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How To File Self Employment Taxes

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How To File Self Employment Taxes

How to file self employment taxes 6. How to file self employment taxes   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. How to file self employment taxes Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. How to file self employment taxes Also use basis to figure depreciation, amortization, depletion, and casualty losses. How to file self employment taxes If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. How to file self employment taxes Only the basis allocated to the business or investment use of the property can be depreciated. How to file self employment taxes Your original basis in property is adjusted (increased or decreased) by certain events. How to file self employment taxes For example, if you make improvements to the property, increase your basis. How to file self employment taxes If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. How to file self employment taxes Keep accurate records of all items that affect the basis of your assets. How to file self employment taxes For information on keeping records, see chapter 1. How to file self employment taxes Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. How to file self employment taxes Cost Basis The basis of property you buy is usually its cost. How to file self employment taxes Cost is the amount you pay in cash, debt obligations, other property, or services. How to file self employment taxes Your cost includes amounts you pay for sales tax, freight, installation, and testing. How to file self employment taxes The basis of real estate and business assets will include other items, discussed later. How to file self employment taxes Basis generally does not include interest payments. How to file self employment taxes However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. How to file self employment taxes You also may have to capitalize (add to basis) certain other costs related to buying or producing property. How to file self employment taxes Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. How to file self employment taxes Loans with low or no interest. How to file self employment taxes   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. How to file self employment taxes You generally have unstated interest if your interest rate is less than the applicable federal rate. How to file self employment taxes See the discussion of unstated interest in Publication 537, Installment Sales. How to file self employment taxes Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. How to file self employment taxes If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. How to file self employment taxes Some of these expenses are discussed next. How to file self employment taxes Lump sum purchase. How to file self employment taxes   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. How to file self employment taxes Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. How to file self employment taxes Figure the basis of each asset by multiplying the lump sum by a fraction. How to file self employment taxes The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. How to file self employment taxes Fair market value (FMV). How to file self employment taxes   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. How to file self employment taxes Sales of similar property on or about the same date may help in figuring the FMV of the property. How to file self employment taxes If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. How to file self employment taxes Real estate taxes. How to file self employment taxes   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. How to file self employment taxes   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. How to file self employment taxes Whether or not you reimburse the seller, do not include that amount in the basis of your property. How to file self employment taxes Settlement costs. How to file self employment taxes   Your basis includes the settlement fees and closing costs for buying the property. How to file self employment taxes See Publication 551 for a detailed list of items you can and cannot include in basis. How to file self employment taxes   Do not include fees and costs for getting a loan on the property. How to file self employment taxes Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. How to file self employment taxes Points. How to file self employment taxes   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. How to file self employment taxes You may be able to deduct the points currently or over the term of the loan. How to file self employment taxes For more information about deducting points, see Points in chapter 4 of Publication 535. How to file self employment taxes Assumption of a mortgage. How to file self employment taxes   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. How to file self employment taxes Example. How to file self employment taxes If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. How to file self employment taxes Constructing assets. How to file self employment taxes   If you build property or have assets built for you, your expenses for this construction are part of your basis. How to file self employment taxes Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. How to file self employment taxes   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. How to file self employment taxes You must capitalize them (include them in the asset's basis). How to file self employment taxes Employee wages paid for the construction work, reduced by any employment credits allowed. How to file self employment taxes Depreciation on equipment you own while it is used in the construction. How to file self employment taxes Operating and maintenance costs for equipment used in the construction. How to file self employment taxes The cost of business supplies and materials used in the construction. How to file self employment taxes    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. How to file self employment taxes Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. How to file self employment taxes To determine the basis of these assets or separate items, there must be an allocation of basis. How to file self employment taxes Group of assets acquired. How to file self employment taxes   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. How to file self employment taxes Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. How to file self employment taxes You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. How to file self employment taxes If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. How to file self employment taxes Farming business acquired. How to file self employment taxes   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. How to file self employment taxes Generally, reduce the purchase price by any cash received. How to file self employment taxes Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. How to file self employment taxes See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. How to file self employment taxes Transplanted embryo. How to file self employment taxes   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. How to file self employment taxes Allocate the rest of the purchase price to the basis of the calf. How to file self employment taxes Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. How to file self employment taxes Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. How to file self employment taxes You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. How to file self employment taxes Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. How to file self employment taxes However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. How to file self employment taxes You produce property if you construct, build, install, manufacture, develop, improve, or create the property. How to file self employment taxes You are not subject to the uniform capitalization rules if the property is produced for personal use. How to file self employment taxes In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. How to file self employment taxes Plants. How to file self employment taxes   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. How to file self employment taxes Animals. How to file self employment taxes   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. How to file self employment taxes The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. How to file self employment taxes Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. How to file self employment taxes For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. How to file self employment taxes For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. How to file self employment taxes Exceptions. How to file self employment taxes   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. How to file self employment taxes   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. How to file self employment taxes See Accrual Method Required under Accounting Methods in chapter 2. How to file self employment taxes   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. How to file self employment taxes If you make this election, special rules apply. How to file self employment taxes This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. How to file self employment taxes This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. How to file self employment taxes    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. How to file self employment taxes See chapter 7, for additional information on depreciation. How to file self employment taxes Example. How to file self employment taxes You grow trees that have a preproductive period of more than 2 years. How to file self employment taxes The trees produce an annual crop. How to file self employment taxes You are an individual and the uniform capitalization rules apply to your farming business. How to file self employment taxes You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. How to file self employment taxes You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. How to file self employment taxes Preproductive period of more than 2 years. How to file self employment taxes   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. How to file self employment taxes Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. How to file self employment taxes Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. How to file self employment taxes More information. How to file self employment taxes   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. How to file self employment taxes 263A-4. How to file self employment taxes Table 6-1. How to file self employment taxes Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. How to file self employment taxes Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. How to file self employment taxes The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. How to file self employment taxes Increases to Basis Increase the basis of any property by all items properly added to a capital account. How to file self employment taxes These include the cost of any improvements having a useful life of more than 1 year. How to file self employment taxes The following costs increase the basis of property. How to file self employment taxes The cost of extending utility service lines to property. How to file self employment taxes Legal fees, such as the cost of defending and perfecting title. How to file self employment taxes Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. How to file self employment taxes Assessments for items such as paving roads and building ditches that increase the value of the property assessed. How to file self employment taxes Do not deduct these expenses as taxes. How to file self employment taxes However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. How to file self employment taxes If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. How to file self employment taxes See chapter 7. How to file self employment taxes Deducting vs. How to file self employment taxes capitalizing costs. How to file self employment taxes   Do not add to your basis costs you can deduct as current expenses. How to file self employment taxes For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. How to file self employment taxes However, you can elect either to deduct or to capitalize certain other costs. How to file self employment taxes See chapter 7 in Publication 535. How to file self employment taxes Decreases to Basis The following are some items that reduce the basis of property. How to file self employment taxes Section 179 deduction. How to file self employment taxes Deductions previously allowed or allowable for amortization, depreciation, and depletion. How to file self employment taxes Alternative motor vehicle credit. How to file self employment taxes See Form 8910. How to file self employment taxes Alternative fuel vehicle refueling property credit. How to file self employment taxes See Form 8911. How to file self employment taxes Residential energy efficient property credits. How to file self employment taxes See Form 5695. How to file self employment taxes Investment credit (part or all) taken. How to file self employment taxes Casualty and theft losses and insurance reimbursements. How to file self employment taxes Payments you receive for granting an easement. How to file self employment taxes Exclusion from income of subsidies for energy conservation measures. How to file self employment taxes Certain canceled debt excluded from income. How to file self employment taxes Rebates from a manufacturer or seller. How to file self employment taxes Patronage dividends received from a cooperative association as a result of a purchase of property. How to file self employment taxes See Patronage Dividends in chapter 3. How to file self employment taxes Gas-guzzler tax. How to file self employment taxes See Form 6197. How to file self employment taxes Some of these items are discussed next. How to file self employment taxes For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. How to file self employment taxes Depreciation and section 179 deduction. How to file self employment taxes   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. How to file self employment taxes For more information on these deductions, see chapter 7. How to file self employment taxes Section 179 deduction. How to file self employment taxes   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. How to file self employment taxes Depreciation. How to file self employment taxes   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. How to file self employment taxes If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. How to file self employment taxes If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. How to file self employment taxes   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. How to file self employment taxes   See chapter 7 for information on figuring the depreciation you should have claimed. How to file self employment taxes   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. How to file self employment taxes Casualty and theft losses. How to file self employment taxes   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. How to file self employment taxes Also, decrease it by any deductible loss not covered by insurance. How to file self employment taxes See chapter 11 for information about figuring your casualty or theft loss. How to file self employment taxes   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. How to file self employment taxes To make this determination, compare the repaired property to the property before the casualty. How to file self employment taxes Easements. How to file self employment taxes   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. How to file self employment taxes It reduces the basis of the affected part of the property. How to file self employment taxes If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. How to file self employment taxes See Easements and rights-of-way in chapter 3. How to file self employment taxes Exclusion from income of subsidies for energy conservation measures. How to file self employment taxes   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. How to file self employment taxes Reduce the basis of the property by the excluded amount. How to file self employment taxes Canceled debt excluded from income. How to file self employment taxes   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. How to file self employment taxes A debt includes any indebtedness for which you are liable or which attaches to property you hold. How to file self employment taxes   You can exclude your canceled debt from income if the debt is any of the following. How to file self employment taxes Debt canceled in a bankruptcy case or when you are insolvent. How to file self employment taxes Qualified farm debt. How to file self employment taxes Qualified real property business debt (provided you are not a C corporation). How to file self employment taxes Qualified principal residence indebtedness. How to file self employment taxes Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. How to file self employment taxes If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. How to file self employment taxes If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. How to file self employment taxes   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. How to file self employment taxes For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. How to file self employment taxes For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. How to file self employment taxes For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. How to file self employment taxes Basis Other Than Cost There are times when you cannot use cost as basis. How to file self employment taxes In these situations, the fair market value or the adjusted basis of property may be used. How to file self employment taxes Examples are discussed next. How to file self employment taxes Property changed from personal to business or rental use. How to file self employment taxes   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. How to file self employment taxes An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. How to file self employment taxes   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. How to file self employment taxes   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. How to file self employment taxes The basis for figuring a gain is your adjusted basis in the property when you sell the property. How to file self employment taxes Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. How to file self employment taxes Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . How to file self employment taxes Property received for services. How to file self employment taxes   If you receive property for services, include the property's FMV in income. How to file self employment taxes The amount you include in income becomes your basis. How to file self employment taxes If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. How to file self employment taxes Example. How to file self employment taxes George Smith is an accountant and also operates a farming business. How to file self employment taxes George agreed to do some accounting work for his neighbor in exchange for a dairy cow. How to file self employment taxes The accounting work and the cow are each worth $1,500. How to file self employment taxes George must include $1,500 in income for his accounting services. How to file self employment taxes George's basis in the cow is $1,500. How to file self employment taxes Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. How to file self employment taxes A taxable gain or deductible loss also is known as a recognized gain or loss. How to file self employment taxes A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. How to file self employment taxes If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. How to file self employment taxes Example. How to file self employment taxes You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. How to file self employment taxes You must report a taxable gain of $4,000 for the land. How to file self employment taxes The tractor has a basis of $6,000. How to file self employment taxes Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. How to file self employment taxes Similar or related property. How to file self employment taxes   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. How to file self employment taxes However, make the following adjustments. How to file self employment taxes Decrease the basis by the following amounts. How to file self employment taxes Any loss you recognize on the involuntary conversion. How to file self employment taxes Any money you receive that you do not spend on similar property. How to file self employment taxes Increase the basis by the following amounts. How to file self employment taxes Any gain you recognize on the involuntary conversion. How to file self employment taxes Any cost of acquiring the replacement property. How to file self employment taxes Money or property not similar or related. How to file self employment taxes   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. How to file self employment taxes Allocating the basis. How to file self employment taxes   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. How to file self employment taxes Basis for depreciation. How to file self employment taxes   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. How to file self employment taxes For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. How to file self employment taxes For more information about involuntary conversions, see chapter 11. How to file self employment taxes Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. How to file self employment taxes A nontaxable gain or loss also is known as an unrecognized gain or loss. How to file self employment taxes If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. How to file self employment taxes Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. How to file self employment taxes For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. How to file self employment taxes There must also be an exchange of like-kind property. How to file self employment taxes For more information, see Like-Kind Exchanges in  chapter 8. How to file self employment taxes The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. How to file self employment taxes Example 1. How to file self employment taxes You traded a truck you used in your farming business for a new smaller truck to use in farming. How to file self employment taxes The adjusted basis of the old truck was $10,000. How to file self employment taxes The FMV of the new truck is $30,000. How to file self employment taxes Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. How to file self employment taxes Example 2. How to file self employment taxes You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). How to file self employment taxes You use both the field cultivator and the planter in your farming business. How to file self employment taxes The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. How to file self employment taxes   Exchange expenses generally are the closing costs that you pay. How to file self employment taxes They include such items as brokerage commissions, attorney fees, and deed preparation fees. How to file self employment taxes Add them to the basis of the like-kind property you receive. How to file self employment taxes Property plus cash. How to file self employment taxes   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. How to file self employment taxes Example. How to file self employment taxes You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. How to file self employment taxes Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). How to file self employment taxes Special rules for related persons. How to file self employment taxes   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. How to file self employment taxes Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. How to file self employment taxes Each person reports it on the tax return filed for the year in which the later disposition occurred. How to file self employment taxes If this rule applies, the basis of the property received in the original exchange will be its FMV. How to file self employment taxes For more information, see chapter 8. How to file self employment taxes Exchange of business property. How to file self employment taxes   Exchanging the property of one business for the property of another business generally is a multiple property exchange. How to file self employment taxes For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. How to file self employment taxes Basis for depreciation. How to file self employment taxes   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. How to file self employment taxes For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. How to file self employment taxes Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. How to file self employment taxes The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. How to file self employment taxes Decrease the basis by the following amounts. How to file self employment taxes Any money you receive. How to file self employment taxes Any loss you recognize on the exchange. How to file self employment taxes Increase the basis by the following amounts. How to file self employment taxes Any additional costs you incur. How to file self employment taxes Any gain you recognize on the exchange. How to file self employment taxes If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. How to file self employment taxes Example 1. How to file self employment taxes You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. How to file self employment taxes You realize a gain of $40,000. How to file self employment taxes This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). How to file self employment taxes Include your gain in income (recognize gain) only to the extent of the cash received. How to file self employment taxes Your basis in the land you received is figured as follows. How to file self employment taxes Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. How to file self employment taxes You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. How to file self employment taxes You realize a gain of $7,250. How to file self employment taxes This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). How to file self employment taxes You include all the gain in your income (recognize gain) because the gain is less than the cash you received. How to file self employment taxes Your basis in the truck you received is figured as follows. How to file self employment taxes Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. How to file self employment taxes   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. How to file self employment taxes The rest is the basis of the like-kind property. How to file self employment taxes Example. How to file self employment taxes You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. How to file self employment taxes You also received $1,000 cash and a truck that had an FMV of $3,000. How to file self employment taxes The truck is unlike property. How to file self employment taxes You realized a gain of $1,500. How to file self employment taxes This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). How to file self employment taxes You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. How to file self employment taxes Your basis in the properties you received is figured as follows. How to file self employment taxes Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). How to file self employment taxes This is the truck's FMV. How to file self employment taxes The rest ($12,500) is the basis of the tractor. How to file self employment taxes Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. How to file self employment taxes Example. How to file self employment taxes You used a tractor on your farm for 3 years. How to file self employment taxes Its adjusted basis is $22,000 and its FMV is $40,000. How to file self employment taxes You are interested in a new tractor, which sells for $60,000. How to file self employment taxes Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. How to file self employment taxes Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). How to file self employment taxes However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. How to file self employment taxes Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). How to file self employment taxes Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. How to file self employment taxes Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. How to file self employment taxes You also must know its FMV at the time it was given to you and any gift tax paid on it. How to file self employment taxes FMV equal to or greater than donor's adjusted basis. How to file self employment taxes   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. How to file self employment taxes Increase your basis by all or part of any gift tax paid, depending on the date of the gift. How to file self employment taxes   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. How to file self employment taxes See Adjusted Basis , earlier. How to file self employment taxes   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. How to file self employment taxes Figure the increase by multiplying the gift tax paid by the following fraction. How to file self employment taxes Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. How to file self employment taxes The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. How to file self employment taxes Example. How to file self employment taxes In 2013, you received a gift of property from your mother that had an FMV of $50,000. How to file self employment taxes Her adjusted basis was $20,000. How to file self employment taxes The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). How to file self employment taxes She paid a gift tax of $7,320. How to file self employment taxes Your basis, $26,076, is figured as follows. How to file self employment taxes Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . How to file self employment taxes 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. How to file self employment taxes If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. How to file self employment taxes However, your basis cannot exceed the FMV of the gift when it was given to you. How to file self employment taxes FMV less than donor's adjusted basis. How to file self employment taxes   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. How to file self employment taxes Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. How to file self employment taxes Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. How to file self employment taxes (See Adjusted Basis , earlier. How to file self employment taxes )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. How to file self employment taxes Example. How to file self employment taxes You received farmland as a gift from your parents when they retired from farming. How to file self employment taxes At the time of the gift, the land had an FMV of $80,000. How to file self employment taxes Your parents' adjusted basis was $100,000. How to file self employment taxes After you received the land, no events occurred that would increase or decrease your basis. How to file self employment taxes If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. How to file self employment taxes If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. How to file self employment taxes If the sales price is between $80,000 and $100,000, you have neither gain nor loss. How to file self employment taxes For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. How to file self employment taxes If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. How to file self employment taxes Business property. How to file self employment taxes   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. How to file self employment taxes Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. How to file self employment taxes The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. How to file self employment taxes However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. How to file self employment taxes The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. How to file self employment taxes For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. How to file self employment taxes Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. How to file self employment taxes If a federal estate return is filed, you can use its appraised value. How to file self employment taxes The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. How to file self employment taxes For information on the alternate valuation, see the Instructions for Form 706. How to file self employment taxes The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. How to file self employment taxes If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. How to file self employment taxes Special-use valuation method. How to file self employment taxes   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. How to file self employment taxes If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. How to file self employment taxes If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. How to file self employment taxes The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. How to file self employment taxes   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. How to file self employment taxes Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. How to file self employment taxes Figure all FMVs without regard to the special-use valuation. How to file self employment taxes   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. How to file self employment taxes This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. How to file self employment taxes The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. How to file self employment taxes   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. How to file self employment taxes To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. How to file self employment taxes If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. How to file self employment taxes The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. How to file self employment taxes   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. How to file self employment taxes   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. How to file self employment taxes Property inherited from a decedent who died in 2010. How to file self employment taxes   If you inherited property from a decedent who died in 2010, different rules may apply. How to file self employment taxes See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. How to file self employment taxes Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. How to file self employment taxes Partner's basis. How to file self employment taxes   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. How to file self employment taxes However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. How to file self employment taxes For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. How to file self employment taxes Shareholder's basis. How to file self employment taxes   The basis of property distributed by a corporation to a shareholder is its fair market value. How to file self employment taxes For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. 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Understanding your CP566 Notice

We need more information to process your application for an Individual Taxpayer Identification Number (ITIN). You may have sent us an incomplete form. You may have sent us the wrong documents.

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Effective June 22, 2012, the IRS has made interim changes that affect the Individual Taxpayer Identification Number (ITIN) application process. Some of the information below, including the documentation requirements for individuals seeking an ITIN, has been superseded by these changes. Taxpayers and their representatives should review these changes, which are further explained in these Frequently Asked Questions, before requesting an ITIN.


What you need to do

  • Go over the instructions for your application.
  • Make sure you don't qualify for a Social Security number (SSN) and you need an ITIN.
  • Go over your application to make sure you’ve answered all the questions.
  • Make sure your documents are correct.
  • Send us the documents we've asked for when you reply.
  • Make sure the documents are translated into English if we've requested a translation. Use a certified translator.
  • Complete and sign the response form at the end of your notice. Mail it to us with any documents we've requested.

You may want to...


Answers to Common Questions

What is an ITIN?
It is a number for you to use on federal tax documents.

Who needs an ITIN?
A non-citizen who has to file a federal tax return or a tax reporting document and does not qualify for an SSN needs an ITIN.

What is correct documentation?
In general, correct documentation is unexpired and has your photograph. It has the same name on it as on your application and tax return. It is from an organization authorized to issue it. The following documents can meet these conditions:

  • a passport
  • a visa (issued by the U.S. Department of State)
  • a civil birth certificate
  • a national, U.S. state, or military identification document
  • a U.S. or foreign driver’s license
  • a U.S. Citizenship and Immigration Services Photo ID
  • a foreign voter registration document or military card
  • U.S. school records (for dependents only)
  • U.S. medical records (for dependents only)

Foreign records must be from a country recognized by the U.S. State Department.

What are the special requirements for school and medical records?
They must be less than one year old. They must be for dependents younger than 18.

How much time do I have to reply?
You have 45 days from the date of your notice to reply.

What happens if I don't reply?
We will reject your application. You'll have to submit a new application for an ITIN.

Should I call you with my reply or mail it to you?
Mail your reply to us at the address on the notice.

What happens to my tax return if you reject my application?
We'll process your return without an ITIN. You'll need to reapply for an ITIN and attach a copy of the return to your application to get a refund.

I sent you documents when I applied for an ITIN. When will you return them?
We'll return your documents within 60 days after we've processed your application.

Whom can I talk to with my questions?
You can call the telephone number on the top right corner of the notice with your questions.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.


Understanding your notice

Reading your notice
Your notice may look different from the sample because the information contained in your notice is tailored to your situation.

Notice CP566, Page 1

Notice CP566, Page 2

Notice CP566, Page 3

Notice CP566, Page 4

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 

Page Last Reviewed or Updated: 14-Mar-2014

The How To File Self Employment Taxes

How to file self employment taxes It's easy, accurate and fast. So why would you file your taxes any other way? How to file self employment taxes Old fashioned paper tax forms have been around for decades, but it might be time for them to go the way of the dodo. Who wants to wait for weeks to get their check in the mail when you can just efile your tax return electronically with the IRS and start enjoying your refund in as little as 7 days. How to file self employment taxes If you consider the money the IRS holds on to while you wait for your refund as an interest free loan, then you’ll realize that you are losing money. No one other than the IRS can get an interest free loan and that doesn’t seem fair, does it? Enter the internet age. Commercial companies have been moving online for years now - when was the last time you've mailed a check or received a paper statement from your bank? Now, even the government sites are starting to get with the program and are offering quick and easy efile to everyone. Here are a few reasons why I switched to efile; maybe it’s time you do to!