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2013 1040x

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2013 1040x

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

2013 1040x 3. 2013 1040x   Limit on Annual Additions Table of Contents Ministers and church employees. 2013 1040x Includible Compensation for Your Most Recent Year of ServiceMost Recent Year of Service Includible Compensation The first component of MAC is the limit on annual additions. 2013 1040x This is a limit on the total contributions (elective deferrals, nonelective contributions, and after-tax contributions) that can be made to your 403(b) account. 2013 1040x The limit on annual additions generally is the lesser of: $51,000 for 2013 and $52,000 for 2014, or 100% of your includible compensation for your most recent year of service. 2013 1040x More than one 403(b) account. 2013 1040x If you contributed to more than one 403(b) account, you must combine the contributions made to all 403(b) accounts on your behalf by your employer. 2013 1040x Ministers and church employees. 2013 1040x   If you are a minister or a church employee, you may be able to increase your limit on annual additions or use different rules when figuring your limit on annual additions. 2013 1040x For more information, see chapter 5. 2013 1040x Participation in a qualified plan. 2013 1040x If you participated in a 403(b) plan and a qualified plan, you must combine contributions made to your 403(b) account with contributions to a qualified plan and simplified employee pensions of all corporations, partnerships, and sole proprietorships in which you have more than 50% control. 2013 1040x You can use Part I of Worksheet 1 in chapter 9 to figure your limit on annual additions. 2013 1040x Includible Compensation for Your Most Recent Year of Service Definition. 2013 1040x   Generally, includible compensation for your most recent year of service is the amount of taxable wages and benefits you received from the employer that maintained a 403(b) account for your benefit during your most recent year of service. 2013 1040x When figuring your includible compensation for your most recent year of service, keep in mind that your most recent year of service may not be the same as your employer's most recent annual work period. 2013 1040x This can happen if your tax year is not the same as your employer's annual work period. 2013 1040x When figuring includible compensation for your most recent year of service, do not mix compensation or service of one employer with compensation or service of another employer. 2013 1040x Most Recent Year of Service Your most recent year of service is your last full year of service, ending on the last day of your tax year that you worked for the employer that maintained a 403(b) account on your behalf. 2013 1040x Tax year different from employer's annual work period. 2013 1040x   If your tax year is not the same as your employer's annual work period, your most recent year of service is made up of parts of at least two of your employer's annual work periods. 2013 1040x Example. 2013 1040x A professor who reports her income on a calendar-year basis is employed on a full-time basis by a university that operates on an academic year (October through May). 2013 1040x To figure her includible compensation for 2013, the professor's most recent year of service is her service from January through May 2013 and from October through December 2013. 2013 1040x Figuring Your Most Recent Year of Service To figure your most recent year of service, begin by determining what is a full year of service for your position. 2013 1040x A full year of service is equal to full-time employment for your employer's annual work period. 2013 1040x After identifying a full year of service, begin counting the service you have provided for your employer starting with the service provided in the current year. 2013 1040x Part-time or employed only part of the year. 2013 1040x   If you are a part-time or a full-time employee who is employed for only part of the year, your most recent year of service is your service this year and your service for as many previous years as is necessary to total 1 full year of service. 2013 1040x To determine your most recent year of service, add the following periods of service: Your service during the year for which you are figuring the limit on annual additions, and Your service during your preceding tax years until the total service equals 1 year of service or you have figured all of your service with the employer. 2013 1040x Example. 2013 1040x You were employed on a full-time basis from July through December 2011 (1/2 year of service), July through December 2012 (1/2 year of service), and October through December 2013 (1/4 year of service). 2013 1040x Your most recent year of service for computing your limit on annual additions for 2013 is the total of your service during 2013 (1/4 year of service), your service during 2012 (1/2 year of service), and your service during the months October through December 2011 (1/4 year of service). 2013 1040x Not yet employed for 1 year. 2013 1040x   If, at the close of the year, you have not yet worked for your employer for 1 year (including time you worked for the same employer in all earlier years), use the period of time you have worked for the employer as your most recent year of service. 2013 1040x Includible Compensation After identifying your most recent year of service, the next step is to identify the includible compensation associated with that full year of service. 2013 1040x Includible compensation is not the same as income included on your tax return. 2013 1040x Compensation is a combination of income and benefits received in exchange for services provided to your employer. 2013 1040x Generally, includible compensation is the amount of income and benefits: Received from the employer who maintains your 403(b) account, and Must be included in your income. 2013 1040x Includible compensation includes the following amounts. 2013 1040x Elective deferrals (employer's contributions made on your behalf under a salary reduction agreement). 2013 1040x Amounts contributed or deferred by your employer under a section 125 cafeteria plan. 2013 1040x Amounts contributed or deferred, at the election of the employee, under an eligible section 457 nonqualified deferred compensation plan (state or local government or tax-exempt organization plan). 2013 1040x  Note. 2013 1040x For information about treating elective deferrals under section 457 plans as Roth contributions, see Publication 575. 2013 1040x Wages, salaries, and fees for personal services earned with the employer maintaining your 403(b) account. 2013 1040x Income otherwise excluded under the foreign earned income exclusion. 2013 1040x Pre-tax contributions (employer's contributions made on your behalf according to your election) to a qualified transportation fringe benefit plan. 2013 1040x Includible compensation does not include the following items. 2013 1040x Your employer's contributions to your 403(b) account. 2013 1040x Compensation earned while your employer was not an eligible employer. 2013 1040x Your employer's contributions to a qualified plan that: Are on your behalf, and Are excludable from income. 2013 1040x The cost of incidental life insurance. 2013 1040x See Cost of Incidental Life Insurance, later. 2013 1040x If you are a church employee or a foreign missionary, figure includible compensation using the rules explained in chapter 5. 2013 1040x Contributions after retirement. 2013 1040x   Nonelective contributions may be made for an employee for up to 5 years after retirement. 2013 1040x These contributions would be based on includible compensation for the last year of service before retirement. 2013 1040x Cost of Incidental Life Insurance Includible compensation does not include the cost of incidental life insurance. 2013 1040x If all of your 403(b) accounts invest only in mutual funds, then you have no incidental life insurance. 2013 1040x If you have an annuity contract, a portion of the cost of that contract may be for incidental life insurance. 2013 1040x If so, the cost of the insurance is taxable to you in the year contributed and is considered part of your basis when distributed. 2013 1040x Your employer will include the cost of your insurance as taxable wages in box 1 of Form W-2. 2013 1040x Not all annuity contracts include life insurance. 2013 1040x Contact your plan administrator to determine if your contract includes incidental life insurance. 2013 1040x If it does, you will need to figure the cost of life insurance each year the policy is in effect. 2013 1040x Figuring the cost of incidental life insurance. 2013 1040x If you have determined that part of the cost of your annuity contract is for an incidental life insurance premium, you will need to determine the amount of the premium and subtract it from your includible compensation. 2013 1040x To determine the amount of the life insurance premiums, you will need to know the following information. 2013 1040x The value of your life insurance contract, which is the amount payable upon your death. 2013 1040x The cash value of your life insurance contract at the end of the tax year. 2013 1040x Your age on your birthday nearest the beginning of the policy year. 2013 1040x Your current life insurance protection under an ordinary retirement income life insurance policy, which is the amount payable upon your death minus the cash value of the contract at the end of the year. 2013 1040x You can use Worksheet A, in chapter 9, to determine the cost of your incidental life insurance. 2013 1040x Example. 2013 1040x Your new contract provides that your beneficiary will receive $10,000 if you should die before retirement. 2013 1040x Your cash value in the contract at the end of the first year is zero. 2013 1040x Your current life insurance protection for the first year is $10,000 ($10,000 − 0). 2013 1040x The cash value in the contract at the end of year two is $1,000, and the current life insurance protection for the second year is $9,000 ($10,000 – $1,000). 2013 1040x The 1-year cost of the protection can be calculated by using Figure 3-1, Table of One-Year Term Premiums for $1,000 Life Insurance Protection . 2013 1040x The premium rate is determined based on your age on your birthday nearest the beginning of the policy year. 2013 1040x Figure 3-1. 2013 1040x Table of One-Year Term Premiums for $1,000 Life Insurance Protection Age Cost   Age Cost   Age Cost 0 $0. 2013 1040x 70   35 $0. 2013 1040x 99   70 $20. 2013 1040x 62 1 0. 2013 1040x 41   36 1. 2013 1040x 01   71 22. 2013 1040x 72 2 0. 2013 1040x 27   37 1. 2013 1040x 04   72 25. 2013 1040x 07 3 0. 2013 1040x 19   38 1. 2013 1040x 06   73 27. 2013 1040x 57 4 0. 2013 1040x 13   39 1. 2013 1040x 07   74 30. 2013 1040x 18 5 0. 2013 1040x 13   40 1. 2013 1040x 10   75 33. 2013 1040x 05 6 0. 2013 1040x 14   41 1. 2013 1040x 13   76 36. 2013 1040x 33 7 0. 2013 1040x 15   42 1. 2013 1040x 20   77 40. 2013 1040x 17 8 0. 2013 1040x 16   43 1. 2013 1040x 29   78 44. 2013 1040x 33 9 0. 2013 1040x 16   44 1. 2013 1040x 40   79 49. 2013 1040x 23 10 0. 2013 1040x 16   45 1. 2013 1040x 53   80 54. 2013 1040x 56 11 0. 2013 1040x 19   46 1. 2013 1040x 67   81 60. 2013 1040x 51 12 0. 2013 1040x 24   47 1. 2013 1040x 83   82 66. 2013 1040x 74 13 0. 2013 1040x 28   48 1. 2013 1040x 98   83 73. 2013 1040x 07 14 0. 2013 1040x 33   49 2. 2013 1040x 13   84 80. 2013 1040x 35 15 0. 2013 1040x 38   50 2. 2013 1040x 30   85 88. 2013 1040x 76 16 0. 2013 1040x 52   51 2. 2013 1040x 52   86 99. 2013 1040x 16 17 0. 2013 1040x 57   52 2. 2013 1040x 81   87 110. 2013 1040x 40 18 0. 2013 1040x 59   53 3. 2013 1040x 20   88 121. 2013 1040x 85 19 0. 2013 1040x 61   54 3. 2013 1040x 65   89 133. 2013 1040x 40 20 0. 2013 1040x 62   55 4. 2013 1040x 15   90 144. 2013 1040x 30 21 0. 2013 1040x 62   56 4. 2013 1040x 68   91 155. 2013 1040x 80 22 0. 2013 1040x 64   57 5. 2013 1040x 20   92 168. 2013 1040x 75 23 0. 2013 1040x 66   58 5. 2013 1040x 66   93 186. 2013 1040x 44 24 0. 2013 1040x 68   59 6. 2013 1040x 06   94 206. 2013 1040x 70 25 0. 2013 1040x 71   60 6. 2013 1040x 51   95 228. 2013 1040x 35 26 0. 2013 1040x 73   61 7. 2013 1040x 11   96 250. 2013 1040x 01 27 0. 2013 1040x 76   62 7. 2013 1040x 96   97 265. 2013 1040x 09 28 0. 2013 1040x 80   63 9. 2013 1040x 08   98 270. 2013 1040x 11 29 0. 2013 1040x 83   64 10. 2013 1040x 41   99 281. 2013 1040x 05 30 0. 2013 1040x 87   65 11. 2013 1040x 90       31 0. 2013 1040x 90   66 13. 2013 1040x 51       32 0. 2013 1040x 93   67 15. 2013 1040x 20       33 0. 2013 1040x 96   68 16. 2013 1040x 92       34 0. 2013 1040x 98   69 18. 2013 1040x 70                       If the current published premium rates per $1,000 of insurance protection charged by an insurer for individual 1-year term life insurance premiums available to all standard risks are lower than those in the preceding table, you can use the lower rates for figuring the cost of insurance in connection with individual policies issued by the same insurer. 2013 1040x Example 1. 2013 1040x Lynne Green, age 44, and her employer enter into a 403(b) plan that will provide her with a $500 a month annuity upon retirement at age 65. 2013 1040x The agreement also provides that if she should die before retirement, her beneficiary will receive the greater of $20,000 or the cash surrender value in the life insurance contract. 2013 1040x Using the facts presented we can determine the cost of Lynne's life insurance protection as shown in Table 3-1. 2013 1040x Lynne's employer has included $28 for the cost of the life insurance protection in her current year's income. 2013 1040x When figuring her includible compensation for this year, Lynne will subtract $28. 2013 1040x Table 3-1. 2013 1040x Worksheet A. 2013 1040x Cost of Incidental Life Insurance Note. 2013 1040x Use this worksheet to figure the cost of incidental life insurance included in your annuity contract. 2013 1040x This amount will be used to figure includible compensation for your most recent year of service. 2013 1040x 1. 2013 1040x Enter the value of the contract (amount payable upon your death) 1. 2013 1040x $20,000. 2013 1040x 00 2. 2013 1040x Enter the cash value in the contract at the end of the year 2. 2013 1040x 0. 2013 1040x 00 3. 2013 1040x Subtract line 2 from line 1. 2013 1040x This is the value of your current life insurance protection 3. 2013 1040x $20,000. 2013 1040x 00 4. 2013 1040x Enter your age on your birthday nearest the beginning of the policy year 4. 2013 1040x 44 5. 2013 1040x Enter the 1-year term premium for $1,000 of life insurance based on your age. 2013 1040x (From Figure 3-1) 5. 2013 1040x $1. 2013 1040x 40 6. 2013 1040x Divide line 3 by $1,000 6. 2013 1040x 20 7. 2013 1040x Multiply line 6 by line 5. 2013 1040x This is the cost of your incidental life insurance 7. 2013 1040x $28. 2013 1040x 00 Example 2. 2013 1040x Lynne's cash value in the contract at the end of the second year is $1,000. 2013 1040x In year two, the cost of Lynne's life insurance is calculated as shown in Table 3-2. 2013 1040x In year two, Lynne's employer will include $29. 2013 1040x 07 in her current year's income. 2013 1040x Lynne will subtract this amount when figuring her includible compensation. 2013 1040x Table 3-2. 2013 1040x Worksheet A. 2013 1040x Cost of Incidental Life Insurance Note. 2013 1040x Use this worksheet to figure the cost of incidental life insurance included in your annuity contract. 2013 1040x This amount will be used to figure includible compensation for your most recent year of service. 2013 1040x 1. 2013 1040x Enter the value of the contract (amount payable upon your death) 1. 2013 1040x $20,000. 2013 1040x 00 2. 2013 1040x Enter the cash value in the contract at the end of the year 2. 2013 1040x $1,000. 2013 1040x 00 3. 2013 1040x Subtract line 2 from line 1. 2013 1040x This is the value of your current life insurance protection 3. 2013 1040x $19,000. 2013 1040x 00 4. 2013 1040x Enter your age on your birthday nearest the beginning of the policy year 4. 2013 1040x 45 5. 2013 1040x Enter the 1-year term premium for $1,000 of life insurance based on your age. 2013 1040x (From Figure 3-1) 5. 2013 1040x $1. 2013 1040x 53 6. 2013 1040x Divide line 3 by $1,000 6. 2013 1040x 19 7. 2013 1040x Multiply line 6 by line 5. 2013 1040x This is the cost of your incidental life insurance 7. 2013 1040x $29. 2013 1040x 07 Figuring Includible Compensation for Your Most Recent Year of Service You can use Worksheet B in chapter 9 to determine your includible compensation for your most recent year of service. 2013 1040x Example. 2013 1040x Floyd has been periodically working full-time for a local hospital since September 2011. 2013 1040x He needs to figure his limit on annual additions for 2014. 2013 1040x The hospital's normal annual work period for employees in Floyd's general type of work runs from January to December. 2013 1040x During the periods that Floyd was employed with the hospital, the hospital has always been eligible to provide a 403(b) plan to employees. 2013 1040x Additionally, the hospital has never provided the employees with a 457 deferred compensation plan, a transportation fringe benefit plan, or a cafeteria plan. 2013 1040x Floyd has never worked abroad and there is no life insurance provided under the plan. 2013 1040x Table 3-3 shows the service Floyd provided to his employer, his compensation for the periods worked, his elective deferrals, and his taxable wages. 2013 1040x Table 3-3. 2013 1040x Floyd's Compensation Note. 2013 1040x This table shows information Floyd will use to figure includible compensation for his most recent year of service. 2013 1040x   Year Years of Service Taxable Wages Elective Deferrals 2014 6/12 of  a year $42,000 $2,000 2013 4/12 of  a year $16,000 $1,650 2012 4/12 of  a year $16,000 $1,650 Before Floyd can figure his limit on annual additions, he must figure includible compensation for his most recent year of service. 2013 1040x Because Floyd is not planning to work the entire 2014 year, his most recent year of service will include the time he is planning to work in 2014 plus time he worked in the preceding 3 years until the time he worked for the hospital totals 1 year. 2013 1040x If the total time he worked is less than 1 year, Floyd will treat it as if it were 1 year. 2013 1040x He figures his most recent year of service shown in the following list. 2013 1040x Time he will work in 2014 is 6/12 of a year. 2013 1040x Time worked in 2013 is 4/12 of a year. 2013 1040x All of this time will be used to determine Floyd's most recent year of service. 2013 1040x Time worked in 2012 is 4/12 of a year. 2013 1040x Floyd only needs 2 months of the 4 months he worked in 2012 to have enough time to total 1 full year. 2013 1040x Because he needs only one-half of the actual time he worked, Floyd will use only one-half of his income earned during that period to calculate wages that will be used in figuring his includible compensation. 2013 1040x Using the information provided in Table 3-3, wages for Floyd's most recent year of service are $66,000 ($42,000 + $16,000 + $8,000). 2013 1040x His includible compensation for his most recent year of service is figured as shown in Table 3-4. 2013 1040x After figuring his includible compensation, Floyd determines his limit on annual additions for 2014 to be $52,000, the lesser of his includible compensation, $70,475 (Table 3-4), and the maximum amount of $52,000. 2013 1040x Table 3-4. 2013 1040x Worksheet B. 2013 1040x Includible Compensation for Your Most Recent Year of Service1 Note. 2013 1040x Use this worksheet to figure includible compensation for your most recent year of service. 2013 1040x 1. 2013 1040x Enter your includible wages from the employer maintaining your 403(b) account for your most recent year of service 1. 2013 1040x $66,000 2. 2013 1040x Enter elective deferrals excluded from your gross income for your most recent year of service2 2. 2013 1040x 4,4753 3. 2013 1040x Enter amounts contributed or deferred by your employer under a cafeteria plan for your most recent year of service 3. 2013 1040x -0- 4. 2013 1040x Enter amounts contributed or deferred by your employer according to your election to your 457 account (a nonqualified plan of a state or local government, or of a tax-exempt organization) for your most recent year of service 4. 2013 1040x -0- 5. 2013 1040x Enter pre-tax contributions (employer's contributions made on your behalf according to your election) to a qualified transportation fringe benefit plan for your most recent year of service 5. 2013 1040x -0- 6. 2013 1040x Enter your foreign earned income exclusion for your most recent year of service 6. 2013 1040x -0- 7. 2013 1040x Add lines 1, 2, 3, 4, 5, and 6 7. 2013 1040x 70,475 8. 2013 1040x Enter the cost of incidental life insurance that is part of your annuity contract for your most recent year of service 8. 2013 1040x -0- 9. 2013 1040x Enter compensation that was both: Earned during your most recent year of service, and Earned while your employer was not qualified to maintain a 403(b) plan 9. 2013 1040x -0- 10. 2013 1040x Add lines 8 and 9 10. 2013 1040x -0- 11. 2013 1040x Subtract line 10 from line 7. 2013 1040x This is your includible compensation for your most recent year of service 11. 2013 1040x 70,475 1Use estimated amounts if figuring includible compensation before the end of the year. 2013 1040x 2Elective deferrals made to a designated Roth account are not excluded from your gross income and should not be included on this line. 2013 1040x  3$4,475 ($2,000 + $1,650 + $825). 2013 1040x Prev  Up  Next   Home   More Online Publications