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1040x mailing address 2. 1040x mailing address   Electing the Section 179 Deduction Table of Contents Introduction Useful Items - You may want to see: What Property Qualifies?Eligible Property Property Acquired for Business Use Property Acquired by Purchase What Property Does Not Qualify?Land and Improvements Excepted Property How Much Can You Deduct?Dollar Limits Business Income Limit Partnerships and Partners S Corporations Other Corporations How Do You Elect the Deduction? When Must You Recapture the Deduction? Introduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. 1040x mailing address This is the section 179 deduction. 1040x mailing address You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. 1040x mailing address Estates and trusts cannot elect the section 179 deduction. 1040x mailing address This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special rules for partnerships and corporations), and how to elect it. 1040x mailing address It also explains when and how to recapture the deduction. 1040x mailing address Useful Items - You may want to see: Publication 537 Installment Sales 544 Sales and Other Dispositions of Assets 954 Tax Incentives for Distressed Communities Form (and Instructions) 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. 1040x mailing address What Property Qualifies? To qualify for the section 179 deduction, your property must meet all the following requirements. 1040x mailing address It must be eligible property. 1040x mailing address It must be acquired for business use. 1040x mailing address It must have been acquired by purchase. 1040x mailing address It must not be property described later under What Property Does Not Qualify . 1040x mailing address The following discussions provide information about these requirements and exceptions. 1040x mailing address Eligible Property To qualify for the section 179 deduction, your property must be one of the following types of depreciable property. 1040x mailing address Tangible personal property. 1040x mailing address Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services, A research facility used in connection with any of the activities in (a) above, or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. 1040x mailing address Single purpose agricultural (livestock) or horticultural structures. 1040x mailing address See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures. 1040x mailing address Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. 1040x mailing address Off-the-shelf computer software. 1040x mailing address Qualified real property (described below). 1040x mailing address Tangible personal property. 1040x mailing address   Tangible personal property is any tangible property that is not real property. 1040x mailing address It includes the following property. 1040x mailing address Machinery and equipment. 1040x mailing address Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs. 1040x mailing address Gasoline storage tanks and pumps at retail service stations. 1040x mailing address Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals. 1040x mailing address   The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. 1040x mailing address For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law. 1040x mailing address Off-the-shelf computer software. 1040x mailing address   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. 1040x mailing address This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. 1040x mailing address It includes any program designed to cause a computer to perform a desired function. 1040x mailing address However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software. 1040x mailing address Qualified real property. 1040x mailing address   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. 1040x mailing address If this election is made, the term “section 179 property” will include any qualified real property that is: Qualified leasehold improvement property, Qualified restaurant property, or Qualified retail improvement property. 1040x mailing address The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 in 2013. 1040x mailing address For more information, see Special rules for qualified section 179 real property, later. 1040x mailing address Also, see Election for certain qualified section 179 real property, later, for information on how to make this election. 1040x mailing address Qualified leasehold improvement property. 1040x mailing address   Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. 1040x mailing address   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. 1040x mailing address A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. 1040x mailing address Examples include the following. 1040x mailing address A complete liquidation of a subsidiary. 1040x mailing address A transfer to a corporation controlled by the transferor. 1040x mailing address An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. 1040x mailing address Qualified restaurant property. 1040x mailing address   Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2014. 1040x mailing address Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals. 1040x mailing address Qualified retail improvement property. 1040x mailing address   Generally, this is any improvement (placed in service after December 31, 2008, and before January 1, 2014) to an interior portion of nonresidential real property if it meets the following requirements. 1040x mailing address The portion is open to the general public and is used in the retail trade or business of selling tangible property to the general public. 1040x mailing address The improvement is placed in service more than 3 years after the date the building was first placed in service. 1040x mailing address The expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building. 1040x mailing address In addition, an improvement made by the lessor does not qualify as qualified retail improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. 1040x mailing address A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. 1040x mailing address Examples include the following. 1040x mailing address A complete liquidation of a subsidiary. 1040x mailing address A transfer to a corporation controlled by the transferor. 1040x mailing address An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. 1040x mailing address Property Acquired for Business Use To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. 1040x mailing address Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify. 1040x mailing address Partial business use. 1040x mailing address   When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. 1040x mailing address If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. 1040x mailing address Use the resulting business cost to figure your section 179 deduction. 1040x mailing address Example. 1040x mailing address May Oak bought and placed in service an item of section 179 property costing $11,000. 1040x mailing address She used the property 80% for her business and 20% for personal purposes. 1040x mailing address The business part of the cost of the property is $8,800 (80% × $11,000). 1040x mailing address Property Acquired by Purchase To qualify for the section 179 deduction, your property must have been acquired by purchase. 1040x mailing address For example, property acquired by gift or inheritance does not qualify. 1040x mailing address Property is not considered acquired by purchase in the following situations. 1040x mailing address It is acquired by one component member of a controlled group from another component member of the same group. 1040x mailing address Its basis is determined either— In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or Under the stepped-up basis rules for property acquired from a decedent. 1040x mailing address It is acquired from a related person. 1040x mailing address Related persons. 1040x mailing address   Related persons are described under Related persons earlier. 1040x mailing address However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears. 1040x mailing address Example. 1040x mailing address Ken Larch is a tailor. 1040x mailing address He bought two industrial sewing machines from his father. 1040x mailing address He placed both machines in service in the same year he bought them. 1040x mailing address They do not qualify as section 179 property because Ken and his father are related persons. 1040x mailing address He cannot claim a section 179 deduction for the cost of these machines. 1040x mailing address What Property Does Not Qualify? Certain property does not qualify for the section 179 deduction. 1040x mailing address This includes the following. 1040x mailing address Land and Improvements Land and land improvements do not qualify as section 179 property. 1040x mailing address Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences. 1040x mailing address Excepted Property Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property. 1040x mailing address Certain property you lease to others (if you are a noncorporate lessor). 1040x mailing address Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. 1040x mailing address Air conditioning or heating units. 1040x mailing address Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code. 1040x mailing address Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income. 1040x mailing address Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months. 1040x mailing address Leased property. 1040x mailing address   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. 1040x mailing address This rule does not apply to corporations. 1040x mailing address However, you can claim a section 179 deduction for the cost of the following property. 1040x mailing address Property you manufacture or produce and lease to others. 1040x mailing address Property you purchase and lease to others if both the following tests are met. 1040x mailing address The term of the lease (including options to renew) is less than 50% of the property's class life. 1040x mailing address For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property. 1040x mailing address Property used for lodging. 1040x mailing address   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. 1040x mailing address However, this does not apply to the following types of property. 1040x mailing address Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to those using the lodging facilities. 1040x mailing address Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients. 1040x mailing address Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures. 1040x mailing address Any energy property. 1040x mailing address Energy property. 1040x mailing address   Energy property is property that meets the following requirements. 1040x mailing address It is one of the following types of property. 1040x mailing address Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat, except for equipment used to generate energy to heat a swimming pool. 1040x mailing address Equipment placed in service after December 31, 2005, and before January 1, 2017, that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. 1040x mailing address Equipment used to produce, distribute, or use energy derived from a geothermal deposit. 1040x mailing address For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage. 1040x mailing address Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017. 1040x mailing address The construction, reconstruction, or erection of the property must be completed by you. 1040x mailing address For property you acquire, the original use of the property must begin with you. 1040x mailing address The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property. 1040x mailing address   For periods before February 14, 2008, energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990). 1040x mailing address How Much Can You Deduct? Your section 179 deduction is generally the cost of the qualifying property. 1040x mailing address However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. 1040x mailing address These limits apply to each taxpayer, not to each business. 1040x mailing address However, see Married Individuals under Dollar Limits , later. 1040x mailing address For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. 1040x mailing address See Do the Passenger Automobile Limits Apply in chapter 5 . 1040x mailing address If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. 1040x mailing address Trade-in of other property. 1040x mailing address   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid. 1040x mailing address Example. 1040x mailing address Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. 1040x mailing address They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. 1040x mailing address The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. 1040x mailing address They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van. 1040x mailing address Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. 1040x mailing address Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200). 1040x mailing address Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 generally cannot be more than $500,000. 1040x mailing address If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. 1040x mailing address You do not have to claim the full $500,000. 1040x mailing address Qualified real property (described earlier) that you elected to treat as section 179 real property is limited to $250,000 of the maximum deduction of $500,000 for 2013. 1040x mailing address The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property in service for only a part of a 12-month tax year. 1040x mailing address After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your actual section 179 deduction. 1040x mailing address Example. 1040x mailing address In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. 1040x mailing address You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. 1040x mailing address This is the maximum amount you can deduct. 1040x mailing address Your $25,000 deduction for the saw completely recovered its cost. 1040x mailing address Your basis for depreciation is zero. 1040x mailing address The basis for depreciation of your machinery is $25,000. 1040x mailing address You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery. 1040x mailing address Situations affecting dollar limit. 1040x mailing address   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. 1040x mailing address The general dollar limit is affected by any of the following situations. 1040x mailing address The cost of your section 179 property placed in service exceeds $2,000,000. 1040x mailing address Your business is an enterprise zone business. 1040x mailing address You placed in service a sport utility or certain other vehicles. 1040x mailing address You are married filing a joint or separate return. 1040x mailing address Costs exceeding $2,000,000 If the cost of your qualifying section 179 property placed in service in a year is more than $2,000,000, you generally must reduce the dollar limit (but not below zero) by the amount of cost over $2,000,000. 1040x mailing address If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. 1040x mailing address Example. 1040x mailing address In 2013, Jane Ash placed in service machinery costing $2,100,000. 1040x mailing address This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000). 1040x mailing address Enterprise Zone Businesses An increased section 179 deduction is available to enterprise zone businesses for qualified zone property placed in service during the tax year, in an empowerment zone. 1040x mailing address For more information including the definitions of “enterprise zone business” and “qualified zone property,” see sections 1397A, 1397C, and 1397D of the Internal Revenue Code. 1040x mailing address The dollar limit on the section 179 deduction is increased by the smaller of: $35,000, or The cost of section 179 property that is also qualified zone property placed in service before January 1, 2014 (including such property placed in service by your spouse, even if you are filing a separate return). 1040x mailing address Note. 1040x mailing address   You take into account only 50% (instead of 100%) of the cost of qualified zone property placed in service in a year when figuring the reduced dollar limit for costs exceeding $2,000,000 (explained earlier). 1040x mailing address Sport Utility and Certain Other Vehicles You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year. 1040x mailing address This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. 1040x mailing address However, the $25,000 limit does not apply to any vehicle: Designed to seat more than nine passengers behind the driver's seat, Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from the passenger compartment, or That has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. 1040x mailing address Married Individuals If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. 1040x mailing address If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. 1040x mailing address If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2,000,000. 1040x mailing address You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. 1040x mailing address If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. 1040x mailing address Example. 1040x mailing address Jack Elm is married. 1040x mailing address He and his wife file separate returns. 1040x mailing address Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. 1040x mailing address His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. 1040x mailing address Their combined dollar limit is $470,000. 1040x mailing address This is because they must figure the limit as if they were one taxpayer. 1040x mailing address They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000. 1040x mailing address They elect to allocate the $470,000 dollar limit as follows. 1040x mailing address $446,500 ($470,000 x 95%) to Mr. 1040x mailing address Elm's machinery. 1040x mailing address $23,500 ($470,000 x 5%) to Mrs. 1040x mailing address Elm's equipment. 1040x mailing address If they did not make an election to allocate their costs in this way, they would have to allocate $235,000 ($470,000 × 50%) to each of them. 1040x mailing address Joint return after filing separate returns. 1040x mailing address   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. 1040x mailing address The dollar limit (after reduction for any cost of section 179 property over $2,000,000). 1040x mailing address The total cost of section 179 property you and your spouse elected to expense on your separate returns. 1040x mailing address Example. 1040x mailing address The facts are the same as in the previous example except that Jack elected to deduct $30,000 of the cost of section 179 property on his separate return and his wife elected to deduct $2,000. 1040x mailing address After the due date of their returns, they file a joint return. 1040x mailing address Their dollar limit for the section 179 deduction is $32,000. 1040x mailing address This is the lesser of the following amounts. 1040x mailing address $470,000—The dollar limit less the cost of section 179 property over $2,000,000. 1040x mailing address $32,000—The total they elected to expense on their separate returns. 1040x mailing address Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. 1040x mailing address Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. 1040x mailing address Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. 1040x mailing address Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. 1040x mailing address See Special rules for qualified section 179 property under Carryover of disallowed deduction, later. 1040x mailing address Taxable income. 1040x mailing address   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. 1040x mailing address Net income or loss from a trade or business includes the following items. 1040x mailing address Section 1231 gains (or losses). 1040x mailing address Interest from working capital of your trade or business. 1040x mailing address Wages, salaries, tips, or other pay earned as an employee. 1040x mailing address For information about section 1231 gains and losses, see chapter 3 in Publication 544. 1040x mailing address   In addition, figure taxable income without regard to any of the following. 1040x mailing address The section 179 deduction. 1040x mailing address The self-employment tax deduction. 1040x mailing address Any net operating loss carryback or carryforward. 1040x mailing address Any unreimbursed employee business expenses. 1040x mailing address Two different taxable income limits. 1040x mailing address   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. 1040x mailing address You may have to figure the limit for this other deduction taking into account the section 179 deduction. 1040x mailing address If so, complete the following steps. 1040x mailing address Step Action 1 Figure taxable income without the section 179 deduction or the other deduction. 1040x mailing address 2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. 1040x mailing address 3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. 1040x mailing address 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. 1040x mailing address 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. 1040x mailing address 6 Figure your actual section 179 deduction using the taxable income figured in Step 5. 1040x mailing address 7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. 1040x mailing address 8 Figure your actual other deduction using the taxable income figured in Step 7. 1040x mailing address Example. 1040x mailing address On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. 1040x mailing address It elects to expense the entire $500,000 cost under section 179. 1040x mailing address In June, the corporation gave a charitable contribution of $10,000. 1040x mailing address A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. 1040x mailing address The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. 1040x mailing address XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. 1040x mailing address XYZ figures its section 179 deduction and its deduction for charitable contributions as follows. 1040x mailing address Step 1– Taxable income figured without either deduction is $520,000. 1040x mailing address Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000. 1040x mailing address Step 3– $20,000 ($520,000 − $500,000). 1040x mailing address Step 4– Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. 1040x mailing address Step 5– $518,000 ($520,000 − $2,000). 1040x mailing address Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. 1040x mailing address Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction. 1040x mailing address Step 7– $20,000 ($520,000 − $500,000). 1040x mailing address Step 8– Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. 1040x mailing address Carryover of disallowed deduction. 1040x mailing address   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. 1040x mailing address This disallowed deduction amount is shown on line 13 of Form 4562. 1040x mailing address You use the amount you carry over to determine your section 179 deduction in the next year. 1040x mailing address Enter that amount on line 10 of your Form 4562 for the next year. 1040x mailing address   If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried forward. 1040x mailing address Your selections must be shown in your books and records. 1040x mailing address For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. 1040x mailing address If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year. 1040x mailing address   If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must deduct the costs being carried forward from the earliest year first. 1040x mailing address Special rules for qualified section 179 real property. 1040x mailing address   You can carry over to 2013 a 2012 deduction attributable to qualified section 179 real property that you elected to expense but were unable to take because of the business income limitation. 1040x mailing address Any such 2012 carryover amounts that are not deducted in 2013, plus any 2013 disallowed section 179 expense deductions attributable to qualified real property, are not carried over to 2014. 1040x mailing address Instead these amounts are treated as property placed in service on the first day of 2013 for purposes of computing depreciation (including the special depreciation allowance, if applicable). 1040x mailing address See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information. 1040x mailing address If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. 1040x mailing address Instead, you must add it back to the property's basis. 1040x mailing address Partnerships and Partners The section 179 deduction limits apply both to the partnership and to each partner. 1040x mailing address The partnership determines its section 179 deduction subject to the limits. 1040x mailing address It then allocates the deduction among its partners. 1040x mailing address Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 1040x mailing address ) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. 1040x mailing address To determine any reduction in the dollar limit for costs over $2,000,000, the partner does not include any of the cost of section 179 property placed in service by the partnership. 1040x mailing address After the dollar limit (reduced for any nonpartnership section 179 costs over $2,000,000) is applied, any remaining cost of the partnership and nonpartnership section 179 property is subject to the business income limit. 1040x mailing address Partnership's taxable income. 1040x mailing address   For purposes of the business income limit, figure the partnership's taxable income by adding together the net income and losses from all trades or businesses actively conducted by the partnership during the year. 1040x mailing address See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). 1040x mailing address However, figure taxable income without regard to credits, tax-exempt income, the section 179 deduction, and guaranteed payments under section 707(c) of the Internal Revenue Code. 1040x mailing address Partner's share of partnership's taxable income. 1040x mailing address   For purposes of the business income limit, the taxable income of a partner engaged in the active conduct of one or more of a partnership's trades or businesses includes his or her allocable share of taxable income derived from the partnership's active conduct of any trade or business. 1040x mailing address Example. 1040x mailing address In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. 1040x mailing address The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). 1040x mailing address Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. 1040x mailing address The partnership's taxable income from the active conduct of all its trades or businesses for the year was $600,000, so it can deduct the full $475,000. 1040x mailing address It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners. 1040x mailing address In addition to being a partner in Beech Partnership, Dean is also a partner in the Cedar Partnership, which allocated to him a $30,000 section 179 deduction and $35,000 of its taxable income from the active conduct of its business. 1040x mailing address He also conducts a business as a sole proprietor and, in 2013, placed in service in that business qualifying section 179 property costing $55,000. 1040x mailing address He had a net loss of $5,000 from that business for the year. 1040x mailing address Dean does not have to include section 179 partnership costs to figure any reduction in his dollar limit, so his total section 179 costs for the year are not more than $2,000,000 and his dollar limit is not reduced. 1040x mailing address His maximum section 179 deduction is $500,000. 1040x mailing address He elects to expense all of the $70,000 in section 179 deductions allocated from the partnerships ($40,000 from Beech Partnership plus $30,000 from Cedar Partnership), plus $55,000 of his sole proprietorship's section 179 costs, and notes that information in his books and records. 1040x mailing address However, his deduction is limited to his business taxable income of $80,000 ($50,000 from Beech Partnership, plus $35,000 from Cedar Partnership minus $5,000 loss from his sole proprietorship). 1040x mailing address He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. 1040x mailing address He allocates the carryover amount to the cost of section 179 property placed in service in his sole proprietorship, and notes that allocation in his books and records. 1040x mailing address Different tax years. 1040x mailing address   For purposes of the business income limit, if the partner's tax year and that of the partnership differ, the partner's share of the partnership's taxable income for a tax year is generally the partner's distributive share for the partnership tax year that ends with or within the partner's tax year. 1040x mailing address Example. 1040x mailing address John and James Oak are equal partners in Oak Partnership. 1040x mailing address Oak Partnership uses a tax year ending January 31. 1040x mailing address John and James both use a tax year ending December 31. 1040x mailing address For its tax year ending January 31, 2013, Oak Partnership's taxable income from the active conduct of its business is $80,000, of which $70,000 was earned during 2012. 1040x mailing address John and James each include $40,000 (each partner's entire share) of partnership taxable income in computing their business income limit for the 2013 tax year. 1040x mailing address Adjustment of partner's basis in partnership. 1040x mailing address   A partner must reduce the basis of his or her partnership interest by the total amount of section 179 expenses allocated from the partnership even if the partner cannot currently deduct the total amount. 1040x mailing address If the partner disposes of his or her partnership interest, the partner's basis for determining gain or loss is increased by any outstanding carryover of disallowed section 179 expenses allocated from the partnership. 1040x mailing address Adjustment of partnership's basis in section 179 property. 1040x mailing address   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. 1040x mailing address This reduction of basis must be made even if a partner cannot deduct all or part of the section 179 deduction allocated to that partner by the partnership because of the limits. 1040x mailing address S Corporations Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. 1040x mailing address The deduction limits apply to an S corporation and to each shareholder. 1040x mailing address The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits. 1040x mailing address Figuring taxable income for an S corporation. 1040x mailing address   To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you total the net income and losses from all trades or businesses actively conducted by the S corporation during the year. 1040x mailing address   To figure the net income (or loss) from a trade or business actively conducted by an S corporation, you take into account the items from that trade or business that are passed through to the shareholders and used in determining each shareholder's tax liability. 1040x mailing address However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. 1040x mailing address For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. 1040x mailing address In figuring the taxable income of an S corporation, disregard any limits on the amount of an S corporation item that must be taken into account when figuring a shareholder's taxable income. 1040x mailing address Other Corporations A corporation's taxable income from its active conduct of any trade or business is its taxable income figured with the following changes. 1040x mailing address It is figured before deducting the section 179 deduction, any net operating loss deduction, and special deductions (as reported on the corporation's income tax return). 1040x mailing address It is adjusted for items of income or deduction included in the amount figured in 1, above, not derived from a trade or business actively conducted by the corporation during the tax year. 1040x mailing address How Do You Elect the Deduction? You elect to take the section 179 deduction by completing Part I of Form 4562. 1040x mailing address If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I. 1040x mailing address For property placed in service in 2013, file Form 4562 with either of the following. 1040x mailing address Your original 2013 tax return, whether or not you file it timely. 1040x mailing address An amended return for 2013 filed within the time prescribed by law. 1040x mailing address An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. 1040x mailing address The amended return must also include any resulting adjustments to taxable income. 1040x mailing address You must keep records that show the specific identification of each piece of qualifying section 179 property. 1040x mailing address These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. 1040x mailing address Election for certain qualified section 179 real property. 1040x mailing address   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. 1040x mailing address If you elect to treat this property as section 179 property, you must elect the application of the special rules for qualified real property described in section 179(f) of the Internal Revenue Code. 1040x mailing address   To make the election, attach a statement indicating you are “electing the application of section 179(f) of the Internal Revenue Code” with either of the following. 1040x mailing address Your original 2013 tax return, whether or not you file it timely. 1040x mailing address An amended return for 2013 filed within the time prescribed by law. 1040x mailing address The amended return must also include any adjustments to taxable income. 1040x mailing address   The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. 1040x mailing address It must specify one or more of the three types of qualified property (described under Qualified real property ) to which the election applies, the cost of each such type, and the portion of the cost of each such property to be taken into account. 1040x mailing address Also, report this on line 6 of Form 4562. 1040x mailing address    The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000. 1040x mailing address Revoking an election. 1040x mailing address   An election (or any specification made in the election) to take a section 179 deduction for 2013 can be revoked without IRS approval by filing an amended return. 1040x mailing address The amended return must be filed within the time prescribed by law. 1040x mailing address The amended return must also include any resulting adjustments to taxable income. 1040x mailing address Once made, the revocation is irrevocable. 1040x mailing address When Must You Recapture the Deduction? You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. 1040x mailing address In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797. 1040x mailing address You also increase the basis of the property by the recapture amount. 1040x mailing address Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 . 1040x mailing address If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. 1040x mailing address Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. 1040x mailing address For qualified real property (described earlier), see Notice 2013-59 for determining the portion of the gain that is attributable to section 1245 property upon the sale or other disposition of qualified real property. 1040x mailing address If the property is listed property (described in chapter 5 ), do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. 1040x mailing address Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement. 1040x mailing address Figuring the recapture amount. 1040x mailing address   To figure the amount to recapture, take the following steps. 1040x mailing address Figure the depreciation that would have been allowable on the section 179 deduction you claimed. 1040x mailing address Begin with the year you placed the property in service and include the year of recapture. 1040x mailing address Subtract the depreciation figured in (1) from the section 179 deduction you claimed. 1040x mailing address The result is the amount you must recapture. 1040x mailing address Example. 1040x mailing address In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. 1040x mailing address The property is not listed property. 1040x mailing address The property is 3-year property. 1040x mailing address He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. 1040x mailing address He used the property only for business in 2011 and 2012. 1040x mailing address In 2013, he used the property 40% for business and 60% for personal use. 1040x mailing address He figures his recapture amount as follows. 1040x mailing address Section 179 deduction claimed (2011) $5,000. 1040x mailing address 00 Minus: Allowable depreciation using Table A-1 (instead of section 179 deduction):   2011 $1,666. 1040x mailing address 50   2012 2,222. 1040x mailing address 50   2013 ($740. 1040x mailing address 50 × 40% (business)) 296. 1040x mailing address 20 4,185. 1040x mailing address 20 2013 — Recapture amount $ 814. 1040x mailing address 80 Paul must include $814. 1040x mailing address 80 in income for 2013. 1040x mailing address If any qualified zone property placed in service during the year ceases to be used in an empowerment zone by an enterprise zone business in a later year, the benefit of the increased section 179 deduction must be reported as other income on your return. 1040x mailing address Prev  Up  Next   Home   More Online Publications
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The 1040x Mailing Address

1040x mailing address 4. 1040x mailing address   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. 1040x mailing address However, the information shown on the filled-in forms is not from any actual person or scenario. 1040x mailing address Example 1—Mortgage loan modification. 1040x mailing address    In 2007, Nancy Oak bought a main home for $435,000. 1040x mailing address Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. 1040x mailing address The loan was secured by the home. 1040x mailing address The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. 1040x mailing address In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. 1040x mailing address    In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. 1040x mailing address The FMV of Nancy's home at the time of the refinancing was $500,000. 1040x mailing address Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. 1040x mailing address After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. 1040x mailing address   In 2013, Nancy was unable to make her mortgage loan payments. 1040x mailing address On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. 1040x mailing address Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. 1040x mailing address   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. 1040x mailing address Identifiable event code "F" appears in box 6. 1040x mailing address This box shows the reason the creditor has filed Form 1099-C. 1040x mailing address To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. 1040x mailing address Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. 1040x mailing address   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. 1040x mailing address Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. 1040x mailing address Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. 1040x mailing address Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). 1040x mailing address   Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. 1040x mailing address Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). 1040x mailing address Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. 1040x mailing address You can see Nancy's Form 1099-C and a portion of her Form 1040 below. 1040x mailing address Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. 1040x mailing address Please click the link to view the image. 1040x mailing address Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. 1040x mailing address Please click the link to view the image. 1040x mailing address Form 1040, U. 1040x mailing address S. 1040x mailing address Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. 1040x mailing address Please click the link to view the image. 1040x mailing address Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. 1040x mailing address    In 2005, John and Mary Elm bought a main home for $335,000. 1040x mailing address John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. 1040x mailing address The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. 1040x mailing address   John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. 1040x mailing address Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. 1040x mailing address   John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. 1040x mailing address Identifiable event code "D" appears in box 6. 1040x mailing address This box shows the reason the creditor has filed Form 1099-C. 1040x mailing address In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. 1040x mailing address In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. 1040x mailing address Their sample Form 1099-C is shown on this page. 1040x mailing address   John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). 1040x mailing address However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. 1040x mailing address   John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). 1040x mailing address Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. 1040x mailing address Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. 1040x mailing address As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. 1040x mailing address Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. 1040x mailing address Thus, John and Mary leave line 10b of Form 982 blank. 1040x mailing address   John and Mary must also determine whether they have a gain or loss from the foreclosure. 1040x mailing address John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. 1040x mailing address Because this loss relates to their home, it is a nondeductible loss. 1040x mailing address   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. 1040x mailing address John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. 1040x mailing address Please click the link to view the image. 1040x mailing address Form 1099-C, Cancellation of Debt Table 1-1. 1040x mailing address Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. 1040x mailing address Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). 1040x mailing address Otherwise, go to Part 2. 1040x mailing address 1. 1040x mailing address Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $315,000. 1040x mailing address 00 2. 1040x mailing address Enter the fair market value of the transferred property $290,000. 1040x mailing address 00 3. 1040x mailing address Ordinary income from the cancellation of debt upon foreclosure or repossession. 1040x mailing address * Subtract line 2 from line 1. 1040x mailing address If less than zero, enter zero. 1040x mailing address Next, go to Part 2 $ 25,000. 1040x mailing address 00 Part 2. 1040x mailing address Gain or loss from foreclosure or repossession. 1040x mailing address   4. 1040x mailing address Enter the smaller of line 1 or line 2. 1040x mailing address If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property $290,000. 1040x mailing address 00 5. 1040x mailing address Enter any proceeds you received from the foreclosure sale   6. 1040x mailing address Add line 4 and line 5 $290,000. 1040x mailing address 00 7. 1040x mailing address Enter the adjusted basis of the transferred property $335,000. 1040x mailing address 00 8. 1040x mailing address Gain or loss from foreclosure or repossession. 1040x mailing address Subtract line 7 from line 6 ($ 45,000. 1040x mailing address 00) * The income may not be taxable. 1040x mailing address See chapter 1 for more details. 1040x mailing address Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. 1040x mailing address Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. 1040x mailing address Credit card debt $ 5,500 2. 1040x mailing address Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. 1040x mailing address Car and other vehicle loans $ 4. 1040x mailing address Medical bills owed $ 5. 1040x mailing address Student loans $ 6. 1040x mailing address Accrued or past-due mortgage interest $ 7. 1040x mailing address Accrued or past-due real estate taxes $ 8. 1040x mailing address Accrued or past-due utilities (water, gas, electric) $ 9. 1040x mailing address Accrued or past-due child care costs $ 10. 1040x mailing address Federal or state income taxes remaining due (for prior tax years) $ 11. 1040x mailing address Judgments $ 12. 1040x mailing address Business debts (including those owed as a sole proprietor or partner) $ 13. 1040x mailing address Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. 1040x mailing address Other liabilities (debts) not included above $ 15. 1040x mailing address Total liabilities immediately before the cancellation. 1040x mailing address Add lines 1 through 14. 1040x mailing address $ 320,500 Part II. 1040x mailing address Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. 1040x mailing address Cash and bank account balances $ 6,000 17. 1040x mailing address Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. 1040x mailing address Cars and other vehicles $ 19. 1040x mailing address Computers $ 20. 1040x mailing address Household goods and furnishings (for example, appliances, electronics, furniture, etc. 1040x mailing address ) $ 21. 1040x mailing address Tools $ 22. 1040x mailing address Jewelry $ 23. 1040x mailing address Clothing $ 24. 1040x mailing address Books $ 25. 1040x mailing address Stocks and bonds $ 26. 1040x mailing address Investments in coins, stamps, paintings, or other collectibles $ 27. 1040x mailing address Firearms, sports, photographic, and other hobby equipment $ 28. 1040x mailing address Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. 1040x mailing address Interest in a pension plan $ 30. 1040x mailing address Interest in education accounts $ 31. 1040x mailing address Cash value of life insurance $ 32. 1040x mailing address Security deposits with landlords, utilities, and others $ 33. 1040x mailing address Interests in partnerships $ 34. 1040x mailing address Value of investment in a business $ 35. 1040x mailing address Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. 1040x mailing address Other assets not included above $ 37. 1040x mailing address FMV of total assets immediately before the cancellation. 1040x mailing address Add lines 16 through 36. 1040x mailing address $ 309,000 Part III. 1040x mailing address Insolvency 38. 1040x mailing address Amount of Insolvency. 1040x mailing address Subtract line 37 from line 15. 1040x mailing address If zero or less, you are not insolvent. 1040x mailing address $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. 1040x mailing address Please click the link to view the image. 1040x mailing address Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)          Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. 1040x mailing address    In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. 1040x mailing address Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. 1040x mailing address Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. 1040x mailing address   In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. 1040x mailing address The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. 1040x mailing address On December 26, 2013, the lender canceled the remaining debt. 1040x mailing address Kathy and Frank have no tax attributes other than basis of personal-use property. 1040x mailing address   The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). 1040x mailing address Identifiable event code "D" appears in box 6. 1040x mailing address This box shows the reason the creditor has filed Form 1099-C. 1040x mailing address Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. 1040x mailing address Kathy and Frank are filing a joint return for 2013. 1040x mailing address   Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. 1040x mailing address Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). 1040x mailing address Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. 1040x mailing address Because this loss relates to their home, it is a nondeductible loss. 1040x mailing address   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. 1040x mailing address Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. 1040x mailing address Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. 1040x mailing address The household furnishings originally cost $30,000. 1040x mailing address The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. 1040x mailing address Kathy and Frank had no adjustments to the cost basis of the car. 1040x mailing address Kathy and Frank had no other assets or liabilities at the time of the cancellation. 1040x mailing address Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). 1040x mailing address   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. 1040x mailing address Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). 1040x mailing address Kathy and Frank had no other assets or liabilities at that time. 1040x mailing address Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. 1040x mailing address   Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. 1040x mailing address The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. 1040x mailing address The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. 1040x mailing address Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. 1040x mailing address Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). 1040x mailing address This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. 1040x mailing address   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. 1040x mailing address Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. 1040x mailing address Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. 1040x mailing address Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). 1040x mailing address   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. 1040x mailing address Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. 1040x mailing address Thus, Kathy and Frank leave line 10b of Form 982 blank. 1040x mailing address However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. 1040x mailing address As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. 1040x mailing address Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). 1040x mailing address Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. 1040x mailing address Kathy and Frank reduce the basis in the car by $14,956. 1040x mailing address 52 ($43,000 x $16,000/$46,000). 1040x mailing address And they reduce the basis in the household furnishings by $28,043. 1040x mailing address 48 ($43,000 x $30,000/$46,000). 1040x mailing address   Following are Kathy and Frank's sample forms and worksheets. 1040x mailing address Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. 1040x mailing address Please click the link to view the image. 1040x mailing address Form 1099-C, Cancellation of Debt Table 1-1. 1040x mailing address Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. 1040x mailing address Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). 1040x mailing address Otherwise, go to Part 2. 1040x mailing address 1. 1040x mailing address Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $1,750,000. 1040x mailing address 00 2. 1040x mailing address Enter the fair market value of the transferred property $1,750,000. 1040x mailing address 00 3. 1040x mailing address Ordinary income from the cancellation of debt upon foreclosure or repossession. 1040x mailing address * Subtract line 2 from line 1. 1040x mailing address If less than zero, enter zero. 1040x mailing address Next, go to Part 2 $0. 1040x mailing address 00 Part 2. 1040x mailing address Gain or loss from foreclosure or repossession. 1040x mailing address   4. 1040x mailing address Enter the smaller of line 1 or line 2. 1040x mailing address If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property. 1040x mailing address $1,750,000. 1040x mailing address 00 5. 1040x mailing address Enter any proceeds you received from the foreclosure sale   6. 1040x mailing address Add line 4 and line 5 $1,750,000. 1040x mailing address 00 7. 1040x mailing address Enter the adjusted basis of the transferred property $3,000,000. 1040x mailing address 00 8. 1040x mailing address Gain or loss from foreclosure or repossession. 1040x mailing address Subtract line 7 from line 6 ($1,250,000. 1040x mailing address 00) * The income may not be taxable. 1040x mailing address See chapter 1 for more details. 1040x mailing address    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. 1040x mailing address Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. 1040x mailing address Credit card debt $ 18,000 2. 1040x mailing address Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. 1040x mailing address Car and other vehicle loans $ 4. 1040x mailing address Medical bills owed $ 5. 1040x mailing address Student loans $ 6. 1040x mailing address Accrued or past-due mortgage interest $ 7. 1040x mailing address Accrued or past-due real estate taxes $ 8. 1040x mailing address Accrued or past-due utilities (water, gas, electric) $ 9. 1040x mailing address Accrued or past-due child care costs $ 10. 1040x mailing address Federal or state income taxes remaining due (for prior tax years) $ 11. 1040x mailing address Judgments $ 12. 1040x mailing address Business debts (including those owed as a sole proprietor or partner) $ 13. 1040x mailing address Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. 1040x mailing address Other liabilities (debts) not included above $ 15. 1040x mailing address Total liabilities immediately before the cancellation. 1040x mailing address Add lines 1 through 14. 1040x mailing address $ 768,000 Part II. 1040x mailing address Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. 1040x mailing address Cash and bank account balances $ 15,000 17. 1040x mailing address Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. 1040x mailing address Cars and other vehicles $ 10,000 19. 1040x mailing address Computers $ 20. 1040x mailing address Household goods and furnishings (for example, appliances, electronics, furniture, etc. 1040x mailing address ) $ 17,000 21. 1040x mailing address Tools $ 22. 1040x mailing address Jewelry $ 23. 1040x mailing address Clothing $ 24. 1040x mailing address Books $ 25. 1040x mailing address Stocks and bonds $ 26. 1040x mailing address Investments in coins, stamps, paintings, or other collectibles $ 27. 1040x mailing address Firearms, sports, photographic, and other hobby equipment $ 28. 1040x mailing address Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. 1040x mailing address Interest in a pension plan $ 30. 1040x mailing address Interest in education accounts $ 31. 1040x mailing address Cash value of life insurance $ 32. 1040x mailing address Security deposits with landlords, utilities, and others $ 33. 1040x mailing address Interests in partnerships $ 34. 1040x mailing address Value of investment in a business $ 35. 1040x mailing address Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. 1040x mailing address Other assets not included above $ 37. 1040x mailing address FMV of total assets immediately before the cancellation. 1040x mailing address Add lines 16 through 36. 1040x mailing address $ 42,000 Part III. 1040x mailing address Insolvency 38. 1040x mailing address Amount of Insolvency. 1040x mailing address Subtract line 37 from line 15. 1040x mailing address If zero or less, you are not insolvent. 1040x mailing address $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. 1040x mailing address Please click the link to view the image. 1040x mailing address Form 982, Reduction of Tax 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