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 X

Irs Gov Form 1040ezFiling 2011 TaxesI Need To File My 2006 Taxes For FreeHow To Amend 2008 Tax ReturnHow To File A 1040xHnrblock Free Tax FormHow To File State And Federal Taxes For FreeHow To File A 1040xH&r Block Taxes Online FreeFiling An Amended Tax Return For 20102009 Tax ReturnsFree State Income Tax1040 XFile Taxes Online For FreeFile 2012 Taxes For FreeAlabama 40 Tax Forms 2012Turbo Tax Free State EfileFree Tax Form 1040ezH&r Block Tax Software 2011Tax 2012Does Military Pay TaxesWhere To File 2012 Taxes OnlineMilitary Reserve Tax DeductionWww Freefilefillableforms ComNeed To File 2012 Tax ReturnsHow Much Do Students Get Back In Taxes1040vHow To File 2011 Income TaxHow Do I File A 2012 Tax ReturnFree Tax Preparation SitesTax Act 2012 OnlineHrblock TaxesPrior Year Tax Returns2011 Ez Tax FormHow Do I File 2010 Taxes2011 Form 1040How To File A 1040ez OnlineIrs Gov Forms Form 1040xIncome Tax ExtentionIrs Ez Form 2011

Form 1040 X

Form 1040 x 6. Form 1040 x   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. Form 1040 x Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Form 1040 x Also use basis to figure depreciation, amortization, depletion, and casualty losses. Form 1040 x If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Form 1040 x Only the basis allocated to the business or investment use of the property can be depreciated. Form 1040 x Your original basis in property is adjusted (increased or decreased) by certain events. Form 1040 x For example, if you make improvements to the property, increase your basis. Form 1040 x If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. Form 1040 x Keep accurate records of all items that affect the basis of your assets. Form 1040 x For information on keeping records, see chapter 1. Form 1040 x Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. Form 1040 x Cost Basis The basis of property you buy is usually its cost. Form 1040 x Cost is the amount you pay in cash, debt obligations, other property, or services. Form 1040 x Your cost includes amounts you pay for sales tax, freight, installation, and testing. Form 1040 x The basis of real estate and business assets will include other items, discussed later. Form 1040 x Basis generally does not include interest payments. Form 1040 x However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. Form 1040 x You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Form 1040 x Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. Form 1040 x Loans with low or no interest. Form 1040 x   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. Form 1040 x You generally have unstated interest if your interest rate is less than the applicable federal rate. Form 1040 x See the discussion of unstated interest in Publication 537, Installment Sales. Form 1040 x Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Form 1040 x If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Form 1040 x Some of these expenses are discussed next. Form 1040 x Lump sum purchase. Form 1040 x   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. Form 1040 x Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Form 1040 x Figure the basis of each asset by multiplying the lump sum by a fraction. Form 1040 x The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Form 1040 x Fair market value (FMV). Form 1040 x   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Form 1040 x Sales of similar property on or about the same date may help in figuring the FMV of the property. Form 1040 x If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. Form 1040 x Real estate taxes. Form 1040 x   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Form 1040 x   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Form 1040 x Whether or not you reimburse the seller, do not include that amount in the basis of your property. Form 1040 x Settlement costs. Form 1040 x   Your basis includes the settlement fees and closing costs for buying the property. Form 1040 x See Publication 551 for a detailed list of items you can and cannot include in basis. Form 1040 x   Do not include fees and costs for getting a loan on the property. Form 1040 x Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Form 1040 x Points. Form 1040 x   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. Form 1040 x You may be able to deduct the points currently or over the term of the loan. Form 1040 x For more information about deducting points, see Points in chapter 4 of Publication 535. Form 1040 x Assumption of a mortgage. Form 1040 x   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. Form 1040 x Example. Form 1040 x If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. Form 1040 x Constructing assets. Form 1040 x   If you build property or have assets built for you, your expenses for this construction are part of your basis. Form 1040 x Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Form 1040 x   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. Form 1040 x You must capitalize them (include them in the asset's basis). Form 1040 x Employee wages paid for the construction work, reduced by any employment credits allowed. Form 1040 x Depreciation on equipment you own while it is used in the construction. Form 1040 x Operating and maintenance costs for equipment used in the construction. Form 1040 x The cost of business supplies and materials used in the construction. Form 1040 x    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Form 1040 x Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. Form 1040 x To determine the basis of these assets or separate items, there must be an allocation of basis. Form 1040 x Group of assets acquired. Form 1040 x   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Form 1040 x Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Form 1040 x You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. Form 1040 x If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Form 1040 x Farming business acquired. Form 1040 x   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. Form 1040 x Generally, reduce the purchase price by any cash received. Form 1040 x Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. Form 1040 x See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. Form 1040 x Transplanted embryo. Form 1040 x   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Form 1040 x Allocate the rest of the purchase price to the basis of the calf. Form 1040 x Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. Form 1040 x Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. Form 1040 x You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Form 1040 x Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. Form 1040 x However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. Form 1040 x You produce property if you construct, build, install, manufacture, develop, improve, or create the property. Form 1040 x You are not subject to the uniform capitalization rules if the property is produced for personal use. Form 1040 x In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. Form 1040 x Plants. Form 1040 x   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. Form 1040 x Animals. Form 1040 x   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. Form 1040 x The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Form 1040 x Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. Form 1040 x For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. Form 1040 x For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. Form 1040 x Exceptions. Form 1040 x   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. Form 1040 x   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. Form 1040 x See Accrual Method Required under Accounting Methods in chapter 2. Form 1040 x   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. Form 1040 x If you make this election, special rules apply. Form 1040 x This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. Form 1040 x This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. Form 1040 x    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. Form 1040 x See chapter 7, for additional information on depreciation. Form 1040 x Example. Form 1040 x You grow trees that have a preproductive period of more than 2 years. Form 1040 x The trees produce an annual crop. Form 1040 x You are an individual and the uniform capitalization rules apply to your farming business. Form 1040 x You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. Form 1040 x You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. Form 1040 x Preproductive period of more than 2 years. Form 1040 x   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Form 1040 x Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. Form 1040 x Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. Form 1040 x More information. Form 1040 x   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. Form 1040 x 263A-4. Form 1040 x Table 6-1. Form 1040 x Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. Form 1040 x Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. Form 1040 x The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. Form 1040 x Increases to Basis Increase the basis of any property by all items properly added to a capital account. Form 1040 x These include the cost of any improvements having a useful life of more than 1 year. Form 1040 x The following costs increase the basis of property. Form 1040 x The cost of extending utility service lines to property. Form 1040 x Legal fees, such as the cost of defending and perfecting title. Form 1040 x Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. Form 1040 x Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Form 1040 x Do not deduct these expenses as taxes. Form 1040 x However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. Form 1040 x If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Form 1040 x See chapter 7. Form 1040 x Deducting vs. Form 1040 x capitalizing costs. Form 1040 x   Do not add to your basis costs you can deduct as current expenses. Form 1040 x For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. Form 1040 x However, you can elect either to deduct or to capitalize certain other costs. Form 1040 x See chapter 7 in Publication 535. Form 1040 x Decreases to Basis The following are some items that reduce the basis of property. Form 1040 x Section 179 deduction. Form 1040 x Deductions previously allowed or allowable for amortization, depreciation, and depletion. Form 1040 x Alternative motor vehicle credit. Form 1040 x See Form 8910. Form 1040 x Alternative fuel vehicle refueling property credit. Form 1040 x See Form 8911. Form 1040 x Residential energy efficient property credits. Form 1040 x See Form 5695. Form 1040 x Investment credit (part or all) taken. Form 1040 x Casualty and theft losses and insurance reimbursements. Form 1040 x Payments you receive for granting an easement. Form 1040 x Exclusion from income of subsidies for energy conservation measures. Form 1040 x Certain canceled debt excluded from income. Form 1040 x Rebates from a manufacturer or seller. Form 1040 x Patronage dividends received from a cooperative association as a result of a purchase of property. Form 1040 x See Patronage Dividends in chapter 3. Form 1040 x Gas-guzzler tax. Form 1040 x See Form 6197. Form 1040 x Some of these items are discussed next. Form 1040 x For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. Form 1040 x Depreciation and section 179 deduction. Form 1040 x   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. Form 1040 x For more information on these deductions, see chapter 7. Form 1040 x Section 179 deduction. Form 1040 x   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Form 1040 x Depreciation. Form 1040 x   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. Form 1040 x If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Form 1040 x If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Form 1040 x   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. Form 1040 x   See chapter 7 for information on figuring the depreciation you should have claimed. Form 1040 x   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. Form 1040 x Casualty and theft losses. Form 1040 x   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Form 1040 x Also, decrease it by any deductible loss not covered by insurance. Form 1040 x See chapter 11 for information about figuring your casualty or theft loss. Form 1040 x   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. Form 1040 x To make this determination, compare the repaired property to the property before the casualty. Form 1040 x Easements. Form 1040 x   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. Form 1040 x It reduces the basis of the affected part of the property. Form 1040 x If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Form 1040 x See Easements and rights-of-way in chapter 3. Form 1040 x Exclusion from income of subsidies for energy conservation measures. Form 1040 x   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Form 1040 x Reduce the basis of the property by the excluded amount. Form 1040 x Canceled debt excluded from income. Form 1040 x   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Form 1040 x A debt includes any indebtedness for which you are liable or which attaches to property you hold. Form 1040 x   You can exclude your canceled debt from income if the debt is any of the following. Form 1040 x Debt canceled in a bankruptcy case or when you are insolvent. Form 1040 x Qualified farm debt. Form 1040 x Qualified real property business debt (provided you are not a C corporation). Form 1040 x Qualified principal residence indebtedness. Form 1040 x Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. Form 1040 x If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Form 1040 x If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. Form 1040 x   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. Form 1040 x For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. Form 1040 x For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. Form 1040 x For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Form 1040 x Basis Other Than Cost There are times when you cannot use cost as basis. Form 1040 x In these situations, the fair market value or the adjusted basis of property may be used. Form 1040 x Examples are discussed next. Form 1040 x Property changed from personal to business or rental use. Form 1040 x   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Form 1040 x An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. Form 1040 x   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Form 1040 x   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. Form 1040 x The basis for figuring a gain is your adjusted basis in the property when you sell the property. Form 1040 x Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Form 1040 x Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Form 1040 x Property received for services. Form 1040 x   If you receive property for services, include the property's FMV in income. Form 1040 x The amount you include in income becomes your basis. Form 1040 x If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Form 1040 x Example. Form 1040 x George Smith is an accountant and also operates a farming business. Form 1040 x George agreed to do some accounting work for his neighbor in exchange for a dairy cow. Form 1040 x The accounting work and the cow are each worth $1,500. Form 1040 x George must include $1,500 in income for his accounting services. Form 1040 x George's basis in the cow is $1,500. Form 1040 x Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. Form 1040 x A taxable gain or deductible loss also is known as a recognized gain or loss. Form 1040 x A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. Form 1040 x If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Form 1040 x Example. Form 1040 x You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. Form 1040 x You must report a taxable gain of $4,000 for the land. Form 1040 x The tractor has a basis of $6,000. Form 1040 x Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. Form 1040 x Similar or related property. Form 1040 x   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. Form 1040 x However, make the following adjustments. Form 1040 x Decrease the basis by the following amounts. Form 1040 x Any loss you recognize on the involuntary conversion. Form 1040 x Any money you receive that you do not spend on similar property. Form 1040 x Increase the basis by the following amounts. Form 1040 x Any gain you recognize on the involuntary conversion. Form 1040 x Any cost of acquiring the replacement property. Form 1040 x Money or property not similar or related. Form 1040 x   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. Form 1040 x Allocating the basis. Form 1040 x   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Form 1040 x Basis for depreciation. Form 1040 x   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Form 1040 x For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Form 1040 x For more information about involuntary conversions, see chapter 11. Form 1040 x Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Form 1040 x A nontaxable gain or loss also is known as an unrecognized gain or loss. Form 1040 x If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Form 1040 x Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Form 1040 x For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Form 1040 x There must also be an exchange of like-kind property. Form 1040 x For more information, see Like-Kind Exchanges in  chapter 8. Form 1040 x The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. Form 1040 x Example 1. Form 1040 x You traded a truck you used in your farming business for a new smaller truck to use in farming. Form 1040 x The adjusted basis of the old truck was $10,000. Form 1040 x The FMV of the new truck is $30,000. Form 1040 x Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. Form 1040 x Example 2. Form 1040 x You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). Form 1040 x You use both the field cultivator and the planter in your farming business. Form 1040 x The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. Form 1040 x   Exchange expenses generally are the closing costs that you pay. Form 1040 x They include such items as brokerage commissions, attorney fees, and deed preparation fees. Form 1040 x Add them to the basis of the like-kind property you receive. Form 1040 x Property plus cash. Form 1040 x   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. Form 1040 x Example. Form 1040 x You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Form 1040 x Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). Form 1040 x Special rules for related persons. Form 1040 x   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Form 1040 x Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. Form 1040 x Each person reports it on the tax return filed for the year in which the later disposition occurred. Form 1040 x If this rule applies, the basis of the property received in the original exchange will be its FMV. Form 1040 x For more information, see chapter 8. Form 1040 x Exchange of business property. Form 1040 x   Exchanging the property of one business for the property of another business generally is a multiple property exchange. Form 1040 x For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Form 1040 x Basis for depreciation. Form 1040 x   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. Form 1040 x For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Form 1040 x Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Form 1040 x The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. Form 1040 x Decrease the basis by the following amounts. Form 1040 x Any money you receive. Form 1040 x Any loss you recognize on the exchange. Form 1040 x Increase the basis by the following amounts. Form 1040 x Any additional costs you incur. Form 1040 x Any gain you recognize on the exchange. Form 1040 x If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Form 1040 x Example 1. Form 1040 x You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. Form 1040 x You realize a gain of $40,000. Form 1040 x This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Form 1040 x Include your gain in income (recognize gain) only to the extent of the cash received. Form 1040 x Your basis in the land you received is figured as follows. Form 1040 x Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. Form 1040 x You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. Form 1040 x You realize a gain of $7,250. Form 1040 x This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). Form 1040 x You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Form 1040 x Your basis in the truck you received is figured as follows. Form 1040 x Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. Form 1040 x   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Form 1040 x The rest is the basis of the like-kind property. Form 1040 x Example. Form 1040 x You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. Form 1040 x You also received $1,000 cash and a truck that had an FMV of $3,000. Form 1040 x The truck is unlike property. Form 1040 x You realized a gain of $1,500. Form 1040 x This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). Form 1040 x You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Form 1040 x Your basis in the properties you received is figured as follows. Form 1040 x Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). Form 1040 x This is the truck's FMV. Form 1040 x The rest ($12,500) is the basis of the tractor. Form 1040 x Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Form 1040 x Example. Form 1040 x You used a tractor on your farm for 3 years. Form 1040 x Its adjusted basis is $22,000 and its FMV is $40,000. Form 1040 x You are interested in a new tractor, which sells for $60,000. Form 1040 x Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. Form 1040 x Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). Form 1040 x However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. Form 1040 x Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). Form 1040 x Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. Form 1040 x Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. Form 1040 x You also must know its FMV at the time it was given to you and any gift tax paid on it. Form 1040 x FMV equal to or greater than donor's adjusted basis. Form 1040 x   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. Form 1040 x Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Form 1040 x   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Form 1040 x See Adjusted Basis , earlier. Form 1040 x   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Form 1040 x Figure the increase by multiplying the gift tax paid by the following fraction. Form 1040 x Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Form 1040 x The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Form 1040 x Example. Form 1040 x In 2013, you received a gift of property from your mother that had an FMV of $50,000. Form 1040 x Her adjusted basis was $20,000. Form 1040 x The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Form 1040 x She paid a gift tax of $7,320. Form 1040 x Your basis, $26,076, is figured as follows. Form 1040 x Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Form 1040 x 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Form 1040 x If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Form 1040 x However, your basis cannot exceed the FMV of the gift when it was given to you. Form 1040 x FMV less than donor's adjusted basis. Form 1040 x   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Form 1040 x Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Form 1040 x Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Form 1040 x (See Adjusted Basis , earlier. Form 1040 x )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. Form 1040 x Example. Form 1040 x You received farmland as a gift from your parents when they retired from farming. Form 1040 x At the time of the gift, the land had an FMV of $80,000. Form 1040 x Your parents' adjusted basis was $100,000. Form 1040 x After you received the land, no events occurred that would increase or decrease your basis. Form 1040 x If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. Form 1040 x If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. Form 1040 x If the sales price is between $80,000 and $100,000, you have neither gain nor loss. Form 1040 x For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. Form 1040 x If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. Form 1040 x Business property. Form 1040 x   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Form 1040 x Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Form 1040 x The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. Form 1040 x However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. Form 1040 x The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Form 1040 x For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. Form 1040 x Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Form 1040 x If a federal estate return is filed, you can use its appraised value. Form 1040 x The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. Form 1040 x For information on the alternate valuation, see the Instructions for Form 706. Form 1040 x The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. Form 1040 x If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Form 1040 x Special-use valuation method. Form 1040 x   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. Form 1040 x If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. Form 1040 x If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. Form 1040 x The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Form 1040 x   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Form 1040 x Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. Form 1040 x Figure all FMVs without regard to the special-use valuation. Form 1040 x   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. Form 1040 x This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. Form 1040 x The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. Form 1040 x   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Form 1040 x To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. Form 1040 x If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Form 1040 x The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. Form 1040 x   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. Form 1040 x   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. Form 1040 x Property inherited from a decedent who died in 2010. Form 1040 x   If you inherited property from a decedent who died in 2010, different rules may apply. Form 1040 x See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. Form 1040 x Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. Form 1040 x Partner's basis. Form 1040 x   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. Form 1040 x However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Form 1040 x For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. Form 1040 x Shareholder's basis. Form 1040 x   The basis of property distributed by a corporation to a shareholder is its fair market value. Form 1040 x For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. Form 1040 x Prev  Up  Next   Home   More Online Publications
Print - Click this link to Print this page

Tax Information for Members of the Military

Special EITC Rules
Special rules apply for calculating Earned Income Tax Credit or EITC for members of the military, ministers or members of the clergy.

Tax Information for Members of the U.S. Armed Forces
Members of the U.S. Armed Forces, especially those serving in combat zones, face some special tax situations and are entitled to some special tax benefits.

Special Tax Considerations for Veterans
Special tax considerations for disabled veterans occasionally result in a need for amended returns

2013 Publ3 (PDF)
Armed Forces' Tax Guide

Employers with Employees in a Combat Zone
FAQs for employers whose workers deploy to a combat zone

Extension of Deadlines — Combat Zone Service
Extension of deadlines for combat zone service

Retirement Plans FAQs regarding USERRA and SSCRA
Insights into the re-employment of veterans and the restoration of retirement plan benefits, as affected by the Uniformed Services and Reemployment Rights Act (USERRA) and the Veterans and Sailors Civil Relief Act (SSCRA).

Miscellaneous Provisions — Combat Zone Service
Miscellaneous provisions related to combat zone service

1040 Central
1040 Central has been updated for the last few weeks of Filing Season 2014.

Page Last Reviewed or Updated: 27-Mar-2014

The Form 1040 X

Form 1040 x Publication 15-B - Main Content Table of Contents 1. Form 1040 x Fringe Benefit OverviewAre Fringe Benefits Taxable? Cafeteria Plans Simple Cafeteria Plans 2. Form 1040 x Fringe Benefit Exclusion RulesAccident and Health Benefits Achievement Awards Adoption Assistance Athletic Facilities De Minimis (Minimal) Benefits Dependent Care Assistance Educational Assistance Employee Discounts Employee Stock Options Employer-Provided Cell Phones Group-Term Life Insurance Coverage Health Savings Accounts Lodging on Your Business Premises Meals Moving Expense Reimbursements No-Additional-Cost Services Retirement Planning Services Transportation (Commuting) Benefits Tuition Reduction Working Condition Benefits 3. Form 1040 x Fringe Benefit Valuation RulesGeneral Valuation Rule Cents-Per-Mile Rule Commuting Rule Lease Value Rule Unsafe Conditions Commuting Rule 4. Form 1040 x Rules for Withholding, Depositing, and ReportingTransfer of property. Form 1040 x Amount of deposit. Form 1040 x Limitation. Form 1040 x Conformity rules. Form 1040 x Election not to withhold income tax. Form 1040 x How To Get Tax Help 1. Form 1040 x Fringe Benefit Overview A fringe benefit is a form of pay for the performance of services. Form 1040 x For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work. Form 1040 x Performance of services. Form 1040 x   A person who performs services for you does not have to be your employee. Form 1040 x A person may perform services for you as an independent contractor, partner, or director. Form 1040 x Also, for fringe benefit purposes, treat a person who agrees not to perform services (such as under a covenant not to compete) as performing services. Form 1040 x Provider of benefit. Form 1040 x   You are the provider of a fringe benefit if it is provided for services performed for you. Form 1040 x You are considered the provider of a fringe benefit even if a third party, such as your client or customer, provides the benefit to your employee for services the employee performs for you. Form 1040 x For example, if, in exchange for goods or services, your customer provides day care services as a fringe benefit to your employees for services they provide for you as their employer, then you are the provider of this fringe benefit even though the customer is actually providing the day care. Form 1040 x Recipient of benefit. Form 1040 x   The person who performs services for you is considered the recipient of a fringe benefit provided for those services. Form 1040 x That person may be considered the recipient even if the benefit is provided to someone who did not perform services for you. Form 1040 x For example, your employee may be the recipient of a fringe benefit you provide to a member of the employee's family. Form 1040 x Are Fringe Benefits Taxable? Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. Form 1040 x Section 2 discusses the exclusions that apply to certain fringe benefits. Form 1040 x Any benefit not excluded under the rules discussed in section 2 is taxable. Form 1040 x Including taxable benefits in pay. Form 1040 x   You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts. Form 1040 x Any amount the law excludes from pay. Form 1040 x Any amount the recipient paid for the benefit. Form 1040 x The rules used to determine the value of a fringe benefit are discussed in section 3. Form 1040 x   If the recipient of a taxable fringe benefit is your employee, the benefit is subject to employment taxes and must be reported on Form W-2, Wage and Tax Statement. Form 1040 x However, you can use special rules to withhold, deposit, and report the employment taxes. Form 1040 x These rules are discussed in section 4. Form 1040 x   If the recipient of a taxable fringe benefit is not your employee, the benefit is not subject to employment taxes. Form 1040 x However, you may have to report the benefit on one of the following information returns. Form 1040 x If the recipient receives the benefit as: Use: An independent contractor Form 1099-MISC, Miscellaneous Income A partner Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Form 1040 x For more information, see the instructions for the forms listed above. Form 1040 x Cafeteria Plans A cafeteria plan, including a flexible spending arrangement, is a written plan that allows your employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages. Form 1040 x If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not make the qualified benefit taxable. Form 1040 x Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. Form 1040 x However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Form 1040 x Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay. Form 1040 x Qualified benefits. Form 1040 x   A cafeteria plan can include the following benefits discussed in section 2. Form 1040 x Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance). Form 1040 x Adoption assistance. Form 1040 x Dependent care assistance. Form 1040 x Group-term life insurance coverage (including costs that cannot be excluded from wages). Form 1040 x Health savings accounts (HSAs). Form 1040 x Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services. Form 1040 x Benefits not allowed. Form 1040 x   A cafeteria plan cannot include the following benefits discussed in section 2. Form 1040 x Archer MSAs. Form 1040 x See Accident and Health Benefits in section 2. Form 1040 x Athletic facilities. Form 1040 x De minimis (minimal) benefits. Form 1040 x Educational assistance. Form 1040 x Employee discounts. Form 1040 x Employer-provided cell phones. Form 1040 x Lodging on your business premises. Form 1040 x Meals. Form 1040 x Moving expense reimbursements. Form 1040 x No-additional-cost services. Form 1040 x Transportation (commuting) benefits. Form 1040 x Tuition reduction. Form 1040 x Working condition benefits. Form 1040 x It also cannot include scholarships or fellowships (discussed in Publication 970, Tax Benefits for Education). Form 1040 x $2,500 limit on a health flexible spending arrangement (FSA). Form 1040 x   For plan years beginning after December 31, 2012, a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $2,500. Form 1040 x For plan years beginning after December 31, 2013, the limit is unchanged at $2,500. Form 1040 x   A cafeteria plan offering a health FSA must be amended to specify the $2,500 limit (or any lower limit set by the employer). Form 1040 x While cafeteria plans generally must be amended on a prospective basis, an amendment that is adopted on or before December 31, 2014, may be made effective retroactively, provided that in operation the cafeteria plan meets the limit for plan years beginning after December 31, 2012. Form 1040 x A cafeteria plan that does not limit health FSA contributions to the dollar limit is not a cafeteria plan and all benefits offered under the plan are includible in the employee's gross income. Form 1040 x   For more information, see Notice 2012-40, 2012-26 I. Form 1040 x R. Form 1040 x B. Form 1040 x 1046, available at www. Form 1040 x irs. Form 1040 x gov/irb/2012-26_IRB/ar09. Form 1040 x html. Form 1040 x Employee. Form 1040 x   For these plans, treat the following individuals as employees. Form 1040 x A current common-law employee. Form 1040 x See section 2 in Publication 15 (Circular E) for more information. Form 1040 x A full-time life insurance agent who is a current statutory employee. Form 1040 x A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Form 1040 x Exception for S corporation shareholders. Form 1040 x   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Form 1040 x A 2% shareholder for this purpose is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Form 1040 x Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Form 1040 x Plans that favor highly compensated employees. Form 1040 x   If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. Form 1040 x A plan you maintain under a collective bargaining agreement does not favor highly compensated employees. Form 1040 x   A highly compensated employee for this purpose is any of the following employees. Form 1040 x An officer. Form 1040 x A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock. Form 1040 x An employee who is highly compensated based on the facts and circumstances. Form 1040 x A spouse or dependent of a person described in (1), (2), or (3). Form 1040 x Plans that favor key employees. Form 1040 x   If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. Form 1040 x A plan favors key employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key employees. Form 1040 x However, a plan you maintain under a collective bargaining agreement does not favor key employees. Form 1040 x   A key employee during 2014 is generally an employee who is either of the following. Form 1040 x An officer having annual pay of more than $170,000. Form 1040 x An employee who for 2014 is either of the following. Form 1040 x A 5% owner of your business. Form 1040 x A 1% owner of your business whose annual pay was more than $150,000. Form 1040 x Simple Cafeteria Plans Eligible employers meeting contribution requirements and eligibility and participation requirements can establish a simple cafeteria plan. Form 1040 x Simple cafeteria plans are treated as meeting the nondiscrimination requirements of a cafeteria plan and certain benefits under a cafeteria plan. Form 1040 x Eligible employer. Form 1040 x   You are an eligible employer if you employ an average of 100 or fewer employees during either of the 2 preceding years. Form 1040 x If your business was not in existence throughout the preceding year, you are eligible if you reasonably expect to employ an average of 100 or fewer employees in the current year. Form 1040 x If you establish a simple cafeteria plan in a year that you employ an average of 100 or fewer employees, you are considered an eligible employer for any subsequent year as long as you do not employ an average of 200 or more employees in a subsequent year. Form 1040 x Eligibility and participation requirements. Form 1040 x   These requirements are met if all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate and each employee eligible to participate in the plan may elect any benefit available under the plan. Form 1040 x You may elect to exclude from the plan employees who: Are under age 21 before the close of the plan year, Have less than 1 year of service with you as of any day during the plan year, Are covered under a collective bargaining agreement, or Are nonresident aliens working outside the United States whose income did not come from a U. Form 1040 x S. Form 1040 x source. Form 1040 x Contribution requirements. Form 1040 x   You must make a contribution to provide qualified benefits on behalf of each qualified employee in an amount equal to: A uniform percentage (not less than 2%) of the employee’s compensation for the plan year, or An amount which is at least 6% of the employee’s compensation for the plan year or twice the amount of the salary reduction contributions of each qualified employee, whichever is less. Form 1040 x If the contribution requirements are met using option (2), the rate of contribution to any salary reduction contribution of a highly compensated or key employee can not be greater than the rate of contribution to any other employee. Form 1040 x More information. Form 1040 x   For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations. Form 1040 x 2. Form 1040 x Fringe Benefit Exclusion Rules This section discusses the exclusion rules that apply to fringe benefits. Form 1040 x These rules exclude all or part of the value of certain benefits from the recipient's pay. Form 1040 x The excluded benefits are not subject to federal income tax withholding. Form 1040 x Also, in most cases, they are not subject to social security, Medicare, or federal unemployment (FUTA) tax and are not reported on Form W-2. Form 1040 x This section discusses the exclusion rules for the following fringe benefits. Form 1040 x Accident and health benefits. Form 1040 x Achievement awards. Form 1040 x Adoption assistance. Form 1040 x Athletic facilities. Form 1040 x De minimis (minimal) benefits. Form 1040 x Dependent care assistance. Form 1040 x Educational assistance. Form 1040 x Employee discounts. Form 1040 x Employee stock options. Form 1040 x Employer-provided cell phones. Form 1040 x Group-term life insurance coverage. Form 1040 x Health savings accounts (HSAs). Form 1040 x Lodging on your business premises. Form 1040 x Meals. Form 1040 x Moving expense reimbursements. Form 1040 x No-additional-cost services. Form 1040 x Retirement planning services. Form 1040 x Transportation (commuting) benefits. Form 1040 x Tuition reduction. Form 1040 x Working condition benefits. Form 1040 x See Table 2-1, later, for an overview of the employment tax treatment of these benefits. Form 1040 x Table 2-1. Form 1040 x Special Rules for Various Types of Fringe Benefits (For more information, see the full discussion in this section. Form 1040 x ) Treatment Under Employment Taxes Type of Fringe Benefit Income Tax Withholding Social Security and Medicare (including Additional Medicare Tax when wages are paid in excess of $200,000) Federal Unemployment (FUTA) Accident and health benefits Exempt1,2, except for long-term care benefits provided through a flexible spending or similar arrangement. Form 1040 x Exempt, except for certain payments to S corporation employees who are 2% shareholders. Form 1040 x Exempt Achievement awards Exempt1 up to $1,600 for qualified plan awards ($400 for nonqualified awards). Form 1040 x Adoption assistance Exempt1,3 Taxable Taxable Athletic facilities Exempt if substantially all use during the calendar year is by employees, their spouses, and their dependent children and the facility is operated by the employer on premises owned or leased by the employer. Form 1040 x De minimis (minimal) benefits Exempt Exempt Exempt Dependent care assistance Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return). Form 1040 x Educational assistance Exempt up to $5,250 of benefits each year. Form 1040 x (See Educational Assistance , later in this section. Form 1040 x ) Employee discounts Exempt3 up to certain limits. Form 1040 x (See Employee Discounts , later in this section. Form 1040 x ) Employee stock options See Employee Stock Options , later in this section. Form 1040 x Employer-provided cell phones Exempt if provided primarily for noncompensatory business purposes. Form 1040 x Group-term life insurance coverage Exempt Exempt1,4, 7 up to cost of $50,000 of coverage. Form 1040 x (Special rules apply to former employees. Form 1040 x ) Exempt Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits. Form 1040 x (See Health Savings Accounts , later in this section. Form 1040 x ) Lodging on your business premises Exempt1 if furnished for your convenience as a condition of employment. Form 1040 x Meals Exempt if furnished on your business premises for your convenience. Form 1040 x Exempt if de minimis. Form 1040 x Moving expense reimbursements Exempt1 if expenses would be deductible if the employee had paid them. Form 1040 x No-additional-cost services Exempt3 Exempt3 Exempt3 Retirement planning services Exempt5 Exempt5 Exempt5 Transportation (commuting) benefits Exempt1 up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($130), qualified parking ($250), or qualified bicycle commuting reimbursement6 ($20). Form 1040 x (See Transportation (Commuting) Benefits , later in this section. Form 1040 x ) Exempt if de minimis. Form 1040 x Tuition reduction Exempt3 if for undergraduate education (or graduate education if the employee performs teaching or research activities). Form 1040 x Working condition benefits Exempt Exempt Exempt 1 Exemption does not apply to S corporation employees who are 2% shareholders. Form 1040 x 2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees. Form 1040 x 3 Exemption does not apply to certain highly compensated employees under a program that favors those employees. Form 1040 x 4 Exemption does not apply to certain key employees under a plan that favors those employees. Form 1040 x 5 Exemption does not apply to services for tax preparation, accounting, legal, or brokerage services. Form 1040 x 6 If the employee receives a qualified bicycle commuting reimbursement in a qualified bicycle commuting month, the employee cannot receive commuter highway vehicle, transit pass, or qualified parking benefits in that same month. Form 1040 x 7 You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. Form 1040 x Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Form 1040 x Also, show it in box 12 with code “C. Form 1040 x ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. Form 1040 x Accident and Health Benefits This exclusion applies to contributions you make to an accident or health plan for an employee, including the following. Form 1040 x Contributions to the cost of accident or health insurance including qualified long-term care insurance. Form 1040 x Contributions to a separate trust or fund that directly or through insurance provides accident or health benefits. Form 1040 x Contributions to Archer MSAs or health savings accounts (discussed in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans). Form 1040 x This exclusion also applies to payments you directly or indirectly make to an employee under an accident or health plan for employees that are either of the following. Form 1040 x Payments or reimbursements of medical expenses. Form 1040 x Payments for specific injuries or illnesses (such as the loss of the use of an arm or leg). Form 1040 x The payments must be figured without regard to any period of absence from work. Form 1040 x Accident or health plan. Form 1040 x   This is an arrangement that provides benefits for your employees, their spouses, their dependents, and their children (under age 27) in the event of personal injury or sickness. Form 1040 x The plan may be insured or noninsured and does not need to be in writing. Form 1040 x Employee. Form 1040 x   For this exclusion, treat the following individuals as employees. Form 1040 x A current common-law employee. Form 1040 x A full-time life insurance agent who is a current statutory employee. Form 1040 x A retired employee. Form 1040 x A former employee you maintain coverage for based on the employment relationship. Form 1040 x A widow or widower of an individual who died while an employee. Form 1040 x A widow or widower of a retired employee. Form 1040 x For the exclusion of contributions to an accident or health plan, a leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Form 1040 x Special rule for certain government plans. Form 1040 x   For certain government accident and health plans, payments to a deceased plan participant's beneficiary may qualify for the exclusion from gross income if the other requirements for exclusion are met. Form 1040 x See section 105(j) for details. Form 1040 x Exception for S corporation shareholders. Form 1040 x   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Form 1040 x A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Form 1040 x Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Form 1040 x Exclusion from wages. Form 1040 x   You can generally exclude the value of accident or health benefits you provide to an employee from the employee's wages. Form 1040 x Exception for certain long-term care benefits. Form 1040 x   You cannot exclude contributions to the cost of long-term care insurance from an employee's wages subject to federal income tax withholding if the coverage is provided through a flexible spending or similar arrangement. Form 1040 x This is a benefit program that reimburses specified expenses up to a maximum amount that is reasonably available to the employee and is less than five times the total cost of the insurance. Form 1040 x However, you can exclude these contributions from the employee's wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. Form 1040 x S corporation shareholders. Form 1040 x   Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee's wages subject to federal income tax withholding. Form 1040 x However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. Form 1040 x Exception for highly compensated employees. Form 1040 x   If your plan is a self-insured medical reimbursement plan that favors highly compensated employees, you must include all or part of the amounts you pay to these employees in their wages subject to federal income tax withholding. Form 1040 x However, you can exclude these amounts (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. Form 1040 x   A self-insured plan is a plan that reimburses your employees for medical expenses not covered by an accident or health insurance policy. Form 1040 x   A highly compensated employee for this exception is any of the following individuals. Form 1040 x One of the five highest paid officers. Form 1040 x An employee who owns (directly or indirectly) more than 10% in value of the employer's stock. Form 1040 x An employee who is among the highest paid 25% of all employees (other than those who can be excluded from the plan). Form 1040 x   For more information on this exception, see section 105(h) of the Internal Revenue Code and its regulations. Form 1040 x COBRA premiums. Form 1040 x   The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a current or former employee under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA). Form 1040 x The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary. Form 1040 x Achievement Awards This exclusion applies to the value of any tangible personal property you give to an employee as an award for either length of service or safety achievement. Form 1040 x The exclusion does not apply to awards of cash, cash equivalents, gift certificates, or other intangible property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, and other securities. Form 1040 x The award must meet the requirements for employee achievement awards discussed in chapter 2 of Publication 535, Business Expenses. Form 1040 x Employee. Form 1040 x   For this exclusion, treat the following individuals as employees. Form 1040 x A current employee. Form 1040 x A former common-law employee you maintain coverage for in consideration of or based on an agreement relating to prior service as an employee. Form 1040 x A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Form 1040 x Exception for S corporation shareholders. Form 1040 x   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Form 1040 x A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Form 1040 x Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Form 1040 x Exclusion from wages. Form 1040 x   You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their cost is not more than the amount you can deduct as a business expense for the year. Form 1040 x The excludable annual amount is $1,600 ($400 for awards that are not “qualified plan awards”). Form 1040 x See chapter 2 of Publication 535 for more information about the limit on deductions for employee achievement awards. Form 1040 x    To determine for 2014 whether an achievement award is a “qualified plan award” under the deduction rules described in Publication 535, treat any employee who received more than $115,000 in pay for 2013 as a highly compensated employee. Form 1040 x   If the cost of awards given to an employee is more than your allowable deduction, include in the employee's wages the larger of the following amounts. Form 1040 x The part of the cost that is more than your allowable deduction (up to the value of the awards). Form 1040 x The amount by which the value of the awards exceeds your allowable deduction. Form 1040 x Exclude the remaining value of the awards from the employee's wages. Form 1040 x Adoption Assistance An adoption assistance program is a separate written plan of an employer that meets all of the following requirements. Form 1040 x It benefits employees who qualify under rules set up by you, which do not favor highly compensated employees or their dependents. Form 1040 x To determine whether your plan meets this test, do not consider employees excluded from your plan who are covered by a collective bargaining agreement, if there is evidence that adoption assistance was a subject of good-faith bargaining. Form 1040 x It does not pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents). Form 1040 x A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. Form 1040 x You give reasonable notice of the plan to eligible employees. Form 1040 x Employees provide reasonable substantiation that payments or reimbursements are for qualifying expenses. Form 1040 x For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Form 1040 x The employee was a 5% owner at any time during the year or the preceding year. Form 1040 x The employee received more than $115,000 in pay for the preceding year. Form 1040 x You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Form 1040 x You must exclude all payments or reimbursements you make under an adoption assistance program for an employee's qualified adoption expenses from the employee's wages subject to federal income tax withholding. Form 1040 x However, you cannot exclude these payments from wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. Form 1040 x For more information, see the Instructions for Form 8839, Qualified Adoption Expenses. Form 1040 x You must report all qualifying adoption expenses you paid or reimbursed under your adoption assistance program for each employee for the year in box 12 of the employee's Form W-2. Form 1040 x Use code “T” to identify this amount. Form 1040 x Exception for S corporation shareholders. Form 1040 x   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. Form 1040 x A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Form 1040 x Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, including using the benefit as a reduction in distributions to the 2% shareholder. Form 1040 x Athletic Facilities You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. Form 1040 x For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, has not attained the age of 25. Form 1040 x On-premises facility. Form 1040 x   The athletic facility must be located on premises you own or lease. Form 1040 x It does not have to be located on your business premises. Form 1040 x However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort. Form 1040 x Employee. Form 1040 x   For this exclusion, treat the following individuals as employees. Form 1040 x A current employee. Form 1040 x A former employee who retired or left on disability. Form 1040 x A widow or widower of an individual who died while an employee. Form 1040 x A widow or widower of a former employee who retired or left on disability. Form 1040 x A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Form 1040 x A partner who performs services for a partnership. Form 1040 x De Minimis (Minimal) Benefits You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. Form 1040 x A de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable. Form 1040 x Cash and cash equivalent fringe benefits (for example, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit, except for occasional meal money or transportation fare. Form 1040 x Examples of de minimis benefits include the following. Form 1040 x Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes. Form 1040 x See Employer-Provided Cell Phones , later in this section, for details. Form 1040 x Occasional personal use of a company copying machine if you sufficiently control its use so that at least 85% of its use is for business purposes. Form 1040 x Holiday gifts, other than cash, with a low fair market value. Form 1040 x Group-term life insurance payable on the death of an employee's spouse or dependent if the face amount is not more than $2,000. Form 1040 x Meals. Form 1040 x See Meals , later in this section, for details. Form 1040 x Occasional parties or picnics for employees and their guests. Form 1040 x Occasional tickets for theater or sporting events. Form 1040 x Transportation fare. Form 1040 x See Transportation (Commuting) Benefits , later in this section, for details. Form 1040 x Employee. Form 1040 x   For this exclusion, treat any recipient of a de minimis benefit as an employee. Form 1040 x Dependent Care Assistance This exclusion applies to household and dependent care services you directly or indirectly pay for or provide to an employee under a dependent care assistance program that covers only your employees. Form 1040 x The services must be for a qualifying person's care and must be provided to allow the employee to work. Form 1040 x These requirements are basically the same as the tests the employee would have to meet to claim the dependent care credit if the employee paid for the services. Form 1040 x For more information, see Qualifying Person Test and Work-Related Expense Test in Publication 503, Child and Dependent Care Expenses. Form 1040 x Employee. Form 1040 x   For this exclusion, treat the following individuals as employees. Form 1040 x A current employee. Form 1040 x A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Form 1040 x Yourself (if you are a sole proprietor). Form 1040 x A partner who performs services for a partnership. Form 1040 x Exclusion from wages. Form 1040 x   You can exclude the value of benefits you provide to an employee under a dependent care assistance program from the employee's wages if you reasonably believe that the employee can exclude the benefits from gross income. Form 1040 x   An employee can generally exclude from gross income up to $5,000 of benefits received under a dependent care assistance program each year. Form 1040 x This limit is reduced to $2,500 for married employees filing separate returns. Form 1040 x   However, the exclusion cannot be more than the smaller of the earned income of either the employee or employee's spouse. Form 1040 x Special rules apply to determine the earned income of a spouse who is either a student or not able to care for himself or herself. Form 1040 x For more information on the earned income limit, see Publication 503. Form 1040 x Exception for highly compensated employees. Form 1040 x   You cannot exclude dependent care assistance from the wages of a highly compensated employee unless the benefits provided under the program do not favor highly compensated employees and the program meets the requirements described in section 129(d) of the Internal Revenue Code. Form 1040 x   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Form 1040 x The employee was a 5% owner at any time during the year or the preceding year. Form 1040 x The employee received more than $115,000 in pay for the preceding year. Form 1040 x You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Form 1040 x Form W-2. Form 1040 x   Report the value of all dependent care assistance you provide to an employee under a dependent care assistance program in box 10 of the employee's Form W-2. Form 1040 x Include any amounts you cannot exclude from the employee's wages in boxes 1, 3, and 5. Form 1040 x Report both the nontaxable portion of assistance (up to $5,000) and any assistance above the amount that is non-taxable to the employee. Form 1040 x Example. Form 1040 x   Company A provides a dependent care assistance flexible spending arrangement to its employees through a cafeteria plan. Form 1040 x In addition, it provides occasional on-site dependent care to its employees at no cost. Form 1040 x Emily, an employee of company A, had $4,500 deducted from her pay for the dependent care flexible spending arrangement. Form 1040 x In addition, Emily used the on-site dependent care several times. Form 1040 x The fair market value of the on-site care was $700. Form 1040 x Emily's Form W-2 should report $5,200 of dependent care assistance in box 10 ($4,500 flexible spending arrangement plus $700 on-site dependent care). Form 1040 x Boxes 1, 3, and 5 should include $200 (the amount in excess of the nontaxable assistance), and applicable taxes should be withheld on that amount. Form 1040 x Educational Assistance This exclusion applies to educational assistance you provide to employees under an educational assistance program. Form 1040 x The exclusion also applies to graduate level courses. Form 1040 x Educational assistance means amounts you pay or incur for your employees' education expenses. Form 1040 x These expenses generally include the cost of books, equipment, fees, supplies, and tuition. Form 1040 x However, these expenses do not include the cost of a course or other education involving sports, games, or hobbies, unless the education: Has a reasonable relationship to your business, or Is required as part of a degree program. Form 1040 x Education expenses do not include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at the end of the course. Form 1040 x Nor do they include the cost of lodging, meals, or transportation. Form 1040 x Educational assistance program. Form 1040 x   An educational assistance program is a separate written plan that provides educational assistance only to your employees. Form 1040 x The program qualifies only if all of the following tests are met. Form 1040 x The program benefits employees who qualify under rules set up by you that do not favor highly compensated employees. Form 1040 x To determine whether your program meets this test, do not consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining. Form 1040 x The program does not provide more than 5% of its benefits during the year for shareholders or owners. Form 1040 x A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. Form 1040 x The program does not allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance. Form 1040 x You give reasonable notice of the program to eligible employees. Form 1040 x Your program can cover former employees if their employment is the reason for the coverage. Form 1040 x   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Form 1040 x The employee was a 5% owner at any time during the year or the preceding year. Form 1040 x The employee received more than $115,000 in pay for the preceding year. Form 1040 x You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Form 1040 x Employee. Form 1040 x   For this exclusion, treat the following individuals as employees. Form 1040 x A current employee. Form 1040 x A former employee who retired, left on disability, or was laid off. Form 1040 x A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Form 1040 x Yourself (if you are a sole proprietor). Form 1040 x A partner who performs services for a partnership. Form 1040 x Exclusion from wages. Form 1040 x   You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance program from the employee's wages each year. Form 1040 x Assistance over $5,250. Form 1040 x   If you do not have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits. Form 1040 x Working condition benefits may be excluded from wages. Form 1040 x Property or a service provided is a working condition benefit to the extent that if the employee paid for it, the amount paid would have been deductible as a business or depreciation expense. Form 1040 x See Working Condition Benefits , later, in this section. Form 1040 x Employee Discounts This exclusion applies to a price reduction you give an employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. Form 1040 x However, it does not apply to discounts on real property or discounts on personal property of a kind commonly held for investment (such as stocks or bonds). Form 1040 x Employee. Form 1040 x   For this exclusion, treat the following individuals as employees. Form 1040 x A current employee. Form 1040 x A former employee who retired or left on disability. Form 1040 x A widow or widower of an individual who died while an employee. Form 1040 x A widow or widower of an employee who retired or left on disability. Form 1040 x A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Form 1040 x A partner who performs services for a partnership. Form 1040 x Exclusion from wages. Form 1040 x   You can generally exclude the value of an employee discount you provide an employee from the employee's wages, up to the following limits. Form 1040 x For a discount on services, 20% of the price you charge nonemployee customers for the service. Form 1040 x For a discount on merchandise or other property, your gross profit percentage times the price you charge nonemployee customers for the property. Form 1040 x   Determine your gross profit percentage in the line of business based on all property you offer to customers (including employee customers) and your experience during the tax year immediately before the tax year in which the discount is available. Form 1040 x To figure your gross profit percentage, subtract the total cost of the property from the total sales price of the property and divide the result by the total sales price of the property. Form 1040 x Exception for highly compensated employees. Form 1040 x   You cannot exclude from the wages of a highly compensated employee any part of the value of a discount that is not available on the same terms to one of the following groups. Form 1040 x All of your employees. Form 1040 x A group of employees defined under a reasonable classification you set up that does not favor highly compensated employees. Form 1040 x   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Form 1040 x The employee was a 5% owner at any time during the year or the preceding year. Form 1040 x The employee received more than $115,000 in pay for the preceding year. Form 1040 x You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Form 1040 x Employee Stock Options There are three kinds of stock options—incentive stock options, employee stock purchase plan options, and nonstatutory (nonqualified) stock options. Form 1040 x Wages for social security, Medicare, and federal unemployment (FUTA) taxes do not include remuneration resulting from the exercise, after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or from any disposition of stock acquired by exercising such an option. Form 1040 x The IRS will not apply these taxes to an exercise before October 23, 2004, of an incentive stock option or an employee stock purchase plan option or to a disposition of stock acquired by such exercise. Form 1040 x Additionally, federal income tax withholding is not required on the income resulting from a disqualifying disposition of stock acquired by the exercise after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or on income equal to the discount portion of stock acquired by the exercise, after October 22, 2004, of an employee stock purchase plan option resulting from any disposition of the stock. Form 1040 x The IRS will not apply federal income tax withholding upon the disposition of stock acquired by the exercise, before October 23, 2004, of an incentive stock option or an employee stock purchase plan option. Form 1040 x However, the employer must report as income in box 1 of Form W-2, (a) the discount portion of stock acquired by the exercise of an employee stock purchase plan option upon disposition of the stock, and (b) the spread (between the exercise price and the fair market value of the stock at the time of exercise) upon a disqualifying disposition of stock acquired by the exercise of an incentive stock option or an employee stock purchase plan option. Form 1040 x An employer must report the excess of the fair market value of stock received upon exercise of a nonstatutory stock option over the amount paid for the stock option on Form W-2 in boxes 1, 3 (up to the social security wage base), 5, and in box 12 using the code “V. Form 1040 x ” See Regulations section 1. Form 1040 x 83-7. Form 1040 x An employee who transfers his or her interest in nonstatutory stock options to the employee's former spouse incident to a divorce is not required to include an amount in gross income upon the transfer. Form 1040 x The former spouse, rather than the employee, is required to include an amount in gross income when the former spouse exercises the stock options. Form 1040 x See Revenue Ruling 2002-22 and Revenue Ruling 2004-60 for details. Form 1040 x You can find Revenue Ruling 2002-22 on page 849 of Internal Revenue Bulletin 2002-19 at www. Form 1040 x irs. Form 1040 x gov/pub/irs-irbs/irb02-19. Form 1040 x pdf. Form 1040 x See Revenue Ruling 2004-60, 2004-24 I. Form 1040 x R. Form 1040 x B. Form 1040 x 1051, available at www. Form 1040 x irs. Form 1040 x gov/irb/2004-24_IRB/ar13. Form 1040 x html. Form 1040 x For more information about employee stock options, see sections 421, 422, and 423 of the Internal Revenue Code and their related regulations. Form 1040 x Employer-Provided Cell Phones The value of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. Form 1040 x Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis fringe benefit. Form 1040 x For the rules relating to these types of benefits, see De Minimis (Minimal) Benefits , earlier in this section, and Working Condition Benefits , later in this section. Form 1040 x Noncompensatory business purposes. Form 1040 x   You provide a cell phone primarily for noncompensatory business purposes if there are substantial business reasons for providing the cell phone. Form 1040 x Examples of substantial business reasons include the employer's: Need to contact the employee at all times for work-related emergencies, Requirement that the employee be available to speak with clients at times when the employee is away from the office, and Need to speak with clients located in other time zones at times outside the employee's normal workday. Form 1040 x Cell phones provided to promote goodwill, boost morale, or attract prospective employees. Form 1040 x   You cannot exclude from an employee's wages the value of a cell phone provided to promote goodwill of an employee, to attract a prospective employee, or as a means of providing additional compensation to an employee. Form 1040 x Additional information. Form 1040 x   For additional information on the tax treatment of employer-provided cell phones, see Notice 2011-72, 2011-38 I. Form 1040 x R. Form 1040 x B. Form 1040 x 407, available at  www. Form 1040 x irs. Form 1040 x gov/irb/2011-38_IRB/ar07. Form 1040 x html. Form 1040 x Group-Term Life Insurance Coverage This exclusion applies to life insurance coverage that meets all the following conditions. Form 1040 x It provides a general death benefit that is not included in income. Form 1040 x You provide it to a group of employees. Form 1040 x See The 10-employee rule , later. Form 1040 x It provides an amount of insurance to each employee based on a formula that prevents individual selection. Form 1040 x This formula must use factors such as the employee's age, years of service, pay, or position. Form 1040 x You provide it under a policy you directly or indirectly carry. Form 1040 x Even if you do not pay any of the policy's cost, you are considered to carry it if you arrange for payment of its cost by your employees and charge at least one employee less than, and at least one other employee more than, the cost of his or her insurance. Form 1040 x Determine the cost of the insurance, for this purpose, as explained under Coverage over the limit , later. Form 1040 x Group-term life insurance does not include the following insurance. Form 1040 x Insurance that does not provide general death benefits, such as travel insurance or a policy providing only accidental death benefits. Form 1040 x Life insurance on the life of your employee's spouse or dependent. Form 1040 x However, you may be able to exclude the cost of this insurance from the employee's wages as a de minimis benefit. Form 1040 x See De Minimis (Minimal) Benefits , earlier in this section. Form 1040 x Insurance provided under a policy that provides a permanent benefit (an economic value that extends beyond 1 policy year, such as paid-up or cash surrender value), unless certain requirements are met. Form 1040 x See Regulations section 1. Form 1040 x 79-1 for details. Form 1040 x Employee. Form 1040 x   For this exclusion, treat the following individuals as employees. Form 1040 x A current common-law employee. Form 1040 x A full-time life insurance agent who is a current statutory employee. Form 1040 x An individual who was formerly your employee under (1) or (2). Form 1040 x A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction and control. Form 1040 x Exception for S corporation shareholders. Form 1040 x   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Form 1040 x A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Form 1040 x Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Form 1040 x The 10-employee rule. Form 1040 x   Generally, life insurance is not group-term life insurance unless you provide it to at least 10 full-time employees at some time during the year. Form 1040 x   For this rule, count employees who choose not to receive the insurance unless, to receive it, they must contribute to the cost of benefits other than the group-term life insurance. Form 1040 x For example, count an employee who could receive insurance by paying part of the cost, even if that employee chooses not to receive it. Form 1040 x However, do not count an employee who must pay part or all of the cost of permanent benefits to get insurance, unless that employee chooses to receive it. Form 1040 x A permanent benefit is an economic value extending beyond one policy year (for example, a paid-up or cash-surrender value) that is provided under a life insurance policy. Form 1040 x Exceptions. Form 1040 x   Even if you do not meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance. Form 1040 x   Under the first exception, you do not have to meet the 10-employee rule if all the following conditions are met. Form 1040 x If evidence that the employee is insurable is required, it is limited to a medical questionnaire (completed by the employee) that does not require a physical. Form 1040 x You provide the insurance to all your full-time employees or, if the insurer requires the evidence mentioned in (1), to all full-time employees who provide evidence the insurer accepts. Form 1040 x You figure the coverage based on either a uniform percentage of pay or the insurer's coverage brackets that meet certain requirements. Form 1040 x See Regulations section 1. Form 1040 x 79-1 for details. Form 1040 x   Under the second exception, you do not have to meet the 10-employee rule if all the following conditions are met. Form 1040 x You provide the insurance under a common plan covering your employees and the employees of at least one other employer who is not related to you. Form 1040 x The insurance is restricted to, but mandatory for, all your employees who belong to, or are represented by, an organization (such as a union) that carries on substantial activities besides obtaining insurance. Form 1040 x Evidence of whether an employee is insurable does not affect an employee's eligibility for insurance or the amount of insurance that employee gets. Form 1040 x   To apply either exception, do not consider employees who were denied insurance for any of the following reasons. Form 1040 x They were 65 or older. Form 1040 x They customarily work 20 hours or less a week or 5 months or less in a calendar year. Form 1040 x They have not been employed for the waiting period given in the policy. Form 1040 x This waiting period cannot be more than 6 months. Form 1040 x Exclusion from wages. Form 1040 x   You can generally exclude the cost of up to $50,000 of group-term life insurance from the wages of an insured employee. Form 1040 x You can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. Form 1040 x In addition, you do not have to withhold federal income tax or pay FUTA tax on any group-term life insurance you provide to an employee. Form 1040 x Coverage over the limit. Form 1040 x   You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. Form 1040 x Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Form 1040 x Also, show it in box 12 with code “C. Form 1040 x ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. Form 1040 x   Figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands of dollars of all insurance coverage over $50,000 (figured to the nearest $100) by the cost shown in Table 2-2. Form 1040 x For all coverage provided within the calendar year, use the employee's age on the last day of the employee's tax year. Form 1040 x You must prorate the cost from the table if less than a full month of coverage is involved. Form 1040 x Table 2-2. Form 1040 x Cost Per $1,000 of Protection For 1 Month Age Cost Under 25 $ . Form 1040 x 05 25 through 29 . Form 1040 x 06 30 through 34 . Form 1040 x 08 35 through 39 . Form 1040 x 09 40 through 44 . Form 1040 x 10 45 through 49 . Form 1040 x 15 50 through 54 . Form 1040 x 23 55 through 59 . Form 1040 x 43 60 through 64 . Form 1040 x 66 65 through 69 1. Form 1040 x 27 70 and older 2. Form 1040 x 06 You figure the total cost to include in the employee's wages by multiplying the monthly cost by the number of full months' coverage at that cost. Form 1040 x Example. Form 1040 x Tom's employer provides him with group-term life insurance coverage of $200,000. Form 1040 x Tom is 45 years old, is not a key employee, and pays $100 per year toward the cost of the insurance. Form 1040 x Tom's employer must include $170 in his wages. Form 1040 x The $200,000 of insurance coverage is reduced by $50,000. Form 1040 x The yearly cost of $150,000 of coverage is $270 ($. Form 1040 x 15 x 150 x 12), and is reduced by the $100 Tom pays for the insurance. Form 1040 x The employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. Form 1040 x The employer also enters $170 in box 12 with code “C. Form 1040 x ” Coverage for dependents. Form 1040 x   Group-term life insurance coverage paid by the employer for the spouse or dependents of an employee may be excludable from income as a de minimis fringe benefit if the face amount is not more than $2,000. Form 1040 x If the face amount is greater than $2,000, the entire cost of the dependent coverage must be included in income unless the amount over $2,000 is purchased with employee contributions on an after-tax basis. Form 1040 x The cost of the insurance is determined by using Table 2-2. Form 1040 x Former employees. Form 1040 x   When group-term life insurance over $50,000 is provided to an employee (including retirees) after his or her termination, the employee share of social security and Medicare taxes on that period of coverage is paid by the former employee with his or her tax return and is not collected by the employer. Form 1040 x You are not required to collect those taxes. Form 1040 x Use the table above to determine the amount of social security and Medicare taxes owed by the former employee for coverage provided after separation from service. Form 1040 x Report those uncollected amounts separately in box 12 of Form W-2 using codes “M” and “N. Form 1040 x ” See the General Instructions for Forms W-2 and W-3 and the Instructions for Form 941. Form 1040 x Exception for key employees. Form 1040 x   Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include the entire cost of the insurance in your key employees' wages. Form 1040 x This exception generally does not apply to church plans. Form 1040 x When figuring social security and Medicare taxes, you must also include the entire cost in the employees' wages. Form 1040 x Include the cost in boxes 1, 3, and 5 of Form W-2. Form 1040 x However, you do not have to withhold federal income tax or pay FUTA tax on the cost of any group-term life insurance you provide to an employee. Form 1040 x   For this purpose, the cost of the insurance is the greater of the following amounts. Form 1040 x The premiums you pay for the employee's insurance. Form 1040 x See Regulations section 1. Form 1040 x 79-4T(Q&A 6) for more information. Form 1040 x The cost you figure using Table 2-2. Form 1040 x   For this exclusion, a key employee during 2014 is an employee or former employee who is one of the following individuals. Form 1040 x See section 416(i) of the Internal Revenue Code for more information. Form 1040 x An officer having annual pay of more than $170,000. Form 1040 x An individual who for 2014 was either of the following. Form 1040 x A 5% owner of your business. Form 1040 x A 1% owner of your business whose annual pay was more than $150,000. Form 1040 x   A former employee who was a key employee upon retirement or separation from service is also a key employee. Form 1040 x   Your plan does not favor key employees as to participation if at least one of the following is true. Form 1040 x It benefits at least 70% of your employees. Form 1040 x At least 85% of the participating employees are not key employees. Form 1040 x It benefits employees who qualify under a set of rules you set up that do not favor key employees. Form 1040 x   Your plan meets this participation test if it is part of a cafeteria plan (discussed in section 1) and it meets the participation test for those plans. Form 1040 x   When applying this test, do not consider employees who: Have not completed 3 years of service, Are part-time or seasonal, Are nonresident aliens who receive no U. Form 1040 x S. Form 1040 x source earned income from you, or Are not included in the plan but are in a unit of employees covered by a collective bargaining agreement, if the benefits provided under the plan were the subject of good-faith bargaining between you and employee representatives. Form 1040 x   Your plan does not favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. Form 1040 x Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay. Form 1040 x S corporation shareholders. Form 1040 x   Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the cost of all group-term life insurance coverage you provide the 2% shareholder in his or her wages. Form 1040 x When figuring social security and Medicare taxes, you must also include the cost of this coverage in the 2% shareholder's wages. Form 1040 x Include the cost in boxes 1, 3, and 5 of Form W-2. Form 1040 x However, you do not have to withhold federal income tax or pay federal unemployment tax on the cost of any group-term life insurance coverage you provide to the 2% shareholder. Form 1040 x Health Savings Accounts A Health Savings Account (HSA) is an account owned by a qualified individual who is generally your employee or former employee. Form 1040 x Any contributions that you make to an HSA become the employee's property and cannot be withdrawn by you. Form 1040 x Contributions to the account are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Form 1040 x The medical expenses must not be reimbursable by insurance or other sources and their payment from HSA funds (distribution) will not give rise to a medical expense deduction on the individual's federal income tax return. Form 1040 x For more information about HSAs, visit the Department of Treasury's website at www. Form 1040 x treasury. Form 1040 x gov and enter “HSA” in the search box. Form 1040 x Eligibility. Form 1040 x   A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance except for permitted insurance listed under section 223(c)(3) or insurance for accidents, disability, dental care, vision care, or long-term care. Form 1040 x For calendar year 2014, a qualifying HDHP must have a deductible of at least $1,250 for self-only coverage or $2,500 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $6,350 for self-only coverage and $12,700 for family coverage. Form 1040 x   There are no income limits that restrict an individual's eligibility to contribute to an HSA nor is there a requirement that the account owner have earned income to make a contribution. Form 1040 x Exceptions. Form 1040 x   An individual is not a qualified individual if he or she can be claimed as a dependent on another person's tax return. Form 1040 x Also, an employee's participation in a health flexible spending arrangement (FSA) or health reimbursement arrangement (HRA) generally disqualifies the individual (and employer) from making contributions to his or her HSA. Form 1040 x However, an individual may qualify to participate in an HSA if he or she is participating in only a limited-purpose FSA or HRA or a post-deductible FSA. Form 1040 x For more information, see Other employee health plans in Publication 969. Form 1040 x Employer contributions. Form 1040 x   Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. Form 1040 x For 2014, you can contribute up to $3,300 for self-only coverage or $6,550 for family coverage to a qualified individual's HSA. Form 1040 x   The contribution amounts listed above are increased by $1,000 for a qualified individual who is age 55 or older at any time during the year. Form 1040 x For two qualified individuals who are married to each other and who each are age 55 or older at any time during the year, each spouse's contribution limit is increased by $1,000 provided each spouse has a separate HSA. Form 1040 x No contributions can be made to an individual's HSA after he or she becomes enrolled in Medicare Part A or Part B. Form 1040 x Nondiscrimination rules. Form 1040 x    Your contribution amount to an employee's HSA must be comparable for all employees who have comparable coverage during the same period. Form 1040 x Otherwise, there will be an excise tax equal to 35% of the amount you contributed to all employees' HSAs. Form 1040 x   For guidance on employer comparable contributions to HSAs under section 4980G in instances where an employee has not established an HSA by December 31 and in instances where an employer accelerates contributions for the calendar year for employees who have incurred qualified medical expenses, see Regulations section 54. Form 1040 x 4980G-4. Form 1040 x Exception. Form 1040 x   The Tax Relief and Health Care Act of 2006 allows employers to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee. Form 1040 x A highly compensated employee for 2014 is an employee who meets either of the following tests. Form 1040 x The employee was a 5% owner at any time during the year or the preceding year. Form 1040 x The employee received more than $115,000 in pay for the preceding year. Form 1040 x You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Form 1040 x Partnerships and S corporations. Form 1040 x   Partners and 2% shareholders of an S corporation are not eligible for salary reduction (pre-tax) contributions to an HSA. Form 1040 x Employer contributions to the HSA of a bona fide partner or 2% shareholder are treated as distributions or guaranteed payments as determined by the facts and circumstances. Form 1040 x Cafeteria plans. Form 1040 x   You may contribute to an employee's HSA using a cafeteria plan and your contributions are not subject to the statutory comparability rules. Form 1040 x However, cafeteria plan nondiscrimination rules still apply. Form 1040 x For example, contributions under a cafeteria plan to employee HSAs cannot be greater for higher-paid employees than they are for lower-paid employees. Form 1040 x Contributions that favor lower-paid employees are not prohibited. Form 1040 x Reporting requirements. Form 1040 x   You must report your contributions to an employee's HSA in box 12 of Form W-2 using code “W. Form 1040 x ” The trustee or custodian of the HSA, generally a bank or insurance company, reports distributions from the HSA using Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. Form 1040 x Lodging on Your Business Premises You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests. Form 1040 x It is furnished on your business premises. Form 1040 x It is furnished for your convenience. Form 1040 x The employee must accept it as a condition of employment. Form 1040 x Different tests may apply to lodging furnished by educational institutions. Form 1040 x See section 119(d) of the Internal Revenue Code for details. Form 1040 x The exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging. Form 1040 x On your business premises. Form 1040 x   For this exclusion, your business premises is generally your employee's place of work. Form 1040 x For special rules that apply to lodging furnished in a camp located in a foreign country, see section 119(c) of the Internal Revenue Code and its regulations. Form 1040 x For your convenience. Form 1040 x   Whether or not you furnish lodging for your convenience as an employer depends on all the facts and circumstances. Form 1040 x You furnish the lodging to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. Form 1040 x This is true even if a law or an employment contract provides that the lodging is furnished as pay. Form 1040 x However, a written statement that the lodging is furnished for your convenience is not sufficient. Form 1040 x Condition of employment. Form 1040 x   Lodging meets this test if you require your employees to accept the lodging because they need to live on your business premises to be able to properly perform their duties. Form 1040 x Examples include employees who must be available at all times and employees who could not perform their required duties without being furnished the lodging. Form 1040 x   It does not matter whether you must furnish the lodging as pay under the terms of an employment contract or a law fixing the terms of employment. Form 1040 x Example. Form 1040 x A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. Form 1040 x If Joan chooses to live at the hospital, the hospital cannot exclude the value of the lodging from her wages because she is not required to live at the hospital to properly perform the duties of her employment. Form 1040 x S corporation shareholders. Form 1040 x   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. Form 1040 x A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Form 1040 x Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Form 1040 x Meals This section discusses the exclusion rules that apply to de minimis meals and meals on your business premises. Form 1040 x De Minimis Meals You can exclude any occasional meal or meal money you provide to an employee if it has so little value (taking into account how frequently you provide meals to your employees) that accounting for it would be unreasonable or administratively impracticable. Form 1040 x The exclusion applies, for example, to the following items. Form 1040 x Coffee, doughnuts, or soft drinks. Form 1040 x Occasional meals or meal money provided to enable an employee to work overtime. Form 1040 x However, the exclusion does not apply to meal money figured on the basis of hours worked. Form 1040 x Occasional parties or picnics for employees and their guests. Form 1040 x This exclusion also applies to meals you provide at an employer-operated eating facility for employees if the annual revenue from the facility equals or exceeds the direct costs of the facility. Form 1040 x For this purpose, your revenue from providing a meal is considered equal to the facility's direct operating costs to provide that meal if its value can be excluded from an employee's wages as explained under Meals on Your Business Premises , later. Form 1040 x If food or beverages you furnish to employees qualify as a de minimis benefit, you can deduct their full cost. Form 1040 x The 50% limit on deductions for the cost of meals does not apply. Form 1040 x The deduction limit on meals is discussed in chapter 2 of Publication 535. Form 1040 x Employee. Form 1040 x   For this exclusion, treat any recipient of a de minimis meal as