' adjusted basis was $100,000. 1040x calculator After you received the land, no events occurred that would increase or decrease your basis. 1040x calculator If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. 1040x calculator If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. 1040x calculator If the sales price is between $80,000 and $100,000, you have neither gain nor loss. 1040x calculator For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. 1040x calculator If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. 1040x calculator Business property. 1040x calculator   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 1040x calculator Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. 1040x calculator The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. 1040x calculator However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. 1040x calculator The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. 1040x calculator For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. 1040x calculator Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. 1040x calculator If a federal estate return is filed, you can use its appraised value. 1040x calculator The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. 1040x calculator For information on the alternate valuation, see the Instructions for Form 706. 1040x calculator The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. 1040x calculator If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 1040x calculator Special-use valuation method. 1040x calculator   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. 1040x calculator If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. 1040x calculator If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. 1040x calculator The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 1040x calculator   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 1040x calculator Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. 1040x calculator Figure all FMVs without regard to the special-use valuation. 1040x calculator   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. 1040x calculator This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. 1040x calculator The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. 1040x calculator   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 1040x calculator To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. 1040x calculator If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. 1040x calculator The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. 1040x calculator   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. 1040x calculator   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. 1040x calculator Property inherited from a decedent who died in 2010. 1040x calculator   If you inherited property from a decedent who died in 2010, different rules may apply. 1040x calculator See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. 1040x calculator Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. 1040x calculator Partner's basis. 1040x calculator   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. 1040x calculator However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. 1040x calculator For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. 1040x calculator Shareholder's basis. 1040x calculator   The basis of property distributed by a corporation to a shareholder is its fair market value. 1040x calculator For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. 1040x calculator Prev  Up  Next   Home   More Online Publications