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Free efile 1. Free efile   Definitions You Need To Know Table of Contents Other options. Free efile Exception. Free efile Certain terms used in this publication are defined below. Free efile The same term used in another publication may have a slightly different meaning. Free efile Annual additions. Free efile   Annual additions are the total of all your contributions in a year, employee contributions (not including rollovers), and forfeitures allocated to a participant's account. Free efile Annual benefits. Free efile   Annual benefits are the benefits to be paid yearly in the form of a straight life annuity (with no extra benefits) under a plan to which employees do not contribute and under which no rollover contributions are made. Free efile Business. Free efile   A business is an activity in which a profit motive is present and economic activity is involved. Free efile Service as a newspaper carrier under age 18 or as a public official is not a business. Free efile Common-law employee. Free efile   A common-law employee is any individual who, under common law, would have the status of an employee. Free efile A leased employee can also be a common-law employee. Free efile   A common-law employee is a person who performs services for an employer who has the right to control and direct the results of the work and the way in which it is done. Free efile For example, the employer: Provides the employee's tools, materials, and workplace, and Can fire the employee. Free efile   Common-law employees are not self-employed and cannot set up retirement plans for income from their work, even if that income is self-employment income for social security tax purposes. Free efile For example, common-law employees who are ministers, members of religious orders, full-time insurance salespeople, and U. Free efile S. Free efile citizens employed in the United States by foreign governments cannot set up retirement plans for their earnings from those employments, even though their earnings are treated as self-employment income. Free efile   However, an individual may be a common-law employee and a self-employed person as well. Free efile For example, an attorney can be a corporate common-law employee during regular working hours and also practice law in the evening as a self-employed person. Free efile In another example, a minister employed by a congregation for a salary is a common-law employee even though the salary is treated as self-employment income for social security tax purposes. Free efile However, fees reported on Schedule C (Form 1040), Profit or Loss From Business, for performing marriages, baptisms, and other personal services are self-employment earnings for qualified plan purposes. Free efile Compensation. Free efile   Compensation for plan allocations is the pay a participant received from you for personal services for a year. Free efile You can generally define compensation as including all the following payments. Free efile Wages and salaries. Free efile Fees for professional services. Free efile Other amounts received (cash or noncash) for personal services actually rendered by an employee, including, but not limited to, the following items. Free efile Commissions and tips. Free efile Fringe benefits. Free efile Bonuses. Free efile   For a self-employed individual, compensation means the earned income, discussed later, of that individual. Free efile   Compensation generally includes amounts deferred in the following employee benefit plans. Free efile These amounts are elective deferrals. Free efile Qualified cash or deferred arrangement (section 401(k) plan). Free efile Salary reduction agreement to contribute to a tax-sheltered annuity (section 403(b) plan), a SIMPLE IRA plan, or a SARSEP. Free efile Section 457 nonqualified deferred compensation plan. Free efile Section 125 cafeteria plan. Free efile   However, an employer can choose to exclude elective deferrals under the above plans from the definition of compensation. Free efile The limit on elective deferrals is discussed in chapter 2 under Salary Reduction Simplified Employee Pension (SARSEP) and in chapter 4. Free efile Other options. Free efile   In figuring the compensation of a participant, you can treat any of the following amounts as the employee's compensation. Free efile The employee's wages as defined for income tax withholding purposes. Free efile The employee's wages you report in box 1 of Form W-2, Wage and Tax Statement. Free efile The employee's social security wages (including elective deferrals). Free efile   Compensation generally cannot include either of the following items. Free efile Nontaxable reimbursements or other expense allowances. Free efile Deferred compensation (other than elective deferrals). Free efile SIMPLE plans. Free efile   A special definition of compensation applies for SIMPLE plans. Free efile See chapter 3. Free efile Contribution. Free efile   A contribution is an amount you pay into a plan for all those participating in the plan, including self-employed individuals. Free efile Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant. Free efile Deduction. Free efile   A deduction is the plan contributions you can subtract from gross income on your federal income tax return. Free efile Limits apply to the amount deductible. Free efile Earned income. Free efile   Earned income is net earnings from self-employment, discussed later, from a business in which your services materially helped to produce the income. Free efile   You can also have earned income from property your personal efforts helped create, such as royalties from your books or inventions. Free efile Earned income includes net earnings from selling or otherwise disposing of the property, but it does not include capital gains. Free efile It includes income from licensing the use of property other than goodwill. Free efile   Earned income includes amounts received for services by self-employed members of recognized religious sects opposed to social security benefits who are exempt from self-employment tax. Free efile   If you have more than one business, but only one has a retirement plan, only the earned income from that business is considered for that plan. Free efile Employer. Free efile   An employer is generally any person for whom an individual performs or did perform any service, of whatever nature, as an employee. Free efile A sole proprietor is treated as his or her own employer for retirement plan purposes. Free efile However, a partner is not an employer for retirement plan purposes. Free efile Instead, the partnership is treated as the employer of each partner. Free efile Highly compensated employee. Free efile   A highly compensated employee is an individual who: Owned more than 5% of the interest in your business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or For the preceding year, received compensation from you of more than $115,000 (if the preceding year is 2012, 2013, or 2014) and, if you so choose, was in the top 20% of employees when ranked by compensation. Free efile Leased employee. Free efile   A leased employee who is not your common-law employee must generally be treated as your employee for retirement plan purposes if he or she does all the following. Free efile Provides services to you under an agreement between you and a leasing organization. Free efile Has performed services for you (or for you and related persons) substantially full time for at least 1 year. Free efile Performs services under your primary direction or control. Free efile Exception. Free efile   A leased employee is not treated as your employee if all the following conditions are met. Free efile Leased employees are not more than 20% of your non-highly compensated work force. Free efile The employee is covered under the leasing organization's qualified pension plan. Free efile The leasing organization's plan is a money purchase pension plan that has all the following provisions. Free efile Immediate participation. Free efile (This requirement does not apply to any individual whose compensation from the leasing organization in each plan year during the 4-year period ending with the plan year is less than $1,000. Free efile ) Full and immediate vesting. Free efile A nonintegrated employer contribution rate of at least 10% of compensation for each participant. Free efile However, if the leased employee is your common-law employee, that employee will be your employee for all purposes, regardless of any pension plan of the leasing organization. Free efile Net earnings from self-employment. Free efile   For SEP and qualified plans, net earnings from self-employment is your gross income from your trade or business (provided your personal services are a material income-producing factor) minus allowable business deductions. Free efile Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for the deductible part of your self-employment tax. Free efile   Net earnings from self-employment does not include items excluded from gross income (or their related deductions) other than foreign earned income and foreign housing cost amounts. Free efile   For the deduction limits, earned income is net earnings for personal services actually rendered to the business. Free efile You take into account the income tax deduction for the deductible part of self-employment tax and the deduction for contributions to the plan made on your behalf when figuring net earnings. Free efile   Net earnings include a partner's distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses). Free efile It does not include income passed through to shareholders of S corporations. Free efile Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership. Free efile Distributions of other income or loss to limited partners are not net earnings from self-employment. Free efile   For SIMPLE plans, net earnings from self-employment is the amount on line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for yourself. Free efile Qualified plan. Free efile   A qualified plan is a retirement plan that offers a tax-favored way to save for retirement. Free efile You can deduct contributions made to the plan for your employees. Free efile Earnings on these contributions are generally tax free until distributed at retirement. Free efile Profit-sharing, money purchase, and defined benefit plans are qualified plans. Free efile A 401(k) plan is also a qualified plan. Free efile Participant. Free efile   A participant is an eligible employee who is covered by your retirement plan. Free efile See the discussions of the different types of plans for the definition of an employee eligible to participate in each type of plan. Free efile Partner. Free efile   A partner is an individual who shares ownership of an unincorporated trade or business with one or more persons. Free efile For retirement plans, a partner is treated as an employee of the partnership. Free efile Self-employed individual. Free efile   An individual in business for himself or herself, and whose business is not incorporated, is self-employed. Free efile Sole proprietors and partners are self-employed. Free efile Self-employment can include part-time work. Free efile   Not everyone who has net earnings from self-employment for social security tax purposes is self-employed for qualified plan purposes. Free efile See Common-law employee and Net earnings from self-employment , earlier. Free efile   In addition, certain fishermen may be considered self-employed for setting up a qualified plan. Free efile See Publication 595, Capital Construction Fund for Commercial Fishermen, for the special rules used to determine whether fishermen are self-employed. Free efile Sole proprietor. Free efile   A sole proprietor is an individual who owns an unincorporated business by himself or herself, including a single member limited liability company that is treated as a disregarded entity for tax purposes. Free efile For retirement plans, a sole proprietor is treated as both an employer and an employee. Free efile Prev  Up  Next   Home   More Online Publications

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Free efile Car Expenses Table of Contents Introduction Depreciation of CarSpecial Depreciation Allowance Depreciation Limit Amended Return Election Not To Claim Special Allowance If you purchased a car after September 10, 2001, for use in your business (or as an employee) and figure your deductible expenses using the actual car expense method, new law contains provisions that may affect your depreciation deduction for that car. Free efile Publication 463, Travel, Entertainment, Gift, and Car Expenses, contains information on figuring depreciation on your car. Free efile However, Publication 463 does not contain the new provisions because it was printed before the law was enacted. Free efile The new provisions are in the Supplement to Publication 463, which is reprinted below. Free efile Supplement to Publication 463 Travel, Entertainment, Gift, and Car Expenses   Introduction This supplemental publication is for taxpayers who purchased a car for business purposes after September 10, 2001, and figure their deductible expenses, including a deduction for depreciation, using the actual car expense method. Free efile After Publication 463 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. Free efile Certain provisions of this new law may reduce your taxes for 2001. Free efile The new law contains the following provisions. Free efile A new depreciation deduction, the special depreciation allowance. Free efile An increase in the limit on depreciation for any car for which you claim the new special depreciation allowance. Free efile If you have already filed your 2001 return, you may wish to file an amended return to claim any of these benefits. Free efile See Amended Return, later. Free efile Depreciation of Car If you used the actual car expense method to figure your deduction for a car you own and use in your business (or as an employee), you generally can claim a depreciation deduction. Free efile However, there is a limit on the depreciation deduction you can take for your car each year. Free efile See Depreciation Limit later. Free efile Special Depreciation Allowance The new law allows you to claim a special depreciation allowance. Free efile This special allowance is a deduction equal to 30% of the depreciable basis of qualified property. Free efile You figure the amount of the special depreciation allowance after any section 179 deduction you choose to claim, but before figuring your regular depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS). Free efile See Depreciation Deduction under Actual Car Expenses in chapter 4 of Publication 463 for information about MACRS. Free efile You can claim the special depreciation allowance only for the year the qualified property is placed in service. Free efile Qualified property. Free efile   Qualified property includes a car (any four-wheeled vehicle, including a truck or van not more than 6,000 pounds, that is made primarily for use on public streets, roads, and highways) that meets all of the following requirements. Free efile You bought it new. Free efile You bought it after September 10, 2001. Free efile (But a car is not qualified property if a binding written contract for you to buy the car was in effect before September 11, 2001. Free efile ) You began using it for business after September 10, 2001, and used it more than 50% in a qualified business use. Free efile Example. Free efile Bob bought a new car on October 15, 2001, for $20,000 and placed it in service immediately, using it 75% for business. Free efile Bob's car is qualified property. Free efile Bob chooses not to take a section 179 deduction for the car. Free efile He does claim the new special depreciation allowance. Free efile Bob first must figure the car's depreciable basis, which is $15,000 ($20,000 × . Free efile 75). Free efile He then figures the special depreciation allowance of $4,500 ($15,000 × . Free efile 30). Free efile The remaining depreciable basis of $10,500 ($15,000 - $4,500) is depreciated using MACRS (200% declining balance method, half-year convention) and results in a deduction of $2,100 ($10,500 × . Free efile 20), for a total depreciation deduction for 2001 of $6,600 ($4,500 + $2,100). Free efile However, Bob's depreciation deduction is limited to $5,745 ($7,660 × . Free efile 75), as discussed next. Free efile Depreciation Limit The limit on your depreciation deduction for 2001 is increased to $7,660 for a car that is qualified property (defined above) and for which you claim the special depreciation allowance. Free efile The limit is increased to $23,080 if the car is an electric car. Free efile The section 179 deduction is treated as depreciation for purposes of this limit. Free efile If you use a car less than 100% in your business or work, the limit is $7,660 (or $23,080 for an electric car) multiplied by the percentage of business and investment use during the year. Free efile For cars that do not qualify for (or for which you choose not to claim) the special depreciation allowance, the limit remains $3,060 ($9,280 for electric cars). Free efile Amended Return If you filed your 2001 calendar year return before June 1, 2002, and did not claim the new special depreciation allowance for a qualified car, you can claim it by filing an amended return on Form 1040X, Amended U. Free efile S. Free efile Individual Income Tax Return, by April 15, 2003. Free efile At the top of the Form 1040X, print “Filed pursuant to Revenue Procedure 2002–33. Free efile ” If you are an employee, attach Form 2106, Employee Business Expenses (revised March 2002). Free efile If you are self-employed, attach Form 4562, Depreciation and Amortization (revised March 2002). Free efile Or, you can claim the special depreciation allowance by filing Form 3115, Application for Change in Accounting Method, with your 2002 return. Free efile For details, see Revenue Procedure 2002–33. Free efile (But, filing Form 1040X for 2001 enables you to claim the special allowance earlier than attaching Form 3115 to your 2002 return. Free efile ) You cannot claim the special depreciation allowance on an amended return (or by using Form 3115) if you made, or are treated as having made, the election not to claim it described later. Free efile Example. Free efile The facts are the same as in the previous example except that Bob filed his original 2001 income tax return on April 15, 2002, and claimed a $3,000 ($20,000 x . Free efile 75 x . Free efile 20) depreciation deduction for his new car using MACRS. Free efile Bob now wishes to claim the special depreciation allowance for his new car on an amended 2001 return. Free efile Bob, who is an employee, files Form 1040X, by April 15, 2003, with an updated Form 2106 (revised March 2002) attached, increasing his total depreciation deduction to $5,745, as figured in the earlier example. Free efile Bob's new filled-in Form 2106 is shown later. Free efile Election Not To Claim Special Allowance You can elect not to claim the special depreciation allowance for a car by making a statement attached to, or written on, your return indicating that you are electing not to claim the special depreciation allowance for 5-year property. Free efile As a general rule, you must make this election by the due date (including extensions) of your return. Free efile You can have an automatic extension of 6 months from the due date of your return (excluding extensions) to make the election with an amended return. Free efile To get this extension, you must have filed your original return by the due date (including extensions). Free efile At the top of the statement, print “Filed pursuant to section 301. Free efile 9100–2. Free efile ” If you elect not to claim the special depreciation allowance for a car, you cannot claim it for any other 5-year property placed in service during the same year. Free efile Unless you elect (or are treated as electing) not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the amount of the allowance, even if the allowance was not claimed. Free efile Deemed election for return filed before June 1, 2002. Free efile   If you did not make the election not to claim the special depreciation allowance in the time and manner described above, you will still be treated as electing not to claim it if all of the following apply. Free efile You filed your 2001 return before June 1, 2002. Free efile You claimed depreciation on your return but did not claim the special depreciation allowance. Free efile You did not file an amended 2001 return by April 15, 2003, or a Form 3115 with your 2002 return, to claim the special depreciation allowance. Free efile Form 2106, Page 1, for Bob Smith Form 2106, Page 2, for Bob Smith Prev  Up  Next   Home   More Online Publications