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Cheap state tax filing Depreciation Table of Contents Introduction Special Depreciation AllowanceQualified Property Election Not To Claim the Allowance Rules for Returns Filed Before June 1, 2002 Passenger Automobiles New York Liberty Zone BenefitsSpecial Liberty Zone Depreciation Allowance Increased Section 179 Deduction Liberty Zone Leasehold Improvement Property If you depreciate business property that you acquired and placed in service after September 10, 2001, new law contains provisions that may affect your depreciation deduction for that property. Cheap state tax filing Publication 946, How To Depreciate Property, contains information on depreciation. Cheap state tax filing However, Publication 946 does not contain the new provisions because it was printed before the law was enacted. Cheap state tax filing The new provisions are in the Supplement to Publication 946, which is reprinted below. Cheap state tax filing Supplement to Publication 946 How To Depreciate Property   Introduction After Publication 946 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. Cheap state tax filing The new law made several changes in the tax rules explained in the publication. Cheap state tax filing Some of the changes apply to property placed in service during 2001. Cheap state tax filing This supplemental publication describes those changes and explains what you should do if you are affected by them. Cheap state tax filing The situations and examples in Publication 946 do not reflect any of the changes made by the Job Creation and Worker Assistance Act of 2002. Cheap state tax filing The new law contains the following provisions. Cheap state tax filing 30% depreciation deductions (special depreciation allowance and special New York Liberty Zone (Liberty Zone) depreciation allowance) for the year qualified property is placed in service after September 10, 2001. Cheap state tax filing An increased dollar limit on the section 179 deduction for qualified Liberty Zone property purchased after September 10, 2001. Cheap state tax filing A shorter recovery period for qualified Liberty Zone leasehold improvement property placed in service after September 10, 2001. Cheap state tax filing An increase in the maximum depreciation deduction for 2001 for a qualified passenger automobile placed in service after September 10, 2001. Cheap state tax filing If you believe you qualify for an increased deduction under any of these new rules, you must file the revised 2001 Form 4562 (dated March 2002) for 2001 calendar or fiscal years and 2000 fiscal years ending after September 10, 2001. Cheap state tax filing If you have already filed a tax return, this supplemental publication explains how to claim these benefits and how to elect not to claim the special depreciation allowance or special Liberty Zone depreciation allowance. Cheap state tax filing See Table 2 at the end of the supplement for an overview of the rules that apply if you filed your return before June 1, 2002. Cheap state tax filing Special Depreciation Allowance You can take a special depreciation allowance for qualified property you place in service after September 10, 2001. Cheap state tax filing The allowance is an additional deduction of 30% of the property's depreciable basis. Cheap state tax filing To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. Cheap state tax filing See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. Cheap state tax filing The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. Cheap state tax filing There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. Cheap state tax filing In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. Cheap state tax filing Example 1. Cheap state tax filing On November 1, 2001, you bought and placed in service in your business qualified property that cost $100,000. Cheap state tax filing You did not elect to claim a section 179 deduction. Cheap state tax filing You can deduct 30% of the cost ($30,000) as a special depreciation allowance for 2001. Cheap state tax filing You use the remaining $70,000 of cost to figure your regular depreciation deduction for 2001 and later years. Cheap state tax filing Example 2. Cheap state tax filing The facts are the same as in Example 1, except that you choose to deduct $24,000 of the property's cost as a section 179 deduction. Cheap state tax filing You use the remaining $76,000 of cost to figure your special depreciation allowance of $22,800 ($76,000 × 30%). Cheap state tax filing You use the remaining $53,200 of cost to figure your regular depreciation deduction for 2001 and later years. Cheap state tax filing Qualified Property To qualify for the special depreciation allowance, your property must meet the following requirements. Cheap state tax filing It is new property of one of the following types. Cheap state tax filing Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. Cheap state tax filing See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. Cheap state tax filing Water utility property. Cheap state tax filing See 25-year property on page 22 in Publication 946. Cheap state tax filing Computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. Cheap state tax filing (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Cheap state tax filing ) Qualified leasehold improvement property (defined later). Cheap state tax filing It meets the following tests (explained later under Tests To Be Met). Cheap state tax filing Acquisition date test. Cheap state tax filing Placed in service date test. Cheap state tax filing Original use test. Cheap state tax filing It is not excepted property (explained later under Excepted Property). Cheap state tax filing Qualified leasehold improvement property. Cheap state tax filing    Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all of the following requirements are met. Cheap state tax filing The improvement is made under or pursuant to a lease by the lessee (or any sublessee) or the lessor of that part of the building. Cheap state tax filing That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part. Cheap state tax filing The improvement is placed in service more than 3 years after the date the building was first placed in service. Cheap state tax filing   However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following. Cheap state tax filing The enlargement of the building. Cheap state tax filing Any elevator or escalator. Cheap state tax filing Any structural component benefiting a common area. Cheap state tax filing The internal structural framework of the building. Cheap state tax filing   Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. Cheap state tax filing However, a binding commitment between related persons is not treated as a lease. Cheap state tax filing Related persons. Cheap state tax filing   For this purpose, the following are related persons. Cheap state tax filing Members of an affiliated group. Cheap state tax filing The persons listed in items (1) through (9) under Related persons on page 8 of Publication 946 (except that “80% or more” should be substituted for “more than 10%” each place it appears). Cheap state tax filing An executor and a beneficiary of the same estate. Cheap state tax filing Tests To Be Met To qualify for the special depreciation allowance, the property must meet all of the following tests. Cheap state tax filing Acquisition date test. Cheap state tax filing    Generally, you must have acquired the property either: After September 10, 2001, and before September 11, 2004, but only if no written binding contract for the acquisition was in effect before September 11, 2001, or Pursuant to a written binding contract entered into after September 10, 2001, and before September 11, 2004. Cheap state tax filing   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001, and before September 11, 2004. Cheap state tax filing Placed in service date test. Cheap state tax filing   Generally, the property must be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005. Cheap state tax filing   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Cheap state tax filing Original use test. Cheap state tax filing   The original use of the property must have begun with you after September 10, 2001. Cheap state tax filing “Original use” means the first use to which the property is put, whether or not by you. Cheap state tax filing Additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test. Cheap state tax filing Excepted Property The following property does not qualify for the special depreciation allowance. Cheap state tax filing Property used by any person before September 11, 2001. Cheap state tax filing Property required to be depreciated using ADS. Cheap state tax filing This includes listed property used 50% or less in a qualified business use. Cheap state tax filing Qualified New York Liberty Zone leasehold improvement property (defined next). Cheap state tax filing Qualified New York Liberty Zone leasehold improvement property. Cheap state tax filing   This is any qualified leasehold improvement property (as defined earlier) if all of the following requirements are met. Cheap state tax filing The improvement is to a building located in the New York Liberty Zone (defined later under New York Liberty Zone Benefits). Cheap state tax filing The improvement is placed in service after September 10, 2001, and before January 1, 2007. Cheap state tax filing No written binding contract for the improvement was in effect before September 11, 2001. Cheap state tax filing Election Not To Claim the Allowance You can elect not to claim the special depreciation allowance for qualified property. Cheap state tax filing If you make this election for any property, it applies to all property in the same property class placed in service during the year. Cheap state tax filing To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. Cheap state tax filing When to make election. Cheap state tax filing   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Cheap state tax filing   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Cheap state tax filing Attach the election statement to the amended return. Cheap state tax filing At the top of the election statement, write “Filed pursuant to section 301. Cheap state tax filing 9100–2. Cheap state tax filing ” Revoking an election. Cheap state tax filing   Once you elect not to deduct the special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Cheap state tax filing A request to revoke the election is subject to a user fee. Cheap state tax filing Rules for Returns Filed Before June 1, 2002 The following rules apply if you placed qualified property in service after September 10, 2001, and filed your return before June 1, 2002. Cheap state tax filing The rules apply to returns for the following years. Cheap state tax filing 2000 fiscal years that end after September 10, 2001. Cheap state tax filing 2001 calendar and fiscal years. Cheap state tax filing Claiming the allowance. Cheap state tax filing   If you did not claim the allowance on your return and did not make the election not to claim the allowance, you can do either of the following to claim the allowance. Cheap state tax filing File an amended return by the due date (not including extensions) of your return for the year following the year the property was placed in service. Cheap state tax filing Write “Filed Pursuant to Rev. Cheap state tax filing Proc. Cheap state tax filing 2002–33” at the top of the amended return. Cheap state tax filing File Form 3115, Application for Change in Accounting Method, with your return for the year following the year the property was placed in service. Cheap state tax filing Your return must be filed by the due date (including extensions). Cheap state tax filing Write “Automatic Change Filed Under Rev. Cheap state tax filing Proc. Cheap state tax filing 2002–33” on the appropriate line of Form 3115. Cheap state tax filing You must also file a copy (with signature) of the completed Form 3115 with the IRS National Office no later than when you file the original with your return. Cheap state tax filing For more information about filing Form 3115, including the address to send it to, see Revenue Procedure 2002–9, Revenue Procedure 2002–19, and Revenue Procedure 2002–33. Cheap state tax filing Example 1. Cheap state tax filing You are an individual and you use the calendar year. Cheap state tax filing You placed qualified property in service for your business in December 2001. Cheap state tax filing You filed your 2001 income tax return before April 15, 2002. Cheap state tax filing You did not claim the special depreciation allowance for the property and did not make the election not to claim the allowance. Cheap state tax filing You can claim the special allowance by filing an amended 2001 return by April 15, 2003, with “Filed Pursuant to Rev. Cheap state tax filing Proc. Cheap state tax filing 2002–33” at the top of the amended return. Cheap state tax filing You must file an amended return by April 15, 2003, even if you get an extension of time to file your 2002 tax return. Cheap state tax filing Example 2. Cheap state tax filing The facts concerning your 2001 return are the same as in Example 1. Cheap state tax filing In addition, you got an automatic 4-month extension of time (to August 15, 2003) to file your 2002 return. Cheap state tax filing You can claim the special allowance by filing a Form 3115 (with “Filed Pursuant to Rev. Cheap state tax filing Proc. Cheap state tax filing 2002–33” on the appropriate line) with your 2002 return by August 15, 2003. Cheap state tax filing You must also file a copy of this Form 3115 with the IRS National Office no later than when you file your 2002 return. Cheap state tax filing Electing not to claim the allowance. Cheap state tax filing   Generally, you have elected not to claim the special depreciation allowance for a class of property if you: Filed your return timely (including extensions) for the year you placed qualified property in service and indicated on a statement with the return that you are not claiming the allowance, or Filed your return timely and filed an amended return within 6 months of the due date of the original return (not including extensions) and indicated on a statement with the amended return that you are not claiming the allowance. Cheap state tax filing The statement must indicate that you are not deducting the special depreciation allowance and the class of property to which the election applies. Cheap state tax filing The statement can be either attached to or written on the return. Cheap state tax filing You can, for example, write “not deducting 30%” on Form 4562. Cheap state tax filing Deemed election. Cheap state tax filing   If you have not followed either of the procedures described above to elect not to claim the allowance, you may still be treated as making the election. Cheap state tax filing You will be treated as making the election if you meet both of the following conditions. Cheap state tax filing You filed your return for the year you placed the property in service and claimed depreciation, but not the special allowance, for any class of property. Cheap state tax filing You do not file an amended return or a Form 3115 within the time prescribed for claiming the special allowance. Cheap state tax filing See Claiming the allowance, earlier. Cheap state tax filing Passenger Automobiles The limit on your depreciation deduction (including any section 179 deduction) for any passenger automobile that is qualified property (defined earlier) placed in service after September 10, 2001, and for which you claim the special depreciation allowance is increased. Cheap state tax filing Generally, the limit is increased from $3,060 to $7,660. Cheap state tax filing However, if the automobile is a qualified electric car, the limit is increased from $9,280 to $23,080 ($22,980 if placed in service in 2002). Cheap state tax filing Table 1 shows the maximum deduction amounts for 2001. Cheap state tax filing Table 1. Cheap state tax filing Maximum Deduction for 2001 Qualified Vehicle Placed in Service Before Sept. Cheap state tax filing 11 Placed in Service After Sept. Cheap state tax filing 10 Passenger automobile $3,060 $7,660 Electric car 9,280 23,080 1 1$22,980 if you place an electric car in service in 2002. Cheap state tax filing Election not to claim the allowance. Cheap state tax filing   The increased maximum depreciation deduction does not apply if you elected not to claim the special depreciation allowance as explained earlier under Election Not To Claim the Allowance and Rules for Returns Filed Before June 1, 2002. Cheap state tax filing New York Liberty Zone Benefits Several benefits are available for property you place in service in the New York Liberty Zone (Liberty Zone). Cheap state tax filing They include a special depreciation allowance for the year you place the property in service, an increased section 179 deduction, and the classification of certain leasehold improvement property as 5-year property. Cheap state tax filing Area defined. Cheap state tax filing   The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York. Cheap state tax filing Special Liberty Zone Depreciation Allowance You can take a special depreciation allowance for qualified Liberty Zone property you place in service after September 10, 2001. Cheap state tax filing The allowance is an additional deduction of 30% of the property's depreciable basis. Cheap state tax filing To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. Cheap state tax filing See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. Cheap state tax filing The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. Cheap state tax filing There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. Cheap state tax filing In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. Cheap state tax filing You cannot claim the special Liberty Zone depreciation allowance for property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. Cheap state tax filing Qualified property is eligible for only one special depreciation allowance. Cheap state tax filing Example 1. Cheap state tax filing On November 1, 2001, you bought and placed in service in your business, which is in the Liberty Zone, qualified Liberty Zone property that cost $200,000. Cheap state tax filing You did not elect to claim a section 179 deduction. Cheap state tax filing You can deduct 30% of the cost ($60,000) as a special Liberty Zone depreciation allowance for 2001. Cheap state tax filing You use the remaining $140,000 of cost to figure your regular depreciation deduction for 2001 and later years. Cheap state tax filing Example 2. Cheap state tax filing The facts are the same as in Example 1, except that you choose to deduct $59,000 of the property's cost as a section 179 deduction. Cheap state tax filing (See Increased Section 179 Deduction, later, for information concerning how this section 179 deduction amount is figured). Cheap state tax filing You use the remaining $141,000 of cost to figure your special Liberty Zone depreciation allowance of $42,300 ($141,000 × 30%). Cheap state tax filing You use the remaining $98,700 of cost to figure your regular depreciation deduction for 2001 and later years. Cheap state tax filing Qualified Liberty Zone Property For a 2001 calendar or fiscal year and a 2000 fiscal year that ends after September 10, 2001, property qualifies for the special Liberty Zone depreciation allowance if it meets the following requirements. Cheap state tax filing It is one of the following types of property. Cheap state tax filing Used property depreciated under MACRS with a recovery period of 20 years or less. Cheap state tax filing See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. Cheap state tax filing Used water utility property. Cheap state tax filing See 25-year property on page 22 in Publication 946. Cheap state tax filing Used computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. Cheap state tax filing (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Cheap state tax filing ) Certain nonresidential real property and residential rental property (defined later). Cheap state tax filing It meets the following tests (explained later under Tests to be met). Cheap state tax filing Acquisition date test. Cheap state tax filing Placed in service date test. Cheap state tax filing Substantial use test. Cheap state tax filing Original use test. Cheap state tax filing It is not excepted property (explained later under Excepted property). Cheap state tax filing Nonresidential real property and residential rental property. Cheap state tax filing   This property is qualifying property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the terrorist attack of September 11, 2001. Cheap state tax filing Property is treated as replacing destroyed or condemned property if, as part of an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned. Cheap state tax filing   For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the terrorist attack. Cheap state tax filing Otherwise, the property is considered damaged real property. Cheap state tax filing For example, if certain structural components of a building (such as walls, floors, or plumbing fixtures) are damaged or destroyed as a result of the terrorist attack, but the building is not destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation allowance. Cheap state tax filing Tests to be met. Cheap state tax filing   To qualify for the special Liberty Zone depreciation allowance, your property must meet all of the following tests. Cheap state tax filing Acquisition date test. Cheap state tax filing   You must have acquired the property by purchase after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001. Cheap state tax filing   For information on the acquisition of property by purchase, see Property Acquired by Purchase on page 15 of Publication 946. Cheap state tax filing   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001. Cheap state tax filing Placed in service date test. Cheap state tax filing   Generally, the property must be placed in service for use in your trade or business or for the production of income before January 1, 2007 (January 1, 2010, in the case of qualifying nonresidential real property and residential rental property). Cheap state tax filing   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Cheap state tax filing Substantial use test. Cheap state tax filing   Substantially all use of the property must be in the Liberty Zone and in the active conduct of your trade or business in the Liberty Zone. Cheap state tax filing Original use test. Cheap state tax filing   The original use of the property in the Liberty Zone must have begun with you after September 10, 2001. Cheap state tax filing   Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Cheap state tax filing Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you. Cheap state tax filing Excepted property. Cheap state tax filing   The following property does not qualify for the special Liberty Zone depreciation allowance. Cheap state tax filing Property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. Cheap state tax filing Property required to be depreciated using ADS. Cheap state tax filing This includes listed property used 50% or less in a qualified business use. Cheap state tax filing Qualified New York Liberty Zone leasehold improvement property (defined earlier in Excepted Property under Special Depreciation Allowance). Cheap state tax filing Example. Cheap state tax filing In December 2001, you bought and placed in service in your business in the Liberty Zone the following property. Cheap state tax filing New office furniture with a MACRS recovery period of 7 years. Cheap state tax filing A used computer with a MACRS recovery period of 5 years. Cheap state tax filing The computer had not previously been used within the Liberty Zone. Cheap state tax filing Because the office furniture is new property, it qualifies for the special depreciation allowance, but not the special Liberty Zone depreciation allowance. Cheap state tax filing Because the computer is used property that had not previously been used in the Liberty Zone, it qualifies for the special Liberty Zone depreciation allowance, but not the special depreciation allowance. Cheap state tax filing Election Not To Claim the Liberty Zone Allowance You can elect not to claim the special Liberty Zone depreciation allowance for qualified property. Cheap state tax filing If you make this election for any property, it applies to all property in the same property class placed in service during the year. Cheap state tax filing To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. Cheap state tax filing When to make the election. Cheap state tax filing   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Cheap state tax filing   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Cheap state tax filing Attach the election statement to the amended return. Cheap state tax filing At the top of the election statement, write “Filed pursuant to section 301. Cheap state tax filing 9100–2. Cheap state tax filing ” Revoking an election. Cheap state tax filing   Once you elect not to deduct the special Liberty Zone depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Cheap state tax filing A request to revoke the election is subject to a user fee. Cheap state tax filing Returns filed before June 1, 2002. Cheap state tax filing   The rules that apply to the special depreciation allowance discussed earlier in Rules for Returns Filed Before June 1, 2002 under Special Depreciation Allowance also apply to the special Liberty Zone depreciation allowance. Cheap state tax filing Increased Section 179 Deduction Under section 179 of the Internal Revenue Code, you can choose 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. Cheap state tax filing For tax years beginning in 2000, that limit was $20,000. Cheap state tax filing For tax years beginning in 2001 and 2002, that limit is generally $24,000. Cheap state tax filing If the cost of qualifying section 179 property placed in service in a year is over $200,000, you must reduce the dollar limit (but not below zero) by the amount of the cost over $200,000. Cheap state tax filing Increased Dollar Limit The dollar limit on the section 179 deduction is increased for certain property placed in service in the Liberty Zone. Cheap state tax filing The increase is the smaller of the following amounts. Cheap state tax filing $35,000. Cheap state tax filing The cost of section 179 property that is qualified Liberty Zone property placed in service during the year. Cheap state tax filing If you use the revised 2001 Form 4562 (dated March 2002) for a tax year beginning in 2000, you must reduce the section 179 dollar limit to $20,000 before adding the additional amount for qualified property. Cheap state tax filing Qualified property. Cheap state tax filing   To qualify for the increased section 179 deduction, your property must be section 179 property that is either: Qualified Liberty Zone property, or Property that would be qualified Liberty Zone property except that it is eligible for the special depreciation allowance. Cheap state tax filing Qualified Liberty Zone property is explained earlier in Qualified Liberty Zone Property under Special Liberty Zone Depreciation Allowance. Cheap state tax filing Property eligible for the special depreciation allowance is explained earlier in Qualified Property under Special Depreciation Allowance. Cheap state tax filing For information on the requirements that must be met for property to qualify for the section 179 deduction, see What Property Qualifies? on page 14 of Publication 946. Cheap state tax filing Example 1. Cheap state tax filing In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $25,000. Cheap state tax filing Because this cost is less than $35,000, the dollar limit on the section 179 deduction is increased by $25,000 to $49,000 ($24,000 + $25,000). Cheap state tax filing Example 2. Cheap state tax filing In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $75,000. Cheap state tax filing Because $35,000 is less than the cost of the property you place in service, the dollar limit on the section 179 deduction you can claim is increased by $35,000 to $59,000 ($24,000 + $35,000). Cheap state tax filing Reduced Dollar Limit Generally, you must reduce the dollar limit for a year by the cost of qualifying section 179 property placed in service in the year that is more than $200,000. Cheap state tax filing However, if the cost of your Liberty Zone property exceeds $200,000, you take into account only 50% (instead of 100%) of the cost of qualified property placed in service in a year. Cheap state tax filing Example. Cheap state tax filing In 2002, you place in service in your business, which is in the Liberty Zone, qualified property costing $460,000. Cheap state tax filing Your increased dollar limit is $59,000 ($35,000 + $24,000). Cheap state tax filing Because 50% of the cost of the property you place in service ($230,000) is $30,000 more than $200,000, you must reduce your $59,000 dollar limit to $29,000 ($59,000 - $30,000). Cheap state tax filing Recapture Rules Rules similar to those explained on page 20 of Publication 946 under When Must You Recapture the Deduction? apply with respect to any qualified property you stop using in the Liberty Zone. Cheap state tax filing Returns Filed Before June 1, 2002 If you filed a return before June 1, 2002, and did not deduct the increased section 179 amount for qualified property placed in service after September 10, 2001, you can deduct the increased amount by filing an amended return by the due date (not including extensions) of the return for the year after the year the property was placed in service. Cheap state tax filing This rule applies to returns for the following years. Cheap state tax filing 2000 fiscal years that end after September 10, 2001. Cheap state tax filing 2001 calendar and fiscal years. Cheap state tax filing On the amended return, write “Filed Pursuant to Rev. Cheap state tax filing Proc. Cheap state tax filing 2002–33. Cheap state tax filing ” Liberty Zone Leasehold Improvement Property Qualified Liberty Zone leasehold improvement property (described earlier in Qualified Property under Special Depreciation Allowance) is 5-year property. Cheap state tax filing This means that it is depreciated over a recovery period of 5 years. Cheap state tax filing For information about recovery periods, see Which Recovery Period Applies? on page 23 of Publication 946. Cheap state tax filing The straight-line method must be used with respect to qualified Liberty Zone leasehold improvement property. Cheap state tax filing Under ADS, the recovery period for qualified Liberty Zone leasehold improvement property is 9 years. Cheap state tax filing Returns Filed Before June 1, 2002 If you filed either of the following returns before June 1, 2002, and did not depreciate qualified Liberty Zone leasehold improvement property placed in service during the tax year as 5-year property using the straight line method, you should file an amended return before you file your return for the year after the year the property was placed in service. Cheap state tax filing Your 2000 fiscal year return (for a 2000 fiscal year that ends after September 10, 2001). Cheap state tax filing Your 2001 calendar or fiscal year return. Cheap state tax filing On the amended return, write “Filed Pursuant to Rev. Cheap state tax filing Proc. Cheap state tax filing 2002–33. Cheap state tax filing ” Table 2. Cheap state tax filing Rules for Returns Filed Before June 1, 2002 Note:This chart highlights the rules for returns affected by the Job Creation and Worker Assistance Act of 2002 that were filed before June 1, 2002, without accounting for any of the new benefits under the law. Cheap state tax filing See the text for definitions and examples. Cheap state tax filing Do not rely on this chart alone. Cheap state tax filing IF you want to. Cheap state tax filing . Cheap state tax filing . Cheap state tax filing THEN you. Cheap state tax filing . Cheap state tax filing . Cheap state tax filing BY. Cheap state tax filing . Cheap state tax filing . Cheap state tax filing claim the special depreciation allowance or special Liberty Zone depreciation allowance • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service, or • must file Form 3115, Application for Change in Accounting Method, with your return for the year after the year the property was placed in service • the due date (including extensions) of your return for the year after the year the property was placed in service, and • must file a copy of your completed Form 3115 with the IRS National Office • the date you file the original Form 3115 with your return for the year after the year the property was placed in service. Cheap state tax filing elect not to claim the special depreciation allowance or the special Liberty Zone depreciation allowance 1 • must have filed your return timely for the year the property was placed in service, and   • must file an amended return stating you are not claiming the allowance • the date that is 6 months after the due date of the original return (not including extensions). Cheap state tax filing deduct the increased section 179 amount • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service. Cheap state tax filing use a 5-year recovery period for depreciating qualified Liberty Zone leasehold improvement property • should file an amended return • the date you file your return for the year after the year the property was placed in service. Cheap state tax filing 1See also Deemed election under Rules for Returns Filed Before June 1, 2002, earlier. 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The Cheap State Tax Filing

Cheap state tax filing Publication 515 - Main Content Table of Contents Withholding of TaxWithholding Agent Withholding and Reporting Obligations Persons Subject to NRA WithholdingIdentifying the Payee Foreign Persons DocumentationBeneficial Owners Foreign Intermediaries and Foreign Flow-Through Entities Standards of Knowledge Presumption Rules Income Subject to NRA WithholdingSource of Income Fixed or Determinable Annual or Periodical Income (FDAP) Withholding on Specific IncomeEffectively Connected Income Income Not Effectively Connected Pay for Personal Services Performed Artists and Athletes (Income Codes 42 and 43) Other Income Foreign Governments and Certain Other Foreign Organizations U. Cheap state tax filing S. Cheap state tax filing Taxpayer Identification NumbersUnexpected payment. Cheap state tax filing Depositing Withheld TaxesWhen Deposits Are Required Adjustment for Overwithholding Returns RequiredJoint owners. Cheap state tax filing Electronic reporting. Cheap state tax filing Partnership Withholding on Effectively Connected IncomeWho Must Withhold Foreign Partner Publicly Traded Partnerships U. Cheap state tax filing S. Cheap state tax filing Real Property InterestForeign corporations. Cheap state tax filing Domestic corporations. Cheap state tax filing U. Cheap state tax filing S. Cheap state tax filing real property holding corporations. Cheap state tax filing Partnerships. Cheap state tax filing Trusts and estates. Cheap state tax filing Domestically controlled QIE. Cheap state tax filing Late filing of certifications or notices. Cheap state tax filing Certifications. Cheap state tax filing Liability of agent or qualified substitute. Cheap state tax filing Reporting and Paying the Tax Withholding Certificates Tax Treaty TablesTable 1 Table 2 Table 3 How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Cheap state tax filing Withholding of Tax In most cases, a foreign person is subject to U. Cheap state tax filing S. Cheap state tax filing tax on its U. Cheap state tax filing S. Cheap state tax filing source income. Cheap state tax filing Most types of U. Cheap state tax filing S. Cheap state tax filing source income received by a foreign person are subject to U. Cheap state tax filing S. Cheap state tax filing tax of 30%. Cheap state tax filing A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. Cheap state tax filing The tax is generally withheld (NRA withholding) from the payment made to the foreign person. Cheap state tax filing The term “NRA withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Cheap state tax filing In most cases, NRA withholding describes the withholding regime that requires withholding on a payment of U. Cheap state tax filing S. Cheap state tax filing source income. Cheap state tax filing Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to NRA withholding. Cheap state tax filing NRA withholding does not include withholding under section 1445 of the Code (see U. Cheap state tax filing S. Cheap state tax filing Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income , later). Cheap state tax filing A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. Cheap state tax filing However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U. Cheap state tax filing S. Cheap state tax filing person is not required to withhold. Cheap state tax filing In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Cheap state tax filing Withholding Agent You are a withholding agent if you are a U. Cheap state tax filing S. Cheap state tax filing or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. Cheap state tax filing A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U. Cheap state tax filing S. Cheap state tax filing branch of certain foreign banks and insurance companies. Cheap state tax filing You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment. Cheap state tax filing Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Cheap state tax filing In most cases, the U. Cheap state tax filing S. Cheap state tax filing person who pays an amount subject to NRA withholding is the person responsible for withholding. Cheap state tax filing However, other persons may be required to withhold. Cheap state tax filing For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. Cheap state tax filing In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later. Cheap state tax filing Liability for tax. Cheap state tax filing   As a withholding agent, you are personally liable for any tax required to be withheld. Cheap state tax filing This liability is independent of the tax liability of the foreign person to whom the payment is made. Cheap state tax filing If you fail to withhold and the foreign payee fails to satisfy its U. Cheap state tax filing S. Cheap state tax filing tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties. Cheap state tax filing   The applicable tax will be collected only once. Cheap state tax filing If the foreign person satisfies its U. Cheap state tax filing S. Cheap state tax filing tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold. Cheap state tax filing Determination of amount to withhold. Cheap state tax filing   You must withhold on the gross amount subject to NRA withholding. Cheap state tax filing You cannot reduce the gross amount by any deductions. Cheap state tax filing However, see Scholarships and Fellowship Grants and Pay for Personal Services Performed , later, for when a deduction for a personal exemption may be allowed. Cheap state tax filing   If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. Cheap state tax filing In no case, however, should you withhold more than 30% of the total amount paid. Cheap state tax filing Or, you may make a reasonable estimate of the amount from U. Cheap state tax filing S. Cheap state tax filing sources and put a corresponding part of the amount due in escrow until the amount from U. Cheap state tax filing S. Cheap state tax filing sources can be determined, at which time withholding becomes due. Cheap state tax filing When to withhold. Cheap state tax filing   Withholding is required at the time you make a payment of an amount subject to withholding. Cheap state tax filing A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. Cheap state tax filing A payment is considered made to a person if it is paid for that person's benefit. Cheap state tax filing For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. Cheap state tax filing A payment also is considered made to a person if it is made to that person's agent. Cheap state tax filing   A U. Cheap state tax filing S. Cheap state tax filing partnership should withhold when any distributions that include amounts subject to withholding are made. Cheap state tax filing However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U. Cheap state tax filing S. Cheap state tax filing partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. Cheap state tax filing If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income , later. Cheap state tax filing A U. Cheap state tax filing S. Cheap state tax filing trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. Cheap state tax filing To the extent a U. Cheap state tax filing S. Cheap state tax filing trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S. Cheap state tax filing Withholding and Reporting Obligations You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. Cheap state tax filing (See Returns Required , later. Cheap state tax filing ) An exception from reporting may apply to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business. Cheap state tax filing Form 1099 reporting and backup withholding. Cheap state tax filing    You also may be responsible as a payer for reporting on Form 1099 payments made to a U. Cheap state tax filing S. Cheap state tax filing person. Cheap state tax filing You must withhold 28% (backup withholding rate) from a reportable payment made to a U. Cheap state tax filing S. Cheap state tax filing person that is subject to Form 1099 reporting if any of the following apply. Cheap state tax filing The U. Cheap state tax filing S. Cheap state tax filing person has not provided its taxpayer identification number (TIN) in the manner required. Cheap state tax filing The IRS notifies you that the TIN furnished by the payee is incorrect. Cheap state tax filing There has been a notified payee underreporting. Cheap state tax filing There has been a payee certification failure. Cheap state tax filing In most cases, a TIN must be provided by a U. Cheap state tax filing S. Cheap state tax filing non-exempt recipient on Form W-9, Request for Taxpayer Identification Number and Certification. Cheap state tax filing A payer files a tax return on Form 945, Annual Return of Withheld Federal Income Tax, for backup withholding. Cheap state tax filing You may be required to file Form 1099 and, if appropriate, backup withhold, even if you do not make the payments directly to that U. Cheap state tax filing S. Cheap state tax filing person. Cheap state tax filing For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U. Cheap state tax filing S. Cheap state tax filing person subject to Form 1099 reporting. Cheap state tax filing See Identifying the Payee , later, for more information. Cheap state tax filing Also see Section S. Cheap state tax filing Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Certain Information Returns. Cheap state tax filing Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting. Cheap state tax filing Wages paid to employees. Cheap state tax filing   If you are the employer of a nonresident alien, you generally must withhold taxes at graduated rates. Cheap state tax filing See Pay for Personal Services Performed , later. Cheap state tax filing Effectively connected income by partnerships. Cheap state tax filing   A withholding agent that is a partnership (whether U. Cheap state tax filing S. Cheap state tax filing or foreign) is also responsible for withholding on its income effectively connected with a U. Cheap state tax filing S. Cheap state tax filing trade or business that is allocable to foreign partners. Cheap state tax filing See Partnership Withholding on Effectively Connected Income , later, for more information. Cheap state tax filing U. Cheap state tax filing S. Cheap state tax filing real property interest. Cheap state tax filing   A withholding agent also may be responsible for withholding if a foreign person transfers a U. Cheap state tax filing S. Cheap state tax filing real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U. Cheap state tax filing S. Cheap state tax filing real property interest to a shareholder, partner, or beneficiary that is a foreign person. Cheap state tax filing See U. Cheap state tax filing S. Cheap state tax filing Real Property Interest , later. Cheap state tax filing Persons Subject to NRA Withholding NRA withholding applies only to payments made to a payee that is a foreign person. Cheap state tax filing It does not apply to payments made to U. Cheap state tax filing S. Cheap state tax filing persons. Cheap state tax filing Usually, you determine the payee's status as a U. Cheap state tax filing S. Cheap state tax filing or foreign person based on the documentation that person provides. Cheap state tax filing See Documentation , later. Cheap state tax filing However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation, then you must apply certain presumption rules, discussed later. Cheap state tax filing Identifying the Payee In most cases, the payee is the person to whom you make the payment, regardless of whether that person is the beneficial owner of the income. Cheap state tax filing However, there are situations in which the payee is a person other than the one to whom you actually make a payment. Cheap state tax filing U. Cheap state tax filing S. Cheap state tax filing agent of foreign person. Cheap state tax filing   If you make a payment to a U. Cheap state tax filing S. Cheap state tax filing person and you have actual knowledge that the U. Cheap state tax filing S. Cheap state tax filing person is receiving the payment as an agent of a foreign person, you must treat the payment as made to the foreign person. Cheap state tax filing However, if the U. Cheap state tax filing S. Cheap state tax filing person is a financial institution, you may treat the institution as the payee provided you have no reason to believe that the institution will not comply with its own obligation to withhold. Cheap state tax filing   If the payment is not subject to NRA withholding (for example, gross proceeds from the sales of securities), you must treat the payment as made to a U. Cheap state tax filing S. Cheap state tax filing person and not as a payment to a foreign person. Cheap state tax filing You may be required to report the payment on Form 1099 and, if applicable, backup withhold. Cheap state tax filing Disregarded entities. Cheap state tax filing   A business entity that is not a corporation and that has a single owner may be disregarded as an entity separate from its owner (a disregarded entity) for federal tax purposes. Cheap state tax filing The payee of a payment made to a disregarded entity is the owner of the entity. Cheap state tax filing   If the owner of the entity is a foreign person, you must apply NRA withholding unless you can treat the foreign owner as a beneficial owner entitled to a reduced rate of withholding. Cheap state tax filing   If the owner is a U. Cheap state tax filing S. Cheap state tax filing person, you do not apply NRA withholding. Cheap state tax filing However, you may be required to report the payment on Form 1099 and, if applicable, backup withhold. Cheap state tax filing You may assume that a foreign entity is not a disregarded entity unless you can reliably associate the payment with documentation provided by the owner or you have actual knowledge or reason to know that the foreign entity is a disregarded entity. Cheap state tax filing Flow-Through Entities The payees of payments (other than income effectively connected with a U. Cheap state tax filing S. Cheap state tax filing trade or business) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. Cheap state tax filing This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Cheap state tax filing Income that is, or is deemed to be, effectively connected with the conduct of a U. Cheap state tax filing S. Cheap state tax filing trade or business of a flow-through entity is treated as paid to the entity. Cheap state tax filing All of the following are flow-through entities. Cheap state tax filing A foreign partnership (other than a withholding foreign partnership). Cheap state tax filing A foreign simple or foreign grantor trust (other than a withholding foreign trust). Cheap state tax filing A fiscally transparent entity receiving income for which treaty benefits are claimed. Cheap state tax filing See Fiscally transparent entity , later. Cheap state tax filing In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation , later) on which it claims such status. Cheap state tax filing You also may be required to treat the entity as a flow-through entity under the presumption rules, discussed later. Cheap state tax filing You must determine whether the owners or beneficiaries of a flow-through entity are U. Cheap state tax filing S. Cheap state tax filing or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of NRA withholding applies. Cheap state tax filing You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. Cheap state tax filing If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. Cheap state tax filing See Documentation and Presumption Rules , later. Cheap state tax filing Withholding foreign partnerships and withholding foreign trusts are not flow-through entities. Cheap state tax filing Foreign partnerships. Cheap state tax filing    A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. Cheap state tax filing If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves a flow-through entity or a foreign intermediary. Cheap state tax filing However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Cheap state tax filing If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees. Cheap state tax filing Example 1. Cheap state tax filing A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation; and a U. Cheap state tax filing S. Cheap state tax filing citizen. Cheap state tax filing You make a payment of U. Cheap state tax filing S. Cheap state tax filing source interest to the partnership. Cheap state tax filing It gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien; Form W-8BEN from the foreign corporation; and Form W-9 from the U. Cheap state tax filing S. Cheap state tax filing citizen. Cheap state tax filing The partnership also gives you a complete withholding statement that enables you to associate a part of the interest payment to each partner. Cheap state tax filing You must treat all three partners as the payees of the interest payment as if the payment were made directly to them. Cheap state tax filing Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S. Cheap state tax filing Report the payment to the U. Cheap state tax filing S. Cheap state tax filing citizen on Form 1099-INT. Cheap state tax filing Example 2. Cheap state tax filing A nonwithholding foreign partnership has two partners: a foreign corporation and a nonwithholding foreign partnership. Cheap state tax filing The second partnership has two partners, both nonresident alien individuals. Cheap state tax filing You make a payment of U. Cheap state tax filing S. Cheap state tax filing source interest to the first partnership. Cheap state tax filing It gives you a valid Form W-8IMY with which it associates a Form W-8BEN from the foreign corporation and a Form W-8IMY from the second partnership. Cheap state tax filing In addition, Forms W-8BEN from the partners are associated with the Form W-8IMY from the second partnership. Cheap state tax filing The Forms W-8IMY from the partnerships have complete withholding statements associated with them. Cheap state tax filing Because you can reliably associate a part of the interest payment with the Form W-8BEN provided by the foreign corporation and the Forms W-8BEN provided by the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest. Cheap state tax filing Example 3. Cheap state tax filing You make a payment of U. Cheap state tax filing S. Cheap state tax filing source dividends to a withholding foreign partnership. Cheap state tax filing The partnership has two partners, both foreign corporations. Cheap state tax filing You can reliably associate the payment with a valid Form W-8IMY from the partnership on which it represents that it is a withholding foreign partnership. Cheap state tax filing You must treat the partnership as the payee of the dividends. Cheap state tax filing Foreign simple and grantor trust. Cheap state tax filing   A trust is foreign unless it meets both of the following tests. Cheap state tax filing A court within the United States is able to exercise primary supervision over the administration of the trust. Cheap state tax filing One or more U. Cheap state tax filing S. Cheap state tax filing persons have the authority to control all substantial decisions of the trust. Cheap state tax filing   In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. Cheap state tax filing A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679 of the Code. Cheap state tax filing   The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. Cheap state tax filing The payees of a payment made to a foreign grantor trust are the owners of the trust. Cheap state tax filing However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Cheap state tax filing If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees. Cheap state tax filing Example. Cheap state tax filing A foreign simple trust has three beneficiaries: two nonresident alien individuals and a U. Cheap state tax filing S. Cheap state tax filing citizen. Cheap state tax filing You make a payment of interest to the foreign trust. Cheap state tax filing It gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident aliens and a Form W-9 from the U. Cheap state tax filing S. Cheap state tax filing citizen. Cheap state tax filing The trust also gives you a complete withholding statement that enables you to associate a part of the interest payment with the forms provided by each beneficiary. Cheap state tax filing You must treat all three beneficiaries as the payees of the interest payment as if the payment were made directly to them. Cheap state tax filing Report the payment to the nonresident aliens on Forms 1042-S. Cheap state tax filing Report the payment to the U. Cheap state tax filing S. Cheap state tax filing citizen on Form 1099-INT. Cheap state tax filing Fiscally transparent entity. Cheap state tax filing   If a reduced rate of withholding under an income tax treaty is claimed, a flow-through entity includes any entity in which the interest holder must treat the entity as fiscally transparent. Cheap state tax filing The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc. Cheap state tax filing ). Cheap state tax filing The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. Cheap state tax filing An entity is considered to be fiscally transparent for the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Cheap state tax filing Subject to the standards of knowledge rules discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity. Cheap state tax filing   The payees of a payment made to a fiscally transparent entity are the interest holders of the entity. Cheap state tax filing Example. Cheap state tax filing Entity A is a business organization organized under the laws of country X that has an income tax treaty in force with the United States. Cheap state tax filing A has two interest holders, B and C. Cheap state tax filing B is a corporation organized under the laws of country Y. Cheap state tax filing C is a corporation organized under the laws of country Z. Cheap state tax filing Both countries Y and Z have an income tax treaty in force with the United States. Cheap state tax filing A receives royalty income from U. Cheap state tax filing S. Cheap state tax filing sources that is not effectively connected with the conduct of a trade or business in the United States. Cheap state tax filing For U. Cheap state tax filing S. Cheap state tax filing income tax purposes, A is treated as a partnership. Cheap state tax filing Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. Cheap state tax filing The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income was realized directly from the source that paid it to A. Cheap state tax filing Accordingly, A is fiscally transparent in its jurisdiction, country X. Cheap state tax filing B and C are not fiscally transparent under the laws of their respective countries of incorporation. Cheap state tax filing Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income was realized directly from the source that paid it to A. Cheap state tax filing Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U. Cheap state tax filing S. Cheap state tax filing source royalty income for purposes of the U. Cheap state tax filing S. Cheap state tax filing -Y income tax treaty. Cheap state tax filing Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. Cheap state tax filing Therefore, A is not treated as fiscally transparent under the laws of country Z. Cheap state tax filing Accordingly, C is not treated as deriving its share of the U. Cheap state tax filing S. Cheap state tax filing source royalty income for purposes of the U. Cheap state tax filing S. Cheap state tax filing -Z income tax treaty. Cheap state tax filing Foreign Intermediaries In most cases, if you make payments to a foreign intermediary, the payees are the persons for whom the foreign intermediary collects the payment, such as account holders or customers, not the intermediary itself. Cheap state tax filing This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Cheap state tax filing You may, however, treat a qualified intermediary that has assumed primary withholding responsibility for a payment as the payee, and you are not required to withhold. Cheap state tax filing An intermediary is a custodian, broker, nominee, or any other person that acts as an agent for another person. Cheap state tax filing A foreign intermediary is either a qualified intermediary or a nonqualified intermediary. Cheap state tax filing In most cases, you determine whether an entity is a qualified intermediary or a nonqualified intermediary based on the representations the intermediary makes on Form W-8IMY. Cheap state tax filing You must determine whether the customers or account holders of a foreign intermediary are U. Cheap state tax filing S. Cheap state tax filing or foreign persons and, if the account holder or customer is foreign, whether a reduced rate of NRA withholding applies. Cheap state tax filing You make these determinations based on the foreign intermediary's Form W-8IMY and associated information and documentation. Cheap state tax filing If you do not have all of the information or documentation that is required to reliably associate a payment with a payee, you must apply the presumption rules. Cheap state tax filing See Documentation and Presumption Rules , later. Cheap state tax filing Nonqualified intermediary. Cheap state tax filing   A nonqualified intermediary (NQI) is any intermediary that is a foreign person and that is not a qualified intermediary. Cheap state tax filing The payees of a payment made to an NQI are the customers or account holders on whose behalf the NQI is acting. Cheap state tax filing Example. Cheap state tax filing You make a payment of interest to a foreign bank that is a nonqualified intermediary. Cheap state tax filing The bank gives you a Form W-8IMY and the Forms W-8BEN of two foreign persons, and a Form W-9 from a U. Cheap state tax filing S. Cheap state tax filing person for whom the bank is collecting the payments. Cheap state tax filing The bank also associates with its Form W-8IMY a withholding statement on which it allocates the interest payment to each account holder and provides all other information required to be on the withholding statement. Cheap state tax filing The account holders are the payees of the interest payment. Cheap state tax filing You should report the part of the interest paid to the two foreign persons on Forms 1042-S and the part paid to the U. Cheap state tax filing S. Cheap state tax filing person on Form 1099-INT. Cheap state tax filing Qualified intermediary. Cheap state tax filing   A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U. Cheap state tax filing S. Cheap state tax filing intermediary) that has entered into a qualified intermediary withholding agreement (discussed later) with the IRS. Cheap state tax filing You may treat a QI as a payee to the extent the QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. Cheap state tax filing In this situation, the QI is required to withhold the tax. Cheap state tax filing You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI. Cheap state tax filing   A payment to a QI to the extent it does not assume primary NRA withholding responsibility is considered made to the person on whose behalf the QI acts. Cheap state tax filing If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U. Cheap state tax filing S. Cheap state tax filing person. Cheap state tax filing Branches of financial institutions. Cheap state tax filing   Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved “know-your-customer” (KYC) rules. Cheap state tax filing The countries with approved KYC rules are listed on IRS. Cheap state tax filing gov. Cheap state tax filing QI withholding agreement. Cheap state tax filing   Foreign financial institutions and foreign branches of U. Cheap state tax filing S. Cheap state tax filing financial institutions can enter into an agreement with the IRS to be a qualified intermediary. Cheap state tax filing   A QI is entitled to certain simplified withholding and reporting rules. Cheap state tax filing In general, there are three major areas whereby intermediaries with QI status are afforded such simplified treatment. Cheap state tax filing   To apply for QI status, complete Form 14345, Qualified Intermediary Application, and Form SS-4, Application for Employer Identification Number. Cheap state tax filing These forms, and the procedures required to obtain a QI withholding agreement are available at www. Cheap state tax filing irs. Cheap state tax filing gov/Businesses/Corporations/Qualified-Intermediaries-(QI). Cheap state tax filing Documentation. Cheap state tax filing   A QI is not required to forward documentation obtained from foreign account holders to the U. Cheap state tax filing S. Cheap state tax filing withholding agent from whom the QI receives a payment of U. Cheap state tax filing S. Cheap state tax filing source income. Cheap state tax filing The QI maintains such documentation at its location and provides the U. Cheap state tax filing S. Cheap state tax filing withholding agent with withholding rate pools. Cheap state tax filing A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding. Cheap state tax filing   A QI is required to provide the U. Cheap state tax filing S. Cheap state tax filing withholding agent with information regarding U. Cheap state tax filing S. Cheap state tax filing persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding. Cheap state tax filing   If a QI obtains documentary evidence under the “know-your-customer” rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. Cheap state tax filing This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence that is not of the type specified in the attachment to the agreement. Cheap state tax filing Form 1042-S reporting. Cheap state tax filing   A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. Cheap state tax filing Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified intermediary or a flow-through entity (discussed earlier). Cheap state tax filing Collective refund procedures. Cheap state tax filing   A QI may seek a refund on behalf of its direct account holders. Cheap state tax filing The direct account holders, therefore, are not required to file returns with the IRS to obtain refunds, but rather may obtain them from the QI. Cheap state tax filing U. Cheap state tax filing S. Cheap state tax filing branches of foreign banks and foreign insurance companies. Cheap state tax filing   Special rules apply to a U. Cheap state tax filing S. Cheap state tax filing branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. Cheap state tax filing If you agree to treat the branch as a U. Cheap state tax filing S. Cheap state tax filing person, you may treat the branch as a U. Cheap state tax filing S. Cheap state tax filing payee for a payment subject to NRA withholding provided you receive a Form W-8IMY from the U. Cheap state tax filing S. Cheap state tax filing branch on which the agreement is evidenced. Cheap state tax filing If you treat the branch as a U. Cheap state tax filing S. Cheap state tax filing payee, you are not required to withhold. Cheap state tax filing Even though you agree to treat the branch as a U. Cheap state tax filing S. Cheap state tax filing person, you must report the payment on Form 1042-S. Cheap state tax filing   A financial institution organized in a U. Cheap state tax filing S. Cheap state tax filing possession is treated as a U. Cheap state tax filing S. Cheap state tax filing branch. Cheap state tax filing The special rules discussed in this section apply to a possessions financial institution. Cheap state tax filing   If you are paying a U. Cheap state tax filing S. Cheap state tax filing branch an amount that is not subject to NRA withholding, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U. Cheap state tax filing S. Cheap state tax filing person for amounts subject to NRA withholding. Cheap state tax filing Consequently, amounts not subject to NRA withholding that are paid to a U. Cheap state tax filing S. Cheap state tax filing branch are not subject to Form 1099 reporting or backup withholding. Cheap state tax filing   Alternatively, a U. Cheap state tax filing S. Cheap state tax filing branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. Cheap state tax filing In this situation, the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. Cheap state tax filing See Nonqualified Intermediaries under  Documentation, later. Cheap state tax filing   If the U. Cheap state tax filing S. Cheap state tax filing branch does not provide you with a Form W-8IMY, then you should treat a payment subject to NRA withholding as made to the foreign person of which the branch is a part and the income as effectively connected with the conduct of a trade or business in the United States. Cheap state tax filing Withholding foreign partnership and foreign trust. Cheap state tax filing   A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP withholding agreement with the IRS and is acting in that capacity. Cheap state tax filing A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT withholding agreement with the IRS and is acting in that capacity. Cheap state tax filing   A WP or WT may act in that capacity only for payments of amounts subject to NRA withholding that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. Cheap state tax filing A WP or WT acting in that capacity must assume NRA withholding responsibility for these amounts. Cheap state tax filing You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts. Cheap state tax filing WP and WT withholding agreements. Cheap state tax filing   The WP and WT withholding agreements and the application procedures for the agreements are in Revenue Procedure 2003-64. Cheap state tax filing Also see the following items. Cheap state tax filing Revenue Procedure 2004-21. Cheap state tax filing Revenue Procedure 2005-77. Cheap state tax filing Employer identification number (EIN). Cheap state tax filing   A completed Form SS-4 must be submitted with the application for being a WP or WT. Cheap state tax filing The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity. Cheap state tax filing Documentation. Cheap state tax filing   A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and a written statement identifying the amounts for which it is so acting. Cheap state tax filing The statement is not required to contain withholding rate pool information or any information relating to the identity of a direct partner, beneficiary, or owner. Cheap state tax filing The Form W-8IMY must contain the WP-EIN or WT-EIN. Cheap state tax filing Foreign Persons A payee is subject to NRA withholding only if it is a foreign person. Cheap state tax filing A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U. Cheap state tax filing S. Cheap state tax filing person. Cheap state tax filing It also includes a foreign branch of a U. Cheap state tax filing S. Cheap state tax filing financial institution if the foreign branch is a qualified intermediary. Cheap state tax filing In most cases, the U. Cheap state tax filing S. Cheap state tax filing branch of a foreign corporation or partnership is treated as a foreign person. Cheap state tax filing Nonresident alien. Cheap state tax filing   A nonresident alien is an individual who is not a U. Cheap state tax filing S. Cheap state tax filing citizen or a resident alien. Cheap state tax filing A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding. Cheap state tax filing Married to U. Cheap state tax filing S. Cheap state tax filing citizen or resident alien. Cheap state tax filing   Nonresident alien individuals married to U. Cheap state tax filing S. Cheap state tax filing citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. Cheap state tax filing However, these individuals are still subject to the NRA withholding rules that apply to nonresident aliens for all income except wages. Cheap state tax filing Wages paid to these individuals are subject to graduated withholding. Cheap state tax filing See Wages Paid to Employees—Graduated Withholding . Cheap state tax filing Resident alien. Cheap state tax filing   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. Cheap state tax filing Green card test. Cheap state tax filing An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. Cheap state tax filing This is known as the green card test because these aliens hold immigrant visas (also known as green cards). Cheap state tax filing Substantial presence test. Cheap state tax filing An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. Cheap state tax filing Under this test, the individual must be physically present in the United States on at least: 31 days during the current calendar year, and 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year. Cheap state tax filing   In most cases, the days the alien is in the United States as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa are not counted. Cheap state tax filing This exception is for a limited period of time. Cheap state tax filing   For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519. Cheap state tax filing Note. Cheap state tax filing   If your employee is late in notifying you that his or her status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. Cheap state tax filing For more information on making adjustments, see chapter 13 of Publication 15 (Circular E). Cheap state tax filing Resident of a U. Cheap state tax filing S. Cheap state tax filing possession. Cheap state tax filing   A bona fide resident of Puerto Rico, the U. Cheap state tax filing S. Cheap state tax filing Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U. Cheap state tax filing S. Cheap state tax filing citizen or a U. Cheap state tax filing S. Cheap state tax filing national is treated as a nonresident alien for the withholding rules explained here. Cheap state tax filing A bona fide resident of a possession is someone who: Meets the presence test, Does not have a tax home outside the possession, and Does not have a closer connection to the United States or to a foreign country than to the possession. Cheap state tax filing   For more information, see Publication 570, Tax Guide for Individuals With Income From U. Cheap state tax filing S. Cheap state tax filing Possessions. Cheap state tax filing Foreign corporations. Cheap state tax filing   A foreign corporation is one that does not fit the definition of a domestic corporation. Cheap state tax filing A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia. Cheap state tax filing Guam or Northern Mariana Islands corporations. Cheap state tax filing   A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons; and At least 20% of the corporation's gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less). Cheap state tax filing Note. Cheap state tax filing   The provisions discussed below under U. Cheap state tax filing S. Cheap state tax filing Virgin Islands and American Samoa corporations will apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that possession. Cheap state tax filing U. Cheap state tax filing S. Cheap state tax filing Virgin Islands and American Samoa corporations. Cheap state tax filing   A corporation created or organized in, or under the laws of, the U. Cheap state tax filing S. Cheap state tax filing Virgin Islands or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons, At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U. Cheap state tax filing S. Cheap state tax filing Virgin Islands, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less), and No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the U. Cheap state tax filing S. Cheap state tax filing Virgin Islands, American Samoa, Guam, the CNMI, or the United States. Cheap state tax filing Foreign private foundations. Cheap state tax filing   A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. Cheap state tax filing Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to NRA withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate. Cheap state tax filing Other foreign organizations, associations, and charitable institutions. Cheap state tax filing   An organization may be exempt from income tax under section 501(a) of the Internal Revenue Code even if it was formed under foreign law. Cheap state tax filing In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations. Cheap state tax filing   Payments to these organizations, however, must be reported on Form 1042-S, even though no tax is withheld. Cheap state tax filing   You must withhold tax on the unrelated business income (as described in Publication 598, Tax on Unrelated Business Income of Exempt Organizations) of foreign tax-exempt organizations in the same way that you would withhold tax on similar income of nonexempt organizations. Cheap state tax filing U. Cheap state tax filing S. Cheap state tax filing branches of foreign persons. Cheap state tax filing   In most cases, a payment to a U. Cheap state tax filing S. Cheap state tax filing branch of a foreign person is a payment made to the foreign person. Cheap state tax filing However, you may treat payments to U. Cheap state tax filing S. Cheap state tax filing branches of foreign banks and foreign insurance companies (discussed earlier) that are subject to U. Cheap state tax filing S. Cheap state tax filing regulatory supervision as payments made to a U. Cheap state tax filing S. Cheap state tax filing person, if you and the U. Cheap state tax filing S. Cheap state tax filing branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. Cheap state tax filing For this purpose, a financial institution organized under the laws of a U. Cheap state tax filing S. Cheap state tax filing possession is treated as a U. Cheap state tax filing S. Cheap state tax filing branch. Cheap state tax filing Documentation In most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following. Cheap state tax filing The payee is a U. Cheap state tax filing S. Cheap state tax filing person. Cheap state tax filing The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. Cheap state tax filing In most cases, you must get the documentation before you make the payment. Cheap state tax filing The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. Cheap state tax filing See Standards of Knowledge , later. Cheap state tax filing If you cannot reliably associate a payment with valid documentation, you must use the presumption rules discussed later. Cheap state tax filing For example, if you do not have documentation or you cannot determine the part of a payment that is allocable to specific documentation, you must use the presumption rules. Cheap state tax filing The specific types of documentation are discussed in this section. Cheap state tax filing However, see Withholding on Specific Income , later, as well as the instructions to the particular forms. Cheap state tax filing As the withholding agent, you also may want to see the Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY. Cheap state tax filing Section 1446 withholding. Cheap state tax filing   Under section 1446 of the Code, a partnership must withhold tax on its effectively connected income allocable to a foreign partner. Cheap state tax filing In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. Cheap state tax filing This is the same documentation that is filed for NRA withholding, but may require additional information as discussed under each of the forms in this section. Cheap state tax filing Joint owners. Cheap state tax filing    If you make a payment to joint owners, you need to get documentation from each owner. Cheap state tax filing Form W-9. Cheap state tax filing   In most cases, you can treat the payee as a U. Cheap state tax filing S. Cheap state tax filing person if the payee gives you a Form W-9. Cheap state tax filing The Form W-9 can be used only by a U. Cheap state tax filing S. Cheap state tax filing person and must contain the payee's taxpayer identification number (TIN). Cheap state tax filing If there is more than one owner, you may treat the total amount as paid to a U. Cheap state tax filing S. Cheap state tax filing person if any one of the owners gives you a Form W-9. Cheap state tax filing See U. Cheap state tax filing S. Cheap state tax filing Taxpayer Identification Numbers , later. Cheap state tax filing U. Cheap state tax filing S. Cheap state tax filing persons are not subject to NRA withholding, but may be subject to Form 1099 reporting and backup withholding. Cheap state tax filing Form W-8. Cheap state tax filing   In most cases, a foreign payee of the income should give you a form in the Form W-8 series. Cheap state tax filing Until further notice, you can rely upon Forms W-8 that contain a P. Cheap state tax filing O. Cheap state tax filing box as a permanent residence address provided you do not know, or have reason to know, that the person providing the form is a U. Cheap state tax filing S. Cheap state tax filing person and that a street address is available. Cheap state tax filing You may rely on Forms W-8 for which there is a U. Cheap state tax filing S. Cheap state tax filing mailing address provided you received the form prior to December 31, 2001. Cheap state tax filing   If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. Cheap state tax filing You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U. Cheap state tax filing S. Cheap state tax filing possession. Cheap state tax filing Other documentation. Cheap state tax filing   Other documentation may be required to claim an exemption from, or a reduced rate of, withholding on pay for personal services. Cheap state tax filing The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Cheap state tax filing These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income. Cheap state tax filing Beneficial Owners If all the appropriate requirements have been established on a Form W-8BEN, W-8ECI, W-8EXP or, if applicable, on documentary evidence, you may treat the payee as a foreign beneficial owner. Cheap state tax filing Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Cheap state tax filing   This form is used by a foreign person to: Establish foreign status; Claim that such person is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding; and If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty. Cheap state tax filing   Form W-8BEN also may be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding. Cheap state tax filing For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding. Cheap state tax filing Claiming treaty benefits. Cheap state tax filing   You may apply a reduced rate of withholding to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the person provides a U. Cheap state tax filing S. Cheap state tax filing TIN and certifies that: It is a resident of a treaty country; It is the beneficial owner of the income; If it is an entity, it derives the income within the meaning of section 894 of the Internal Revenue Code (it is not fiscally transparent); and It meets any limitation on benefits provision contained in the treaty, if applicable. Cheap state tax filing   If the foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner also must certify on Form W-8BEN that it will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to NRA withholding received during a calendar year exceeds, in the aggregate, $500,000. Cheap state tax filing   An entity derives income for which it is claiming treaty benefits only if the entity is not treated as fiscally transparent for that income. Cheap state tax filing See Fiscally transparent entity discussed earlier under Flow-Through Entities. Cheap state tax filing   Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. Cheap state tax filing For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States or the treaty country. Cheap state tax filing   The exemptions from, or reduced rates of, U. Cheap state tax filing S. Cheap state tax filing tax vary under each treaty. Cheap state tax filing You must check the provisions of the tax treaty that apply. Cheap state tax filing Tables at the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding that apply in cases where all conditions of the particular treaty articles are satisfied. Cheap state tax filing   If you know, or have reason to know, that an owner of income is not eligible for treaty benefits claimed, you must not apply the treaty rate. Cheap state tax filing You are not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which you did not have actual knowledge, or reason to know, that the statements were incorrect. Cheap state tax filing Exceptions to TIN requirement. Cheap state tax filing   A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements for the following exceptions are met. Cheap state tax filing Income from marketable securities (discussed next). Cheap state tax filing Unexpected payments to an individual (discussed under U. Cheap state tax filing S. Cheap state tax filing Taxpayer Identification Numbers ). Cheap state tax filing Marketable securities. Cheap state tax filing   A Form W-8BEN provided to claim treaty benefits does not need a U. Cheap state tax filing S. Cheap state tax filing TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. Cheap state tax filing For this purpose, income from a marketable security consists of the following items. Cheap state tax filing Dividends and interest from stocks and debt obligations that are actively traded. Cheap state tax filing Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund). Cheap state tax filing Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933. Cheap state tax filing Income related to loans of any of the above securities. Cheap state tax filing Offshore accounts. Cheap state tax filing   If a payment is made outside the United States to an offshore account, a payee may give you documentary evidence, rather than Form W-8BEN. Cheap state tax filing   In most cases, a payment is made outside the United States if you complete the acts necessary to effect the payment outside the United States. Cheap state tax filing However, an amount paid by a bank or other financial institution on a deposit or account usually will be treated as paid at the branch or office where the amount is credited. Cheap state tax filing An offshore account is an account maintained at an office or branch of a U. Cheap state tax filing S. Cheap state tax filing or foreign bank or other financial institution at any location outside the United States. Cheap state tax filing   You may rely on documentary evidence given to you by a nonqualified intermediary or a flow-through entity with its Form W-8IMY. Cheap state tax filing This rule applies even though you make the payment to a nonqualified intermediary or flow-through entity in the United States. Cheap state tax filing In most cases, the nonqualified intermediary or flow-through entity that gives you documentary evidence also will have to give you a withholding statement, discussed later. Cheap state tax filing Documentary evidence. Cheap state tax filing   You may apply a reduced rate of withholding to income from marketable securities (discussed earlier) paid outside the United States to an offshore account if the beneficial owner gives you documentary evidence in place of a Form W-8BEN. Cheap state tax filing To claim treaty benefits, the documentary evidence must be one of the following: A certificate of residence that: Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident, States that the person has filed its most recent income tax return as a resident of that country, and Is issued within 3 years prior to being presented to you. Cheap state tax filing Documentation for an individual that: Includes the individual's name, address, and photograph, Is an official document issued by an authorized governmental body, and Is issued no more than 3 years prior to being presented to you. Cheap state tax filing Documentation for an entity that: Includes the name of the entity, Includes the address of its principal office in the treaty country, and Is an official document issued by an authorized governmental body. Cheap state tax filing In addition to the documentary evidence, a foreign beneficial owner that is an entity must provide a statement that it derives the income for which it claims treaty benefits and that it meets one or more of the conditions set forth in a limitation on benefits article, if any, (or similar provision) contained in the applicable treaty. Cheap state tax filing Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. Cheap state tax filing   This form is used by a foreign person to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim that the income is effectively connected with the conduct of a trade or business in the United States. Cheap state tax filing (See Effectively Connected Income , later. Cheap state tax filing )   Effectively connected income for which a valid Form W-8ECI has been provided is generally not subject to NRA withholding. Cheap state tax filing   If a partner submits this form to a partnership, the income claimed to be effectively connected with the conduct of a U. Cheap state tax filing S. Cheap state tax filing trade or business is subject to withholding under section 1446. Cheap state tax filing If the partner has made, or will make, an election under section 871(d) or 882(d), the partner must submit Form W-8ECI, and attach a copy of the election, or a statement of intent to elect, to the form. Cheap state tax filing    If the partner's only effectively connected income is the income allocated from the partnership and the partner is not making the election under section 871(d) or 882(d), the partner should provide Form W-8BEN to the partnership. Cheap state tax filing Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. Cheap state tax filing   This form is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U. Cheap state tax filing S. Cheap state tax filing possession to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim a reduced rate of, or an exemption from, withholding as such an entity. Cheap state tax filing   If the government or organization is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the partner is subject to withholding under section 1446. Cheap state tax filing   See Foreign Governments and Certain Other Foreign Organizations , later. Cheap state tax filing Foreign Intermediaries and Foreign Flow-Through Entities Payments made to a foreign intermediary or foreign flow-through entity are treated as made to the payees on whose behalf the intermediary or entity acts. Cheap state tax filing The Form W-8IMY provided by a foreign intermediary or flow-through entity must be accompanied by additional information for you to be able to reliably associate the payment with a payee. Cheap state tax filing The additional information required depends on the type of intermediary or flow-through entity and the extent of the withholding responsibilities it assumes. Cheap state tax filing Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U. Cheap state tax filing S. Cheap state tax filing Branches for United States Tax Withholding. Cheap state tax filing   This form is used by foreign intermediaries and foreign flow-through entities, as well as certain U. Cheap state tax filing S. Cheap state tax filing branches, to: Represent that a foreign person is a qualified intermediary or nonqualified intermediary, Represent, if applicable, that the qualified intermediary is assuming primary NRA withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility, Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust, Represent that a foreign flow-through entity is a nonwithholding foreign partnership, or a nonwithholding foreign trust and that the income is not effectively connected with the conduct of a trade or business in the United States, Represent that the provider is a U. Cheap state tax filing S. Cheap state tax filing branch of a foreign bank or insurance company and either is agreeing to be treated as a U. Cheap state tax filing S. Cheap state tax filing person or is transmitting documentation of the persons on whose behalf it is acting, or Represent that, for purposes of section 1446, it is an upper-tier foreign partnership or a foreign grantor trust and that the form is being used to transmit the required documentation. Cheap state tax filing For information on qualifying as an upper-tier foreign partnership, see Regulations section 1. Cheap state tax filing 1446-5. Cheap state tax filing Qualified Intermediaries In most cases, a QI is any foreign intermediary that has entered into a QI withholding agreement (discussed earlier) with the IRS. Cheap state tax filing A foreign intermediary that has received a QI employer identification number (QI-EIN) may represent on Form W-8IMY that it is a QI before it receives a fully executed agreement. Cheap state tax filing The intermediary can claim that it is a QI until the IRS revokes its QI-EIN. Cheap state tax filing The IRS will revoke a QI-EIN if the QI agreement is not executed and returned to the IRS within a reasonable period of time after the agreement was sent to the intermediary for signature. Cheap state tax filing Responsibilities. Cheap state tax filing   Payments made to a QI that does not assume NRA withholding responsibility are treated as paid to its account holders and customers. Cheap state tax filing However, a QI is not required to provide you with documentation it obtains from its foreign account holders and customers. Cheap state tax filing Instead, it provides you with a withholding statement that contains withholding rate pool information. Cheap state tax filing A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding. Cheap state tax filing A qualified intermediary is required to provide you with information regarding U. Cheap state tax filing S. Cheap state tax filing persons subject to Form 1099 reporting and to provide you withholding rate pool information separately for each such U. Cheap state tax filing S. Cheap state tax filing person unless it has assumed Form 1099 reporting and backup withholding responsibility. Cheap state tax filing For the alternative procedure for providing rate pool information for U. Cheap state tax filing S. Cheap state tax filing non-exempt persons, see the Form W-8IMY instructions. Cheap state tax filing   The withholding statement must: Designate those accounts for which it acts as a qualified intermediary, Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding responsibility, and Provide sufficient information for you to allocate the payment to a withholding rate pool. Cheap state tax filing   The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI. Cheap state tax filing Primary responsibility not assumed. Cheap state tax filing   If a QI does not assume primary NRA withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for the payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to each withholding rate pool for foreign payees. Cheap state tax filing Unless the alternative procedure applies, the qualified intermediary must provide you with a separate withholding rate pool for each U. Cheap state tax filing S. Cheap state tax filing person subject to Form 1099 reporting and/or backup withholding. Cheap state tax filing The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Cheap state tax filing Primary NRA withholding responsibility assumed. Cheap state tax filing   If you make a payment to a QI that assumes primary NRA withholding responsibility (but not primary Form 1099 reporting and backup withholding responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the part of the payment attributable to withholding rate pools for each U. Cheap state tax filing S. Cheap state tax filing person, unless the alternative procedure applies, subject to Form 1099 reporting and/or backup withholding. Cheap state tax filing The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Cheap state tax filing Primary NRA and Form 1099 responsibility assumed. Cheap state tax filing   If you make a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting and backup withholding responsibility, you can reliably associate a payment with valid documentation provided that you receive a valid Form W-8IMY. Cheap state tax filing It is not necessary to associate the payment with withholding rate pools. Cheap state tax filing Example. Cheap state tax filing You make a payment of dividends to a QI. Cheap state tax filing It has five customers: two are foreign persons who have provided documentation entitling them to a 15% rate of withholding on dividends; two are foreign persons subject to a 30% rate of withholding on dividends; and one is a U. Cheap state tax filing S. Cheap state tax filing individual who provides it with a Form W-9. Cheap state tax filing Each customer is entitled to 20% of the dividend payment. Cheap state tax filing The QI does not assume any primary withholding responsibility. Cheap state tax filing The QI gives you a Form W-8IMY with which it associates the Form W-9 and a withholding statement that allocates 40% of the dividend to a 15% withholding rate pool, 40% to a 30% withholding rate pool, and 20% to the U. Cheap state tax filing S. Cheap state tax filing individual. Cheap state tax filing You should report on Forms 1042-S 40% of the payment as made to a 15% rate dividend pool and 40% of the payment as made to a 30% rate dividend pool. Cheap state tax filing The part of the payment allocable to the U. Cheap state tax filing S. Cheap state tax filing individual (20%) is reportable on Form 1099-DIV. Cheap state tax filing Smaller partnerships and trusts. Cheap state tax filing   A QI may apply special rules to a smaller partnership or trust (Joint Account Provision) only if the partnership or trust meets the following conditions. Cheap state tax filing It is a foreign partnership or foreign simple or grantor trust. Cheap state tax filing It is a direct account holder of the QI. Cheap state tax filing It does not have any partner, beneficiary, or owner that is a U. Cheap state tax filing S. Cheap state tax filing person or a pass- through partner, beneficiary, or owner. Cheap state tax filing   For information on these rules, see section 4A. Cheap state tax filing 01 of the QI agreement. Cheap state tax filing This is found in Appendix 3 of Revenue Procedure 2003-64. Cheap state tax filing Also see Revenue Procedure 2004-21. Cheap state tax filing Related partnerships and trusts. Cheap state tax filing    A QI may apply special rules to a related partnership or trust only if the partnership or trust meets the following conditions. Cheap state tax filing It is a foreign partnership or foreign simple or grantor trust. Cheap state tax filing It is either: A direct account holder of the QI, or An indirect account holder of the QI that is a direct partner, beneficiary, or owner of a partnership or trust to which the QI has applied this rule. Cheap state tax filing For information on these rules, see section 4A. Cheap state tax filing 02 of the QI agreement. Cheap state tax filing This is found in Appendix 3 of Revenue Procedure 2003-64. Cheap state tax filing Also see Revenue Procedure 2005-77. Cheap state tax filing Nonqualified Intermediaries If you are making a payment to an NQI, foreign flow-through entity, or U. Cheap state tax filing S. Cheap state tax filing branch that is using Form W-8IMY to transmit information about the branch's account holders or customers, you can treat the payment (or a part of the payment) as reliably associated with valid documentation from a specific payee only if, prior to making the payment: You can allocate the payment to a valid Form W-8IMY, You can reliably determine how much of the payment relates to valid documentation provided by a payee (a person that is not itself a foreign intermediary, flow- through entity, or U. Cheap state tax filing S. Cheap state tax filing branch), and You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required. Cheap state tax filing The NQI, flow-through entity, or U. Cheap state tax filing S. Cheap state tax filing branch must give you certain information on a withholding statement that is associated with the Form W-8IMY. Cheap state tax filing A withholding statement must be updated to keep the information accurate prior to each payment. Cheap state tax filing Withholding statement. Cheap state tax filing   In most cases, a withholding statement must contain the following information. Cheap state tax filing The name, address, and TIN (if any, or if required) of each person for whom documentation is provided. Cheap state tax filing The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided. Cheap state tax filing The status of the person for whom the documentation has been provided, such as whether the person is a U. Cheap state tax filing S. Cheap state tax filing exempt recipient (U. Cheap state tax filing S. Cheap state tax filing person exempt from Form 1099 reporting), U. Cheap state tax filing S. Cheap state tax filing non-exempt recipient (U. Cheap state tax filing S. Cheap state tax filing person subject to Form 1099 reporting), or a foreign person. Cheap state tax filing For a foreign person, the statement must indicate whether the person is a beneficial owner or a foreign intermediary, flow-through entity, or a U. Cheap state tax filing S. Cheap state tax filing branch. Cheap state tax filing The type of recipient the person is, based on the recipient codes used on Form 1042-S. Cheap state tax filing Information allocating each payment, by income type, to each payee (including U. Cheap state tax filing S. Cheap state tax filing exempt and U. Cheap state tax filing S. Cheap state tax filing non-exempt recipients) for whom documentation has been provided. Cheap state tax filing The rate of withholding that applies to each foreign person to whom a payment is allocated. Cheap state tax filing A foreign payee's country of residence. Cheap state tax filing If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc. Cheap state tax filing ). Cheap state tax filing In the case of treaty benefits claimed by entities, whether the applicable limitation on benefits statement and the statement that the foreign person derives the income for which treaty benefits are claimed, have been made. Cheap state tax filing The name, address, and TIN (if any) of any other NQI, flow-through entity, or U. Cheap state tax filing S. Cheap state tax filing branch from which the payee will directly receive a payment. Cheap state tax filing Any other information a withholding agent requests to fulfill its reporting and withholding obligations. Cheap state tax filing Alternative procedure. Cheap state tax filing   Under this alternative procedure the NQI can give you the information that allocates each payment to each foreign and U. Cheap state tax filing S. Cheap state tax filing exempt recipient by January 31 following the calendar year of payment, rather than prior to the payment being made as otherwise required. Cheap state tax filing To take advantage of this procedure, the NQI must: (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. Cheap state tax filing You must receive the withholding statement with all the required information (other than item 5) prior to making the payment. Cheap state tax filing    This alternative procedure cannot be used for payments to U. Cheap state tax filing S. Cheap state tax filing non-exempt recipients. Cheap state tax filing Therefore, an NQI must always provide you with allocation information for all U. Cheap state tax filing S. Cheap state tax filing non-exempt recipients prior to a payment being made. Cheap state tax filing Pooled withholding information. Cheap state tax filing   If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, prior to the payment of a reportable amount. Cheap state tax filing A withholding rate pool is a payment of a single type of income (as determined by the income categories on Form 1042-S) that is subject to a single rate of withholding. Cheap state tax filing For example, an NQI that has foreign account holders receiving royalties and dividends, both subject to the 15% rate, will provide you with information for two withholding rate pools (one for royalties and one for dividends). Cheap state tax filing The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment. Cheap state tax filing Failure to provide allocation information. Cheap state tax filing   If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. Cheap state tax filing You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules . Cheap state tax filing An NQI is deemed to have f