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Irs Gov Free State File

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Irs Gov Free State File

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

Irs gov free state file 2. Irs gov free state file   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Irs gov free state file Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. Irs gov free state file S. Irs gov free state file or foreign source income. Irs gov free state file This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. Irs gov free state file S. Irs gov free state file Virgin Islands (USVI). Irs gov free state file Generally, the same rules that apply for determining U. Irs gov free state file S. Irs gov free state file source income also apply for determining possession source income. Irs gov free state file However, there are some important exceptions to these rules. Irs gov free state file Both the general rules and the exceptions are discussed in this chapter. Irs gov free state file U. Irs gov free state file S. Irs gov free state file income rule. Irs gov free state file   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. Irs gov free state file Table 2-1 shows the general rules for determining whether income is from sources within the United States. Irs gov free state file Table 2-1. Irs gov free state file General Rules for Determining U. Irs gov free state file S. Irs gov free state file Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Irs gov free state file Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. Irs gov free state file For more information, see Regulations section 1. Irs gov free state file 863-1(b). Irs gov free state file Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. Irs gov free state file Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. Irs gov free state file Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. Irs gov free state file It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. Irs gov free state file Services performed wholly within a relevant possession. Irs gov free state file   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. Irs gov free state file However, there is an exception for income earned as a member of the U. Irs gov free state file S. Irs gov free state file Armed Forces or a civilian spouse. Irs gov free state file U. Irs gov free state file S. Irs gov free state file Armed Forces. Irs gov free state file   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. Irs gov free state file However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. Irs gov free state file Civilian spouse of active duty member of the U. Irs gov free state file S. Irs gov free state file Armed Forces. Irs gov free state file   If you are a bona fide resident of a U. Irs gov free state file S. Irs gov free state file possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Irs gov free state file Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. Irs gov free state file S. Irs gov free state file possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. Irs gov free state file Services performed partly inside and partly outside a relevant possession. Irs gov free state file   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Irs gov free state file Compensation (other than certain fringe benefits) is sourced on a time basis. Irs gov free state file Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Irs gov free state file   Or, you may be permitted to use an alternative basis to determine the source of compensation. Irs gov free state file See Alternative basis , later. Irs gov free state file   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Irs gov free state file In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Irs gov free state file Time basis. Irs gov free state file   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Irs gov free state file Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. Irs gov free state file The time period for which the income is made does not have to be a year. Irs gov free state file Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Irs gov free state file Example. Irs gov free state file In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Irs gov free state file Your Puerto Rico source income is $60,000, figured as follows. Irs gov free state file       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. Irs gov free state file   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Irs gov free state file Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. Irs gov free state file You determine the period to which the income is attributable based on the facts and circumstances of your case. Irs gov free state file For more information on multi-year compensation, see Treasury Decision (T. Irs gov free state file D. Irs gov free state file ) 9212 and Regulations section 1. Irs gov free state file 861-4, 2005-35 I. Irs gov free state file R. Irs gov free state file B. Irs gov free state file 429, available at www. Irs gov free state file irs. Irs gov free state file gov/irb/2005-35_IRB/ar14. Irs gov free state file html. Irs gov free state file Certain fringe benefits sourced on a geographical basis. Irs gov free state file   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. Irs gov free state file Housing. Irs gov free state file Education. Irs gov free state file Local transportation. Irs gov free state file Tax reimbursement. Irs gov free state file Hazardous or hardship duty pay. Irs gov free state file Moving expense reimbursement. Irs gov free state file For information on determining the source of the fringe benefits listed above, see Regulations section 1. Irs gov free state file 861-4. Irs gov free state file Alternative basis. Irs gov free state file   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. Irs gov free state file If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. Irs gov free state file De minimis exception. Irs gov free state file   There is an exception to the rule for determining the source of income earned in a possession. Irs gov free state file Generally, you will not have income from a possession if during a tax year you: Are a U. Irs gov free state file S. Irs gov free state file citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. Irs gov free state file This exception began with income earned during your 2008 tax year. Irs gov free state file Pensions. Irs gov free state file   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. Irs gov free state file The contribution portion is sourced according to where services were performed that earned the pension. Irs gov free state file The investment earnings portion is sourced according to the location of the pension trust. Irs gov free state file Example. Irs gov free state file You are a U. Irs gov free state file S. Irs gov free state file citizen who worked in Puerto Rico for a U. Irs gov free state file S. Irs gov free state file company. Irs gov free state file All services were performed in Puerto Rico. Irs gov free state file Upon retirement you remained in Puerto Rico and began receiving your pension from the U. Irs gov free state file S. Irs gov free state file pension trust of your employer. Irs gov free state file Distributions from the U. Irs gov free state file S. Irs gov free state file pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. Irs gov free state file S. Irs gov free state file source income. Irs gov free state file Investment Income This category includes such income as interest, dividends, rents, and royalties. Irs gov free state file Interest income. Irs gov free state file   The source of interest income is generally determined by the residence of the payer. Irs gov free state file Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. Irs gov free state file   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. Irs gov free state file See Regulations section 1. Irs gov free state file 937-2(i) for more information. Irs gov free state file Dividends. Irs gov free state file   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. Irs gov free state file There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. Irs gov free state file For more information, see Regulations section 1. Irs gov free state file 937-2(g). Irs gov free state file Rental income. Irs gov free state file   Rents from property located in a relevant possession are treated as income from sources within that possession. Irs gov free state file Royalties. Irs gov free state file   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. Irs gov free state file   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. Irs gov free state file Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. Irs gov free state file The most common situations are discussed below. Irs gov free state file Real property. Irs gov free state file   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. Irs gov free state file The location of the property generally determines the source of income from the sale. Irs gov free state file For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. Irs gov free state file If, however, the home you sold was located in the United States, the gain is U. Irs gov free state file S. Irs gov free state file source income. Irs gov free state file Personal property. Irs gov free state file   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. Irs gov free state file Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. Irs gov free state file If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. Irs gov free state file   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. Irs gov free state file The rules applying to sales of inventory are discussed below. Irs gov free state file For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. Irs gov free state file Inventory. Irs gov free state file   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Irs gov free state file The source of income from the sale of inventory depends on whether the inventory was purchased or produced. Irs gov free state file Purchased. Irs gov free state file   Income from the sale of inventory that you purchased is sourced where you sell the property. Irs gov free state file Generally, this is where title to the property passes to the buyer. Irs gov free state file Produced. Irs gov free state file   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. Irs gov free state file For information on making the allocation, see Regulations section 1. Irs gov free state file 863-3(f). Irs gov free state file Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. Irs gov free state file S. Irs gov free state file citizen or resident alien prior to becoming a bona fide resident of a possession. Irs gov free state file You are subject to these special rules if you meet both of the following conditions. Irs gov free state file For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. Irs gov free state file For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). Irs gov free state file If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Irs gov free state file Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. Irs gov free state file S. Irs gov free state file tax return. Irs gov free state file (See chapter 3 for additional filing information. Irs gov free state file ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. Irs gov free state file These rules apply to dispositions after April 11, 2005. Irs gov free state file For details, see Regulations section 1. Irs gov free state file 937-2(f)(1) and Examples 1 and 2 of section 1. Irs gov free state file 937-2(k). Irs gov free state file Example 1. Irs gov free state file In 2007, Cheryl Jones, a U. Irs gov free state file S. Irs gov free state file citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. Irs gov free state file S. Irs gov free state file corporation listed on the New York Stock Exchange. Irs gov free state file On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Irs gov free state file Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. Irs gov free state file On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. Irs gov free state file On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Irs gov free state file Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. Irs gov free state file The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. Irs gov free state file This existing special rule applies if you are a U. Irs gov free state file S. Irs gov free state file citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. Irs gov free state file S. Irs gov free state file assets during the 10-year period beginning when you became a bona fide resident. Irs gov free state file The gain is U. Irs gov free state file S. Irs gov free state file source income that generally is subject to U. Irs gov free state file S. Irs gov free state file tax if the property is either (1) located in the United States; (2) stock issued by a U. Irs gov free state file S. Irs gov free state file corporation or a debt obligation of a U. Irs gov free state file S. Irs gov free state file person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). Irs gov free state file See chapter 3 for filing information. Irs gov free state file Special election. Irs gov free state file   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Irs gov free state file Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. Irs gov free state file This election overrides both of the special rules discussed earlier. Irs gov free state file   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. Irs gov free state file Marketable securities. Irs gov free state file   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Irs gov free state file Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. Irs gov free state file S. Irs gov free state file holding periods. Irs gov free state file   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. Irs gov free state file The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. Irs gov free state file This is your gain (or loss) that is treated as being from sources within the relevant possession. Irs gov free state file If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. Irs gov free state file Example 2. Irs gov free state file Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. Irs gov free state file S. Irs gov free state file and possession holding periods. Irs gov free state file Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. Irs gov free state file Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). Irs gov free state file By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Irs gov free state file Other personal property. Irs gov free state file   For personal property other than marketable securities, use a time-based allocation. Irs gov free state file Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. Irs gov free state file      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. Irs gov free state file Example 3. Irs gov free state file In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. Irs gov free state file On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. Irs gov free state file On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. Irs gov free state file She had owned the interest for a total of 1,720 days. Irs gov free state file Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. Irs gov free state file The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). Irs gov free state file By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Irs gov free state file Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Irs gov free state file Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. Irs gov free state file These rules do not apply to amounts paid as salary or other compensation for services. Irs gov free state file See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. Irs gov free state file Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. Irs gov free state file These circumstances are listed below. Irs gov free state file You have an office or other fixed place of business in the relevant possession to which the income can be attributed. Irs gov free state file That office or place of business is a material factor in producing the income. Irs gov free state file The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Irs gov free state file An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Irs gov free state file The three kinds of income from sources outside the relevant possession to which these rules apply are the following. Irs gov free state file Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. Irs gov free state file Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. Irs gov free state file Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. Irs gov free state file Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Irs gov free state file Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. Irs gov free state file Example. Irs gov free state file Marcy Jackson is a bona fide resident of American Samoa. Irs gov free state file Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. Irs gov free state file A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Irs gov free state file Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. Irs gov free state file The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. Irs gov free state file However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. Irs gov free state file Prev  Up  Next   Home   More Online Publications