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Freetaxusa 2009

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Freetaxusa 2009

Freetaxusa 2009 1. Freetaxusa 2009   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. Freetaxusa 2009 At-risk limits. Freetaxusa 2009 Passive activities. Freetaxusa 2009 Net operating loss. Freetaxusa 2009 When Can I Deduct an Expense?Economic performance. Freetaxusa 2009 Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Freetaxusa 2009  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Freetaxusa 2009 See Optional safe harbor method under Business use of your home , later. Freetaxusa 2009 Introduction This chapter covers the general rules for deducting business expenses. Freetaxusa 2009 Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. Freetaxusa 2009 Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. Freetaxusa 2009 What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Freetaxusa 2009 An ordinary expense is one that is common and accepted in your industry. Freetaxusa 2009 A necessary expense is one that is helpful and appropriate for your trade or business. Freetaxusa 2009 An expense does not have to be indispensable to be considered necessary. Freetaxusa 2009 Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. Freetaxusa 2009 In some cases you may not be allowed to deduct the expense at all. Freetaxusa 2009 Therefore, it is important to distinguish usual business expenses from expenses that include the following. Freetaxusa 2009 The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Freetaxusa 2009 Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Freetaxusa 2009 Some of your business expenses may be included in figuring cost of goods sold. Freetaxusa 2009 Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Freetaxusa 2009 If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Freetaxusa 2009 The following are types of expenses that go into figuring cost of goods sold. Freetaxusa 2009 The cost of products or raw materials, including freight. Freetaxusa 2009 Storage. Freetaxusa 2009 Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Freetaxusa 2009 Factory overhead. Freetaxusa 2009 Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Freetaxusa 2009 Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Freetaxusa 2009 This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. Freetaxusa 2009 For more information, see the following sources. Freetaxusa 2009 Cost of goods sold—chapter 6 of Publication 334. Freetaxusa 2009 Inventories—Publication 538. Freetaxusa 2009 Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Freetaxusa 2009 Capital Expenses You must capitalize, rather than deduct, some costs. Freetaxusa 2009 These costs are a part of your investment in your business and are called “capital expenses. Freetaxusa 2009 ” Capital expenses are considered assets in your business. Freetaxusa 2009 In general, you capitalize three types of costs. Freetaxusa 2009 Business start-up costs (See Tip below). Freetaxusa 2009 Business assets. Freetaxusa 2009 Improvements. Freetaxusa 2009 You can elect to deduct or amortize certain business start-up costs. Freetaxusa 2009 See chapters 7 and 8. Freetaxusa 2009 Cost recovery. Freetaxusa 2009   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. Freetaxusa 2009 These recovery methods allow you to deduct part of your cost each year. Freetaxusa 2009 In this way, you are able to recover your capital expense. Freetaxusa 2009 See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Freetaxusa 2009 A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Freetaxusa 2009 A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Freetaxusa 2009 See Publication 946 for details. Freetaxusa 2009 Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Freetaxusa 2009 These costs may include expenses for advertising, travel, or wages for training employees. Freetaxusa 2009 If you go into business. Freetaxusa 2009   When you go into business, treat all costs you had to get your business started as capital expenses. Freetaxusa 2009   Usually you recover costs for a particular asset through depreciation. Freetaxusa 2009 Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Freetaxusa 2009 However, you can choose to amortize certain costs for setting up your business. Freetaxusa 2009 See Starting a Business in chapter 8 for more information on business start-up costs. Freetaxusa 2009 If your attempt to go into business is unsuccessful. Freetaxusa 2009   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. Freetaxusa 2009 The costs you had before making a decision to acquire or begin a specific business. Freetaxusa 2009 These costs are personal and nondeductible. Freetaxusa 2009 They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Freetaxusa 2009 The costs you had in your attempt to acquire or begin a specific business. Freetaxusa 2009 These costs are capital expenses and you can deduct them as a capital loss. Freetaxusa 2009   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. Freetaxusa 2009   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Freetaxusa 2009 You cannot take a deduction for these costs. Freetaxusa 2009 You will recover the costs of these assets when you dispose of them. Freetaxusa 2009 Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Freetaxusa 2009 You must fully capitalize the cost of these assets, including freight and installation charges. Freetaxusa 2009 Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Freetaxusa 2009 See Regulations section 1. Freetaxusa 2009 263A-2 for information on these rules. Freetaxusa 2009 Improvements Improvements are generally major expenditures. Freetaxusa 2009 Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Freetaxusa 2009 The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. Freetaxusa 2009 Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Freetaxusa 2009 Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Freetaxusa 2009 However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Freetaxusa 2009 Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Freetaxusa 2009 Restoration plan. Freetaxusa 2009   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Freetaxusa 2009 This applies even if some of the work would by itself be classified as repairs. Freetaxusa 2009 Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Freetaxusa 2009 Motor vehicles. Freetaxusa 2009   You usually capitalize the cost of a motor vehicle you use in your business. Freetaxusa 2009 You can recover its cost through annual deductions for depreciation. Freetaxusa 2009   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Freetaxusa 2009 See Publication 463. Freetaxusa 2009   Generally, repairs you make to your business vehicle are currently deductible. Freetaxusa 2009 However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Freetaxusa 2009 Roads and driveways. Freetaxusa 2009    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. Freetaxusa 2009 The cost of maintaining a private road on your business property is a deductible expense. Freetaxusa 2009 Tools. Freetaxusa 2009   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. Freetaxusa 2009 Machinery parts. Freetaxusa 2009   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. Freetaxusa 2009 Heating equipment. Freetaxusa 2009   The cost of changing from one heating system to another is a capital expense. Freetaxusa 2009 Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Freetaxusa 2009 However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. Freetaxusa 2009 You can deduct the business part. Freetaxusa 2009 For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. Freetaxusa 2009 The remaining 30% is personal interest and generally is not deductible. Freetaxusa 2009 See chapter 4 for information on deducting interest and the allocation rules. Freetaxusa 2009 Business use of your home. Freetaxusa 2009   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Freetaxusa 2009 These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Freetaxusa 2009   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Freetaxusa 2009 The business part of your home must be used exclusively and regularly for your trade or business. Freetaxusa 2009 The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. Freetaxusa 2009   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. Freetaxusa 2009   Your home office qualifies as your principal place of business if you meet the following requirements. Freetaxusa 2009 You use the office exclusively and regularly for administrative or management activities of your trade or business. Freetaxusa 2009 You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Freetaxusa 2009   If you have more than one business location, determine your principal place of business based on the following factors. Freetaxusa 2009 The relative importance of the activities performed at each location. Freetaxusa 2009 If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Freetaxusa 2009 Optional safe harbor method. Freetaxusa 2009   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. Freetaxusa 2009 This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Freetaxusa 2009   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. Freetaxusa 2009 Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). Freetaxusa 2009 You are not required to allocate these deductions between personal and business use, as is required under the regular method. Freetaxusa 2009 If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Freetaxusa 2009   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Freetaxusa 2009 All of the requirements discussed earlier under Business use of your home still apply. Freetaxusa 2009   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Freetaxusa 2009    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. Freetaxusa 2009 Business use of your car. Freetaxusa 2009   If you use your car exclusively in your business, you can deduct car expenses. Freetaxusa 2009 If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Freetaxusa 2009 Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Freetaxusa 2009   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Freetaxusa 2009 Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Freetaxusa 2009 Beginning in 2013, the standard mileage rate is 56. Freetaxusa 2009 5 cents per mile. Freetaxusa 2009   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. Freetaxusa 2009   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Freetaxusa 2009 How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. Freetaxusa 2009 Recovery of amount deducted (tax benefit rule). Freetaxusa 2009   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. Freetaxusa 2009 If you have a recovery in a later year, include the recovered amount in income in that year. Freetaxusa 2009 However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. Freetaxusa 2009   For more information on recoveries and the tax benefit rule, see Publication 525. Freetaxusa 2009 Payments in kind. Freetaxusa 2009   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Freetaxusa 2009 You cannot deduct the cost of your own labor. Freetaxusa 2009   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Freetaxusa 2009 If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Freetaxusa 2009 Limits on losses. Freetaxusa 2009   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Freetaxusa 2009 There may be limits on how much of the loss you can deduct. Freetaxusa 2009 Not-for-profit limits. Freetaxusa 2009   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. Freetaxusa 2009 See Not-for-Profit Activities , later. Freetaxusa 2009 At-risk limits. Freetaxusa 2009   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. Freetaxusa 2009 You are at risk in any activity for the following. Freetaxusa 2009 The money and adjusted basis of property you contribute to the activity. Freetaxusa 2009 Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Freetaxusa 2009 For more information, see Publication 925. Freetaxusa 2009 Passive activities. Freetaxusa 2009   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. Freetaxusa 2009 In general, deductions for losses from passive activities only offset income from passive activities. Freetaxusa 2009 You cannot use any excess deductions to offset other income. Freetaxusa 2009 In addition, passive activity credits can only offset the tax on net passive income. Freetaxusa 2009 Any excess loss or credits are carried over to later years. Freetaxusa 2009 Suspended passive losses are fully deductible in the year you completely dispose of the activity. Freetaxusa 2009 For more information, see Publication 925. Freetaxusa 2009 Net operating loss. Freetaxusa 2009   If your deductions are more than your income for the year, you may have a “net operating loss. Freetaxusa 2009 ” You can use a net operating loss to lower your taxes in other years. Freetaxusa 2009 See Publication 536 for more information. Freetaxusa 2009   See Publication 542 for information about net operating losses of corporations. Freetaxusa 2009 When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Freetaxusa 2009 An accounting method is a set of rules used to determine when and how income and expenses are reported. Freetaxusa 2009 The two basic methods are the cash method and the accrual method. Freetaxusa 2009 Whichever method you choose must clearly reflect income. Freetaxusa 2009 For more information on accounting methods, see Publication 538. Freetaxusa 2009 Cash method. Freetaxusa 2009   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Freetaxusa 2009 Accrual method. Freetaxusa 2009   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Freetaxusa 2009 The all-events test has been met. Freetaxusa 2009 The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Freetaxusa 2009 Economic performance has occurred. Freetaxusa 2009 Economic performance. Freetaxusa 2009   You generally cannot deduct or capitalize a business expense until economic performance occurs. Freetaxusa 2009 If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. Freetaxusa 2009 If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Freetaxusa 2009 Example. Freetaxusa 2009 Your tax year is the calendar year. Freetaxusa 2009 In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Freetaxusa 2009 You paid it by check in January 2014. Freetaxusa 2009 If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. Freetaxusa 2009 If you use the cash method of accounting, deduct the expense on your 2014 return. Freetaxusa 2009 Prepayment. Freetaxusa 2009   You generally cannot deduct expenses in advance, even if you pay them in advance. Freetaxusa 2009 This rule applies to both the cash and accrual methods. Freetaxusa 2009 It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Freetaxusa 2009 Example. Freetaxusa 2009 In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Freetaxusa 2009 Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Freetaxusa 2009 You can deduct the rent for 2014 and 2015 on your tax returns for those years. Freetaxusa 2009 Contested liability. Freetaxusa 2009   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Freetaxusa 2009 Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Freetaxusa 2009 S. Freetaxusa 2009 possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. Freetaxusa 2009 However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Freetaxusa 2009 See Regulations section 1. Freetaxusa 2009 461-2. Freetaxusa 2009 Related person. Freetaxusa 2009   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Freetaxusa 2009 However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. Freetaxusa 2009 Your deduction is allowed when the amount is includible in income by the related cash method payee. Freetaxusa 2009 See Related Persons in Publication 538. Freetaxusa 2009 Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Freetaxusa 2009 Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Freetaxusa 2009 The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Freetaxusa 2009 It does not apply to corporations other than S corporations. Freetaxusa 2009 In determining whether you are carrying on an activity for profit, several factors are taken into account. Freetaxusa 2009 No one factor alone is decisive. Freetaxusa 2009 Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. Freetaxusa 2009 Presumption of profit. Freetaxusa 2009   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Freetaxusa 2009 Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Freetaxusa 2009 The activity must be substantially the same for each year within this period. Freetaxusa 2009 You have a profit when the gross income from an activity exceeds the deductions. Freetaxusa 2009   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. Freetaxusa 2009   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. Freetaxusa 2009 This means the limits discussed here will not apply. Freetaxusa 2009 You can take all your business deductions from the activity, even for the years that you have a loss. Freetaxusa 2009 You can rely on this presumption unless the IRS later shows it to be invalid. Freetaxusa 2009 Using the presumption later. Freetaxusa 2009   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. Freetaxusa 2009   You can elect to do this by filing Form 5213. Freetaxusa 2009 Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. Freetaxusa 2009   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Freetaxusa 2009 Accordingly, it will not restrict your deductions. Freetaxusa 2009 Rather, you will gain time to earn a profit in the required number of years. Freetaxusa 2009 If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Freetaxusa 2009 If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. Freetaxusa 2009   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. Freetaxusa 2009 The period is extended only for deductions of the activity and any related deductions that might be affected. Freetaxusa 2009    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Freetaxusa 2009 Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. Freetaxusa 2009 Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. Freetaxusa 2009 You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Freetaxusa 2009 However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. Freetaxusa 2009 Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. Freetaxusa 2009 If you are an individual, these deductions may be taken only if you itemize. Freetaxusa 2009 These deductions may be taken on Schedule A (Form 1040). Freetaxusa 2009 Category 1. Freetaxusa 2009   Deductions you can take for personal as well as for business activities are allowed in full. Freetaxusa 2009 For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Freetaxusa 2009 Deduct them on the appropriate lines of Schedule A (Form 1040). Freetaxusa 2009 For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). Freetaxusa 2009 The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. Freetaxusa 2009 The reduction amount returns to $100 for tax years beginning after December 31, 2009. Freetaxusa 2009 See Publication 547 for more information on casualty losses. Freetaxusa 2009 For the limits that apply to home mortgage interest, see Publication 936. Freetaxusa 2009 Category 2. Freetaxusa 2009   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. Freetaxusa 2009 Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Freetaxusa 2009 Category 3. Freetaxusa 2009   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. Freetaxusa 2009 Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Freetaxusa 2009 Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Freetaxusa 2009    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Freetaxusa 2009 They are subject to the 2%-of-adjusted-gross-income limit. Freetaxusa 2009 See Publication 529 for information on this limit. Freetaxusa 2009 Example. Freetaxusa 2009 Adriana is engaged in a not-for-profit activity. Freetaxusa 2009 The income and expenses of the activity are as follows. Freetaxusa 2009 Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. Freetaxusa 2009 The limit is reached in category (3), as follows. Freetaxusa 2009 Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. Freetaxusa 2009 $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. Freetaxusa 2009 Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Freetaxusa 2009 The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Freetaxusa 2009 Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. Freetaxusa 2009 Partnerships and S corporations. Freetaxusa 2009   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Freetaxusa 2009 They are reflected in the individual shareholder's or partner's distributive shares. Freetaxusa 2009 More than one activity. Freetaxusa 2009   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Freetaxusa 2009 The following are the most significant facts and circumstances in making this determination. Freetaxusa 2009 The degree of organizational and economic interrelationship of various undertakings. Freetaxusa 2009 The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Freetaxusa 2009 The similarity of the undertakings. Freetaxusa 2009   The IRS will generally accept your characterization if it is supported by facts and circumstances. Freetaxusa 2009    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Freetaxusa 2009 Figure separately whether each is a not-for-profit activity. Freetaxusa 2009 Then figure the limit on deductions and losses separately for each activity that is not for profit. Freetaxusa 2009 Prev  Up  Next   Home   More Online Publications
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Uncertain Tax Positions - Schedule UTP

Third Year of Uncertain Tax Position Reporting

The IRS is currently reviewing its third year of returns filed with Schedule UTP. Beginning with Tax Year 2010, Schedule UTP was a new schedule that certain corporations  used to report uncertain tax positions. Additionally, with Announcement 2010-76, the IRS expanded its policy of restraint in connection with its decision to require certain corporations to file Schedule UTP. Directives to LB&I personnel have been issued setting forth the IRS’s planned treatment of these UTPs by examiners and other personnel.

Submit your questions, comments, or concerns regarding Schedule UTP to the IRS. Although individual responses will not be provided, the IRS will consider submissions in efforts to improve Schedule UTP.

Information about UTP Education and Outreach Efforts:

LB&I is undertaking an education and outreach effort regarding Schedule UTP. LB&I will mail letters to inform certain taxpayers that a review of their Schedule UTP determined that one or more of the concise descriptions they provided did not meet the requirements set forth in the Schedule UTP instructions. If the taxpayer has a valid Power of Attorney on file with the IRS, the Power of Attorney will also receive a copy of this letter.

While the letter requires no action by taxpayers regarding their Schedule UTP, taxpayers are advised to ensure that on any future filings of a Schedule UTP, the concise descriptions follow the Schedule UTP Instructions. All returns filed with a Schedule UTP will continue to be subject to a review in LB&I.

Taxpayers with questions about the letter or the concise descriptions are being referred to this WEB Site.

Related Documents:

Date

Document

Document Description or Originator

 

 

Forms

Instructions

2013 Form 1120 Schedule UTP Instructions for Form 1120 Schedule UTP
2012 Form 1120 Schedule UTP Instructions for Form 1120 Schedule UTP
2011 Form 1120 Schedule UTP Instructions for Form 1120 Schedule UTP
2010 Form 1120 Schedule UTP Instructions for Form 1120 Schedule UTP
 
IRS Pronouncements:
09-24-10 Announcement 2010-76, Policy of Restraint and Uncertain Tax Positions Impact of the Policy of Restraint on Uncertain Tax Positions. 
09-24-10 Announcement 2010-75, Reporting of Uncertain Tax Positions Reporting of Uncertain Tax Positions.
04-19-10 Announcement 2010-30 Schedule UTP draft form and instructions.
03-05-10 Announcement 2010-17 Extension for comment request for Uncertain Tax Position reporting requirements.
01-26-10 Announcement 2010-9 Comment request for Uncertain Tax Position reporting requirements.
 
IRS and LB&I Guidance Memorandums:
05-31-13 Guidance for Preparing UTP Concise Descriptions Specific Guidance
11-01-11

UTP Guidance and Procedures for the Field

Cover memo by Commissioner, LB&I    
11-01-11 LB&I Schedule UTP Guidance Specific guidance
08-31-11 UTP Guidance and Procedures for the Compliance Assurance Process (CAP) Program Commissioner, LB&I memo
05-11-11

Centralized Management of LB&I Returns with UTP Schedules

Commissioner, LB&I memo
03-23-11 Uncertain Tax Positions - Modified Policy of Restraint Commissioner, LB&I memo
09-24-10 Directive for LB&I: Reporting of Uncertain Tax Positions Deputy Commissioner, Services and Enforcement
 
Public Statements and Comments by IRS Executives:
03-26-12 IRS Deputy Commissioner, Service and Enforcement Remarks before Tax Executives Institute  Remarks of Steven T. Miller, Deputy Commissioner, Service and Enforcement Internal Revenue Service Before the Tax Executives Institute, Mid Year Conference
09-24-10 IRS Commissioner Shulman Remarks before the American Bar Association, 9/24/2010   
04-12-10 Remarks of IRS Commissioner Shulman at the Tax Executives Institute Mid-Year Meeting   
01-26-10 IR-2010-13 Remarks of IRS Commissioner Doug Shulman to the New York State Bar Association Taxation Section Annual Meeting
 
Other Documents:
02-04-14 UTP Filing Statistics  
03-14-13 Frequently Asked Questions  

 

Page Last Reviewed or Updated: 26-Feb-2014

The Freetaxusa 2009

Freetaxusa 2009 Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. Freetaxusa 2009 Proc. Freetaxusa 2009 2013-16 Table of Contents SECTION 1. Freetaxusa 2009 PURPOSE SECTION 2. Freetaxusa 2009 BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. Freetaxusa 2009 BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. Freetaxusa 2009 FEDERAL INCOME TAX TREATMENT SECTION 5. Freetaxusa 2009 INFORMATION-REPORTING OBLIGATIONS SECTION 6. Freetaxusa 2009 HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. Freetaxusa 2009 PENALTY RELIEF FOR 2012 SECTION 8. Freetaxusa 2009 SCOPE AND EFFECTIVE DATE SECTION 9. Freetaxusa 2009 DRAFTING INFORMATION SECTION 1. Freetaxusa 2009 PURPOSE This revenue procedure provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP®). Freetaxusa 2009 Under HAMP, a borrower may be eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to the program’s Principal Reduction AlternativeSM (PRA). Freetaxusa 2009 In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. Freetaxusa 2009 Current plans call for HAMP to continue accepting new borrowers through the end of 2013. Freetaxusa 2009 The Internal Revenue Service (Service) is providing this guidance to address the tax consequences for borrowers (HAMP-PRA borrowers) who are participating in the PRA and the reporting obligations for participating mortgage loan holders and servicers. Freetaxusa 2009 SECTION 2. Freetaxusa 2009 BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . Freetaxusa 2009 01 To help distressed borrowers lower their monthly mortgage payments, Treasury and HUD established HAMP for mortgage loans that are not owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Freetaxusa 2009 A description of the program can be found at www. Freetaxusa 2009 makinghomeaffordable. Freetaxusa 2009 gov. Freetaxusa 2009 . Freetaxusa 2009 02 Under HAMP, a participating loan servicer, acting on behalf of the mortgage loan holder, must consider a sequence of modification steps for each eligible borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines. Freetaxusa 2009 These steps include a reduction in the mortgage loan’s interest rate, an extension of the mortgage loan’s term, and a reduction in the mortgage loan’s principal balance. Freetaxusa 2009 . Freetaxusa 2009 03 In some cases, the unpaid principal balance of the modified mortgage loan is divided into (1) an amount that bears stated interest and that is used to calculate the borrower’s new monthly mortgage payment (the “Non-forbearance Portion”), and (2) a forbearance amount, which does not bear stated interest and on which periodic payments of stated principal are not required. Freetaxusa 2009 The stated principal of the forbearance amount is due upon the earliest of the borrower’s transfer of the property, payoff of the balance on the Non-forbearance Portion of the mortgage loan, or maturity of the mortgage loan. Freetaxusa 2009 However, as noted in section 2. Freetaxusa 2009 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. Freetaxusa 2009 (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. Freetaxusa 2009 ”) . Freetaxusa 2009 04 If a mortgage loan is being considered for a HAMP modification and the amount owed on the mortgage loan is greater than 115 percent of the value of the property, then the servicer must consider whether principal reduction under PRA should be used as part of the HAMP modification. Freetaxusa 2009 . Freetaxusa 2009 05 The first step toward a HAMP modification is a trial period plan, in which the borrower’s monthly mortgage payment is set at a monthly payment amount determined under the HAMP guidelines. Freetaxusa 2009 The trial period plan effective date is the due date for the first of the reduced payments that are to be made under the trial period plan. Freetaxusa 2009 (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. Freetaxusa 2009 ) In general, the trial period is three months, and, during this period, the borrower must satisfy certain conditions before the changes to the terms of the mortgage loan become permanent (the “Trial Period Conditions”). Freetaxusa 2009 Specifically, depending on the borrower’s trial period payment history, the borrower’s compliance with HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period Conditions, the borrower will be offered a permanent modification of the terms of the mortgage loan, including monthly mortgage payments that are lower than those under the old mortgage loan. Freetaxusa 2009 Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. Freetaxusa 2009 . Freetaxusa 2009 06 After the mortgage loan is permanently modified under HAMP, if the modified mortgage loan is in good standing on the first, second, or third annual anniversary of the trial period plan effective date (the “Three-year Period”), the servicer must reduce the unpaid principal balance of the mortgage loan on the respective anniversary date by one-third of the initial PRA Forbearance Amount. Freetaxusa 2009 (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. Freetaxusa 2009 ) In general, if a HAMP-PRA borrower’s mortgage loan is in good standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan prior to the reduction of the entire PRA Forbearance Amount, the servicer must reduce the remaining outstanding principal balance of the mortgage loan by the remaining PRA Forbearance Amount. Freetaxusa 2009 . Freetaxusa 2009 07 In connection with every HAMP loan modification, the HAMP program administrator (acting on behalf of the federal government) provides incentives to the borrower, the servicer, and the investor (that is, the holder of the mortgage loan). Freetaxusa 2009 If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. Freetaxusa 2009 These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. Freetaxusa 2009 The size of the PRA Investor Incentive Payments depends on the amount of principal reduced, the loan-to-value ratio at the time of the HAMP modification, and the loan’s payment history before the modification. Freetaxusa 2009 The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. Freetaxusa 2009 For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a mortgage loan over the aggregate PRA Investor Incentive Payments scheduled to be paid with respect to that loan is called the “PRA Adjusted Forbearance Amount. Freetaxusa 2009 ” . Freetaxusa 2009 08 A PRA Investor Incentive Payment is earned by the investor on each date on which the servicer reduces the unpaid principal balance of the mortgage loan by a portion of the PRA Forbearance Amount (generally, on the first three annual anniversaries of the trial period plan effective date). Freetaxusa 2009 . Freetaxusa 2009 09 If a HAMP-PRA borrower’s early payment in full of the Non-forbearance Portion of the mortgage loan accelerates the reduction of the remaining PRA Forbearance Amount (described above in section 2. Freetaxusa 2009 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. Freetaxusa 2009 . Freetaxusa 2009 10 If, prior to completion of the Three-year Period, a mortgage loan ceases to be in good standing because of the HAMP-PRA borrower’s payment history, then the remaining PRA Forbearance Amount is not further reduced and is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA borrower refinances, or otherwise pays off the Non-forbearance Portion of the mortgage loan, or the mortgage loan matures. Freetaxusa 2009 SECTION 3. Freetaxusa 2009 BACKGROUND—APPLICABLE PROVISIONS OF LAW . Freetaxusa 2009 01 Under § 61 of the Internal Revenue Code, except as otherwise provided in subtitle A, gross income means all income from whatever source derived, including income from discharge of indebtedness. Freetaxusa 2009 See § 61(a)(12). Freetaxusa 2009 . Freetaxusa 2009 02 Under § 1. Freetaxusa 2009 1001-3 of the Income Tax Regulations, if a debt instrument undergoes a significant modification, then the modification results in an exchange of the original debt instrument for the modified debt instrument. Freetaxusa 2009 In general, an agreement to change a term of a debt instrument is a modification at the time the borrower and holder enter into the agreement, even if the change in term is not immediately effective. Freetaxusa 2009 However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. Freetaxusa 2009 See § 1. Freetaxusa 2009 1001-3(c)(6). Freetaxusa 2009 . Freetaxusa 2009 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. Freetaxusa 2009 1001-3), the borrower is treated as having satisfied the original debt instrument with an amount of money equal to the issue price of the new debt instrument. Freetaxusa 2009 If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. Freetaxusa 2009 See also § 1. Freetaxusa 2009 61-12(c). Freetaxusa 2009 . Freetaxusa 2009 04 The issue price of a non-publicly traded debt instrument issued for non-publicly traded property generally reflects the amount of principal that the borrower is required to pay to the holder of the instrument. Freetaxusa 2009 If a borrower has the ability to avoid paying certain amounts (including principal) without violating the terms of the instrument, the payment schedule for the instrument is generally determined based on an assumption that the borrower will avoid any requirement to make those payments. Freetaxusa 2009 See, e. Freetaxusa 2009 g. Freetaxusa 2009 , §§ 1. Freetaxusa 2009 1272-1(c)(5) and 1. Freetaxusa 2009 1274-2(d). Freetaxusa 2009 . Freetaxusa 2009 05 Under § 108(a), gross income does not include any amount that but for § 108(a) would be includible in gross income by reason of the discharge (in whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged is qualified principal residence indebtedness that is discharged before January 1, 2014, or (2) the discharge occurs when the taxpayer is insolvent. Freetaxusa 2009 Section 108(a)(1)(E) and 108(a)(1)(B). Freetaxusa 2009 (Although § 108 contains other exclusions as well, this revenue procedure focuses on these two exclusions because they are the most likely to apply to the greatest number of HAMP-PRA borrowers. Freetaxusa 2009 ) . Freetaxusa 2009 06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence indebtedness is any indebtedness that is incurred by a borrower to buy, build, or substantially improve the borrower’s principal residence and is secured by that residence. Freetaxusa 2009 . Freetaxusa 2009 07 Qualified principal residence indebtedness also includes a loan secured by the borrower’s principal residence that refinances qualified principal residence indebtedness, but only to the extent of the amount of the refinanced indebtedness. Freetaxusa 2009 See §§ 108(h) and 163(h)(3)(B)(i). Freetaxusa 2009 . Freetaxusa 2009 08 The maximum amount of discharged indebtedness that a borrower may exclude from gross income under the qualified principal residence indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a separate return). Freetaxusa 2009 Under § 108(h)(4), if only part of the discharged indebtedness is qualified principal residence indebtedness, then the exclusion applies only to the amount of the discharged indebtedness that exceeds the amount of the loan (determined immediately before the discharge) that is not qualified principal residence indebtedness. Freetaxusa 2009 . Freetaxusa 2009 09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of the amount of the debt discharged or the amount by which the taxpayer is insolvent immediately before the discharge. Freetaxusa 2009 . Freetaxusa 2009 10 Section 108(d)(3) provides that, for purposes of the insolvency exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities exceed the fair market value of all of the taxpayer’s assets immediately before the discharge of indebtedness. Freetaxusa 2009 Under § 108(a)(2)(C), the qualified principal residence indebtedness exclusion takes precedence over the insolvency exclusion when both exclusions apply to discharged indebtedness, unless the taxpayer elects to apply the insolvency exclusion. Freetaxusa 2009 . Freetaxusa 2009 11 If an amount is excluded from gross income as a discharge of qualified principal residence indebtedness, the taxpayer must reduce the basis of the taxpayer’s principal residence. Freetaxusa 2009 See § 108(h)(1). Freetaxusa 2009 If a discharged amount is excluded from gross income because the taxpayer was insolvent when the discharge occurred, the taxpayer must reduce certain tax attributes (possibly including basis). Freetaxusa 2009 See § 108(b). Freetaxusa 2009 For further discussion of income from the discharge of indebtedness, the qualified principal residence indebtedness exclusion, the insolvency exclusion, and other exclusions from gross income that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Freetaxusa 2009 . Freetaxusa 2009 12 Taxpayers who exclude any discharged amounts from gross income report both the exclusion and the resulting reduction in basis or other tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). Freetaxusa 2009 See Form 982 instructions and Publication 4681. Freetaxusa 2009 This form is to be filed with the tax return for the taxable year in which the amount is discharged but is excluded from gross income. Freetaxusa 2009 . Freetaxusa 2009 13 Governmental payments made to or on behalf of individuals or other persons are included within the broad definition of gross income under § 61 unless an exception applies. Freetaxusa 2009 See Notice 2003-18, 2003-1 C. Freetaxusa 2009 B. Freetaxusa 2009 699, and Rev. Freetaxusa 2009 Rul. Freetaxusa 2009 79-356, 1979-2 C. Freetaxusa 2009 B. Freetaxusa 2009 28. Freetaxusa 2009 However, if disbursements are made by a governmental unit to individuals in the interest of the general welfare (that is, are generally based on individual or family need) and the disbursements do not represent compensation for services, then the amounts disbursed are excluded from the income of the recipient (general welfare exclusion). Freetaxusa 2009 See Rev. Freetaxusa 2009 Rul. Freetaxusa 2009 2005-46, 2005-2 C. Freetaxusa 2009 B. Freetaxusa 2009 120, and Rev. Freetaxusa 2009 Rul. Freetaxusa 2009 75-246, 1975-1 C. Freetaxusa 2009 B. Freetaxusa 2009 24. Freetaxusa 2009 . Freetaxusa 2009 14 Under § 451 and § 1. Freetaxusa 2009 451-1(a), a taxpayer that uses the cash receipts and disbursements method of accounting includes income in gross income when the taxpayer actually or constructively receives the income. Freetaxusa 2009 . Freetaxusa 2009 15 Section 6041 requires every person engaged in a trade or business (including the United States and its agencies) to (1) file an information return (Form 1099-MISC, Miscellaneous Income, is used for this purpose) for each calendar year in which the person makes, in the course of its trade or business, payments to another person of fixed or determinable income aggregating $600 or more, and (2) furnish a copy of the information return to that other person. Freetaxusa 2009 See § 6041(a) and (d) and § 1. Freetaxusa 2009 6041-1(a)(1) and (b). Freetaxusa 2009 . Freetaxusa 2009 16 Section 6050P requires applicable entities (including the United States and its agencies, financial entities, and any organization a significant trade or business of which is the lending of money) to (1) file an information return (Form 1099-C, Cancellation of Debt, is used for this purpose) for each calendar year in which it discharges indebtedness of another person of $600 or more, and (2) furnish a copy of the information return to that other person. Freetaxusa 2009 See § 6050P(a)-(c) and §§ 1. Freetaxusa 2009 6050P-1(a) and 1. Freetaxusa 2009 6050P-2(a) and (d). Freetaxusa 2009 . Freetaxusa 2009 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. Freetaxusa 2009 These penalties apply in the case of a failure to timely file an information return, a failure to include all required information on the return, or the inclusion of incorrect information on the return. Freetaxusa 2009 Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. Freetaxusa 2009 ” . Freetaxusa 2009 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. Freetaxusa 2009 These penalties apply in the case of a failure to timely furnish a payee statement, a failure to include all required information on the statement, or the inclusion of incorrect information on the payee statement. Freetaxusa 2009 Section 6724(d)(2) includes in the term “payee statement” copies of Forms 1099-MISC and 1099-C that are required to be furnished to taxpayers. Freetaxusa 2009 SECTION 4. Freetaxusa 2009 FEDERAL INCOME TAX TREATMENT . Freetaxusa 2009 01 Because a HAMP modification with a PRA principal reduction is a significant modification, it results in a deemed debt-for-debt exchange in which the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one. Freetaxusa 2009 See § 1. Freetaxusa 2009 1001-3. Freetaxusa 2009 At the time of the modification, therefore, under § 108 and this revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness income equal to any excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan. Freetaxusa 2009 See also § 61(a)(12) and § 1. Freetaxusa 2009 61-12(c). Freetaxusa 2009 . Freetaxusa 2009 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. Freetaxusa 2009 Because the HAMP-PRA borrower has this ability, that amount should not be taken into account in determining the issue price of the new mortgage loan. Freetaxusa 2009 Because the issue price of the new mortgage loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted Forbearance Amount contributes to the excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new mortgage loan. Freetaxusa 2009 . Freetaxusa 2009 03 On the other hand, the investor has not given up its right to receive the remainder of the PRA Forbearance Amount, because the HAMP program administrator is expected to make those payments on the HAMP-PRA borrower’s behalf by making the PRA Investor Incentive Payments. Freetaxusa 2009 Because the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan. Freetaxusa 2009 . Freetaxusa 2009 04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. Freetaxusa 2009 Therefore, for purposes of § 1. Freetaxusa 2009 1001-3, the date of the modification is the date of the permanent modification. Freetaxusa 2009 . Freetaxusa 2009 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. Freetaxusa 2009 01 of this revenue procedure for the taxable year in which the permanent modification occurs. Freetaxusa 2009 Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. Freetaxusa 2009 The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge. Freetaxusa 2009 . Freetaxusa 2009 06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower. Freetaxusa 2009 . Freetaxusa 2009 07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. Freetaxusa 2009 This is consistent with Rev. Freetaxusa 2009 Rul. Freetaxusa 2009 2009-19, 2009-28 I. Freetaxusa 2009 R. Freetaxusa 2009 B. Freetaxusa 2009 111, which addressed the treatment of Pay-for-Performance Success Payments. Freetaxusa 2009 . Freetaxusa 2009 08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. Freetaxusa 2009 If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan. Freetaxusa 2009 . Freetaxusa 2009 09 As described in section 2. Freetaxusa 2009 09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. Freetaxusa 2009 To the extent that the HAMP-PRA borrower is described in section 4. Freetaxusa 2009 07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. Freetaxusa 2009 To the extent that the HAMP-PRA borrower is described in section 4. Freetaxusa 2009 08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment. Freetaxusa 2009 SECTION 5. Freetaxusa 2009 INFORMATION-REPORTING OBLIGATIONS . Freetaxusa 2009 01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. Freetaxusa 2009 A copy of this form is required to be furnished to the borrower. Freetaxusa 2009 . Freetaxusa 2009 02 As stated in sections 4. Freetaxusa 2009 01 and 4. Freetaxusa 2009 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. Freetaxusa 2009 . Freetaxusa 2009 03 An investor is an applicable entity that is required under § 1. Freetaxusa 2009 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. Freetaxusa 2009 Under § 1. Freetaxusa 2009 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. Freetaxusa 2009 Identifiable events determine when Forms 1099-C have to be issued. Freetaxusa 2009 Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. Freetaxusa 2009 This rule under § 1. Freetaxusa 2009 6050P-1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced. Freetaxusa 2009 . Freetaxusa 2009 04 The investor (or the loan servicer acting on behalf of the investor) reports the full amount of the discharge on the Form 1099-C regardless of whether some or all of the amount is excludible from income under the qualified principal residence indebtedness exclusion, the insolvency exclusion, or any other exclusion that may apply. Freetaxusa 2009 That discharged amount will generally be the PRA Adjusted Forbearance Amount (which does not include the amounts expected to be satisfied by PRA Investor Incentive Payments). Freetaxusa 2009 . Freetaxusa 2009 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Freetaxusa 2009 07 of this revenue procedure, the PRA Investor Incentive Payments are excluded from the gross income of the HAMP-PRA borrower, and thus they are not fixed or determinable income to the HAMP-PRA borrower. Freetaxusa 2009 Under § 6041, these payments are not subject to information reporting. Freetaxusa 2009 See Notice 2011-14, 2011-11 I. Freetaxusa 2009 R. Freetaxusa 2009 B. Freetaxusa 2009 544, 546. Freetaxusa 2009 . Freetaxusa 2009 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Freetaxusa 2009 08 of this revenue procedure, the PRA Investor Incentive Payments are includible in gross income as fixed or determinable income in the taxable year required by the HAMP-PRA borrower’s method of accounting. Freetaxusa 2009 The payment is subject to the information reporting requirements of § 6041, as described in section 3. Freetaxusa 2009 15 of this revenue procedure. Freetaxusa 2009 Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. Freetaxusa 2009 SECTION 6. Freetaxusa 2009 HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . Freetaxusa 2009 01 In general. Freetaxusa 2009 The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). Freetaxusa 2009 As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. Freetaxusa 2009 Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. Freetaxusa 2009 A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6. Freetaxusa 2009 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. Freetaxusa 2009 Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. Freetaxusa 2009 02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option. Freetaxusa 2009 . Freetaxusa 2009 02 HAMP-PRA borrower options. Freetaxusa 2009 A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways— (1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or (2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2. Freetaxusa 2009 06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. Freetaxusa 2009 If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. Freetaxusa 2009 06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction. Freetaxusa 2009 . Freetaxusa 2009 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. Freetaxusa 2009 (1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and includes in gross income any remaining discharge. Freetaxusa 2009 (2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6. Freetaxusa 2009 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. Freetaxusa 2009 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. Freetaxusa 2009 This section 6. Freetaxusa 2009 03(2) applies only if the change to reporting the discharge using the method described in section 6. Freetaxusa 2009 02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. Freetaxusa 2009 To make this change, the borrower must— (i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and (ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. Freetaxusa 2009 (3) Example. Freetaxusa 2009 The following example illustrates the application of section 6. Freetaxusa 2009 03(2) of this revenue procedure. Freetaxusa 2009 In 2010, B’s basis in B’s principal residence was $330,000. Freetaxusa 2009 In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. Freetaxusa 2009 B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). Freetaxusa 2009 The trial period plan effective date also fell in 2010. Freetaxusa 2009 B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6. Freetaxusa 2009 02(2) of this revenue procedure. Freetaxusa 2009 That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982 reporting exclusion of any such discharge of indebtedness. Freetaxusa 2009 The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence. Freetaxusa 2009 For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. Freetaxusa 2009 02(1) of this revenue procedure. Freetaxusa 2009 Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6. Freetaxusa 2009 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). Freetaxusa 2009 (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. Freetaxusa 2009 02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2. Freetaxusa 2009 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. Freetaxusa 2009 Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. Freetaxusa 2009 1001-3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. Freetaxusa 2009 Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. Freetaxusa 2009 (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. Freetaxusa 2009 03(4) of this revenue procedure and who takes the following corrective measures: (i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. Freetaxusa 2009 The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year. Freetaxusa 2009 (ii) If the HAMP-PRA borrower did not include any of the discharge of indebtedness in gross income (that is, if the HAMP-PRA borrower excluded all of it), the HAMP-PRA borrower may file a new Form 982 that the Service will treat as superseding the earlier Form 982. Freetaxusa 2009 The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). Freetaxusa 2009 The new Form 982 should be the Form 982 for the year of the permanent modification and should be filed with the return for the taxable year in which the HAMP-PRA borrower’s mortgage loan ceased to be in good standing. Freetaxusa 2009 . Freetaxusa 2009 04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge as being realized on the dates on which the unpaid principal balance of the mortgage loan is reduced. Freetaxusa 2009 (1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge at the times that the unpaid principal balance on the new mortgage loan is reduced, instead of at the time of the permanent modification, then the HAMP-PRA borrower’s federal income tax returns for the taxable year that contains the permanent modification and for the subsequent taxable years must not treat any of the discharge as being realized at the time of the permanent modification and must treat the entire HAMP-PRA discharge as being realized in the amounts—and at the times—of the reductions in the unpaid principal balance. Freetaxusa 2009 Except as described in the last sentence of this paragraph, therefore, the income tax return for the year of the permanent modification must include no gross income from—nor report on Form 982 an exclusion of—any amount of the HAMP-PRA discharge. Freetaxusa 2009 Instead, the HAMP-PRA discharge is included in gross income (or is reported on Form 982 as excluded from gross income) in the subsequent years in which the unpaid principal balance is reduced. Freetaxusa 2009 If the first such reduction occurs in the year of the permanent modification, however, then the amount of any such reduction is reflected as an inclusion or exclusion on the federal income tax return for that year. Freetaxusa 2009 (2) A HAMP-PRA borrower who has been using the method described in section 6. Freetaxusa 2009 02(1) of this revenue procedure may change to the method described in section 6. Freetaxusa 2009 02(2) but must comply with the consistency and open-year requirements described in section 6. Freetaxusa 2009 01 of this revenue procedure. Freetaxusa 2009 SECTION 7. Freetaxusa 2009 PENALTY RELIEF FOR 2012 . Freetaxusa 2009 01 The Service will not assert penalties under § 6721 or § 6722 against an investor for failing to timely file and furnish a 2012 Form 1099-C as required by section 5. Freetaxusa 2009 03 through 5. Freetaxusa 2009 04 and section 8. Freetaxusa 2009 02 of this revenue procedure with respect to discharge of indebtedness resulting from HAMP-PRA permanent modifications that take place during calendar year 2012 if the following requirements are satisfied: (1) Not later than February 28, 2013, a statement is sent to the HAMP-PRA borrower containing the following: (a) The HAMP-PRA borrower’s name, address, and taxpayer identification number; and (b) The date and amount of the discharge of indebtedness (as described in sections 4. Freetaxusa 2009 01 through 4. Freetaxusa 2009 04 of this revenue procedure) that is required to be reported for 2012. Freetaxusa 2009 (2) Not later than March 28, 2013, a statement is sent to the Service. Freetaxusa 2009 It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. Freetaxusa 2009 01(1) of this revenue procedure. Freetaxusa 2009 The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . Freetaxusa 2009 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. Freetaxusa 2009 06 and 8. Freetaxusa 2009 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. Freetaxusa 2009 . Freetaxusa 2009 03 Section 8. Freetaxusa 2009 03 and 8. Freetaxusa 2009 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. Freetaxusa 2009 SECTION 8. Freetaxusa 2009 SCOPE AND EFFECTIVE DATE . Freetaxusa 2009 01 This revenue procedure applies to all borrowers, investors, and servicers who participate, or have participated, in the HAMP-PRA, regardless of when the permanent modification occurs. Freetaxusa 2009 . Freetaxusa 2009 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. Freetaxusa 2009 . Freetaxusa 2009 03 Because of the effective date in section 8. Freetaxusa 2009 02 of this revenue procedure, an investor is not subject to penalties under § 6721 or § 6722 on the grounds that the investor failed to timely file and furnish a 2010 or 2011 Form 1099-C as described in section 5. Freetaxusa 2009 03 through 5. Freetaxusa 2009 04 of this revenue procedure (or on the grounds that the investor filed or furnished a 2010 or 2011 Form 1099-C that is inconsistent with section 5. Freetaxusa 2009 03 through 5. Freetaxusa 2009 04 of this revenue procedure), provided that the investor demonstrates a good faith attempt to comply with the requirements of § 6050P and that the failure was not due to willful neglect. Freetaxusa 2009 . Freetaxusa 2009 04 Because of the effective date in section 8. Freetaxusa 2009 02 of this revenue procedure, the Service will not assert penalties under § 6721 or § 6722 on the grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as described in section 5. Freetaxusa 2009 06 of this revenue procedure. Freetaxusa 2009 SECTION 9. Freetaxusa 2009 DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. Freetaxusa 2009 Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. Freetaxusa 2009 Pflanz and Sheldon A. Freetaxusa 2009 Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. Freetaxusa 2009 Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). Freetaxusa 2009 For further information regarding this revenue procedure, contact Procedure and Administration branch 1 at (202) 622-4910, Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions and Products branch 1 at (202) 622-3920 (not toll-free calls). Freetaxusa 2009 Prev  Up  Next   Home   More Internal Revenue Bulletins