Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

Form 1040 Ez

Form 1040 Ez 2013 InstructionsIrs 1040v FormEfile Free Federal And StateHow To File 1040 Ez Form OnlineFile For Extension 2011 Taxes FreeWhere Can I File My State And Federal Taxes Online For FreeWww Myfreetaxes Com Cnm2Efile State Taxes For FreeCan I Efile 1040nrIncome Tax Return FilingHow To Do 2012 TaxesFree Tax 2007Do I File Taxes Amend Previous YearsFile A 2010 Tax ReturnHow Do I Amend My 2012 Federal Tax ReturnHow Do I Fill Out A 1040xDo College Students Have To File TaxesHow To File 2011 Taxes Late OnlineWww Irs Gov Amended Tax Return1040x CalculatorWww Freetaxusa Com Taxes2011State Tax Filing Online For FreeTax Forms 2012 Federal 1040Freetaxusa2011 TaxesTurbotax Amended ReturnWhere Can Ie File My State Taxes For FreeHow Do You Amend Tax ReturnsTax Form AmendmentFile Extension OnlineAmend Federal Tax ReturnState Taxes Free FileHow To File Military TaxesHow To Fill Out A 1040ez1040ez Forms 20122012 Income TaxCan I File 2011 Tax Return Online1040x 20121040 Ez Tax FormState Tax ExtensionFree State Tax Forms Online

Form 1040 Ez

Form 1040 ez 1. Form 1040 ez   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Form 1040 ez Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Form 1040 ez The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Form 1040 ez If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Form 1040 ez Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Form 1040 ez Rental income is any payment you receive for the use or occupation of property. Form 1040 ez In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Form 1040 ez When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Form 1040 ez Most individual taxpayers use the cash method. Form 1040 ez Cash method. Form 1040 ez   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Form 1040 ez You constructively receive income when it is made available to you, for example, by being credited to your bank account. Form 1040 ez Accrual method. Form 1040 ez    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Form 1040 ez You generally deduct your expenses when you incur them, rather than when you pay them. Form 1040 ez More information. Form 1040 ez   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Form 1040 ez Types of Income The following are common types of rental income. Form 1040 ez Advance rent. Form 1040 ez   Advance rent is any amount you receive before the period that it covers. Form 1040 ez Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Form 1040 ez Example. Form 1040 ez On March 18, 2013, you signed a 10-year lease to rent your property. Form 1040 ez During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Form 1040 ez You must include $19,200 in your rental income in the first year. Form 1040 ez Canceling a lease. Form 1040 ez   If your tenant pays you to cancel a lease, the amount you receive is rent. Form 1040 ez Include the payment in your income in the year you receive it regardless of your method of accounting. Form 1040 ez Expenses paid by tenant. Form 1040 ez   If your tenant pays any of your expenses, those payments are rental income. Form 1040 ez Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Form 1040 ez For more information, see Rental Expenses , later. Form 1040 ez Example 1. Form 1040 ez Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Form 1040 ez Under the terms of the lease, your tenant does not have to pay this bill. Form 1040 ez Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Form 1040 ez You can deduct the utility payment made by your tenant as a rental expense. Form 1040 ez Example 2. Form 1040 ez While you are out of town, the furnace in your rental property stops working. Form 1040 ez Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Form 1040 ez Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Form 1040 ez You can deduct the repair payment made by your tenant as a rental expense. Form 1040 ez Property or services. Form 1040 ez   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Form 1040 ez   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Form 1040 ez Example. Form 1040 ez Your tenant is a house painter. Form 1040 ez He offers to paint your rental property instead of paying 2 months rent. Form 1040 ez You accept his offer. Form 1040 ez Include in your rental income the amount the tenant would have paid for 2 months rent. Form 1040 ez You can deduct that same amount as a rental expense for painting your property. Form 1040 ez Security deposits. Form 1040 ez   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Form 1040 ez But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Form 1040 ez    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Form 1040 ez Include it in your income when you receive it. Form 1040 ez Other Sources of Rental Income Lease with option to buy. Form 1040 ez   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Form 1040 ez If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Form 1040 ez Part interest. Form 1040 ez   If you own a part interest in rental property, you must report your part of the rental income from the property. Form 1040 ez Rental of property also used as your home. Form 1040 ez   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Form 1040 ez However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Form 1040 ez See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Form 1040 ez Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Form 1040 ez Personal use of rental property. Form 1040 ez   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Form 1040 ez Also, your rental expense deductions may be limited. Form 1040 ez See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Form 1040 ez Part interest. Form 1040 ez   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Form 1040 ez Example. Form 1040 ez Roger owns a one-half undivided interest in a rental house. Form 1040 ez Last year he paid $968 for necessary repairs on the property. Form 1040 ez Roger can deduct $484 (50% × $968) as a rental expense. Form 1040 ez He is entitled to reimbursement for the remaining half from the co-owner. Form 1040 ez When To Deduct You generally deduct your rental expenses in the year you pay them. Form 1040 ez If you use the accrual method, see Publication 538 for more information. Form 1040 ez Types of Expenses Listed below are the most common rental expenses. Form 1040 ez Advertising. Form 1040 ez Auto and travel expenses. Form 1040 ez Cleaning and maintenance. Form 1040 ez Commissions. Form 1040 ez Depreciation. Form 1040 ez Insurance. Form 1040 ez Interest (other). Form 1040 ez Legal and other professional fees. Form 1040 ez Local transportation expenses. Form 1040 ez Management fees. Form 1040 ez Mortgage interest paid to banks, etc. Form 1040 ez Points. Form 1040 ez Rental payments. Form 1040 ez Repairs. Form 1040 ez Taxes. Form 1040 ez Utilities. Form 1040 ez Some of these expenses, as well as other less common ones, are discussed below. Form 1040 ez Depreciation. Form 1040 ez   Depreciation is a capital expense. Form 1040 ez It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Form 1040 ez   You can begin to depreciate rental property when it is ready and available for rent. Form 1040 ez See Placed in Service under When Does Depreciation Begin and End in chapter 2. Form 1040 ez Insurance premiums paid in advance. Form 1040 ez   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Form 1040 ez You cannot deduct the total premium in the year you pay it. Form 1040 ez See chapter 6 of Publication 535 for information on deductible premiums. Form 1040 ez Interest expense. Form 1040 ez   You can deduct mortgage interest you pay on your rental property. Form 1040 ez When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Form 1040 ez Chapter 4 of Publication 535 explains mortgage interest in detail. Form 1040 ez Expenses paid to obtain a mortgage. Form 1040 ez   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Form 1040 ez These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Form 1040 ez Form 1098, Mortgage Interest Statement. Form 1040 ez   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. Form 1040 ez If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Form 1040 ez Attach a statement to your return showing the name and address of the other person. Form 1040 ez On the dotted line next to line 13, enter “See attached. Form 1040 ez ” Legal and other professional fees. Form 1040 ez   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Form 1040 ez For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Form 1040 ez You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Form 1040 ez Local benefit taxes. Form 1040 ez   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Form 1040 ez These charges are nondepreciable capital expenditures and must be added to the basis of your property. Form 1040 ez However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Form 1040 ez Local transportation expenses. Form 1040 ez   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Form 1040 ez However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Form 1040 ez See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Form 1040 ez   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Form 1040 ez For 2013, the standard mileage rate for business use is 56. Form 1040 ez 5 cents per mile. Form 1040 ez For more information, see chapter 4 of Publication 463. Form 1040 ez    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Form 1040 ez In addition, you must complete Form 4562, Part V, and attach it to your tax return. Form 1040 ez Pre-rental expenses. Form 1040 ez   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Form 1040 ez Rental of equipment. Form 1040 ez   You can deduct the rent you pay for equipment that you use for rental purposes. Form 1040 ez However, in some cases, lease contracts are actually purchase contracts. Form 1040 ez If so, you cannot deduct these payments. Form 1040 ez You can recover the cost of purchased equipment through depreciation. Form 1040 ez Rental of property. Form 1040 ez   You can deduct the rent you pay for property that you use for rental purposes. Form 1040 ez If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Form 1040 ez Travel expenses. Form 1040 ez   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Form 1040 ez You must properly allocate your expenses between rental and nonrental activities. Form 1040 ez You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Form 1040 ez The cost of improvements is recovered by taking depreciation. Form 1040 ez For information on travel expenses, see chapter 1 of Publication 463. Form 1040 ez    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Form 1040 ez Uncollected rent. Form 1040 ez   If you are a cash basis taxpayer, do not deduct uncollected rent. Form 1040 ez Because you have not included it in your income, it is not deductible. Form 1040 ez   If you use an accrual method, report income when you earn it. Form 1040 ez If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Form 1040 ez See chapter 10 of Publication 535 for more information about business bad debts. Form 1040 ez Vacant rental property. Form 1040 ez   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Form 1040 ez However, you cannot deduct any loss of rental income for the period the property is vacant. Form 1040 ez Vacant while listed for sale. Form 1040 ez   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Form 1040 ez If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Form 1040 ez Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Form 1040 ez These charges are also called loan origination fees, maximum loan charges, or premium charges. Form 1040 ez Any of these charges (points) that are solely for the use of money are interest. Form 1040 ez Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Form 1040 ez The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Form 1040 ez In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Form 1040 ez The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Form 1040 ez If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Form 1040 ez De minimis OID. Form 1040 ez   The OID is de minimis if it is less than one-fourth of 1% (. Form 1040 ez 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Form 1040 ez   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Form 1040 ez On a constant-yield basis over the term of the loan. Form 1040 ez On a straight line basis over the term of the loan. Form 1040 ez In proportion to stated interest payments. Form 1040 ez In its entirety at maturity of the loan. Form 1040 ez You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Form 1040 ez Example. Form 1040 ez Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Form 1040 ez The loan is to be repaid over 30 years. Form 1040 ez During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Form 1040 ez When the loan was made, she paid $1,500 in points to the lender. Form 1040 ez The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Form 1040 ez Carol determines that the points (OID) she paid are de minimis based on the following computation. Form 1040 ez Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Form 1040 ez 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Form 1040 ez Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Form 1040 ez Under the straight line method, she can deduct $50 each year for 30 years. Form 1040 ez Constant-yield method. Form 1040 ez   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Form 1040 ez   You figure your deduction for the first year in the following manner. Form 1040 ez Determine the issue price of the loan. Form 1040 ez If you paid points on the loan, the issue price generally is the difference between the principal and the points. Form 1040 ez Multiply the result in (1) by the yield to maturity (defined later). Form 1040 ez Subtract any qualified stated interest payments (defined later) from the result in (2). Form 1040 ez This is the OID you can deduct in the first year. Form 1040 ez Yield to maturity (YTM). Form 1040 ez   This rate is generally shown in the literature you receive from your lender. Form 1040 ez If you do not have this information, consult your lender or tax advisor. Form 1040 ez In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Form 1040 ez Qualified stated interest (QSI). Form 1040 ez   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Form 1040 ez Example—Year 1. Form 1040 ez The facts are the same as in the previous example. Form 1040 ez The yield to maturity on Carol's loan is 10. Form 1040 ez 2467%, compounded annually. Form 1040 ez She figured the amount of points (OID) she could deduct in 2013 as follows. Form 1040 ez Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Form 1040 ez 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Form 1040 ez To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Form 1040 ez Then follow steps (2) and (3), earlier. Form 1040 ez Example—Year 2. Form 1040 ez Carol figured the deduction for 2014 as follows. Form 1040 ez Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Form 1040 ez 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Form 1040 ez    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Form 1040 ez A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Form 1040 ez However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Form 1040 ez Points when loan refinance is more than the previous outstanding balance. Form 1040 ez   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Form 1040 ez For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Form 1040 ez Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Form 1040 ez Improvements. Form 1040 ez   You must capitalize any expense you pay to improve your rental property. Form 1040 ez An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Form 1040 ez Betterments. Form 1040 ez   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Form 1040 ez Restoration. Form 1040 ez   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Form 1040 ez Adaptation. Form 1040 ez   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Form 1040 ez Separate the costs of repairs and improvements, and keep accurate records. Form 1040 ez You will need to know the cost of improvements when you sell or depreciate your property. Form 1040 ez The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Form 1040 ez Table 1-1. Form 1040 ez Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications
Print - Click this link to Print this page

Individual Retirement Arrangements (IRAs)

Getting Started
Learn about saving for retirement using Traditional and Roth IRAs.

Contribution Limits
How much can you contribute to your IRA?

Deduction Limits
How much of your IRA contributions can you deduct on your taxes?

Rollovers (See our Rollover Chart)
The why, what, how, when and where about moving your retirement savings.

Distributions
Taking withdrawals from your IRA - when and how much.

Beneficiaries
Information for spousal and non-spousal IRA beneficiaries

Saver's Credit
Individuals may be able to take a tax credit of up to $1,000 if they make eligible contributions to an IRA.

SEP and SIMPLE IRA Plans

Additional IRA Resources

Page Last Reviewed or Updated: 26-Mar-2014

The Form 1040 Ez

Form 1040 ez Listed Property Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Listed Property DefinedPassenger Automobile Defined Dwelling Unit Other Property Used for Transportation Computers and Related Peripheral Equipment Predominant Use TestMeeting the Predominant Use Test Qualified Business Use Method of Allocating Use Applying the Predominant Use Test Deductions After Recovery Period Leased PropertyLessor Lessee What Records Must Be KeptAdequate Records Reporting Information on Form 4562 Deductions in Later Years Appendix Topics - This chapter discusses: Listed property defined The predominant use test What records must be kept Useful Items - You may want to see: Publication 463 Travel, Entertainment, and Gift Expenses 587 Business Use of Your Home (Including Use by Day-Care Providers) 917 Business Use of a Car 946 How To Depreciate Property Form (and Instructions) 2106–EZ Unreimbursed Employee Business Expenses 2106 Employee Business Expenses 4255 Recapture of Investment Credit 4562 Depreciation and Amortization This chapter discusses some special rules and recordkeeping requirements for listed property. Form 1040 ez For complete coverage of the rules, including the rules concerning passenger automobiles, see Publication 946. Form 1040 ez If listed property is not used predominantly (more than 50%) in a qualified business use as discussed inPredominant Use Test, later, the section 179 deduction is not allowable and the property must be depreciated using the straight line method. Form 1040 ez Listed Property Defined Listed property is any of the following: Any passenger automobile (defined later), Any other property used for transportation, Any property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment), Any computer and related peripheral equipment, defined later, unless it is used only at a regular business establishment and owned or leased by the person operating the establishment. Form 1040 ez A regular business establishment includes a portion of a dwelling unit (defined later), if, and only if, that portion is used both regularly and exclusively for business as discussed in Publication 587. Form 1040 ez Any cellular telephone (or similar telecommunication equipment) placed in service or leased in a tax year beginning after 1989. Form 1040 ez Passenger Automobile Defined A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (at 6,000 pounds or less of gross vehicle weight for trucks and vans). Form 1040 ez It includes any part, component, or other item physically attached to the automobile or usually included in the purchase price of an automobile. Form 1040 ez A passenger automobile does not include: An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business, and A vehicle used directly in the trade or business of transporting persons or property for compensation or hire. Form 1040 ez Dwelling Unit A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Form 1040 ez It does not include a unit in a hotel, motel, inn, or other establishment where more than half the units are used on a transient basis. Form 1040 ez Other Property Used for Transportation Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles for transporting persons or goods. Form 1040 ez Listed property does not include: Any vehicle which, by reason of its design, is not likely to be used more than a minimal amount for personal purposes, such as clearly marked police and fire vehicles, ambulances, or hearses used for those purposes, Any vehicle that is designed to carry cargo and that has a loaded gross vehicle weight over 14,000 pounds, bucket trucks (cherry pickers), cement mixers, combines, cranes and derricks, delivery trucks with seating only for the driver (or only for the driver plus a folding jump seat), dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks, Any passenger bus used for that purpose with a capacity of at least 20 passengers and school buses, Any tractor or other special purpose farm vehicle, and unmarked vehicles used by law enforcement officers if the use is officially authorized, and Any vehicle, such as a taxicab, if substantially all its use is in the trade or business of providing services to transport persons or property for compensation or hire by unrelated persons. Form 1040 ez Computers and Related Peripheral Equipment A computer is a programmable electronically activated device that: Is capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention, and Consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. Form 1040 ez Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. Form 1040 ez Computer or peripheral equipment does not include: Any equipment which is an integral part of property which is not a computer, Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment, and Equipment of a kind, used primarily for the user's amusement or entertainment, such as video games. Form 1040 ez Predominant Use Test If “listed property,” defined earlier, placed in service after June 18, 1984, is not used predominantly (more than 50%) in a qualified business use during any tax year: The section 179 deduction on the property is not allowable, and You must depreciate the property using the straight line method. Form 1040 ez Listed property placed in service before 1987. Form 1040 ez   For listed property placed in service before 1987, depreciate the property over the following period: Class of Property Listed Property Recovery Period 3-year property 5 years 5-year property 12 years 10-year property 25 years 18-year real property 40 years 19-year real property 40 years If you must use the above recovery periods for listed property not used predominantly in a trade or business, use the percentages from Table 16 titled Listed Property Not Used Predominantly (Other Than 18- or 19-year Real Property), and Table 17 for 18- or 19-year real property, near the end of this publication in the Appendix. Form 1040 ez Listed property placed in service after 1986. Form 1040 ez   For information on listed property placed in service after 1986, see Publication 946. Form 1040 ez Meeting the Predominant Use Test Listed property meets the predominant use test for any tax year if its business use is more than 50% of its total use. Form 1040 ez You must allocate the use of any item of listed property used for more than one purpose during the tax year among its various uses. Form 1040 ez The percentage of investment use of listed property cannot be used as part of the percentage of qualified business use to meet the predominant use test. Form 1040 ez However, the combined total of business and investment use is taken into account to figure your depreciation deduction for the property. Form 1040 ez Note: Property does not stop being predominantly used in a qualified business use because of a transfer at death. Form 1040 ez Example. Form 1040 ez Sarah Bradley uses a home computer 50% of the time to manage her investments. Form 1040 ez She also uses the computer 40% of the time in her part-time consumer research business. Form 1040 ez Sarah's home computer is listed property because it is not used at a regular business establishment. Form 1040 ez Because her business use of the computer does not exceed 50%, the computer is not predominantly used in a qualified business use for the tax year. Form 1040 ez Because she does not meet the predominant use test, she cannot elect a section 179 deduction for this property. Form 1040 ez Her combined rate of business/investment use for determining her depreciation deduction is 90%. Form 1040 ez Qualified Business Use A qualified business use is any use in your trade or business. Form 1040 ez However, it does not include: The use of property held merely to produce income (investment use), The leasing of property to any 5% owner or related person (to the point that the property is used by a 5% owner or person related to the owner or lessee of the property), The use of property as compensation for the performance of services by a 5% owner or related person, or The use of property as compensation for the performance of services by any person (other than a5% owner or related person) unless the value of the use is included in that person's gross income for the use of the property and income tax is withheld on that amount where required. Form 1040 ez See Employees, later. Form 1040 ez 5% owner. Form 1040 ez   A 5% owner of a business, other than a corporation, is any person who owns more than 5% of the capital or profits interest in the business. Form 1040 ez   A 5% owner of a corporation is any person who owns, or is considered to own: More than 5% of the outstanding stock of the corporation, or Stock possessing more than 5% of the total combined voting power of all stock in the corporation. Form 1040 ez Related person. Form 1040 ez   A related person is anyone related to a taxpayer as discussed under Related persons, in chapter 2 under Nonqualifying Property in Publication 946. Form 1040 ez Entertainment Use The use of listed property for entertainment, recreation, or amusement purposes is treated as a qualified business use only to the extent that expenses (other than interest and property tax expenses) for its use are deductible as ordinary and necessary business expenses. Form 1040 ez See Publication 463. Form 1040 ez Leasing or Compensatory Use of Aircraft If at least 25% of the total use of any aircraft during the tax year is for a qualified business use, the leasing or compensatory use of the aircraft by a 5% owner or related person is treated as a qualified business use. Form 1040 ez Commuting The use of a vehicle for commuting is not business use, regardless of whether work is performed during the trip. Form 1040 ez Use of Your Passenger Automobile by Another Person If someone else uses your automobile, that use is not business use unless: That use is directly connected with your business, The value of the use is property reported by you as income to the other person and tax is withheld on the income where required, or The value of the use results in a payment of fair market rent. Form 1040 ez Any payment to you for the use of the automobile is treated as a rent payment for 3). Form 1040 ez Employees Any use by an employee of his or her own listed property (or listed property rented by an employee) in performing services as an employee is not business use unless: The use is for the employer's convenience, and The use is required as a condition of employment. Form 1040 ez Use for the employer's convenience. Form 1040 ez   Whether the use of listed property is for the employer's convenience must be determined from all the facts. Form 1040 ez The use is for the employer's convenience if it is for a substantial business reason of the employer. Form 1040 ez The use of listed property during the employee's regular working hours to carry on the employer's business is generally for the employer's convenience. Form 1040 ez Use required as a condition of employment. Form 1040 ez   Whether the use of listed property is a condition of employment depends on all the facts and circumstances. Form 1040 ez The use of property must be required for the employee to perform duties properly. Form 1040 ez The employer need not explicitly require the employee to use the property. Form 1040 ez A mere statement by the employer that the use of the property is a condition of employment is not sufficient. Form 1040 ez Example 1. Form 1040 ez Virginia Sycamore is employed as a courier with We Deliver which provides local courier services. Form 1040 ez She owns and uses a motorcycle to deliver packages to downtown offices. Form 1040 ez We Deliver explicitly requires all delivery persons to own a small car or motorcycle for use in their employment. Form 1040 ez The company reimburses delivery persons for their costs. Form 1040 ez Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. Form 1040 ez Example 2. Form 1040 ez Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. Form 1040 ez He must travel to these sites on a regular basis. Form 1040 ez Uplift does not furnish an automobile or explicitly require him to use his own automobile. Form 1040 ez However, it reimburses him for any costs he incurs in traveling to the various sites. Form 1040 ez The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. Form 1040 ez Method of Allocating Use For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. Form 1040 ez You determine the percentage of qualified business use by dividing the number of miles the vehicle is driven for business purposes during the year by the total number of miles the vehicle is driven for all purposes (including business miles) during the year. Form 1040 ez For other items of listed property, allocate the property's use on the basis of the most appropriate unit of time. Form 1040 ez For example, you can determine the percentage of business use of a computer by dividing the number of hours the computer is used for business purposes during the year by the total number of hours the computer is used for all purposes (including business hours) during the year. Form 1040 ez Applying the Predominant Use Test You must apply the predominant use test for an item of listed property each year of the recovery period. Form 1040 ez First Recovery Year If any item of listed property is not used predominantly in a qualified business use in the year it is placed in service: The property is not eligible for a section 179 deduction, and The depreciation deduction must be figured using the straight line method. Form 1040 ez Note: The required use of the straight line method for an item of listed property that does not meet the predominant use test is not the same as electing the straight line method. Form 1040 ez It does not mean that you have to use the straight line method for other property in the same class as the item of listed property. Form 1040 ez Years After the First Recovery Year If you use listed property predominantly (more than 50%) in a qualified business use in the tax year you place it in service, but not in a subsequent tax year during the recovery period, the following rules apply: Figure depreciation using the straight line method. Form 1040 ez Do this for each year, beginning with the year you no longer use the property predominantly in a qualified business use, and Figure any excess depreciation on the property and add it to: Your gross income, and The adjusted basis of your property. Form 1040 ez See Recapture of excess depreciation, next. Form 1040 ez Recapture of excess depreciation. Form 1040 ez   You must include any excess depreciation in your gross income for the first tax year the property is not predominantly used in a qualified business use. Form 1040 ez Any excess depreciation must also be added to the adjusted basis of your property. Form 1040 ez Excess depreciation is the excess (if any) of: The amount of depreciation allowable for the property (including any section 179 deduction claimed) for tax years before the first tax year the property was not predominantly used in a qualified business use, over The amount of depreciation that would have been allowable for those years if the property were not used predominantly in a qualified business use for the year it was placed in service. Form 1040 ez This means you figure your depreciation using the percentages fromTable 16 or 17. Form 1040 ez For information on investment credit recapture, see the instructions for Form 4255. Form 1040 ez Deductions After Recovery Period When listed property (other than passenger automobiles) is used for business, investment, and personal purposes, no deduction is ever allowable for the personal use. Form 1040 ez In tax years after the recovery period, you must determine if there is any unrecovered basis remaining before you compute the depreciation deduction for that tax year. Form 1040 ez To make this determination, figure the depreciation for earlier tax years as if your property were used 100% for business or investment purposes, beginning with the first tax year in which some or all use is for business or investment. Form 1040 ez See Car Used 50% or Less for Business in Publication 917. Form 1040 ez Leased Property The limitations on cost recovery deductions apply to the rental of listed property. Form 1040 ez The following discussion covers the rules that apply to the lessor (the owner of the property) and the lessee (the person who rents the property from the owner). Form 1040 ez SeeLeasing a Car in Publication 917 for a discussion of leased passenger automobiles. Form 1040 ez Lessor The limitations on cost recovery generally do not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property. Form 1040 ez A person is considered regularly engaged in the business of leasing listed property only if contracts for leasing of listed property are entered into with some frequency over a continuous period of time. Form 1040 ez This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of the person's business in its entirety. Form 1040 ez Occasional or incidental leasing activity is insufficient. Form 1040 ez For example, a person leasing only one passenger automobile during a tax year is not regularly engaged in the business of leasing automobiles. Form 1040 ez An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee. Form 1040 ez Lessee A lessee of listed property (other than passenger automobiles), must include an amount in gross income called the inclusion amount for the first tax year the property is not used predominantly in a qualified business use. Form 1040 ez Inclusion amount for property leased before 1987. Form 1040 ez   You determine the inclusion amount for property leased after June 18, 1984 and before 1987 by multiplying the fair market value of the property by both the average business/investment use percentage and the applicable percentage. Form 1040 ez You can find the applicable percentages for listed property that is 5- or 10-year recovery property in Tables 19 or 20 in Appendix A of Publication 946. Form 1040 ez   The lease term for listed property other than 18- or 19-year real property, and residential rental or nonresidential real property, includes options to renew. Form 1040 ez For 18- or 19-year real property and residential rental or nonresidential real property that is listed property, the period of the lease does not include any option to renew at fair market value, determined at the time of renewal. Form 1040 ez You treat two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property as one lease. Form 1040 ez Special rules. Form 1040 ez   The lessee adds the inclusion amount to gross income in the next tax year if: The lease term begins within 9 months before the close of the lessee's tax year, The lessee does not use the property predominantly in a qualified business use during that portion of the tax year, and The lease term continues into the lessee's next tax year. Form 1040 ez The lessee determines the inclusion amount by taking into account the average of the business/investment use for both tax years and the applicable percentage for the tax year the lease term begins. Form 1040 ez   If the lease term is less than one year, the amount included in gross income is the amount that bears the same ratio to the additional inclusion amount as the number of days in the lease term bears to 365. Form 1040 ez Maximum inclusion amount. Form 1040 ez   The inclusion amount cannot be more than the sum of the deductible amounts of rent allocable to the lessee's tax year in which the amount must be included in gross income. Form 1040 ez What Records Must Be Kept You cannot take any depreciation or section 179 deduction for the use of listed property (including passenger automobiles) unless you can prove business/investment use with adequate records or sufficient evidence to support your own statements. Form 1040 ez How long to keep records. Form 1040 ez   For listed property, records must be kept for as long as any excess depreciation can be recaptured (included in income). Form 1040 ez Adequate Records To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. Form 1040 ez It is not necessary to record information in an account book, diary, or similar record if the information is already shown on the receipt. Form 1040 ez However, your records should back up your receipts in an orderly manner. Form 1040 ez Elements of Expenditure or Use The records or other documentary evidence must support: The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses, The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year, The date of the expenditure or use, and The business or investment purpose for the expenditure or use. Form 1040 ez Written documents of your expenditure or use are generally better evidence than oral statements alone. Form 1040 ez A written record prepared at or near the time of the expenditure or use has greater value as proof of the expenditure or use. Form 1040 ez A daily log is not required. Form 1040 ez However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time and backed up by other documents is preferable to a statement prepared later. Form 1040 ez Timeliness The elements of an expenditure or use must be recorded at the time you have full knowledge of the elements. Form 1040 ez An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use is generally considered a timely record if in the regular course of business: The statement is submitted by an employee to the employer, or The statement is submitted by an independent contractor to the client or customer. Form 1040 ez For example, a log maintained on a weekly basis, which accounts for use during the week, will be considered a record made at or near the time of use. Form 1040 ez Business Purpose Supported An adequate record of business purpose must generally be in the form of a written statement. Form 1040 ez However, the amount of backup necessary to establish a business purpose depends on the facts and circumstances of each case. Form 1040 ez A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. Form 1040 ez For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel. Form 1040 ez Business Use Supported An adequate record contains enough information on each element of every business or investment use. Form 1040 ez The amount of detail required to support the use depends on the facts and circumstances. Form 1040 ez For example, a taxpayer whose only business use of a truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips. Form 1040 ez Although an adequate record generally must be written, a record of the business use of listed property, such as a computer or automobile, can be prepared in a computer memory device using a logging program. Form 1040 ez Separate or Combined Expenditures or Uses Each use by you is normally considered a separate use. Form 1040 ez However, repeated uses can be combined as a single item. Form 1040 ez Each expenditure is recorded as a separate item and not combined with other expenditures. Form 1040 ez If you choose, however, amounts spent for the use of listed property during a tax year, such as for gasoline or automobile repairs, can be combined. Form 1040 ez If these expenses are combined, you do not need to support the business purpose of each expense. Form 1040 ez Instead, you can divide the expenses based on the total business use of the listed property. Form 1040 ez Uses which can be considered part of a single use, such as a round trip or uninterrupted business use, can be accounted for by a single record. Form 1040 ez For example, use of a truck to make deliveries at several locations which begin and end at the business premises and can include a stop at the business in between deliveries can be accounted for by a single record of miles driven. Form 1040 ez Use of a passenger automobile by a salesperson for a business trip away from home over a period of time can be accounted for by a single record of miles traveled. Form 1040 ez Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. Form 1040 ez Confidential Information If any of the information on the elements of an expenditure or use is confidential, it does not need to be in the account book or similar record if it is recorded at or near the time of the expenditure or use. Form 1040 ez It must be kept elsewhere and made available as support to the district director on request. Form 1040 ez Substantial Compliance If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the district director's satisfaction, you can establish this element by any evidence the district director deems adequate. Form 1040 ez If you fail to establish that you have substantially complied with the adequate records requirement for an element of an expenditure or use to the district director's satisfaction, you must establish the element: By your own oral or written statement containing detailed information as to the element, and By other evidence sufficient to establish the element. Form 1040 ez If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. Form 1040 ez If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. Form 1040 ez Sampling You can maintain an adequate record for portions of a tax year and use that record to support your business and investment use for the entire tax year if it can be shown by other evidence that the periods for which an adequate record is maintained are representative of use throughout the year. Form 1040 ez Loss of Records When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use. Form 1040 ez Reporting Information on Form 4562 If you claim a deduction for any listed property, you must provide the requested information on page 2, Section B of Form 4562. Form 1040 ez If you claim a deduction for any vehicle, you must answer certain questions onpage 2 of Form 4562 to provide information about the vehicle use. Form 1040 ez Employees. Form 1040 ez   Employees claiming the standard mileage rate or actual expenses (including depreciation) must use Form 2106 instead of Part V of Form 4562. Form 1040 ez Employees claiming the standard mileage rate may be able to use Form 2106–EZ. Form 1040 ez Employer who provides vehicles to employees. Form 1040 ez   An employer who provides vehicles to employees must obtain enough information from those employees to provide the requested information onForm 4562. Form 1040 ez   An employer who provides more than five vehicles to employees need not include any information on his or her tax return. Form 1040 ez Instead, the employer must obtain the information from his or her employees and indicate on his or her return that the information was obtained and is being retained. Form 1040 ez   You do not need to provide the information requested on page 2 of Form 4562 if, as an employer: You can satisfy the requirements of a written policy statement for vehicles either not used for personal purposes, or not used for personal purposes other than commuting, or You treat all vehicle use by employees as personal use. Form 1040 ez See the instructions for Form 4562. Form 1040 ez Deductions in Later Years When listed property is used for business, investment, and personal purposes, no deduction is allowable for its personal use either in the current year or any later tax year. Form 1040 ez In later years, you must determine if there is any remaining unadjusted or unrecovered basis before you compute the depreciation deduction for that tax year. Form 1040 ez In making this determination, figure the depreciation deductions for earlier tax years as if the listed property were used 100% for business or investment purposes in those years, beginning with the first tax year in which some or all of the property use is for business or investment. Form 1040 ez For more information about deductions after the recovery period for automobiles, see Publication 917. Form 1040 ez Appendix The following tables are for use in figuring depreciation deductions under the ACRS system. Form 1040 ez Table 1. Form 1040 ez 15-Year Real Property* (Other Than Low-Inclome Housing) Table 3. Form 1040 ez Low-Income Housing* Table 6 - Table 9 Table 6 - Table 9 Table 10 - Table 13 Table 14 - Table 17 Prev  Up  Next   Home   More Online Publications